EDTX Denies Daubert Motion Where Expert Used "Low Volume, High Price" Benchmarks, Ignored Demand Elasticity, and Offered a Royalty That Exceeded the Defendants' Profits and Even Some Sales Prices

On December 13, 2010, Magistrate Judge Everingham of the Eastern District of Texas addressed a Daubert motion to exclude testimony from plaintiff's damages expert on lost profits and reasonable royalty. SynQor, Inc. v. Artesyn Technologies, Inc., Case No. 2:07-CV-497-TJW-CE (E.D. Tex. Dec. 13, 2010). The technology at issue was bus converters for computer systems.

The first issue concerned benchmark prices for the expert's lost profits analysis. The expert, Mr. Reed, had selected a per unit benchmark price of $70 for the "but for" pricing. This benchmark was based entirely on the last three orders the plaintiff received from a single customer, Cisco. Mr. Reed then used this benchmark to establish "but for" prices ranging from $60 to $107 per unit for the plaintiff's bus converters, based on different types of bus converters sold by defendants. His calculations using the prices in this range resulted in numerous "but for" prices that were higher than the actual selling price for the specific bus converter and assumed that the "but for" price would remain constant for the damages period.

The defendants challenged the $70 price as a "low volume, high price" benchmark that ignored pricing for nearly 125,000 units sold by the plaintiff and 3.4 million bus converters sold by the defendants worldwide. The defendants contended that Mr. Reed's "but for" prices (ranging from $60 to $107 per unit) resulted in prices that were 1.5 to 3 times the actual prices obtained by the plaintiff or the defendants for comparable products. However, the problem with defendants' argument was that the three sales to Cisco selected by Mr. Reed were within the relevant damages period. This allowed the court to distinguish O2 Micro Int'l Ltd. V. Beyond Innovation Tedh., Case No. 2:04-CV032, 2005 WL 6440628 (E.D. Tex., Dec. 9, 2005), in which the plaintiff's expert had relied on sales prices that occurred before the alleged infringement, where the prices had dropped by 300% by the time infringement began. The defendants' argument in SynQor that Mr. Reed cherry-picked a high number, and then applied that number across the board, was not consistent with O2 Micro.

Judge Everingham held that Daubert did not compel exclusion of Mr. Reed's lost profits testimony at least for the time being. The court reasoned:

For instance, it is not clear to the Court whether other companies that are not named as defendants in this lawsuit, but that are listed as suppliers in the market, could have provided non-infringing alternatives to the defendants' accused products. Indeed, the plaintiff has conceded that this is not a two-supplier market case and Mr. Reed's report lists a number of non-party suppliers. (Dkt. No. at 561-2 at 2.) Likewise, it is not clear to the Court whether a fully regulated DC-DC converter would be an acceptable non-infringing alternative.

To be sure, if it is shown that a non-infringing alternative did exist, then Mr. Reed's Panduit analysis would not be grounded in factual predicates because it assumes that there are not any non-infringing alternatives. To make this assumption, Mr. Reed relies solely on the information provided by plaintiff's technical experts, Dr. Leeb and Dr. Schlecht. Whether Dr. Leeb and Dr. Schlecht have any factual basis for making this assertion will be tested at trail [sic, trial]. Therefore, at this point in the case, the undersigned is not persuaded that Daubert requires the exclusion of the expert's opinion and therefore DENIES the defendants' motion to exclude Dr. Reed's testimony relating to the $70 benchmark.

... The presiding judge should evaluate the evidence at trial and ultimately determine at that time whether or not the underlying factual predicates have been sufficiently developed to warrant the submission of Mr. Reed's opinions to the jury.

Second, Judge Everingham considered the defendants' contention that Mr. Reed's lost profits analysis was flawed because it assumed demand would remain at a historic level and thus ignored the elasticity of demand. The plaintiff responded that Mr. Reed did consider demand elasticity because he excluded certain units from his damages base and that, even if he did find the market inelastic, this is not a basis to exclude his testimony. Judge Everingham was not prepared, at this point in the case, to rule that Mr. Reed's high prices would not have impacted demand for the accused products but the Judge recognized that it is a "rare circumstance[]" when a "patentee is entitled to a higher price divorced from the effect of that higher price on demand for the product." Again, however, he cautioned that the presiding judge should evaluate the evidence at trial and determine at that time whether Mr. Reed's damages theory should be submitted to the jury.

Third, the court turned to plaintiff's theory of reasonable royalty damages, which assumed that the defendants would have agreed to what they believed was an excessive royalty rate. The defendants contended that Mr. Reed's $70 benchmark price resulted in a royalty that was greater than the defendants' profit margins and, in many cases, greater than their selling prices. The plaintiff countered that Mr. Reed had used the correct Georgia-Pacific methodology and that he was correct not to cap damages because the profits earned by the defendants were a result of the eroded market that they created by infringing the plaintiff's patents. Judge Everingham decided, again, that it was not the proper point to exclude Mr. Reed's testimony. However, the Judge did note that, for one of the defendants, the non-eroded price would result in an effective royalty of 130% of the actual average price of defendants' product. The Judge admonished that experts should not be allowed to present a price erosion model through the guise of reasonable royalty and suggested that the presiding judge evaluate the evidence more fully at trial.