FRAND Royalty Issues in Metaswitch v. Genband

The Patent Damages Blog recently published a post on Magistrate Judge Roy S. Payne's recent Memorandum Order in response to a motion to exclude certain opinions of the plaintiff's proposed expert in Metaswitch Networks Ltd. v. Genband US LLC, a case now pending in the Eastern District of Texas.  Reminiscent of Microsoft v. Motorola, the magistrate will allow the expert to rely "on the W-CDMA patent pool as evidence of the FRAND rate in this case," and to apply a multiplier of three to that rate, "based on real-world factors such as the participation rate and the value of expected cross-licenses" (Order p.4).  Reminiscent of In re Innovatio IP Ventures LLC, the expert also wanted to apply, in the alternative, a "top-down" approach that would "allocat[e] the available profit on the smallest saleable unit ('SSU') across an estimate of the minimum number of all relevant SEPs" (Order p.5).  The court excluded this testimony, however, stating:

the way Mr. Lynde determines the “proportion of Genband’s ’006 patent to total SEPs for the Metaswitch accused product” is by counting the number of companies that provided intellectual property disclosures to the IETF standard setting organization, and assuming that the value of each participant company’s patent portfolio is the same. (Dkt. No. 177-3 at ¶ 48). This approach ignores the size of each company, the number of patents in each company’s portfolio, and the differences in value between patents—his approach necessarily assumes that every participant company’s patent portfolio was exactly the same as Nortel’s. Mr. Lynde’s only justification for glossing over these details is that “Nortel is one of many large technology companies with significant patent portfolios in this area.” (Id.). He does not attempt to quantitatively (or even qualitatively) compare Nortel’s portfolio to the portfolios of the other participant companies.

Mr. Lynde’s top down approach is highly speculative and not supported by sufficient “facts or data.” See In re Innovatio IP Ventures, LLC, 2013 U.S. Dist. LEXIS 144061 at *168 (N.D. Ill. Sept. 27, 2013) (top down approach “requires verifiable data points, such as the number of 802.11 standards-essential patents”). Mr. Lynde admits in his report that “there is no information available with regard to the specific patents that may be covered under the blanket declaration by a given company.” (Dkt. No. 177-3 at ¶ 48). An absence of information is not a license to speculate. Mr. Lynde’s opinions relating to the “top down” approach are excluded (Order pp. 5-6).

As I've stated in a couple of recent papers coauthored with Norman Siebrasse (see here and here), I am somewhat sympathetic to some version of a top-down approach to estimating FRAND royalties (though not necessarily to the Innovatio approach in every particular).  At the same time, I recognize that it may be problematic to apply such an approach when the evidence as to the number of (valid and infringed) SEPs and the relative importance of the SEPs at issue in comparison with the others is lacking.  In a sense, the issue boils down to whether courts should allow the use of certain shortcuts or assumptions--what I might refer to as "soft presumptions"--because, notwithstanding their shortcomings, they are better than any other alternative.  I'm not yet sure what the right answer is, but I plan to being addressing this issue in a forthcoming article.