Judge Posner, a 7th Circuit Court of Appeals judge sitting here by designation, released a bold Daubert ruling that illustrates how judges are demanding more rigorous quantification of damages. It contains strong commentary on two expert opinions and is worthy of some serious thought coming from a prominent appeals court judge.
Addressing the patents in suit one-by-one, he starts by noting the huge discrepancy between plaintiff’s and defendant’s claimed damages on Apple’s ‘002 patent (toolbar notification window showing such information as battery strength). Motorola’s damages expert Michael Wagner proposed a $100,000 reasonable royalty, while Apple’s expert Brian Napper proposed a $14 million royalty, a difference of 140x. Judge Posner notes that “[t]he size of the disparity is a warning sign. Either one of the experts is way off base, or the estimation of a reasonable royalty is guesswork remote from the application of expert knowledge to a manageable issue within the scope of that knowledge.”
Wagner’s royalty was based on the cost his client Motorola would incur to design around the patent. Yet Judge Posner describes Wagner’s opinion as surprisingly inadequate, because he fails to use the same approach here as he would have used outside litigation; outside of litigation, Wagner would gather information from third parties, since Motorola already would know its design-around costs. This is quite interesting, because Wagner’s opinion (basing a royalty on the cost to design around) is common in IP damages cases. Here at VLF Consulting, we’re not sure of the ramifications of this ruling – if other courts will rule the same way, and how such evidence of design-around costs will be handled.
Meanwhile, Napper based his $14 million opinion mainly on Motorola’s customer surveys regarding the reasons they purchased the phone. Describing in detail Napper’s use of the survey, Judge Posner criticizes the number of leaps Napper had to make, calling various aspects of Napper’s work unreasonable, arbitrary, unverified, bizarre, and unsupportable. The root problem, according to the judge, is that the survey dealt with importance of features, but a “responsible advisor” outside of litigation would have constructed a survey to determine the incremental dollar value to the customer of having an unobstructed notification window as opposed to one that was occasionally partly obstructed. Judge Posner thus excludes Napper’s damages opinions on this patent.
This leaves a couple big issues for litigants and their damages experts to wrestle with. First, how do we decide if a commissioned survey is worth the cost? The judge wanted a better survey for this $14 million claim, but what about a $1 million claim? A $200,000 claim? Posner’s guidance on this point is thus: “Uncertainty is a [sic.] bad; it is tolerated only when the cost of eliminating it would exceed the benefit.” Second, in cases where the relevant buyers are a few corporate buyers instead of retail consumers, surveys may not be appropriate or possible. Will the courts allow a lower evidentiary hurdle for such cases? Third, the dispositive element of a patent may not be clear until the late stages of litigation; at that point, it may not be feasible to complete a study in the allotted time.
For Apple’s ‘949 patent, Wagner uses the same methodology (cost of a design-around, based on interviews with his client) and similarly arrives at a $100,000 royalty. Judge Posner again rejects this opinion, here noting that Wagner’s assumptions about the time and cost of removing the patented functionality are “not within Wagner’s competence.” Here, “the dispositive element of the ‘949 patent is the use of a tap on the right‐hand side of the screen to switch to the next page of a Kindle book that has been loaded on the cell phone.” To avoid infringement, Motorola could have replaced the tap feature in Kindle Reader with a swipe, or else shipped cell phones without the app, requiring the user to download it for free. Napper’s $35 million royalty opinion was based on the premium some users pay for a desktop peripheral input device over a mouse, which he claims demonstrates the value of “gestural control.” Again the judge rejects this opinion, noting that a survey could have more closely addressed the value of the “tap for next item” functionality.
Quite interestingly, Judge Posner reject’s Apple’s argument that Napper need not account for the cost of Motorola’s non-infringing alternatives:
An expert witness “must provide reasons for rejecting alternative hypotheses ‘using scientific methods and procedures’ and the elimination of those hypotheses must be founded on more than ‘subjective beliefs or unsupported speculation,’” Clausen v. M/V NEW CARISSA, 339 F.3d 1049, 1058 (9th Cir. 2003), quoting Claar v. Burlington Northern R.R., 29 F.3d 499, 502 (9th Cir. 1994); see also Committee Notes on 2000 Amendment to Fed. R. Evid. 702, as an aspect of his more general duty to be as “as careful [in his litigation work] as he would be in his regular professional work outside his paid litigation consulting.” Sheehan v. Daily Racing Form, Inc., supra, 104 F.3d at 942; see also Kumho Tire Co. v. Carmichael, supra, 526 U.S. at 152.
The judge suggests that Napper could have met such requirements by (for example) quantifying the impact on sales to Motorola if it had shipped phones without the app.
For Apple’s ‘263 patent, Napper claimed a reasonable royalty of $29 to $31 million, based on the design-around cost to Motorola (of adding a chip to its phones) based on a Apple’s technical expert. Judge Posner rejects this since it relies upon “an engineer who works for Apple,” who the judge suggests may have a conflict of interest because he is “handsomely compensated by Apple.” You can almost hear Apple and Napper now complaining “but judge, first you want us to consider design-around costs, but now you reject that even though we used the information available to us.”
For Apple’s ‘647 patent, Napper bases his $10.5 million royalty damages on the value of a similar app available for download. But the judge rejects this methodology and notes that a “competently designed and administered consumer survey” could have answered the question better.
For Motorola’s ‘559 patent, Judge Posner takes the similar position that Motorola’s damages expert (Carla Mulhern) failed to use real-world practices in arriving at her reasonable royalty of $347 million. The judge dismissed as “nonsense” the position that Apple would pay the $347 million – just a small fraction of its profit!— without taking into account Apple’s non-infringing alternatives. The judge also dismisses as “science fiction” Mulhern’s lost profits calculation because Apple had non-infringing alternatives; namely, to break its contract with AT&T and use the Verizon network, or to pay the 2.25% royalty demanded by Motorola.
Apple, Inc. v. Motorola, Inc., et. al., 1-11-cv-08540 (N.D. IL, May 22, 2012, Order)(Posner)