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IP Alert: Federal Circuit Affirms Exclusion of Expert Opinion on Reasonable Royalty Rate

September 13, 2021

On August 26, in MCL Intellectual Property, LLC v. Micron Technology, Inc., the Federal Circuit affirmed exclusion of an expert opinion regarding a reasonable royalty, holding that the district court did not abuse its discretion by excluding the expert’s unfounded opinions and late-disclosed damages theories.

MLC Intellectual Property, LLC (“MLC”) had brought the action in district court against Micron Technology, Inc. (“Micron”) for infringement of a patent covering an apparatus for programming an electrically alterable non-volatile semiconductor memory cell having more than two predetermined memory states. The district court granted a Daubert motion excluding the opinion of MCL’s damages expert regarding a reasonable royalty rate on three grounds: 1) the expert’s characterization of prior licenses as reflecting a 0.25% royalty rate as factually unfounded, 2) MLC did not adequately disclose its reasonable royalty contentions including the 0.25% royalty rate in fact discovery (prior to expert discovery), and 3) MLC’s damages expert did not adequately address apportionment of the patented technology in the accused product. After granting a petition for interlocutory appeal of the Daubert ruling, the Federal Circuit affirmed the exclusion of the expert’s opinion on all three grounds.

Regarding the expert’s characterization of two prior license agreements as reflecting use of a 0.25% royalty rate, the Federal Circuit noted that the prior license agreements did not disclose a 0.25% royalty rate and the expert did not attempt to derive a rate from the disclosed lump-sum payment amounts and projected sales. The Federal Circuit rejected the expert’s opinion that a 0.25% royalty rate in the most favored customer provision in one of the agreements demonstrated that such rate “represented” the lump sum amounts in the agreements. 

Next, the Federal Circuit agreed with the district court’s ruling that the expert opinion should be excluded because the proposed reasonable royalty rate of 0.25% and factual bases therefor were not previously disclosed in fact discovery and were disclosed for the first time in the expert’s report. During fact discovery, Micron served interrogatories requesting MLC’s damages contentions and supporting evidence, and MLC responded that the “royalty rate will be based on at least the Georgia-Pacific factors, and will include but not [be] limited to consideration of license agreements” that were produced in discovery. However, MLC did not disclose the 0.25% royalty rate in its answers to the interrogatories. The Federal Circuit noted that MLC had the agreement and extrinsic evidence “in its possession from the outset of the case, largely mitigating any timing and fairness concerns preventing MLC from knowing its contentions about a reasonable royalty until after the close of fact discovery.” Thus, the Federal Circuit, citing the Northern District of California, stated that Rule 26(a) disclosures “should include a claimed royalty rate . . .  ‘even though subsequent discovery may eventually warrant a modification of the calculation.’” Therefore, the Federal Circuit ruled that since MLC did not disclose the claimed 0.25% royalty during fact discovery, the district court was within its discretion to exclude the royalty rate from the expert’s opinions as a sanction for not disclosing the royalty rate during fact discovery. 

Third, the Federal Circuit agreed with the district court’s exclusion of the expert’s opinion because the expert did not further apportion the 0.25% royalty rate to account for the relative value of the technology within the accused product. The expert had opined that the prior license agreements were comparable to the hypothetical negotiation of the patent-in-suit wherein apportionment of the technology would already be accounted for in the royalty rate. The expert had opined that comparability is demonstrated because the flash memory market is a commodity market. The court rejected this theory, reasoning that, “general characterization of the flash memory market as a whole as a commodity market does not satisfy this requirement of establishing that a license is, in fact, comparable.” Further, after noting that of the 41 patents licensed in one of the prior license agreements only one patent was the patent-in-suit, the Federal Circuit stated that the expert “conducted no assessment of the licensed technology versus the accused technology to account for any differences.” Based on lack of sufficient evidence of comparability, the Federal Circuit held that the expert’s “comparable license theory does not properly apportion for the value of the patented technology.”

The Federal Circuit further rejected the argument that the expert need not apportion the value of the technology in the accused product because the royalty base was the smallest single patent practicing unit (“SSPPU”). The court noted that the claimed technology was “not commensurate in scope” with the SSPPU which also contained allegedly non-infringing features such as “error correction hardware,” “data clocking hardware,” “addressing hardware,” “cache registers,” and “digital to analog converters,” and then affirmed the district court’s exclusion order “for failure to apportion.”

This case is one of a series of Federal Circuit cases analyzing reasonable royalty awards and evaluating apportionment in the royalty rate and/or royalty base to account for the use of the patented technology. The case reinforces the critical importance of developing concrete evidence of apportionment of the patented technology in the accused product as a foundation for a reasonable royalty damage claim. Further, the case emphasizes the importance of early disclosure of contentions, including quantification of damage contentions and/or a claimed reasonable royalty rate. Disclosing this information during the fact discovery phase of a lawsuit may be necessary to avoid exclusion of contentions that are first asserted in expert reports. 

For more information on this ruling, please contact Fitch Even partner Karl R. Fink, author of this alert. 

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