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Neither Expert Nor Inventor Allowed To Opine On Reasonable Royalty Damages

Originally Published in Financial Complexity Made Clear, May 2013

By: David Nolte
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A Delaware federal court recently closed the door on each of two possible paths to damages for Plaintiff in the matter of AVM Technologies, LLC v. Intel, Inc. (Civil Action No. 10-610-RGA). U.S. District Judge Richard G. Andrews granted Defendant's motion to exclude Plaintiff's expert, while also granting Defendant's motion in limine to preclude any proposed expert testimony from the inventor of the patent in question. In short, the Judge found that the expert had failed to perform the required work to support his conclusions and that the inventor should not be allowed to provide testimony beyond his actual activities (e.g. the inventor could not offer testimony on any hypothetical negotiation). As a result, Defendant has filed a motion for summary judgment based on the absence of damages evidence.

Plaintiff's expert originally presented four Intel litigation settlement agreements as a basis for his reasonable royalty opinion that damages relating to the AVM Technologies '547 patent were at least $150 to $300 million. The Judge had previously indicated an intention to exclude three of the four agreements because they were portfolio agreements for dozens of patents rather than individual licenses for a single patent. This left Plaintiff's expert with only one litigation settlement agreement to support his conclusion. However, this alone was not the fatal flaw of his position.

Plaintiff's expert's report indicated that Intel paid $110 million in the remaining litigation settlement agreement (the "2009 WARF agreement"), but as highlighted by the Judge in his Memorandum Opinion, he failed to explain a three patent license agreement for less than $7 million (the "2003 WARF agreement") and did nothing to understand the circumstances surrounding any of the settlements that would affect their comparability:

"The report further states that Evans did not know anything about any of the seven license agreements discussed other than their express terms and information from press releases with respect to the settlements and resulting licenses."

His comments on comparability were limited to describing that the patent that was the subject of the current litigation was more important to Intel's commercial interests and had a larger royalty base, thereby deserving a higher royalty amount. The Court criticized the analysis as (citations omitted):

"not supported by any methodology that explains why the 2009 WARF agreement by itself could be the basis for an accurate conclusion about the hypothetical negotiation over the '547 patent. To say that one litigation settlement agreement relating to a different patent and executed five years after the hypothetical negotiation would have taken place - even assuming the '752 patent is comparable to the '547 patent - is the basis for an opinion is completely speculative without, at a minimum, some analysis of the litigation that led to the settlement. Without analysis of the litigation, the conclusion cannot be based on "sound economic and factual predicates."

Evans' report simply contains no analysis of factors that might affect the value of the settlement. For example, what was the amount of damages ultimately sought in the litigation? Would the issue of willfulness have been tried, with the possibility of treble damages? Or... had sanctions been imposed?... Evans also conceded at the February 1 hearing that he did not focus on the provision in the WARF agreement in which WARF agreed to dispute resolution before filing litigation on any of its 2000 other patents against Intel or its customers and did not compare that provision to other license agreements.

Whereas multiple settlement agreements might show a pattern, a single settlement agreement on a different patent without any analysis of the settlement context is not a reliable method for calculating damages. Moreover, neither Evans nor Joseph McAlexander, AVM's technical expert, address why the 2003 license agreement for three WARF patents mentioned in paragraph 41(f) of Evans' expert report is irrelevant. An analysis that relies on a single license agreement but does not take into account why other licenses are not comparable cannot be a reliable analysis. Evans has not explained why his analysis did not consider the 2003 WARF agreement. In fact, Evans testified at the February 1 hearing that he never reviewed the three patents that were the subject of the 2003 WARF agreement and conceded that it was not one of the agreements on which he relied in his original expert report."

AVM Technologies attempted to salvage its damages evidence through testimony from the inventor of the technology. However, in addition to being late disclosed, the Court deemed much of the proposed content inappropriate when not introduced by an expert witness (citations omitted):

"Much of Tran's proffered testimony would be improper expert opinion, including, for example, an analysis of the estimated costs that "Intel necessarily would have incurred to avoid the '547 patent"; the calculation of a "per design technology use" fee that Intel would pay for each different product design using the '547 patent; a multiplication factor to apply to the per design technology use fee; and a final damages number based on the application of the adjusted and discounted per design technology use fee to the number of product designs. These calculations are the province of expert analysis."


"Tran's proposed testimony regarding events that "would have" occurred is also inadmissible. Although a lay witness may testify to facts within his personal knowledge, a lay witness may not offer testimony as to events that "would have occurred."

Perhaps most tellingly, the inventor previously testified in deposition that he had "no idea" what he would have accepted for a license fee.

As described by the Court, this sizeable damages claim could have been salvaged had the expert been able to show a reliable pattern or performed additional analysis to better understand the basis for the sole settlement agreement. Consistent with the circumstances described in this prior article, attempting to use a percipient witness to establish a reasonable royalty is not a recommended strategy.

David Nolte is a principal at Fulcrum Financial Inquiry LLP with over 30 years experience performing forensic accounting, auditing, business appraisals, and related financial consulting. He regularly serves as an expert witness.

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