Wirtgen America, Inc. v. Caterpillar, Inc.

Filing 308

MEMORANDUM OPINION. Signed by Judge Joshua D. Wolson on 02/05/2024. (vfm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
WIRTGEN AMERICA, INC.,

Case No. 1:17-cv-00770-JDW-MPT

Plaintiff,
v.
CATERPILLAR, INC.,

Defendant.
MEMORANDUM
Economists love assumptions. One joke recites that a physicist, a chemist, and an
economist find themselves on a desert island with a single can of food. The physicist offers
to calculate the force needed to use a coconut to open the can. The chemist offers to
make a solution that will eat through the can’s top. The economist tells them they are
making it too complicated and just to assume a can opener.
The world of patent damages is filled with economic assumptions, including that
the infringer and patent holder sat down and negotiated a license just before the
infringement began. To construct that hypothetical negotiation, a damages expert must
assume that each side participated willingly in the negotiation. But some participants are
more willing than others. In this case, Wirtgen America, Inc. held patents on features that
gave it a competitive advantage over one of its primary competitors, Caterpillar, Inc. It

didn’t license those patents to Caterpillar in real life, and it presumably would not have
wanted to license them in the world of a hypothetical negotiation, either.
When Dr. Pallavi Seth constructed a hypothetical negotiation to calculate those
damages, she placed a great deal of emphasis on Wirtgen’s reluctance to enter into a
license agreement with its competitor. Too much emphasis, as it turns out. Because in
constructing the hypothetical negotiation, Dr. Seth assumed that Wirtgen wouldn’t enter
into a license with Caterpillar unless it received at least all of the profits it would lose from
lost machine sales. That assumption holds true regardless of the value of those
technologies or circumstances that might have made Caterpillar less willing to license
some patents than others.
Federal Circuit law does not allow Dr. Seth to make that assumption, however. She
had to apportion her damages to account for non-infringing elements of the cold planers
at issue. Her failure to do so means that I must exclude her damages analysis.
I.

BACKGROUND 1
A.

The Patented Technologies

Wirtgen asserts nearly 20 claims across 7 patents. The patents relate broadly to
road construction equipment—primarily cold planers—but they cover a range of different

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I write this opinion for the benefit of the Parties. Given their familiarity with the
underlying dispute and its procedural history, I recount here only the circumstances
necessary to resolve this Motion.
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features. The ‘309 Patent 2 discloses road building machines that can adjust the machine’s
height relative to the frame or chassis. The ‘530 Patent 3 discloses a road construction
machine with a drum, adjustable ground supports, and lifting sensors. The ‘972 Patent 4
discloses similar features. The ‘641 Patent 5 makes disclosures about a method for working
ground surfaces with a milling drum, including raising the drum off the ground. The ‘788
Patent 6 discloses a road construction machine that is height-adjustable for milling depth
or slope. The ‘474 Patent 7 covers similar subject matter and shares a similar specification.
The ‘268 Patent 8 discloses aspects of the drive train in a road construction machine.
B.

Dr. Seth’s Analysis

Wirtgen submits Dr. Seth as its damages expert. Dr. Seth estimated a reasonable
royalty that Caterpillar would have paid to Wirtgen if Wirtgen and Caterpillar had engaged
in a hypothetical negotiation on the eve of the first alleged infringement. Dr. Seth cites to
evidence showing that Wirtgen would be reluctant to license to Caterpillar, even under
very favorable license terms. For example, Wirtgen has never licensed its patents to
Caterpillar in the past.

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U.S. Patent No. 7,828,309
U.S. Patent No. 9,656,530
4 U.S. Patent No. 8,424,972
5 U.S. Patent No. 7,530,641
6 U.S. Patent No. 7,946,788
7 U.S. Patent No. 8,690,474
8 U.S. Patent No. RE48,268.
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Nevertheless, using a willing licensor/willing licensee framework, Dr. Seth
estimated the highest amount that would ensure Caterpillar found the agreement
profitable (otherwise known as Caterpillar’s maximum willingness to pay or “MWP”) and
the lowest amount that would ensure Wirtgen found the agreement profitable (Wirtgen’s
minimum willingness to accept or “MWA”). Dr. Seth defines Caterpillar’s MWP as “the
anticipated incremental profits earned from practicing the Asserted Patents,” and
Wirtgen’s MWA as “the profits it anticipates to lose should Caterpillar practice the
Asserted Patents.” (D.I. 213-1 ¶ 17.) The difference between those Wirtgen’s MWA and
Caterpillar’s MWP) equals the “joint surplus value.” (Id. ¶ 18.)
Wirtgen’s MWA is its lost profits due to infringement. Those lost profits represent
“both potential machine sales and spare and replacement parts sales associated with
those machines that Wirtgen would have had the opportunity to make itself if not for
Caterpillar’s alleged infringement of the Asserted Patents.” (D.I. 213-1 ¶ 17 n.11.)
Dr. Seth opines that the joint surplus value “may not relate entirely to the Asserted
Patents,” so she apportions the joint surplus value “to isolate the incremental value
contributions of the Asserted Patents to the accused products.” (Id.; see also id. ¶¶ 20406, 241-42.) She apportions the joint surplus value using an apportionment rate based on
a count of family-level forward patent citations. She then splits the apportioned joint
surplus value between the parties using the Rubenstein bargaining model. Finally, she
arrives at her damages calculation by adding Wirtgen’s split of the apportioned joint

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surplus value to Wirtgen’s MWA. Stated as a percentage of her total damages figure,
Wirtgen’s MWA accounts for roughly 95%.
According to Dr. Seth, the method for determining Wirtgen’s MWA would not
change depending on which patents the jury finds Caterpillar infringed. (The actual
amount of the MWA might change because different patents were in effect at different
times.) During her deposition, she acknowledged that she “did not conduct any patentby-patent apportionment” with respect to her calculation of the MWA. (D.I. 213-2 at 10809.)
C.

Procedural History

Caterpillar filed a motion to exclude Dr. Seth’s testimony. On February 1, 2024, I
held a hearing with counsel for the Parties concerning the potential exclusion of Dr. Seth’s
testimony. At that hearing, I ruled that Dr. Seth’s reasonable royalty analysis was deficient
and noted that I would memorialize the reasons for that decision in writing. This opinion
provides that reasoning.
II.

LEGAL STANDARD
Regional circuit law governs aspects of expert opinion admissibility unless the

issues are unique to patent law. See Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1390
(Fed. Cir. 2003). Federal Rule of Evidence 702 provides that a qualified expert may testify
in the form of an opinion if: “(a) the expert’s scientific, technical, or other specialized
knowledge will help the trier of fact to understand the evidence or to determine a fact in

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issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product
of reliable principles and methods; and (d) the expert has reliably applied the principles
and methods to the facts of the case.” FED. R. EVID. 702. Rule 702’s requirements establish
“three distinct substantive restrictions on the admission of expert testimony:
qualifications, reliability, and fit.” Elcock v. Kmart Corp., 233 F.3d 734, 741 (3d Cir. 2000);

see also Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993).
“A patent owner, having prevailed on liability, may receive a reasonable royalty or
lost profits, but not both for the same infringing units.” Asetek Danmark A/S v. CMI USA

Inc., 852 F.3d 1352, 1362 (Fed. Cir. 2017). A standard, but non-exclusive, way of
determining lost profits is utilizing the four-factor test articulated in Panduit Corp. v.

Stahlin Bros. Fibre Works, 575 F.2d 1152, 1156 (6th Cir. 1978). A reasonable royalty, on the
other hand, is often “based upon a hypothetical negotiation between the patentee and
the infringer when the infringement began.” Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d
512, 517 (Fed. Cir. 1995). Most analyses of a reasonable royalty utilize the fifteen-factor
test set out in Georgia–Pacific Corp. v. United States Plywood Corp. See id. at 517 n.7.
(citing 318 F. Supp. 1116, 1120 (S.D.N.Y.1970), modified and aff'd, 446 F.2d 295 (2d Cir.),

cert. denied, 404 U.S. 870, 92 S.Ct. 105, 30 L.Ed.2d 114 (1971)). A hypothetical negotiation
“necessarily involves an element of approximation and uncertainty.” Id. Nonetheless,
“given the great financial incentive parties have to exploit the inherent imprecision in
patent valuation, courts must be proactive to ensure that the testimony presented—using

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whatever methodology—is sufficiently reliable to support a damages award.”

Commonwealth Sci. & Indus. Rsch. Organisation v. Cisco Sys., Inc., 809 F.3d 1295, 1301
(Fed. Cir. 2015).
Apportionment requires that “a patentee must take care to seek only those
damages attributable to the infringing features.” Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d
1308, 1326 (Fed. Cir. 2014). The Federal Circuit requires that “to be admissible, all expert
damages opinions must separate the value of the allegedly infringing features from the
value of all other features.” Commonwealth Sci. & Indus. Rsch. Organisation, 809 F.3d at
1301 (citation omitted) (explaining that apportionment is the governing rule where multicomponent products are involved). So, an expert’s failure to properly apportion damages
justifies exclusion of that expert’s testimony at trial. See LaserDynamics, Inc. v. Quanta

Computer, Inc., 694 F.3d 51, 69 (Fed. Cir. 2012); Uniloc USA, Inc. v. Microsoft Corp., 632
F.3d 1292, 1318 (Fed. Cir. 2011).
The entire market value rule “is a narrow exception” to the rule of apportionment.

LaserDynamics, Inc., 694 F.3d at 67. “If it can be shown that the patented feature drives
the demand for an entire multi-component product, a patentee may be awarded damages
as a percentage of revenues or profits attributable to the entire product.” Id.
Wirtgen, as the party offering Dr. Seth’s testimony, bears the burden of proving
that her testimony meets Rule 702’s restrictions. In re Paoli R.R. Yard PCB Litig., 35 F.3d

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717, 744 (3d Cir. 1994). Further, as the patentee, Wirtgen bears the ultimate burden of
proving damages. See Uniloc USA, Inc., 632 F.3d at 1315.
III.

ANALYSIS
Dr. Seth didn’t properly apportion her reasonable royalty, even though the law

requires her to do so. In simplified terms, her royalty payment sums two figures: Wirtgen’s
MWA; and the joint surplus value. But Dr. Seth apportioned only the joint surplus value.
That is, she didn’t apportion Wirtgen’s MWA/lost profits. In other words, Dr. Seth premises
Wirtgen’s lost profits on sales of entire machines and not the value that a specific patent
added to that machine. Thus, she sets a whopping 95% of her damages figure in a way
that includes the value of all the other features in the machines. Because Dr. Seth doesn’t
invoke the entire market value rule, that’s impermissible.
In her reasonable royalty calculation, Dr. Seth was permitted to “consider the
profits on sales [Wirtgen] might lose as a result of granting a license.” Asetek Danmark

A/S, 852 F.3d at 1362 (citing Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554–55 (Fed. Cir.
1995) (en banc)). As a general matter, lost profits might even predominate an ultimate
reasonable royalty figure. See id.; see also FloodBreak, LLC v. Art Metal Indus., LLC, No.
3:18-CV-503 (SRU), 2020 WL 6060974, at *16 (D. Conn. Oct. 13, 2020) (allowing a damages
expert who “weighed lost profits more heavily than other factors in her hypothetical
negotiation” to testify at trial); Apple, Inc. v. Samsung Elecs. Co., No. 12-CV-00630-LHK,
2014 WL 794328, at *22 (N.D. Cal. Feb. 25, 2014) (same). That framework might be

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particularly relevant in a case like this one where the licensor would have been reluctant
to make a deal. But Dr. Seth’s lost profits are problematic because that figure fails to
isolate the value of the allegedly infringing features from the value of all other features.

See VirnetX, Inc., 767 F.3d at 1329. It is Dr. Seth’s use of unapportioned lost profits wherein
the issue lies.
Dr. Seth’s apportionment approach is out of step even when compared to the cases
Wirtgen cites. The Federal Circuit has acknowledged that certain methodologies
themselves can build in apportionment. See Mentor Graphics Corp. v. EVE-USA, Inc., 851
F.3d 1275, 1288 (Fed. Cir. 2017) (proper analysis of Panduit factors may account for
apportionment); Vectura Ltd. v. Glaxosmithkline LLC, 981 F.3d 1030, 1041 (Fed. Cir. 2020)
(comparable licenses and negotiations). When a damages expert walks through the

Panduit factors in determining a lost profit analysis, and then inputs that analysis into her
reasonable royalty rate calculation, she might take care of apportionment too. See, e.g.,

FloodBreak, LLC, 2020 WL 6060974, at *5. An analysis of licenses to comparable
technology might also do the trick. See, e.g., Plexxikon Inc. v. Novartis Pharms. Corp., No.
4:17-CV-04405-HSG, 2021 WL 97544, at *5 (N.D. Cal. Jan. 12, 2021).
But Dr. Seth doesn’t use the Panduit factors to arrive at her lost profits number.
She also can’t rely on a comparable license because Wirtgen hasn’t licensed these patents
before. To be clear, it’s okay that she didn’t use the Panduit factors or comparable licenses.
But, in the absence of doing either, she had to find another adequate way to apportion

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her damage award in light of the facts of this case. See Commonwealth Sci. & Indus. Rsch.

Organisation, 809 F.3d at 1301.
She attempts to meet that requirement in her analysis of Georgia-Pacific’s Factor
13, but it’s inadequate. See generally AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338
(Fed. Cir. 2015); Bd. of Regents Univ. of Texas Sys. v. Bos. Sci. Corp., 645 F. Supp.3d 324,
330 (D. Del. 2022). On one hand, Dr. Seth acknowledges the rule of apportionment in that
analysis. She notes that “[t]he Accused Product as a whole incorporates value from other
patents, know-how, human capital, and raw materials, in addition to the value contributed
by the technology embodied by the Asserted Patents.” (See D.I. 213-11 ¶ 195.) She then
passingly suggests that the sales data she relied on already accounts for apportionment.
(See id.) But, without a more fulsome analysis, it’s unclear how machine sales data could
possibly do that. Wirtgen’s counsel could not answer that question at the hearing. The
fact that Dr. Seth mentioned apportionment in talking about the thirteenth Georgia-

Pacific factor doesn’t mean that she apportioned her damages properly, and it doesn’t
make her analysis admissible. See, e.g., NNCrystal US Corp. v. Nanosys, Inc., No. CV 191307-RGA, 2023 WL 2891453, at *3 (D. Del. Apr. 11, 2023).
One example from the hearing demonstrates some of the problems with Dr. Seth’s
analysis. Around the time of the hypothetical negotiation, Caterpillar analyzed several of
Wirtgen’s patents to determine how they impacted Caterpillar in the marketplace. For
some, Caterpillar concluded that it had no workaround and its inability to provide the

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patented technology substantially harmed its market position. But for the ‘309 Patent,
Caterpillar determined that it could design a workaround in a few months and at a
relatively low cost. (Hearing Tr. at 66-67.) By assuming that Wirtgen’s MWA would be its
lost profits, and then setting that as a damages floor, Dr. Seth fails to account for the fact
that the ‘309 Patent—as one example—was less valuable to Caterpillar. Apportionment
would have corrected that flaw.
During the hearing, Wirtgen’s counsel defended Dr. Seth’s work by arguing that
she conducted a hypothetical negotiation of Wirtgen’s patent portfolio. (Hearing Tr. at
61-62.) The problem with that approach, though, is that the portfolio contains unrelated
patents covering different features of the machines. And the hypothetical negotiation
would only have included those patents that the jury finds infringed, not the whole
portfolio. Dr. Seth’s approach therefore leaves open the possibility of awarding damages
for features that the jury finds not to be infringing.
A failure to apportion goes to admissibility, not weight. If Wirtgen prevails on
liability, it will be entitled only to a damage award which captures “the value of what was
taken” meaning the patented technology. See Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d
1201, 1226 (Fed. Cir. 2014). As the Federal Circuit has explained, “care must be taken to
avoid misleading the jury by placing undue emphasis on the value of the entire product.”

Commonwealth Sci. & Indus. Rsch. Organisation, 809 F.3d at 1302. Under these

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circumstances, I find that since 95% of Dr. Seth’s damages figure is unapportioned lost
profits, admission risks “skew[ing] the damages horizon for the jury.” Id.
At the conclusion of the hearing, Wirtgen suggested that Dr. Seth may still be able
to testify. (See Hearing Tr. at 70:13-23.) I haven’t been supplied with her revised expert
report, nor have I been able to parse the excerpts of the expert report I have to determine
the merits of this request. Therefore, I am not ruling out the possibility that Dr. Seth may
be able to testify on matters not at-issue in this opinion, but I’m not blessing it, either.
IV.

CONCLUSION
Dr. Seth assumes that Wirtgen would have been a reluctant licensor. While

reasonable, that assumption leads her to award to Wirtgen all of its lost profits, and then
some, without determining if any particular patented technology justified such a recovery.
Because she fails to apportion to ensure that Wirtgen would receive only the benefit of
its patented technologies in her damages analysis, Dr. Seth’s analysis runs afoul of
governing Federal Circuit precedent and requires exclusion. To the extent that Wirtgen
believes that there are parts of Dr. Seth’s opinion that survive this analysis, it may disclose
the testimony that it proposes to Caterpillar in short order, and I will resolve any remaining
disputes at the final pretrial conference. An appropriate Order follows.
BY THE COURT:

/s/ Joshua D. Wolson
JOSHUA D. WOLSON, J.
February 5, 2024
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