How did the Appraisal Experts Hold Up in Apple v. Samsung?
By Sherrye Henry, Esq., Sr. Legal Editor, Business Valuation Update
Apple, Inc. v. Samsung Electronics, Co., 2012 U.S. Dist. LEXIS 90877 (June 30, 2012)
Anyone with a smart phone bill has reason to read about the Apple/Samsung litigation and August 24th billion dollar settlement. The federal district court decision is sparse on economic damages details, but it does offer a great deal of insight into how each side subjected the more than 16 financial experts to dueling Daubert motions.
Appraisers can't ignore the law when doing damages calculation. In its challenge to the defendant’s primary damages evidence, the plaintiff argued that his apportionment of the defendant’s profits, derived from infringement of its design patents, was inconsistent with the federal remedy set forth in the Patent Act (35 USC § 289).
In particular, that act entitles the holder of a design patent to an infringer’s entire profits. In providing the remedy in 1887, Congressional legislators specifically removed the need to “apportion the infringer’s profits between the patented design and the article bearing the design,” the court explained. (Editor’s note: Compare this remedy with the federal standard for damages in the infringement of utility patents, which require any reasonable royalties or lost profits to be apportioned between the patented and unpatented features of the product; see, e.g., Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), available at BVLaw.)
Faced with the clear language of the act, the defendant could provide no legal basis for its position, but merely appealed to “procedural and policy arguments for allowing apportionment in this case”. Without any basis in law, however, the court found this expert’s apportionment of patent design damages unreliable and prejudicial, and excluded them.
The plaintiff also challenged the expert’s apportionment of damages related to its trade dress claims, arguing that his use of a consumer survey was unreliable and his methodology was generally unsound. The court summarily dismissed the first point, finding the survey data was the kind experts in the same field typically rely on.
At the same time, it found that neither the defendant nor its expert had cited “any evidence supporting their assertion that [his] calculations are based on a generally accepted, peer-reviewed method.” By contrast, the plaintiff raised “serious doubts” about the reliability of the expert’s calculations, which contained several obvious math errors. Without providing any more specifics, the court excluded his apportionment analysis with respect to the plaintiff’s trade dress claims.
As a third and final challenge against this same rebuttal expert, the plaintiff sought to exclude his assertion that “demand for the patented features” of a product is required under the first prong of the four-part Panduit test, which establishes eligibility for damages. (Panduit Corp. v. Stahlin Bros, Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)). However, Panduit’s first prong simply requires a showing of demand for the patented product; as a result, the expert’s opinion that Panduit also required evidence of demand for the patented features was contrary to law, and the court excluded this portion of his testimony as well.
Five lines of attack against the plaintiff’s expert. The defendant cited five grounds for excluding various aspects of the damages calculations by the plaintiff’s expert, as follows:
- Lost profits. The defendant claimed the plaintiff’s expert should have used a separate price elasticity study to account for certain market factors that contributed to Apple’s profits, such as its higher prices and consumer loyalty platform. However, in markets in which the parties are direct competitors—as is the case here—the lost profits remedy for utility patents does not require such a study, the court held. Further, the plaintiff’s expert did isolate the demand for Apple’s particular intellectual property rights at issue in the suit. “And in any event,” the court found, in denying this aspect of the defendant’s motion, “evidence of demand for the patented product as a whole is relevant to the first Panduit factor under a lost profits analysis.”
- Reasonable royalty. The defendant claimed the expert’s reasonable royalty calculations, using the income approach, were improper for four reasons.
Critique of costs. In the rebuttal portion of his report, the expert claimed the plaintiff was entitled to a disgorgement of all of the defendant’s profits related to the infringement, and that it was the defendant’s burden to reduce this amount by a proper accounting for costs. To the extent the expert sought to critique the accuracy of the defendant’s accounting, the court said, his opinion was permissible. However, to the extent he sought to “instruct the jury as to [the defendant’s] burden of proof for establishing costs,” his opinion was improper attorney argument and inadmissible. Pre-notice damages. Since any damages would be limited to the time after the defendant received actual notice of infringement, the plaintiff’s expert must subtract any pre-notice damages from his calculations, the defendant said. This turned on a fact regarding when the defendant actually received notice, however, and was not a proper ground for excluding the expert’s evidence under the Daubert standard, the court explained, and denied this portion of the motion. Irreparable harm. In stating an opinion on whether the plaintiff had suffered irreparable harm from the infringement, its expert had also overstepped his bounds. Since this evidence was not relevant to any issue at trial, the court struck these portions of his testimony.
- a. Apportionment. The expert attributed the entire premium value of Apple’s iPhone and iPad products to the asserted IP without due apportionment, as required by the Uniloc standard, the defendant argued. But this objection went to the weight and not the admissibility of the evidence, the court said, which also found the expert’s income approach was essentially sound.
- b. Cost. The expert’s cost approach improperly used the defendant Samsung’s total gross profits for the loss period, the defendant said, but this went to the weight of the evidence as well. “While determination of a reasonable royalty is not based on an infringer’s profits,” the court emphasized, “an infringer’s profits are a relevant consideration under at least three Georgia-Pacific factors.”
- c. Unwilling licensee. The defendant took issue with the expert’s assumption that Apple would have been reluctant in negotiations, when the hypothetical standard requires assuming a prudent and willing licensee. The court disagreed, finding that precedent permits consideration of a patentee’s “actual unwillingness to license” within the hypothetical negotiation framework.
- d. Comparable license. In attempting to establish a floor for his calculations, the plaintiff’s expert relied on one particular license, which he conceded was “not a comparable license to any of the Apple intellectual property in suit.” As a result, his reliance violated the federal standard requiring sufficient comparability among licenses used as the basis for a reasonable royalty calculation. See, e.g, ResQNet.com Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010) (available at BVLaw). Accordingly, it excluded the expert’s opinion related to this one license.
Stage set for the much-publicized verdict. After ruling on the remaining motions related to the patent, technical, and other experts in the suit—leaving most of their testimony intact—the court ordered the parties to proceed to trial, leading to the August 24th infringement judgment against Samsung.