Damage Expert Stricken without Leave to Amend after District Court Determines That Expert Over Reached by Using Entire Market Value Rule

October 9, 2013

As this patent infringement action moved closer to trial, the parties filed various motions in limine, including defendant Fortinet Inc.'s motion to strike the report and expert testimony of Network Protection Sciences, LLC's ("NPS") damage expert. In its motion to strike, Fortinet contended that the damage expert's analysis improperly based royalties on the entire market value of the accused products.

To analyze the motion to strike, the district court summed up the entire market value rule as follows: "The entire market value rule -- which has varied somewhat in formulation over time -- has been a highly-criticized and highly-litigated methodology. In recent years, the Federal Circuit has restricted its use, most notably in LaserDynamics v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012). In that action, the Federal Circuit explained it as follows (per Judge Jimmie Reyna):

"Where small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product. Thus, it is generally required that royalties be based not on the entire product, but instead on the smallest salable patent-practicing unit.

"The entire market value rule is a narrow exception to this general rule. If it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits
attributable to the entire product. The entire market value rule is derived from Supreme Court precedent requiring that "the patentee . . . must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative." The Court explained that "the entire value of the whole machine, as a marketable article, [must be] properly and legally attributable to the patented feature."

694 F.3d at 67 (emphasis added, citations and quotation marks omitted)."

The district court then noted that NPS's expert "did not admit that he used the entire market value rule in his report. Instead, based on sales data and deposition testimony, Mr. Jarosz first determined that the FortiOS software was not sold separately from its hardware (or virtual machine) 'chassis.' The "smallest salable units," therefore, were the accused Fortinet products (though they contain substantial non-accused components). Mr. Jarosz then stated: "Accordingly, when evaluating the quantitative evidence discussed below, I have used as the royalty base the price of the accused Fortinet hardware product or virtual machine that utilizes the FortiOS operating system" (Jarosz Rpt. at 35-36)."

The district court concluded, based on these statements that the expert's analysis was therefore based on the entire market value of the overall unit.

The district court agreed "with Fortinet that NPS has failed to provide sufficient evidence that the patented features drive demand for any Fortinet product, much less for all 70+ products. Therefore, use of the entire market value rule will not be allowed."

NPS' expert concluded in his report that the "patent in suit either directly or indirectly drives demand for products running the FortiOS operating system." As the district court explained, "Indirectly is not good enough. And, Mr. Jarosz also admitted that "product attributes enabled by the patented technology are not the only drivers of demand for the accused products." Mr. Jarosz further admitted that the accused Fortinet products contain numerous, valuable unpatented features, and that not all customers use the accused products in an infringing manner -- i.e., for some users, the accused features are not even significant (Jarosz Rpt. at 24-25, 62, 75-76). Accepting these admissions as true, it cannot be the case that the accused features drive demand for the accused products within the meaning of LaserDynamics. Put differently, NPS has not shown (and a jury could not reasonably find on this record) that the patented components drive demand for any accused products. Using the accused products as a royalty base therefore raises the same specter of error and jury prejudice as in LaserDynamics and runs afoul of the entire market value rule. Under a straightforward application of LaserDynamics, Mr. Jarosz's analysis cannot be presented to the jury."

Having excluded this testimony from the jury, this left the question of whether NPS should be given leave to amend the report. "Over the course of many years and more than a dozen patent trials, the undersigned judge has concluded that giving a second bite simply encourages overreaching on the first bite (by both sides). A second bite may be appropriate where the expert report can be salvaged with minimal disruption to an orderly trial, but where the report is not even close, there is a positive need to deny a second bite in order to encourage candor in the first place. To this must be added the fact that the trial date is only four days away and the parties and the Court have built their calendars around that date. To start over with a new royalty analysis would impose prejudice on the defense as well and disrupt the Court's calendar, which is burdened with other trials set far into the future. Possibly, plaintiff can cobble together a royalty case based on other disclosed witnesses and evidence. Possibly not. If not, it is a problem clearly of plaintiff's own overreaching and it will not be allowed a second bite at the apple."

Network Protection Sciences, LLC v. Fortinet, Inc., Case No. C 12-01106 WHA (N.D. Cal. Sept. 26, 2013)

The authors of www.PatentLawyerBlog.com are patent trial 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.