Wednesday, March 30, 2011

ePlus v. Lawson Software -- ResQNet Doesn't Let You Pick and Choose

As the ResQNet decision continues to roll on through the world of patent damages, the scope of how and when to use settlement agreements to calculate a reasonable royalty is becoming, if anything, even more confusing.

In January, Judge Payne of the Eastern District of Virginia was presented with a plaintiff's expert who picked just the settlement licenses he liked as part of his reasonable royalty analysis -- and was confronted with a Daubert motion to exclude all of his testimony.

In this case, the plaintiff's expert had five settlement agreements that had previously been entered into by the plaintiff as part of the data he could use to make a determination under Georgia-Pacific factor 1 -- whether there was an established royalty.

Three of those agreements, with Verian, SciQuest and Perfect Commerce, were entered into shortly after the patent litigation began and were for relatively low amounts. The plaintiff's expert chose not to rely on them.

Instead, the plaintiff's expert relied on two other agreements, one of which (Ariba) was entered into after a jury returned a verdict of infringement and the other (SAP) was reached after a hung jury mistrial. Both of these settlements were for substantial amounts (10-20 times the amount of the other settlements). These were the settlements the plaintiff's expert chose to use, converting these two lump sum amounts to a running royalty.

On the Daubert challenge, the court hammered the plaintiff's expert.

First, the court condemned the plaintiff's choosing only to rely on the high value settlements, while ignoring the low ones -- no reason, the court noted, was given for this picking and choosing of data.

The court also criticized the expert's using the later (post-verdict) settlements at all, since they were entered into well after the date of the hypothetical negotiation. The court also noted that these licensing agreements contained extensive cross-licensing provisions which made them quite different than the hypothetical license being constructed for the litigation.

Finally, the court criticized the use of lump-sum licenses as a basis for determining a "running" reasonable royalty -- especially without a rigorous economic analysis as to how to convert one to the other (which the court found lacking here).

Finding that the plaintiff's damages expert's opinion was without sufficient economic basis, the court excluded it.

Note -- at trial, ePlus later got a verdict of infringement, but -- because its damages expert's testimony had been excluded -- no damages.

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