Opinion ID: 2757602
Heading Depth: 3
Heading Rank: 1

Heading: Admissibility of License Evidence

Text: Before trial, D-Link moved to exclude certain testimony by Ericsson’s damages expert, arguing that it violated the EMVR. Specifically, D-Link argued that, because the damages calculations were, in part, based on licenses which were themselves tied to the entire value of the licensed products, even though the technology being licensed related to only a component of those products, the testimony was impermissible as a matter of law. In denying that motion, the district court explained that Ericsson’s expert’s reference to those prior licenses was not improper because the expert properly apportioned any damages calculations based on those licenses to account for the value of the patents at issue. D-Link noted its objection to this line of testimony at trial by entering a continuing objection to Ericsson’s expert’s testimony to the extent it was predicated on or made any reference to these licenses. J.A. 1437–38 at 4:37–5:13. At trial, both Ericsson and D-Link then referred to the value 38 ERICSSON, INC. v. D-LINK SYSTEMS, INC. of laptops generally. J.A. 1325 at 11:24–12:21; J.A. 1332 at 37:22–38:11. After the jury found infringement and awarded Ericsson 15 cents per infringing device, D-Link moved for JMOL and for a new trial, arguing that the admission of this expert testimony violated the EMVR. The district court denied both motions. On appeal, D-Link argues that the district court prejudicially erred by: (1) not excluding Ericsson’s damages expert’s testimony on the challenged licenses, and (2) allowing Ericsson’s counsel to compare the cost of the end product to the requested royalty at trial. According to D- Link, because Ericsson did not dispute that the asserted claims are practiced entirely by the Wi-Fi chips—not by other components of the accused end products—Ericsson should never have been allowed to base its damages award or its arguments at trial on the price of the end products. Ericsson responds that the jury award of 15 cents per infringing product is consistent with comparable Ericsson licenses, insisting that our court has found comparable licenses to be the best evidence of a reasonable royalty rate. Ericsson further argues that the jury award is consistent with “industry norms” and in accord with its damages expert’s testimony. According to Ericsson, its expert conducted a rigorous analysis, which separated the value of the patents at issue from any other patents covered by the licenses he referenced. Because of this apportionment, Ericsson asserts that neither its damages calculation nor its expert’s reference to actual industry licenses was improper, under the EMVR or otherwise. With respect to counsel’s reference to the cost of laptops at trial, Ericsson argues that D-Link never objected to these references, and made similar references itself. We conclude that the district court properly admitted evidence of the licenses to which D-Link objects and that any objection to counsel’s references to the cost of items ERICSSON, INC. v. D-LINK SYSTEMS, INC. 39 incorporating the allegedly infringing chips was waived. While a number of our cases have referred to the concept of an entire market value “rule,” the legal standard actually has two parts, which are different in character. There is one substantive legal rule, and there is a separate evidentiary principle; the latter assisting in reliably implementing the rule when—in a case involving a perunit royalty—the jury is asked to choose a royalty base as the starting point for calculating a reasonable royalty award. As we explained recently in VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014), where multicomponent 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. 767 F.3d at 1326 (citing Garretson v. Clark, 111 U.S. 120, 121 (1884)). As a substantive matter, it is the “value of what was taken” that measures a “reasonable royalty” under 35 U.S.C. § 284. Dowagiac Mfg. Co. v. Minn. Moline Plow Co., 235 U.S. 641, 648 (1915). What is taken from the owner of a utility patent (for purposes of assessing damages under § 284) is only the patented technology, and so the value to be measured is only the value of the infringing features of an accused product. When the accused infringing products have both patented and unpatented features, measuring this value requires a determination of the value added by such features. Indeed, apportionment is required even for nonroyalty forms of damages: a jury must ultimately “apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features” using “reliable and tangible” evidence. Garretson, 111 U.S. at 121. Logically, an economist could do this in various ways—by careful selection of the royalty base to reflect the value added by the patented feature, where that differentiation is possible; by adjustment of the 40 ERICSSON, INC. v. D-LINK SYSTEMS, INC. royalty rate so as to discount the value of a product’s nonpatented features; or by a combination thereof. The 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. Our cases have added to that governing legal rule an important evidentiary principle. The point of the evidentiary principle is to help our jury system reliably implement the substantive statutory requirement of apportionment of royalty damages to the invention’s value. The principle, applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product. It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product—by, for instance, dramatically reducing the royalty rate to be applied in those cases—it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances. See LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67, 68 (Fed. Cir. 2012) (barring the use of too high a royalty base—even if mathematically offset by a “‘low enough royalty rate’”—because such a base “carries a considerable risk” of misleading a jury into overcompensating, stating that such a base “‘cannot help but skew the damages horizon for the jury’” and “make a patentee’s proffered damages amount appear modest by comparison” (quoting Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1320 (Fed. Cir. 2011))). Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by ERICSSON, INC. v. D-LINK SYSTEMS, INC. 41 reference to that value. Id. Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries—often, the smallest salable unit and, at times, even less. VirnetX, 767 F.3d at 1327–28. We apply these concepts to a challenge to expert testimony regarding licenses in which royalties were set by reference to the value of an end product. We conclude that the expert testimony about which D-Link complains violated neither the rule from Garretson regarding apportionment, nor the evidentiary principle demanding an appropriate balance between the probative value of admittedly relevant damages evidence and the prejudicial impact of such evidence caused by the potential to mislead the jury into awarding an unduly high royalty. We find, accordingly, that the district court did not err by failing to exercise its discretion under Federal Rule of Evidence 403 to exclude the license testimony at issue here. Uniloc, 632 F.3d at 1320; see LaserDynamics, 694 F.3d at 77–78 (finding that the district court abused its discretion by failing to exclude a license under Federal Rule of Evidence 403). This court has recognized that licenses may be presented to the jury to help the jury decide an appropriate royalty award. See, e.g., Monsanto Co. v. McFarling, 488 F.3d 973, 978 (Fed. Cir. 2007) (“An established royalty is usually the best measure of a ‘reasonable’ royalty for a given use of an invention . . . .”); Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (finding that “royalties received by the patentee for the licensing of the patent in suit” is a relevant factor for the jury to consider). Prior licenses, however, are almost never perfectly analogous to the infringement action. VirnetX, 767 F.3d at 1330. For example, allegedly comparable licenses may cover more patents than are at issue in the action, include cross-licensing terms, cover foreign intellectual property rights, or, as here, be calculated as 42 ERICSSON, INC. v. D-LINK SYSTEMS, INC. some percentage of the value of a multi-component product. Testimony relying on licenses must account for such distinguishing facts when invoking them to value the patented invention. Recognizing that constraint, however, the fact that a license is not perfectly analogous generally goes to the weight of the evidence, not its admissibility. See Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1326 (Fed. Cir. 2014) (“Here, whether these licenses are sufficiently comparable such that Motorola’s calculation is a reasonable royalty goes to the weight of the evidence, not its admissibility.”); accord ActiveVideo Networks, Inc. v. Verizon Commc’ns, Inc., 694 F.3d 1312, 1333 (Fed. Cir. 2012) (“Although we may not have decided these evidentiary issues the same way had we presided over the trial, the district court did not abuse its discretion.”). In each case, district courts 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. As the testimony at trial established, licenses are generally negotiated without consideration of the EMVR, and this was specifically true with respect to the Ericsson licenses relating to the technology at issue. Making real world, relevant licenses inadmissible on the grounds D- Link urges would often make it impossible for a patentee to resort to license-based evidence. Such evidence is relevant and reliable, however, where the damages testimony regarding those licenses takes into account the very types of apportionment principles contemplated in Garretson. In short, where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis—and the district court exerERICSSON, INC. v. D-LINK SYSTEMS, INC. 43 cises its discretion not to exclude such evidence—is not reversible error. 4 We do conclude, however, that, when licenses based on the value of a multi-component product are admitted, or even referenced in expert testimony, the court should give a cautionary instruction regarding the limited purposes for which such testimony is proffered if the accused infringer requests the instruction. The court should also ensure that the instructions fully explain the need to apportion the ultimate royalty award to the incremental value of the patented feature from the overall product. As to the first, while D-Link did ask for a generic instruction on the EMVR, it did not ask for an instruction specifically referencing the licenses or the testimony relating thereto about which it objected. On the second, while the court told the jury about the Georgia-Pacific factors—which do take the concepts of apportionment into account to some extent—it did not separately caution the jury about the importance of apportionment. 5 As explained in Section B.2 below, we need not determine whether D-Link preserved its objections to these instructions or, if it did, whether it was prejudiced by the instructions actually given on these issues, because we vacate the damages award for other reasons. As noted, D-Link also argues that the district court prejudicially erred by allowing Ericsson’s counsel to 4 Because D-Link does not challenge the methodol- ogy used by Ericsson’s damages expert, we need not consider the propriety of his apportionment analysis. See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597 (1993). 5 While factors 9 and 13 of the Georgia-Pacific factors allude to apportionment concepts, we believe a separate instruction culled from Garretson would be preferable in future cases. 44 ERICSSON, INC. v. D-LINK SYSTEMS, INC. reference the total cost of a laptop when discussing the requested royalty rate. We find that D-Link waived this argument. D-Link’s continuing objection only applied to Ericsson’s expert’s reference to the prior licenses. See J.A. 1437–38 at 4:37–5:13. Nowhere in the record does D-Link object to counsel’s reference to the market value of a laptop at trial. In fact, D-Link actually referred to the value of its own end products on crossexamination. And D-Link failed to raise this issue in its post-trial motions. See J.A. 1332 at 37:22–38:11. We see no prejudice or injustice that would require us to address this issue for the first time on appeal and we therefore decline to do so. See Novo Nordisk A/S v. Becton Dickinson & Co., 304 F.3d 1216, 1220 (Fed. Cir. 2012) (“Although appellate tribunals are not prohibited from taking remedial action when it is apparent that prejudice or unfairness entered the trial and the interest of justice requires, ‘counsel for the defense cannot as a rule remain silent, interpose no objections, and after a verdict has been returned seize for the first time on the point that the comments to the jury were prejudicial.’” (quoting United States v. SoconyVacuum Oil Co., 310 U.S. 150, 238–39 (1940))).