Experts on Damages, Valuation & Accounting Experts on Damages, Valuation & Accounting

Patent Infringement Damages Under Fire

March 4th, 2013

March 2013

Seventh Circuit Judge Richard Posner is one of the foremost legal scholars in the United States, particularly on economic matters. He has written numerous influential opinions and almost forty books on law and economics, teaches at the University of Chicago Law School, and is widely respected in the legal community. And two of his recent damage rulings will have a signification impact on the patent litigation process, or more specifically reduce it.

If the decisions described herein were from someone less well known, the cases might be disregarded as idiosyncratic. But coming from Justice Posner, the rulings are afforded much more weight and could encourage other judges to rule similarly.

Last summer in Apple vs. Motorola, Judge Posner, sitting by designation, threw out both sides’ damage witnesses. This article discusses the Apple case and the damages ruling.  Posner’s current and second ruling affecting the patent damage landscape is Brandeis University and GFA Brands, Inc., vs. Keebler Co., No. District of Illinois, (Case no. 1:12-cv-01508, January 18, 2013).

In this second action, again sitting by designation, Judge Poser gutted the damage case for a plaintiff patentee involving the formula for cookies used by defendant Keebler. Judge Posner eliminated practically all of the damage calculation, not based on the plaintiff’s grotesque misuse of damage principles, but based on Judge Posner’s own detailed analysis and questions which occurred to him that had not been anticipated and answered by the plaintiff’s expert in their work.

As with last summer’s Apple case, Judge Posner’s ruling was not a result of any concern regarding the qualifications of the expert. In the Keebler case, Judge Posner concludes:

“Dr. Layne-Farrar is the plaintiffs’ damages expert and is a highly qualified consulting economist. There is no doubt about her general competence to estimate damages, in this case in the form of a reasonable royalty for Keebler’s alleged infringing use of the plaintiffs’ product…”

However, he then proceeded to dismiss most of Dr. Layne-Farrar’s work based on his own analysis. The Court summarized the reasonable royalty issue as follows:

“The reasonable royalty is the price that Keebler would have paid to GFA (the plaintiff that does the licensing of the plaintiffs’ patent) had it negotiated for a license before it started using the infringing blend rather than risk being sued for patent infringement. E.g. Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). Keebler would not have paid a royalty higher than the cost to it of switching to a non-infringing substitute for the plaintiffs’ margarine in its cookies or otherwise reworking its manufacturing process to avoid making the infringing margarine.”

Notably, the last part of the above quote is not universally true. Nevertheless, it is Judge Posner’s view, which then affects the rest of his analysis.

The Keebler case underscores the importance of acceptable non-infringing alternatives in determining a reasonable royalty rate. When there is an acceptable economic alternative to use of the infringed patent, the royalty rate will necessarily be smaller than if no such alternative exists. The plaintiffs’ expert addressed this issue, but not to the thoroughness and in the manner that Judge Posner desired. The Order states:

“Dr. Layne- Farrar testified (in her report and in answer to my questions) that there was no cheap and satisfactory substitute for the plaintiffs’ fat blend that would not contain trans-fats. In order to avoid infringing while also avoiding trans-fats (the primary commercial value of the plaintiffs’ margarine is not its effect on HDL and the HDL/LDL ratio but that it does not contain trans-fats), Keebler would have had to consider the possible effects of substituting a non-infringing oil blend on other elements of consumer demand besides aversion to trans-fats. These elements, she testified, include consumer aversion to sogginess in cookies (a possible result if the cookies contained a non-infringing oil blend that had a high ratio of unsaturated to saturated fat), and aversion to saturated fat (a result if for example butter, which contains no trans-fats, was used in place of the patented margarine).”

In addressing this, the damage expert discussed the issues with a technical expert. This is done commonly by damage witnesses, who understandably lack the scientific or other technical background themselves. Judge Posner had no quarrel with such reliance on another expert, but thought that a second technical expert should have also been consulted. Absent this second consultation, Judge Posner posed questions that he thought were important (and probably are), but then gave the plaintiff no opportunity to answer such questions before gutting plaintiff’s case on this pretrial motion.

At the core of one of Judge Posner’s questions was that butter could be an acceptable non-infringing alternative for the patented product. If so, butter would be more expensive, and the cost difference would be a means of measuring a reasonable royalty. This might be true, but this is not Plaintiff’s case. Plaintiff specifically stated that butter was not an acceptable alternative, as the quote above (and the further quote below) acknowledges. But, because the Judge was not yet satisfied with this contention, the Order concluded that this contention could not proceed to a trial. Here are the words from the exclusion Order:

“Maybe there’s no perfect substitute for the patented invention (or something quite like it) and that that’s why Keebler risked being sued for infringement …Maybe butter, which would neither infringe nor contain the dreaded trans-fats nor produce a soggy cookie, would have too much saturated fat to be suitable; this is a possible inference from the fact that Keebler did not return to using butter when it eliminated trans-fats. But even if there is no perfect substitute, this by itself would not allow the estimation of a reasonable royalty. For that royalty would depend on the cost, in higher production costs and loss of business to competitors, of the best imperfect substitute; and Dr. Layne-Farrar offered no evidence about either cost.”

Plaintiff’s expert reviewed licenses to support the reasonable royalty rate. This is a common and widely accepted analysis tool. As with practically any analysis that is based on comparable transactions, there were differences between the subject hypothetical license, and the comparable transactions. Judge Posner determined that two of the three licenses used by the plaintiff’s expert were not sufficiently comparable and excluded them. This left plaintiff’s expert with only one license, which the expert specifically concluded was a floor, and not the best indication of value. However, Judge Posner’s Order made this one license the only thing left in plaintiff’s entire damage presentation.

With the plaintiff’s damage case a shell of its former self, the matter settled. So, unlike the Apple case which is being appealed, the Keebler case will not provide an opportunity for appellate review.  However, both cases serve as a cautionary tale regarding how jurists may apply their gate keeping role.

Fulcrum Inquiry regularly assesses damages in intellectual property litigation as a damages expert witness.