Expert Survives Daubert Challenge on Entire Market Value Theory

June 24, 2011

In a recent decision from the Eastern District of Texas, the court allowed the testimony of an expert witness on the entire market value theory even though the expert did not provide evidence of consumer demand. The court found that the expert could use the entire market value theory of the accused products in calculating the reasonable royalty because it was economically justified.

The court began by noting that the "entire market value rule" allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for the customer demand. Defendants moved to exclude plaintiff's expert on the ground that the patented feature of the accused product had not been shown to provide the basis for consumer demand. The defendants also argued that it was largely undisputed that, in fact, the patented feature did not provide the basis for the consumer demand of the accused product. The plaintiff argued that the expert was justified in calculating a reasonable royalty based on the entire market value of the accused products as that is the industry standard and because nearly every comparable license in the case was based upon a percentage of the total accused product (or licensed product) sales price.

The court, relying upon the Federal Circuit's decision in Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009) found that the entire market value theory may be appropriate where it is "economically justified." Id. at 1359 ("even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price or number of units sold can be economically justified"). The court found that here it was economically justified to base the reasonable royalty on the market value of the entire accused product mainly because the comparable licenses were based on the sales price of the licensed products and not some apportionment between the features of the products.

Defendants' position was based on the argument that a plaintiff cannot ever use the entire market value rule unless plaintiff proves the patented features provide the basis for the demand. The court disagreed. "If this rule were absolute, then it would put Plaintiff in a tough position because on one hand, the patented feature does not provide the basis for the customer demand, but on the other hand, the most reliable licenses are based on the entire value of the licensed products." Indeed, the court noted that "[p]laintiff bases its analysis on approximately 13 comparable licenses of the patents-in-suit that also use the entire base of the licensed product, and Defendants do the same."

Thus, the court concluded that to deny the plaintiff the use of the entire market value theory would force it to choose between to untenable positions, i.e., that it either speculate as to how to apportion the licenses based on the entire market value of a portion of the product or that it disregard the relevant license and base a damage model on some other evidence. The court found that neither outcome was desirable as the best evidence (the comparable licenses) would not be used in the damage analysis.

Accordingly, the court found that "Plaintiff may base its reasonable royalty analysis on the entire value of the accused products, despite not showing the accused features provide the basis of the customer demand. In this Court's view, Federal Circuit jurisprudence regarding the 'entire market value rule' allows for this result, and further, Federal Circuit damages jurisprudence encourages this result by placing a large emphasis on comparable licenses of the patents-in-suit."

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The court's analysis provides some key guidance on the use of the entire market value theory and emphasizes the importance of comparable licenses. As the Federal Circuit continues to issue decisions regarding damage models, it is important to develop the best cases for comparable licenses as these remain one of the keys to establishing a reasonable royalty rate.

Mondis Technology Ltd. v. LG Electronics, Inc., et. al., Case No. 2-07-cv-00565 (E.D. Tex. June 14, 2011)
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The authors of www.PatentLawyerBlog.com are patent litigation lawyers at Jeffer Mangels Butler & Mitchell LLP. We represent inventors, patent owners and technology companies in patent licensing and litigation. Whether pursuing patent violations or defending infringement claims, we are aggressive and effective advocates for our clients. For more information contact Stan Gibson at 310.201.3548 or SGibson@jmbm.com.