Tuesday, June 25, 2019

Federal Circuit Affirms Use of Settlement to Determine a Reasonable Royalty

The opinion, published today and authored by Judge Taranto (joined by Judges Mayer and Chen), is Elbit Systems Land and C4I Ltd. v. Hughes Network Systems, LLC.  A jury determined that Hughes infringed claims 2 and 4 of Elbit’s U.S. Patent No. 6,240,073, which "claims a system for transmitting information from user terminals to a central hub using satellite communication" (p.2).  The court affirms on liability, and then proceeds to reject three challenges to the $21,075,750 damages award. 

First, the court rejects the argument that it was improper for Mr. Martinez to base his royalty estimate on a prior settlement between defendant Hughes and another firm, Gilat:
We have previously explained that prior settlements can be relevant to determining damages. Prism Techs. LLC v. Sprint Spectrum L.P., 849 F.3d 1360, 1369 (Fed. Cir. 2017). Not every settlement will be relevant, and some, while probative, will introduce a danger of unfair prejudice that substantially outweighs the probative value. Id. Thus, whether in using a settlement agreement at all or in drawing the appropriate lessons from the particular settlement for the case in which it is being used, relevant circumstances—such as similarities and differences in technologies and market conditions and the state of the earlier litigation when settled—must be carefully considered. Id. at 1370–71. Use of actual past licenses and negotiations to inform the hypothetical negotiation does not “require[] identity of circumstances.” Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1330 (Fed. Cir. 2014). Instead, the prior licenses or settlements need to be “sufficiently comparable” for evidentiary purposes and any differences in circumstances must be soundly accounted for. . . . 
Mr. Martinez relied on a prior settlement and appropriately accounted for differences between the circumstances of that settlement and the present circumstances. The relied-on settlement was one between Hughes itself and Gilat, another satellite internet company. The Gilat Agreement was the result of a suit that Hughes, as patent owner, filed against Gilat for allegedly infringing Hughes’s older satellite communication system, which used satellite communication for only one direction (hub to terminals) of the transmission. Mr. Martinez testified to how what Hughes received in that settlement provided relevant evidence for determining what Hughes reasonably should pay as a royalty for use of Elbit’s technology at issue here.
Relevant facts considered by Mr. Martinez include the following. The Gilat Agreement occurred only four months after the agreed-on date of the hypothetical negotiation posited for determining the reasonable royalty in this matter. . . . The time periods for assessing value in the satellite-service marketplace were therefore very close. The technologies were also related for purposes of determining market value. . . . The Gilat Agreement involved obtaining internet access using one-way satellite communication, and the ’073 patent involves obtaining internet access using two-way satellite communication. All three companies, Gilat, Hughes, and Shiron (Elbit’s predecessor) participated in the satellite internet-access market. While Hughes and Gilat were established competitors and Shiron was a start-up, Shiron had the “breakthrough technology,” J.A. 1720, that represented “the next generation” of internet access, J.A. 1717, while the Gilat Agreement concerned “the old one-way product,” J.A. 1717–18.
Mr. Martinez attended to all of those facts. Mr. Martinez also accounted for the fact that the Gilat Agreement was a settlement prompted by litigation. . . . In the end, he relied on the per-unit figure in the Gilat Agreement for one-way technology, together with Hughes-based evidence that two-way technology was worth at least an additional 20%, to arrive at his proposed per-unit figure—which the jury adopted (pp. 12-14).
For previous discussion of Prism Technologies on this blog, see here.  Second, the court rejects a challenge based on the apportionment principle:
Mr. Martinez testified that apportionment “is essentially embedded in [the] comparable value” from the Gilat Agreement concerning a comparable component of a larger product or service. . . . Rather than “parse out a value for each of the claims,” Mr. Martinez “came up with a market, comparable royalty rate, and then [he] adjusted it as necessary” for the hypothetical negotiation. . . . As we have noted, to reach his final figure, he increased the royalty by 20% from the Gilat Agreement, Hughes executives having made statements indicating that the two-way system provided a 20% increase in value over the old one-way system. . . .
Mr. Martinez’s approach is consistent with our precedent concerning the apportionment requirement that a royalty should reflect the value of patented technology. . . . In CSIRO, the district court started with evidence of proposed royalty rates from the parties’ prior attempts at negotiating a license for the patent. . . . We determined that the district court’s analysis was not in error because it “already built in apportionment” by starting from “discussions centered on a license rate” for the same patent, those discussions having already informally apportioned the proposed license rates to the value of the patented technology. . . . Hughes has not shown the unreasonableness of that analysis of how a negotiation can fulfill the apportionment requirement. And this case is relevantly similar. Mr. Martinez’s testimony allowed the jury to find that the components at issue, for purposes of apportionment to the value ponents at issue in the Gilat-Hughes agreement, and Hughes introduced no evidence that precluded such a finding. Gilat and Hughes would have had to consider the benefit from the patented technology over other technology and account for that in the Gilat Agreement. As a result, when Mr. Martinez used the Gilat Agreement as his starting point, his analysis could reasonably be found to incorporate the required apportionment (pp. 15-16).
Finally, the court concludes that Mr. Martinez's testimony did not inappropriately refer to the entire market value of Hughes's products:
At three points in his testimony, Mr. Martinez referred to the revenue Hughes receives from service fees for an average customer over the course of that customer’s time buying the relevant service from Hughes. First, in explaining how he arrived at his reasonable royalty rate, he stated, based on his expert report, that he “determined that Hughes earns approximately $2500 of revenue per customer,” on average, from its DirecWay, HN, HX, and HT products. . . . Second, the $2500 number was referenced in his conclusion that $18 was a reasonable royalty because “[$]18 is a smaller portion of the $2500.” . . . According to Mr. Martinez, it was “reasonable” for “Hughes to pay $18 in order to get approximately $2500 worth of revenue.” . . . Finally, in summarizing his analysis, he reiterated that a royalty rate of $18 was “very reasonable given the $2500 of revenue that Hughes derives from the products.” . . . Hughes does not identify, and the transcript at those passages does not reveal, an objection by Hughes to that testimony.
Mr. Martinez’s reference to life-of-service customer-specific (service) revenue from relevant products does not fall into a pattern we have specifically disapproved. The $2500 customer-specific reference is not the same as Uniloc’s reference to Microsoft’s $19 billion in company-wide revenue. Nor did Mr. Martinez use a high price of a multi-component overall product or service as a base, multiplied by a percentage, in a rate-base running-royalty calculation. Rather, he calculated a flat per-unit dollar figure based on a license examined for comparability and checked the reasonableness of the resulting figure, as part of a hypothetical-negotiation analysis, against a life-of-relationship service-revenue figure for an average customer. This analysis may be more akin to the reliance on licenses that was the subject of Ericsson, where we upheld a license-based calculation that relied on product value, concluding that, under the evidentiary principle grounded in a prejudice-probativeness balance, such a methodology is not automatically reversible error. Ericsson, 773 F.3d at 1228.
We do not decide here how the evidentiary principle at issue would apply to testimony of the sort Mr. Martinez gave if the testimony stood alone and an objection were made in a timely fashion with an adequate explanation of why Mr. Martinez’s particular analysis created the kind of prejudice that substantially outweighs probative value of the type targeted by the evidentiary principle at issue. But the pretrial motion to which Hughes points as raising the present issue did not identify a reference of the sort Mr. Martinez made and seek and support its exclusion. . . . Then, at trial, as far as we have been shown, there was no objection by Hughes and no judicial ruling that opened the door to what Hughes itself did—namely, affirmatively use Uniloc-type evidence. Specifically, Hughes itself referred to a figure representing company-wide revenue, see J.A. 10183, despite the pretrial agreement about exclusion of “total revenues,” J.A. 119; J.A. 156, and in closing argument, Hughes called the jury’s attention to the exhibit disclosing that figure, J.A. 2566. In these circumstances, whether as a matter of forfeiture or as a matter of insufficiency of a showing of prejudice from the Elbit testimony under the principle invoked by Hughes, we see no reversible error in the district court’s refusal to grant a new trial (pp. 17-19).
The court decided not to review the district court's finding that the case was exceptional, and thus potentially meriting attorneys' fees, because the district court had not yet quantified the amount of fees, if any, that will be assessed against Hughes (pp. 19-24).

In another case decided today, Cellspin Soft, Inc. v. Fitbit, Inc., the court reverses a judgment (1) dismissing infringement claims for lack of patentable subject matter, and (2) awarding fees to the prevailing defendants.  Though not necessary to the outcome on appeal, the appellate court rejects the district court's finding of exceptionality premised on the latter's conclusion that "Cellspin should have filed a 'test case' before asserting its patents here" and its faulting of "Cellspin for amending its complaint just a few days before the scheduled hearing on Appellees’ motions to dismiss" (pp. 23-24).

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