Challenge to Plaintiff's Damage Expert's Opinion on Reasonable Royalty Successful Where Expert Relied on Hypothetical Negotiation That Would Have Resulted in Financially Catastrophic Agreement for Defendants

July 27, 2012

Defendants filed a motion to exclude the expert testimony of plaintiff's expert on damages, including both lost profits and a reasonable royalty. The district court began its analysis by noting the Daubert standards for expert reports and then addressed the question of the reasonable royalty methodology used by plaintiff's expert. The district court then noted it was troubled by the expert's application of the hypothetical negotiation.

Explaining that the hypothetical negotiation began as only one factor under Georgia Pacific but as now evolved to be an umbrella over all the factors, the district court stated that neither party appeared to challenge the appropriateness or applicability of the hypothetical negotiation approach generally. The district court then reiterated the principles of a hypothetical negotiation as set forth by the Federal Circuit: "The methodology encompasses fantasy and flexibility ; fantasy because it requires a court to imagine what warring parties would have agreed to as willing negotiators; flexibility because it speaks of negotiations as of the time infringement began, yet permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators. Fromson v. Western Litho-Plate & Supply Co., 853 F.2d 1568, 1575 (Fed. Cir. 1988)."

The district court then rejected plaintiff's expert's approach because it would result in a financially catastrophic agreement that would not be reasonable to assume: " Given that backdrop, the Court cannot assume, as WG's counsel has urged, that ION, in a hypothetical negotiation with WG, would have taken as risk on the infringement question and agreed to a huge, profit-eliminating (and even revenue eliminating) royalty obligation for itself. As a mater of law, no such risk can be taken in a hypothetical negotiation in which infringement is deemed known. With knowledge of validity and infringement, such a financially catastrophic agreement would have been totally unreasonable. The court in Georgia-Pacific acknowledged the proposition that negotiators in hypothetical negotiations must be deemed to act reasonably: "the primary inquiry, often complicated by secondary ones, is what the parties would have agreed upon, if both were reasonably trying to reach an agreement." Georgia-Pacific, 318F. Supp. At 1121 (quoting Faulkner v. Gibbs, 199 F.2d 635, 639 (9th Cir. 1952) (internal quotation marks omitted). Even putting case law aside, any unreasonable negotiating approach must be rejected, since the ultimate goal is to arrive at what the statute terms a 'reasonable royalty.' Mr. Sims's methodology inherently arrives at an unreasonable result, and one to which no reasonable negotiator for ION could possibly have agreed."

Accordingly, the district court excluded plaintiff's expert on reasonable royalty.

Turning to the issue of lost profits, the district court noted that "[t]o recover lost profits, a patentee must show a reasonable probability that 'but for' the infringing activity, the patentee would have made the infringer's sales." The district court then analyzed the basis for the expert's report on lost profits, including the reliance on surveys: "In considering WG's lost profits, Mr. Sims evaluated a number of surveys that ION's customers conducted using ION's DigiFIN product. He then reconstructed the market to determine whether WesternGeco would have gotten bids to perform those surveys absent ION's alleged infringement. Out of all surveys performed using DigFIN, Mr. Sims identified a small subset which he believes WG would have been awarded in his reconstructed market. Mr. Sims then proceeded to consider each of the four Panduit factors, ultimately concluding that there was a high demand for steerable streamers, that noninfringing alternatives would not have been acceptable as to this subset of surveys, and that WG had the manufacturing and marketing capability to exploit the demand for steerable streamers."

The district court then concluded that defendants' objections were more appropriate to raise through cross-examination and the defendants' own evidence: "After considering these arguments, the Court is persuaded that the issues raised by defendants are properly addressed on cross-examination and through Defendants' own presentation of evidence. Mr. Sims applied the methodological approach that all parties agree is appropriate by utilizing the Panduit factors. In applying that approach, he went through each of the four factors with a detailed explanation of why he reached his particular conclusions. Although there are undoubtedly other approaches that Mr. Sims could have taken, Defendants have failed to persuade the Court that his methodology or approach was improper under the Daubert standard."

Accordingly, the district court permitted the expert to testify regarding lost profits.


Westerngeco LLC v. Ion Geophysical Corporation, et al., Case No. 4:09-CV-1827 (S.D. Tex. July 16, 2012)

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