This is the first time we have seen a court disallow discussion of the profit margins of an accused product on the grounds that the patented feature was not shown to be the basis of customer demand for the product. In This Daubert ruling from June 2011, a Texas court considered a motion against opinions of plaintiff’s expert Michael Gallagher regarding (1) a comparable license, and (2) the entire market value rule.
First, the plaintiff was relying upon (probably heavily) a past license with GE where the patent-in-suit, along with one other patent, was licensed for 7.5%, a rate far higher than any other license. But the expert simply dismissed the value of the second patent, saying that it was his “understanding” that the patent added no value to the license, “without any explanation whatsoever of where that understanding came from.” The court rejects this, which is probably not surprising in light of the federal circuit’s higher bar now on the use of comparable licenses (see ResQNet: comparable agreements must be “commensurate with what the defendant has appropriated”).
Second, the court makes two interesting interpretations of the recent federal circuit demands on the use of the entire market value rule. First, both sides agreed that the patented products derived most of their value from unpatented features. So while some other district courts would thus disallow use of the entire product sales as the royalty base, this court permits plaintiffs to use the entire product sales, apparently because the “comparable” licenses do the same. This is similar to the Virginia district court ruling in ActiveVideo v. Verizon. Next, the court reviews the expert’s calculation that the defendant still would have earned a respectable 12.1% incremental profit margin had they paid his proposed 7.5% reasonable royalty. The court finds that this contravenes Uniloc, since “Gallagher is clearly checking or analyzing his royalty rate in light of ULT’s total sales of the accused products” and that putting “ULT’s profit margins on the accused products in front of the jury is improper under Uniloc.” The Uniloc court seemed focused mainly on the prejudicial impact of showing the jury the total products sales of $19 billion, which it said “cannot help but skew the damages horizon for the jury.” This is the first time we have seen a court disallow the discussion of the profitability of the accused product on entire market value grounds. One might have expected this court to allow that profitability testimony, since at the same time, it was being lenient in allowing the total product sales to be used as the royalty base (which some courts have disallowed under the EMV rule).
Case: Lighting Ballast Control LLC v. Philips Electronics North America, et al., 7:09-CV-29-O (W.D. TX, June 10, 2011, Order) (O’Conner)