Patent Damages

EDTX accepts Nash Bargaining; finds plaintiff’s expert failed to account for smallest salable unit

On March 1, 2013, the EDTX issued an opinion in VirnetX Inc. v. Cisco Systems, Inc., Case No. 6:10-cv-00417-LED (Doc. No. 745), granting in part and denying in part Cisco’s motion to exclude certain opinions by VirnetX’s damages expert, Roy Weinstein.  The court addressed two issues:  (1) whether Mr. Weinstein had accounted for the smallest salable patent practicing unit (SSU) in determining the royalty base the accused products; and (2) the acceptability of Mr. Weinstein’s reliance on the Nash Bargaining Solution (NBS) profit splitting model.  The court ruled for Cisco on issue #1 and for VirnetX on issue #2.

 Mr. Weinstein had applied two different damages models in his report:  the Nash Bargaining Solution (NBS) and a hypothetical negotiation.  Cisco argued that Mr. Weinstein’s royalty base was flawed because he failed to limit the base to revenue from the alleged infringing products or components.  Cisco further argued that Mr. Weinstein had incorrectly applied the different damages models in calculating damages.

  •  SSU vs. EMVR

Mr. Weinstein calculated the reasonable royalty by “(1) taking the total revenue from the accused products and removing U.S. Government sales from the revenue base; (2) removing ancillary items sold with the accused products such as power cables, batteries, extra memory, etc. from the revenue base; (3) multiplying this adjusted revenue base by 70% to reflect the percentage of accused products purchased for security reasons to determine the ‘adjusted royalty base’; and (4) multiplying the apportioned revenue base by a reasonable royalty rate of 1%.”  Slip op. at 3 n.2.

Cisco contended that Mr. Weinstein used the entire revenue from the accused products without satisfying the requirements of EMVR – i.e., the patented feature drove demand for the accused products.  Cisco further contended that the 70% “adjustment” was nothing more than  “math trick” and was “indistinguishable from simply applying a lower royalty to the entire market value of the accused products.”  Slip op. at 4.  VirnetX countered by arguing that Mr. Weinstein had apportioned out several components from the base, that any defects in his analysis were due to imperfect and inadequate sales information provided by Cisco, and that he properly relied on a customer survey to reduce the base by the 70% multiplier.

The court found that Mr. Weinstein “made no sincere attempt to tie VirnetX’s damages to the smallest saleable patent-practicing unit.”  Slip op. at 4 (citing LaserDynamics).  The court observed that Cisco sells components and software separately from its larger servers and towers and that Mr. Weinstein failed to consider using these smaller units as his royalty base.  The court concluded that the 70% “apportionment factor is a poor substitute for the type of analysis one should undertake when parsing an alleged infringer’s profits for patented versus unpatented features.”  Slip op. at 5.  The court thus granted Cisco’s motion on this issue, but did suggest that Mr. Weinstein could “amend his report and recalculate his royalty base in light of the Court’s ruling.”  Id.

  •  NBS

Here, however, the court denied Cisco’s motion.  Cisco contended that Mr. Weinstein’s use of the NBS was unreliable because he failed to calculate the incremental profits associated with the use of the patented invention, and instead applied NBS to Cisco’s gross profit margins without tying those profits to the patented feature.  Cisco also challenged the 45%/55% profit split advanced by Mr. Weinstein.

The court disagreed that Mr. Weinstein had used the wrong profits, finding that he “considered the same incremental profits associated with the incremental revenue created by the patents-in-suit as Cisco’s own expert.”  Slip op. at 5.  The court further noted that he did proffer some explanation as to why Cisco and VirnetX would have deviated from the traditional 50/50 profit split.  The court thus denied Cisco’s motion as to NBS.

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