Another Unsupported Patent Royalty Rejected

Expert testimony on patent royalties that is unsupported by evidence is excluded. Dominion Assets LLC v. Masimo Corp., Case No. 14-cv-03002 (N.D. Cal. Aug. 1, 2018). Plaintiff Dominion alleged infringement by Defendant Masimo of U.S. Patent Nos. 5,379,764 and 5,460,177, which are directed to radiation measurement techniques for blood concentration. Dominion presented expert testimony on a reasonable royalty. Masimo filed a motion to exclude the expert’s testimony as (1) failing to rely on a license agreement that is economically comparable to the patented invention, (2) failing to apportion damages to the allegedly infringing features, and (3) failing to tie the royalty rate to the facts of the case. The Court agreed with Masimo, excluding Dominion’s expert testimony on damages.

On the license agreements, the expert relied on settlement agreements between Masimo and a third party. The agreements involved Masimo’s revolutionary technology. Dominion purchased the asserted patents out of bankruptcy cheaply and had not developed any products. The Court noted the expert’s fundamental economic flaw: comparing the highly-valued Masimo technology to the low-valued patents. Further, the Court noted that the expert’s opinion was unreliable because the agreements covered a portfolio of patents, and not the single claim asserted by Dominion. Finally, the agreements were the result of ongoing litigation, and the Court noted that the coercive nature of litigation makes resulting settlement agreements unreliable as measure of a hypothetical negotiation for a reasonable royalty. The Court excluded testimony related to these agreements.

On apportionment, a topic familiar to our readers, the expert relied on the entire market value rule (EMVR), setting the royalty base as the entire product sold by Masimo. The Court noted that the expert had not provided evidence that the patented feature was the sole driver of customer demand, which is the standard to determine whether EMVR is appropriate. The expert neither considered the non-infringing features that could have driven demand for the product nor attempt to apportion damages at all. The Court excluded the damages opinions for failing to apportion the value between the infringing and noninfringing features.

On the royalty rate, the expert used the settlement agreements to determine a 4% royalty rate for the ’764 patent and a 3.75% rate for the ‘177 patent. The Court could not understand how the expert arrived at these royalty rates, noting that the expert never explained where the royalty rate started and why the ‘764 patent was more valuable than the ‘177 patent. The Court held that the royalty rate was “plucked out of thin air” and excluded the expert’s testimony. Dominion at *16.

 

Lessons for Practice

Damages calculations require evidence. Once again we see a court strike expert testimony for failing to adequately support the damages alleged. One key point here is the Court’s discussion of the applicability of the settlement agreements. While the agreements were similar technologically, the economic nature and circumstances of the post-litigation settlement agreements were too far removed from a hypothetical pre-litigation negotiation to be used for a reasonable royalty calculation.

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