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Federal Circuit Affirms Exclusion Of Damages Expert’s Royalty Rate Opinions
08/31/2021On August 26, 2021, the United States Court of Appeals for the Federal Circuit (“CAFC”) issued an order affirming orders from the United States District Court for the Northern District of California excluding certain opinions of plaintiff’s damages expert. MLC Intellectual Property LLC v. Micron Technology Inc., __ F.3d __ (Fed. Cir. August 26, 2021). In its decision, the CAFC let stand the district court judge’s orders precluding plaintiff’s damages expert from characterizing certain license agreements as supporting his reasonable royalty rate determination.
Plaintiff patent owner sued defendant for infringement of its ’571 patent directed at solid-state memory devices capable of alterably storing more than one bit of information per memory cell. While certain independent claims of the ’571 patent are directed to a “multi-level memory device,” the only claim on appeal is more narrowly directed to an “[a]pparatus for programming an electrically alterable non-volatile memory cell having more than two predetermined memory states.” Plaintiff identified defendant’s bare and packaged non-volatile NAND memory die containing single and multi-level memory cells of infringement. Defendant contended that while a single die is the smallest saleable patent practicing unit, there are numerous other non-infringing features in its die.
Plaintiff had licensed a patent portfolio including the ’571 patent to a number of defendant’s competitors between 2006 and 2010. With this background, plaintiff’s damages expert attempted to reconstruct the hypothetical licensing negotiation between plaintiff and defendant. For the royalty base, the expert opined on two separate approaches for determining the royalty base: (1) a comparable license approach and (2) the smallest saleable patent practicing unit (“SSPPU”) approach. Plaintiff’s damages expert then evaluated the Georgia Pacific factors to determine an appropriate royalty base. In doing so, he relied on a prior patent portfolio license in which a lump sum was paid by the licensee, but which also included a most favored customer provision that would reduce the lump sum to 0.25% of worldwide sales if the portfolio was later licensed at that rate to another company.
Defendant moved to preclude plaintiff’s damages expert from mischaracterizing the prior license as reflecting a 0.25% royalty rate and to strike portions of his report as based on evidence not disclosed during discovery and for failure to apportion out the value of non-patented features. In significant part, the district court granted defendant’s motions and plaintiff filed an interlocutory appeal.
Applying an abuse of discretion standard, the CAFC first affirmed the district court’s determination that testimony about a 0.25% royalty rate was not based on sufficient facts or data and was not the product of reliable principles and methods. The CAFC agreed with the district court that the license agreement upon which plaintiff relied for the 0.25% royalty rate did not actually disclose a royalty rate and that the royalty rate inferred from its most favored customer provision was incompatible with the agreement as a whole and the rate that could have been derived from the lump-sum payments under the license and licensees projected sales. The CAFC also criticized the expert for failing to provide testimony on how the lump sum could be converted to the 0.25% royalty rate.
The CAFC next reviewed the district court’s decision to strike portions of plaintiff’s expert report relying on undisclosed facts. On appeal, plaintiff asserted that it provided adequate disclosure in its responses to defendant’s interrogatories directed at the factual and legal basis for the relief sought and any alleged reasonable royalty rate, and that anything more would have required it to disclose material designated for expert discovery. Defendant argued that plaintiff failed to identify, in response to these interrogatories, a number of documents ultimately relied on by its expert to show that the prior license agreement reflects a 0.25% royalty rate. The parties acknowledged that the district court mistakenly concluded that the license agreement itself had not been disclosed. Nonetheless, the CAFC concluded that plaintiff’s failure to identify the other documents upon which its expert relied was sufficient basis to strike his 0.25% royalty rate opinions. The CAFC agreed with the district court that, had plaintiff disclosed this information, defendant could have sought fact discovery regarding this contention.
The CAFC also rejected plaintiff’s narrow reading of Rule 26. Rule 26 explains that the disclosures required under section (a)(2) governing disclosure of expert testimony are in “addition to the disclosures required by Rule 26(a)(1).” And Rule 26(a)(1)(A)(iii) requires parties seeking damages to provide in their initial disclosures “a computation of each category of damages” as well as “the documents or other evidentiary material, unless privileged or protected from disclosure, on which each computation is based.” The CAFC also found that plaintiff’s position undermined the district court’s discretion to encourage early discovery.
Last, the CAFC affirmed the district court’s decision on defendant’s Daubert motion to exclude plaintiff’s expert’s reasonable royalty rate opinions for failure to apportion. The accused technology does not make up the whole of the accused die, noted the CAFC. And, neither of plaintiff’s expert’s damages theories—comparable license or SSPPU—apportioned for the non-patented aspects of the accused dies or wafers. Respecting the comparable license theory, the CAFC observed that plaintiff’s expert conducted no assessment of the licensed technology versus the accused technology to account for any differences.
