Abstract

Plaintiff's damages expert in a patent infringement case submitted a damages report that calculated a reasonable royalty for the defendant's infringement based in part on licenses granted to settle litigation over a different patent. The expert also relied on other licenses for products containing both patented and unpatented features without determining what amounts were attributable to the patented features and instead argued that this division was already reflected in the licenses. The district court found that the plaintiff had failed to justify how a license to settle litigation over a different patent was comparable to a license between willing parties for the patents-in-suit. It further concluded that the plaintiff needed to provide a more thorough explanation of how and why the other licenses reflected a division of the patented and unpatented features. These flaws led the district court to exclude the report.

Background

Biedermann Technologies owns several patents covering bone screws and methods of using them. It sued K2M, alleging that K2M's spine correction devices infringed these patents through their unauthorized use of the screws. Biedermann sought damages from K2M in the form of a reasonable royalty. To determine the royalty, Biedermann's damages expert relied on a construct called the "hypothetical negotiation."

The hypothetical negotiation imagines an alternate reality where the infringer licensed the technology instead of infringing the patents. It asks how a negotiation would have proceeded between a willing licensor and a willing licensee at the time of initial infringement, assuming the patents were valid and infringed. Courts often use existing licenses to inform this hypothetical negotiation but take care to ensure those licenses are sufficiently comparable to the hypothetical negotiation.

An additional wrinkle arises when the accused products incorporate infringing technology into a larger device, as damages must then be divided between the patented and unpatented features of the accused product. This allocation requires analyzing the incremental value of the patented features relative to the unpatented features. In some instances, the existing licenses may already incorporate such considerations into their royalty calculation.

Biedermann's damages expert relied on four licenses as evidence in the hypothetical negotiation. Two licenses arose in 2008 from agreements to settle litigation against Alphatec Spine and Allez Spine over infringement of Biedermann's '678 patent, which was not a patent asserted against K2M. Two more licenses, to Stryker in 2012 and NuVasive in 2018, did not involve litigation between the parties or arose well after its conclusion. Biedermann's report also relied on statements from its founder and president regarding the company's licensing practices. The report did not separately divide the royalty between the patented and unpatented features, instead arguing that the existing licenses had already done so.

K2M moved to exclude the expert's opinion.

The Biedermann Technologies  Decision

The court determined that two fundamental flaws doomed the admissibility of the expert's opinion: (1) the 2008 settlement licenses were not comparable to the hypothetical negotiation and (2) the expert failed to adequately divide the damages between the patented and unpatented features of K2M's accused product.

The expert's analysis of the 2008 settlement licenses suffered from several errors. As an initial matter, it did not rectify the differing context of those licenses as compared to the hypothetical negotiation. Biedermann entered the licenses to settle ongoing litigation with Alphatec and Allez, yet the damages report did not explain the underlying litigation. The court found this omission particularly glaring in light of K2M's plausible contention that the licensees were motivated by a substantial damages award Biedermann had secured against a third co-defendant. This fact suggested that Alphatec and Allez were not willing licensees.

The court also questioned the technological and economic comparability of the 2008 licenses. The licenses did not cover the patents-in-suit, and Biedermann's damages report did not engage in a substantive analysis of how the incremental value added by the patents-in-suit to K2M's products compared to the incremental value added by the 2008 licensed technology to Alphatec's and Allez's products. The report also failed to consider how market conditions in 2008 compared to market conditions in 2012 at the time of the hypothetical negotiation, or how differences in the Alphatec and Allez licenses affected their royalty rates. These omissions left the court unable to conclude that the 2008 settlement licenses were comparable to the hypothetical negotiation.

Turning to the two licenses it did deem comparable (the Stryker and NuVasive licenses), the court found that the damages report failed to adequately divide the damages between the features covered by the patents-in-suit and those that were not. The report needed to do this because the patented screws formed only a part of K2M's larger spine correction system. Although Biedermann tried to argue that the Stryker and NuVasive licenses incorporated those considerations into their royalty calculations, the damages report failed to address whether the use and value of the patented features in the licensed Stryker and NuVasive products aligned with the same features in K2M's accused products. It instead assumed that these features aligned and proceeded from that assumption. Given the lack of substantive analysis, the court found it impossible to determine the accuracy of those contentions.

The court also rebuffed Biedermann's attempts to use its standard licensing practices to plug the holes in the analysis, concluding that the expert had simply defaulted to the licensing policy to select the proposed royalty range. Generic licensing policies could not, however, replace a considered analysis of the disparities between the licenses and the hypothetical negotiation. The expert needed to explain how to normalize the royalty rates in the various licenses to the hypothetical negotiation. The failure to do so secured its inadmissibility.

Strategy and Conclusion

The evidence used to calculate a reasonable royalty in a hypothetical negotiation must be comparable to a negotiation between willing partners that involves the accused technology. Damages experts should account for any differences in negotiating position or technology and should do so in detail.

Further Information

The Biedermann Technologies  order can be found here.

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