Over the past few years, courts have begun cracking down on improper damages theories. The Federal Circuit’s 2012 opinion in LaserDynamics v. Quanta is instructive on this point, noting that in the absence of evidence that the patented functionality is the source of the demand for the entire product, then damages must be based on the “smallest salable patent-practicing unit.” This is an issue that has particular relevance to standard-essential patent litigation, as the functionality that allows for standards compliance is often implemented on a smaller chip within a larger consumer product device — think of a baseband chip within a smartphone, for instance.
In fact, this very issue just arose in a pending litigation (set to go to trial later this month in E.D. Tex.) brought by non-practicing entity Wi-LAN against Alcatel-Lucent, Ericsson, Sony Mobile Communications, and HTC, in which Wi-LAN accused the defendants of infringing several Wi-LAN patents by manufacturing and selling base stations and handsets that are compliant with the 3GPP High-Speed Packet data Access cellular standard (HSPA). This past Friday, presiding Judge Leonard Davis granted in part a Daubert motion brought by Alcatel-Lucent, HTC, and Sony to exclude certain Wi-LAN expert testimony on damages.
Wi-LAN’s expert, John C. Jarosz, had analyzed several existing Wi-LAN license agreements involving the patents-in-suit, and calculated a damages figure in the amount of a lump-sum royalty that was based on a reasonable royalty and a hypothetical negotiation between the parties. But the court found that Mr. Jarosz did not tie the calculation of damages to the smallest saleable patent-practicing unit, instead using the price of the entire HSPA-compliant base station as a base without offering evidence that the patented features drove demand for the entire product. The court noted that in fact, the base stations needed only an optional software upgrade and modem card to comply with the HSPA standard — and the patents-in-suit represent only a small portion of the overall HSPA standard. As such, the court excluded Mr. Jarosz’s reasonable royalty calculations as being a violation of the Entire Market Value rule. The court also rejected a “catch-all” statement by Mr. Jarosz that he had taken all the evidence into consideration in arriving at a final lump-sum royalty (based in part on a reasonably royalty), calling this “a poor substitute for the required analysis” that distinguishes between patented and unpatented features of an accused device.
The court did, however, allow for Wi-LAN to present an amended report by July 3, with subsequent (and expedited) depositions and rebuttal reports to follow if necessary. Having expert damages testimony excluded can be crippling or even fatal to a patent owner’s case (as Apple and Motorola learned before Judge Posner last year), so you can bet that Wi-LAN’s expert is currently preparing a supplemental report. We’ll keep you posted on any interesting trial and post-trial happenings in this case over the next few weeks.