The Federal Circuit, in Prism Tech. LLC v. Sprint Spectrum L.P., Nos. 2016-1456, 2016-1457 (Fed. Cir. March 6, 2017) (Judge Taranto authoring), issued an opinion addressing comparable license agreements and the cost savings approach for reasonable royalties. We summarize the opinion here. The section on comparable license agreements is lengthy and worth reading in full.
The District of Nebraska, in Prism Technologies LLC v. AT&T Mobility, Civil Action No. 8:12-cv-00122-LES-TDT (Judge Lyle E. Strom) (September 22, 2014), granted a motion to exclude testimony from Prism’s damages expert James Malackowski. As described by the Court:
Mr. Malackowski’s model has multiple stages. First, he attempted to isolate the “economic footprint” of the invention in each defendant’s revenues to create a royalty base in a three-step calculation. First, he identified each defendant’s data services revenue. Second, he reduced the revenue of RIM subscribers per Prism’s RIM agreement. Third, he “apportioned” these revenues by each defendant’s cost savings fraction….The cost-savings fraction is a separate, two-step, calculation. Mr. Malackowski identified the numerator of this fraction as the cost savings value of the asserted patents (Filing No. 265-3, at 43-46).Then, Mr. Malackowski identified the denominator as the total network costs for each defendant (Id.). The resulting fraction represented the “benefit cost savings” of the infringing system.
From this royalty base, Mr. Malackowski applied a royalty rate that varied between 2-4%. The defendants took issue with this damages model on three main grounds, 1) that a revenue-based royalty was inappropriate as a matter of law, 2) that the “cost-savings” apportionment was flawed, and 3) the methodology was effectively a “black box” that could not be correlated with the invention’s economic footprint.
On November 25, 2013, Judge Davis of the Eastern District of Texas issued an opinion in TracBeam L.L.C. v. AT&T Inc., Case No. 6:11-CV-96 (Doc. No. 551), in which the court ruled on several issues including a motion to exclude opinions of TracBeam’s damages expert, Robert Mills. According to the court, the parties agreed that an appropriate royalty rate would be based on AT&T’s cost savings from using the patented technology compared to the best available non-infringing alternative. The issue centered around how to compute the cost savings. Mr. Mills opined that the cost savings to AT&T was the cost of building a new location network infrastructure at a price of $742M. AT&T claimed that Mr. Mills wrongly used the cost of AT&T’s entire location network rather than the cost savings based on the value of the patented methods. AT&T argued that the value of the invention could be assessed by taking “the difference in cost between the redundant system and the existing system.” Slip op. at 8.