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January 26, 2015 Practice Points

Daubert Challenges to Intellectual Property Damages Analyses

In the first half of 2014, challenges to financial experts, resulted in 42 percent being partially or totally excluded and in the area of intellectual property, more than half resulted in the experts' testimony being excluded or partially excluded

by Jennifer Vanderhart

In the first half of 2014, it was reported that there were 103 challenges to financial experts, of which 42 percent resulted in the experts' testimony being partially or totally excluded. In the area of intellectual property, 12 of the 23 challenges—more than half—resulted in the experts' testimony being excluded or partially excluded. Several recent challenges in which the expert testimony was allowed in intellectual property disputes, however, diverge from that trend.

In EveryScape, Inc. v. Adobe Systems Incorporated, Adobe argued that EveryScape's expert used the Entire Market Value (EMV) of Vanishing Point rather than apportioning the incremental value added to Photoshop by the accused Clone Brush. EveryScape responded that the Clone Brush is the unique component of Vanishing Point and that the other tools and features of the software are commonplace. The court ruled that Daubert is not intended to require an expert who proffers expert testimony to prove to the judge that their assessment of the situation is the correct one among competing theories. Rather it requires only that the conclusion has been reached in a scientifically sound and methodologically reliable fashion.

In Numatics Inc. v. Baluff, Inc. et al., the court denied defendant's motion to exclude the report of Numatic's damages expert on lost profits and reasonable royalties. The court opined that Numatic's expert properly applied that Panduit test when calculating lost profits. In particular, defendants argued that the expert did not consider other market participants when calculating lost profits and that he did not appropriately allocate market share. However the court opined that the expert did consider non-infringing alternatives and had found them unsuitable. In addition to challenging plaintiff's lost profit analysis, defendants also challenged plaintiff's expert's use of the entire market value of the infringing products as the royalty base. The court opined the expert appropriately supported his contention that the accused display was the primary feature driving sales, and that even if some customers might have purchased the product without the display, the expert was not required to negate all possibilities of alternative or foregone purchases.

In Ultratec, Inc. et al v. Sorenson Communications, Inc. et al. the court denied Sorenson's motion to exclude the expert's reliance on supply agreements rather than true patent licenses. Recent decisions have generally not favored using comparable license agreements unless it could be shown that the technology was very similar. In this case there were no bare patent licenses for the asserted patents and the court opined that the supply agreements the expert relied on "represented an actual agreement into which plaintiffs were willing to enter considering their attempts to maintain a monopoly (factor 4) and involved plaintiffs' competitors, which are similar to defendants (factor 5)." In addition, the expert adjusted the royalty rate to account for differences between those agreements and a hypothetical license to which the parties would have agreed.

In Mobile Telecommunications Technologies LLC v. Sprint Nextel, et al., Apple filed a motion to strike the expert report of Mobile Telecommunications Technologies LLC(MTEL)'s expert for numerous reasons. The defendant alleged that the plaintiff's expert failed to apportion the base to account for non-infringing features. In this case, however, the court noted that there is a factual contention that the apps, which are the basis of the royalty base, derive all their value from technology that is allegedly infringing and therefore apportionment would not be necessary. Apple also contends that comparable apps are available for free, and that the expert did not address that fact appropriately. The court noted that revenue and value can be had from apps which are able to be downloaded for free, which was acknowledged by the expert. In addition, Apple argued that the expert's analysis that was based on data downloads over the life of a smartphone was improper because no cell phone provider ever charged for data based on the life of the phone and many cell providers do not charge for data downloads at all. The court found that the expert adequately addressed the first point and opined that the second point was "flatly incorrect." The court noted that even if data downloads are not invoiced specifically, the cell carriers recover that cost from the consumer in some way. Apple had also filed a motion to prevent discussion of certain facts such as Apple's size, wealth, overall revenues or the entire market value of the accused sales. The court granted Apple's motion and stated that the expert was not to discuss overall sales of the accused products without leave of the court, to be obtained outside the presence of the jury.

Although numerous Daubert motions filed against experts analyzing intellectual property damages have been denied by the courts recently, none of the seminal decisions addressing EMV or apportionment have been overturned. Apportionment is still likely to be the prudent course for patent infringement matters involving multi-component products unless it is being claimed that the allegedly infringing technology drives sales.

Keywords: commercial and business, litigation, intellectual property, entire market value, EMT, royalty, Daubert, expert, royalty base, royalty rate

Jennifer Vanderhart, Ph.D., is a managing director at FTI Consulting in Washington, D.C.

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