Western District Of Texas Rejects Expert’s Hypothetical Negotiation Analysis That Used The Wrong Parties
On March 3, 2022, the United States District Court for the Western District of Texas entered a redacted copy of its February 24, 2022 order striking plaintiff’s expert report on damages and excluding the testimony of its damages expert. Daedalus Blue LLC v. SZ DJI Technology Co., Ltd., No. 6:20-cv-00073-ADA, Dkt. No. 173 (W.D. Tex. Mar. 3, 2022). The Court found the expert’s initial, timely-served report used the wrong parties in his hypothetical negotiation analysis and, for that reason, could not withstand defendant’s Daubert challenge. On the other hand, the expert’s “supplemental” report re-doing his analysis with the correct parties was untimely and thus stricken.
By way of background, “hypothetical negotiation” is an approach to determining reasonable royalty patent damages that looks at what a willing licensor (i.e., the patent-owner) and a willing licensee (i.e., the infringer) would have negotiated at the time the infringement began. In some cases, the patent-owner at the time infringement begins may not be the plaintiff. As the Court here recognized, the bargaining position of the prior patent-owner may be different than plaintiff’s—which can significantly change the damages analysis.
When plaintiff Daedalus initially served its damages expert report, the report analyzed a hypothetical negotiation between Daedalus and defendant DJI. However, the owner of the patents-in-suit at the time of the hypothetical negotiation was IBM, not Daedalus; thus, the initial hypothetical negotiation analysis used the wrong parties—a fact that defendant’s expert pointed out in his report. Right before plaintiff’s expert’s deposition, plaintiff served a second report in which the expert stated he “reconsidered the entirety of [his] opinions with respect to those factors that might change based on a change of the party of the hypothetical negotiation,” although he ultimately arrived at the same damages numbers.
Defendant moved to strike the second report and to exclude testimony based on the initial report under Daubert. The Court granted both motions.
With respect to the second report, the Court found that it was not properly a “supplemental” report under Federal Rule of Civil Procedure 26(e). In particular, the new analysis was not based on information unavailable at the time of the original report. The Court also considered whether the failure to timely disclose was substantially justified or harmless under Federal Rule of Civil Procedure 37(c)(1), concluding it was not. The prejudice to defendant, the case schedule, and plaintiff’s explanation for the late report all weighed against plaintiff. Notably, the Court found that, although the testimony to be excluded was important because it was plaintiff’s only expert testimony on damages, that factor did not outweigh the others because expert testimony is not necessary to recover damages in a patent case.
With respect to the original expert report, plaintiff essentially admitted that it could not stand alone without the “supplemental” report analyzing the proper parties to the hypothetical negotiation. Since the Court had struck the second report, it excluded the testimony of plaintiff’s damages expert.