Analytical Approach Still Acceptable For Reasonable Royalties

Article, Law360May 2017

Legal

In Law360, Mark Pedigo discusses the merits of the analytical approach in calculating reasonable royalties.

As appeared in Law360, May 8, 2017.

By: Mark Pedigo

In a recent guest article in Law360 — “The Limited Role Of Analytical Approach To Reasonable Royalty” (April 13, 2017) — that was written in response to my March 3, 2017, article titled “Determining Reasonable Royalties With Analytical Approach,” the author asserts that the analytical approach is generally inappropriate for the valuation of intellectual property, is an economically unreliable measure of the value of a feature, is generally unsuited for determining a reasonable royalty, and remains “the roughest of proxies,” giving rise to the same mechanical and arbitrary awards that caused the Federal Circuit to pronounce the 25 percent rule of thumb to be junk science in Uniloc v. Microsoft. The author’s reasoning for concluding that the analytical approach is no more than inappropriate, unreliable and arbitrary junk science appears to be the following assertions that were made in his article:

  • Proponents of the analytical approach suggest different methods of implementation, resulting in very different estimates of a reasonable royalty for the same innovation, which he claims have no theoretical basis;
  • The analytical approach has been criticized on legal grounds since it arbitrarily awards the entire incremental profit to the patent owner, does not allow for apportioning, and does not accommodate a negotiation between a willing patent owner and a willing licensee; and
  • Various case specific factual issues such as potential differences in how the profits of the accused products and the “normal profit” is calculated, profits can be impacted by factors other than product features, many companies sell a wide range of diverse products thus complicating the calculation of normal or target profit, use of standard or average industry margins can be impacted by the efficiency of the various industry players, product profitability may be affected by product life cycle, and residual profit on an accused product can be negative even when the patented feature has significant value.

The author justifies his position through references to certain isolated aspects of trial testimony in the Carnegie Mellon University v. Marvell Technology Group Ltd. case. The ultimate outcome of this case is summarized, in part, below. In fact, below are several examples of Federal Circuit and district court cases since the 2011 Uniloc case referred to in the article (which did not involve the use of the analytical approach), where various forms of the analytical approach were accepted by the courts.

  • 2011: The district court in Energy Transportation Group Inc. v. Sonic Innovations Inc. concluded that the jury’s damages verdict was supported by substantial evidence. The verdict was based, in part, on the testimony of the plaintiff’s damages expert, who provided testimony based on two different derivations of the analytical approach and an analysis of the Georgia-Pacific factors.[1] The Federal Circuit subsequently affirmed the opinion noting that the plaintiff’s expert’s royalty rate opinions were tied to the benefit accorded by the patents at issue … In its opinion, the Federal Circuit specifically distinguished the analysis used by the plaintiff’s expert from Uniloc.[2]
  • 2013: In WesternGeco LLC v. Ion Geophysical Corp. the district court denied the defendant’s post-trial motions for judgment as a matter of law, a new trial and a remittur on damages. In its opinion, the district court noted that the value of the patented technology was quantified through the plaintiff’s expert’s use of the analytical approach.[3]
  • 2013: In the Carnegie Mellon University v. Marvell Technology Group Ltd. case that the author refers to, the expert used a version of the analytical approach in addition to an analysis of the Georgia-Pacific factors and other analyses to reach her reasonable royalty opinion. The jury found that the plaintiff was entitled to reasonable royalty damages consistent with the opinion of the plaintiff’s expert and the district court denied the defendant’s post-trial motions for judgment as a matter of law, a new trial, and a remittur on damages. The Federal Circuit affirmed the royalty rate but modified the royalty base.[4]
  • 2014: In Numatics Inc. v. Balluff Inc., the defendant filed a motion to exclude the testimony of the plaintiff’s expert, which was denied. The expert used the analytical approach in addition to an analysis of the Georgia-Pacific factors. The district court, in denying the motion, concluded that the expert used accepted methodologies and that his opinion was supported by the evidence.[5]
  • 2016: In Metaswitch Networks Ltd. v. Genband U.S. LLC, the defendant filed a motion to exclude the testimony of the plaintiff’s expert, which was denied. The expert used the analytical approach in addition to an analysis of the Georgia-Pacific factors.[6]
  • 2016: In Canrig Drilling Technology Ltd. v. Trinidad Drilling LP, the district court denied the plaintiff’s motion to exclude the defendant's expert’s testimony pertaining to the analytical approach.[7]

These are just a few examples where courts have admitted testimony based on the analytical approach and where jury verdicts based, in part, on the analytical approach have been affirmed. While the author may believe the analytical approach is unreliable, many courts clearly think otherwise and it remains an accepted approach to be used in the analysis of reasonable royalties.

While the analytical approach is clearly an acceptable approach for use in the analysis of reasonable royalties, the author does give examples of situations where the use of the analytical approach could provide misleading results if care is not taken in the analysis. As noted in my initial article, each case is unique and the usefulness of the analytical approach (or any other method for that matter) depends upon the case facts and how the method is used. It is important to use care when using the analytical approach and ensure comparability of the information relied upon. Finally, the method may need to be used in conjunction with other methods and information such as other Georgia-Pacific factors in order to arrive at a reasonable royalty conclusion.

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Mark Pedigo is a director in the Denver office of RGL Forensics.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice

[1] Energy Transportation Group, Inc. v. Sonic Innovations, Inc., No. 05cv422 (D.Del. June 7, 2011), the Defendants’ Opening Brief in Support of Defendants’ Renewed Motion for Judgment as a Matter of Law with Respect to Damages or, in the Alternative, for a Remittitur or New Trial on Damages dated March 27, 2008, and the Plaintiff Energy Transportation Group Inc. 's Opposition to the Defendants’ Renewed Motion dated May 9, 2008.
[2] Energy Transp. Group, Inc. v. William Demant Holding AS, 697 F.3d 1342, 1356-1357 (Fed. Cir. 2012)
[3] WesternGeco L.L.C. v. Ion Geophysical Corp., 953 F.Supp.2d 731, 757-758 (S.D. Tex. 2013).
[4] Carnegie Mellon Univ. v. Marvell Tech. Group, Ltd., 986 F.Supp.2d 574 (W.D. Pa. 2013) and Carnegie Mellon University v. Marvell Tech. Group, Ltd., 807 F.3d 1283, 1305 (Fed. Cir. 2015).
[5] Numatics, Inc. v. Balluff, Inc., 66 F.Supp.3d 934, 954-956 (E.D. Mich. 2014).
[6] Metaswitch Networks Ltd. v. Genband U.S. LLC, 2:14cv744, (E.D. Tex. March 5, 2016).
[7] Canrig Drilling Technology Ltd. v. Trinidad Drilling L.P., 15-0656 (S.D.Tex December 12, 2016).

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