United States District Court, N.D. California, San Jose Division
June 25, 2014
EMBLAZE LTD., Plaintiff,
APPLE INC., Defendant
(Re: Docket Nos. 428 and 430).
For Emblaze Ltd., Plaintiff: Andrew P. Nemiroff, LEAD ATTORNEY, PRO HAC VICE, Lisa A. Ferrari, Marilyn Neiman, PRO HAC VICE, Martin Brian Pavane, Cozen O'Connor, New York, NY; Mark V. Isola, Rehon & Roberts, San Jose, CA; Martin L. Fineman, Davis Wright Tremaine LLP, San Francisco, CA; Nathan Dooley, Los Angeles, CA.
For Apple Inc., Defendant: James Joseph DeCarlo, LEAD ATTORNEY, Greenberg Traurig LLP(Sta Monica), New York, NY; Mark Fowler, LEAD ATTORNEY, Krista Anne Celentano, Robert Buergi, DLA Piper LLP (U.S.), East Palo Alto, CA; Stephen M. Ullmer, LEAD ATTORNEY, Sarah Elizabeth Barrows, Greenberg Traurig LLP, San Francisco, CA; Eduardo J Blanco, DLA Piper LLP, Palo Alto, CA; Erin Paige Gibson, Jacob Daniel Anderson, John Allcock, Robert Chen Williams, DLA Piper LLP (U.S.), San Diego, CA; Julie Pamela Bookbinder, Greenberg Traurig, LLP (NYC), New York, NY; Kenneth L. Steinthal, King & Spalding, San Francisco, CA; Michael A. Nicodema, PRO HAC VICE, Scott J Bornstein, Greenberg Traurig LLP, New York, NY; William Sloan Coats, III, Greenberg Traurig, LLP, East Palo Alto, CA.
For Microsoft Corporation, Interested Party: Eric Lance Wesenberg, LEAD ATTORNEY, Perkins Coie LLP, Palo Alto, CA.
For Akamai Technologies, Inc., Miscellaneous: David H. Judson, LEAD ATTORNEY, Law Office of David H. Judson, Dallas, TX.
For Apple Inc., Counter-claimant: James Joseph DeCarlo, LEAD ATTORNEY, Greenberg Traurig LLP(Sta Monica), New York, NY; Kenneth L. Steinthal, LEAD ATTORNEY, King & Spalding, San Francisco, CA; Scott J Bornstein, LEAD ATTORNEY, Greenberg Traurig LLP, New York, NY; Erin Paige Gibson, DLA Piper LLP (U.S.), San Diego, CA; Julie Pamela Bookbinder, Greenberg Traurig, LLP (NYC), New York, NY; Mark Fowler, Robert Buergi, DLA Piper LLP (U.S.), East Palo Alto, CA; Michael A. Nicodema, PRO HAC VICE, Greenberg Traurig LLP, Florham Park, NJ; Sarah Elizabeth Barrows, Stephen M. Ullmer, Greenberg Traurig LLP, San Francisco, CA; William Sloan Coats, III, Greenberg Traurig, LLP, East Palo Alto, CA.
For Emblaze Ltd., Counter-defendant: Lisa A. Ferrari, Marilyn Neiman, PRO HAC VICE, Martin Brian Pavane, Cozen O'Connor, New York, NY; Mark V. Isola, Rehon & Roberts, San Jose, CA; Martin L. Fineman, Davis Wright Tremaine LLP, San Francisco, CA; Nathan Dooley, Los Angeles, CA.
ORDER RE: APPLE'S MOTIONS TO EXCLUDE EMBLAZE'S DAMAGES EXPERTS
PAUL S. GREWAL, United States Magistrate Judge.
Before the court are a pair of Daubert
motions filed by Apple in this patent case. The motions seek to exclude the opinions of Emblaze damages experts Catharine Lawton and David Teece. After considering the parties' respective arguments, in both the papers and at the hearing, the court holds that Lawton and Teese may testify at trial, subject to the restrictions laid out below.
A. Lawton's Damages Analysis
Lawton's report analyzed the accused Apple products using the so-called " income approach" method. The income approach
is a method used to value intellectual property assets based on the present value of the future income stream generated by an asset. There are three major inputs to the income approach: (1) expected future cash flows from the asset; (2) economic life of the asset; and (3) business risk associated with the realization of the cash flow stream. The key goal is to estimate the present value of incremental profits generated by the asset over its economic life, taking into account the risk associated with generating those profits. Once the present value of the incremental profits is determined, these profits are split in some manner between the licensor and licensee, typically in the form of a royalty. (citations omitted).
Using the income approach, Lawton calculated the additional gross profit margin on each of the accused products from the date Apple's http live-streaming (" HLS" ) was included. This calculation served as a " high end" starting point for the reconstruction of the hypothetical royalty rate, because the accused products include non-patented features.
Lawton's rate analysis then turned to the Georgia-Pacific factors. Lawton concluded that factor 2 -- the rate paid for comparable patents -- supported minimum royalty rates in the range of $.10 to $3.10 per accused product unit. The other factors were either neutral (factors 1, 3-6 and 12-13) or supported an increased hypothetically negotiated royalty rate (factors 7-11). Lawton concluded that the facts of this case supported a $2.00 per unit royalty for hardware and a 1% royalty for software and application revenue.
B. Teece's Expert Opinion on Digital Convergence and Network Effects
Teece was retained by Emblaze " to address three topics: the convergence between computing and communications, network effects in software, and the implications of digital convergence and network effects for licensing the '473 patent at issue in this case." 
II. LEGAL STANDARDS
Expert testimony may only be admitted in a manner consistent with the Federal Rules of Evidence, Daubert, Kumho Tire Co. v. Carmichael  and more recent appellate court progeny.
A. Daubert Generally
Federal Rule of Evidence 702 allows admission of " scientific, technical, or other specialized knowledge" by a qualified expert if it will " help the trier of fact to understand the evidence or to determine a fact in issue."  Expert testimony must be both relevant and reliable to be admitted pursuant to Rule 702. When considering expert testimony, the trial court serves " as a 'gatekeeper' to exclude junk science that does not meet Federal Rule of Evidence 702's reliability standards." 
An expert witness may provide opinion testimony if: (1) " the testimony is based upon sufficient facts or data; " (2) " the testimony is the product of reliable principles and methods; and" (3) " the expert has reliably applied the principles and methods to the facts of the case."  Under Daubert, courts consider (1) whether a theory or technique " can be (and has been) tested; " (2) " whether the theory or technique has been subjected to peer review and publication; " (3) " the known or potential
rate of error; " and (4) whether there is " general acceptance" of the methodology in the " relevant scientific community." 
The inquiry into admissibility of expert opinion is a " flexible one," where shaky " but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion."  " 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." 
A trial court thus must be sure that its review of expert testimony focuses " solely on principles and methodology, not on the conclusions that they generate."  " Daubert and Rule 702 are safeguards against unreliable or irrelevant opinions, not guarantees of correctness."  " A judge must be cautious not to overstep its gatekeeping role and weigh facts, evaluate the correctness of conclusions, impose its own preferred methodology, or judge credibility, including the credibility of one expert over another. These tasks are solely reserved for the fact finder."  " That the gatekeeping role of the judge is limited to excluding testimony based on unreliable principles and methods is particularly essential in the context of patent damages."  The Federal Circuit " has recognized that questions regarding which facts are most relevant or reliable to calculating a reasonable royalty are 'for the jury.'" 
B. Section 284 and the Georgia-Pacific Factors
35 U.S.C. § 284 provides that upon " finding for the claimant, the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." Infringement compensation can be the patentee's " lost profits" or the " reasonable royalty he would have received through arms-length bargaining."  The goal of the damages award is not to punish the infringer, but rather to make the patentee whole by ascertaining what the patent holder would have made " had the infringer not infringed."  " The burden of proving damages falls on the patentee." 
No lost profits are claimed in this case. Lawton's report instead proposes a per unit damages assessment for Apple's alleged infringement of the patent claims
in suit. The Georgia-Pacific factors are used in the " hypothetical negotiation" approach to determining a reasonable royalty. The hypothetical negotiation approach " attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began."  " The hypothetical negotiation tries, as best as possible, to recreate the ex ante licensing negotiation scenario and to describe the resulting agreement." 
The Georgia-Pacific factors constitute a non-exhaustive list of fifteen factors to consider in determining what reasonable royalty would result from the hypothetical negotiation. The Georgia-Pacific court explained:
A comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license may be drawn from a conspectus of the leading cases. The following are some of the factors mutatis mutandis seemingly more pertinent to the issue herein:
1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.
3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
4. The licensor's established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
5. The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.
6. The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
7. The duration of the patent and the term of the license.
8. The established profitability of the product made under the patent; its commercial success; and its current popularity.
9. The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
14. The opinion testimony of qualified experts.
15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee--who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention--would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.
C. The Entire Market Value Rule
" By statute, reasonable royalty damages are deemed the minimum amount of infringement damages 'adequate to compensate for the infringement.'"  To most accurately calculate the minimum amount of infringement damages adequate to compensate for infringement of an accused product, " it is generally required that royalties be based not on the entire product, but instead on the 'smallest salable patent-practicing unit.'"  The entire market value rule is a " narrow exception to the general rule" requiring royalties to be based on the smallest salable patent-practicing unit. " If it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product."  " Where small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product." 
Damages testimony attempting " to show economic entitlement to damages based on technology beyond the scope of
the claimed" invention is not permissible. The reasoning behind the entire market value and smallest salable patent-practicing unit doctrines also is consistent with the Federal Circuit's rejection of the " 25 percent rule of thumb" in Uniloc and the U.S. Supreme Court's early apportionment case law, which holds that a patentee " must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features." 
A. Wholesale Exclusion of Lawton's Testimony Is Not Warranted, But Limits on the Scope of Her Testimony Are
Apple raises four essential challenges to the Lawton's opinions, which are persuasive only in part.
First, Apple argues that Lawton uses an inadmissible base consisting of Apple's unapportioned, additional gross margin following Apple's introduction of HLS in June 2009. According to Apple, such a base violates the EMVR because this unapportioned margin is not focused on the smallest saleable patent-practicing unit. Apple might be right about the inadmissibility of such a royalty base. But its argument nevertheless is puzzling, as Lawton plainly uses a base of every unit of the accused infringing product, not the incremental gross margin Apple complains about. To the extent Lawton relies upon the incremental gross margin, she does so in her estimate of the hypothetical royalty rate, not the base. Because Apple mischaracterizes the base relied upon the expert, this argument must be rejected.
Second, Apple argues that Lawton uses an inadmissible unit base of every unit sold. Here, Apple emphasizes that no Apple units directly infringe. Putting
aside the inconsistency of this characterization of Lawton's base with Apple's characterization described above, Lawton's " all infringing unit" base is not methodologically flawed. Apple does not cite to a single case suggesting that the royalty base of a hypothetical negotiation must be limited to units deemed to directly infringe. Such a rule makes especially little sense in cases like this one, where indirect infringement by the defendant is alleged and the bulk of the direct infringement alleged is that of third parties.
Third, Apple argues that Lawton uses no discernable or reliable methodology. Apple focuses on both the " incomparable licenses or litigation demands" relied on by Lawton in her rate calculation and the fact that Lawton performs " no specific math" in her rate estimate. But in contrast to the expert testimony recently rejected by Judge Koh in GPNE v. Corp. v. Apple, Inc., Lawton's analysis did not " fundamentally reduce to taking [her] opinion based on  years of experience for granted."  Lawton instead analyzed licenses and demands for the use of other patents she concluded were comparable to the hypothetical license at issue here among other Georgia-Pacific factors. Although Apple remains well within its rights to question whether these other licenses and demands are indeed comparable, that ultimate question must be resolved by the jury, not this court. The court's task here is simply to determine whether that Lawton has identified a sufficient nexus between the licenses and demands to the hypothetical license at issue.
Because the court agrees with Apple that Lawton's report does not " do anything to establish that [the patentee's demands in Apple v. Samsung or the Apple-Motorola license disclosed in the Apple v. Motorola litigation] are technically and economically similar to the facts" of this case, Lawton may not rely on those licenses at trial. Apple's challenge with respect to the publically available standards-essential technology licenses relating to MP3, MPEG-4 and AVC/H.264 is another story. Here, Apple urges that public information regarding licensing in that space
should be excluded not because of an insufficient nexus to this case, but because Apple has produced its own licenses to that technology. The Federal Circuit, however, has approved the use of " publicly available information" and also held that the " existence of other facts" or data that could also have been relied upon does not make the evidence selected irrelevant. Even if data are " imperfect, and more (or different) data might have resulted in a 'better' or more 'accurate' estimate in the absolute sense, it is not the district court's role under Daubert to evaluate the correctness of facts underlying an expert's testimony. Questions about what facts are most relevant or reliable to calculating a reasonable royalty are for the jury."  In addition, to the extent Lawton's resulting estimates are imprecise, any reasonable royalty analysis " necessarily involves an element of approximation and uncertainty."  Because the court does not find that the probative value of these publicly-available licenses evidence will be substantially outweighed by the danger of unfair prejudice, exclusion is not warranted.
Finally, Apple argues that Lawton has engaged in naked " Apple bashing." Apple highlights a number choice quotes from Lawton's report, ranging from a charge that Apple has " turned into paranoid security Nazis" to various excerpts suggesting Steve Jobs is a thief or worse. Other quotes focus on Apple's discovery practices. This is an easy call. Lawton will not be permitted to engage in such emotional appeals.
B. Teece Shall Be Restricted to the General Expert Opinion Tendered in His Report
Apple urges that the " degree of abstraction and imprecision of Teece's opinions renders" them largely unhelpful " to the trier of fact, and therefore inadequate under Rule 702(a)."  In support, Apple points out Teece " mentioned 'live streaming' in only a single paragraph of his" report and used the rest of his report to propound abstract opinions regarding digital convergence and network effects/externalities.
Teece's " conclusions" that " follow from the combination of digital convergence and network externalities" are only loosely connected to the facts and technology at issue in this case. Teece's deposition also revealed sizable separation between the facts of this case and Teece's analysis. At deposition, Teece conceded he was only applying general principles to the case at the " level of principle" and not engaged in a " granular case-specific analysis."  At bottom, Teece's high-level opinions 
are of limited use to the fact-finder in resolving any question of fact at issue in this case.
Nevertheless, Rule 702 permits general principles testimony without substantive connection to the facts of a case. The committee explains:
If the expert purports to apply principles and methods to the facts of the case, it is important that this application be conducted reliably. Yet it might also be important in some cases for an expert to educate the factfinder about general principles, without ever attempting to apply these principles to the specific facts of the case. For example, experts might instruct the factfinder on the principles of thermodynamics, or bloodclotting, or on how financial markets respond to corporate reports, without ever knowing about or trying to tie their testimony into the facts of the case. The amendment does not alter the venerable practice of using expert testimony to educate the factfinder on general principles. For this kind of generalized testimony, Rule 702 simply requires that: (1) the expert be qualified; (2) the testimony address a subject matter on which the factfinder can be assisted by an expert; (3) the testimony be reliable; and (4) the testimony " fit" the facts of the case.
Because Teece's general expert testimony on digital convergence and network effects falls into this category of permissible testimony, exclusion is not warranted merely on the grounds that Teece has not sufficiently grounded his testimony in the case. Teece may generally opine that digital convergence and network effects could have affected the hypothetical negotiation. But that is it.
IT IS SO ORDERED.