Monday, June 3, 2024

Split Federal Circuit Affirms $20 Million Royalty Against Google

The decision is EcoFactor, Inc. v. Google LLC, majority opinion by Judge Reyna (joined by Judge Lourie), opinion dissenting-in-part by Judge Prost.  The case involves U.S. Patent No. 8,738,327, which “relates generally to the operation of smart thermostats in computer-networked heating and cooling systems” (p.2).  The case was tried in the W.D. Texas and the jury returned a verdict that claim 5 of the asserted patent was valid, that Google infringed, and that Google should pay $20,109,300.  I will focus on the damages issues, which were the only point on which the majority and the dissent-in-part disagreed.  The questions mostly boil down to whether the court should have excluded the opinion of EcoFactor’s expert Mr. Kennedy “because it lacked any reliable methodology or underlying calculations,” or because of a “lack of comparability and appointment” (p.9). 

Mr. Kennedy premised his opinion on EcoFactor having “entered the hypothetical negotiation with the expectation of receiving a royalty in the amount of $X per unit,” and on this basis his proposed damages amount was $Y (p.10).  (The per-unit royalty rate is said to be “confidential business information subject to a protective order,” and thus is denominated “X.”  Similarly, the proposed damages amount is said to be confidential information and is designated “Y” (p.10 nn. 4, 5).  So we don’t know what X and Y are, but we are told that the amount the jury awarded ($20,019,300) was “significantly less than” $Y (p.13).)  The $X rate was based on “three licensing agreements EcoFactor entered into with third-party smart thermostat manufacturers—the Schneider and Daikin licenses in 2020, and the Johnson license in 2021,” as well as testimony from EcoFactor’s CEO Mr. Habib (p.11).  The majority opinion states that “Each of these agreements included the same $X royalty rate at issue here. Each license agreement provided in a whereas clause that the licensee would pay EcoFactor a lump sum amount “set forth in this Agreement based on what EcoFactor believes is a reasonable royalty calculation of [$X] per-unit for . . . estimated past and [] projected future sales of products accused of infringement in the Litigation” (id.) and that Mr. Habib  testified that the lump sums contained in each of the three license agreements were based on the $X royalty rate” (id.). 

The majority and dissent dispute the significance of the $X rate mentioned in these agreements. According to the majority:

the three admissible license agreements each disclose that EcoFactor believed that the lump sums in each license was “based on” the $X royalty rate. Additionally, in its whereas clause, the Schneider license agreement, unlike the Johnson and Daikin agreements, states that “nothing in this clause should be interpreted as agreement by Schneider that [$X] per unit is a reasonable royalty.” J.A. 10400. This clause, included by Schneider, speaks to its belief that $X may not have been reasonable but it does not speak to whether $X was actually applied in arriving at the lump sum. Arguably, this provision, when read in context, could also mean that the $X royalty rate was applied by EcoFactor and Schneider. If Schneider did not believe that the $X royalty rate was actually being applied, it could have said such in the agreement. But Schneider did not. Finally, as noted above, Johnson noted in an email chain with EcoFactor that it was “applying” the $X royalty rate. How much weight should be given to the provisions in the license agreements, including whether they are “self-serving” as Google claims, and the EcoFactor email is a question for the jury (pp.13-14).

The dissent, citing precedent to the effect that “lump sum payments . . . should not support running royalty rates without testimony explaining how they apply to the facts of the case,” views the three licenses as insufficiently reliable support for an $X rate, writing

Consider what these licenses do (and do not) say. Starting with the Schneider license, one preliminary recital states: “WHEREAS EcoFactor represents that it has agreed to the payment set forth in this Agreement based on what [it] believes is a reasonable royalty calculation of [$X] per-unit for what it has estimated is past and projected future sales of products accused of infringement in this Litigation.” J.A. 10400 (emphasis added). Yet the body of the license (i.e., its substantive and agreed upon terms and conditions)—which, unlike the recitals, reflects the view of both parties—says that its lump-sum payment “is not based upon sales and does not reflect or constitute a royalty.” J.A. 10402 (emphasis added).


The Daikin and Johnson licenses both contain nearly identical preliminary recitals about the $X rate. . . . As in the Schneider license, the body of the Daikin license—which, again, reflects the view of both parties—says that its lump-sum payment “is not based upon sales and does not reflect or constitute a royalty.” And while the Johnson license lacks a similar refutation of the recital’s “belief” (a belief that, again, was EcoFactor’s alone), it still offers nothing more than the recital itself to support any royalty rate. . . .


Mr. Kennedy cited nothing else showing that the $X rate was actually used. He cited no documents, records, sales data, or testimony showing any calculation of the lump-sum payments or otherwise establishing that these licenses used the $X rate. Mr. Habib’s testimony, relying on no underlying data, likewise offers no support. EcoFactor offered no testimony explaining how the lump-sum “payments could be converted to a royalty rate.” Whitserve, 694 F.3d at 30.


At bottom, all we have are the recitals of one party’s “beliefs” contradicted by mutually agreed upon contractual language by both parties. That’s not enough under our law (dissent pp. 2-5).

The majority and dissent also dispute whether the three licenses were sufficiently comparable and whether Mr. Kennedy’s opinion properly apportioned the value of the patent in suit.  From the majority opinion:

. . . Mr. Kennedy sufficiently showed, for purposes of admissibility, that the three license agreements were economically comparable to the hypothetically negotiated agreement. Mr. Kennedy acknowledged that, based on [technical expert] Mr. De la Iglesia’s unrebutted testimony, the Schneider and Daikin licenses list seven technically comparable asserted patents, including the ’327 patent at issue in the hypothetically negotiated agreement. . . . He also noted that the Johnson license did not list the ’327 patent as an asserted patent but listed four others that covered the same interrelated smart thermostat technologies. . . . Finally, Mr. Kennedy acknowledged that the three licenses also covered patents in EcoFactor’s portfolio that were not asserted in the underlying litigation facing Johnson, Schneider, and Daikin. . . .  


Mr. Kennedy accounted for such differences. Mr. Kennedy testified that in arriving at the $X royalty rate in a hypothetical negotiation, Google would argue that the three license agreements included EcoFactor’s portfolio, not just the ’327 patent, and thus the $X royalty rate should be decreased. . . . Mr. Kennedy then provided that the three license agreements reflect a settlement and thus the $X royalty rate reflects a risk that that EcoFactor’s patents would be found not infringed or invalid. . . . According to Mr. Kennedy, this consideration would not be present at the hypothetical negotiation between EcoFactor and Google, since the assumption is that the ’327 patent was infringed and valid. . . . As a result, this point would place upward pressure on the negotiated rate.


The three licenses aside, Mr. Kennedy separately grounded his apportionment opinion on underlying internal profit and survey data from Google. Mr. Kennedy testified that, based on underlying customer surveys from Google and based on EcoFactor’s technical expert’s testimony, the infringed technology at issue in this case attributed to Z% [another confidential amount] of the profits for the infringed products. . . . Based on this data, Mr. Kennedy calculated the amount of profit per unit that could be attributed to the ’327 patent, which was more than double the $X royalty rate (pp. 16-17).

Again, the dissent says that this was insufficient:

When calculating the ’327 patent’s value, Mr. Kennedy relied on EcoFactor’s technical expert, Mr. de la Iglesia, who compared the asserted patents in each license to the ’327 patent and concluded that the asserted patents and the ’327 patent were technologically comparable. . . . But EcoFactor’s technical expert didn’t discuss the remaining patents in each license—the non-asserted patents in EcoFactor’s portfolio . . . .


. . . Mr. Kennedy did not ask the necessary question under our law—what effect the specific non-asserted patents in EcoFactor’s portfolio would have on the hypothetical negotiation.6/ Even worse, other evidence in the record indicates that the specific non-asserted patents were not considered at all (dissent pp. 7-8).

6/ It would not be difficult for EcoFactor to offer an answer. For example, Mr. de la Iglesia could have determined that the non-asserted patents in the Schneider, Daikin, and Johnson licenses have no technological overlap with the ’327 patent and concluded that the non-asserted patents added only nominal value to the license.

The dissent closes with the following observations:

Ultimately, the majority’s real concern is that, “[i]f the standard for admissibility is raised too high, then the trial judge no longer acts as the gatekeeper but assumes the role of the jury.” Maj. 19. But we must pay close attention to the reliability of the methodology underlying expert testimony to ensure that the jury can fulfill its proper role as the factfinder. . . . Our damages law ensures that an expert asks the right questions (dissent p.10).

That is an interesting way to think about the matter:  that courts should focus on whether the expert asked the right questions.  Put another way, if you were an independent expert tasked with estimating an appropriate royalty for the technology in suit, what questions would you ask to find the right number?  I’m inclined to agree with the dissent that the majority was a bit too lenient here, and that we should expect experts to ask more penetrating questions.  Of course, the trial judge could ask those questions too, but that is a fraught undertaking in a jury trial since it can appear that the judge is favoring one side or the other.  Once again, the unique U.S. system of trying patent infringement cases to juries can have practical consequences, for better or worse.

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