The case is Altria Client Services LLC v. R.J. Reynolds Vapor Co., opinion for the court by Judge Prost, with an opinion concurring in part and dissenting in part by Judge Bryson. Despite the high damages award, and the fact that Judge Bryson dissented on one of the damages issues, this is a nonprecedential opinion. Altria filed suit against Reynolds for the infringement of three patents relating to pod-based vaping devices. The jury found the patents valid and infringed, and the Federal Circuit agrees that there was sufficient evidence for these findings. On damages, Reynolds argues that the evidence did not support the 5.25% royalty rate Altria’s expert calculated on the basis of a comparable license, and that the expert did not properly apportion damages, but the majority disagrees on these issues as well.
On the first of these two damages issues, Reynolds didn’t challenge Altria’s expert’s methodology under Federal Rule of Evidence 702, so the jury award “must be upheld unless the amount is grossly excessive or monstrous, clearly not supported by the evidence, or based only on speculation or guesswork” (p.8, citation omitted). According to the majority:
Altria offered several theories supporting the proposition that a comparable license used a 5.25% royalty rate, and it suffices for our purposes to identify one supported by the evidence. Altria sought to use a comparable license to prove its damages. One was a license between two companies, Fontem and Nu Mark. One part of this license is a lump-sum payment from Nu Mark to Fontem of $43 million granting Nu Mark the right to practice Fontem’s patents in the United States until at least 2030. To calculate the effective per-unit royalty rate from this lump-sum payment, Altria’s damages expert relied on a projection made by Nu Mark. This projection applied a 5.25% royalty to sales from 2017 to 2023 and resulted in $44 million of estimated royalties. J.A. 28365–66. Thus, Altria’s expert, noting the similarity between the $43 million lump-sum payment and the $44 million in projected sales, concluded that the $43 million lump-sum payment in the Fontem-Nu Mark license was calculated using a 5.25% per-unit royalty rate (p.9).
The majority rejects Reynolds’ arguments that, first, the expert used the wrong projection, stating that “[t]he jury was presented with expert testimony explaining multiple different sales projections that the jury could use to “deriv[e] a [per-unit] rate from the lump-sum payments and projected sales,” and noting that “Reynolds did not object to the admission or use of these projections” (p.9, citation omitted). Second, the majority rejects the argument “that the maximum per-unit royalty rate the jury could calculate from the licenses in this record was 3.6%, or perhaps 2.1%,” noting that “Reynolds and Altria presented the jury with several different per-unit royalty rates likely supportable on this record—5.25%, 3.6%, 2.1%, and 0.21%,” and that in view “of this competing testimony, and again in the absence of an objection from Reynolds on the methodology that Altria’s expert used to calculate a per-unit rate in a comparable license,” it was up to the jury to “decide for itself which royalty rate best fit the facts of this case” (p.9).
Judge Bryson, however, thinks that the 5.25% rate is not supported by the record, writing:
The court’s opinion relies on the Fontem-Nu Mark license, under which Nu Mark paid Fontem a lump sum of $43 million for the right to practice Fontem’s patents until at least 2030. Altria’s expert noted that Nu Mark prepared a number of projections. One projected a level of sales under that license between 2017 and 2023 that would yield a total royalty payment of $44 million at a royalty rate of 5.25%. Altria’s expert testified that the similarity between the $43 million actually paid under the Fontem-Nu Mark license and the $44 million expected to be paid at a royalty rate of 5.25% for the years 2017 through 2023 gave him “great confidence” that the 5.25% rate “was the real benchmark.” . . .
The problem with that line of analysis is that the $44 million projected royalty payment was based on projected sales only through 2023, while the $43 million actually paid for the license was for rights extending all the way to 2030, seven more years than the 2017–2023 period. What that means is that if the projected sales for 2024 through 2030 were similar to the projected sales from 2017 through 2023, the $43 million paid for the license would represent a royalty rate of only about half the 5.25% claimed by Altria. . . . Put another way, Altria’s expert attributed the entire $43 million in royalties to the first seven years of projected sales, rather than spreading out the royalties over the entire Fontem license period. . . . Altria pointed to no basis in the record to ignore the years between 2024 and 2030, so the expert’s testimony on the Fontem-Nu Mark license provides no support for the 5.25% royalty figure adopted by the jury.
Altria identifies various other pieces of evidence that it argues support the 5.25% royalty rate. Like the majority, however, I view the Nu Mark projections as the strongest piece of evidence as to the proper royalty rate. The remaining pieces of evidence are not sufficient to support the jury’s verdict.
I would therefore grant a new trial to Reynolds on the damages issue unless Altria agreed to a remittitur of approximately half of the $95.3 million award (dissent, pp. 1-3).
On the apportionment issue, which involved that same license (and for which Reynolds apparently did raise a Rule 702 objection), the majority writes that “Altria offered a detailed accounting for differences in the economic and technological circumstances of the contracting parties and explained how it valued Altria’s patents,” with a technical expert opining that certain licensed patents were of little value in comparison with five families covering “key features of an e-cigarette device,” and the economic expert concluding that “the importance of the patented features to Nu Mark was similar to the technical importance of the patented features from Altria’s patents to the” Reynolds device (pp. 10-11). Reynolds’ challenges, the court says, are “disagreements with the particular adjustments that Altria’s damages expert made, but that the lower court did not abuse its discretion in concluding that the expert’s methodology was reliable and in its (unspecified) wording of an apportionment jury instruction (pp. 11- 12).
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In other news, I was one of four witnesses invited to testify yesterday morning at a hearing of the United States House of Representatives Judiciary Committee's Subcommittee on Courts, Intellectual Property, and the Internet, titled “IP and Strategic Competition with China: Part IV - Patents, Standards, and Lawfare.” I provided a comparative overview of litigation involving FRAND-committed SEPs in the U.S., the U.K., Germany, and China. Yesterday afternoon, Professor Jorge Contreras—who’s been visiting this past semester at the University of Minnesota—testified at a hearing of the U.S. Senate Judiciary Committee’s Subcommittee on Intellectual Property on the RESTORE Act (for coverage of which, see here, here, and here). In addition, on Tuesday USITC ALJ McNamara concluded that Lenovo infringes three FRAND-committed SEPs owned by Ericsson, and the Munich Division of the UPC awarded Huawei an injunction against Netgear in another FRAND case (see discussions here, here, here, and here). I may have more to say about these two cases after the New Year, but plan to take a blogging break between now and then. Happy holidays!
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