United States District Court, N.D. California, San Jose Division
ORDER GRANTING-IN-PART MOTION TO EXCLUDE (Re: Docket No. 131)
PAUL S. GREWAL, Magistrate Judge.
In the aftermath of ResQNet.com, Inc. v. Lansa, Inc.,  settlement agreements are now indisputably fair game in assessing patent damages. Despite the suggestions of its own precedent and that of the Supreme Court,  the Federal Circuit recognized that "the most reliable license in the record [may be one] that arose out of litigation." But such licenses are hardly now per se admissible; the Federal Circuit itself has cautioned as much. This case illustrates why.
Robert Mills is a damages expert. Plaintiff Sentius International, LLC has tendered Mills for his opinions regarding the proper measure of damages adequate to compensate Sentius for the alleged infringement by Defendant Microsoft Corporation. In calculating patent damages, Mills not only relied on a settlement agreement, but also a decision in an earlier case regarding a motion for judgment as a matter of law. Mills also relies on the so-called "income approach" theory as well as the overall profitability of the accused products.
Microsoft now brings a Daubert motion seeking to exclude Mills' testimony. Because Mills' methodology does not entirely pass muster under Daubert and Rule 403, the court GRANTS Microsoft's motion in part, excluding Mills' testimony to the extent that it relies on the Lucent JMOL and the Arendi settlement agreement. Because Mills' income approach theory is methodologically sound, the court DENIES Microsoft's motions to the extent that it seeks to exclude Mills' testimony relating to this approach. Finally, the court GRANTS Microsoft's motion to exclude Mills' testimony relating Microsoft's and Microsoft Office's overall profitability, such that Mills may not refer to Microsoft or Office's profitability but may refer to Microsoft's profit margins.
Expert testimony may only be admitted in a manner consistent with the Federal Rules of Evidence, Daubert,  Kumho  and more recent appellate court progeny. 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." 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, 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." The inquiry into the admissibility of an 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."
A trial court must be sure that its review of expert testimony focuses "solely on principles and methodology, not on the conclusions that they generate." "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." The Federal Circuit recently clarified that this limitation of the gatekeeping role of the judge to the exclusion of "testimony based on unreliable principles and methods is particularly essential in the context of patent damages." This is because "questions regarding which facts are most relevant or reliable to calculating a reasonable royalty are for the jury.'"
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." 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. Damages may take the form of "reasonable royalty [the patentee] would have received through arms-length bargaining" in a hypothetical negotiation. 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." No matter the form, "[t]he burden of proving damages falls on the patentee."
A patent holder may use settlement agreements to establish reasonable royalty damages "under certain limited circumstances." This is because, as the Supreme Court observed over one hundred years ago, settlement agreements have little probative value to establish patent damages:
It is clear that a payment of any sum in settlement of a claim for an alleged infringement cannot be taken as a standard to measure the value of the improvements patented in determining the damages sustained by the owners of the patent in other cases of infringement. Many considerations other than the value of the improvements patented may induce the payment in such cases. The avoidance of the risk and expense of litigation will always be a potential motive for a settlement.
That said, a settlement agreement may be admissible when "the most reliable license in [the] record [is one that] arose out of litigation." Accordingly, to rely on a settlement agreement to establish patent damages, a patent holder "must only show that [its expert's] consideration of [the] patent litigation settlement is sufficiently reliable to be admissible under Daubert. "
Sentius asked Mills to estimate the damages caused by Microsoft's alleged infringement of its United States Reissue Patent Nos. RE 40, 731 and RE 43, 633 based on certain features of applications within the Microsoft Office suite products. Mills used the Georgia-Pacific factors to determine a reasonable royalty to which the parties would have agreed in a hypothetical negotiation for a license to Sentius' patents. To determine damages for Microsoft's use of background grammar and spell checkers, Mills used two main approaches that are at issue here.
First, Mills looked to an earlier patent infringement dispute between Microsoft and Alcatel-Lucent. In that dispute, Lucent alleged that "certain features of [Microsoft's products], when used, practice the methods of [Lucent's patent]." After a jury found infringement and awarded Lucent damages against Microsoft, the Federal Circuit vacated the jury's damages award and remanded the case for a new trial on damages. On retrial, the jury awarded Lucent damages of $70 million and Microsoft moved for judgment as a matter of law. Granting-in-part Microsoft's motion, Judge Huff found that "as a matter of law a reasonable jury could not have returned a verdict in excess of $26.3 million ...