Opinion ID: 809963
Heading Depth: 2
Heading Rank: 1

Heading: The Cartel Report

Text: This court applies regional circuit law to evidentiary issues. The Third Circuit requires a party challenging the district court’s evidentiary ruling to demonstrate that the district court acted irrationally and arbitrarily. In re Paoli R.R. Yard PCB Litig., 113 F.3d 444, 453 (3d Cir. 1997). Defendants argue that the trial court should have excluded the Cartel Report under Federal Rule of Evidence 403 because it was unduly prejudicial. The district court admitted the Cartel Report into evidence and permitted ETG’s damages expert to discuss the report in response to Defendants’ presentation of royalty rates from certain license agreements offered by the Hearing Instrument Manufacturers Patent Partnership (“HIMPP”). HIMPP is an industry group that pools patents needed for development of programmable and digital hearing aids. HIMPP licenses all of its patents for a flat 3% royalty on the price of each hearing aid covered by one or more of the ap- proximately 250 patents in the HIMPP patent pool. Defendants’ damages expert used the HIMPP rates as part of the basis for his opinion that a reasonable royalty for access to the ETG patents would be in the range of 0.25 to 0.5%. ETG responded that the HIMPP royalty rates are low, industry-friendly rates and not probative of market rates for the ETG patents. As support, ETG cited the Cartel Report’s findings that the hearing aid market is highly concentrated and the industry enjoys “exceedingly high profit margins” due to a lack of competition. ENERGY TRANSPORT v. WILLIAM DEMANT 20 The district court instructed that ETG would not be permitted use the Cartel Report to “engage in hyperbolic statements or . . . inflammatory language” characterizing the Defendants’ activities as collusive. J.A. 1295. This instruction helped limit the potential for undue prejudice at trial. Indeed, Defendants did not object during trial to the manner in which ETG used the Cartel Report. After the trial in this case, on April 20, 2010, a German appellate court overturned the Cartel Report’s ultimate conclusion that an “oligopoly” existed and stated that “no restrictions on competition ensue from [HIMPP]” and similar industry consortia. J.A. 2164. The German court, however, “based its decision on the extensive investigations conducted by the Federal Cartel Office into prevailing market conditions,” and those underlying facts were not disturbed by the appellate court. J.A. 2160; see Energy, 2011 U.S. Dist. LEXIS 60716, at . ETG relied on the facts presented in the Cartel Report regarding the hearing aid market and industry structure—not the legal conclusion that the market was an oligopoly—to make its case that the HIMPP licenses did not represent armslength transactions and that HIMPP royalties did not represent prevailing market rates. ETG also relied on the high profit margins on hearing aids evidenced in the Cartel Report to argue for damages at a higher royalty rate than that suggested by Defendants. These facts were clearly relevant to the determination of a reasonable royalty rate for the ETG patents. Defendants have not shown that the district court acted irrationally or arbitrarily in finding that the probative value of the Cartel Report outweighed any potential prejudice.