Tuesday, February 8, 2022

The Federal Circuit's Analysis of Comparable Licenses in Apple v. Wi-LAN

As I mentioned previously, on Friday the Federal Circuit vacated and remanded a multimillion-dollar damages award in  Apple Inc. v. Wi-LAN Inc. (opinion by Chief Judge Moore, joined by Judges Bryson and Prost). Here is my analysis.

There are two patents in suit in Apple v. Wi-LAN:  the ’145 patent, which “is directed to allocating bandwidth in a wireless communication system,” and the ’757 patent, which “purports to improve signal quality and offer greater error protection in data transmission using a modulation scheme” (pp. 2, 4).  Apple sued Wi-LAN for a declaratory judgment of noninfringement and invalidity, and “Wi-LAN counterclaimed, alleging that certain Apple devices—including the iPhone 6, iPhone 6 Plus, iPhone 5, iPhone 5S, and iPhone 5C—infringed at least one claim of those patents based on their use of the Long-Term Evolution (LTE) wireless communication standard” (p.5).  In particular, “Wi-LAN contended that its patented technology enabled Voice over Long-Term Evolution (VoLTE), which provides voice call service over a 4G LTE network” (pp. 5-6).  The jury concluded that Apple infringed three claims of ’145 and one claim of ’757, based in part on the district court’s construction of claim terms “subscriber unit” and “subscriber station.”  On appeal, Apple challenges the claim construction and infringement findings, but the Federal Circuit affirms on these issues. On Wi-LAN’s cross-appeal, the court reverses a “partial summary judgment of noninfringement for all accused phones equipped with Intel chips based on a 2011 license agreement between Wi-LAN and Intel” (p.6), based on its conclusion that the district court misinterpreted that agreement.  For present purposes, however, I’ll skip over these issues to focus on damages.

As for damages, at trial Wi-LAN’s technical expert compared systems using “VoLTE against the best purported noninfringing alternative, Skype,” and attributed the improved voice quality of VoLTE to the ’145 patent.  Wi-LAN’s damages expert in turn used this testimony to conclude that a hypothetical negotiation between the parties would have resulted in a royalty of $0.85 per phone, or $145.1 million total.  The jury awarded this amount, but the district court granted Apple’s motion for a new trial on damages on the ground that the technical expert’s “testimony conflated the patented technology with VoLTE generally” (p.7).  During the new trial on damages, then, Wi-LAN’s economic expert “pivoted to a royalty rate of $0.45 per phone based on three comparable licenses that covered the asserted patents” (p.7).  Based on this testimony, the jury awarded $0.45 per phone or $85.23 million in damages, which the district court allowed to stand.

On appeal, the Federal Circuit affirms the order granting the first new trial on damages (pp. 23-25).  It vacates the order denying Apple’s request for a new trial on damages following the second damages trial, however, and remands for a third trial on damages.  The matter hinges on the economic expert’s use of comparable licenses:

To estimate a reasonable royalty in this case, Mr. Kennedy first culled more than 150 Wi-LAN license agreements down to three comparable agreements . . . : the Vertu, Doro, and Unnecto license agreements. He chose those three licenses because they (1) involved phones as the licensed products; (2) became effective in 2013 or later; (3) licensed patents covering LTE or related technology; and (4) were executed after the asserted patents issued. . . . In addition to licensing patents covering LTE, each agreement also licensed other patents in Wi-LAN’s portfolio.

Mr. Kennedy then set out to adjust for the differences between those licenses and the license that would have resulted from the hypothetical negotiation. He acknowledged that—unlike the Vertu, Doro, and Unnecto portfolio licenses—the hypothetical negotiation would have resulted in a license to only the ’145 and ’757 patents. . . .

To account for this difference, Mr. Kennedy first sought to establish that, in practice, only a handful of valuable patents drive the royalty rate for a license, and the rest of the portfolio is included for a marginal upcharge. . . .

Mr. Kennedy, relying in part on [Wi-LAN witness] Mr. Skippen’s testimony, determined that the ’145 and ’757 patents were key patents in the three licenses for three reasons: they were specifically listed in the comparable licenses, they were discussed in negotiations, and Apple continued to use the technology after the patents were asserted against them, rather than switch to a noninfringing alternative. . .  (pp. 16-18).

The Federal Circuit, however, doesn’t buy it:

Mr. Kennedy’s opinion that the asserted patents were key patents is untethered to the facts of this case. As a preliminary matter, all three licenses were obtained prior to any litigation. . . . Thus, unlike Apple, the licensees did not continue to use the technology after being found to infringe. More importantly, those licenses treated the asserted patents as chaff, not wheat. For example, there is no evidence that the ’757 patent was discussed during negotiations for any of the comparable licenses . . . . Each license divided the licensed patents between two categories: Asserted Patents and Non-Asserted Patents. None of the licenses list the ’757 patent among the “Asserted Patents,” which were the patents focused on during underlying negotiations. . . . Two of the licenses, Doro and Vertu, do not list the ’757 patent at all. And Unnecto’s reference to the ’757 patent is easily lost in a schedule listing hundreds of Non-Asserted patents. . . . And Mr. Skippen also expressly testified that the ’757 patent was not discussed in initial negotiations of the Doro license agreement. . . . There is no record evidence supporting Mr. Kennedy’s assumption that the ’757 patent was a key patent. . . .

For similar reasons, the record does not support that the Doro or Unnecto licenses treated the ’145 patent as a key patent. Neither lists the ’145 patent as one of the “Asserted Patents.” Doro doesn’t list it at all, and as with the ’757 patent, Unnecto lists the ’145 patent with hundreds of other patents in the chaff. There is also no evidence that the ’145 patent was discussed in negotiations for either agreement. . . .

That just leaves the Vertu license’s treatment of the ’145 patent. Mr. Skippen testified that the ’145 patent was discussed during the Vertu license negotiations. . . . And that license lists the ’145 patent as one of the “Asserted Patents.” . . . However, it also lists five other “Asserted Patents.” Id. And Mr. Kennedy failed to address the extent to which these other patents contributed to the royalty rate in the Vertu license. Yet he opined that excluding these patents (and the rest of Wi-LAN’s portfolio) from the hypothetical negotiation would have netted Apple only a 25 percent discount. Mr. Kennedy’s silence on these equally situated patents is troubling and makes his opinion unreliable.

Mr. Kennedy’s methodological and factual errors in analyzing the comparable license agreements render his opinion untethered to the facts of this case. Thus, Mr. Kennedy’s damages testimony should have been excluded (pp. 19-20).

A few observations here.  First, I have done no research on the underlying record, so I have no personal knowledge whether the court’s discussion of the expert testimony is overly harsh to the persons involved.  Second, I wonder if it would be useful for someone (say, the Federal Circuit Bar Association) to devote some effort to developing a checklist for district courts to consider in determining when proposed comparable licenses really are sufficiently comparable?  Third, I assume that the decision to remand for a third trial on damages is correct as a matter of procedural law, but doesn’t it seem kind of wasteful?  As a policy matter, if we want to provide the proper incentives for parties to present cogent evidence on damages, shouldn’t there be some sanction—like, say, dismissal—for failing to do so two times in a row? Though to be sure, Judge Posner tried something like that a few years back in the Apple v. Motorola dispute and got reversed for it. 

For other discussion of this case, see here, here, and here.

1 comment:

  1. Your concluding comment that a third trial seems wasteful is quite true. Expensive for litigants, judicial system, and jury members. But it sounds to me that the plaintiff here twice convinced a jury of substantial damages, presumably over Apple's vigorous defense pointing out the flaws in plaintiff's position. Most efficient policy in my mind would be to let the jury weigh the competing evidence from both parties, and stick with the outcome unless there was egregious misbehavior. Thank you for all your work on the fantastic blog!