Multimedia Patent Trust v. Apple Inc. et al, No. 3:2010cv02618 - Document 651 (S.D. Cal. 2012)
Court Description: ORDER Granting in Part and Denying in Part 495 Daubert Motion to Exclude MPT's Damages Experts. The Court excludes Mr. Yurkerwich's testimony and damages analysis to the extent it relies on or is based on Defendants' revenues or p rofits of the accused products. The Court excludes Mr. Yurkerwich and Prof. Teece's expert testimony to the extent it relies on or is based on generic industry data as part of their damages analysis. The Court denies the remainder of Defendants' motion to exclude without prejudice to any contemporaneous objections at trial made outside the presence of the jury. Signed by Judge Marilyn L. Huff on 11/20/2012. (All non-registered users served via U.S. Mail Service)(leh)
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Multimedia Patent Trust v. Apple Inc. et al Doc. 651 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 MULTIMEDIA PATENT TRUST, Plaintiff, 12 ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ DAUBERT MOTION TO EXCLUDE PLAINTIFF’S DAMAGES EXPERTS vs. 13 14 CASE NO. 10-CV-2618-H (KSC) APPLE INC., et al., 15 Defendants. [Doc. No. 495, 641] 16 17 18 19 20 21 22 23 24 25 26 27 On October 23, 2012, Defendants filed a Daubert motion to exclude MPT’s damages experts. (Doc. No. 495) On November 6, 2012, MPT filed its response in opposition. (Doc. No. 597.) On November 13, 2012, Apple and LG filed their reply. (Doc. No. 625.) On November 17, 2012, MPT filed a notice of supplemental damages expert reports. (Doc. No. 638.) On November 19, 2012, Apple and LG filed a supplemental brief in support of their motion. (Doc. No. 641.) On November 20, 2012, the Court held a hearing on the matter. Christopher Mathews, Frederick Lorig, Sidford Brown, and Diane Hutnyan appeared for MPT. Justin Barnes, Kelly Hunsaker, Michael Tyler, Lara Garner, Richard Sterba, and Michael McKeon appeared for Apple and LG. Sarita Venkat appeared for Apple. For the reasons below, the Court GRANTS IN PART and DENIES IN PART Apple and LG’s Daubert motion. 28 -1- 10cv2618 Dockets.Justia.com 1 2 BACKGROUND On December 20, 2010, Plaintiff Multimedia Patent Trust (“MPT”) filed a complaint 3 for patent infringement against Defendants Apple, Inc. (“Apple”), LG1, and Canon.2 (Doc. No. 4 1, Compl.) The complaint alleges that Defendants are liable for infringement of one or more 5 of three patents related to video compression technology: U.S. Patent Nos. 4,958,226 (“the 6 ’266 Patent”), 5,227,878 (“the ’878 Patent”), and 5,136,377 (“the ’377 Patent”) (collectively 7 the “Patents-in-Suit”). (Id.) On March 21, 2011, Apple, LG, and Canon filed their answers. 8 (Doc. Nos. 38-39, 41.) On November 9, 2012, the Court granted Canon’s motion for summary 9 judgment of its affirmative defense of patent exhaustion, removing Canon as a Defendant from 10 this case. (Doc. No. 608 at 9-10.) DISCUSSION 11 12 I. Legal Standard for a Daubert Motion to Exclude Expert Testimony 13 A district court’s decision to admit expert testimony under Daubert in a patent case 14 follows the law of the regional circuit. Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 15 1390-91 (Fed. Cir. 2003). When considering expert testimony offered pursuant to Rule 702, 16 the trial court acts as a “gatekeeper” by “making a preliminary determination of whether the 17 expert’s testimony is reliable.” Elsayed Mukhtar v. Cal. State Univ., Hayward, 299 F.3d 1053, 18 1063 (9th Cir. 2002); see Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999); Daubert 19 v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993). Under Rule 702 of the Federal Rules 20 of Evidence, a court may permit opinion testimony from an expert only if such testimony “will 21 assist the trier of fact” and “(1) the testimony is based upon sufficient facts or data, (2) the 22 testimony is the product of reliable principles and methods, and (3) the witness has applied the 23 principles and methods reliably to the facts of the case.” 24 “The test for reliability [of expert testimony] is flexible and depends on the discipline 25 26 1 “LG” includes LG Electronics, Inc., LG Electronics U.S.A., Inc., and LG Electronics 27 Mobilecomm U.S.A., Inc. 28 2 “Canon” includes Canon U.S.A., Inc. and Canon, Inc. -2- 10cv2618 1 involved.” Wagner v. Cnty. of Maricopa, 2012 U.S. App. LEXIS 23631, at *14 (9th Cir. Nov. 2 16, 2012). “Under Daubert, the district judge is ‘a gatekeeper, not a fact finder.’ When an 3 expert meets the threshold established by Rule 702 as explained in Daubert, the expert may 4 testify and the jury decides how much weight to give that testimony.” Primiano v. Cook, 598 5 F.3d 558, 564-65 (9th Cir. 2010); see also Micro Chem., 317 F.3d at 1392 (“When . . . the 6 parties’ experts rely on conflicting sets of facts, it is not the role of the trial court to evaluate 7 the correctness of facts underlying one expert’s testimony.”). “‘[T]he test under Daubert is not 8 the correctness of the expert’s conclusions but the soundness of his methodology.’” Primiano, 9 598 F.3d at 564. “Shaky but admissible evidence is to be attacked by cross examination, 10 contrary evidence, and attention to the burden of proof, not exclusion.” Id. (citing Daubert, 11 509 U.S. at 594, 596); accord i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 856 (Fed. Cir. 12 2010). 13 Whether to admit or exclude expert testimony lies within the trial court’s discretion. 14 GE v. Joiner, 522 U.S. 136, 141-42 (1997); United States v. Calderon-Segura, 512 F.3d 1104, 15 1109 (9th Cir. 2008). The Ninth Circuit has explained that “[a] trial court not only has broad 16 latitude in determining whether an expert’s testimony is reliable, but also in deciding how to 17 determine the testimony’s reliability.” Mukhtar v. Cal. State Univ., 299 F.3d 1053, 1064 (9th 18 Cir. 2002). 19 II. Legal Standards for Calculating Patent Damages 20 “Upon finding for the claimant the court shall award the claimant damages adequate to 21 compensate for the infringement, but in no event less than a reasonable royalty for the use 22 made of the invention by the infringer, together with interest and costs as fixed by the court.” 23 35 U.S.C. § 284. Two alternative methods exist for calculating damages in a patent case; they 24 “are the patentee’s lost profits and the reasonable royalty he would have received through 25 arms-length bargaining.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 26 2009). MPT does not contend that it is entitled to lost profits. [See Doc. No. 495-1, 27 Declaration of Justin Barnes, Exs. A, C.] Accordingly, damages is this case should be 28 calculated by determining the reasonable royalty MPT would have received through -3- 10cv2618 1 arms-length negotiation. See Lucent, 580 F.3d at 1324. 2 To calculate the reasonable royalty, patentees generally consider a hypothetical 3 negotiation, in which the asserted patent claims are assumed valid, enforceable, and infringed, 4 and attempt “to ascertain the royalty upon which the parties would have agreed had they 5 successfully negotiated an agreement just before infringement began.” Lucent, 580 F.3d at 6 1324-25; see also Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 n.13 (Fed. Cir.1995) (en 7 banc). This hypothetical negotiation “necessarily involves an element of approximation and 8 uncertainty.” Lucent, 580 F.3d at 1325; see also Fromson v. Western Litho Plate & Supply 9 Co., 853 F.2d 1568, 1574 (Fed. Cir. 1988) (“Determining a fair and reasonable royalty is often 10 . . . a difficult judicial chore, seeming often to involve more the talents of a conjurer than those 11 of a judge”). “Still, a reasonable royalty analysis requires a court to hypothesize, not to 12 speculate.” ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). “A 13 damages theory must be based on ‘sound economic and factual predicates.’” LaserDynamics, 14 Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) (quoting Riles v. Shell 15 Exploration & Prod. Co., 298 F.3d 1302, 1311 (Fed. Cir. 2002)). 16 In determining the reasonable royalty that would have been agreed to at the hypothetical 17 negotiation, parties in patent cases frequently utilize the fifteen factors enunciated in 18 Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). The 19 Federal Circuit has expressly “sanctioned the use of the Georgia-Pacific factors to frame the 20 reasonable royalty inquiry.” Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1317 (Fed. 21 Cir. 2011). 22 A hypothetical negotiation can result in either a lump-sum license or a running royalty 23 license. See Lucent, 580 F.3d at 1326. A lump-sum license is an up-front payment in full for 24 the invention that involves uncertainty about “whether the technology is commercially 25 successful or even used.” Id. In contrast, a running royalty license is directly tied to how often 26 the invention is incorporated into products by the licensee and is calculated by multiplying the 27 proposed royalty rate by the proposed royalty base. See id. at 1326, 1338-39. 28 “The burden of proving damages falls on the patentee.” Lucent, 580 F.3d at 1324. To -4- 10cv2618 1 properly carry this burden, the patentee must sufficiently tie the expert testimony on damages 2 to the facts of the case. Uniloc, 632 F.3d at 1315 (citing Daubert, 509 U.S. at 591). 3 III. Mr. Yurkerwich’s Damages Analysis 4 MPT’s damages expert Mr. Yurkerwich’s analysis begins by giving a general overview 5 of the Patents-in-Suit, Alcatel-Lucent, MPT, IPValue, MPEG-LA, licenses involving the 6 Patents-in-Suit, MPT’s licensing activity, and the accused products. (Doc. No. 495-1, 7 Declaration of Justin Barnes Ex. A ¶¶ 5-34, Ex. C. ¶¶ 5-40.) Mr. Yurkerwich then examines 8 Apple and LG documents to analyze the Defendants’ use of the H.264 standard. (Id. Ex. A ¶¶ 9 35-39, Ex. C. ¶¶ 41-62.) 10 Mr. Yurkerwich then utilizes the market approach to analyze the value of the Patents-in- 11 Suit. (Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶¶ 44-71, Ex. C. ¶¶ 67-94.) Under 12 this approach, Mr. Yurkerwich analyzes various licenses to the Patents-in-Suit. (Id.) Mr. 13 Yurkerwich first identifies four Lucent licenses that provided Lucent with an initial lump sum 14 payment and then a per unit royalty of $1.50 to $2.00 depending on certain circumstances for 15 three of the licenses and a 0.5% running royalty for the fourth license. (Id. Ex. A ¶¶ 47-50, Ex. 16 C ¶¶ 70-73.) Mr. Yurkerwich then identifies the 32 licenses that MPT has received for the 17 Patents-in-Suit, which consists mostly of lump sum agreements. (Id. Ex. A ¶¶ 51-59, Ex. C 18 ¶¶ 74-82.) Out of the 32 licenses, Mr. Yurkerwich analyzes the nine licenses that he had unit 19 data for and calculates that the average per unit rate for this group of licenses was $0.86 per 20 unit.3 (Id. Ex. A ¶¶ 60-63, Ex. C ¶¶ 83-86.) Mr. Yurkerwich then explains that MPT’s licenses 21 had litigation discount percentages from 20% to 55%, and that based on these litigation 22 discounts the actual value of the licenses–if its is assumed that the patents are infringed and 23 valid–should be adjusted upward by a multiple of between 1.25 and 2. (Id. Ex. A ¶¶ 66-71, 24 Ex. C ¶¶ 89-94.) 25 Mr. Yurkerwich then takes this information and analyzes the fifteen Georgia-Pacific 26 27 3 On November 15, 2012, MPT served on Defendants supplement damages expert reports where Mr. Yurkerwich analyzes a tenth MPT lump sum license that it recently entered 28 into with Motorola/Google. (Doc. No. 637, Declaration of Sidford Brown Exs. 1-2.) -5- 10cv2618 1 factors to determine the reasonable royalty the parties would have agreed to during the 2 hypothetical negotiation. (Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶¶ 74-97, Ex. 3 C. ¶¶ 95-121.) Mr. Yurkerwich concludes that the reasonable royalty for Apple and LG’s 4 alleged infringement that would have been reached at the hypothetical negotiation would be 5 $1.50 per unit, resulting in a total reasonable royalty of $195.9 million for Apple and $61.3 6 million for LG.4 (Id. Ex. A ¶¶ 4, 96-98, Ex. C ¶¶ 4, 118-22.) In explaining the reasonableness 7 of his $1.50 per unit royalty rate, Mr. Yurkwich states that the $1.50 per unit rate would be 8 approximately 0.25% of Apple’s accused product revenue and approximately 0.78% of LG’s 9 accused product revenue. (Id. Ex. A ¶ 97, Ex. C ¶¶ 120-21.) Mr. Yurkerwich also states that 10 at a 1% royalty rate the average per unit amount for Apple’s accused products would be $6.00 11 based on their average selling price of $600 and the average per unit amount for LG’s products 12 would be $1.92 based on their average selling price of $192. (Id. Ex. A ¶ 96, Ex. C ¶ 119.) 13 IV. Entire Market Value Rule 14 Under the entire market value rule, a patentee may be awarded damages as a percentage 15 of revenues or profits attributable to the entire product only “[i]If it can be shown that the 16 patented feature drives the demand for an entire multi-component product.” LaserDynamics, 17 694 F.3d at 67; see also Uniloc, 632 F.3d at 1318 (“The entire market value rule allows a 18 patentee to assess damages based on the entire market value of the accused product only where 19 the patented feature creates the ‘basis for customer demand’ or ‘substantially create[s] the 20 value of the component parts.’”). “In other words, ‘[t]he entire market value rule allows for 21 the recovery of damages based on the value of an entire apparatus containing several features, 22 when the feature patented constitutes the basis for customer demand.’” LaserDynamics, 694 23 F.3d at 67 (quoting Lucent, 580 F.3d at 1336). The entire market value rule is “derived from 24 Supreme Court precedent requiring that ‘the patentee . . . must in every case give evidence 25 26 4 On October 24, 2012, Mr. Yurkerwich revised his damages expert report for LG to account for the accused products struck by the Court in its Order granting in part and denying 27 in part LG’s motion to strike MPT’s final infringement contentions. (Doc. No. 625, Declaration of Justin Barnes Ex. T.) In the revised damages expert report, Mr. Yurkerwich 28 concludes that the total reasonable royalty for LG would now be $9.1 million. (Id. ¶¶ 4, 98.) -6- 10cv2618 1 tending to separate or apportion the defendant’s profits and the patentee’s damages between 2 the patented feature and the unpatented features, and such evidence must be reliable and 3 tangible, and not conjectural or speculative,’ or show that ‘the entire value of the whole 4 machine, as a marketable article, is properly and legally attributable to the patented feature.’” 5 Uniloc, 632 F.3d at 1318 (quoting Garretson v. Clark, 111 U.S. 120, 121 (1884)). “Where 6 small elements of multi-component products are accused of infringement,” and the entire 7 market value rule has not been satisfied, “it is generally required that royalties be based not on 8 the entire product, but instead on the ‘smallest salable patent-practicing unit.’” 9 LaserDynamics, 694 F.3d at 67 (quoting Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 10 2d 279, 283, 287-88 (N.D.N.Y. 2009) (Rader, J.)). 11 The patentee bears the burden of proving that the entire market value rule has been 12 satisfied. See IP Innovation L.L.C. v. Red Hat, Inc., 705 F. Supp. 2d 687, 690 (E.D. Tex. 13 2010) (Rader, J.); see also Lucent, 580 F.3d at 1336 (“[T]he patentee must prove that the 14 patent-related feature is the basis for customer demand.” (quotation marks omitted)). A 15 damages expert that improperly utilizes the entire market value rule in calculating the 16 reasonable royalty should be excluded. See, e.g., IP Innovation, 705 F. Supp. 2d at 689-91. 17 Defendants argue that Mr. Yurkerwich’s damages analysis violates the entire market 18 value rule. (Doc. No. 495 at 5-12.) Specifically, Defendants argue that Mr. Yurkerwich’s 19 damages analysis is based on the entire market value of the accused products without 20 performing any apportionment. (Id.) In response, MPT argues that Mr. Yurkerwich’s analysis 21 does not violate the entire market value rule because Mr. Yurkerwich’s per-unit royalty is not 22 based on the entire market value of the accused products. (Doc. No. 597 at 5-12.) MPT argues 23 that because Mr. Yurkerwich’s royalty is based on the number of units sold, the entire market 24 value rule is inapplicable. (Id. at 6, 10-11.) 25 In his expert reports, Mr. Yurkerwich concludes that the reasonable royalty for Apple 26 and LG’s infringement that would have been reached at the hypothetical negotiation would be 27 $1.50 per unit. (Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶¶ 4, 96-98, Ex. C ¶¶ 4, 28 118-22.) The Court concludes that Mr. Yurkerwich’s $1.50 per unit royalty does not violate -7- 10cv2618 1 the entire market value rule. The entire market value rule is applicable when a patentee uses 2 the revenue or profits of an entire accused product as his royalty base. See LaserDynamics, 3 694 F.3d at 67; Uniloc, 632 F.3d at 1318; Garretson, 111 U.S. at 121. In having a royalty of 4 $1.50 per product, Mr. Yurkerwich’s royalty does not use Defendants’ revenues or profits as 5 a royalty base. His royalty is based on the number of units sold regardless of the amount of 6 revenue or profits derived from the various products. Therefore, Mr. Yurkerwich’s $1.50 per 7 unit royalty does not rely on the entire market value of Defendants’ accused products, and the 8 entire market value rule does not apply. 9 Defendants argue that Mr. Yurkerwich’s $1.50 per unit royalty is actual based on the 10 entire value of the accused products because he relies on MPT’s purported practice to negotiate 11 licenses in which payments were based on a 1%, 0.5%, or 0.1% royalty of revenue, with a 12 minimum payment of $1.50 per unit. (Doc. No. 495 at 7-9.) Although Mr. Yurkerwich relies 13 on this alleged licensing practice, he does not seek a 1%, 0.5%, or 0.1% royalty rate in his 14 report. He seeks a royalty rate of $1.50 per unit, the minimum payment under the practice. 15 This $1.50 minimum per unit rate does not depend on the accused products’ revenues or 16 profits, and therefore the entire market value rule is not applicable. 17 Defendants attempt to argue that Mr. Yurkerwich’s $1.50 per unit royalty is similar to 18 the royalty rate in Lucent v. Microsoft, which this Court found violated the entire market value 19 rule. (Doc. No. 495 at 5; Doc. No. 625 at 2-3.) The Court disagrees. In Lucent, the patentee 20 sought a 1% royalty rate and attempted to argue that the entire market value rule was not 21 implicated by its proposed royalty so long as it stated the defendant’s revenue in terms of unit 22 price and number of units rather than in terms of total dollar revenue. See Lucent Techs., Inc. 23 v. Microsoft Corp., 2011 U.S. Dist. LEXIS 75504, at *29-31 (S.D. Cal. Jul. 13, 2011). This 24 Court found that the entire market value rule applied because the patentee was seeking a 25 royalty based on the entire market value of the accused products, i.e., a percentage of the 26 products’ revenue. See id. Here, MPT is not seeking a royalty rate based on a percentage of 27 Defendants’ revenue, as the patentee in Lucent was; instead, MPT is requesting a per unit 28 royalty that is $1.50 per product regardless of the revenue derived from the products. -8- 10cv2618 1 Mr. Yurkerwich’s damages analysis does not end with his conclusion that a $1.50 per 2 unit would be the appropriate reasonable royalty in this case. In an effort to support his $1.50 3 per unit royalty, Mr. Yurkwich states that the $1.50 per unit rate would be approximately 4 0.25% of Apple’s accused product revenue and approximately 0.78% of LG’s accused product 5 revenue. (Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶ 97, Ex. C ¶¶ 120-21.) Mr. 6 Yurkerwich also states that at a 1% royalty rate the average per unit amount for Apple’s 7 accused products would be $6.00 based on their average selling price of $600 and the average 8 per unit amount for LG’s products would be $1.92 based on their average selling price of $192. 9 (Id. Ex. A ¶ 96, Ex. C ¶ 119.) These statements violate the entire market rule. See Uniloc, 632 10 F.3d at 1321 (“[T]he fact that the entire market value was brought in as only a ‘check’ is of no 11 moment.”). In making these statements, Mr. Yurkerwich relies on the total revenues of the 12 accused products to support his royalty rate. Therefore, the entire market value rule is 13 applicable to these statements. See LaserDynamics, 694 F.3d at 67; Uniloc, 632 F.3d at 1318; 14 Garretson, 111 U.S. at 121. A patentee may only rely on the entire market value of the accused 15 products in its reasonable royalty analysis if it can show that the patented feature, here video 16 compression technology, drives the demand for the entire accused products. See 17 LaserDynamics, 694 F.3d at 67. MPT does not even attempt to make such a showing. 18 Instead, MPT argues that its market approach complies with the entire market value 19 rule. (Doc. No. 597 at 3-10.) MPT argues that its reasonable royalty analysis complies with 20 the entire market value rule because Mr. Yurkerwich’s analysis properly performs an 21 apportionment of the royalty base by relying on comparable licenses. (Id. at 5-10.) The Court 22 first notes that the entire market value rule is not satisfied simply because a patentee relies on 23 comparable licenses in its damages analysis. Whether a reasonable royalty analysis properly 24 relies on comparable licenses is a different legal inquiry from whether a reasonable royalty 25 analysis violates the entire market value rule. See, e.g., LaserDynamics, 694 F.3d at 66-70, 26 79-81 (performing a separate analysis for determining whether the entire market value rule was 27 violated and whether the damages were based on comparable licenses); Lucent, 580 F.3d at 28 1325-32, 1336-39 (same). However, the use of the accused products’ entire market value as -9- 10cv2618 1 a royalty base can be economically justified where sophisticated parties have entered into 2 “agreements that base the value of the patented invention as a percentage of the commercial 3 products’ sale price.” Lucent, 580 F.3d at 1339; see also Microsoft Corp. v. Motorola, Inc., 4 2012 U.S. Dist. LEXIS 152244, at *29 (W.D. Wash. Oct. 22, 2012); Mondis Tech., Ltd. v. LG 5 Elecs., Inc., 2011 U.S. Dist. LEXIS 78482, at *17-18 (E.D. Tex. Jun. 14, 2011). 6 Here, MPT attempts to rely on several of its lump sum agreements with various 7 licensees to justify its use of the entire market value of the accused products. (Doc. No. 597 8 at 6-7; Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶¶ 82-84, Ex. C ¶¶ 105-07.) Lump 9 sum agreements are inherently not based on a percentage of the commercial products’ sale 10 price because they are entered into without the parties knowing the full extent to which the 11 licensee will use the invention and the revenue and profits the licensee will derive from that 12 use.5 See Lucent, 580 F.3d at 1326 (“[A]n upfront, paid-in-full royalty removes, as an option 13 for the licensee, the ability to reevaluate the usefulness, and thus the value, of the patented 14 technology as it is used and/or sold by the licensee.”). MPT also relies on three agreements 15 entered into by Lucent that contain royalty rates of $1.50 to $2.00 per unit. (Doc. No. 495-1, 16 Declaration of Justin Barnes Ex. A ¶ 81, Ex. C ¶ 104.) Because the royalty rates in these 17 Lucent agreements were based per unit dollar amounts, the royalty rates were not based on the 18 covered products’ revenues or profits. Therefore, MPT’s evidence of comparable licenses is 19 insufficient to justify its use of the entire market value of the Defendants’ accused products as 20 21 5 In his expert reports, Mr. Yurkerwich states: “MPT and the licensees chose to 22 calculate the amounts potentially owed based on applying the revenue and per unit rates to the sales of potentially infringing products.” (Doc. No. 495-1, Declaration of Justin Barnes Ex. 23 A ¶ 84, Ex. C ¶ 107.) Even assuming this is true, Mr. Yurkerwich fails to provide any evidence showing whether the ultimate lump sum payments were based on revenue rate, which 24 involves the entire market value of the products, or a per unit rate, which does not. In addition, Mr. Yurkerwich does not support his statement with any language contained in the actual 25 agreements. Mr. Yurkerwich’s statement appears to be based on MPT’s purported licensing policy as explained by its licensing trustee, Mr. DeBlasi. (Id. Ex. A ¶¶ 14-23; Ex. C ¶¶ 15-24.) 26 MPT and Mr. Yurkerwich have failed to present any evidence showing that both parties to these agreements, not just MPT, understood that the lump sum payments were based on the 27 revenue of the relevant products and were a reflection of a MPT’s royalty models. (See also id. Ex. A ¶ 22; Ex. C ¶ 23 (explaining that MPT royalty models “were not intended to 28 document the ultimate payments agreed to with the licensee”).) - 10 - 10cv2618 1 part of its damages analysis. 2 In addition, it is unnecessary for Mr. Yurkerwich to state his royalty rate as a percentage 3 of Defendants’ revenue or state what a 1% royalty of Defendants’ accused products would be 4 because his ultimate conclusion–based on the information he relied on–is that a reasonable 5 royalty would be a rate of $1.50 per product. Under these circumstances, any discussion of 6 the Defendants’ total revenue carries a substantial danger of unfair prejudice to the Defendant. 7 See Uniloc, 632 F.3d at 1320 (“The disclosure that a company has made $19 billion dollars in 8 revenue from an infringing product cannot help but skew the damages horizon for the jury, 9 regardless of the contribution of the patented component to this revenue.”). Therefore, the 10 Court also concludes that any reference to the royalty rate as a percentage of Defendants’ 11 revenue should be excluded under Federal Rule of Evidence 403 because the probative value 12 is substantially outweighed by the danger of unfair prejudice to the Defendants. Accordingly, 13 the Court excludes Mr. Yurkerwich’s testimony and damages analysis to the extent it relies on 14 or is based on Defendants’ revenues or profits of the accused products. 15 V. License Comparability 16 Georgia-Pacific factor 1 considers: “The royalties received by the patentee for the 17 licensing of the patent in suit, proving or tending to prove an established royalty.” 18 Georgia-Pacific, 318 F. Supp. at 1120. For a damages expert to rely on a prior license, “there 19 must be a basis in fact to associate the royalty rates used in prior licenses to the particular 20 hypothetical negotiation at issue in the case.” Uniloc, 632 F.3d at 1317. Therefore, “licenses 21 relied on by the patentee in proving damages [must be] sufficiently comparable to the 22 hypothetical license at issue in suit.” Lucent, 580 F.3d at 1325. 23 A patentee may not rely on license agreements that are “‘radically different from the 24 hypothetical agreement under consideration’ to determine a reasonable royalty.” Uniloc, 632 25 F.3d at 1316 (quoting Lucent, 580 F.3d at 1328); see also, e.g., Wordtech Sys. v. Integrated 26 Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir. 2010) (declining to find licenses 27 comparable because they “arose from divergent circumstances and covered different 28 material”); ResQNet.com, 594 F.3d at 870 (criticizing damages expert for relying on licenses - 11 - 10cv2618 1 that showed no “discernible link to the claimed technology”). Further, “comparisons of past 2 patent licenses to the infringement must account for ‘the technological and economic 3 differences’ between them.” Wordtech, 609 F.3d at 1320 (quoting ResQNet, 594 F.3d at 873); 4 see also Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197, 1211 (Fed. Cir. 2010) (“[U]se 5 of past patent licenses under factors 1 and 2 must account for differences in the technologies 6 and economic circumstances of the contracting parties.”). Moreover, “alleging a loose or 7 vague comparability between different technologies or licenses does not suffice.” 8 LaserDynamics, 694 F.3d at 79. The testimony of a damages expert in a patent suit who relies 9 on non-comparable licenses in reaching his royalty rate should be excluded. See, e.g., IP 10 Innovation L.L.C., 705 F. Supp. 2d at 690-91. 11 Defendants argue that the nine MPT licenses Mr. Yurkerwich primarly relies on in his 12 analysis are not comparable to the license that would have been reached at the hypothetical 13 negotiation as a matter of law. (Doc. No. 625 at 10.) Defendants point out that the MPT 14 licenses grant rights to additional patents, include international rights, were related to different 15 products, were in settlement of active litigation, and are dated several years after Apple’s 16 hypothetical negotiation date. (Id.) However, under Federal Circuit precedent, a patentee may 17 rely on licenses that are different from the hypothetical agreement as long as they are not 18 “radically different.” Uniloc, 632 F.3d at 1316. Defendants have failed to show that these 19 licenses are radically different. Indeed, Defendants’ own damages expert relies on some of 20 these MPT licenses in performing his reasonable royalty analysis despite the differences noted 21 by Defendants. (Doc. No. 597, Declaration of Sidford Brown Ex. 2 ¶ 58, Ex. 3 ¶ 66.) A 22 damages expert may rely on comparable licenses that are different from the hypothetical 23 agreement as long as he “account[s] for ‘the technological and economic differences’ between 24 them.” Wordtech, 609 F.3d at 1320. Here, Mr. Yurkerwich acknowledges the differences 25 noted by Defendants and explains how these differences do or do not affect his reasonable 26 royalty calculation. (Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶¶ 14-23, 51-71, 27 80-87, Ex. C ¶¶ 15-24, 74-94, 103-10.) For example, Mr. Yurkerwich explains that MPT’s 28 licensing practice was not dependent on the number of patents being licensed and foreign - 12 - 10cv2618 1 royalties were of limited importance in MPT’s royalty models, and Mr. Yurkerwich provides 2 a basis to adjust the royalties of these licenses to account for the fact that they were reached 3 in settlement of litigation. (Id. Ex. A ¶¶ 18, 58, 66-71, Ex. C ¶¶ 19, 81, 89-94; Doc. No. 637, 4 Declaration of Sidford Brown Ex. 1 ¶ 8, 11, Ex. 2 ¶ 8, 11.) Defendants may argue that some 5 of these explanations are not credible. However, shaky but admissible evidence is to be 6 attacked by cross examination, contrary evidence, and attention to the burden of proof, not 7 exclusion. Primiano, 598 F.3d at 564; i4i, 598 F.3d at 856. 8 Defendants also argue that Mr. Yurkerwich’s analysis is improper because he relies on 9 only nine of the 32 MPT licenses in performing his reasonable royalty analysis. (Doc. No. 495 10 at 15-18; Doc. No. 625 at 9-10.) Defendants argue that Mr. Yurkerwich impermissibly cherry 11 picked these nine licenses to inflate his proposed royalty rate. (Id.) But, “Federal Circuit 12 caselaw only requires a damages expert to rely on comparable licenses. It does not require an 13 expert to rely on all comparable licenses . . . .” Dataquill Ltd. v. High Tech Computer Corp., 14 2012 U.S. Dist. LEXIS 53164, at *17 (S.D. Cal. Apr. 16, 2012) (citing Uniloc, 632 F.3d at 15 1316; Wordtech, 609 F.3d at 1320; ResQNet.com, 594 F.3d at 870). Indeed, Defendants’ own 16 damages expert relies on several licenses in his damages analysis and concludes that some are 17 more useful to the reasonable royalty analysis than others. (Doc. No. 597, Declaration of 18 Sidford Brown Ex. 2 ¶¶ 43, 58, Ex. 3 ¶¶ 52, 66.) Mr. Yurkerwich explains in his expert reports 19 that he relied on these nine licenses and not all 32 licenses because these are the only licenses 20 for which he was able to locate the necessary per unit data. (Doc. No. 495-1, Declaration of 21 Justin Barnes Ex. A ¶ 61, Ex. C ¶ 84.) Defendants may disagree with Mr. Yurkerwich’s 22 decision to rely on these nine licenses, but the proper recourse then is for Defendants to present 23 contrary evidence and attack Mr. Yurkerwich’s testimony on cross-examination rather than for 24 the Court to exclude Mr. Yurkerwich’s testimony. See Primiano 598 F.3d at 564; Dataquill, 25 2012 U.S. Dist. LEXIS 53164, at *17-18. 26 Finally, Defendants argue that Mr. Yurkerwich improperly converts the nine MPT lump 27 sum licenses into running royalties. (Doc. No. 495 at 18-20.) Lump-sum agreements can be 28 relevant to running royalty damages, and vice versa, but “some basis for comparison must exist - 13 - 10cv2618 1 in the evidence presented to the jury.” Wordtech, 609 F.3d at 1320 (quoting Lucent, 580 F.3d 2 at 1330); accord Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10, 30 (Fed. Cir. 3 2012). Here, Mr. Yurkerwich has provided a basis for comparison by relying on MPT’s unit 4 data for these agreements and information about MPT’s licensing policies and calculations. 5 (Doc. No. 495-1, Declaration of Justin Barnes Ex. A ¶¶ 60-63, Ex. C ¶¶ 83-86.) See, e.g., 6 Dataquill, 2012 U.S. Dist. LEXIS 53164, at *16-17. Therefore, this is not a case where the 7 expert “did not offer any testimony to explain how [the] payments could be converted to a 8 royalty rate.” Whitserve, 694 F.3d at 30; see also Lucent, 580 F.3d at 1328. Accordingly, the 9 Court declines to exclude Mr.Yurkerwich’s damages analysis based on his reliance on the nine 10 MPT licenses. 11 VI. Established Royalty 12 Defendants argue that the Court should exclude Mr. Yurkerwich from opining that MPT 13 has an “established royalty” or a “licensing program” with established rates because he has not 14 satisfied the five-part test from Rude v. Wescott, 130 U.S. 152 (1889) to prove an established 15 royalty. (Doc. No. 495 at 13-15.) In response, MPT argues that Defendants misconstrue Mr. 16 Yurkerwich’s analysis. (Doc. No. 597 at 23-24.) MPT argues that Mr. Yurkerwich may 17 consider MPT’s licenses under Georgia-Pacific factor 1 without establishing that there is a 18 single unitary established royalty. (Id.) 19 The Court agrees with MPT. In his expert reports, Mr. Yurkerwich’s does not opine 20 that MPT’s licensing policy constituted a single established royalty or that MPT had 21 established rates. Mr. Yurkerwich simply states MPT’s licensing policy and relies on that 22 information to interpret the MPT licenses under Georgia-Pacific factor 1. (Doc. No. 495-1, 23 Declaration of Justin Barnes Ex. A ¶¶ 14-23, 51-65, 80-87, Ex. C ¶¶ 15-24, 74-86, 103-10.) 24 Because Mr. Yurkerwich does not contend that there is an established royalty, there is no need 25 for him to show that the five-part test from Rude v. Wescott has been satisfied in this case. See 26 Caluori v. One World Techs., Inc., 2012 U.S. Dist. LEXIS 25508, at *12 n.6 (C.D. Cal. Feb. 27 27, 2012) (explaining that a expert may rely on evidence to show a reasonable royalty even if 28 it does not constitute proof of an established royalty). - 14 - 10cv2618 1 VII. Reliance on Industry Data 2 Defendants argue that Mr. Yurkerwich and MPT’s other expert, Prof. Teece, improperly 3 rely on generic industry data that has no nexus to the parties, the patents, or the accused 4 products. (Doc. No. 495 at 24-25.) In Uniloc, the Federal Circuit explained that evidence 5 relevant to the calculation of a reasonable royalty “must be tied to the relevant facts and 6 circumstances of the particular case at issue and the hypothetical negotiations that would have 7 taken place in light of those facts and circumstances at the relevant time.” 632 F.3d at 1318. 8 Therefore, a damages expert’s testimony should not be based on “an arbitrary, general rule, 9 unrelated to the facts of this case.” Id. (granting new trial on damages based on the expert’s 10 use of the 25% rule in forming his damages opinion); see also, e.g., Oracle Am., Inc. v. Google 11 Inc., 798 F. Supp. 2d 1111, 1119-21 (N.D. Cal. 2011) (excluding expert testimony based on 12 the Nash bargaining solution). 13 In his expert report, Mr. Yurkerwich relies on “various industry surveys” to support his 14 calculation of the litigation discount that should be applied to MPT’s licenses. (Doc. No. 49515 1, Declaration of Justin Barnes, Ex. A ¶ 69, Ex. C ¶ 92.) Mr. Yurkerwich states “[t]he 16 probabilities of success in these surveys could be instructive when attempting to quantify this 17 validity and infringement discount.” (Id.) Prof. Teece also relies on these same industry 18 surveys in his expert reports. (Id. Ex. O ¶¶ 65-68, Ex. P ¶¶ 64-67.) In addition, Prof. Teece 19 relies on industry royalty rates to support the reasonableness of MPT’s licensing policies. (Id. 20 Ex. O ¶¶ 74-98, Ex. P ¶¶ 73-97.) This generic industry data is not tethered to the relevant facts 21 and circumstances of the present case. Indeed, in its opposition, MPT fails to provide any 22 explanation of how this industry data is related to the facts in this case. (See Doc. No. 597 at 23 24-25.) Therefore, any damages testimony based on this industry data should be excluded. 24 See Uniloc, 632 F.3d at 1318; Oracle, 798 F. Supp. 2d at 1119-21. Accordingly, the Court 25 excludes Mr. Yurkerwich and Prof. Teece’s expert testimony to the extent it relies on or is 26 based on generic industry data as part of their damages analysis. 27 /// 28 /// - 15 - 10cv2618 1 2 Conclusion After consideration of the parties’ briefs and the arguments of counsel, the Court 3 GRANTS IN PART and DENIES IN PART Defendants Daubert motion to exclude Mr. 4 Yurkwerwich’s damages analysis. The Court excludes Mr. Yurkerwich’s testimony and 5 damages analysis to the extent it relies on or is based on Defendants’ revenues or profits of the 6 accused products. The Court excludes Mr. Yurkerwich and Prof. Teece’s expert testimony to 7 the extent it relies on or is based on generic industry data as part of their damages analysis. 8 The Court denies the remainder of Defendants’ motion to exclude without prejudice to any 9 contemporaneous objections at trial made outside the presence of the jury. 10 IT IS SO ORDERED. 11 Dated: November 20, 2012 ____________________________ 12 13 MARILYN L. HUFF, District Judge UNITED STATES DISTRICT COURT 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 16 - 10cv2618
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