United States: Expert Opinions On Reasonable Royalties Must Have A Basis For Comparison To Licenses On Which They Rely And Tie Them To The Facts Of The Case

Abstract

A Delaware court refused to consider expert opinions on a reasonable royalty for patent infringement that relied on licenses that were not economically comparable, did not provide a basis for comparison to the facts of the case, and were based on a bargaining theory that was not tied to the facts of the case.

Background

Bayer accused Baxalta and Nektar Therapeutics of infringing a patent directed to a factor VIII protein used to treat hemophilia A, a congenital bleeding disorder caused by a deficient or defective factor VIII protein.

Each party contended that the other's expert opinion on reasonable royalties was unreliable and should not be considered by the court in determining the appropriate reasonable royalty to be awarded for patent infringement. The plaintiff argued the defendants' damages expert opinions (1) improperly relied on the technical expert's non-infringement and invalidity analysis, (2) lacked economic foundation and arbitrarily apportioned damages, and (3) failed to show the licenses relied on were technologically or economically comparable to a license that would result from a hypothetical negotiation between the parties. The defendants, on the other hand, argued the plaintiff's damages expert impermissibly relied on a "rule of thumb" bargaining theory and failed to apportion damages.

The Bayer Decision

The court analyzed each of the motions to exclude expert testimony relating to the appropriate reasonable royalty to be awarded for patent infringement, and ultimately excluded certain portions of the proposed testimony.

Plaintiff's Motion to Exclude Reasonable Royalty Testimony

The plaintiff argued that a patent must be presumed to be valid and infringed at the time of a hypothetical negotiation between the parties to determine a reasonable royalty, and that the defendants' damages opinions were inconsistent with that presumption. The court disagreed, based on the following reasoning. Concluding that a patent makes only small improvements over the prior art does not render a damages opinion inconsistent with the presumption of validity; validity does not define a patent's economic value—a valid patent might offer little economic value over existing inventions; and defendants' damages expert thus properly relied on a technical expert's invalidity opinions to determine the patent's economic value. As to the assumption of infringement, the court excluded parts of the defendants' damages expert opinion that were inconsistent with the court's claim construction.

The plaintiff next argued that the apportionment calculation the defendants' damages expert presented in determining a reasonable royalty lacked economic foundation because royalties must be apportioned between infringing and non-infringing features of the accused product. The court disagreed and found the expert properly apportioned damages based on the value of the accused product that could be attributable to the patent and the percentage of the accused products that would infringe the patented claims. The court further explained that the plaintiff's arguments regarding the expert's apportionment methods went to the weight and credibility of the expert's opinion, so the plaintiff's argument could be properly addressed in cross-examination.

Lastly, the plaintiff argued the defendants' damages expert failed to show how the licenses relied on in forming his opinions were technically and economically comparable to a license resulting from a hypothetical negotiation between the parties. The court found that the damages expert provided enough evidence showing the licenses were technically comparable, and questions of degree could be addressed through cross-examination. As to whether the licenses were economically comparable, the plaintiff argued the license resulting from a hypothetical negotiation between the parties would be a non-exclusive, running royalty license between competitors. In contrast, of the four licenses relied upon by the expert, only one was non-exclusive, two were between competitors, and none used a running royalty. The court was most persuaded by the plaintiff's argument that the defendants' expert improperly used lump-sum licenses to support a running royalty hypothetical license without some basis for comparison. The court rejected the defendants' proposition that a lump-sum license may easily support a running royalty license, but not vice versa, explaining that such licenses rely on different considerations and have fundamental differences that would be relevant to the economic comparison. Finding that the defendants' expert did not reconcile these features with the hypothetical license, the court excluded his comparable license opinion from being considered in determining a reasonable royalty.

Defendants' Motion to Exclude Reasonable Royalty Testimony

The court next addressed the defendants' argument that the plaintiff's damages expert impermissibly relied on a bargaining theory—the Nash Bargaining Solution—and failed to tie his analysis to the facts of the case. This theory proposes a 50/50 split of the incremental profits associated with use of the patented technology where two parties bargain under a certain set of premises. The proponent of the theory must tie the case facts to the set of premises, because the theory proves the profit-split only based on those premises. Otherwise, the theory is unsupported by adequate facts and reasoning and is an inadmissible "rule of thumb."

The court analyzed the plaintiff's expert opinions to determine whether they were sufficiently tied to the case facts. First, the damages expert conducted substantial analysis to determine end points of the bargaining range for the hypothetical negotiation. From there, the damages expert derived a royalty rate at the mid-point of that range based on the assumption that the parties had equal bargaining power. Next, the damages expert relied on a document concerning defendants' efforts to develop and commercialize the accused product to support the Nash theory. But the court found the record did not show the document was an agreement concerning the accused product, much less an agreement sufficiently comparable to the hypothetical license. Regardless of the damages expert's use of a royalty range, the court ultimately found that he did not tie the Nash premises to the facts of the case and excluded the damages expert's opinion.

Regarding apportionment, the expert compared profits from the accused product to profits from an older generation product since the expert considered the two products nearly identical aside from the infringing features. The defendants argued that both products included non-infringing features that require further apportionment. The court disagreed, finding the apportionment analysis of the plaintiff's damages expert sufficiently reliable and related to the facts of the case, so it did not exclude those opinions.

Strategy and Conclusion

Courts may carefully evaluate the opinions of damages experts before deciding whether to take them into account in determining a reasonable royalty for patent infringement, considering the methodologies used and how the facts of the case apply to those methodologies. They may analyze whether licenses supporting an expert opinion are technically and economically comparable to the license that would result in a hypothetical negotiation between the parties, the basis used by the expert for comparison, and whether the expert adequately ties their analysis to the applicable facts of the case.

Further Information

The Baxter decision can be found here.

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