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

United States District Court, N.D. California

July 2, 2019

MLC INTELLECTUAL PROPERTY, LLC, Plaintiff,
v.
MICRON TECHNOLOGY, INC., Defendant.

          ORDER GRANTING IN PART AND DENYING IN PART AS MOOT MICRON'S DAMAGES MOTION IN LIMINE #1 RE: DKT. NO. 444

          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, Micron's damages motion in limine #1 is GRANTED in part and DENIED in part as moot.[1]

         INTRODUCTION

         Pursuant to Federal Rules of Evidence 401, 402 and 403, Micron seeks to “preclude MLC from relying on any testimony, evidence, argument, or insinuation regarding irrelevant royalty rates for the ‘571 patent that exceeds the disclosure within the four corners of the license agreements themselves.” Motion at 1 (Dkt. No. 444). Specifically, Micron moves to exclude evidence and argument regarding: (1) the alleged royalty rate that Mr. Milani (MLC's damages expert) derives from the Hynix and Toshiba agreements, (2) the royalty rate Mr. Milani derives from the testimony of a BTG witness (Simon Fisher) in litigation between MLC and BTG, and (3) the royalty rates and slide presentations that Mr. Epstein[2] offered during the failed licensing negotiations with Micron in 2013-2014. Id. Micron also seeks to preclude MLC from eliciting testimony from Mr. Liesegang (Micron's rebuttal licensing expert) regarding royalty rates tied to IBM's licensing policy in the 1980s and 1990s.

         In a separate order, the Court has granted Micron's Daubert motion to exclude Epstein's expert testimony, concluding inter alia that testimony regarding Epstein's licensing negotiations with Micron is irrelevant. Accordingly, for the reasons set forth in that order, the Court GRANTS this motion to the extent it is directed at Epstein's testimony. Further, because Liesegang is Micron's rebuttal witness to Epstein, the Court DENIES AS MOOT the portion of the motion regarding Liesegang's testimony about IBM's royalty rates, as Micron has represented that Liesegang will not testify if Epstein is excluded.

         Thus, what remains of the present motion focuses on the question of whether there is a factual basis for Milani to testify that the BTG/Hynix and BTG/Toshiba lump sum licenses contain or “reflect” specific royalty rates, as well as whether Milani may rely on Fisher's deposition testimony for alleged royalty rates.[3] As set forth below, the Court concludes that the Hynix and Toshiba licenses do not contain specific royalty rates nor do they state how the lump sums were calculated, and therefore Milani may not mischaracterize those agreements by testifying that they do, in fact, “reflect” specific royalty rates. The Court also concludes that Milani's opinion that the Hynix and Toshiba agreements reflect a 0.25% royalty rate is not grounded in any facts or a reliable methodology because even if admissible, the extrinsic evidence upon which Milani relies suggests that BTG may have calculated the lump sum payments by applying 0.25% to Gartner forecasts of future revenue for Hynix and Toshiba from 2006-2011. However, both license agreements covered a significantly longer time period through the expiration of the last patent in December 2017 (and the ‘571 patent's expiration in June 2015), and thus to the extent 0.25% was used to calculate lump sum payments, that number was not applied to forecasted sales over the entire terms of the license agreements and therefore cannot reflect a royalty rate for those licenses. Thus, Milani's opinion that the Hynix and Toshiba agreements “reflect” a 0.25% royalty rate is supported neither by the actual license agreements nor by the extrinsic evidence. Finally, as a separate basis of exclusion, the Court finds that Milani may not rely on the Fisher deposition testimony and the other extrinsic evidence that he relies upon for his opinion that the licenses reflect royalty rates because MLC failed to disclose that evidence as a basis for a royalty rate calculation in discovery.

         BACKGROUND

         I. The Hynix and Toshiba Licenses

         On April 11, 2007, BTG (which then owned the rights to the MLC patent portfolio) entered into licenses with Hynix and Toshiba. Both licenses were to MLC's entire portfolio of 30 U.S. patents (including the ‘571 patent), and 11 foreign patents.[4]

         The Hynix license agreement defines “Licensed Products” as “any and all Hynix products, including MLC Memory Devices, the making, using, selling or offering for sale, exporting, importing or otherwise disposing of which would otherwise infringe one or more claims of the Licensed Patents.” Hynix License § 1.5 (Dkt. No. 444-2). The license granted Hynix and its subsidiaries a “non-exclusive, worldwide, indivisible non-transferable and personal license” to 41 patents “through the expiration date of the last of the Licensed Patents to expire.” Id. §§ 3.1, 6.1.[5]Under “Compensation, ” the agreement states that “In consideration of the release and License, Hynix shall pay to BTG $21, 000, 000 (twenty-one million dollars) as follows: (a) $11, 000, 000 (eleven million dollars) no later than 30 April 2007 (b) $5, 000, 000 (five million dollars) no later than 31 March 2008 [and] (c) $5, 000, 000 (five million dollars) no later than 31 December 2009.” Id. § 4.1.

         Section 4.3 of the agreement, titled “Future Licenses, ” is the basis of Milani's opinion that the agreement contains a 0.25% royalty rate. That section provides:

Future Licenses. BTG hereby agrees that Hynix will be granted most-favoured customer status. In the event that BTG grants a license under the Licensed Patents after the Effective Date, other than a license granted in settlement of litigation, in which the royalty rate is less than 0.25%, then as its sole remedy, Hynix's future payments, if any, shall be reduced so that Hynix, in total pays not more than 90% of the royalty rate paid by the new licensee. In no event shall Hynix receive any refund of any amount paid, or which became due, prior to the execution of the new license agreement. In the case of a paid up license, the royalty rate shall be calculated using formula X/Y x 100 where X is the gross undiscounted value of sales of MLC Memory Devices made and forecast to be made by the new licensee through 31 December 2011 (future sales shall be BTG's reasonable and good faith estimate based upon a reputable industry analyst data). BTG shall notify Hynix within thirty (30) days after BTG enters into an agreement granting a license under the Licensed Patents to a new licensee. Within six (6) months of BTG notifying Hynix it has entered into a new license under the Licensed Patents, Hynix may have an independent internationally recognized accounting firm conduct an audit of BTG's records, without disclosing such records to Hynix, and subject to such accounting firm entering into a reasonable non-disclosure agreement, to confirm Hynix is paying, in total as specified in Section 4.1, not more than 90% of the rate paid by the new licensee taking into account the factors described above.

Id. § 4.3.

         The Hynix agreement also contains Section 7.7 titled “Entire Understanding.” That provision reads:

This Agreement embodies the entire understanding between the parties relating to the subject matter hereof, whether written or oral, and there are no prior representations, warranties or agreements between the parties that are not contained in this Agreement.

Id. § 7.7.

         The Toshiba license agreement is similar to the Hynix agreement in several respects. The “Licensed Products” are defined as “all Toshiba or its Subsidiaries' products, including MLC Memory Devices, ” and the term of the license was through the expiration of the last of the licensed patents. Toshiba License §§ 3.1, 6.1. The license also provided Toshiba with the option of extending the license to a Toshiba-SanDisk joint venture. Id. §§ 3.2, 3.6. The compensation provided under the license is as follows:

4.1. Compensation. In consideration of the release and license granted by BTG in this Agreement, Toshiba shall pay to BTG the following sums:
(a) $6, 000, 000 (six million dollars) no later than 30 days after the Effective Date;
(b) $11, 000, 000 (eleven million dollars) on or before March 31, 2008;
(c) if Toshiba has exercised the Option in accordance with Section 3.6, a further $10, 000, 000 (ten million dollars) on or before March 31, 2009;
(d) $6, 000, 000 (six million dollars) on or before March 31, 2009;
(e) if Toshiba has exercised the Option in accordance with Section 3.6, a further $10, 000, 000 (ten million dollars) on or before March 31, 2009; and
(f) if BTG has, on or before December 31, 2008, either: (i) entered into a license under the Licensed Patents with two of the companies whose annual worldwide revenue of NAND Flash Memory Devices in 2007 as reported by Gartner Dataquest (or if such information is not available from Gartner, then as reported by another reputable market research firm agreed by the parties such as iSupply or Forrester) is ranked as top three other than Toshiba; or (ii) initiated any litigation against any one of such company in any jurisdiction for infringement of one or more claims of any of the Licensed Patents, a further $2, 000, 000 (two million dollars) no later than April 30, 2009, provided that BTG shall notify Toshiba in writing indicating the above with relevant evidences . . . .

Id. § 4.1. The Toshiba license does not contain a “most favored customer” provision. The Toshiba license contains Section 7.7 “Entire Understanding” that is identical to the “Entire Understanding” provision in the Hynix license. Milani states that Toshiba paid a total of $25 million under the license ($23 million followed by a $2 million payment). Milani Report at 48.

         II. Milani's Royalty Rate Opinion re: the Hynix and Toshiba Licenses

         In his report, Milani states that he considers the Hynix and Toshiba licenses to be the most relevant licenses for determining a reasonable royalty in a hypothetical negotiation. Milani Report at 47-48, 50. Regarding the Hynix license, Milani states that it “contains a most favored customer provision which provides a quantitative metric allowing for the application of the terms of the Hynix Agreement to the Hypothetical License, while also adjusting for Micron's extent of use. To that point, I consider the 0.25% royalty rate called for in the most favored customer provision to reflect a relevant consideration for evaluating a reasonable royalty and understand that rate was applied to Hynix's worldwide sales.” Id. at 47 (citing BTG06398-06402).[6] With regard to the Toshiba license, Milani states, “given the most favored customer provision in the Hynix Agreement, and the fact that both agreements were executed on the same day, it's reasonable to presume BTG considered the royalty rate in the Toshiba Agreement to reflect a running royalty that is at least equal to the rate reflected by the Hynix Agreement.” Id. at 48 (citing BTG06398-06402).

         Milani uses the 0.25% royalty rate derived from the Hynix license as the starting point for his calculation of the appropriate royalty rate in this case. Milani states,

Relative to the Hynix Agreement, the scope of the hypothetical license would be narrower, because the Hynix Agreement had a worldwide scope. Mr. Simon Fisher, the BTG employee responsible for licensing the ‘571 Patent, provided deposition testimony regarding the relationship between the worldwide scope of the license grant and the 0.25% royalty rate reflected within the Hynix agreement. [citing Fisher's deposition testimony at 237-238, produced in this case as BTG02097-BTG02142][7] On that point, Mr. Fisher testified that BTG's historical licenses were based on worldwide shipments, but the MLCIP Patent Portfolio was predominantly made up of U.S. rights. Recognizing this, Mr. Fisher explained that rather than adjusting the royalty base to reflect only U.S. sales, BTG discounted the royalty rate in the Agreements to account for the larger royalty base. Mr. Fisher further explained that, in connection with negotiating the Agreements, BTG considered the proper rate to apply to U.S. sales would be 0.75%, but since BTG presumed that amount reflected only a third of a licensee's total shipments, the rate in the agreement was discounted to 0.25%. Therefore, I consider the Hynix Agreement suggests a royalty rate of 0.75% is the proper rate to consider in connection with determining a reasonable royalty in a hypothetical negotiation.

         Milani Report at 54 (internal footnotes omitted).

         Milani further explains his royalty rate calculation:

In summary, as discussed throughout the Georgia-Pacific factors (and the remainder of this report), I consider the 0.25% rate discussed in the Hynix Agreement to be a relevant metric for evaluating a reasonable royalty in a hypothetical negotiation. I also consider that the 0.25% royalty rate should be adjusted to 0.75%, to reflect the fact that it was applied to a base of worldwide sales. Further, I consider that at least 50% (and potentially much more) of the 0.75% royalty rate is attributable to the technology of the ‘571 Patent. Based on that apportionment, I consider the resultant 0.375% royalty rate to reflect the minimum rate that does not account for differences between real-world and hypothetical licenses, such as the assumption of validity and infringement, as discussed in Mr. Epstein's expert report.
Finally, I recognize that the historical licensing practices of both BTG and Micron have been based on lump-sum payments. I also recognize the lump-sum payments included in the BTG license agreements reflect the application of the 0.25% royalty rate reflected in the agreements to a royalty base comprised of estimated worldwide sales. [citing BTG06398-06402]. Therefore, applying the 0.375% royalty rate to the royalty bases discussed above in Section 10 results in the following lump sum payments, but recognizes that the appropriate lump sum payment in this case may be much higher after the rate has been properly adjusted, as discussed above.

         Milani Report at 67.[8] The lump sum damages payments that Milani arrives at are between $63, 142, 053 and $70, 207, 876. Id.

         III. Fisher's Deposition Testimony

         Excerpts from the Fisher deposition testimony are at Dkt. No. 442-15. Fisher was a BTG employee who was involved in negotiating the Hynix and Toshiba licenses and the other efforts to license the BTG/MLC patent portfolio. Fisher was deposed in connection with a breach of contract lawsuit brought by MLC against BTG. In the deposition excerpts provided to the Court, [9] Fisher was asked about BTG's negotiations with Toshiba. Fisher Tr. at 236:1-239:25. Fisher testified, “And if we can get a deal done quickly with Toshiba as the initial licensee, we would do it at this [unspecified] number and then presented that number.” Id. at 236:3-6. The questioning continued:

Q: Was that number supposed to be an up-front number that was going to be paid -
A: Yeah, it was a fully paid-up lump sum number.
Q: All right. And would that fully paid-up lump sum number be considered a royalty rate?
A: Well, it's - it was a payment in lieu of past shipments and a paid-up amount in lieu of future royalties. So I don't know how - I don't know how the finance people would view it, whether they'd view it as a compensation payment or as a royalty payment.
Q: What calculations did you, BTG, use to get to $60 million?
A: We did a number of calculations. There were sort of different approaches for what we, you know - I think I termed out early bird licensing model that - the value that we had put forward, and we calculated on a variety of royalty rates initially taking the Gartner Dataquest numbers, taking the U.S. - as I recall, the U.S. proportion of those, taking a potential royalty award that might come from a court at some future date, MPV'ing that with a fairly harsh discount because of the risk of litigation.
Another model was to take the Gartner Dataquest numbers worldwide and use a .25 percent royalty rate.
And there was another model which had a staggered or tiered set of royalties.
So actually, you know, there was a whole range of numbers that [sic] could come up with. And I think in the Toshiba case it was as low as $16 million, and I don't remember what the upper bound was, but through the process of discussion, I think we all settled on the opening number of 60 something million dollars being the appropriate one.
Q: Why did you, BTG, use the .25 percent royalty rate when you were talking about using the Dataquest material?
A: Well, based on the - based on the worldwide shipments, leveraging worldwide licenses off of a predominantly U.S. patent position, that was a reasonably - well, seemed to be deemed appropriate by everyone at the time number to use for a first licensee scheme. Given that a third of the worldwide shipments, as a rule of thumb, end up in the U.S., it's equivalent to a .75 percent based on the U.S. shipments which represents a sort of discount off of a sort of ...

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