Judge Payne recently denied  defendant LG’s motion to exclude damages expert testimony on alleged standard essential patents (SEPs) where LG challenged the experts opinion (1) because he did not start with a royalty-rate that is then adjusted  by applying Georgia-Pacific factors and (2) because he failed to apportion value to the patented feature given his reliance on the end product price.  The patents-in-suit are alleged to be essential to the GSM, UMTS/HSPA and LTE cellular standards, but the parties disagreed whether the patents are SEPs and other patents-in-suit are not alleged to be SEPs.

The decision sheds some incremental insight on the entire market value rule (EMVR) that concerns when one can use the end product as the royalty base.  The court considered it a rule of evidence for U.S. jury trials to avoid jury confusion and found that the expert properly considered the end product price to assess profitability of the accused device, but otherwise did not rely on the end product as a royalty base.  He ruled that the expert may rely on that end product price in his analysis, but he cannot “publish” (i.e., disclose) that end product price to the jury given the EMVR’s “important evidentiary principle” that “care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product” and concern that “diclosure of the end product’s total revenue cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.”

Royalty Rates and Georgia-Pacific

LG first challenged the damages expert’s opinion because he “fail[ed] to link [Georgia-Pacific] factors to any royalty rate calculation” or “state that any value is used as a starting point.”  Judge Payne ruled that the Georgia-Pacific analysis is a flexible one for which the expert provided a sufficient detailed analysis:

… [The damages expert] performs a detailed economic analysis under each Georgia-Pacific factor, describing the evidence he considered (or elected not to consider) and his reasons for doing so.  The Federal Circuit has “never described Georgia-Pacific factors as a talisman for royalty rate calculations” and has stated it is not necessarily correct to “resort to the factors to justify urging an increase or a decrease in a royalty calculation.”  In other words, Georgia-Pacific analysis is a flexible one.  There is no legal requirement that an expert begin with a particular “starting point” and then use the fifteen factors to nudge the royalty up or down.  Here, [the damages expert] frames his economic analysis around the Georgia-Pacific factors and offers his royalty rate opinions as a conclusion, having considered the applicability (or inapplicability) of each factor.  In doing so, he spells out the economics principles and methods on which he relies. [quoting Ericsson, Inc. v. D-Link Sys., 773. F.3d 1201 (Fed. Cir. 2014)]

Entire Market Value Rule (EMVR) Apportionment

LG also challenged the damages expert’s opinion for using the entire value of the accused devices without apportioning the marginal value of the patented features to those devices.  But Judge Payne found that the expert was not using the entire value of the device as a royalty base, but for estimating the profit margins of the devices when applying  Georgia-Pacific factor 8 on profitability of the accused device and “as a check to determine whether his calculated royalty rate is fair and reasonable in the FRAND context.”  Judge Payne ruled this was permissible, because “[p]rofitability is a relevant factor in a FRAND damages analysis, and [the damages expert] does not attempt to base his damages calculation on the entire value of any accused product.”

Nonetheless, Judge Payne ruled that the damages expert could not “publish the entire revenue or profit of an accused device to the jury” based on “an important evidentiary principle” of the EMVR for avoiding jury confusion:

The admissibility of these opinions under Rule 702 does not, however, imply that it would be proper for [the damages expert] to publish the entire revenue or profit of an accused device to the jury at trial.  There is an “‘important evidentiary principle’ that ‘care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product.’ … disclosure of the end product’s total revenue ‘cannot help but skew the damages horizon from the jury, regardless of the contribution of the patented component to this revenue.  While it is appropriate for [the damages expert] to use entire revenue and profit figures to calculate profit margins in his expert report, it may be inappropriate as an evidentiary matter for him to present these figures to the jury.” [citing CSIRO v. Cisco Sys., 809 F.3d 1295, 1302 (Fed. Cir. 2015) ]