Judge Gilstrap recently ruled that  certain challenges to a damages expert’s testimony  went toward the weight a jury could give that testimony, rather than whether the testimony should be admitted.  Specific FRAND-related portions of the testimony that he would admit at trial include the following:

• Expert could testify that the hypothetical FRAND royalty rate to be awarded for infringement damages (which presumes the patents are valid and infringed) would be higher than the royalty rate of a comparable FRAND license, which comparable license’s royalty rate may have been skewed low based on discounts made for litigation risks and costs.
• Expert could testify about FRAND royalties that the accused infringer charges for its own SEPs.
• Expert could testify about licenses negotiated in the context of German litigation and threat of injunction.

Judge Gilstrap indicated that the expert had sufficiently identified what he relied on and explained adjustments that he made to those proposed comparable licenses to account for differences from the hypothetical negotiated license.  The defendant’s challenges to that testimony goes to the weight the jury should give the testimony, not its admissibility.

Judge Gilstrap’s ruling is an interesting example of how FRAND litigation has matured since taking the main stage in Judge Robart’s first-of-its-kind FRAND royalty decision in Microsoft v. Motorola (see our May 1, 2013 post) and Judge Holderman’s following decision in In re Innovatio (see our Oct. 3, 2013 post).  Both of those 2013 decisions were based on, inter alia, a general failure of litigants to present sufficiently comparable licenses.  Since then, Federal Circuit decisions have leaned toward admitting comparable licenses where expert testimony sufficiently accounts for differences from the hypothetical negotiated license.

For example, the Federal Circuit’s 2014 Virnetx decision (a non-SEP case) counseled that, although “alleging loose or vague comparability … does not suffice,” a jury may consider comparable licenses where differences from the hypothetically negotiated license are explained to them (see our Sep. 17, 2014 post).  And the Federal Circuit’s 2015 Ericsson decision (an SEP FRAND case) stressed that, although real world licenses “are almost never perfectly analogous to the infringement action,” the jury may consider them if expert testimony accounts for “distinguishing facts when invoking them to value the patented invention.” (see our Dec. 5, 2015 post).  Litigants following the Federal Circuit’s guidance may find courts more willing to allow expert testimony on proposed comparable licenses despite their differences from the hypothetical negotiated license.

Decision

Defendants Motorola Mobility and ZTE filed a Daubert motion to exclude testimony of patent owner St Lawrence’s damages expert.  The expert testimony concerns what FRAND royalty to award as damages in this case based on a hypothetical negotiation between the patent owner and defendants who are willing to enter a license agreement and do so under an assumption that the patents are valid and infringed (i.e., the hypothetical FRAND royalty).  The Defendants raised several challenges to the expert testimony.  We discuss below three challenges related to use of comparable licenses in determining a litigated FRAND royalty.

Accounting for Discount for Litigation Risks and Costs

The Defendants challenged the damages expert’s testimony that would apply an upward adjustment to the royalty from a comparable FRAND license because that royalty had been discounted (lowered) to account for litigation risks and costs (but the hypothetical FRAND royalty presumes the patents are valid and infringed).  Specifically, the expert’s starting point for determining the hypothetical FRAND royalty rate was the FRAND rate negotiated in a license between the patent owner and Samsung.  The expert then increased the hypothetical royalty rate “to calculate the amount that Motorola might offer in the hypothetical negotiation if litigation and patent validity were not issues as they were in the Samsung negotiation.”  To estimate the amount of the discount in the Samsung license, the expert relied on two licensing proposals that someone else (LG) has made to St. Lawrence that included a 50% “settlement discount” and a 18.25% “invalidity discount.”

Motorola argued that the ultimate license agreement that LG entered with St. Lawrence was very different than the two proposals–by almost a factor of ten–and “do not reflect any actual settlement or invalidity discounts provided to LG and ultimately agreed to by” St. Lawrence.  Further, the Samsung agreement itself “does not contain any discounts to be adjusted for.”

Judge Gilstrap, however, ruled that the damages expert’s testimony would not be excluded because the expert had sufficiently disclosed his methodologies and identified what he was relying on, which allows Motorola to make an informed cross-examination on this issue:

In light of these facts, Mr. Weinstein’s reliance on the LG proposals is not excludable.  In principle, experts may increase royalty rates derived from prior licenses to account for discounts attributable to litigation risks and costs.  Motorola’s disagreement primarily lies not with [the experts] methodology but with the inputs [he] uses.  In fact, the sources [the expert] uses to justify these inputs is transparent.  In other words, [the expert’s] methodology is “not so opaque as to be immune from rigorous cross-examination, the ‘traditional and appropriate means of attacking shaky but admissible evidence.'”  The Court has also considered and rejected Motorola’s other criticisms concerning [the expert’s] application of settlement discounts to the Samsung rate, for example, its argument that the Samsung agreement does not contain any discounts to be adjusted for.  [The expert] has provided a clear statement in his report explaining his opinion that the Samsung rate has non-itemized settlement discounts, an opinion that can be rigorously cross-examined.

Judge Gilstrap was not ruling that Motorola’s arguments were without any merit.  But the arguments do not justify excluding the testimony.  Motorola’s cross-examination of the expert at trial could undermine the weight the jury gives the expert’s testimony.

Judge Gilstrap also rejected Motorola’s argument that the FRAND commitment precludes adjusting the Samsung negotiated FRAND rate to a different litigated hypothetical FRAND rate for Motorola:

Motorola also asserts that the existence of a FRAND obligation precludes any adjustment to the Samsung license’s effective royalty rate to account for the hypothetical negotiation’s infringement and validity assumptions [i.e., the assumption that both parties consider the patents to be valid and infringed].  However, [Motorola] cites no persuasive authority holding that an expert may not adjust FRAND royalty rates to account for the hypothetical negotiation’s assumption of infringement and validity.

Motorola’s rejected argument probably was that the “non-discriminatory” part of the FRAND commitment precludes having different royalty rates for different licensees (Motorola’s exact argument is not available because the briefs are filed under seal).

Relying on Defendants Own FRAND Licenses

Motorola challenged the damages expert’s reliances on comparable FRAND licenses that Motorola entered to license its own SEPs.  Motorola argued that Georgia-Pacific Factor 2 concerns “rates paid by the licensee [of the hypothetical negotiation] for use of other patents”, meaning rates that Motorola paid for a license, not royalty rates that Motorola charges.

Judge Gilstrap rejected this argument directly, because it is erroneously premised on an argument “that an expert cannot consider evidence that does not explicitly fall within the Georgia-Pacific framework,” stating:

Such notion has no support in the law.  The real question is whether rates charged by Motorola is relevant evidence to the hypothetical negotiation.  The Court finds that [the expert’s] report adequately explains the relevance of this evidence.  Accordingly, even if evidence of FRAND rates Motorola charges for its own cellular technology may not explicitly fall within Factor 2 by its express terms, it is neither irrelevant nor unreliable evidence.  Therefore, it should not be excluded.

FRAND Licenses Negotiated In Context of Litigation

Motorola also challenged the expert’s reliance on proposed comparable licenses that St. Lawrence “negotiated in the context of litigation in Germany” and, thus, those licenses were “tainted by the coercive environment of patent litigation.”  Judge Gilstrap rejected this challenge because the expert had not used those licenses as a starting point, but to make adjustments in his proposed hypothetical royalty rate after taking into account litigation-induced pressure in the comparable licenses:

[The expert] does not use these licenses as a starting point for his opinion.  Rather, he uses these additional licenses to justify an adjustment of the hypothetical royalty rate.  In doing so, he explicitly takes into account how an injunction could have placed pressure on the licensees and affected the rates of these additional licenses.  As with many of its other challenges, Motorola’s argument goes to the weight and not admissibility of the testimony.