EDTX allows cost savings approach for royalties, based on cost of entire location network

On November 25, 2013, Judge Davis of the Eastern District of Texas issued an opinion in TracBeam L.L.C. v. AT&T Inc., Case No. 6:11-CV-96 (Doc. No. 551), in which the court ruled on several issues including a motion to exclude opinions of TracBeam's damages expert, Robert Mills. According to the court, the parties agreed that an appropriate royalty rate would be based on AT&T's cost savings from using the patented technology compared to the best available non-infringing alternative. The issue centered around how to compute the cost savings. Mr. Mills opined that the cost savings to AT&T was the cost of building a new location network infrastructure at a price of $742M. AT&T claimed that Mr. Mills wrongly used the cost of AT&T's entire location network rather than the cost savings based on the value of the patented methods. AT&T argued that the value of the invention could be assessed by taking "the difference in cost between the redundant system and the existing system." Slip op. at 8.

The court initially opined that cost savings may be used to value a reasonable royalty and cited Federal Circuit authority for that proposition: "One way to value a reasonable royalty is to estimate the 'cost savings from use of the infringing product.' Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1240 (Fed. Cir. 2011) (citing and quoting Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1080-81 (Fed. Cir. 1983)." Slip op. at 8. The court also noted that the "hypothetical negotiation is limited by acceptable non-infringing alternatives." Id. (citing Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302, 1312 (Fed. Cir. 2002), for the proposition that "[t]he economic relationship between the patented method and non-infringing alternative methods, of necessity, would limit the hypothetical negotiation.").

The court then addressed AT&T's objection to Mr. Mills cost savings approach, ultimately deciding that TracBeam could present his approach to the jury. The court noted AT&T's concern that "the cost of a new network is an inaccurate measure and inflates the base for the royalty analysis," but also stated that AT&T had failed "to offer evidence assessing the value of the patented method itself." Slip op. at 8-9. In contrast, noted the court, TracBeam contended that the cost of AT&T's entire location network was an "accurate measure of the patent's value because other non-infringing alternatives are impractical or more expensive than a new network." Id. at 9.

The court distinguished Riles, in which the Federal Circuit found that the cost of an entire offshore drilling platform was not the value of a patented method of anchoring such a platform. There, said the court, the Federal Circuit had rejected the cost of the entire drilling platform as a way of valuing the patent because the drilling platform could perform operations that did not infringe. Although the court did observe that TracBeam's theory "appears to be a gross over-valuation as in Riles," the court also noted that AT&T had not introduced evidence to show that a location network can perform non-infringing operations unlike in Riles. "Consequently, the Court is unable to apportion anything less than the full cost of a location network to the patented technology." Slip op. at 9 (emphasis added).

The court concluded that AT&T's motion to strike Mr. Mill's report should be denied, because a reasonable jury could find the value of the patented methods to be the cost of an entire location network. According to the court, even though AT&T was right that "non-infringing alternatives can serve as a cap on the damages" and had "provided several alternatives that are significantly cheaper than the cost of a new location network," TracBeam had produced "admissible evidence AT&T's noninfringing alternatives are either impractical or more expensive than the cost of a location network." Slip op. at 10.