Halo Electronics, Inc. v. Bel Fuse Inc. et al
Filing
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ORDER Denying 338 Defendants' Daubert Motion/Motion in Limine No. 1 to Preclude Certain of Plaintiff's Expert Opinions. Signed by Judge Philip M. Pro on 10/25/2012. (Copies have been distributed pursuant to the NEF - AC)
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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HALO ELECTRONICS, INC.,
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Plaintiff,
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v.
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PULSE ELECTRONICS, INC. and
PULSE ELECTRONICS
CORPORATION,
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Defendants.
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2:07-cv-00331-PMP-PAL
ORDER
Before the Court is Defendants Pulse Electronics, Inc. and Pulse Electronics
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Corporation’s (collectively “Pulse”) Motion in Limine to Preclude Certain of Plaintiff’s
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Expert Opinions (Doc. #338), filed June 22, 2012. Plaintiff Halo Electronics, Inc. (“Halo”)
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filed an Opposition (Doc. #366) on July 6, 2012. The Court held a hearing on this motion
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and other pretrial matters on October 1, 2012. For the reasons set forth below, the Court
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denies Pulse’s motion in its entirety.
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I. SUMMARY OF THE ARGUMENTS
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Pulse seeks to exclude certain opinions of Halo’s damages expert, John Hansen
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(“Hansen”), as irrelevant and unreliable expert testimony under Federal Rule of Evidence
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702. First, Pulse contends its sales of the accused products outside of the United States
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(“U.S.”) are irrelevant. Pulse further argues Hansen’s royalty base analysis is unsupported
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by proper evidence and should be excluded. Pulse also claims Hansen used a method the
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Federal Circuit has rejected as unreliable to calculate the royalty rate. Pulse additionally
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challenges Hansen’s reliance on a patent licensing agreement to which Pulse is not a party
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in determining the royalty rate. Pulse further argues Hansen should be precluded from
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asserting the damages period began in 2002. Finally, Pulse contends its total worldwide
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sales figures for the accused products should be excluded as irrelevant.
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Halo responds that Hansen’s opinions are based on relevant and reliable evidence
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and methodology and should not be excluded. Halo first argues Pulse’s sales of the accused
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products outside of the U.S. are relevant for Halo’s induced infringement claim.
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Additionally, Halo submits Hansen properly relied on the only evidence available for his
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royalty base analysis. Halo further contends Hansen applied a method the Federal Circuit
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has condoned to determine a reasonable royalty rate. Halo also argues the license to which
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Pulse is not a party is relevant to the royalty rate analysis. Halo further asserts that when
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the damages period began is a question of fact for the jury to decide. Finally, Halo argues
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Pulse’s total worldwide sales revenue on the accused products is relevant for both damages
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and non-damages purposes.
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II. DISCUSSION
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Federal Rule of Evidence 702 permits testimony based on “scientific, technical,
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or other specialized knowledge” by experts qualified by “knowledge, skill, experience,
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training, or education” if the testimony is both relevant and reliable. See also Fed. R. Evid.
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402. The trial court acts as a “gatekeeper” to exclude expert testimony that is not both
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relevant and reliable. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147-48 (1999).
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Testimony is relevant if it will “help the trier of fact to understand the evidence
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or to determine a fact in issue.” Fed. R. Evid. 702; see also Daubert v. Merrell Dow
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Pharm., Inc., 43 F.3d 1311, 1315 (9th Cir. 1995) (stating testimony is relevant if it
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“logically advances a material aspect of the proposing party’s case”). To be helpful to the
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jury, the testimony must be “‘tied to the facts’” of the particular case. Daubert v. Merrell
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Dow Pharm., Inc., 509 U.S. 579, 591 (1993) (quoting United States v. Downing, 753 F.2d
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1224, 1242 (3d Cir. 1985)).
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Expert testimony is reliable if it is “based upon sufficient facts or data,” “the
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product of reliable principles and methods,” and the expert “reliably applied the principles
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and methods to the facts of the case.” Fed. R. Evid. 702. Reliability, however, is not
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determined based on the “correctness of the expert’s conclusions but the soundness of his
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methodology.” Stilwell v. Smith & Nephew, Inc., 482 F.3d 1187, 1192 (9th Cir. 2007)
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(quotation omitted). “Shaky but admissible evidence is to be attacked by cross
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examination, contrary evidence, and attention to the burden of proof, not exclusion.”
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Primiano v. Cook, 598 F.3d 558, 564 (9th Cir. 2010).
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Whether to admit expert testimony, as well as deciding how to determine whether
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the testimony is reliable, lies within the trial court’s discretion. Kumho Tire Co., 526 U.S.
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at 152; United States v. Calderon-Segura, 512 F.3d 1104, 1109 (9th Cir. 2008). The party
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offering the expert testimony bears the burden of establishing its admissibility. Lust by and
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through Lust v. Merrell Dow Pharm., Inc., 89 F.3d 594, 598 (9th Cir. 1996).
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A. Hansen’s 30% Royalty Base Determination
1. Relevance
Pulse first argues its sales of the accused products outside of the U.S. are
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irrelevant because the Court previously found Pulse is not liable for direct infringement for
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these sales. Accordingly, Pulse submits the royalty base should be limited to 13-14% of
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Pulse’s worldwide sales of the accused products, which is the amount Pulse sells directly in
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the U.S. Halo responds that the amount of Pulse’s accused products imported back into the
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U.S. by third parties is relevant for Halo’s viable claim of induced infringement. Halo
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therefore argues the royalty base should not be limited to Pulse’s U.S. sales.
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The Court previously found a genuine issue of material fact regarding whether
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Pulse is liable for induced infringement. (Order (Doc. #300) at 48-49.) Therefore, the
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amount of non-U.S. sales of Pulse’s accused products that were imported back into the U.S.
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by third parties is relevant to Halo’s induced infringement claim and the royalty base
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analysis.
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2. Reliability
Pulse asserts Hansen’s 30% royalty base determination is based on insufficient
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evidence and therefore unreliable. Pulse argues Hansen improperly, and only, relied on
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statements by Halo’s Vice President estimating the amount of Pulse’s accused products that
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came back into the U.S., general investment disclosures from third parties, and a licensing
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agreement between Halo and a third party. Halo responds that Pulse and its customers did
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not have the statistics to show the amount of accused products Pulse initially sold outside
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the U.S. that eventually were imported back into the country. Therefore, Halo concludes
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Hansen was required to use other evidence to estimate the amount. Halo also argues
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Hansen reasonably considered the licensing agreement between Halo and its competitor
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estimating the imports of the competitors’ licensed products and the statements of Halo’s
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Vice President estimating the same for Pulse, as reasonable beliefs of the industry.
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Hansen reasonably relied on the available evidence to approximate the amount of
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Pulse’s accused products that are sold directly to and imported into the U.S. Pulse and a
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company to which Pulse’s customers sold admitted that, in addition to the accused products
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Pulse sold directly into the U.S., some of the accused products sold outside of the U.S. are
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incorporated into end-products and then imported back into the U.S. (Decl. of Craig C.
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Countryman (Docs. #372-75), Ex. 18 at 15-19, Ex. 20 at 352-53.) However, neither Pulse
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nor the other company could provide information regarding how many of the end-products
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containing Pulse’s accused products are imported back into the U.S. (Id., Ex. 18 at 15-19,
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Ex. 20 at 349-50, 352.)
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Based on the lack of direct statistics, Hansen relied on other evidence to
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approximate how many of Pulse’s accused products were indirectly imported into the U.S.
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(Defs.’ Daubert Mot./Mot. in Limine No. 1 to Preclude Certain of Pl.’s Expert Ops. (Doc.
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#338), Ex. 2 [“Hansen Report”] at 4, 39.) Hansen first identified the type of end-products
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the accused products are incorporated into, such as servers, desktops, notebook computers,
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switches, and routers. (Hansen Report at 40.) Then, based on the worldwide sales figures
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for these end-products, Hansen determined the percentage of sales into the U.S. of these
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end-products. (Id.) Hansen further determined that Pulse sold the accused products to
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customers outside of the U.S., and those customers sold to companies that sell these end-
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products in the U.S. (Id.)
Next, Hansen looked at the percentage of U.S. sales for the companies to which
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Pulse’s customers sold, based on those companies’ total worldwide sales figures. (Id.)
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Hansen specifically considered customers to which Pulse sold a high percentage of the
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accused products, and those customers sold to a company that made a majority of its sales
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in the U.S. (Id.) Therefore, based on the percentage of end-products that are sold into the
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U.S. and the percentage of U.S. sales of the companies to which Pulse’s customers sold to,
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Hansen found it was reasonable to assume that at least 30% of Pulse’s accused products are
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incorporated into products that ultimately are shipped into the U.S. (Id. at 41.) Neither the
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estimation given by Halo’s Vice President nor the licensing agreement between Halo and a
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third party are incorporated into the royalty base analysis section of Hansen’s report.
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Rather, they are referenced in a footnote as evidence that supported a higher rate, rendering
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the 30% base more reasonable in Hansen’s opinion. (Hansen Report at 41 n.182.)
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The statistical evidence Hansen uses to estimate his proposed royalty base is
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more reliable than that in PACT XPP Techs, AG v. Xilinx, Inc., No. 07-cv-00563 (E.D.
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Tex. Apr. 16, 2012). In PACT, the court rejected the expert’s assumption that 3% of the
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defendant’s accused products were sold to the government because the defendant’s
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customers sold 3% of the customer’s total products to the government. Id. at 6-7. The
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court noted there was “no evidence supporting the assumption that the percentage of each
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customer’s sales to the government is representative of the percentage of that customer’s
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[products purchased from the defendant] that are sold to the government.” Id. at 6. Here,
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however, Hansen narrowed his inquiry to the end-products that could contain the accused
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products, as well as companies that bought from Pulse’s customers and sold those end-
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products in the U.S. (Hansen Report at 40.) This resulted in an estimation tailored to the
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potential amount of Pulse’s accused products imported back into the U.S.
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Hansen based his royalty base analysis on sufficient facts considering the
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evidence available in this case. An estimation was necessary given the lack of specific data
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showing how much of Pulse’s sales of the accused products outside the U.S. were
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eventually imported back into the U.S. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d
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1301, 1336 (Fed. Cir. 2009) (noting the reasonable royalty analysis “necessarily involves an
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element of approximation and uncertainty.”) (quotation omitted). The proper avenue for
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Pulse to challenge the evidence Hansen relied on and the conclusions drawn from that
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evidence is on cross examination or otherwise at trial, not the exclusion of Hansen’s royalty
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base opinion altogether. Therefore, Hansen’s opinion regarding the 30% royalty base is
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admissible.
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B. Hansen’s 10-15% Royalty Rate Determination
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Pulse next argues Hansen improperly arrived at a 10-15% royalty rate by dividing
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the profit margins of Halo and Pulse in half and using the resulting figures as the upper and
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lower limits for the rate. Pulse contends this is a “supercharged” 50% version of the “25%
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rule of thumb” rule rejected by the Federal Circuit in Uniloc USA, Inc. v. Microsoft Corp.,
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632 F.3d 1292 (Fed. Cir. 2011). Halo counters that Hansen did not rely on a “rule of
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thumb” concept, and properly relied on the 15 factors in Georgia-Pacific Corp. v. U.S.
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Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) to determine his proposed royalty rate.
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The 25% rule of thumb rule posits that in a hypothetical negotiation between the
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parties, 25% of the profit would go with the patent owner and the rest would stay with the
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infringer. Uniloc, 632 F.3d at 1311. The expert in Uniloc started with this 25% figure, and
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then considered the Georgia-Pacific factors to determine whether that rate should be
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adjusted. Uniloc, 632 F.3d at 1311. The Federal Circuit found the 25% rule of thumb
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assumption a “fundamentally flawed tool for determining a baseline royalty rate in a
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hypothetical negotiation.” Id. at 1315. Therefore, the expert’s opinion was inadmissible
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under Daubert and the Federal Rules of Evidence for “fail[ing] to tie a reasonable royalty
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base to the facts of the case at issue.” Uniloc, 632 F.3d at 1315, 1318.
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Halo has shown Hansen did not apply a “50% rule of thumb” assumption in his
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royalty rate analysis. Hansen analyzed each of the 15 Georgia-Pacific factors to predict the
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results of a hypothetical negotiation between the parties and to propose a reasonable royalty
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rate. (Hansen Report at 8-36.) The Federal Circuit approves using the Georgia-Pacific
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factors as a reliable way to frame the reasonable royalty inquiry. Uniloc, 632 F.3d at 1317.
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Hansen tied the specific facts of this case to his proposed royalty rate by using this
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approved methodology. Because Halo has demonstrated Hansen used the Georgia-Pacific
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factors to determine his reasonable royalty rate range of 10-15%, rather than a version of
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the unreliable 25% rule, the Court will not exclude Hansen’s royalty rate analysis.
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C. Hansen’s Reliance on a License Between Third Parties
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Pulse also argues Hansen improperly relied on a patent use license to which Pulse
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was not a party under Georgia-Pacific factor 2 in the royalty rate analysis. Pulse argues it
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obtained a controlling interest in the licensee company well after the license was negotiated
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and entered into, therefore the license does not indicate what Pulse would have agreed to
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had it negotiated the license. Halo responds that Hansen’s reliance on the license is relevant
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under factor 2 because this factor addresses rates the licensee has paid on comparable
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patents, not just agreements the licensee negotiated. Halo contends Pulse acquired a
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controlling interest in the licensee company, made the licensee company’s payments under
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the license for a period of time, and then negotiated with the licensor company to settle for
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missed payments and reach a new agreement. Halo further argues even if Hansen’s reliance
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on the license under factor 2 was improper, the license is relevant under factor 12 as an
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example of a licensing agreement on comparable patents.
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Hansen’s reliance on the license for his analysis of factor 2 is factually supported.
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Factor 2 looks at “[t]he rates paid by the licensee for the use of other patents comparable to
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the patent in suit.” Georgia-Pacific, 318 F. Supp. at 1120. Hansen considered the license
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under factor 2 because the licensee company was Pulse’s affiliate. (Hansen Report at 13.)
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Hansen also noted Pulse paid royalties pursuant to the licensing agreement and renegotiated
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the licensing arrangement. (Id. at 13, 14 n.55.) Thus, the license is relevant to factor 2 to
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show the rates Pulse has paid to use comparable patents.
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The license is also relevant under factor 12. Factor 12 considers “[t]he portion of
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the profit or of the selling price that may be customary in the particular business or in
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comparable businesses to allow for the use of the invention or analogous inventions.”
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Georgia-Pacific, 318 F. Supp. at 1120. Hansen noted the license under factor 12 as an
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indicator of the royalty rates that may be appropriate here. (Hansen Report at 32.)
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Additionally, in his summary and conclusion, Hansen considered factors 1, 2, and 12
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together as addressing “licensing history and comparable license agreements, as well as
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royalty rates within the industry,” finding the license placed upward pressure on the royalty
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rate. (Hansen Report at 33-34.) Pulse does not argue the license is inappropriate under
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factor 12. Therefore, the license is relevant to the royalty rate analysis under factors 2 and
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12 and is admissible.
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D. The Damages Period
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Pulse next argues Hansen should be prohibited from testifying that the damages
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period began in 2002. Pulse argues that the Court previously held letters sent by Halo to
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Pulse in 2002 informed Pulse only of the possibility it was infringing and implied that Halo
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had yet to thoroughly investigate, citing the Court’s summary judgment Order (Doc. #300)
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at page 38 for support. According to Pulse, the 2002 letters therefore did not provide
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legally adequate notice to begin the damages period under 38 U.S.C. § 287 as a matter of
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law. Pulse thus concludes that Hansen should be required to opine the damages period
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began in 2003. Halo responds that Pulse already moved for summary judgment for lack of
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actual notice based on these 2002 letters, which the Court denied. Halo claims Pulse’s
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motion in limine is really an untimely motion for summary judgment based on inadequate
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notice. Finally, Halo argues whether the 2002 letters gave Pulse adequate legal notice of
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infringement is an issue of fact for the jury to decide.
Pulse previously moved for summary judgment on the theory of equitable
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estoppel. (Defs.’ Mot. Summ. J. on Equitable Estoppel & Partial Summ. J. on Laches &
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Failure to Give Notice Under 38 U.S.C. § 287(a) (Doc. #249) at 8-11.) In that motion,
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Pulse argued Halo should be estopped from bringing this infringement action because its
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2002 letters followed by Halo’s inaction misled Pulse into believing Halo would not be
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enforcing its patents. (Id. at 8-9.) In its summary judgment Order, the Court ruled that
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Halo raised genuine issues of material fact about whether Halo should be estopped. (Order
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(Doc. #300) at 38.) In the context of the equitable estoppel analysis, the Court concluded a
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“reasonable jury could find that the letters do not rise to the level of threatening vigorous
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enforcement then delaying bringing an action.” (Id.) The Court did not hold that Halo
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failed to give adequate notice under § 287 as a matter of law. To the extent Pulse’s motion
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in limine is an attempt to move for summary judgment on the issue of the adequacy of
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notice, it is untimely and the Court will not consider it. Therefore, the Court will not
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preclude Hansen from opining the damages period began in 2002 at this time.
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E. Reference to Pulse’s Total Worldwide Sales of the Accused Products
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Finally, Pulse contends that Hansen and Halo should be precluded from referring
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to Pulse’s total worldwide sales of the accused products. Pulse argues even if Hansen’s
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30% royalty base is admitted, only the sales figures for the accused products that ultimately
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ended up in the U.S. are relevant. Halo argues the worldwide sales figures are relevant to
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calculate damages for induced infringement, for 2 factors in the royalty rate analysis, and
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for other non-damages issues.
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Halo has shown Pulse’s total worldwide sales figures for the accused products are
relevant. To calculate Halo’s infringement damages, Hansen applied his royalty base to
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Pulse’s total worldwide sales figures, and then he applied his reasonable royalty rate to the
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resulting figure. (Hansen Report at 41-42.) Therefore, the worldwide sales figures are
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relevant to the damages analysis. Pulse’s worldwide sales figures are likewise relevant to
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the royalty rate analysis. Factor 6 considers whether the patented technology promotes the
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sale of other products, for either the patentee or licensee. Georgia-Pacific, 318 F. Supp. at
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1120. Therefore, the extent of Pulse’s worldwide sales of the accused products is relevant
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to determining its effect on the sale of Pulse’s other products internationally. (Hansen
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Report at 20-21.) Factor 8 considers, among other things, the commercial success of the
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product, and the worldwide sales figures are relevant to that determination as well. (Hansen
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Report at 22); Georgia-Pacific, 318 F. Supp. at 1120.
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Finally, Pulse’s worldwide sales figures may be relevant to non-damages issues.
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Specifically, Halo has shown the worldwide sales figures are probative of the patented
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products’ commercial success, a factor relevant to analyzing the obviousness of the
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patented products. See Mintz v. Dietz & Watson, Inc., 679 F.3d 1372, 1380 (Fed. Cir.
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2012) (finding the patentee’s worldwide sales of the patented products relevant to the
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commercial success analysis); Gambro Lundia AB v. Baxter Healthcare Corp., 110 F.3d
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1573, 1579 (Fed. Cir. 1997) (finding the accused infringer’s sales relevant to the
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commercial success analysis). Therefore, the Court will not exclude reference to Pulse’s
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worldwide sales figures for the accused products.
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III. CONCLUSION
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IT IS THEREFORE ORDERED that Defendants Pulse Electronics, Inc., and
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Pulse Electronics Corporation’s Daubert Motion/Motion in Limine No. 1 to Preclude
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Certain of Plaintiff’s Expert Opinions (Doc. #338) is hereby DENIED.
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DATED: October 25, 2012
_______________________________
PHILIP M. PRO
United States District Judge
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