1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA
9 Lighting Defense Group LLC, No. CV-22-01476-PHX-SMB Consolidated with: CV-22-01671-PHX- 10 Plaintiff, SMB
11 v. ORDER
12 Shanghai Sansi Electronic Engineering Company Limited, et al., 13 Defendants. 14 SANSI LED Lighting Inc., and SANSI 15 Smart Lighting Inc.,
16 Plaintiffs/Counter- Defendants, 17 v. 18 Lighting Defense Group LLC, 19 Defendant/Counter- 20 Plaintiff.
22 Pending before the Court is Defendants SANSI LED Lighting Incorporated, SANSI 23 Smart Lighting Incorporated, Shanghai SANSI Electronic Engineering Company 24 Limited’s (collectively, “SANSI”) Motion to Exclude the Testimony of Expert Thomas P. 25 McGahee (Doc. 91). Plaintiff Lightning Defense Group LLC (“LDG”) filed a response 26 (Doc. 120), to which SANSI replied (Doc. 130). LDG requested oral argument (Doc. 120 27 at 1), which was scheduled for November 15, 2024, but the Court vacated oral argument, 28 finding it unnecessary (Doc. 143). See LRCiv. 7.2(f). The Court will grant SANSI’s 1 Motion for the following reasons. 2 I. FACTUAL BACKGROUND 3 This Motion stems from LDG’s allegations that SANSI infringed upon four of its 4 patents (the “patents-in-suit”) beginning in 2017. (Doc. 18.) The patents-in-suit relate to 5 heat management technology for high efficiency lighting products, including those for light 6 emitting diodes (also known as LEDs). (Id. at 2 ¶¶ 1–2.) The technology facilitates heat 7 dispersion, resulting in LED products that are longer lasting, more efficient, and higher 8 powered. (Id.) LDG alleges that SANSI made, imported, distributed, and sold infringing 9 lighting products through its domestic affiliates, online, and through various retailers. (Id. 10 at 7–14.) LDG seeks adequate compensation of at least a “reasonable royalty” under 35 11 U.S.C. § 284 for the alleged infringement. (Id. at 17–21.) LDG offers its damages expert 12 Dr. Thomas P. McGahee’s (“Dr. McGahee”) opinion on how to calculate the reasonable 13 royalty. Dr. McGahee opined that under a hypothetical negotiation, the parties would have 14 agreed to running per-unit royalty license for the infringing products sold, imported, and 15 inventoried during the period of infringement. (Id. at 25–58.) 16 SANSI now moves to exclude Dr. McGahee’s expert testimony as untethered from 17 the facts of this case, methodologically flawed, and unreliable. (Doc. 91.) 18 II. LEGAL STANDARD 19 Federal Rules of Evidence 702 and 703, along with Daubert v. Merrell Dow 20 Pharmaceuticals, Inc., 509 U.S. 579 (1993) and its progeny, provide the legal framework 21 for the admissibility of expert testimony.1 See Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 22 1315 (Fed. Cir. 2014), overruled on other grounds by Williamson v. Citrix Online, LLC, 23 792 F.3d 1339 (Fed. Cir. 2015). Rule 702 allows expert testimony if it is “more likely than 24 not” that: (a) “the expert’s scientific, technical, or other specialized knowledge will help 25 the trier of fact to understand the evidence or to determine a fact in issue;” (b) “the 26 1 The Court’s decision to admit expert testimony in a patent infringement case follows the 27 law of the regional circuit. GoDaddy.com LLC v. RPost Commc’ns Ltd., No. CV-14-00126-PHX-JAT, 2016 WL 2643003, at *2 (D. Ariz. May 10, 2016), aff’d, 685 F. 28 App’x 992 (Fed. Cir. 2017) (citing Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1390–91 (Fed. Cir. 2003)). 1 testimony is based upon sufficient facts or data;” (c) “the testimony is the product of 2 reliable principles and methods”; and (d) “the expert’s opinion reflects a reliable 3 application of the principles and methods to the facts of the case.” Rule 703 states: 4 An expert may base an opinion on facts or data in the case that the expert has 5 been made aware of or personally observed. If experts in the particular field would reasonably rely on those kinds of facts or data in forming an opinion 6 on the subject, they need not be admissible for the opinion to be admitted. 7 But if the facts or data would otherwise be inadmissible, the proponent of the opinion may disclose them to the jury only if their probative value in helping 8 the jury evaluate the opinion substantially outweighs their prejudicial effect. 9 Under Daubert, the Court’s focus “must be solely on principles and methodology, not on 10 the conclusion that they generate.” 509 U.S. at 595. “This entails a preliminary assessment 11 of whether the reasoning or methodology underlying the testimony is scientifically valid 12 and of whether that reasoning or methodology properly can be applied to the facts in issue.” 13 Id. at 592. 14 The Daubert standard applies to not only “scientific” testimony but also expert 15 testimony. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147–149 (1999). Admissibility 16 is preconditioned on a valid connection to the pertinent inquiry. Id. at 149. Where an 17 expert’s “testimony’s factual basis, data, principles, methods, or their application are called 18 sufficiently into question . . . the trial judge must determine whether the testimony has ‘a 19 reliable basis in the knowledge and experience of [the relevant] discipline.’” Id. (alteration 20 in original) (quoting Daubert, 509 U.S. at 592). The inquiry is a “flexible one.” Daubert, 21 509 U.S. at 594; see also Primiano v. Cook, 598 F.3d 558, 564 (9th Cir. 2010) (“Shaky but 22 admissible evidence is to be attacked by cross examination, contrary evidence, and 23 attention to the burden of proof, not exclusion.”). “Basically, the judge is supposed to 24 screen the jury from unreliable nonsense opinions, but not exclude opinions merely because 25 they are impeachable.” Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960, 26 969–70 (9th Cir. 2013) (“The district court is not tasked with deciding whether the expert 27 is right or wrong, just whether his testimony has substance such that it would be helpful to 28 a jury.”). In this gatekeeping function, the Court’s inquiry remains tied to the facts of a 1 particular case. Kumho Tire, 526 U.S. at 151 (citing Daubert, 509 U.S. at 591). 2 “Under these rules, a district court may exclude evidence that is based upon 3 unreliable principles or methods, legally insufficient facts and data, or where the reasoning 4 or methodology is not sufficiently tied to the facts of the case.” Summit 6, LLC v. Samsung 5 Elecs. Co., 802 F.3d 1283, 1295 (Fed. Cir. 2015); see also Pyramid Techs., Inc. v. Hartford 6 Cas. Ins. Co., 752 F.3d 807, 813 (9th Cir. 2014) (“[T]he trial court must assure that the 7 expert testimony both rests on a reliable foundation and is relevant to the task at hand.” 8 (internal quotation marks omitted)); Messick v. Novartis Pharms. Corp., 747 F.3d 1193, 9 1196–97 (9th Cir. 2014) (“Relevancy depends on the particular law at issue.”); Primiano, 10 598 F.3d at 565 (“Expert opinion testimony is relevant if the knowledge underlying it has 11 a valid connection to the pertinent inquiry. And it is reliable if the knowledge underlying 12 it has a reliable basis in the knowledge and experience of the relevant discipline.”). The 13 “sufficient facts or data” element under Rule 702 requires foundation, not corroboration, 14 and “does not preclude an expert from making projections based on a reliable 15 methodology.” Elosu v. Middlefork Ranch Inc., 26 F.4th 1017, 1025 (9th Cir. 2022) 16 (noting “a court may reject wholly speculative testimony and unfounded testimony,” but 17 errs “if it overlooks relevant data submitted as the foundation of an expert’s remarks”). 18 III. DISCUSSION 19 A. Calculating Damages 20 Damages in patent infringement cases are limited to those “adequate to compensate 21 for the infringement, but in no event less than a reasonable royalty.” 35 U.S.C. § 284. For 22 reasonable royalties, the damages must reflect “the use made of the invention by the 23 infringer.” Id. The aim of a reasonable royalty is to “compensate a patentee . . . for its lost 24 opportunity to obtain a reasonable royalty that the infringer would have been willing to pay 25 if it had been barred from infringing.” AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 26 1334 (Fed. Cir. 2015). A reasonable royalty is “merely the floor below which damages 27 shall not fall.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009) 28 (citation omitted). “Stated differently, a ‘reasonable royalty is the amount that a person, 1 desiring to manufacture [, use, or] sell a patented article, as a business proposition, would 2 be willing to pay as a royalty and yet be able to make[, use, or] sell the patented article, in 3 the market, at a reasonable profit.’” Looksmart Grp., Inc. v. Microsoft Corp., No. 4 17-CV-04709-JST, 2019 WL 4009263, at *2 (N.D. Cal. Aug. 5, 2019) (alterations in 5 original) (quoting Aqua Shield v. Inter Pool Cover Team, 774 F.3d 766, 771–72 (Fed. Cir. 6 2014)). 7 Patent litigants may use an “analytical method” to calculate reasonable royalties, 8 which generally involves using an infringer’s projected profits for the infringing product 9 and apportioning that amount between the infringer and patentee. Lucent, 580 F.3d 10 at 1324. But litigants more commonly use the hypothetical negotiation approach. Id.; see 11 also Cal. Inst. of Tech. v. Broadcom Ltd., 25 F.4th 976, 994 (Fed. Cir. 2022) (noting the 12 inquiry assesses what the parties would have agreed to just before infringement began). 13 The hypothetical negotiation approach evaluates what willing parties would have specified 14 in a licensing agreement’s royalty payment scheme, had the infringement not occurred. 15 Lucent, 580 F.3d at 1325 (noting this assumes the asserted patent claims are valid and 16 infringed). A reasonable royalty analysis involves a degree of hypothesizing but “must be 17 based on ‘sound economic and factual predicates.’” LaserDynamics, Inc. v. Quanta 18 Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) (citation omitted); see also Alaska 19 Rent-A-Car, 738 F.3d at 968 (noting “[a]s in any damages case, the calculation ha[s] to 20 address a hypothetical world that never existed”). The analysis necessarily involves an 21 element of “‘approximation and uncertainty,’ and the ultimate royalty determination must 22 reflect the two-sided nature of the posited negotiation.” Aqua Shield, 774 F.3d at 771 23 (quoting Lucent, 580 F.3d at 1325). But this does not invite speculation, rather the damages 24 inquiry focuses on the economic harm caused by the infringement. ResQNet.com, Inc. v. 25 Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). 26 Parties “frequently rely on comparable licensing agreements” to discern a 27 reasonable royalty. Bio-Rad Lab’ys, Inc. v. 10X Genomics Inc., 967 F.3d 1353, 1372 (Fed. 28 Cir. 2020). “Assessing the comparability of licenses requires a consideration of whether 1 the license at issue involves comparable technology, is economically comparable, and 2 arises under comparable circumstances as the hypothetical negotiation.” Id. at 1372–73. 3 The parties’ use of the relevant technology after infringement is also a legitimate aid to 4 discern a reasonable royalty. Lucent, 580 F.3d at 1333–34. Usage data, like sales 5 projections or estimates as to the expected frequency of use, may provide information what 6 the parties might have estimated in the hypothetical negotiation. Id. at 1334. 7 “A reasonable royalty may be a lump-sum payment not calculated on a per unit 8 basis, but it may also be, and often is, a running payment that varies with the number of 9 infringing units. A running royalty structure generally has two prongs: a royalty base and 10 a royalty rate.” VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326 (Fed. Cir. 2014); see 11 also Embrex, Inc. v. Serv. Eng’g Corp., 216 F.3d 1343, 1350 (Fed. Cir. 2000) (noting 12 royalties are ordinarily computed based on sales of a patented product, but parties may 13 choose other methods). The royalty base represents revenue generated by the infringement. 14 Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10, 27 (Fed. Cir. 2012). The royalty 15 rate represents the percentage of revenue owed to the patentee. Id. The amount payable 16 under the typical running royalty licenses “is tied directly to the how often the licensed 17 invention is later used or incorporated into products by the licensee.” Lucent, 580 F.3d 18 at 1326 (explaining this structure shifts the risks to the licensor because payments are tied 19 to the magnitude of sales). 20 A lump-sum analysis involves different considerations. Id. (explaining lump-sum 21 licenses benefit the licensor by enabling it to raise money quickly without needing to 22 administratively track revenue numbers and benefits the licensee by capping its liability 23 without further expenditure). Generally, this type of license obligates the licensee to pay 24 the entire amount irrespective of whether the patented technology is commercially 25 successful in use. Id. (noting, on the other hand, “the licensed technology may be widely 26 successful, and the licensee may have acquired the technology for far less than what later 27 proved to be its economic value”). Parties agreeing to a lump-sum royalty agreement may 28 consider the expected or estimated usage of the to-be-licensed invention, assuming proof 1 is presented to support the expectation. Id. at 1327; see also Interactive Pictures Corp. v. 2 Infinite Pictures, Inc., 274 F3d 1371, 1384–85 (Fed. Cir. 2001) (accepting factual evidence 3 of the patentee’s business plan and projected sales prepared before infringement began). 4 Central to the hypothetical negotiation is the application of a fifteen-factor test set 5 forth in Georgia-Pacific Corp v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 6 1970). See Lucent, 580 F.3d at 1324–25.2 “[E]vidence purporting to apply to these, and 7 any other factors, must be tied to the relevant facts and circumstances of the particular case 8 at issue and the hypothetical negotiations that would have taken place in light of those facts 9 and circumstances at the relevant time.” Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 10 1292, 1318 (Fed. Cir. 2011). “If the patentee fails to tie the theory to the facts of the case, 11 the testimony must be excluded.” Id. at 1315. 12 B. Dr. McGahee’s Opinion 13 Dr. McGahee’s decision to use a running royalty structure to compute the reasonable 14 royalty is the crux of the dispute. Dr. McGahee used the Georgia-Pacific factors to 15 evaluate the “economic pressures” that would have been present during the hypothetical 16 negotiation,” which would “dictate the royalty payment structure.” (Doc. 108 at 23.) For 17 Factors 2–6, 8–10, and 13–15, Dr. McGahee either made no findings or found they were 18 neutral with regards to the structure of the hypothetical negotiation. (Id. at 41–50, 53–56.) 19 2 “These factors include: (1) royalties the patentee has received for licensing the patent to 20 others; (2) rates paid by the licensee for the use of comparable patents; (3) the nature and scope of the license (exclusive or nonexclusive, restricted or nonrestricted by territory or 21 product type); (4) any established policies or marketing programs by the licensor to maintain its patent monopoly by not licensing others to use the invention or granting 22 licenses under special conditions to maintain the monopoly; (5) the commercial relationship between the licensor and licensee, such as whether they are competitors; (6) 23 the effect of selling the patented specialty in promoting sales of other products of the licensee; (7) the duration of the patent and license term; (8) the established profitability of 24 the product made under the patent, including its commercial success and current popularity; (9) the utility and advantages of the patent property over old modes or devices; (10) the 25 nature of the patented invention and the benefits to those who have used the invention; (11) the extent to which the infringer has used the invention and the value of that use; (12) the 26 portion of profit or of the selling price that may be customary in that particular business to allow for use of the invention or analogous inventions; (13) the portion of the realizable 27 profit that should be credited to the invention as opposed to its non-patented elements; (14) the opinion testimony of qualified experts; and (15) the results of a hypothetical negotiation 28 between the licensor and licensee.” Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1240 n.3 (Fed. Cir. 2011) (citing Georgia-Pacific, 318 F. Supp. at 1120). 1 Under the remaining factors, LDG argues Dr. McGahee’s findings supported or tended to 2 support using the running royalty structure. (See id. at 27–41, 45, 50–53.) 3 Under Factor 1, which evaluates the “royalties received by the patentee for the 4 licensing of the patent in suit, proving or tending to prove an established royalty,” 5 Georgia-Pacific, 318 F. Supp. at 1120, Dr. McGahee reviewed twenty-three of LDG’s 6 licenses that included a license to the patents-in-suit. (Id. at 27.) He noted, “[a]mong these 7 23 patent license agreements, 7 agreements include representations as to the licensee’s 8 revenues and/or unit sales associated with licensed products, allowing for the derivation of 9 an effective royalty rate either as a percentage of sales revenues or a per-unit rate,” but not 10 the others, making them less informative. (Id.) Dr. McGahee then discussed the specifics 11 of those seven licenses, which he explained tended to show they were based, in part, on the 12 magnitude of sales and expected extent of use under the license. (Id. at 34–35.) He 13 expounded that the licenses covering a limited term and restrictions on sales channels, 14 particular licensed products, and brand names associated with selling licensed products 15 “suggest[ed] that the payments were based in part on the expected extent of the licensed 16 used.” (Id. at 34–35.) Dr. McGahee also noted that he had a discussion with LDG’s CEO, 17 Andrew Ramer, where Mr. Ramer explained LDG “considers sales information, the length 18 of the license, and the number of licensed products, among other factors, when negotiating 19 patent licenses agreements.” (Id. at 30–31.) Based on this discussion and these restrictions 20 on use, Dr. McGahee opined that LDG would have sought a higher royalty rate from 21 licensees accounting for their economic circumstances. (Id. at 30–31, 34–35.) 22 Under Factor 7, which evaluates “[t]he duration of the patent and the term of the 23 license,” Georgia-Pacific, 318 F. Supp. at 1120, Dr. McGahee stated: 24 From an economic perspective, [patentee] reasonably would expect that 25 granting a license to the Patents-in-Suit with significant remaining useful life would result in significant benefits to SANSI over a long period of time (i.e., 26 up to 11.4 years). Similarly, SANSI would view obtaining licensing rights 27 to the Patents-in-Suit, which would enable it to compete more effectively in the LED lighting source market, as providing significant value over this 28 lengthy license period. Under a running royalty payment structure, the 1 lengthy duration of the license can be accounted for in the royalty base to which a running royalty rate will be applied (because the licensed sales will 2 accrue over the life of the agreement). 3 4 (Doc. 108 at 45.) He then concluded “this Georgia-Pacific factor is supportive of a running 5 royalty payment structure.” (Id.) 6 Under Factor 11, which evaluates “[t]he extent to which the infringer has made use 7 of the invention; and any evidence probative of the value of that use,” Georgia-Pacific, 8 318 F. Supp. at 1120, Dr. McGahee explained that since 2017, the LED market was 9 experiencing and continuing to experience significant growth in the sales and share of the 10 overall lighting market. (Doc 108 at 50.)3 He then pointed to SANSI’s sales data from 11 2017 through 2020, which indicated “significant sales and profits from the [infringing] 12 [p]roducts.” (Id. at 50–51.) Dr. McGahee concluded “[a]t the hypothetical negotiation, 13 the parties would recognize that by agreeing to a running royalty payment structure, the 14 royalty payments ultimately paid under the license would account for SANSI’s actual 15 extent of use of the patented technology,” thus this factor supported a running royalty 16 structure. (Id. at 51.) 17 Under Factor 12, which evaluates “[t]he portion of the profit or of the selling price 18 that may be customary in the particular business or in comparable businesses to allow for 19 the use of the invention or analogous inventions,” Georgia-Pacific, 318 F. Supp. at 1120, 20 Dr. McGahee pointed to a “Signify licensing program,” which involved Signify publicly 21 offering licenses for its patent portfolio at royalty rates calculated by a percentage of net 22 revenues. (Doc. 120-1 at 52–53.) Dr. McGahee concluded, although the Signify patents 23 lacked technological comparability to the patents-in-suit, “from an economic perspective, 24 the industry practice of offering a running royalty payment structure as evidenced by the 25 Signify patent licensing program is supportive of my conclusion that [patentee] and SANSI 26 would have negotiated a running royalty payment structure.” (Id. at 53.) 27 3 Earlier in his report, Dr. McGahee noted reports from the U.S. Department of Energy 28 and an article that indicated sales of LED products were increasing overall and relative to other lighting products from 2015 to 2020. (Id. at 20–21.) 1 C. The Parties’ Arguments 2 At bottom, SANSI’s Daubert challenge is that Dr. McGahee’s opinion is untethered 3 from the facts of this case, speculative, and flawed, therefore warranting exclusion. (Doc. 4 91 at 7, 17.) According to SANSI, Dr. McGahee cherry-picked seven licenses from a pool 5 of twenty-three relevant lump-sum licenses based on the availability of sales and revenue 6 data from those licenses, and his only reason for doing so was to facilitate reaching his 7 predetermined conclusion that the parties would negotiate to a running royalty license. (Id. 8 at 8–11.) SANSI argues that Dr. McGahee improperly relied non-comparable licenses 9 from a “Signify licensing program” to ignore sixteen relevant lump-sum licenses and then 10 reason that the “industry practice” is to offer a running royalty structure. (Id.) SANSI 11 concludes this disregard of actual licensing evidence renders Dr. McGahee’s opinion 12 unreliable and violates Federal Circuit precedent. (Id. (citing LaserDynamics, 694 F.3d 13 at 57–58, 77–81).) Compounding unreliability, SANSI further argues Dr. McGahee 14 misconstrues Mr. Ramer’s statements to reach the conclusion that the lump-sum amounts 15 are based in part on magnitude of sales, which in turn informed his overall theory that a 16 running royalty would apply. (Id. at 12–13.) In their view, Mr. Ramer’s statement does 17 not show that LDG definitively considers potential reaped royalties from future licensed 18 sales. (Id.) SANSI also notes that Dr. McGahee failed to review negotiation 19 correspondence, which tended to disprove his running royalty theory. (Id.) 20 In response, LDG accuses SANSI of mischaracterizing Dr. McGahee’s report and 21 argues his decision to pursue a running royalty is supported throughout his analysis of all 22 Georgia-Pacific factors. (Doc. 120 at 6, 9–12, 16–17.) In doing so, LDG repeatedly 23 characterizes SANSI’s arguments as issues going to the weight of Dr. McGahee’s opinions, 24 not admissibility. (Id. at 6, 7, 15, 20 & n.6.) LDG contends that Dr. McGahee 25 appropriately considered all twenty-three licenses but found those that lacked revenue or 26 sales data rendered them less informative to the hypothetical negotiation inquiry. (Id. 27 at 16–17.) According to LDG, this data enabled Dr. McGahee to adjust for the “relative 28 extent of use,” i.e., extent of sales. (Id.) LDG further notes Dr. McGahee’s analysis of 1 Factors 1, 7, 11, and 12 support using a running royalty structure. (Id. at 10–11, 17.) LDG 2 disagrees with SANSI’s characterization of the Signify licensing program, noting SANSI’s 3 expert also opines on it, and argues it is relevant to prove an industry practice of using a 4 running royalty structure. (Id. at 17–18.) Finally, LDG responds that the negotiation 5 correspondence shows that a licensee offered a running royalty, which LDG considered in 6 granting the license. (Id. at 6, 7 n.3, 8, 10, 15 & n.6.) 7 In reply, SANSI criticizes LDG for failing to address the substance of their 8 arguments, reiterating that their Daubert challenge pertains to reliability, not credibility. 9 (Doc. 130 at 3.) SANSI again argues Dr. McGahee’s Georgia-Pacific analysis does not 10 inform why he pursued the running royalty in the first place, therefore he failed to tie that 11 assumption to the facts of this case. (Id. at 3–7.) As to Factors 1, 7, and 11, SANSI argues 12 Dr. McGahee’s reasoning is void of meaningful analysis on the why and artificially 13 buttresses his preconceived conclusion. (Id.) SANSI notes that Factor 12, in which Dr. 14 McGahee addressed the Signify licensing program, is LDG’s only evidence that implies 15 anyone uses a running royalty in this industry. (Id.) But even then, Dr. McGahee failed to 16 provide the necessary link between that program and the parties’ hypothetical negotiation, 17 and in fact, Dr. McGahee fatally opined that the two were not “technologically 18 comparable.” (Id.) 19 To LDG’s point that Dr. McGahee considered all twenty-three licenses, SANSI 20 replies that “mere reference to the fact that there were 23 licenses in the record does not 21 amount to consideration of all of those licenses.” (Id. at 7–8.) SANSI contends that the 22 only consideration given to the other licenses was that they were “less informative” because 23 they lacked the data that would allow Dr. McGahee to derive a running royalty rate. (Id.) 24 SANSI reiterates that under LaserDynamics, such strained and selective reasoning to 25 exclude licenses probative to the structure of the hypothetical negotiation renders the entire 26 opinion unreliable. (Id. at 9.) SANSI further argues Dr. McGahee baselessly converted 27 the seven lump-sum licenses, and Mr. Ramer’s statements, the negotiation correspondence, 28 and restrictions in the license do not support using a running royalty. (Id. at 10–13.) 1 D. Analysis 2 Dr. McGahee’s opinion is unreliable. Here’s why. “Beginning from a 3 fundamentally flawed premise and adjusting it based on legitimate considerations specific 4 to the facts of the case nevertheless results in a fundamentally flawed conclusion.” Uniloc, 5 632 F.3d at 1317. 6 The hypothetical negotiation inquires “into what the parties would have anticipated, 7 looking forward when negotiating,” it is not a “backward-looking inquiry into what turned 8 out to have happened.” Aqua Shield, 774 F.3d at 772. True, the hypothetical negotiation 9 involves a degree of hypothesizing and uncertainty, but it “must be based on ‘sound 10 economic and factual predicates.’” LaserDynamics, 694 F.3d at 67 (citation omitted); 11 Lucent, 580 F.3d at 1325. Under the Georgia-Pacific analysis, “past and present licenses 12 to the actual patent and the actual claims in litigation” are relevant. ResQNet.com, Inc. v. 13 Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). “Assessing the comparability of licenses 14 requires a consideration of whether the license at issue involves comparable technology, is 15 economically comparable, and arises under comparable circumstances as the hypothetical 16 negotiation.” Bio-Rad, 967 F.3d at 1372–73. There is no dispute that the Federal Circuit 17 has not recognized a categorical bar on obtaining damages in the form of a running royalty 18 where there is a history of lump-sum licenses. LaserDynamics, 694 F.3d at 81. In fact, 19 “[f]ull consideration of all the Georgia-Pacific factors might well justify a departure from 20 the amount or even the form of [pantentee’s] past licensing practices, given the appropriate 21 evidence and reasoning.” Id. 22 At the outset, the parties’ arguments pose a unique hypothetical negotiation posture. 23 Their dispute does not address the licenses that patents-in-suits’ previous owner executed 24 prior to SANSI’s infringement, and instead address subsequent licenses LDG executed 25 after infringement began under the hypothetical negotiation. See, e.g., Harris Corp. v. 26 Ericsson Inc., 417 F.3d 1241, 1257 (Fed. Cir. 2005) (noting, although the hypothetical 27 negotiation generally pertains to events at the time of and preceding infringement, 28 “not[hing] automatically exclud[es] evidence of subsequent events); cf. Odetics, Inc. v. 1 Storage Tech. Corp., 185 F.3d 1259, 1276–77 (Fed. Cir. 1999) (holding exclusion of 2 licenses executed after the onset of infringement as irrelevant was not improper). 3 Dr. McGahee failed to base his opinion on the running royalty structure on 4 appropriate evidence and reasoning, which infected his entire opinion permeating it with 5 unreliability. It is undisputed that all twenty-three licenses involve lump-sum payments 6 and are actual licenses involving the patents-in-suit. Regarding form of the royalty 7 structure, all twenty-three are certainly probative of what a hypothetical negotiation would 8 have rendered for the structure. See id. at 79–80 (“Actual licenses to the patents-in-suit are 9 probative not only of the proper amount of a reasonable royalty, but also of the proper form 10 of the royalty structure.”). Dr. McGahee opined that the sixteen licenses lacking sales and 11 revenue data “ma[de] those agreements less informative for the determination of a 12 reasonable royalty.” (Doc. 120-1 at 27.) But this consideration evidently pertains to the 13 amount of the royalty without consideration afforded to the structure. 14 Dr. McGahee’s subsequent analysis of licenses, now culled to the seven, illuminates 15 the inconsistencies in his selective reasoning. He opined that the availability of the sales 16 data made it “reasonable to conclude” that the amounts paid for the seven licenses reflect, 17 in part, the magnitude of sales. This is simply a circular conclusion couched as an analysis 18 of fact. See, e.g., Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) (“[N]othing in either 19 Daubert or the Federal Rules of Evidence requires a district court to admit opinion 20 evidence that is connected to existing data only by the ipse dixit of the expert.”). Based on 21 his limited reasoning, if the availability of data indicates that the license was negotiated 22 based on magnitude of sales, the inverse should also hold true. But Dr. McGahee does not 23 go as far to suggest the unavailability of data is indicative that those licenses were not based 24 on magnitude of sales. Dr. McGahee even acknowledges that sales data may be available 25 from third-party vendors, suggesting he premises his conclusions on incomplete data. 26 (Doc. 120-1 at 27 n.92.) Further, the data he used relates to a licensee’s past sales, not 27 anticipated future sales. From the view of the hypothetical negotiation, using SANSI’s 28 infringing sales invites backward-looking justifications that allow LDG to capitalize on 1 SANSI’s successes using an after-the-fact running royalty when the evidence 2 overwhelmingly shows LDG’s risk adverse preference for lump-sum licenses. 3 Dr. McGahee also points to the seven licenses providing for a limited term, 4 restrictions on where a licensee could sell its products, restrictions on the particular 5 licensed products, and restrictions on branding “suggest” the agreements are based, in part, 6 on expected extent of use. This conclusion, however, is disconnected from the reality of 7 this case. Had Dr. McGahee not whittled down the licenses, his analysis of these facts 8 would have highlighted that all twenty-three licenses include restrictions on the affiliated 9 brand names, sales channels, and licensed products. (See Doc. 120-1 at 201–07.) 10 Additionally, ten of the ignored licenses provide for a limited term. (Id.) This is to say, 11 the basis for reaching the conclusion that extent of use suggests the form of the licenses to 12 justify a running royalty is necessarily true of nearly all, if not all, of the licenses. In other 13 words, to the extent Dr. McGahee predicates his analysis on the availability of these terms 14 to justify a running royalty, his reasoning is selective and suspect. See LaserDynamics, 15 694 F.3d at 81 (finding selective reasoning unreliable). 16 Dr. McGahee’s reliance on Mr. Ramer’s statements is also unavailing. Regardless 17 of whether LDG considers sales information, length of the license, and number of licensed 18 products in negotiating licenses, all twenty-three licenses at issue were executed as 19 lump-sum agreements. Further, Mr. Ramer’s statements provide no probative value to 20 ascertain how LDG prophesizes those lump sums to reflect a running royalty, when it is 21 uniquely in position to reveal such a practice. LDG’s arguments about the other negotiation 22 correspondence suffers a similar flaw. First, Dr. McGahee did not rely on the emails to 23 conclude a running royalty structure would apply. Second, those emails show that in 24 negotiating a license, Mr. Ramer indicated that “the only way” that LDG would “consider” 25 a running royalty was if the prospective licensee paid an up-front lump-sum payment, of 26 which LDG would credit past and future sales against with assurances the licensee would 27 meet a minimum. (Doc. 120-1 at 68–69.) That is not the running royalty structure Dr. 28 McGahee predicates his opinion on— it is fundamentally inconsistent with the risk profiles 1 inherent in running royalty agreement. See Lucent, 580 F.3d at 1326. Put simply, Mr. 2 Ramer’s statements and the emails do not any establish factual basis to conclude the 3 hypothetical negotiation would take on a running royalty structure. 4 Regarding the Signify licensing program, Dr. McGahee failed provide any 5 conceivable link of an industry practice of offering running royalty licenses that applies to 6 LDG. See Uniloc, 632 F.3d at 1318. Instead, Dr. McGahee recites running royalty figures 7 that he opined supported his theory “from an economic perspective.” He does not explain 8 what that perspective is or how that would induce the hypothetical negotiation to take on a 9 running royalty structure that is contrary to LDG’s historical practices. See Joiner, 522 10 U.S. at 146. Such a proposition would be wholly inconsistent with the evidence in this 11 case. Further, Dr. McGahee’s analysis of this evidence pertains to Factor 12, addressing 12 “customary” rates charged in the “industry.” Georgia-Pacific, 318 F. Supp. at 1120. Dr. 13 McGahee essentially uses the Signify licensing program as if it were a comparable license 14 to opine industry practice suggests a running royalty structure. The Court is cognizant 15 degree of comparability is a factual issue for the jury. ActiveVideo Networks, Inc. v. 16 Verizon Communications, Inc., 694 F.3d 1312, 1333 (Fed.Cir.2012). However, “the 17 Federal Circuit’s well-established precedent require[es] some degree of comparability 18 between licenses used in the Georgia-Pacific analysis for the jury to weigh.” TV 19 Interactive Data Corp. v. Sony Corp., 929 F. Supp. 2d 1006, 1015–16 (N.D. Cal. 2013). 20 Dr. McGahee conceded there was no technological comparability and made no effort to 21 establish link addressing economic comparability between the program and the parties. See 22 Uniloc, 632 F.3d at 1319 (explaining use of the Georgia-Pacific factors requires showing 23 how the factors would impact the hypothetical negotiation in light of the relevant facts and 24 circumstances of the case). Therefore, his opinion on the Signify licensing program is 25 untethered from the facts of the case and speculative.4
26 4 LDG also attempts to justify Dr. McGahee’s reliance on the Signify licensing program to discuss an industry practice by noting that both parties’ experts address the program. 27 (Doc. 120 at 17–18.) However, SANSI’s expert opined that the Signify licensing program was not economically nor technologically sufficiently comparable to inform the structure 28 or amount of a reasonable royalty. (Doc. 126-1 at 252–55.) Further, SANSI’s expert noted the licenses in that program were considerably broader, covering comprehensive portfolio 1 Additionally, Dr. McGahee’s opinion that market trends would lead LDG to 2 anticipate SANSI’s significant sales and profits, thus inducing LDG to seek an increased 3 royalty suffers the same flaw as his opinion on the seven licenses containing limited terms 4 and restrictions. He provides no consideration to the fact that all twenty-three licenses 5 became effective around the period of this purported boom. Yet not a single one takes on 6 a running royalty form. Again, Dr. McGahee bases his conclusion that the parties would 7 negotiate running royalty structure, in part, on a basis that is necessarily true of nearly all 8 twenty-three of LDG’s licenses, including those he did not consider under this factor. 9 Therefore, his reasoning is selective and suspect. See LaserDynamics, 694 F.3d at 81 10 (upholding exclusion of expert testimony where the expert opined that market trends 11 justified a running royalty and excluded other relevant lump-sum licenses despite those 12 licenses being entered into when the value of the technology was increasing). 13 For these reasons, Dr. McGahee relies on strained reasoning to deduce a royalty rate 14 applicable to all of SANSI’s infringing sales that replicates the damages LDG would have 15 sustained had it executed running royalty license. Missing from the opinion is any indicia 16 beyond speculation that the parties would agree to per-unit running royalty license at a 17 hypothetical negotiation. Therefore, Dr. McGahee’s opinion is based on unsound factual 18 predicates, untethered from the facts of this case, and therefore unreliable as a whole. 19 LaserDynamics, 694 F.3d at 81. 20 /// 21 /// 22 /// 23 /// 24 /// 25 ///
26 of patented invention, and put Signify in a stronger bargaining position. (Id.) Despite Dr. McGahee regurgitating patent and royalty figures, this type of economic analysis is entirely 27 absent from his and renders it unreliable. See, e.g., TV Interactive Data, 929 F. Supp. 2d at 1016 & n.4 (rejecting a party’s argument that the court should allow its expert to opine 28 on that licenses support his royalty rate where the other party’s expert found the licenses noncomparable and neutral). IV. CONCLUSION 2 Accordingly, 3 IT IS ORDERED granting Defendants’ Motion to Exclude the Testimony of 4|| Expert Thomas P. McGahee (Doc. 91). 5 Dated this 20th day of November, 2024. 6 Se . ~P 7 SO ~
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