Test Your Daubert Skills: Will "Liability Likelihood" Royalty Calculation Get Through?
Patent attorneys, let’s test your Daubert skills. You can even pick your side: plaintiff or defense, exclude or admit. We’ve got MAZ Corporation on one side and Blackberry on the other. MAZ claims Blackberry infringed its document encryption patent and has sued for damages. Cue plaintiff’s damages expert, Mr. Perry, and the (almost always) incumbent Daubert motion by Blackberry to exclude.
While we are all pretty familiar with the calculation of damages in a patent infringement action—i.e., “damages adequate to compensate for the infringement” usually proven in the form of “the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before the infringement began”—Mr. Perry has an interesting way of calculating a “successfully negotiated” royalty. What is the best proof of the reasonable value of something? What people are willing to pay for it, right? This is why prior agreements for licensing of the patent-in-suit are relevant in determining damages in patent infringement suits. But, what if the prior agreement was reached as the result of a settlement in litigation? Any agreement reached as the result of a settlement is just that—a compromise. Each party bends a little, meaning no party gets what they believe is the full value of their claim. In other words, a settlement does not reflect the royalty agreement the parties would have reached “just before the infringement began.”
Mr. Perry, however, has a very pragmatic, mathematic solution for this. In the MAZ v. Blackberry suit, Mr. Perry relied upon a prior licensing agreement reached as a settlement to litigation. However, knowing a settlement value needs to be increased to reach before-the-infringement-began value, Perry applies a factor to increase the royalty at a rate equal to the likelihood of liability in a patent suit. In other words:
If: Settlement Value = Likelihood of Liability x Expected Damages
Then: Expected Damages = Settlement Value ÷ Likelihood of Liability
If the agreement reached in settlement set the royalty rate at $100k and Perry found the likelihood of liability in a patent suit to be 40%, then the calculation would proceed as follows:
$100,000 = 40% x Expected Damages
Expected Damages = $100,000 ÷ 40% or Damages = $250,000
This accounts for the nature of compromise inherent in a settlement value. It also increases the settlement value by an amount related to the likelihood of liability in a patent suit. If there is a problem, what is it? If there is not, why is the calculation sound? Test yourself before reading on.
In the MAZ vs. Blackberry matter, the court found Perry’s calculation was not reliable because it was “not based on any facts relating to the merits of Plaintiff's case.” In addition, the estimate “did not consider the nature of the patent-in-suit, the accused products, or either party's litigation strategy.” Apparently Perry did not pioneer this “likelihood of liability” calculation, though, as the court noted two other cases where a similar type of “likelihood” calculation (one at 25% and another at 33%) were rejected. Based on these findings, the court granted Blackberry’s motion to exclude in part, only to the extent of the unreliable “likelihood of liability” calculation referenced above. As often occurs, the court allowed Perry opportunity to amend his report, if possible, to correct the unreliable portion.
Expert testimony and the many, varying reasons for exclusion or admission are topics we love to learn about. Let us know if you’re a patent-savvy attorney: How did you do? Did the wily Perry get by you?
 Virnetx. Inc. v. Cisco Systems, Inc., 767 F.3d 1308, 1326 (Fed. Cir. 2014).
 Citing Virnetx, 767 F.3d at 1334.
 Uniloc USA, Inc. v. Microsoft Corp. , 632 F.3d 1292, 1317 (Fed. Cir. 2011 ) (rejecting 25%); Avocent Redmond Corp. v. Rose Elecs., 2013 WL 8844098, at *5 (W.D. Wash. Mar. 11, 2013)(rejecting 33%).