Realtime Data LLC v. Rackspace US, Inc. et al
MEMORANDUM OPINION AND ORDER. The Court DENIES Defendant's Motion to Exclude Testimony by Stephen Dell. (Doc. No. 234.) (UNSEALED VERSION OF 252 SEALED MEMORANDUM OPINION AND ORDER.) Signed by Magistrate Judge John D. Love on 11/16/17. (mll, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
REALTIME DATA LLC,
NETAPP, INC., SOLIDFIRE, LLC,
CIVIL ACTION NO. 6:16-CV-00961-RWS
MEMORANDUM OPINION AND ORDER
Before the Court is Defendant NetApp and SolidFire’s (Collectively “NetApp”) Daubert
Motion to Exclude Testimony by Mr. Stephen Dell. (Doc. No. 234.) Plaintiff Realtime filed a
Response (Doc. No. 244) and Sur-Reply, (Doc. No. 249), and NetApp filed a Reply. (Doc. No.
Realtime alleges that NetApp infringes certain claims of six U.S. Patents. The Asserted
Patents generally relate to different systems and methods of data compression. Specifically,
Realtime alleges that NetApp’s ONTAP software and products and services running ONTAP,
AltaVault; and Solidfire compression products and services, including the SolidFire all-flash
storage system products infringe the Asserted Claims of the Asserted Patents. (Doc. Nos. 33,
235-2 at ¶ 2 (“Dell’s Rep.”).)
Realtime has designated Mr. Stephen Dell as a Damages Expert in this matter. Id. Mr.
Dell opines that Realtime is entitled to a reasonable royalty due to NetApp’s sales of the Accused
Products. Dell’s Rep. ¶ 89. Mr. Dell found that there is “a functional relationship  between the
Accused Products and services and maintenance offerings that are tied to sale of the Accused
Rule 702 provides that an expert witness may 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 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). “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).
Defendants move to exclude Mr. Dell’s damages opinions on three bases: (1) Mr. Dell
calculates the wrong royalty base by including non-patented software/hardware service and
maintenance offerings; (2) Mr. Dell’s apportionment analysis is speculative and unreliable; and
(3) Mr. Dell’s hypothetical negotiation is impermissibly immutable. (Doc. No. 234.)
Dell’s Calculation of the Royalty Base
NetApp argues that Mr. Dell calculated the wrong royalty base because the calculation
“assumes a royalty base that encompasses both the accused products and NetApp’s revenues
from software/hardware service and maintenance offerings.” (Doc. No. 234 at 4.) NetApp
maintains that by including the convoyed sales of non-patented products, Mr. Dell must satisfy
the three factors of the entire market value rule (“EMVR”). Id. Realtime argues that NetApp
misstates the requirements because courts have allowed using convoyed sales of non-patented
products for a royalty base calculation. (Doc. No. 244 at 1.)
In a reasonably royalty analysis, damages must be tied “to the claimed invention’s
footprint in the marketplace.” ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir.
2010). Thus, “where multi-component products are involved, the governing rule is that the
ultimate combination of royalty base and royalty rate must reflect the value attributable to the
infringing features of the product, and no more.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d
1201, 1226 (Fed. Cir. 2014) (citing VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326 (Fed.
Cir. 2014)). When the accused products have both patented and non-patented features, the
damages analysis requires an apportionment analysis in order to determine the value added by
such features. To determine the royalty base, “the patentee should  base its damages on ‘the
smallest salable infringing unit with close relation to the claimed invention.” VirnetX, 767 F.3d
at 1327 (citing Cornell University v. Hewlett-Packard Co., 609 F.Supp.2d 279, 287–88
(N.D.NY. 2009)). “Where the smallest salable unit is, in fact, a multi-component product
containing several non-infringing features with no relation to the patented feature . . . the
patentee must do more to estimate what portion of the value of the product is attributable to the
patented technology. Id.
Defendant relies on Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549 (Fed. Cir. 1995) to
show that convoyed sales cannot be included in the royalty base. However, the language in RiteHite is ambiguous as to whether it is improper to consider convoyed sales in calculating the
royalty base. See 56 F.3d at 1549. The case addresses the question of whether collateral sales
may be considered in a lost profits calculation based on the entire market value rule. Id. at 1549
n. 9. A footnote only states that “[the] issue of royalty base is not to be confused with the
relevance of anticipated collateral sales to the determination of a reasonable royalty rate.” Id.
(citing Deere & Co. v. Int’l Harvester Co., 710 F.2d 1551, 1559 (Fed. Cir. 1983).
Conversely, the two cases relied on by Plaintiff show that convoyed sales may be
considered in calculating a royalty base. See Interactive Pictures Corp. v. Infinite Pictures, Inc.,
274 F.3d 1371, 1385 (Fed Cir. 2001); Fujifilm Corp. v. Benun, 605 F.3d 1366, 1373 (Fed. Cir.
2010). In Interactive Pictures, plaintiff’s damages expert had computed this value by using
projected future sales for all of defendant’s products as the royalty base, even though only a
subset of defendant’s products were accused of infringement. 274 F.3d at 1384. Plaintiff argued
that even though not all of defendant’s products infringed the asserted patents, the accused
products were bundled with sales of defendant’s other products and drove the overall sales of
defendant’s products. Id. On that basis, plaintiff argued that it was proper for the royalty base to
account for projected revenue from all of defendant’s products. Id. The Federal Circuit agreed,
stating that plaintiff’s damages expert:
permissibly included all Infinite products in the royalty base, and that [plaintiff’s
expert] did not provide for an unfair double recovery by factoring the bundling
and convoying sales into the royalty rate. The jury was entitled to rely on
evidence of bundling and convoyed sales in determining the proper scope of the
Id. at 1385 (citing Deere & Co., 710 F.2d at 1559). In Fujifilm, the Federal Circuit cited
Interactive Pictures and agreed that the jury was entitled to rely on evidence of bundling and
convoyed sales in determining the royalty base. 605 F.3d at 1372–73. The Federal Circuit in
Fujifilm upheld a jury’s damages award which included a royalty rate of $2.00 per infringing
product. Id. Plaintiff’s expert opined that “in a hypothetical negotiation the royalty rate would
have changed inversely to the royalty-base changes, resulting in a consistent royalty amount.”
Id. at 1372. In other words, plaintiff’s expert provided an example where convoyed sales were
included in the royalty base, but the royalty rate was lower and an example where convoyed
sales were not included in the royalty base, but were considered in reaching a higher royalty rate.
Id. at 1372–73.
The explicit statements in these two cases govern here.
Both the cases
specifically dealt with the issue of whether it was proper to include convoyed sales in both the
royalty base and rate.
However, this analysis does not end the inquiry. In the context of the entire market value
rule, the Federal Circuit has cautioned against the prejudicial impact that a large royalty base
may have on the jury. See Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1320 (Fed. Cir.
2011) (the disclosure of the full product revenue for an allegedly infringing product “cannot help
but skew the damages horizon for the jury, regardless of the contribution of the patented
component to this revenue.”). In order to safeguard against this concern, as well as meet the
admissibility standards prescribed by Daubert, an expert who wishes to include convoyed sales
in a royalty base must at least “present a clear explanation of 1) why and how the purported
convoyed sales are tied to the sales of the accused products and 2) what value of the royalty base
is attributable to the accused products themselves versus the convoyed sales.” See Realtime
Data, LLC v. Actian Corp. et al., No. 6:15-cv-463, 2017 WL 1513098, at *1 (E.D. Tex. April 27,
2017). Further, as the Federal Circuit explained in Rite-Hite, “[the] issue of royalty base is not to
be confused with the relevance of anticipated collateral sales to the determination of a reasonable
royalty rate.” Rite-Hite, 56 F.3d at 1549 n.9. In other words, it is not appropriate to adjust the
royalty base due to collateral sales in the midst of the Georgia-Pacific analysis—any
consideration of collateral sales in this context should be related to the adjustment of the royalty
rate. And again, in adjusting the royalty rate due to collateral sales, the analysis should likewise
be clear as to why and how the expert believes the collateral sales are tied to the sales of the
accused products, and how this connection impacts the royalty rate. With these conditions met,
it may be appropriate to include convoyed sales in the consideration of both the royalty base and
rate. See, e.g., Fujifilm, 605 F.3d at 1372–73.
In this case, Mr. Dell stated he understood the “combination of hardware and software
comprising the accused systems must function together.” Dell’s Rep. ¶ 77. Mr. Dell relied on
the fact that NetApp provides its software and related hardware appliances “to the market as an
‘engineered system to manage customers’ data.” Id. at ¶ 76. Mr. Dell also relied on NetApp’s
Vice President and General Manager of SolidFire, Daniel Berg, who indicated “software is not of
much value unless it runs on a piece of hardware, so we sold [SolidFire] as [an] appliance, the
combination of hardware and software.” Id. Mr. Dell also relied on NetApp’s Vice President of
Product Management who stated that the hardware appliances on ONTAP are only capable of
running ONTAP and not any other file system software. Id. Because of this, Mr. Dell concluded
that “the Accused Products (i.e., the accused software and accused hardware products identified
above) represent the smallest saleable patent practicing unit (“SSPPU”) asserted to infringe the
Mr. Dell went on in his analysis to assess the functional relationship between the services
and maintenance offerings and the Accused Products “to determine if such sales are convoyed
sales or sold only for business convenience.” Id. at ¶ 87. Mr. Dell noted that the maintenance
offerings were intended to “provide customers with bug fixes, patches and support for software,
as well as hardware maintenance and warranties directly related to the products purchased, i.e.,
the Accused Products.” Id. Further, Mr. Dell found the offerings “are sold ‘bundled’ with
certain product offerings and in many cases are required to be purchased in conjunction with the
Accused Products.” Id. (emphasis in original). Mr. Dell noted that the “service and maintenance
offerings are not sold on a stand-alone basis from the Accused Products and have no intended
purpose separate and apart from the Accused Products.” Id. at ¶ 88. Based on these factors, Mr.
“I am unaware of any reason why NetApp’s customers would purchase service
and maintenance offerings for the Accused Products without also purchasing the
Accused Product. As a result, this evidence demonstrates that demand for the
Accused Products forms the basis of customer demand for the related service and
maintenance offerings attributed to the Accused Products.”
Overall, Mr. Dell decided that the “revenues generated from the sale of service and
maintenance services constitute convoyed sales that should also be included in the royalty base
in this case.” Id. at ¶ 90.
Through the above analysis, Mr. Dell specifically explains the basis for considering
certain NetApp services as convoyed sales. Realtime Data, 2017 WL 1513098 at *1. He then
apportioned the value of the royalty base attributed to the accused products themselves versus the
convoyed sales. Dell’s Rep. ¶¶ 101–26 (analyzing the percentage of financial benefit in each
product and determining the appropriate apportionment); see id. Because Mr. Dell “present[ed]
a clear explanation of 1) why and how the purported convoyed sales are tied to the sales of the
accused products and 2) what value of the royalty base is attributable to the accused products
themselves versus the convoyed sales,” Mr. Dell’s analysis of the different convoyed sales in his
royalty base and apportionment analysis is not inherently unreliable. Realtime Data, 2017 WL
1513098 at *1. Although NetApp argues there are other features driving demand for the accused
products “including many that rank higher than deduplication and compression” in customer
support questions, (Doc. No. 234 at 5) that goes to the weight of the testimony and opinion, not
on its admissibility. See FED. R. EVID. 702 Advisory Committee’s Notes, 2000 Amendments
(citing Rock v. Arkansas, 483 U.S. 44, 61 (1987)).
Dell’s Apportionment Analysis
NetApp argues that the methodology Mr. Dell used in his apportionment analysis is
improper. (Doc. 234 at 7.) NetApp states that Mr. Dell (1) fails to tie his apportionment factor
to the particular features of each accused product and (2) improperly relies on comparable
licenses to determine the apportionment rate for the products in this litigation. Id. at 8–11.
Realtime argues that Mr. Dell’s apportionment analysis is methodologically sound due to his
analysis of the documents, testing, and licensing history to isolate the incremental value from the
patented compression functionality; his application of the factor to each accused product; and his
reliance on comparable licenses. (Doc. No. 244 at 8–14.)
NetApp maintains that Mr. Dell only found an apportionment factor of 25% without
explaining any variance in the products, the differing features, or what created a split of 25/75%.
(Doc. No. 234 at 9.) However, Mr. Dell relies on information on the individual products and the
expert report of Dr. Wesel to come to the conclusion that each of the products have an
apportionment factor of 25%. Throughout his report Mr. Dell specifies the differentiating factors
of the products and comes to the conclusion that the accused products each provide “direct cost
savings due to the ability to store more data with less overall storage capacity.” Dell Rep. ¶ 52–
60, 74. Mr. Dell relied on the fact that each of the products used similar NetApp storage devices
to run similar software. Id. ¶¶ 52–66. Mr. Dell also relies on Dr. Wesel’s reports and figures in
each of the products to show “customers will rely upon deduplication . . . [which] will provide
additional storage savings over the use of only compression by itself.” Id. at ¶ 116. Mr. Dell
noted that Dr. Wesel’s report showed storage efficiencies ranging between 22% and 32.8% with
an average efficiency gain of approximately 28%. Id. at ¶ 119. Mr. Dell relied on the license
agreements produced by Realtime in other cases to show apportionment factors ranging between
25% and 33%. Id. at ¶ 120. Mr. Dell determined “that apportionment factors ranging broadly
between 20% and 50% are appropriate in this case” and therefore determined “an apportionment
factor of 25% would be considered a fair and reasonable apportionment factor used by the parties
to determine the revenue base that is directly tied to the economic benefits attributable to the
patents-in-suit.” Id. at ¶¶ 121, 123. Based on the presented data, Mr. Dell did look at the
differences in each product and concluded that 25% was fair for each product.
NetApp also argues that it was inappropriate for Mr. Dell to rely on prior license
agreements for his analysis and use the prior licenses as a “rule of thumb.” (Doc. No. 234 at 10–
11.) Licenses may be presented to the jury to help the jury decide an appropriate royalty rate.
Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201, 1227 (Fed. Cir. 2014) (internal citation
omitted). “Prior licenses, however, are almost never perfectly analogous to the infringement
action.” Id. License may cover more patents than those at issues, involve foreign intellectual
property rights, or calculate as some percentage of the value of a multi-component product. Id.
“Testimony relying on licenses must account for such distinguishing facts when invoking them
to value the patented invention.” Id.; see ResQNet, 594 F.3d at 869 (improper to rely on a
license with no relationship to the claimed invention); VirnetX, 767 F.3d at 1330 (allowing an
expert to rely on six challenged licenses because four related to the patents-in-suit and others
were drawn to a related jury, and the jury was allowed to evaluate the relevance of the licenses).
However, the fact that a license is not perfectly analogous “generally goes to the weight of the
evidence, not its admissibility. Id. (citing Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1326
(Fed. Cir. 2014)). The court “must assess the extent to which the proffered testimony, evidence,
and arguments would skew unfairly the jury’s ability to apportion the damages to account only
for the value attributable to the infringing features.” Id.
In Mr. Dell’s report, he analyzes former license agreements “involving the patents-in-suit
or other patents owned by Realtime.” Dell Rep. ¶ 134. He then:
“analyzed and considered the various similarities and differences that may exist
between these licenses and that of the hypothetical negotiation in this case,
including similarities/differences in the factors or circumstances leading to the
license, the accused products and the importance of the asserted patents to the
accused products and the importance of the asserted patents to the accused
products, the number and similarity of patents licensed, the parties to the license,
as well as other extrinsic factors such as litigation risk, relevant industry, and
financial condition of the parties[.]”
Id. Mr. Dell proceeded to analyze each of the license agreements with which patents they tied to,
the agreed upon royalty rate, the apportioned value, and the lump sum paid. Id. ¶¶ 137–76. Mr.
Dell noted when the prior license agreements correlated directly to the patents-in-suit, and where
the license agreements had at least one of the patents-in-suit and noted these agreements
provided “further insight into Realtime’s licensing practices and the economic considerations[.]”
Id. at ¶ 152. Mr. Dell asserted that it was the patents now asserted against NetApp that “drove
the value of the licensing negations” in three of the agreements he relied on. Id. at ¶ 177.
Further, Mr. Dell relied on a discussion with Realtime’s vice president to find that the
apportionment methodology was comparable. Id. at ¶ 149. Based on his review, Mr. Dell found
that royalty rates ranged “from 3% to 10% of apportioned accused revenue for the relevant
license period[.]” Id. at ¶ 176. He also found the “apportionment factors rang[ed] between 25%
and 50%[.]” Id. Because Mr. Dell utilized prior license agreements that use the same patents-insuit, and because he compared NetApp’s technological differences, his consideration of
comparable licenses to the patents-in-suit to apportion was not an unreliable methodology. See
LaserDynamics, Inc. v. Quanta Computer Inc., 694 F.3d 51, 79 (Fed. Cir. 2012) (citing ResQNet,
594 F.3d at 869) (“Actual licenses to the patented technology are highly probative as to what
constitutes a reasonable royalty for those patents rights because such actual licenses most clearly
reflect the economic value of the patented technology in the marketplace”).
Dell’s Hypothetical Negotiation
NetApp argues that Dell’s hypothetical negotiation is immutable because Mr. Dell over-
generalizes the bargaining power of the NetApp and SolidFire and over-generalized that the
same conclusion would happen in 2010, 2012, 2014, or 2015. (Doc. No. 234 at 12.) NetApp
argues that the market changed and both companies changed over the years, and this analysis
confirms he used a “rule of thumb” analysis. Id. Realtime maintains that Mr. Dell looked at the
different hypothetical negotiation dates and found the outcome did not materially change. (Doc.
No. 244 at 15.) Realtime states that the market would increase over time and the accused
products would be commercially successful. Id. Realtime argues that Mr. Dell looked at the fact
that SolidFire was not acquired until 2015, but found the royalty outcome would not change. Id.
Mr. Dell notes that he was told to consider a hypothetical negotiation date at different
times. Dell. Rep. ¶ 132, 266. Mr. Dell determined that certain factors “such as the timing of the
license agreements entered in to in this case, as well as the continued importance and
introduction of additional compression and deduplication features in the Accused Products, may
provide additional factors for the parties to consider in negotiating the terms of the hypothetical
license.” Id. at ¶ 132. He found NetApp “has continued to add additional compression and
deduplication algorithms to each successive product release” and therefore the range negotiated
apportionment range would receive upward pressure. Id. at ¶ 266. Based on this he found there
would be no significant change in the hypothetical negotiation. Id. Because he did consider
various factors, his statements were not over-generalized and the court finds his testimony
Further, Mr. Dell notes in his supplemental report that he considered different factors in
the negotiation between Realtime and SolidFire before it was acquired. (Doc. No. 244-6 at ¶ 5.)
Mr. Dell concluded “[t]he hypothetical negotiation between Realtime and SolidFire would result
in the same 25% apportionment factor and 3.75% royalty rate that would be utilized in
calculating the lump sum payment calculation.” Id. Because Mr. Dell did consider SolidFire’s
position before NetApp acquired it, he did not over-generalize his findings and did not apply a
“rule of thumb” analysis.
For the reasons stated herein, the Court DENIES Defendant’s Motion to Exclude
Testimony by Stephen Dell. (Doc. No. 234.)
So ORDERED and SIGNED this 16th day of November, 2017.
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