Sitting by designation, Judge Rader recently outlined the analysis that a district court should conduct when considering whether an expert’s royalty analysis rests on “sound economic proof.”
In IP Innovation L.L.C. v. Red Hat, Inc., 1 Judge Rader reiterated that:
“a reliable reasonable royalty calculation depends on trustworthy evidence of both the royalty base and the royalty rate.”
The Court then excluded the plaintiff’s expert’s reasonable royalty opinion because it improperly inflated both the royalty base and royalty rate.
In his proposed royalty base, plaintiff’s damage expert had included 100% of defendants’ total revenues from sales of subscriptions to the accused operating systems. Judge Rader found the plaintiff’s expert erred in invoking the entire market value rule for three reasons. First, the claimed invention was “only one of over a thousand components included in the accused products.” Second, selected user statements were insufficient to show total market demand for the feature or its contribution to the demand for the entire product. Third, users did not buy the accused operating systems because of the accused feature; rather most sales came from products that did not take advantage of the accused feature. Overall, the Court found that the expert did not account for the record evidence showing that most users of the accused operating systems did not use the patented feature at all. Accordingly, the record could not support the conclusion that the often-unused feature drove demand for a royalty base of 100% of the operating systems.
Judge Rader also excluded the expert’s opinion on the grounds that he “arbitrarily picked a royalty rate that is much higher than existing royalty rates for licenses to the patents-in-suit.” As a starting point, the expert relied on published studies of average royalty rates in the “software industry” or the “computer and electronic products manufacturing industry.” The Court rejected this analysis on the grounds that both industries were broader than the particular feature at issue and that there was no evidence that the industry agreements were comparable to the patents-in-suit. The Court suggested that two licenses entered into a decade before the alleged hypothetical negotiation date were “far more relevant than the general market studies” that the expert had relied on in his expert report. The Court’s decision came approximately one month after the Federal Circuit’s ResQNet decision, and interestingly, in focusing on the two licenses, Judge Rader noted that they were not settlement agreements, seemingly suggesting that settlement agreements were less than relevant.
1 Case No. 2:07-CV-447, 2010 1 WL 986620 (E.D. Tex. Mar. 2, 2010)