Lack Of Expert Results In Zero Damages, Despite A Liability Win

May 2013

A recent ruling in a New Jersey federal court will no doubt serve as a warning for litigants who decline to employ the services of an expert to establish reasonable royalties.  In the matter of Unicom Monitoring, LLC (“Plaintiff”)v. Cencom, Inc. et al (“Defendant”) (Civil Action No. 06-1166 (MLC)), U.S. District Judge Mary L. Cooper granted Defendant’s motion for summary judgment based on Plaintiff’s failure to prove damages despite a finding of infringement.  The Court found that the fact witnesses Plaintiff offered were not capable of the providing the required information to calculate damages.  Without an expert to address the issues, damages were deemed appropriate, but not quantifiable.

Plaintiff successfully argued that Defendant infringed on its ‘647 Patent, which pertains to “security systems that communicate with a central monitoring station via a telephone line.”  However, when it came to damages, Plaintiff dropped the ball by failing to offer expert testimony.  Instead, Plaintiff offered two fact witnesses to testify regarding:

“Unicom’s ownership of the Patent-in-Suit, its policy not to license the ‘647 Patent, the various public means by which Cencom markets the DD2, Unicom’s test marketing of its product and resulting sales, Unicom’s damages and irreparable injury.” 

The April 19, 2013 Memorandum Opinion summarized the available damages evidence on the record (citations omitted):

“Unicom did not identify a damages expert, nor did it submit a damages report at any point in the duration of this case.  Unicom did not produce licenses for the patent-insuit or for a comparable technology.  The only evidence in the record with respect to the reasonable royalty rate that Unicom asks the factfinder to apply comes from a short statement of attorney argument in Unicom’s opposition papers and a brief calculation the Court painstakingly elicited during oral argument.  (“Since Cencom and Unicom were in the same business, Unicom would only have licensed Cencom for a royalty rate in the vicinity of 30% of revenues collected from DD2 customers, including monitoring fees.”);”

Defendant successfully argued that without expert testimony, there was no reasonable basis for an award.  Statute 35 U.S.C. § 284 governs the use of a reasonable royalty for patent damages.  It provides:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court . . . .  The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.” 

As described above, the statute does not specifically require expert testimony and the Court similarly did not indicate that use of an expert was a necessary condition to prove damages.  However, the Court found that the fact witnesses were not in a position to testify regarding a hypothetical reasonable royalty:

“Unicom does not have an expert to guide a factfinder through a hypothetical negotiation process to reach a reasonable royalty rate as a damages award.  Rather, the evidence Unicom intends to present regarding the hypothetical negotiation is contrary to the basic premise of those negotiations.  See Riles, 298 F.3d at 1312 (“A ‘reasonable royalty’ contemplates a hypothetical negotiation between the patentee and the infringer at a time before the infringement began.” (emphasis added)); see also Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078 (Fed.Cir. 1983) (stating that a “reasonable royalty may be based upon an established royalty, if there is one, or if not upon a hypothetical royalty resulting from arm’s length negotiations between a willing licensor and a willing licensee” (emphasis added)).  Unicom does not intend to present evidence that is competent to establish a reasonable royalty as it must be calculated: the witnesses will be testifying to the wrong time period; Unicom’s policy of not licensing the patent is at odds with the presumed voluntary negotiation; Unicom does not have an expert to delve into hypotheticals; Unicom does not have an analogous practice of licensing that can be uniformly applied; and Unicom has no rationale to support its suggested reasonable royalty calculation.”

The Court further explained how an expert could have provided needed assistance to the Court:

“Although there are many Georgia-Pacific factors which the Court can consider, the failure to present competent evidence regarding how the factfinder should perform the reasonable royalty calculation is fatal to [Plaintiff’s] claim for reasonable royalty damages. A factfinder cannot be asked to speculate from numbers unsupported by law and divorced from expert guidance, but rather the factfinder needs either clear guidance from an expert about how to apply complex calculations or simple factual proofs about what this patentee has previously accepted in factually analogous licensing situations.”

Accordingly, the Court found that despite the finding of liability and an entitlement to damages, Plaintiff did not meet its burden in proving the amount of damages and dismissed the case with prejudice.  This result should serve as a cautionary tale for those who decline to employ experts in such circumstances and put themselves at risk for a similar chain of events.

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