Some Thoughts on EcoFactor

As previously noted, yesterday the Federal Circuit issued its en banc decision in EcoFactor, Inc. v. Google LLC.  As readers will recall, the court requested that the parties address “the district court’s adherence to Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), in its allowance of testimony from EcoFactor’s damages expert assigning a per-unit royalty rate to the three licenses in evidence in this case.”  I joined the law professors’ amicus brief urging reversal.  The 8-2 majority opinion by Chief Judge Moore “reverse[s] the district court’s denial of Google’s motion for a new trial on damages,” but “reinstate[s] the portions of the panel opinion that pertain to issues other than damages” (p.23).    There are two separate opinions concurring in part and dissenting in part, one by Judge Reyna joined by Judge Stark, and one by Judge Stark joined by Judge Reyna.  These two judges concur in reinstating the non-damages portion of the panel opinion, and in the majority’s conclusion that the en banc proceeding was proper notwithstanding the non-participation of Judge Newman.

The relevant facts, as I discussed in my post on the original panel opinion last June, are as follows (with page cites to that opinion):

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. . . . 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 apportionment” (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 Federal Circuit granted the rehearing en banc in September.  In December, it clarified that apportionment would not be an issue in the en banc proceeding.  It heard oral arguments in March.

On my reading, the majority opinion essentially holds that a self-serving recital that a licensor believes that a lump-sum royalty reflects a royalty rate of $X per unit is not a sufficient basis for an expert to opine that $X per unit is a reasonable royalty rate—though it can still be relevant evidence, insofar as it may reflect what the licensor would have agreed to in the hypothetical negotiation.  (See majority opinion p.12 (“We hold the existing licenses upon which Mr. Kennedy relied were insufficient, individually or in combination, to support his conclusion that prior licensees agreed to the $X royalty rate”); p.14 (“Mr. Kennedy could have relied upon the Schneider license as evidence of the amount EcoFactor would agree to as the willing licensor, but the license cannot be read to support Mr. Kennedy’s testimony that Schneider was agreeing to pay the $X royalty”; p.16 (“The licenses, individually or in combination, do not support Mr. Kennedy’s opinion that the licensees were paying the $X rate, agreed to pay the $X rate, or agreed that the $X rate was a reasonable royalty”).)  In my view, that is a sensible rule.  The consequence of ruling to the contrary would be that a licensor’s self-serving recital would always provide adequate support for an expert’s opinion, no matter how divorced from reality that recital may be.  To put it another way—as I did in my discussion of Judge Prost’s dissent from the June 2024 panel opinion—in evaluating whether an expert’s opinion has a sufficiently reliable basis, perhaps we should focus on whether the expert asked the right questions:  that is, 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?  Under this rule, if such a hypothetical independent expert wouldn’t rely on self-serving recitals as indicative of value, but the real-world expert did, then there is a problem, unless either there is other evidence confirming the reliability of the recitals, or the expert limits their reliance to the issue of what the real-world licensor would have accepted.

In the present case, the majority and dissents disagree not only on where to draw the line between gatekeeping and fact finding, but also on whether the expert’s opinion was sustainable based on other evidence in the record, including the testimony of EcoFactor CEO Mr. Habib; if so, whether any error in admitting Mr. Kennedy’s testimony was merely harmless; whether the district court’s failure to provide reasons for denying a new trial was an abuse of discretion; and whether the appellate court should be interpreting the three purportedly comparable licenses as a matter of law.  I’m not going to address these latter issues here, other than to state that in my view the majority reached the right decision in sending this back for a new trial on damages.