Prism Technologies v. AT&T et al

Filing 411

MEMORANDUM AND ORDER that the defendants' motions (Filing No. 261 in 8:12CV122; Filing No. 221 in 8:12CV123; Filing No. 234 in 8:12CV124; Filing No. 214 in 8:12CV125; Filing No. 204 in 8:12CV126)) are granted. Mr. Malackowski is prohibited from offering his opinion and testimony at trial in its entirety. In light of this order, the Court dismisses AT&T'scase-specific motion (Filing No. 266) against Mr. Malackowski. DATED this 22nd day of September, 2014. Ordered by Senior Judge Lyle E. Strom. (ADB)

IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEBRASKA
PRISM TECHNOLOGIES LLC,

)
)
Plaintiff,
)
)
v.
)
)
AT&T MOBILITY, LLC,
)
)
Defendant.
)
______________________________)
PRISM TECHNOLOGIES LLC,
)
)
Plaintiff,
)
)
v.
)
)
SPRINT SPECTRUM L.P.,
)
d/b/a SPRINT PCS,
)
)
Defendant.
)
______________________________)
PRISM TECHNOLOGIES LLC,
)
)
Plaintiff,
)
)
v.
)
)
T-MOBILE USA, INC.,
)
)
Defendant.
)
______________________________)
PRISM TECHNOLOGIES LLC,
)
)
Plaintiff,
)
)
v.
)
)
UNITED STATES CELLULAR
)
CORPORATION, d/b/a U.S.
)
CELLULAR,
)
)
Defendant.
)
______________________________)

8:12CV122

MEMORANDUM AND ORDER

8:12CV123

8:12CV124

8:12CV125

PRISM TECHNOLOGIES LLC,

)
)
Plaintiff,
)
)
v.
)
)
CELLCO PARTNERSHIP d/b/a
)
VERIZON WIRELESS,
)
)
Defendant.
)
______________________________)

8:12CV126

This matter is before the Court on the common Daubert
motion (Filing No. 261 in 8:12CV122; Filing No. 221 in 8:12CV123;
Filing No. 234 in 8:12CV124; Filing No. 214 in 8:12CV125; Filing
No. 204 in 8:12CV126)1 of the five defendants in five separate
cases.

Pursuant to Section 299 of Title 35, plaintiff Prism

Technologies, L.L.C. (“Prism”) opted to file separate actions
against common alleged infringers of its patents (35 U.S.C.
§ 299(a), (b); Filing No. 135).

In the interest of judicial

economy, the parties agreed to allow the filing of “common
motions for summary judgment” and “common Daubert motions” by the
defendants, AT&T Mobility L.L.C., Sprint Spectrum L.P., T-Mobile
U.S.A., Inc., United States Cellular Corporation d/b/a U.S.
Cellular, and Cellco Partnership d/b/a Verizon Wireless (referred
to heretofore as the “defendants”) (Filing No. 226).

1

The

For ease of citation, the Court will cite to the filings
in the AT&T Mobility L.L.C. case (8:12CV122).
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defendants filed the current common Daubert motion to exclude the
opinions and testimony of James E. Malackowski (“Malackowski”).
A case-specific Daubert motion (Filing No. 266) against
Malackowski was also filed by AT&T.

The matter has been fully

briefed and is ready for disposition (Filing No. 264, Filing No.
337, Filing No. 368).

After review of the motion, briefs,

indices of evidence, oral arguments, and relevant case law, the
Court rules as follows.
I.

BACKGROUND

A.

PROCEDURE
Originally, Prism alleged infringement of three

asserted patents (Filing No. 1).

Ultimately, Prism narrowed the

scope of this action to two patents:

U.S. Patent No. 8,127,345

(“Patent ‘345") and U.S. Patent No. 8,387,155 (“Patent ‘155")
(Filing No. 1; Filing No. 242, 9; Filing No. 243-4, 3; Filing No.
243-5, 2).

Prism dropped its third asserted patent, U.S. Patent

7,290,288 (“Patent ‘288"), from this action (Id.).
The United States Patent and Trademark Office (“PTO”)
issued Patent ‘345, entitled “METHOD AND SYSTEM FOR MANAGING
ACCESS TO PROTECTED COMPUTER RESOURCES VIA AN INTERNET PROTOCOL
NETWORK”, on February 28, 2012, from an application filed October
30, 2007 (Filing No. 1-6, at 1).

Patent‘345 is allegedly a

continuation of Patent ‘288, entitled “METHOD AND SYSTEM FOR
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CONTROLLING ACCESS, BY AN AUTHENTICATION SERVER, TO PROTECTED
COMPUTER RESOURCES PROVIDED VIA AN INTERNET PROTOCOL NETWORK” and
filed on August 29, 2002 (Id.).
The PTO issued Patent ‘155, entitled “SYSTEM FOR
MANAGING ACCESS TO PROTECTED COMPUTER RESOURCES”, on February 26,
2013, from an application filed November 11, 2010, with the PTO.
Prism contends that the Patent ‘155 application was a
continuation of the Patent ‘345 application.
Prism has a fourth, unasserted patent, U.S. Patent No.
6,516,416 (“‘416 Patent”), entitled “SUBSCRIPTION ACCESS SYSTEM
FOR USE WITH AN UNTRUSTED NETWORK”.

The Court has referenced

this patent in its prior orders (E.g., Filing No. 132).
On April 4, 2012, Prism filed its complaints against
AT&T and various other cellular phone providers in separate
actions, alleging direct infringement, indirect contributory
infringement, and indirect inducement of infringement of Patents
‘345 and ‘155 (Filing No. 1, 85).

The complaint was amended

September 21, 2012 (Filing No. 40) and March 1, 2013 (Filing No.
85).

On April 23, 2013, the parties submitted a Joint Claim

Construction Statement and the Court conducted a Markman hearing
on July 2, 2013 (Filing Nos. 110, 130).

The Court issued its

Markman order on July 30, 2013, accepting jointly stipulated
terms and construing disputed terms (Filing No. 132).
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Prism has retained experts to testify and offer
testimony and opinions at trial regarding damages and the systems
in this case.

The parties submitted their briefs and a Daubert

hearing was held August 27, 2014.

Mr. Malackowski will offer

expert damage testimony at trial.

Specifically, Mr. Malackowski

has created a “reasonable royalty amount” for the defendant’s
purported infringement based upon a royalty rate and a royalty
base (Filing No. 337, at 7).

The defendants move to exclude such

testimony in its entirety (Filing No. 264, at 34).
B.

MALACKOWSKI’S MODEL
Mr. Malackowski calculated the royalties against each

defendant from February 28, 2012 until December 31, 2013, subject
only to the defendants producing information for 2014.
No. 337, at 11 n.3.

Filing

Mr. Malackowski’s model is based upon a

hypothetical negotiation between Prism and each defendant.

Id.

at 11.
Mr. Malackowski’s model has multiple stages.

First, he

attempted to isolate the “economic footprint” of the invention in
each defendant’s revenues to create a royalty base in a threestep calculation.

First, he identified each defendant’s data

services revenue.

Second, he reduced the revenue of RIM

subscribers per Prism’s RIM agreement.

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Third, he “apportioned”

these revenues by each defendant’s cost savings fraction.

The

third step is pivotal to this motion.
The cost-savings fraction is a separate, two-step,
calculation.

Mr. Malackowski identified the numerator of this

fraction as the cost savings value of the asserted patents
(Filing No. 265-3, at 43-46).2

Then, Mr. Malackowski identified

the denominator as the total network costs for each defendant
(Id.).

The resulting fraction represented the “benefit cost

savings” of the infringing system.

Therefore, the royalty base

equation is as follows:
[(data revenue - RIM revenue) x (cost savings/network costs)]
AT&T characterizes the left-side of the equation as the “revenue
calculation” and the right-side as the “cost-savings
calculation.”

Mr. Malackowski concluded, for each defendant,

that the products of these calculations were the royalty bases.
Next, Mr. Malackowski considered the Georgia-Pacific
factors to create a royalty rate of 2-4% for each defendant (Id.
at 46-86).

The product of the royalty base and the royalty-rate

2

The cost savings are the difference between the assumed
costs of owning all backhaul infrastructure and the cost to lease
the backhaul for each defendant. Filing No. 264, at 10. The
backhaul is a physical infrastructure which the defendant does
not own but rather leases from third parties under strict
contractual terms.
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constituted the total reasonable royalty per defendant (Id. at
87).
II.

STANDARD OF REVIEW
The Court must determine whether Mr. Malackowski’s

specialized knowledge will assist the trier of fact to understand
evidence or to determine a fact in issue.

Fed. R. Evid. 702.

Under Rule 702, the Court must consider whether (1) the testimony
is based upon sufficient facts or data, (2) the testimony is the
product of reliable principles and methods, and (3) the witness
has applied the principles and methods reliably to the facts of
the case.
Royalty damage calculations are governed by case law:
Upon a showing of infringement, a
patentee is entitled to “damages
adequate to compensate for the
infringement, but in no event less
than a reasonable royalty for the
use made of the invention by the
infringer.” 35 U.S.C. § 284. A
“reasonable royalty” derives from a
hypothetical negotiation between
the patentee and the infringer when
the infringement began. See, e.g.,
Unisplay, S.A. v. Am. Elec. Sign
Co., 69 F.3d 512, 517 (Fed. Cir.
1995). A comprehensive (but
unprioritized and often
overlapping) list of relevant
factors for a reasonable royalty
calculation appears in
Georgia–Pacific Corp. v. United
States Plywood Corp., 318 F. Supp.
1116, 1120 (S.D.N.Y. 1970).
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Thus, the trial court must
carefully tie proof of damages to
the claimed invention's footprint
in the market place. See, e.g.,
Grain Processing Corp. v. Am.
Maize–Prods. Co., 185 F.3d 1341,
1350 (Fed. Cir. 1999) (“To prevent
the hypothetical from lapsing into
pure speculation, this court
requires sound economic proof of
the nature of the market and likely
outcomes with infringement factored
out of the economic picture.”);
Riles v. Shell Exploration & Prod.
Co., 298 F.3d 1302, 1312 (Fed. Cir.
2002) (“[T]he market would pay [the
patentee] only for his product . .
. . [The patentee's damages] model
[does not support the award because
it] does not associate [the]
proposed royalty with the value of
the patented method at all, but
with the unrelated cost of the
entire Spirit platform.”). Any
evidence unrelated to the claimed
invention does not support
compensation for infringement but
punishes beyond the reach of the
statute.
ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 568-69 (Fed. Cir.
2010).

When the patented invention does not drive demand for the

entire accused product, “it is generally required that royalties
be based not on the entire product, but instead on the ‘smallest
saleable patent-practicing unit [“SSPPU”].’”

LaserDynamics, Inc.

v. Quanta Computer, Inc., 694 F.3d 51, 67 (citing Cornell Univ.
v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283, 287-88
(N.D.N.Y. 2009)).

“A damages theory must be based on ‘sound
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economic and factual predicates.’”

LaserDynamics, Inc., 694 F.3d

at 67 (citing Riles v. Shell Exploration & Pro. Co., 298 F.3d
1302, 1311 (Fed. Cir. 2002)).
The proponent of the expert testimony must prove its
admissibility by a preponderance of the evidence.
U.S. at 592-93, n.10.

Daubert, 509

“[T]estimony is inadmissible if it is

speculative, unsupported by sufficient facts, or contrary to the
facts of the case.”

Marmo v. Tyson Fresh Meats, Inc., 457 F.3d

748, 757 (8th Cir. 2006).

“When the analytical gap between the

data and proffered opinion is too great, the opinion must be
excluded.”

General Elec. Co. v. Joiner, 522 U.S. 136, 146

(1997).
III. DISCUSSION
The defendants summarized their position into three
objections at oral arguments.

First, defendants argue a revenue-

based royalty model is inappropriate as a matter of law because
“customer demand for the patented invention” does not generate
data plan revenues (Defendants’ Slide No. 5).

Second, defendants

object to Mr. Malackowski’s application of “cost-savings” to
apportion revenues (Defendants’ Slide No. 21).

Third, the

defendants claim that Mr. Malackowski’s methodology is a “black
box” which cannot be correlated to the invention’s economic
footprint (Defendants’ Slide No. 26).
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A.

CONSUMER DEMAND
The Federal Circuit has held “the entire market value

rule permits recovery of damages based on the value of a
patentee's entire apparatus containing several features when the
patent-related feature is the ‘basis for customer demand.’”
Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549 (Fed. Cir.
1995), cert. denied, 516 U.S. 867 (1995) (quoting State Indus.,
Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir.
1989)).
As the Federal Circuit recently
noted, “[w]here small elements of
multi-component products are
accused of infringement, calculating a royalty on the entire
product carries a considerable risk that the patentee will be
improperly compensated for non-infringing components of that
product.” Thus, the general rule is that royalties will be based
on the “‘smallest salable patent- practicing unit.’”
AVM Techs., L.L.C. v. Intel Corp., Civ. Action No. 10-610, 2013
WL 126233, *2 (D. Del. January 4, 2013) (citing and quoting
LaserDynamics v. Quanta Comp., Inc., 694 F.3d 51, 67 (Fed. Cir.
2012)).

If the patentee cannot satisfy the entire market value

rule, it must “in every case give evidence tending to separate or
apportion the defendant's profits and the patentee's damages
between the patented feature and the unpatented features, and
such evidence must be reliable and tangible, and not conjectural
or speculative.”

Id. (quoting Uniloc, 632 F.3d at 1318).

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In Laserdynamics, the patentee held a patent for an
optical disc drive (“ODD”) compatible for laptops.

The patentee

attempted to create a royalty base from the entire revenue of the
laptops.

LaserDynamics, 694 F.3d at 68 (“the royalty was

expressly calculated as a percentage of the entire market value
of a laptop computer rather than a patent-practicing ODD alone.
This, by definition, is an application of the entire market value
rule.”).

The court in that case found that the patentee failed

to offer sufficient evidence to show the allegedly infringed
patent drove demand for the laptop and therefore, the entire
market model in that case was impermissible.
Like Laserdynamics, the defendants argue Malackowski’s
model is an entire market model, and because he failed to offer
sufficient proof that the alleged patent drives the sales of
services, Malackowski’s model is impermissible.

Prism argues

Malackowski’s damage model does not contemplate “the entire
market value of the accused device”; instead, he attempts to
reach the “smallest saleable patent-practicing unit” (“SSPPU”).
The entire market value rule would come into effect in this case
only if Malackowski used the total data revenue sales of each
provider.

Because Malackowski attempts to “apportion” revenues,

the entire market value rule is not in play and the defendants’
motion on this basis is denied.
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B.

COST-SAVINGS CORRELATED TO REVENUE
There are two issues before the Court.

First, revenue-

generation and cost-savings are undisputedly proper methods for
calculating royalty bases.

In this case, Malackowski has created

a hybrid of the two forms.

The issue is whether such a model is

methodically sound.3
Second, case law requires a patentee to apportion the
damages between the patented feature and the unpatented features,
and such apportionment must be reliable and tangible.

The issue

before the Court is whether Malackowski’s evidence sufficiently
correlates the patents-in-suit to his model.

What effect, if

any, does the cost-savings of the alleged infringement have on
revenue?
1. CROSSING METHODS
Malackowski’s model took the product of the “revenue
calculation” and the “cost-savings calculation” -- the third step
in Malackowski’s model:
[(data revenue - RIM revenue) x (cost savings/network costs)]
Methodologically, this is a unique and largely untested method of
calculating damages.

Prism points to only two, unreported

3

The Court stresses the issue is not whether cost-savings
is appropriate, despite arguments to the contrary.
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instances patent damages where calculated in such a fashion.
Both damage opinions where calculated by Malackowski.
In the case of In re Nortel Networks Inc. (“Nortel”),
Prism offers six pages of trial transcript testimony.

Filing No.

338-2, at 3-8 (citing In re Nortel Networks Inc., Case No. 0910138 (Bankr. D. Del. May 30, 2014)).

In that transcript,

Malackowski explained he used “cost approach for allocation” and
not for valuation.

Id. at 6.

Malackowski appeared to calculate

the value of patents in the research and development department
(“patent portfolio”) of the bankrupt entity.

Id.

These six

pages show very little to support Malackowski’s model in this
case.

A thorough reading does not illustrate Malackowski’s

methodology or whether it was sound.

Prism does not tie the

Nortel bankruptcy case into the this patent case.
337, at 38.

See Filing No.

Therefore, the Court gives little weight to the

precedential value of the Nortel bankruptcy case.
In Tekmira Pharmaceuticals Corp. v. Alnylam
Pharmaceuticals, Inc., Malackowski also performed a “cost-based
apportionment metric.”

Filing No. 337, at 38; Filing No. 337-6

(citing Tekmira Pharmaceuticals Corp. v. Alnylam Pharmaceuticals,
Inc., Civ. A. No. 11-1010-BLS2, (Mass. Bus. Lit. Super. Ct. Oct.
22, 2012)).

The Massachusetts court analyzed Malackowski’s

opinion under the Daubert and Commonwealth v. Lanigan, 419 Mass.
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15 (1994) models and found the Court did not need to apply its
gate-keeping function.

However, the court did not analyze the

model Malackowski will offer at trial, the cost-savings/revenue
model, that appears before the Court in this case.

In fact, it

appears as though Malackowski did not apply revenues into his
calculations in the Tekmira case.

Filing No. 337-6, at 6.

Therefore, the Court gives little weight to the precedential
value of the Tekmira case.
The Court agrees with the defendants that Malackowski’s
methodology and model has never before been attempted.

Prism

argues that Malackowski has performed hundreds of “damages
analyses over the past 20 years.”

Filing 337, at 38 n.33.

Prism

then qualifies that assertion by stating legal requirements have
recently changed and Malackowski has a “limited number of matters
(about a dozen or so) and most of those matters did not focus on
cost savings to the accused infringer as the primary benefit.”

Id.

Prism cannot point to any precedent where merging cost-savings
and revenues passes the strictures of Daubert.

The lack of

precedent from the Federal Circuit compounds the mthodological
issues in Malackowski’s model.
Cost savings or revenue are a permissible form of
calculating patent damages.

However, the Court can find no case

law to support Prism’s claim that the product of revenue as a
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fraction of cost savings is permissible, let alone logical.
Malackowski’s model is the first of its kind in patent cases.

In

addition, no evidence has been adduced to correlate a revenue to
cost-savings calculation.
2.

CORRELATING REVENUE TO COST-SAVINGS
Malackowski fails to correlate revenue to cost-savings

because his reasoning is conclusory and his model includes
elements of the network which do not infringe on Prism’s asserted
patents.
First, Malackowski’s reasoning is conclusory.

In

Prism’s own words:
Indeed, the . . . primary benefits
of the Asserted Patents are enjoyed
by Defendants in the form of cost
savings from using an untrusted
network as opposed to the
non-infringing alternatives, such
as building a dedicated trusted
network at much greater expense. As
a result, Mr. Malackowski used a
cost based approach to quantify the
value of the patented technology to
each Defendant, reflected as
portions of each Defendants’ data
service revenues.
Filing No. 337, at 10.

Malackowski’s model is much like these

two sentences -- there is no continuity to complete the
syllogistic reasoning.

The first sentence is true.

To apportion

revenues, Malackowski focused on one of the primary contributions

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and benefits of the claimed inventions -- “the cost savings
realized by [each Defendant] through the use of an untrusted
network, as provided for by the Asserted Patents.”
337, at 6.

Filing No.

Cost savings analysis could represent the difference

between what each defendant spends in network leasing and the
cost of building its own backhaul.

Filing No. 337, at 24-25.

The second sentence, however, is completely conclusory.
It does not explain why, if cost-savings is an appropriate
measure of damages, Malackowski then took that figure, used it as
a numerator, and multiplied the resulting fraction against the
defendants’ revenues.

There is no minor premise to link the

major premise to Malackowski’s conclusion.
cost-savings is appropriate.

Prism simply argues

Filing No. 337, at 24-28.

It

cannot be overstated that cost-savings analysis should not
include the revenue figure as a matter of course.
Second, Prism argues the infringed invention causes the
defendants to generate revenues by its very nature.

Prism cites

some defendants’ recent rate hikes based upon network-improvement
costs.

The increase in rates did not specifically correlate to

the infringing system, but the unapportioned network.

Because

damages must be apportioned to the alleged infringing invention,
the sweeping and categorical use of “network improvements” to
prove a correlation between revenues and the cost-savings of the
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invention is prohibited.

The rate hikes of some defendants due

to “network improvements” is insufficient to prove a relationship
between revenues and the invention.
Malackowski offers no logical underpinning to link his
cost-saving calculation to the defendants’ revenue calculation.
Malackowski’s apportionment fails to apportion revenue to the
defendants’ network features infringing Prism’s patents and to
determine the revenue attributable to the defendants’ use of the
invention.

Malackowski’s model is over broad and beyond the

context of the invention.
flawed.

His apportionment is methodically

After review of the expert materials, case law, and the

parties’ submissions, the Court finds Malackowski’s model unsound
and will grant the defendants’ motion to exclude his testimony
and opinion in its entirety.
C.

BLACK BOX
In Uniloc, plaintiff’s damages expert began his

analysis by utilizing the “25% rule of thumb,” which assumed that
“25% of the value of the product would go to the patent owner and
the other 75% would remain with [the infringer.]”
3d at 1311.

Uniloc, 632 F.

The expert then applied the Georgia-Pacific factors,

adjusting the 25% baseline upwards or downwards in accordance
with his analysis.

Id.

The Federal Circuit rejected this

approach and eliminated further use of the 25% rule “because it
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fails to tie a reasonable royalty base to the facts of the case
at issue.”

Uniloc, 632 F. 3d at 1315.
Prism argues Malackowski’s royalty rate is de minimis,

small, “only between 8% and 12% of a Defendant’s data service
revenues.”

Filing No. 337, at 8, 11-12, 14-15.

The Court does

not consider the relative size of Malackowski’s rate.

The Court

considers whether that rate complies with relevant case law.
To the extent that Malackowski rejected previous
licenses as a starting-point to acquire a royalty rate, the Court
defers to Malackowski’s judgment and will deny the defendants’
motion.

The situation in this case is distinguishable from

Laserdynamics wherein the expert chose a settlement license
specifically for its unreasonably high rate in lieu of more
reasonable alternatives.

Here, Malackowski disregarded all

settlements regardless of favoritism.

The defendants’ objection

is merely a disagreement between the parties’ experts.
Furthermore, the Court finds nothing in the Uniloc
decision to require Malackowski to articulate a starting point
before calculating a reasonable royalty rate.
IT IS ORDERED:
1) The defendants’ motions (Filing No. 261 in
8:12CV122; Filing No. 221 in 8:12CV123; Filing No. 234 in

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8:12CV124; Filing No. 214 in 8:12CV125; Filing No. 204 in
8:12CV126)) are granted.
2) Mr. Malackowski is prohibited from offering his
opinion and testimony at trial in its entirety.
3) In light of this order, the Court dismisses AT&T’s
case-specific motion (Filing No. 266) against Mr. Malackowski.
DATED this 22nd day of September, 2014.
BY THE COURT:
/s/ Lyle E. Strom
____________________________
LYLE E. STROM, Senior Judge
United States District Court

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