The opinion of the court was delivered by: Marilyn L. Huff, District Judge United States District Court
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT MICROSOFT'S MOTION IN LIMINE CONCERNING SIMS' SUPPLEMENTAL EXPERT REPORT
On June 29, 2011, Defendant Microsoft Corporation filed a motion in limine to limit Lucent's damages theories from its expert's, Raymond Sims, June 23, 2011 supplemental expert report. (Doc. No. 1302.) On July, 7, 2011, Plaintiff Lucent Technologies, Inc. filed an opposition. (Doc. No. 1311.) The Court held a motion hearing on July 13, 2011. Luke L. Dauchot and Jeanne Heffernan appeared on behalf of Plaintiff Lucent. Juanita Brooks, Roger Denning, Francis Albert, and Michael Rosen appeared on behalf of Defendant Microsoft. After due consideration, the Court GRANTS in part and DENIES in part the motion in limine.
Microsoft brings this motion in limine to challenge the supplemental report on damages submitted by Lucent's expert Raymond Sims as in violation of Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993), and the entire market value rule. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011).
The Court has already ruled on two sets of motions in limine filed by the parties. (See Doc. Nos. 1179-80, 1284-85.) The first motions in limine were filed on December 7, 2010. (See Doc. Nos. 1008-1013, 1020-1032.) On the day of the motion hearing, January 4, 2011, the Federal Circuit rendered its opinion in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). In Uniloc, the Federal Circuit rejected the 25% rule of thumb under Daubert holding that the rule "fails to tie a reasonable royalty base to the facts of the case at issue" and further clarified the entire market value rule. 632 F.3d at 1315. In light of the impact of the Uniloc opinion on the damages analysis in this case, the Court permitted the parties to update their damages expert reports and submit additional briefing.
The parties filed their second set of motions in limine on May 13, 2011. (Doc. Nos. 1219-22; 1224-25.) On June 16, 2011, the Court issued its order denying in part and granting in part the motions. (Doc. Nos. 1284-85.) In its order regarding Lucent's damage calculations, the Court stated that "[i]n summary, the Court concludes that Lucent fails to properly apportion its damages calculation to separate between the patented features and unpatented features of Microsoft Outlook. Lucent must perform an additional apportionment in order to introduce a proper royalty base for its damages calculation or meet the three factored test for the entire market value rule if it seeks to use all revenue from infringing copies of Outlook as its base." (Doc. No. 1284 at 14.) In light of the rulings in its order, the Court granted the parties another opportunity to supplement their damages expert reports to comport with the rulings. (See Doc. Nos. 1284-85.) In addition, the Court allowed further objections to be filed on modified expert reports. (Id.) On June 23, 2011, Lucent's expert Raymond Sims supplied his supplemental expert report. Microsoft brings this present motion on the grounds that the supplemental expert report fails to comport with the Court's previous ruling on apportionment.
I. Legal Standard under Daubert
Under Daubert, the court is charged with a "gatekeeping function" to ensure expert testimony is both reliable and relevant. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993). Courts have the "responsibility of ensuring that all expert testimony must pertain to 'scientific, technical, or other specialized knowledge.'" Uniloc, 632 F.3d at 1315. The court must decide if such testimony is based on a "firm scientific or technical grounding" as required under Federal Rule of Evidence 702. Id. Under Rule 702, a witness qualified as an expert by knowledge, skill, experience, training or education can testify in opinion or otherwise if: (1) the testimony is based on sufficient facts or data; (2) the testimony is the product of reliable principles and methods; and (3) the witness has applied the principles and methods reliably to the facts of the case. Fed. R. Evid. 702. Rule 703 of the Federal Rules of Evidence permits experts to render opinions even if based on inadmissible evidence so long as the inadmissible evidence is of the type reasonably relied on by experts in that field. Daubert, 509 U.S. at 595. Such inadmissible facts or data may be admissible as the basis for an expert's opinion if their "probative value in assisting the jury to evaluate the expert's opinion substantially outweighs their prejudicial effect." Fed. R. Evid. 703.
In addition to reliability and relevancy, "the patentee must sufficiently tie the expert testimony on damages to the facts of the case." Uniloc, 632 F.3d at 1315 (citing Daubert, 509 U.S. at 59)). "[O]ne major determinant of whether an expert should be excluded under Daubert is whether he has justified the application of a general theory to the facts of the case." Id. If the expert methodology is sound and the evidence relied upon sufficiently relates to the case at hand, disputes about the degree of relevance or accuracy may go to the testimony's weight but not its admissibility.
For a proper calculation of patent damages, the Federal Circuit requires "sound economic and factual predicates." See Riles v. Shell Exploration and Prod. Co., 298 F.3d 1301, 1311 (Fed. Cir. 2002); see also Grain Processing Corp. v. American Maize-Products Co., 185 F. 3d 1341, 1350 (Fed. Cir. 1999) ("To prevent the hypothetical from lapsing into pure speculation, this court requires sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture."); Crystal Semiconductor Corp. v. TriTech Microelectronics Intern., Inc., 246 F.3d 1336, 1355 (Fed. Cir. 2001) ("Such market reconstruction, though hypothetical, requires 'sound economic proof of the nature of the market.'").
Accordingly, any economic expert testifying about patent damages must base the opinion on sound economic principles meeting the test in Daubert and Rule 702 of the Federal Rules of Evidence. A trial court's decision to admit expert testimony under Daubert follows the law of the regional circuit. Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1390-91 (Fed. Cir. 2003). A trial court has broad discretion in assessing the relevance and reliability of expert testimony. United States v. Finley, 301 F.3d 1000, 1007 (9th Cir. 2002). The requirement of Rule 702(1) "is not intended to authorize a trial court to exclude an expert's testimony on the ground that the court believes one version of the facts and not the other." Fed. R. Evid. 702, Adv. Comm. Note (2000). The inquiry into admissibility of expert opinion is a "flexible one," where "[s]haky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion." Primiano v. Cook, 598 F.3d 558, 564 (9th Cir. 2010). "Under Daubert, the district judge is 'a gatekeeper, not a fact finder.' When an expert meets the threshold established by Rule 702 as explained in Daubert, the expert may testify and the jury decides how much weight to give that testimony." Id. (quoting United States v. Sandoval-Mendoza, 472 F.3d 645, 654 (9th Cir. 2006)). As the Supreme Court noted in Daubert, "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." 509 U.S. at 596.
There are two alternative categories of infringement compensation: the patentee's lost profits and the reasonable royalty the patentee would have received through arms-length bargaining. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). "Determining a fair and reasonable royalty is often . . . a difficult judicial chore, seeming often to involve more the talents of a conjurer than those of a judge." ResQNet.com Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). To ascertain the reasonable royalty, patentees commonly consider a hypothetical negotiation, in which the asserted patent claims are assumed valid, enforceable, and infringed, and attempt to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began. Lucent, 580 F.3d at 1324--25; Georgia--Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y.1970); see also Rite--Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 n.13 (Fed. Cir.1995) (en banc). Thus, the hypothetical negotiation which "attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began," necessarily "involves an element of approximation and uncertainty." Lucent, 580 F.3d at 1324-25.
A lump sum license is a "upfront, paid-in-full royalty." Lucent, 580 F.3d at 1326. A lump sum royalty benefits the licensor by raising a substantial amount of money quickly. Id. On the other hand, a lump sum royalty benefits the licensee by limiting its liability and allowing it to use the patented technology without any concerns of further expenditure. Id. Furthermore, a lump sum royalty removes inherent risks in such negotiations, such as the risk of underreporting of actual usage of the patented technology by the licensee, and eliminates administrative burdens of having to monitor usage. Id. A lump sum royalty also eliminates any ability for the licensee to reevaluate the usefulness and value of the patented technology-the licensee is obligated to pay the agreed-upon lump sum royalty regardless of whether the patented technology is successful or even used. Id. While a lump sum royalty may eliminate risks for both parties, it may also create risks. If either party forecasts the popularity or use of the patented feature incorrectly, a licensee may end up paying a lump-sum far in excess of what the patented invention is later shown to be worth or a licensor may end up accepting a lump-sum that is far less than what the patented invention is later shown to be worth. Id.
During negotiation for a lump-sum royalty figure, the parties may "consider the expected or estimated usage" of the patented invention. Lucent, 580 F.3d at 1327. Generally, a more frequently used invention is more valuable and commands a high lump-sum royalty. Id. Conversely, a minimally used feature will command a lower lump-sum payment. The lump sum analysis does not require the parties to precisely calculate the use of the patented feature, unlike a running royalty license. In a typical running royalty, the license is tied to the use of the patented feature standing alone or incorporated into other products. "Royalties are dependent on the level of sales or usage by the licensee." Lucent, 580 F.3d at 1326. In a lump sum calculation, the parties agree on a fully paid up amount based on "expected or estimated usage."
Id. at 1327. "Running-royalty agreements can be relevant to lump-sum damages, but 'some basis for comparison must exist in the evidence presented to the jury.'" Wordtech Systems, Inc v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir. 2010)(quoting Lucent, 580 F.3d at 1330). There must be some link between the licensed patent and the infringed patent in order to properly consider ...