Metaswitch Networks Ltd v. GENBAND US LLC et al
Filing
297
ORDER denying 181 , 277 Motions to Strike Mr. Raymond Sims. Signed by Magistrate Judge Roy S. Payne on 03/05/2016. (rsp2, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION
METASWITCH NETWORKS LTD.
v.
GENBAND US LLC, ET AL.
§
§
§
§
§
Case No. 2:14-cv-744-JRG-RSP
MEMORANDUM ORDER
Before the Court is a Motion to Exclude Certain Opinions of Metaswitch’s Damages
Expert Mr. Raymond S. Sims filed by Genband US LLC (“Genband”). (Dkt. No. 181; “Motion to
Strike”). Also before the Court is Genband’s Motion to Exclude Opinions of Mr. Sims contained in
his Addendum Report. (Dkt. No. 277; “Motion to Strike Addendum Report”). Metaswitch
Networks Ltd. (“Metaswitch”) opposes these Motions.
I. LAW
A. Rule 702
Rule 702 permits an expert witness to offer opinion testimony 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 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.
“The inquiry envisioned by Rule 702 is . . . a flexible one,” but, in Daubert, the Supreme
Court held that the Rules also “assign to the trial judge the task of ensuring that an expert’s
testimony both rests on a reliable foundation and is relevant to the task at hand.” Daubert v.
Merrell Dow Pharms. Inc., 509 U.S. 579, 594, 597 (1993); see also Apple Inc. v. Motorola, Inc.,
757 F.3d 1286, 1321 (Fed. Cir. 2014) (“Experts routinely rely upon other experts hired by the
party they represent for expertise outside of their field.”).
“The relevance prong [of Daubert] requires the proponent [of the expert testimony] to
demonstrate that the expert’s ‘reasoning or methodology can be properly applied to the facts in
issue.’” Johnson v. Arkema, Inc., 685 F.3d 452, 459 (5th Cir. 2012) (quoting Curtis v. M & S
Petroleum, Inc., 174 F.3d 661, 668 (5th Cir. 1999)). “The reliability prong [of Daubert] mandates
that expert opinion ‘be grounded in the methods and procedures of science and . . . be more than
unsupported speculation or subjective belief.’” Johnson, 685 F.3d at 459 (quoting Curtis, 174 F.3d
at 668).
In assessing the “reliability” of an expert’s opinion, the trial court may consider a list of
factors including: “whether a theory or technique . . . can be (and has been) tested,” “whether the
theory or technique has been subjected to peer review and publication,” “the known or potential
rate of error,” “the existence and maintenance of standards,” and “general acceptance” of a theory
in the “relevant scientific community.” Daubert, 509 U.S. at 593–94; see also Kumho Tire Co.,
Ltd. v. Carmichael, 526 U.S. 137, 150 (1999) (“Daubert makes clear that the factors it mentions do
not constitute a ‘definitive checklist or test.’”); U.S. v. Valencia, 600 F.3d 389, 424 (5th Cir. 2010).
“The proponent need not prove to the judge that the expert’s testimony is correct, but she
must prove by a preponderance of the evidence that the testimony is reliable.” Johnson, 685 F.3d
at 459 (quoting Moore v. Ashland Chem., Inc., 151 F.3d 269, 276 (5th Cir. 1998) (en banc)). At
base, “the question of whether the expert is credible or the opinion is correct is generally a
question for the fact finder, not the court.” Summit 6, LLC v. Samsung Elecs. Co., Ltd., 802 F.3d
1283, 1296 (Fed. Cir. 2015).
2
B. Damages
Upon a finding of infringement, a patent holder 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. “The patentee . . . 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 . . . [unless] the entire value of the whole
machine, as a marketable article, is properly and legally attributable to the patented feature.”
Garretson v. Clark, 111 U.S. 120, 121 (1884). Accordingly, proof of damages must be carefully
tied to “the claimed invention’s footprint in the market place.” VirnetX, Inc. v. Cisco Sys., 767 F.3d
1308, 1327 (Fed. Cir. 2014); CSIRO v. Cisco Sys., 809 F.3d 1295 (Fed. Cir. 2015) (“damages
awarded for patent infringement must reflect the value attributable to the infringing features of the
product, and no more”).
“[E]stimating a ‘reasonable royalty’ is not an exact science. As such, the record may
support a range of ‘reasonable’ royalties, rather than a single value. Likewise, there may be more
than one reliable method for estimating a reasonable royalty.” Apple Inc. v. Motorola, Inc., 757
F.3d 1286, 1315 (Fed. Cir. 2014). In determining whether to admit or exclude a damages opinion
under Rule 702, “[t]he essential requirement is that the ultimate reasonable royalty award must be
based on the incremental value that the patented invention adds to the end product.” Ericsson, Inc.
v. D-Link Sys., 773 F.3d 1201, 1226 (Fed. Cir. 2014).
C. Timely Disclosure
A party must disclose the opinions of its experts “at the times and in the sequence that the
court orders.” Fed. R. Civ. P. 26(a)(2)(D). A party who fails to timely disclose bears the burden of
proving that such failure is harmless. See Heidtman v. County of El Paso, 171 F.3d 1038, 1040 (5th
3
Cir. Tex. 1999). A court considers four factors to determine whether a Rule 26 violation is
harmless: “(1) [the party’s] explanation for its failure to disclose the evidence, (2) the importance
of the evidence, (3) the potential prejudice to [the opposing party] in allowing the evidence, and
(4) the availability of a continuance.” CQ, Inc. v. TXU Min. Co., L.P., 565 F.3d 268, 280 (5th Cir.
2009).
II. ANALYSIS
Mr. Sims is Metaswitch’s damages expert. His opening expert report was served September
2, 2015. (Dkt. No. 181-2; “Report”). His Addendum Expert Report was served February 19, 2016.
(Dkt. No. 277-3; “Addendum”).
A. Motion to Strike Mr. Sims’s Opening Report
Genband moves to strike two categories of opinions in Mr. Sims’s Opening Report. First,
Mr. Sims’s damages opinions for Patent No. 6,807,273 (the ’273 Patent) applying a “cost
approach” that compares the cost of using the patented technology with the cost of implementing
“the next-best acceptable non-infringing alternative.” See Report at 33. 1 Second, Mr. Sims’s
damages opinions for Patent Nos. 6,816,482 (the ’482 Patent) and 7,881,282 (the ’282 Patent) that
apply an “analytical approach” which “presumes that the value of a patent and a reasonable royalty
is the difference between the profits earned on the patented product and the standard industry
profits earned on products not covered by the patent-in-suit.” See Report at 31.
1. The ’273 Patent
Genband challenges Mr. Sims’s ’273 Patent damages opinions on several grounds. The
first of these grounds is a challenge to his overall methodology, arguing it runs afoul of the entire
market value rule (“EMVR”). (Dkt. No. 181 at 6–8). Specifically, Genband argues that Mr. Sims
1
Citations to the docket, including to Mr. Sims’s Report and Addendum, use the page number
reflected in the CM/ECF header.
4
inappropriately relies on the entire cost of implementing a non-infringing alternative to the ’273
Patent—migrating subscriber lines from old line frame equipment to new equipment. According to
Genband, this opinion violates the entire market value rule because upgrading line frames provides
benefits other than those attributable to the ’273 Patent, such as electricity cost savings and “access
to enhanced applications and services.” (Dkt. No. 181 at 8). Thus Genband contends Mr. Sims has
not apportioned his damages analysis to encompass only the incremental value of the invention.
Mr. Sims’s opinion is based on the theory that upgrading line frames is the “next best
alternative” to practicing the ’273 Patent. Report at 34. Mr. Sims cites the expert report of Dr.
Burger as support for this proposition. Id. Metaswitch also cites a Genband document that
characterizes “complete line migration” as the “next-best-alternative” to the CS1500 product. (Dkt.
No. 197-10 at 8). Based on the premise that upgrading line frames is the next best alternative, Mr.
Sims attributes the value of the patent to the difference between the cost of practicing the patent
and the cost he has calculated for transitioning to this alternative. Report at 36–37.
Mr. Sims’s methodology does not run afoul of the entire market value rule because it
attempts to isolate the incremental value that Genband would ascribe to the patented features, and
not more. If upgrading line frames is in fact the “next best” alternative to the ’273 Patent, then the
cost of implementing that alternative is equivalent to the cost of avoiding infringement. The fact
that one might be motivated to upgrade for reasons unrelated to infringement, or that one might
obtain additional benefits from upgrading, does not mean that this methodology incorporates the
value of unpatented features. See Report at 33 (“all other things equal, the profits would be lower
by the amount of the cost savings if the alternative to the patent were implemented and, therefore,
those cost savings represent the portion of the profits directly attributable to the patent(s)”). The
cost savings of the patent over the next best alternative way to obtain the same results represents
5
the savings the patent provides to one who practices it, and is therefore a sufficiently reliable
measure of the incremental value of the patent. See Powell v. Home Depot U.S.A., Inc., 663 F.3d
1221, 1240 (Fed. Cir. 2011) (“Reliance upon estimated cost savings from use of the infringing
product is a well settled method of determining a reasonable royalty.”). Mr. Sims’s cost approach
is therefore based on sufficiently reliable principles and is admissible under Rule 702.
Genband also takes issue with Mr. Sims’s inclusion of ongoing costs because this figure is
derived from a Genband document and not based on the opinion of Metaswitch’s technical expert.
(Id. at 7–8). There is nothing inappropriate about Mr. Sims basing a portion of his opinion on
Genband documents reflecting cost estimates. Genband offers no reason why an economist would
not consider and rely on these estimates.
Genband also argues that Mr. Sims’s royalty calculation is unreliable because he assumes
that “all 354 C15 units sold in the U.S. are included in the royalty base.” Genband contends that at
most 271 C15 installations fall within the scope of Metaswitch’s infringement contentions because
the other 83 C15s are not connected to line frames. (Dkt. No. 181 at 9). Genband clarifies in its
Reply that this “is not a Genband non-infringement position” but is based on Dr. Sims’s statement
in his report that “C15s connected to the line frames of DMS switches” are accused. (Dkt. No. 212
at 5–6); see also Report at 73.
Mr. Sims is not a technical expert, and he does not say that the only accused or infringing
C15s are those connected to the line frames of DMS switches. Genband does not cite the opinion
of any technical expert to support its contention that not all C15s are connected to the line frames
of DMS switches or that any such unconnected C15s do not infringe. Mr. Sims does cite evidence
that the C15 “is strategically positioned in the market based on the cost savings associated with its
ability to interface with legacy switch line frames” and thereby concludes it is appropriate to
6
include all C15 units in the royalty base. Report at 73–74. Whether all C15s are actually connected
to line frames, and whether such connection is required to infringe, is fundamentally a fact dispute
and not a Daubert issue. To be entitled to damages, Metaswitch must meet its burden to prove
infringement. And Genband is free to argue that some or all C15s do not infringe. Genband is also
free to cross-examine Mr. Sims about his support for his royalty base. However, Mr. Sims’s
methodology for selecting a royalty base is rooted in evidence and economic reasoning; it is
therefore sufficiently reliable under Rule 702.
Finally, Genband argues Mr. Sims has inappropriately included in his royalty base C15 or
C1500 units that were sold by Nortel (not Genband) between 2008 and May 2010. (Dkt. No. 181 at
10). Metaswitch responds that not just sale, but also use of infringing products can give rise to
liability for infringement, and that “the actions of repair and maintenance have been included
among the list of affirmative acts which may lead to liability for inducement” because repair and
maintenance tend to perpetuate infringing use. See Nuance Communs. Inc. v. Tellme Networks,
Inc., 707 F. Supp. 2d 472, 486 n.17 (D. Del. 2010) (citing Aro Mfg. Co. v. Convertible Top
Replacement Co., 377 U.S. 476, 484 (1964)). Metaswitch also argues that Genband is liable for
direct infringement arising out of “repair,” “maintenance,” and “training” activities in connection
with the Nortel products, arguing this qualifies as infringing “use.” (Dkt. No. 197 at 15).2
Accordingly, it is not a violation for Rule 702 for Mr. Sims to include the Nortel units in his
royalty base and to assign the same measure of damages for these units (since his damages are
based on the cost Genband would need to pay to cease or avoid infringement). Of course,
Metaswitch will need to prove that Genband infringes, directly or indirectly, with respect to the
2
Metaswitch also argues Genband could be jointly liable, or liable as a successor, for Nortel’s
allegedly infringing sales. At the February 22, 2016 pretrial conference, Metaswitch represented it
would not pursue a theory of “successor liability,” so the Court does not consider this theory.
7
units sold by Nortel. But this is a liability fact question, and not a Daubert issue.
For the foregoing reasons, the Court declines to strike the damages of opinions of Mr. Sims
for the ’273 Patent.
Additionally, this ruling bears on Genband’s Motion in Limine No. 14, which asks the
Court to “[e]xclude evidence or argument suggesting that the jury should award damages for sales
or other activities of Nortel or uReach.” (Dkt. No. 289 at 14). Because Metaswitch has represented
that it is not pursuing a theory of successor liability, this Motion is GRANTED. However,
Metaswitch is not precluded from arguing that Genband is liable for direct or indirect infringement
arising from the “use” of accused products originally sold by a third party such as Nortel or
uReach.
2. The ’482 and ’282 Patents
Genband also moves to strike Mr. Sims’s damages opinions for the ’482 and ’282 Patents.
(Dkt. No. 181 at 18–19). For these patents, Mr. Sims employs the “analytical approach,” which
“presumes that the value of a patent and a reasonable royalty is the difference between the profits
earned on the patented product and the standard industry profits earned on products not covered by
the patent-in-suit.” Report at 31. Genband argues that Mr. Sims’s analysis does not compare the
profit for the accused products to “standard industry profits,” but instead compares the profitability
of the accused products to Genband’s un-accused G9 product. Genband also argues that Mr.
Sims’s analysis runs afoul of the EMVR because it “appl[ies] an 8% royalty rate to all revenues
from the accused products.” (Dkt. No. 181 at 19). Genband contends that Mr. Sims “fails to
consider the economic differences [between the accused and un-accused products] that affect
profitability and that are not even allegedly attributable to the patents.” (Id.).
The “analytical approach” has been accepted by the Federal Circuit as one way to calculate
8
a reasonable royalty. See TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 899 (Fed. Cir. 1986); see
also Summit 6, LLC v. Samsung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015). The analytical
approach in TWM was applied by subtracting “the infringer’s usual or acceptable net profit from its
anticipated net profit realized from sales of infringing devices.” Id. The difference between the
standard profit an infringer can expect to obtain from the sale of non-patented articles and the
profit it obtains from the sale of a patented article should, ceteris paribus, be equal to the profit
attributable to the patented features.
Although Mr. Sims uses the phrase “standard industry profits” in his broad-strokes
characterization of the analytical approach, there is nothing about the analytical approach that
precludes a comparison between the profit margins on specific products. Mr. Sims, relying on the
technical opinions of Dr. Burger, opines that there are “only two material differences between the
[accused] G2/G6 and the [un-accused] G9.” Report at 32. First, the G9 has higher capacity and
scale than the accused products; Mr. Sims opines that higher capacity would tend to increase the
G9’s profitability. Id. Second, the G2/G6 products allegedly practice the patents whereas the G9
does not. Id. Accordingly, Mr. Sims concludes that the difference in profitability between the
accused G2/G6 and the un-accused G9 should be less than or equal to the value of the patents
(because the higher capacity of the G9 tends to increase its profitability and thereby understate the
value of the patented features). He opines that the difference in profit margins between these
products is 8%, and states that this is a “conservative” measure of damages because “[i]f the
greater capacity of the G9 were removed, the expectation would be that the difference in
profitability between the G2/G6 and G9 would be even larger.” Id.
Genband does not identify any specific flaws in this methodology. Genband cites
references in Mr. Sims’s report and in the TWM case to “industry standard profit” and “industry
9
standard net profit” as the point of comparison for an analytical approach, but Genband does not
explain why comparing the profitability of specific products is somehow less reliable. (Dkt. No.
212 at 6). So long as the comparison isolates the value of the patented features—and no more—it
is immaterial whether the profitability of a specific product or of an industry is used. Genband also
faults Mr. Sims for failing to account for “different factors [that] affect the price of each product”
but does not specify what these factors are. Id. Mr. Sims’s analysis does account for the “only two”
differences he and Dr. Burger have identified between the G2/G6 and the G9. Report at 32.
Genband is free to cross-examine Mr. Sims about any other factors it believes he has not
considered. Finally, the fact that Mr. Sims’s analysis results in a valuation of the patent equal to
8% of the total revenue for the accused products does not mean he has run afoul of the EMVR, as
Genband contends. Every damages number can be expressed mathematically as some percentage
of total revenue. Mr. Sims’s damages calculation does not rely on total revenue as a base, and
instead attempts to apportion only the fraction of the profit margin of the accused products
attributable to the patented features.
For the foregoing reasons, the Court declines to strike the damages of opinions of Mr. Sims
for the ’482 and ’282 Patents.
B. Motion to Strike Mr. Sims’s Addendum Report
Genband moves to strike Mr. Sims’s opinions as to royalty rates contained in an Addendum
Report served February 19, 2016. (Dkt. No. 277). Genband does not raise objections to the
substance of Mr. Sims’s opinions under Rule 702 and Daubert, but Genband argues the Addendum
should be excluded as untimely.
In early February 2016, the parties agreed to exchange (and did exchange) supplemental
sales and revenue information through December 31, 2015. (Dkt. No. 277-2). The parties also
10
agreed that their damages experts would serve supplemental reports based on this information.
(Id.). The parties did not reach a “clear agreement about the contents of those reports,” with
Genband contending that any supplemental expert opinions should be limited to an adjustment of
the royalty base but not the royalty rate. (Id. at 2, 8–9).
Because the parties did not move to amend the Court’s Docket Control Order to permit late
supplementation of expert reports, any such late reports are untimely under Rule 26. Fed. R. Civ.
P. 26(a)(2)(D) (parties must disclose expert reports “at the times and in the sequence that the court
orders”) (emphasis added). Accordingly, the Court must consider whether the late disclosure is
“harmless” under the Fifth Circuit’s four-factor test: “(1) [the party’s] explanation for its failure to
disclose the evidence, (2) the importance of the evidence, (3) the potential prejudice to [the
opposing party] in allowing the evidence, and (4) the availability of a continuance.” CQ, Inc., 565
F.3d at 280.
The fact that the parties mutually agreed to supplement their expert reports provides a
satisfactory explanation for Metaswitch’s failure to timely disclose and suggests that the parties
considered the supplemental sales and revenue information sufficiently important to warrant late
supplementation. Thus factors (1) and (2) weigh in favor of allowing Mr. Sims to supplement his
report. That the supplemental reports were exchanged just a few weeks before trial renders a
continuance not reasonably available, and factor (4) therefore weighs against allowing
supplementation.
The key question is whether Mr. Sims’s Addendum Report will cause substantial prejudice
to Genband. Mr. Sims’s Addendum Report does not appear to introduce any new methodologies,
and Genband does not contend it does. However, because many of Mr. Sims’s damages
calculations rely on the cost of next-best alternatives or a comparison between the profit margins
11
on Genband products, the supplemental sales and revenue information the parties exchanged
resulted in changes to Mr. Sims’s estimated royalty rate (i.e. the royalty per product) in addition to
his royalty base (i.e. the number of products sold) for three asserted patents. See (Dkt. No. 277 at
2–4). Genband argues this is improper because “Mr. Sims did not opine that the parties would have
agreed to re-negotiate or alter the royalty rate” as new data became available. (Id. at 3). However,
it is well-settled that post-hypothetical-negotiation evidence can act as a “book of wisdom” to
inform the royalty rate the parties would have agreed to (and Mr. Sims’s original report relied on
data that post-dated the hypothetical negotiation). See Aqua Shield v. Inter Pool Cover Team, 774
F.3d 766, 772 (Fed. Cir. 2014). Genband does not articulate any specific prejudice other than the
need to “conduct discovery” into the bases for Mr. Sims’s new opinions. (Dkt. No. 277 at 5–6).
But Mr. Sims’s new opinions are based on Genband’s financial data, and it is undisputed that his
methodology has not changed. It is therefore unclear why additional discovery would be helpful.
Finally, the fact that the parties agreed to exchange supplemental financial information and expert
reports, while “agree[ing] to disagree” with respect to the details of what that supplementation
would entail suggests the parties did not perceive a significant risk of prejudice. See (Id. at 4, 6).
Because Genband will suffer little if any prejudice, the Court declines to strike the Sims
Addendum Report as untimely.
III. CONCLUSION
In light of the foregoing, Genband’s Motion to Strike (Dkt. No. 181) is DENIED.
Genband’s Motion to Strike the Addendum Report (Dkt. No. 277) is DENIED. Genband’s Motion
in Limine No. 14 is GRANTED to the extent set forth in Part II.A.2 above.
12
SIGNED this 3rd day of January, 2012.
SIGNED this 5th day of March, 2016.
____________________________________
ROY S. PAYNE
UNITED STATES MAGISTRATE JUDGE
13
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?