The Northern District of Texas in Axcess Int’l, Inc. v. Savi Tech., Inc., Case No. 3:10-cv-1033-F (N.D. Tex. January 25, 2013), ruled on defendant’s motion to exclude plaintiff’s damages expert, Dr. Scott D. Hakala, from testifying on damages. The court held a pretrial hearing and afterward considered issues related to Dr. Hakala’s expert report. Axcess submitted a supplemental document in an attempt address the court’s concern that Dr. Hakala had inadequately apportioned the royalty base to account for the smallest salable patent practicing unit and failed to give a reliable assessment of the royalty rate. The court continued the trial to permit Axcess an opportunity to address the court’s concerns and in the opinion outlined the additional requirements for Dr. Hakala’s new expert report.
- Entire market value rule/smallest salable unit
The first issue concerned whether Dr. Hakala had improperly applied the entire market value rule or had apportioned for the smallest salable unit. The accused product was Savi’s RFID tags that contained the accused feature plus, as Dr. Hakala admitted, other non-accused features. Dr. Hakala used the entire revenue of the RFID tags as the royalty base. The court found it unclear, however, whether Dr. Hakala had determined that the RFID tags were the smallest salable patent practicing unit and ordered further analysis from Dr. Hakala to demonstrate why he used the total revenue for all accused tags to compute the base or, if his conclusion was based on the entire market value rule, how the patented technology drives demand for all the accused tags.
An interesting point of this discussion was the court’s recognition that the smallest salable unit can be larger than the patented feature. The court described the facts in Cornell and LaserDynamics and how in both cases the smallest salable unit was larger than the accused features in the products at issue. Regarding Cornell: “The Cornell court rejected the plaintiff’s expert’s testimony because he calculated the royalty base using the ‘computer brick’ rather than the processor, which the court found to be the smallest salable patent-practicing unit. However, the claimed technology was only ‘a component of a component within the processor.’” Slip op. at 4. Regarding LaserDynamics: “[T]he patent involved was ‘directed to a method of optical disc discrimination which essentially enables an optical disc drive (‘ODD’) to automatically identify the type of optical disc—e.g., a compact disc (‘CD’) versus a digital video disc (‘DVD’)—that is inserted into the ODD.’ LaserDynamics, Inc., 694 F.3d at 56. The court found that the smallest salable patent practicing unit was the ODD, not the patented component.” Slip op. at 4-5.
- Royalty rate—comparable licenses
The court first considered Georgia-Pacific factor #1: royalties received by the patentee for licensing the patent in suit. Dr. Hakala relied on a draft agreement between Axcess and Honeywell that contained a 10% royalty rate, but that was negotiated before any patents had issued. The royalty provision was deleted prior to execution of the agreement, and instead Honeywell decided to purchase the product. Dr. Hakala tried to overcome this problem by contending that Honeywell’s purchase of the product included an implied license to practice any patents once they issued and that 10% royalty would be indicative of the target royalty rate for the patents.
The court rejected this argument because Factor #1 relates to royalties received for the patent in suit. Plus, the court found the draft provision of questionable comparability because the draft agreement covered seven different patents. The court ordered Dr. Hakala to provide more detail and analysis regarding Factor #1, including a “more robust analysis of the actual agreement … rather than rely on the draft royalty provision.” Slip op. at 12.
Next, the court considered Hakala’s analysis of Georgia-Pacific Factor #2—rates paid by licensees for the use of other patents comparable to the patent in suit. Here, the court found that Hakala had once again provided insufficient evidence of comparability for license agreements related to Savi’s technology. The court wanted a discussion of how the patents in the Savi-related agreements and the corresponding licenses compared to the patent in suit and the hypothetical agreement at issue. The court stated: “Once Dr. Hakala provides a basis for finding comparability, then ‘[t]he degree of comparability of the [Savi] license agreements as well as any failure on the part of [Dr. Hakala] to control for certain variables are factual issues best addressed by cross examination and not by exclusion.’ ActiveVideo Networks, Inc. v. Verizon Communications, Inc., 694 F.3d 1312, 1333 (Fed. Cir. 2012).” Slip op. at 13.
- Lost profits
Here, the dispute was over Dr. Hakala’s use of a “channel partner theory” that he claimed was used to calculate an alternative royalty figure. Savi argued that it was actually a lost profits theory. In this theory, Dr. Hakala estimated Axcess’s target incremental profit margin and multiplies it by the revenues realized from the accused tags to determine a reasonable royalty. The court agreed this was a lost profits analysis because the product of profit margin and total revenues equals gross profit. The court thus required to prove “but for” causation for lost profits.