Federal Circuit Vacates Damages Award for Lack of Substantial Evidence

This morning the court handed down its opinion in Enplas Display Device Corp. v. Seoul Semiconductor Co. (majority opinion by Judge Stoll, with Judge Newman concurring in part and dissenting in part).  As described by the court, the patents in suit are "directed to methods of backlighting display panels, particularly LED displays used in televisions, laptop computers, and other electronics" (p.2).  Enplas filed an action for a declaratory judgment of noninfringement and invalidity, and Seoul Semiconductor counterclaimed for induced infringement.  The court affirms the district court's determination that the patents were not anticipated by the prior art, and that Enplas induced third parties to infringe; but it vacates and remands the damages award for lack of substantial evidence.  From the opinion:

Enplas argues that the district court erred when it denied JMOL that the damages award was not supported by substantial evidence. Specifically, it contends that the only evidence supporting the $4 million award was testimony from SSC’s damages expert that explicitly and improperly included non-infringing devices in the royalty calculation. Before trial, Enplas filed a Daubert motion to exclude this testimony. The district court deferred full consideration of that motion, stating that it was more appropriate for a motion in limine. Enplas filed a motion in limine, seeking to exclude SSC’s damages expert’s testimony regarding “other lenses” not at issue in this case. The district court denied that motion, holding:

Consistent with this Court’s prior rulings, [SSC’s expert] cannot assume that infringement can be proven for the lenses not in this case. However, [SSC’s expert] may present evidence that under a lump-sum royalty negotiation, [Enplas] would seek to cover all of its potentially infringing products. As long as [the] ultimate damages determination is adequately adjusted to only recover for those lenses in the case, [the] testimony is permitted.

J.A. 13144 (emphasis added). Thus, the district court’s order limited SSC’s expert to a damages theory based on infringing and “potentially infringing products.” Id. It did not allow a damages theory based on sales of nonaccused products.

At trial, SSC’s expert opined that Enplas would have agreed to a lump sum royalty in a hypothetical negotiation for the ’554 and ’209 patents. She testified that “[i]f the license [were] limited only to the accused lenses . . . the reasonable royalty for the ’554 Patent [would be] $500,000, and for the ’209 Patent $70,000.” J.A. 15539 at 722:3–5. She explained that “the $570,000 covers the[] five products” accused of infringement in this case. J.A. 15534 at 717:1–3. SSC’s expert did not stop there, however. She went on to testify that Enplas and SSC would not have limited the license to just the accused products “if there [were] a risk of infringing the patent by manufacturing other products that are similar in nature.”J.A. 15534 at 717:11–13 (emphasis added). The “more pragmatic approach,” explained SSC’s expert, would have been for the parties to agree to a premium “freedom to operate” license to avoid the need to test and negotiate licenses for additional or future potentially infringing lenses that Enplas might sell. J.A. 15534–35 at 717:22–718:3.

To determine the premium that Enplas would pay, SSC’s expert assessed the volume of sales of all nonaccused lenses made by Enplas. Because none of this information had been produced during discovery, SSC’s expert found “some publicly-available information from the Enplas website” and used that to “determine what that volume of sales would be.” J.A. 15535 at 718:17–25. SSC’s expert testified that “the volume of sales” for Enplas’s unit that sells lenses “is eight to ten times the sales of the specific products that we’re here to talk about today”—i.e., the accused infringing products. J.A. 15537 at 720:3–7.

Based on this information and theory, SSC’s expert testified that Enplas and SSC would have agreed to pay $2 to 4 million depending on the ultimate “volume of sales of potentially infringing products beyond the ones in this case.” J.A. 15538 at 721:2–5 (emphases added). SSC’s expert did not present any explanation or evidence whatsoever to show how the past revenue from Enplas’s noninfringing lenses could reasonably estimate the future revenue from Enplas’s infringing or potentially infringing lenses. . . .

Here, SSC’s expert opined that Enplas and SSC would have agreed to a $2 to 4 million royalty based on a royalty base comprising sales of non-accused lenses. J.A. 15538 at 721:2–5. This testimony cannot support the jury’s damages award, for § 284 and our precedent proscribe awarding damages for non-infringing activity. Thus, the jury’s $4 million award for infringement of the ’554 patent cannot stand (pp. 16-23).

Judge Newman dissents, arguing inter alia that the court should defer to the expert's testimony that a hypothetical ex ante license would have been in the amount of "$2 to 4 million for a freedom to operate license . . . to alleviate business uncertainty" (dissent p.9).  The dissent also makes more of the fact that the plaintiff did not challenge this testimony at trial or offer a rebuttal case on damages (p.12), and views the majority as permitting Enplas to "challenge admissibility under the guise of substantial evidence," rather than "under the framework of the Federal Rules of Evidence . . . through a Daubert challenge" (p.7).