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District Court Precludes Damage Expert from Using a Settlement Agreement to Derive a Reasonable Royalty Calculation Where Expert Employed a Likelihood of Liability Estimate Based Solely on a Study That Patent Holders Prevail Approximately 40 Percent

MAX Encryption Technologies (“MAZ”) filed a patent infringement action against Blackberry for patent entitled “Method of Transparent Encryption and Decryption for an Electronic Document Management System,” U.S. Patent No. 6,185,681 (the “‘681 patent”). As the case progressed toward trial, Blackberry filed a motion to exclude the testimony of MAZ’ damages expert, Chase Perry.

As explained by the district court, “[i]n reaching his baseline estimate for damages, Mr. Perry relied on a previous license agreement involving the patent-in-suit. The previous license agreement, however, was made in the context of settling a litigation dispute, and thus did not reflect the royalty the parties would have reached ‘just before infringement began.’ Therefore, the damages amount arrived at in the settlement agreement had to be translated into a damages number that the same parties would have arrived at just before infringement began had they, instead, assumed that the patent was infringed and valid. This implies that the amount of the previous settlement would need to be increased to arrive at the royalties that would have been agreed to in a hypothetical negotiation.’

The expert attempted to account for this discrepancy by estimating the discount factor the parties used when negotiating the previous license agreement. “Specifically, he reasoned that if Settlement Value = Likelihood of Liability * Expected Damages, then Expected Damages = Settlement Value/Likelihood of Liability.” He then arrived at his estimate of expected damages by estimating the likelihood of liability at 40%.

The district court found this analysis devoid of any basis in fact. “Mr. Perry’s estimate for the likelihood of liability was not based on any facts relating to the merits of Plaintiff’s case. The estimate did not consider the nature of the patent-in-suit, the accused products, or either party’s litigation strategy. Instead, the estimate was based on a study that found that ‘patent holders tend to prevail approximately 40% of the time’ in the District of Delaware. The Court agrees with Blackberry that Mr. Perry’s estimate approach is not reliable as it is not sufficiently tied to the particular facts of this case. See, e.g., Virnetx, 767 F.3d at 1334.”

The district court also noted that “[t]he Federal Circuit rejected an approach similar to Mr. Perry’s when it considered a methodology that did ‘not say anything about a particular technology, industry, or party.’ Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1317 (Fed. Cir. 2011) (rejecting ’25 percent rule’ that set baseline royalty rate at 25% of profits on patented invention without considering merits of patentee’s case, nature of patented invention, or industry-specific market dynamics). Similarly, a district court confronting facts quite similar to those presented here granted a motion to strike the testimony of an expert who adjusted his estimate based on the fact that ‘patent holders are successful in only 33% of cases nationwide.’ Avocent Redmond Corp. v. Rose Elecs., 2013 WL 8844098, at *5 (W.D. Wash. Mar. 11, 2013).”

Accordingly, the district court ordered that portion of the expert’s opinion excluded, but did order the parties to file a joint report on whether the expert should be permitted to correct the unreliable portion of the analysis.

Maz Encryption Technologies, LLC v. Blackberry Corp., Case No. 13-304-LPS (D. Del. Aug. 25, 2016)

The authors of are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. For more information about this case, contact Stan Gibson at 310.201.3548 or