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MLC Intellectual Property, LLC v. Micron Technology, Inc.

United States District Court, N.D. California

June 28, 2019

MLC INTELLECTUAL PROPERTY, LLC, Plaintiff,
v.
MICRON TECHNOLOGY, INC., et al., Defendants.

          ORDER GRANTING MICRON'S DAUBERT MOTION TO EXCLUDE EXPERT TESTIMONY OF RONALD EPSTEIN RE: DKT. NO. 448

          SUSAN ILLSTON, UNITED STATES DISTRICT JUDGE.

         On June 6, 2019, the Court held a hearing on numerous pretrial motions. For the reasons set forth below, the Court GRANTS Micron's motion to exclude the expert testimony of Ronald Epstein pursuant to the Federal Rules of Evidence and Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993).[1]

         BACKGROUND

         Mr. Epstein is the Managing Partner of EpicenterLaw, P.C. Epstein's Expert Report ¶ 3 (Dkt. No. 442-9). EpicenterLaw “is the law firm through which [Epstein] provide[s] legal services related to patent monetization.” Id. In September 2012, MLC retained EpicenterLaw to “perform legal services related to the monetization of the MLC Portfolio (identified in Exhibit A attached hereto)[2] through licensing, sale or other disposition.” MLC/EpicenterLaw Engagement Agreement ¶ 1(a) (Dkt. No. 442-39). Under the terms of that agreement, MLC agreed to pay EpicenterLaw a “success fee” of 15% to 20% of the licensing revenue if EpicenterLaw successfully negotiated a license between MLC and Micron. Id. ¶ 2.[3]

         Pursuant to the MLC/EpicenterLaw engagement agreement, Epstein represented MLC in licensing negotiations with Micron during 2013-2014. Those negotiations were unsuccessful, and MLC filed this lawsuit against Micron on August 12, 2014.

         On November 2, 2018, MLC first identified Epstein as a percipient witness with “Knowledge regarding notice of infringement, and prior efforts to license the '571 patent.” MLC's First Amended Initial Disclosures at 3 (Dkt. No. 419-4).

         In January 2019, MLC retained Epstein as an expert. MLC states that Epstein is a “licensing expert” and that he will “serve as a testifying expert to explain to the jury the differences between real world and hypothetical licensing negotiations.” Opp'n at 1 (Dkt. No. 501). Epstein's description of his expert assignment is as follows: “Given my first-hand involvement in negotiations with Micron with respect to the MLC Patents, including the ‘571 Patent, I was asked by MLC IP to provide an account of my negotiations with Micron, as well as the facts and issues I considered with respect to said negotiations.” Expert Report at ¶ 17. MLC states that Epstein is “not being offered as a damages expert.” Opp'n at 23 n.13. Similarly, at his deposition, Epstein repeatedly stated that he was not providing an opinion about damages. See, e.g., Epstein Tr. at 241:10-11 (“Yeah, I make no opinion as to damages in this case.”); id. at 269:9-11 (“A: Yeah, I wouldn't propose to testify to the jury - what they should find as - yes, what they should find as damages.”).

         Micron challenges Epstein's expert testimony on numerous grounds, including that he is essentially providing lay percipient testimony in the guise of expert testimony, and that he is in fact providing damages opinions that are inadmissible. In order to evaluate these arguments, the Court sets forth a detailed description of Epstein's expert opinions as set forth in his report and his deposition.

         Epstein first opines about “Real-World Patent Licensing Negotiation Practices.” Expert Report at ¶¶ 19-66. In that section of his report, Epstein details the “History of the MLC Patents” and the “Prior Licenses to the MLC Patents, Including the ‘571 Patent, ” which is essentially a factual recitation of the ownership and assignment of the MLC patents and the licensing of the MLC patent portfolio. Id. ¶¶ 19-33. Epstein was not personally involved in negotiating the prior licenses (with e.g., Hynix and Toshiba); those licenses were negotiated by BTG (the prior owner of the MLC patent portfolio). Epstein states that in his 2013-2014 negotiations with Micron, he considered those license agreements in determining the appropriate royalty demand offered to Micron. Id. ¶ 33.

         Epstein then discusses the “Differences Between a Real-World License Negotiations and a Hypothetical Negotiation in an Enforcement Action, ” including the “Patent Licensing Market Model” that Epstein created. Epstein states that “[i]n preparing for my negotiations with Micron, I took advantage of the knowledge I had regarding real world patent license royalty negotiations and how they differed from the hypothetical negotiations envisioned by the Georgia-Pacific case.” Id. ¶ 35.[4] Epstein states,

37. While the hypothetical negotiation permits consideration of “real world” factors, referred to as the Georgia-Pacific factors, the hypothetical deal or transaction resulting from the hypothetical negotiation is based on important assumptions that do not necessarily exist in the real-world. . . . For instance, in the hypothetical negotiation, the asserted patent claims are deemed to be valid and enforceable, the accused product in the litigation is deemed to be infringed [sic], and the parties are assumed to be willing negotiators able to “successfully negotiate[] an agreement just before infringement began.” Lucent Techs., 580 F.3d at 1325. Moreover, the royalty rate resulting from the hypothetical negotiation must be applied to a royalty base (e.g., sale price or revenue) that has been apportioned and, thus, directly attributable to the patented technology, as opposed to the entire market value of a multicomponent product unless, of course, the patented feature is the driver of demand. [citations] Further, given the extraterritoriality limitations of patent rights, the royalty base must also be limited to sales or revenues resulting from domestic acts of infringement.
38. However, real-world patent licensing negotiations on the price or royalty is rooted in myriad of competing economic interests, bargaining powers, and risks that are not necessarily present in a hypothetical negotiation. For instance, significant concerns such as unproven validity and infringement, the appropriate royalty base and royalty rates, as well as the uneven ability of the two parties in dealing with the costs and complexity of patent enforcement actions as an alternative to agreement often results in royalty payments heavily discounted from those expected under a Georgia-Pacific style negotiation. . . .

Id. ¶¶ 37-38 (emphasis in original).

         Epstein then explains that he has “found that the dynamics of real-world licensing negotiation could be best understood using a Patent Licensing Market Model containing three market segments.” Id. ¶ 43. Epstein states that the three market segments are “first adopters, ” “ethical adopters” and “invention plagiarists.” Id. ¶ 44. “First adopters are potential licensees that negotiate for a patent license prior to the patented technology being introduced into the marketplace.” Id. ¶ 45. The “first adopters” “will not use the technology without a license, ” are generally “willing to discuss royalties 1% - 10% or more, ” they evaluate “the potential patent license with regard to the direct economic benefit it will receive from adoption in terms of increasing the potential licensee's ability to (1) gain market share, (2) raise prices and/or (3) to lower costs, ” and they comprise a very small percentage of the market, of between 1 to 3 players “max.” Id. ¶¶ 44-45. In Epstein's opinion, “this segment is the closest to the Georgia-Pacific hypothetical negotiation.” Id. ¶ 45.

         Epstein states that “the second and third segments, Ethical Adopters and Invention Plagiarists, are based on the fact that there [sic] for all practical purposes, there is an unlimited supply of competent engineering talent in the world, so once a product containing a patented innovation is released in the marketplace, that innovation will be reverse engineered and copied by any who see an advantage to them in adopting that innovation. The two segments differ only as to the willingness of the two parties to engage in negotiations without the necessity of engaging in some form of enforcement action” Id. ¶ 47.

         Epstein states,

48. Ethical Adopters are potential licensees who have adopted a patented invention, usually through observing the innovation in the First Adopters' products or the patented invention is adopted by a standard setting body, but when approached by the patent holder are willing to engage in patent license negotiations without there having to be an enforcement action underway. In this segment, the gains in market share and profitability available from adoption have been claimed by the First Adopter(s), so this potential licensee is seeking only to stop the loss of market share and/or profitability their first adopter competitor is causing them. So, while the Ethical Adopters have some respect for intellectual property and are willing, once the infringement is pointed out, to engage in licensing negotiations, the price they are willing to pay is not defined by the value the patented technology brings the potential licensee, but rather by the cost of alternatives. What that means from a practical perspective is the price the potential licensee thinks it would have to pay the patent holder in the event of a successful patent enforcement action, discounted to account for the risk associated with the patent holder's having to obtain a ruling that their patents are valid and infringed, as well as setting the appropriate royalty basis and royalty rate (under the Georgia-Pacific factors), and have that ruling affirmed on appeal, as well as the time value of money associated with the time associated in getting that ruling.[5] In my experience, accounting for these issues results in royalty rates that represent a 90% - 95% or even more discount off of what the parties jointly believe might be the damages awarded in an enforcement action.
49. It has also been my experience that in recent years there have been few Ethical Adopters outside the context of standards essential patents. Often, the cost of enforcement to the patent holder together with the fact that interest on royalties delayed can often pay for any costs an infringer may incur in defending any enforcement actions that are actually brought by patent holders provides potential licensees a more economically attractive alternative to ethical adoption. That said, after a patent holder has successfully licensed its patents against one or more Invention Plagiarists (see below), some number of Invention Plagiarists are then willing to become Ethical Adopters.
50. Invention Plagiarists are potential licensees who have adopted the patented technology and are resistant to paying a fair amount for a license under such patents outside a filed patent enforcement action. Invention Plagiarists neither know nor care who actually spent the money and effort in developing the patented technology, and when approached by the patent holder, the Invention Plagiarists show no interest or concern in obtaining a license under the patents, claiming that they were simply practicing what has been in the “public domain.” The only option for a patent holder to obtain a royalty from an Invention Plagiarist is to file and pursue an enforcement action against them.
51. Under this scenario, the potential licensee, in addition to considering the same risks and considerations discussed in the second “Ethical Adopter” scenario, add to their pricing consideration the question of whether the patent holder has the capability, commitment and resources to bring and maintain an enforcement action to conclusion. This includes an evaluation of the legal and business acumen and resources the patent holder has, as well as the ability of the patent holder to afford the high cost of patent litigation as well as manage the stresses of a long adversarial process. The patent holder, for their part, has to calculate for themselves whether they will have access to sufficient risk capital to afford the high price of patent litigation, whether the return on a successful prosecution would provide an acceptable return on that capital, and whether they are prepared themselves to manage the stresses of participation in litigation.
52. It has been my experience that Invention Plagiarists review these factors related to pricing and only offer settlement values that represent as much a 90% - 95% discount off of what the Invention Plagiarist itself believes would be damages awarded against it in the outcome of a trial (as opposed to an agreed upon potential damages in the Ethical Adopter segment). That said, Invention Plagiarists are not shy in refraining to make any serious offer until they have had an opportunity to use their superior sophistication, experience and access to capital to exhaust potential licensees into accepting a de minimis sum.
53. Additionally, Invention Plagiarists typically seek lump-sum payments, as opposed to running royalties for a number of reasons, including the opportunity to obtain further discounts by paying immediately, by being able to calculate the amount due on an agreed, intentionally conservative, volume of product, allowing the potential licensee to sell additional product volume royalty free, and the ability to characterize such payments as capital expenses as opposed to operating expenses which can matter a lot to publicly traded companies. Indeed, the Federal Circuit has observed that “certain fundamental differences exist between lump-sum agreements and running-royalty agreements” as they rely on “different considerations.” See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1330 (Fed. Cir. 2009). The Federal Circuit observed a myriad of advantages and disadvantages to a patent holder and licensee under either payment arrangement, including the avoidance of ongoing administrative burdens of monitoring usage of the invention. Id. In my experience, as stated above, the licensee/infringer, particularly where the licensee/infringer is a large company, typically prefers to negotiate lump-sum payments as opposed to running royalties so as to characterize the royalty payment as a one-time capital expense as opposed to an ongoing operating expense.

Id. ¶¶ 48-53.

         Epstein then reviews the efforts first by BTG, and later Muir Consulting, to license the MLC patents to Micron.[6] Epstein noted that in 2007, BTG offered Micron a fully paid up license for the patent portfolio for $21 million, which he states was derived by applying a 0.25% royalty rate on an estimate of Micron's forecasted worldwide revenue for MLC NAND Flash from 2006 through 2011. Id. ¶ 57. Epstein states, “Regarding the 0.25% rate being offered to Micron in the 2007 BTG Letter, it is my opinion that this rate represented an offer to potential licensees in the category I defined above as Ethical Adopters, and as such had been already heavily discounted versus the value of such patented inventions as might be calculated in an enforcement action under the Georgia Pacific factors.” Id. ¶ 58. Epstein states that it was also his opinion at the time [he was retained by MLC to serve as its licensing counsel] that the 0.25% rate being offered to Micron by BTG was “further discounted” because (1) the offer was based on worldwide revenues, and “[h]ad the revenue base been limited to U.S. sales only, it goes without saying that the royalty rate would have been higher to account for the smaller revenue base”[7]; (2) the 2007 BTG letter expressly stated that its $21 million offer was based on a “very conservative forecast of Micron's future sales”; (3) the 2007 BTG letter expressly stated that the “proposed amount also reflects a heavily discounted royalty rate, ” which Epstein states is “in accord with those offered to Ethical Adopters”; and (4) the letter expressly stated that the conservative and discounted offer was motivated in part by BTG's eagerness to resolve the matter. Id. ¶¶ 59-63. Epstein states, “as such, BTG was willing to offer a discount on the higher end of those generally offered to Ethical Adopters, meaning a discount of 90% - 95% or more to what BTG reasonably thought it might receive at trial if an enforcement action were pursued through judgment and appeal.” Id. ¶ 63. Epstein also states that he “understand[s] that BTG's analysis as to the discounted royalty rate was based on general market data of U.S. shipments of NAND Flash products, as opposed to any particular entity. In other words, BTG did not investigate Micron's infringement in determining the royalty rate it offered Micron.” Id. ¶ 60.[8]

         Epstein then discusses EpicenterLaw's licensing negotiations with Micron. Epstein states that in his negotiations with Micron, he presented Micron with a royalty rate ranging between 1% to 3%. Id. ¶¶ 68, 85. Epstein describes his negotiations with Micron, during which he presented infringement and validity charts for the ‘571 patent, as well as charts showing a “Damages Model” applying different royalty rates to Micron's forecasted worldwide and U.S. revenue.[9] Epstein reproduces that Damages Model in his report, which shows a damages range of $172, 000, 000 (applying a 1% royalty to U.S. revenue) up to $786, 000, 000 (applying at 3% royalty to worldwide revenue). Id. ¶ 83.

         Epstein provides the following explanation of how he arrived at the 1-3% royalty range:

85. Epicenter arrived at the 1% to 3% royalty range identified in the [Damages Chart] by considering the 0.25% rate BTG offered based on worldwide sales, and taking into account the evidence[10] of validity and infringement Epicenter developed against Micron, the fact that there was widespread willingness of other players in the market to take a license. These factors, had they been known to BTG at the time, would not have warranted in the “heavily discounted royalty rate” of 0.25% that BTG initially offered. Rather, the applicable discount would have been significantly smaller, resulting in a royalty rate higher than 0.25%.
86. However, despite the increased confidence of a favorable verdict and damages award, the uncertainty of litigation, the risk of judicial findings of invalidity and non-infringement remains a critical concern, as well as the desire to avoid the cost of litigation. As such, the 1% to 3% royalty range still reflects a discount on what the appropriate royalty rate in the event of an enforcement action where validity was confirmed and definitive proof of infringement existed. In other words, where validity was confirmed and definitive proof of infringement existed, the appropriate royalty rate would be higher than the 1% to 3% royalty range I presented to Micron in 2013.

Id. ¶¶ 85-86.

         At his deposition, Epstein provided the following explanation of how EpicenterLaw determined the 1-3% royalty range:

Q: And you adjusted that based on - where did you start to get your 1 percent number, do you recall?
A: So my view was, my initial thought was, well, this seems to be a blocking patent on a type of product, MLC flash. And blocking portfolios, you tend to see anywhere from 2 to 5 percent, because, you know, this - this is a little bit smaller than that. I think we went down, in part so we didn't have to argue too much. We went down to 1 to 3 percent. And then when I saw what BTG wrote, I said, “Well, they seem to be thinking the same thing.” So that just seemed to be further confirmation.
Q: Now, that 2 to 5 percent that you talked about, that's not in your report, correct?
A: No.
Q: Why not?
A: I didn't - I mean, this is just my - as I said earlier, you know, my general knowledge. You asked me how I got here. How I got here is, you know, if you look at what Rambus and Tessera and Qualcomm charge, you know, those look more like first-adopter royalties. That would be the kind of thing you would expect to see in an arm's length, you know, Georgia-Pacific kind of situation. So you start there.

Epstein Tr. at 272:4-273:5.

         Epstein states in his report that when he was negotiating with Micron, he believed that the ‘571 patent was the most important and valuable of the patents in MLC's patent portfolio “because the ‘571 Patent provided multi-level cell functionalities that were fundamental to the other MLC Patents in the portfolio. Even though all the MLC Patents are a related family of assets that provide similar features and benefits, those benefits would be de minimis beyond the benefits provided by the ‘571 Patent. Indeed, it was Epicenter's understanding that compared to the other MLC Patents, the ‘571 Patent accounted for most, if not all, of the value of the MLC Patent[s] because it provided fundamental functionality without which the technologies claimed by the other MLC Patents cannot be effectively practiced.” Id. ¶ 81.

         At his deposition, Epstein was asked about his opinion in Paragraph 81 that the ‘571 patent was the most important patent in the portfolio. Epstein stated that the reason he reached that conclusion “was the mere idea of how to program a multi-level cell. That was the big challenge to a successful multi-level cell, is how to take something that is traditionally on/off and make it on/off plus, even more on, and - even - even more on. That was a difficult challenge.” Epstein Tr. at 185:24-186:5. When he was asked about his conclusion that the programming methodology was the fundamental aspect of the ‘571 patent, Epstein stated, “Well, if you can't program it, then everything else after that is pointless.” Id. at 191:1-2. The questioning continued:

Q: I guess what steps did you do to determine it was fundamental?
A: We came - you know, the position we took with Micron is - and I stand by the position we took with Micron, which is, this was fundamental to the whole idea of MLC, multi-level cell. There was no multi-level cell memory sold in the world that did not infringe that patent.
Q: And what was your proof of that?
A: In part, you know, our analysis of the - of the - Micron art and in part the relative ease with which BTG got licenses from Toshiba and some of the other players.
Q: Well, that - that could just be because Toshiba didn't want to spend money fighting it, correct?
A: Hypothetically, sure. In practice, doubtful.
. . .
Q: You mentioned earlier is your - in your - one of your answers that there was no MLC in the world that didn't practice the ‘571 patent. At what point ...

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