A divided Federal Circuit has issued an en banc decision that appears to significantly tighten the standard for admitting expert testimony on damages. On May 21, an 8-2 majority held in part that Western District of Texas Judge Alan D. Albright had been wrong to admit expert testimony on damages from plaintiff EcoFactor, Inc. because it was not "based upon sufficient facts or data", ruling that a district court errs by admitting expert testimony where a "critical fact" relied upon by the expert is contradicted by relevant evidence—and on that basis, reversing a contrary Federal Circuit panel decision that affirmed the lower court's ruling on that issue. As a result, the majority overturned a $20M damage award against Alphabet (Google), sending the case back for a new trial on damages. The decision prompted two additional opinions, both warning that the majority had conflated its role as a gatekeeper with the jury's role as the factfinder.
The litigation below, filed in January 2020, is just one of several cases between the parties in a complex campaign that has spanned multiple district courts as well as the International Trade Commission (ITC). In January 2022, just before the start of trial, Judge Albright issued the underlying Daubert decision denying Google's motion to exclude the opinion of David Kennedy, EcoFactor's damages expert. Kennedy had relied on a "hypothetical negotiation" approach that Google contended was unreliable "because it lacked any reliable methodology or underlying calculations" and "should have been excluded for lack of comparability and apportionment". As is often the case, Judge Albright's decision—issued under seal, but cited in relevant part in appellate filings—is memorialized only in a table indicating the court's ruling, without including any explanatory reasoning in the written record. At trial, Kennedy then argued that Google should pay a certain dollar amount per infringing unit (the exact amount, identified as "$X", is otherwise redacted from public filings), after which a jury found that the defendant infringed claim 3 of the tried patent (8,738,327) and awarded the aforementioned $20M as a lump sum.
A Federal Circuit panel majority affirmed Judge Albright's Daubert order in June 2024, also upholding the lower court's denial of a Google motion for summary judgment of patent ineligibility and rejecting its appeal as to infringement. With respect to Kennedy's testimony, after a review of the admissible evidence in support of the expert's suggested royalty rate—three licenses (2020 licenses with Schneider and Daikin and a 2021 license with Johnson that EcoFactor characterized as each reflecting the $X royalty rate); the testimony of EcoFactor's CEO, Shayan Habib; and a contemporaneous email chain between EcoFactor and Johnson applying the royalty rate—the appeals court ruled that EcoFactor's damages opinion "was sufficiently tied to the facts of the case and thus admissible".
The majority also rejected Google's argument that the EcoFactor damages expert's opinion should be excluded because "the three license agreements were for EcoFactor's entire patent portfolio and [that expert] failed to account for the value of the '327 patent within that portfolio". Per the Federal Circuit, Kennedy did account for the differences in the prior licenses (as covering larger sets of patents), as those differences might have played out in a hypothetical license negotiation, and "separately grounded his apportionment opinion on underlying internal profit and survey data from Google". Under this latter analysis, the damages expert opined that the final royalty rate would have been "a very reasonable and conservative first offer". Based on all of this review, the appeals court concluded that Judge Albright did not abuse his discretion by declining to grant a new trial on damages.
Circuit Judge Sharon Prost dissented, arguing that Google was correct that Kennedy had calculated his recommended royalty rate in an "unreliable way" and that that the rate "did not reflect the value of the '327 patent (as distinct from that of other patents covered by those licenses)". As a result, Judge Prost contended that Judge Albright had abused his discretion in declining to exclude Kennedy's opinion—and that by ruling to the contrary, the majority "at best muddles our precedent and at worst contradicts it".
In September 2024, nine members of the Federal Circuit granted Google's petition for rehearing en banc and vacated the panel decision, asking the parties to file briefs on whether the district court complied with Federal Rule of Evidence 702 (which concerns the admissibility of expert testimony) and the Supreme Court's Daubert decision (which established a framework for assessing the relevance and reliability of such testimony). The court also held that third parties could file amicus briefs without seeking leave to do so, as a result of which 21 such briefs were filed. Two circuit judges did not participate in deciding Google's petition: Tiffany P. Cunningham, who apparently recused herself; and Pauline Newman, who remains suspended from hearing cases due her refusal to provide medical records and submit to examinations related to alleged cognitive decline. (The majority of the remaining judges later rejected EcoFactor's argument that the en banc panel was statutorily improper for including less than the court's full complement.)
The Majority En Banc Opinion
Chief Circuit Judge Kimberly Moore authored the court's May 21 majority en banc opinion, joined by Circuit Judge Prost as well as Circuit Judges Alan D. Lourie, Timothy B. Dyk, Richard G. Taranto, Raymond T. Chen, Todd M. Hughes, and Kara Farnandez Stoll. The majority began its analysis by reviewing whether Judge Albright had abused his discretion by admitting Kennedy's testimony, identifying two reasons why he had done so.
The first was that Judge Albright failed to create a sufficient record that included his ruling and the reasons behind it as required under Fifth Circuit law: As also noted above, the Federal Circuit observed that he "gave no rationale for ruling that the expert testimony was admissible or denying Google's motion for a new trial on damages", and held that "[a]n absence of reviewable reasoning may be sufficient grounds for this court to conclude the district court abused its discretion".
Second, the majority held that the denial "was an abuse of discretion on this record because Mr. Kennedy's opinion that the licenses show industry acceptance of an $X per unit royalty rate is not based upon sufficient facts or data". In support of this conclusion, the majority took a step back to review the relevant principles—giving a brief history of Rule 702, explaining that it had been amended in 2000 to highlight the court's role as a gatekeeper, adding three reliability-based requirements for expert testimony, in light of the Supreme Court's 1993 ruling to that effect in Daubert. Further amendments in 2023 (after Judge Albright denied Google's motion to exclude) that did not change the applicable substantive standard clarified that it is the proponent of the expert opinion or testimony at issue that has the burden to establish that it is admissible, and underscored that "an expert's opinion must stay within the bounds of a reliable application of the expert's basis and methodology".
The majority then held that "[d]eterminations of admissibility, which fall within the gatekeeping role of the court, are separate from determinations of weight and credibility, which are within the province of the jury in a jury case", a conclusion bolstered (per the majority) by language from the Rule 702 advisory committee stating that certain courts holding to the contrary had been wrong. This distinction "is particularly essential in the context of patent damages", the majority underscored, since estimating a reasonable royalty "by its nature 'necessarily involves an element of approximation and uncertainty'". Since there may be a range of reasonable royalties rather than just one, and because there may be multiple reliable methods for estimating a reasonable royalty, the majority observed that experts may properly give testimony offering competing conclusions as to a given set of facts, as reflected in Rule 702.
The majority found in light of the above that Kennedy had failed to justify his proposed royalty rate. As a general matter, it found that Kennedy was correct to use the well-worn framework contemplating what the accused infringer would pay as a willing licensee under the hypothetical negotiation framework from Georgia-Pacific and its progeny—pointing in particular to the Georgia-Pacific factor establishing that actual licenses are "highly probative" to what a reasonable royalty would have been. However, the court held that an expert must provide some basis for offering a lump-sum license in order to estimate a reasonable royalty, given the "fundamental differences" between the two.
The Schneider, Daikin, and Johnson licenses relied upon by Kennedy offered no such basis, the majority found, determining that as a matter of contract interpretation, none of the licenses supported the $X royalty rate that Kennedy had opined Google should pay. The majority scrutinized the language of certain preliminary recitals ("whereas" clauses) found in the three licenses that each include the $X rate, clauses that Kennedy had relied upon in his opinion—underscoring that the language in each recital explicitly stated that it this was EcoFactor's belief alone, and noting that the $X rate appears nowhere else in any of the three licenses.
The majority further observed that in the Schneider and Daikin licenses, additional language explicitly stated that their respective lump sums do not reflect or constitute a royalty—meaning that those licenses "expressly disavow" such a rate—while the Johnson license did not involve the assertion of the '327 patent here at issue (per a footnote). While the majority found that the licenses might be relevant to the reasonable royalty analysis as to what EcoFactor would pay, it determined that the licenses did not support the notion that the licensees would pay that same rate. This conclusion, the majority emphasized, does not encroach on the jury's role as a factfinder, but instead "involves the gatekeeping function of the court to ensure that there are sufficient facts or data for Mr. Kennedy's testimony that the licensees agreed to the $X royalty rate".
The majority also found that Kennedy had not properly relied on the testimony of Habib, EcoFactor's CEO, who had testified that the lump-sum payments from the three licenses were calculated by multiplying past and future sales by the $X rate. The majority found that the record did not support the notion that such a calculation had taken place, pointing out that Habib had also testified that EcoFactor had not been given access to such sales data for any of the three licensees. The majority additionally noted that Kennedy testified that he had not seen sales data, and pointed to statements by Habib that "the origin of the $X per unit rate was his 'general understanding' of the relevant industry" and that the licensees had all agreed to an $X-per-unit royalty rate, which the majority found was contrary to the evidence. Without any supporting evidence for these statements, the majority concluded that "Habib's testimony amounts to an unsupported assertion from an interested party".
The majority additionally pushed back against Judge Stark's dissent, arguing that his statement that Habib's belief was based on conversations with advisers who had actually seen financial data was "inaccurate" based on the record, and noting that testimony reflecting this notion had been excluded by Judge Albright. Nor does this merely present a factual dispute for the jury to resolve, the majority countered—stating that "it is not the province of the jury to credit testimony which was expressly excluded from trial".
Finally, the majority dismissed further evidence pointed to by EcoFactor (such as market share data) as supporting admissibility, determining instead that it was not relevant, as Kennedy had not relied on that evidence in his determination of an $X rate—emphasizing that "Rule 702 requires the expert's relied-upon facts or data—not the record as a whole—to constitute a sufficient basis for the expert's testimony". Nor was the majority sympathetic to EcoFactor's additional argument that at least the Johnson license supported the $X rate, as Kennedy had relied solely upon the combination of the three licenses. Circuit Judge Jimmie V. Reyna, in a concurrence in part and dissent in part, countered that Kennedy's reliance on the evidence would be an issue if the court were reviewing the pretrial decision on admissibility, but that the court could consider the entire record when reviewing a motion for a new trial, as was the case here.
The majority concluded as a result of the above issues that Kennedy's testimony lacked "sufficient facts or data, as required by Rule 702(b)"—finding that this "deficiency renders Mr. Kennedy's testimony unreliable and therefore inadmissible under Rule 702".
More broadly, the majority held that "[w]here, as here, the relevant evidence is contrary to a critical fact upon which the expert relied, the district court fails to fulfill its responsibility as gatekeeper by allowing the expert to testify at trial". Judge Albright's failure to do so here was "undoubtedly prejudicial", the majority thus determined—finding that because it "cannot be sure that the admission of Mr. Kennedy's testimony did not influence the jury's damages award", it was necessary to remand for a new trial on damages (thus reversing Judge Albright's denial of Google' motion to that effect). However, the majority reinstated the portions of the panel decision that denied Google's appeal as to patent eligibility and infringement.
Judge Reyna's Opinion
Judge Reyna concurred in part and dissented in part, joined by Circuit Judge Leonard P. Stark. Judge Reyna faulted the majority for departing from the original scope of the en banc proceeding: Rather than addressing "the extent to which district courts have discretion to decide fact-based questions of admissibility under Rule 702 and Daubert", he characterized its shift to a "new theory" of contract interpretation as one that deprived EcoFactor of notice and an opportunity to be heard.
Turning then to the admissibility of Kennedy's testimony, Judge Reyna argued that it had been properly supported by the Schneider, Daikin, and Johnson licenses viewed in light of Habib's testimony, as further citing market share data—in particular, data on the relative size of Google compared to the other three licenses. In contrast to the majority, which as noted above characterized this testimony as based on conversations with advisors who had not seen the relevant data and as having been excluded, Judge Reyna characterized this market share information as uncontested by the defendant. He also asserted that it was reasonable to use market share data to form a multiple for Google (based on its relative size compared to the other licensees) that would then be applied to the amount from those licenses, thus resulting in a lump sum that Google would have to pay.
Given this record, Judge Reyna contended that Judge Albright did not abuse his discretion by concluding that Kennedy's testimony was based on "sufficient facts or data" under Rule 702—which he characterized as not requiring "that expert opinion be based on undisputed or dispositive facts or data". To the contrary, Judge Reyna argued that in recognition of the possibility that there may be multiple versions of the facts, Rule 702 bars a trial court from excluding testimony because it agrees with one version over another (citing advisory committee notes to the rule's 2000 amendment). Judge Reyna underscored that the majority impermissibly weighed the credibility of Habib's testimony and ignored additional facts bolstering Kennedy's reliance on it—and asserted that the majority, by faulting Habit's testimony for not being based on record evidence, misunderstood the "very purpose of a fact witness, whose basis for testifying is personal knowledge". Even if the majority had been correct that Kennedy's testimony should have been admissible, Judge Reyna further insisted that the remedy should not have been "wholesale exclusion".
Judge Reyna additionally argued that Google had failed to meet its burden to show that the admission of Kennedy's evidence had been prejudicial, under Fifth Circuit law establishing that a party does not carry its burden to show prejudice when the erroneously admitted evidence was duplicative of properly admitted evidence. That was the case here, Judge Reyna noted, since Habib testified to the jury about the $X rate without objection from Google—meaning that the jury would have heard about that figure even without the benefit of Kennedy's opinion. In any event, Judge Reyna observed that "while EcoFactor sought damages based on the $X rate, the jury returned a verdict that appears to be based on a much smaller royalty rate". Under similar circumstances, Judge Reyna held, other courts have held that errors regarding the exclusion of such evidence were harmless.
Circuit Judge Stark's Opinion
Judge Stark also concurred in part and dissented in part, joined by Judge Reyna. After broadly agreeing with Judge Reyna that the majority focused relatively little on Rule 702 and Daubert despite the scope of its en banc review being limited to those issues, Judge Stark proceeded to argue that the majority was wrong to interpret the record as "so completely one-sided" that, as expressed in the majority's central holding, "the relevant evidence is contrary to a critical fact upon which the expert relied" (emphasis added to quote by Judge Stark). While he concurred that a "district court should not admit expert testimony that is unquestionably at odds with the evidence upon which an expert opinion is based" (emphasis in original), Judge Stark asserted that for the reasons outlined by Judge Reyna, there was actually sufficient evidence supporting Kennedy's opinion.
However, beyond that dispute over the record, Judge Stark underscored an "important reality", that the scope of the majority opinion was in fact quite narrow—asserting that it "only governs where an expert's testimony is undoubtedly contrary to a critical fact upon which the expert relies. Thus, in the vast majority of patent cases, where the relevant evidence the experts are considering can support competing conclusions, the Majority Opinion is inapplicable" (emphasis in original).
Nevertheless, Judge Stark expressed a concern that the majority opinion would be "misread" to require that "district judges, in pursuit of their gatekeeping responsibilities, to invade the province of jurors and resolve fact disputes"—thus potentially allowing Rule 702 to serve as a way for courts to resolve fact disputes, "at least with respect to damages experts".
This concern, per Judge Stark, is "grounded in the Majority's apparent conclusion" that Judge Albright abused his discretion by admitting testimony based on disputed facts, even though disputed facts are "not necessarily insufficient" (emphasis in original). To the contrary, Judge Stark—reviewing various facts that could support either party's view of the three licenses and Habib's testimony—concluded that "[b]ecause the jury could reasonably have credited EcoFactor's interpretation of the disputed evidence, that evidence can constitute 'sufficient facts and data' under Rule 702". Courts do not abandon their role as gatekeepers by allowing experts to rely on disputed facts; all this means is that a factfinder must later resolve those disputes, he insisted. "That factfinder should not be us", cautioned Judge Stark—faulting the majority for assuming that role anyway.
Finally, Judge Stark echoed the majority's frustration with Judge Albright's "failure to put [his] reasoning on the record", stating that this "lack of explanation makes our reviewing function unnecessarily difficult". However, he argued that this does not rise to the level of an abuse of discretion, and even if it did, Judge Stark asserted that the majority had itself provided "no reasoning" why the proper remedy should be a retrial on damages. Rather, Judge Stark would have vacated the judgment and ordered the district judge to "fulfill his gatekeeping responsibility"—i.e., to provide "sufficient explanation of his prior ruling or re-doing his analysis, potentially by conducting an evidentiary Daubert hearing, making findings of fact, and interpreting the license agreements".
What Comes Next
Initial reactions to the majority's decision have generally indicated that the likely result will be greater scrutiny over the factual bases for expert opinions. For instance, Manatt, Phelps & Phillips partner Bruce Zisser told Law360 that he expects defendants to cite the decision in "most cases going forward, aiming to pick apart damages testimony by contending that the evidence is contrary to a key fact" (per Law360's summary)—and that courts may give it greater weight due to its rare status as an en banc opinion. Thompson Coburn partner Nathan Fonda sees that strategy as likely to be utilized by both plaintiffs and defendants, predicting to IAM that the case will be "cited frequently by both sides in an attempt to excuse damages experts", and stating that he expects "parties to try to argue that any arguable flaw is grounds for exclusion of the expert's ultimate opinion on damages". Fonda also invoked the part of the decision addressing the dispute over whether the three cited license agreements included the cited royalty rate, stating that the ruling could shift incentives during settlement negotiations as plaintiffs try to get "accused infringer[s] to agree to a stated royalty rate".
The Federal Circuit has not yet issued its mandate, as further noted by Fonda, so it is not yet clear whether it will order Judge Albright to merely exclude Kennedy's evidence during the damages retrial or allow parties to revisit their expert reports. It also remains to be seen whether, as other stakeholders have speculated, the case could potentially work its way up to the Supreme Court.
For additional background on the twists and turns in this campaign, see "A West Texas Jury Giveth, the ITC Taketh Away" (April 2022), as well as "Federal Circuit Sidesteps Fifth Circuit Ruling on Convenience Transfers" (February 2023); "Claim Construction by Another Name Is Still Claim Construction" (February 2024); and "Denial of Summary Judgment Is Not Appealable After Trial on the Merits, Reminds Federal Circuit" (June 2024).
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