The US Court of Appeals for the Federal Circuit affirmed a district court’s decision to preclude a damage expert from characterizing license agreements and opining on a reasonable royalty rate where the sponsoring party failed to produce key documents and to apportion for non-patented features. MLC Intellectual Property, LLC v. Micron Technology, Inc., Case No. 20-1413 (Fed. Cir. Aug. 26, 2021) (Stoll, J.)
MLC sued Micron for infringing claims of a patent relating to programing multi-level memory cells. In his expert report, MLC’s damage expert, Michael Milani, attempted to reconstruct the hypothetical negotiation. Milani opined on two separate approaches to determining the royalty base: A comparable license and the smallest saleable patent practicing unit.
Milani considered each of the Georgia-Pacific factors to determine a reasonable royalty rate. He determined that a Hynix Semiconductor license agreement was relevant, notwithstanding that it required a lump sum payment for a non-exclusive license to a patent portfolio containing the asserted patent rather than a royalty rate. Milani relied on a most favored customer provision that contemplated Hynix paying less for the patents if the licensor granted a license at a royalty rate of less than 0.25% to any new licensee to arrive at his royalty rate. Milani applied this rate to another lump sum agreement MLC had with Toshiba Corporation. To support his opinion, Milani relied on extrinsic evidence, including summaries of negotiations involving the asserted patent and another alleged infringer and letters and memorandums with other licensees—all contemplating a 0.25% royalty rate. Micron moved to exclude Milani’s testimony.
Micron filed a motion in limine to preclude Milani from mischaracterizing the license agreements as reflecting a 0.25% royalty rate. Micron moved to strike portions of Milani’s expert report under Fed. R. Civ. Pro. 37 as based on facts, evidence and theories that MLC disclosed for the first time in its damage expert report. Micron further filed a Daubert motion, seeking to exclude Milani’s reasonable royalty opinion for failure to apportion out the value of non-patented features. The district court granted all three motions.
The district court rejected Milani’s reliance on the most favored customer provision in the Hynix agreement for the 0.25% royalty rate, finding that the provision did not apply the rate to the lump sum nor did it provide any insight into how the lump sum was calculated. The district court also determined that Milani did not base his testimony on sufficient facts or data, and his opinion was not the product of reliable principles and methods. Finally, the district court found that MLC did not disclose the extrinsic evidence relied on by Milani to reflect the 0.25% rate, and therefore MLC could not rely on that evidence. Lastly, the district court determined that there was no evidence supporting Milani’s opinion that the 0.25% rate apportioned non-patented features of the accused products. MLC filed an interlocutory appeal.
The Federal Circuit found that Milani’s testimony relating to the 0.25% royalty rate rested on an inference from the most favored customer clause that went well beyond what the clause implies as a whole and was untethered to the evidence presented. Citing to its own precedent, the Court analogized similar cases involving lump sum payments and unsupported conversions to royalty rates. The Court noted that Milani’s testimony may have been proper if he had merely asserted that he “considered the 0.25% royalty rate called for in the most favored customer provision to reflect a relevant consideration for evaluating a reasonable royalty,” but Milani crossed the line when he stated that he “understood that the 0.25% rate was applied to Hynix worldwide sales.” The Court determined that Milani’s characterization of the agreements rendered his opinion unreliable.
Addressing the district court’s exclusion of information under Rule 37(c)(1), the Federal Circuit rejected MLC’s argument that it was not required to disclose specific facts and documents supporting its damages theory during fact discovery because it ultimately disclosed them during expert discovery. The Court pointed to Micron’s interrogatories, which asked for the factual basis; legal basis; and all facts, evidence and testimony regarding any applicable royalty rate that MLC intended to rely upon at trial. MLC argued that it provided adequate responses by identifying documents under Rule 33(d) and stating that the rate would be determined by relevant licenses and negotiations but conceded that some of the extrinsic evidence Milani relied on was not disclosed.
The Federal Circuit noted that the Ninth Circuit affords district courts wide latitude in applying Rule 37(c)(1) to exclude information that a party failed to provide under Rule 26. The Court found that the district court acted well within its discretion when it excluded Milani’s opinion as a result of MLC’s failure to supplement its discovery responses and disclose information required by Rule 26(e), including what it believed was an appropriate royalty rate, that it believed the Hynix and Toshiba licenses reflected a 0.25% royalty rate, and the extrinsic evidence on which Milani relied in support of his belief. The Court rejected MLC’s argument that it was not required to identify the documents that Milani would be using, how he would interpret those documents or how he would use them to derive a royalty rate under Rule 26(a)(2). The Court noted that the local district court (Northern District of California) rules expressly require an initial computation and disclosure of the evidence that will be relied on to the full extent the patent plaintiff could or should know of it under Rule 26(a)(1).
The Federal Circuit found that neither of Milani’s damages theories (comparable license or smallest saleable patent practicing unit) apportioned for the non-patented aspects of the accused dies or wafers. The Court determined that Milani failed to assess the licensed technology versus the accused technology to account for any differences, nor did he provide any apportionment for the asserted patent that was only one of many contained in a patent portfolio. The Court thus affirmed the district court’s Daubert order excluding MLC’s expert testimony regarding a reasonable royalty for failure to apportion.