Following a pre-trial conference, a Texas judge rejected on Daubert grounds proposed expert testimony on a reasonable royalty, since that royalty would have been excessive for the defendant. Unfortunately, the Court goes into very little detail about the size of the reasonable royalty claimed by plaintiff’s expert Raymond Sims, whose royalty testimony the Court precluded. The relevant portion of the opinion is:
“Given that backdrop, the Court cannot assume, as WG’s counsel has urged, that ION, in a hypothetical negotiation with WG, would have taken a risk on the infringement question and agreed to a huge, profit-eliminating (and even revenue eliminating) royalty obligation for itself. As a matter of law, no such risk can be taken in a hypothetical negotiation in which infringement is deemed known. With knowledge of validity and infringement, such a financially catastrophic agreement would have been totally unreasonable. The court in Georgia-Pacific acknowledged the proposition that negotiators in hypothetical negotiations must be deemed to act reasonably: “The primary inquiry, often complicated by secondary ones, is what the parties would have agreed upon, if both were reasonably trying to reach an agreement.” (citation omitted). Even putting case law aside, any unreasonable negotiating approach must be rejected, since the ultimate goal is to arrive at what the statute terms a “reasonable royalty.” Mr. Sims’s methodology inherently arrives at an unreasonable result, and one to which no reasonable negotiator for ION could possibly have agreed. The Court therefore grants ION’s motion to exclude Mr. Sims’s testimony on reasonable royalty.”
The Federal Circuit has allowed reasonable royalties to exceed a defendant’s profits , so the judge’s ruling here must surely have been impacted by the sheer magnitude of the claimed royalty. Too bad there wasn’t more detail about it.
Another interesting ruling in this order was the further exclusion of Sims testimony regarding one particular source of lost profits for the plaintiff. In short, the Court excluded a claim of lost profits on a particular sale where the plaintiff did not actually bid on the work: “Without having submitted a tender on this survey, [plaintiff] cannot legitimately argue. . . that this survey would have been won by [it] in a reconstructed market.”
A few days later, the Court precluded Mr. Sims entirely from testifying as to his proposed 10% reasonable royalty for defendant Fugro, ruling that: “… Mr. Sims methodology in determining Fugro’s reasonable royalty is highly flawed and would not be helpful to a jury. Of particular concern is the fact that Mr. Sims offers no opinion at all on the allocation of values between patented and unpatented features of the surveys. Moreover, the Court is not persuaded that the 10% royalty rate applied by Mr. Sims is based on an appropriate projected-profit figure for Fugro.”
 “[I]t is settled law that an infringer’s net profit margin is not the ceiling by which a reasonable royalty is capped.” Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1238 (Fed. Cir. 2011) (emphasis in original).
WesternGeco LLC v. ION Geophysical Corporation, 4-09-cv-01827 (S.D. TX July 19, 2012, Order) (Ellison, J.)