Overview
In an en banc decision in EcoFactor, Inc. v. Google LLC, the US Court of Appeals for the Federal Circuit concluded that the district court abused its discretion by admitting testimony from a damages expert that a lump-sum payment in EcoFactor’s license agreements reflected a certain per-unit royalty rate because the testimony was not based on sufficient facts or data.
In Depth
EcoFactor sued Google over its Nest thermostats that allegedly infringed EcoFactor’s HVAC patent. A prior Federal Circuit panel decision upheld a district court’s denial of the defendant’s motion for a new trial on damages. There, the Federal Circuit found that the plaintiff’s damages expert sufficiently showed that prior license agreements were economically comparable to a hypothetically negotiated agreement between the parties. The Court subsequently issued a decision vacating that panel decision and granting Google’s petition for rehearing en banc to reconsider the practice of using a patent owner’s prior license agreements to determine royalty rates, particularly when the scope of licenses varies or when lump sums and royalties are not clearly apportioned.
Google argued that the district court abused its discretion in denying a new trial on damages because EcoFactor’s expert opinion was unreliable under Federal Rule of Evidence 702 and Daubert. To estimate a reasonable royalty, the expert employed the hypothetical negotiation framework, which “attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.”
As part of his analysis, the expert considered lump-sum settlement licenses between EcoFactor and three licensees: Daikin Industries, Schneider Electric USA, and Johnson Controls. The expert testified that lump-sum amounts in these licenses reflected an $X per unit rate applied to their sales and that Google should pay that same rate.
In an 8 – 2 decision, the Federal Circuit held that the existing licenses upon which the expert relied were insufficient, individually or in combination, to support the conclusion that prior licensees agreed to the $X royalty rate and, therefore, the district court abused its discretion by failing to exclude this testimony. The Court considered each of the licenses in turn.
Starting with the Daikin license, the Federal Circuit noted that the agreement contained a preliminary recital, which states that EcoFactor represents it has agreed that the payment set forth in the agreement is based on what EcoFactor believes is a reasonable royalty calculation of $X per unit but that the rate does not appear anywhere else in the license. The Court also noted that the operative payment provision in the agreement states that “[s]uch [a lump-sum] amount is not based upon sales and does not reflect or constitute a royalty.” The Court found that the license directly contradicts any claim that the lump sum is based on any particular royalty rate or even that it is based on sales volume.
Turning to the Schneider license, the Federal Circuit noted that the agreement contained similar language indicating that EcoFactor represented that the payment set forth in the agreement is based on what EcoFactor believes is a reasonable royalty calculation of $X per unit. However, the Court also noted that the agreement included language indicating that Schneider did not agree that $X per unit is a reasonable royalty. Like the Daikin agreement, the Scheider agreement includes an operative payment provision that states that the lump-sum amount is not based on sales and does not reflect or constitute a royalty. The Court found that while the license could be used as evidence of what EcoFactor might agree to as a royalty rate, it cannot be read to support the expert’s testimony about what Schneider was willing to pay.
The Federal Circuit noted that the Johnson Controls license contained substantially the same preliminary recital as the Daikin license, finding that this language indicates EcoFactor’s representation of its unilateral belief that $X constitutes a reasonable royalty but does not provide a basis for the expert to conclude that Johnson Controls agreed to that rate.
The Federal Circuit did, however, state that the licenses are relevant to a reasonable royalty analysis because they state EcoFactor’s belief that $X is a reasonable royalty for its patent portfolio and could be relied upon as an indication of the amount that EcoFactor would have accepted as a willing licensor. EcoFactor’s expert opined that the unilateral assertion in each license’s “whereas” recital evidenced the licensees’ agreement to pay the $X royalty rate. The Court found that the expert’s assertion – that those prior willing licensees had agreed to the $X royalty rate – was not supported by the licenses. Accordingly, the Federal Circuit found that the district court erred in admitting that testimony.
Apart from the licenses, the only other evidence relied upon by the expert was testimony from EcoFactor’s CEO about how lump-sum license payments were calculated. However, that testimony was not supported by record evidence, given that the CEO testified that neither he nor anyone else at EcoFactor had been given access to sales data for Daikin, Schneider, or Johnson Controls. The expert similarly testified that he had not seen any licensee sales data or documentation regarding calculation of the lump-sum license payments. Instead, he relied on the CEO’s testimony that the calculations were based on the $X per unit rate. The Federal Circuit found that the CEO’s testimony amounted to an unsupported assertion on behalf of EcoFactor that the $X rate was applied to calculate the lump-sum payment amounts. The Court, therefore, determined that this testimony did not provide a sufficient basis for the expert to conclude that Daikin, Schneider, and Johnson Controls agreed to pay a royalty of $X per unit.
The Federal Circuit concluded that the district court’s decision to admit the testimony was undoubtedly prejudicial, noting that the $X rate was crucial to the expert’s damages analysis since it was both the starting point and the outcome of a hypothetical negotiation between EcoFactor and Google.
Judge Jimmie Reyna filed a partial dissent, finding that there was ample support for the expert’s testimony, including the CEO’s testimony about his own general understanding of the space and market, the value of the product, consultation with advisors, and undisputed market share data.
Judge Leonard Stark also filed a partial dissent, finding that, rather than addressing the proper standard for admitting expert testimony under Rule 702 and Daubert, the Federal Circuit’s holding is so narrow that it has no applicability beyond this case.
