Patent Damages
18Oct/170

D Minn addresses inexorable flow, non-infringing alternatives, EMVR, apportionment

Posted by patentda

The District of Minnesota, Judge Ericksen presiding, in Select Comfort Corp. v. Tempur Sealy Int’l, Inc., Civil Action 14-cv-245 JNE/TNL (D. Minn. June 23, 2017), issued an order concerning lost profits and reasonably royalty related to a patented air mattress valve.   Judge Ericksen excluded Select Comfort’s expert’s testimony on lost profits and reasonably royalty, but allowed Tempur Sealy’s expert’s testimony on noninfringing alternatives.  Judge Ericksen also granted Tempur Sealy’s motion for summary judgement on lost profits, but denied summary judgment on reasonably royalty.

Lost Profits

Tempur Sealy argued that Select Comfort’s expert, Schwartz, proffered no evidence that “the patented features form the basis of consumer demand, which is required to prove the absence of a non-infringing alternative under the second Panduit factor,” citing Mentor.  Slip Op. at 9.  “To prove that there are no acceptable noninfringing substitutes, the patent owner must show either that ( 1) the purchasers in the marketplace generally were willing to buy the patented product for its advantages, or (2) the specific purchasers of the infringing product purchased on that basis,” id. at 10 (quoting Standard Havens Prods.).  Ultimately the Court found an absence of such evidence, and concluded that “Schwartz's opinion on lost profits must be excluded.”  Id. at 12.

Select Comfort, the patent owner and plaintiff, was pursuing lost profits under the theory of “inexorable flow,” a theory of lost profits that arises when the patent owner is not the company who directly suffered the lost sales but argues that the lost profits inexorably flowed to it.  In this case, the issue centered on Select Comfort’s subsidiary, which was the company that had purportedly suffered lost profits.  Select Comfort argued that it was entitled to the subsidiary’s lost profits because those losses inexorably flowed to Select Comfort and thus were recoverable to Select Comfort.  The court noted that the Federal Circuit has not adopted the inexorable flow theory—noting that “lost profits must come from the lost sales of a product or service the patentee itself was selling.”  Id. at 24-25 (quoting Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1367 (Fed. Cir. 2008)).  In addition to arguing that Select Comfort did not show lack of noninfringing alternatives, Tempur Sealy argued that Schwartz did not distinguish whether the lost profits were those of Select Comfort itself or those of a wholly owned subsidiary, a fact Schwartz admitted during deposition.  Id. at 26.  Indeed, Schwartz testified that “[h]e calculated what he characterized as ‘the rolled-up profits’” from Select Comfort.  The court observed that just because Select Comfort consolidates its financial statements does not demonstrate inexorable flow of profits from the subsidiary to Select Comfort, even assuming the viability of the inexorable flow doctrine.  Ultimately, “the Court conclude[d] that Select Comfort did not demonstrate the absence of acceptable noninfringing alternatives,” granting Tempur Sealy’s summary judgment motion of no lost profit damages.    

Select Comfort moved to exclude Tempur Sealy’s expert’s opinion that a Funai pump is a non-infringing alternative.  Id. at 19.  The Court rejected Select Comfort’s argument that the expert’s opinions about the Funai pump should be excluded because they are based on unreliable evidence, although the Court did limit his opinions to those identified in his report.  Id. at 19-20.

Reasonably Royalties

Regarding reasonable royalties, Tempur Sealy argued Schwartz’s opinion violated the entire market rule and should be excluded.  Id. at 13.  “The entire market value rule is a narrow exception to this general rule [that royalties be based not on the entire product, but instead on the smallest salable patent-practicing unit].  If it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product.”  Id. (quoting Laser Dynamics).  But driving demand is a high bar, requiring the feature to be more than just “valuable, important, or even essential.”  Id. at 13-14.  Because there was “no evidence that the patented valve enclosure assembly drove consumer demand,” the Court excluded Schwartz’s opinion.  Id. at 14.

In the alternative, Schwartz opined on the smallest salable unit.  Tempur Sealy argued that Schwartz failed to apportion between the patented features and the unpatented features of the air mattress pump, which includes power supply, hand controls, and the pump itself.  Id.  Because Schwartz “did not apportion between the patented and unpatented features in his reasonabl[e] royalty analysis,” the Court excluded his opinion.  Id. at 14-15. 

Neither of these rulings, however, cut off Select Comfort’s claim for damages based on a reasonable royalty.  Id. at 27.  Quoting Info-Hold Inc. v. Muzak LLC, 783 F.3d 1365, 1372 (Fed. Cir. 2015), the Court noted that “a patentee’s failure to show that its royalty estimate is correct is insufficient grounds for awarding a royalty of zero.”  In Info-Hold, the Federal Circuit also stated that, “[b]y extension, the exclusion of the patentee’s damages evidence is not sufficient to justify granting summary judgment.”  Id.

15Aug/16Off

NDCA excludes expert testimony for failure to apportion (including addressing claim scope argument)

Posted by Chris Marchese

The Northern District of California, in Nortek Air Solutions, LLC v. Energy Lab Corp., No. 14-cv-02919-BLE (July 15, 2016) (Judge Beth Labson Freeman), granted Energy Labs’ Daubert motion to exclude testimony of Nortek’s damages expert, Dr. Stephen Prowse, regarding reasonable royalty damages.  The motion included three reasons; we address the first one here:  “Dr. Prowse’s royalty analysis fails to apportion the value of the allegedly patented features from the unpatented features in the accused products ….”  Slip op. at 8.  The accused products were air handling systems.

In response to the motion, Nortek argued that Dr. Prowse had properly relied on the value of the accused air handling system as a whole rather than a smaller component for several reasons:  (1) “because the asserted claims are directed to the entire air handling unit rather than any individual features,” and (2) because “the air handling unit is the smallest saleable unit and thus an appropriate royalty base.”  Id.

19Jun/15Off

CDIL rejects defendants’ EMVR and SSPPU arguments and allows royalty base on entire products

Posted by Chris Marchese

The Central District of Illinois, in Philippi-Hagenbuch, Inc. v. Western Tech. Services Int’l, Inc., Case No. 12-1099 (Chief Judge James E. Shadid) (April 8, 2015), denied defendants’ motion to exclude opinions of plaintiffs’ damages expert, Michael E. Tate.  Tate had offered opinions on lost profits and reasonable royalty.  The reasonable royalty issue—whether Tate’s opinion that the royalty base should be the entire products at issue, which were truck bodies and water tanks, or should be apportioned—is addressed here.

The case involved two sets of patents:  water tank patents and truck body patents.  The plaintiffs contended that their patented design process created a water tank or a truck body and that no smaller, salable unit was separable or could be apportioned from the larger products for purposes of damages computation.  To this end, the court noted that the truck body patents claim a process for designing a custom truck body for specific environments by use of three-dimensional modeling of the loads to be hauled.  Some of the evidence indicated that the defendants’ customers purchased the custom truck bodies over generic bodies because the custom bodies were designed to meet the customers’ specifications, to carry a particular load, and to “max out” the truck’s performance, making the premium cost for the patented truck bodies worthwhile to the customers. 

10Dec/14Off

District of Nebraska excludes cost-savings apportionment model

Posted by Justin Barnes

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.

5Nov/14Off

Damages base – is the name of the game the claim?

Posted by Chris Marchese

“The name of the game is the claim.”  Chief Judge Rich wrote those words back in 1990.  Giles S. Rich, The Extent of the Protection and Interpretation of Claims--American Perspectives, 21 Int'l Rev. Indus. Prop. & Copyright L., 497, 499 (1990) ("To coin a phrase, the name of the game is the claim.").  That statement has typically been invoked in the context of claim construction.  However, in the ever-changing landscape of patent damages law, it seems to have growing force and effect. 

21Oct/14Off

SDFla excludes “end around” regarding EMVR

Posted by Justin Barnes

The Southern District of Florida, in Atlas IP, LLC v. Medtronic, Inc., Civil Action No. 13-CIV-23309 (Judge Cecilia Altonaga) (Oct. 6, 2014), granted a motion to exclude testimony from Atlas’ damages expert Donald Merino.  First, Medtronic alleged that Merino’s royalty base was “inflated and unreliable because it is derived from the entire market value of Medtronic end products, instead of the smallest salable patent-practicing unit.”  The Court held that “while undoubtedly the end product derives value from the allegedly infringing technology, Medtronic buys a chip from third parties, and the chip includes the allegedly infringing technology.”  Because of that, the chip was the SSPPU.  But rather than start an apportionment analysis with the chip, Merino started with the end product, and apportioned from there.  Atlas argued that this was permissible under the Rembrandt v Facebook decision, but the Court disagreed.  Instead, the Court held that starting with a base larger than the SSPPU and then apportioning down was simply “form over substance,” and rejected Merino’s approach based on “his improper use of the EMVR.”

4Aug/14Off

Judge Davis would make a good damages expert (CSIRO v Cisco)

Posted by Justin Barnes

On July 23, 2014, Judge Davis of the Eastern District of Texas issued findings of fact and conclusions of law regarding damages figures in CSIRO v Cisco, Case No. 6:11-cv-00343-LED.  Infringement and validity were stipulated, and the parties agreed to a bench trial on damages, which lasted four days.  CSIRO’s ‘069 patent related to IEEE 802.11 wireless standards (excluding 802.11b).

There was an allegation that CSIRO had made a RAND commitment to the IEEE regarding one of the 802.11 standards (802.11a), but Judge Davis put very little emphasis on this point, as CSIRO had volunteered to license the ‘069 patent anyway (even for 802.11 standards where there were no RAND commitments) and the number of accused products involving 802.11a was less than 0.1% of the total accused products.

30Jun/14Off

EDTX excludes expert who attempted to apportion the royalty base by claim elements; allows do-over

Posted by Chris Marchese

On June 21, 2014, Judge Davis of the Eastern District of Texas issued an opinion on a Daubert motion.  The case is Thinkoptics, Inc. v. Nintendo of America, Inc., Case No. 6:11-CV-455.  Thinkoptics moved to exclude the testimony of Nintento’s damages expert, Professor Daniel J. Slottje.  The court granted the motion, but also allowed a do-over. 

26Jun/14Off

NDCA does not require “further” apportionment of smallest saleable unit

Posted by Justin Barnes

On June 20, 2014, Judge Rogers of the Northern District of California issued a Daubert opinion in MediaTek Inc. v. Freescale Semiconductor, Inc., Case No. 11-cv-5341 YGR, addressing numerous grounds raised by the Defendant.  The discussion on royalty rate and market share were very short and not particularly noteworthy, but the royalty base discussion addressed an issue that is of considerable importance and relevance to other cases.   

4Jun/14Off

MDPA approves smallest salable unit as base; allows lump sum agreements as evidence of running royalty

Posted by Chris Marchese

On May 27, 2014, Judge Caldwell of the Middle District of Pennsylvania issued an opinion on a motion for reconsideration of an earlier Daubert opinion.  The case is Kimberly-Clark Worldwide, Inc. v. First Quality Baby Products, LLC, Civil No. 1:09-CV-1685.  The court addressed defendants’ motion to exclude opinions by plaintiff’s damages expert, Julie L. Davis, on two issues:  (1) whether Ms. Davis’ use of the smallest salable patent-practicing unit (“SSU”) as the royalty base violated the entire market value rule (“EMVR”); and (2) whether Ms. Davis’ use of lump sum agreements as evidence of a running royalty rate should be allowed.  The court ruled in plaintiff’s favor on both issues.