Judge Bryson sitting by designation in EDTX denies summary judgment motion and motion to exclude defendants' expert's testimony on noninfringing alternatives for reasonable royalty

On August 10, 2012, in TQP Development, LLC v. Merrill Lynch & Co., Inc., Case No. 2:08-CV-471-WCB (E.D. Tex.), Judge William C. Bryson of the Federal Circuit, sitting by designation, considered plaintiff's motion for partial summary judgment and motion to exclude opinions by the defendants' damages expert on noninfringing alternatives. The twist here is that the noninfringing alternatives were being offered on the issue of reasonable royalty damages; this was not a lost profits case. Judge Bryson denied both motions and ruled that defendants' expert could testify regarding the noninfringing alternatives, which the defendants' expert contended would impact any hypothetical negotiation. The technology at issue was cipher algorithms.

Initially, the parties stipulated that the defendants' had access to and were capable of implementing noninfringing cipher algorithms. However, the plaintiff argued that the noninfringing alternatives were not available on the browsers of defendants' customers at the date of the hypothetical negotiation. The thrust of plaintiff's argument was that, even assuming defendants' customers had access to and were capable of using the algorithms, they were not "available" because defendants had failed to show their customers could also implement the algorithms.

Judge Bryson first cited to a key Federal Circuit case on noninfringing alternatives (though in the lost profits context): Grain Processing Corp. v. American Maize Prods. Co., 185 F.3d 1341, 1349 (Fed. Cir. 1999). The Judge then cited an EDTX case for a three-part test to use in determining whether an alternative product is "available":

In determining whether the alternative product is available, the court may consider whether '(1) the defendant could readily obtain all of the material needed to implement the non-infringing alternative; (2) the non-infringing alternative was well known in the field at the time of infringement; and (3) the defendant had all of the necessary equipment, know-how, and experience to use the non-infringing alternative.' LaserDynamics, Inc. v. Quanta Computer, Inc., No. 2:06-CV-348, 2011 WL 197869, at *3 (E.D. Tex. Jan. 20, 2011), citing Grain Processing, 185 F.3d at 1353-54.

Citing testimony from defendants' expert, Judge Bryson found that the alternative ciphers were on the market and available at the time of the hypothetical negotiation. However, there was still an open question on element (3) and, because this issue is factual in nature and the plaintiff's motion was in the context of summary judgment, Judge Bryson denied plaintiff's motion for summary adjudication on noninfringing alternatives.

The Court then turned to plaintiff's motion to exclude defendants' expert's testimony, denying this motion as well. Plaintiff disputed whether the expert had support for his conclusion that the noninfringing alternatives were available. Judge Bryson found that the expert had provided sufficient factual basis for this conclusion.

Second, Judge Bryson rejected plaintiff's argument that the expert improperly calculated the cost of implementing the alternative cipher algorithms. Plaintiff relied on Judge Posner's opinion in Apple v. Motorola in which a damages expert's opinion was excluded because he had reported and improperly manipulated a cost number provided by a single employee. Judge Bryson rejected this argument:

Contrary to [plaintiff's] assertion, the fact that a party relies on a single employee is not dispositive; instead, the ultimate question is whether the expert's opinion is sufficiently reliable and relevant. See United States v. Valencia, 600 F.3d 389, 424 (5th Cir. 2010). In any event, [defendants' expert] relied on more than a single [defendant] employee in reaching his cost estimate, so the Apple case is inapplicable here.

Judge Bryson then analyzed the expert's methodology for the cost of implementing the noninfringing alternative cipher algorithms. The Judge found persuasive that the expert had consulted the defendants' technical expert and a technical fact witness from one of the defendants; that he reviewed documentary evidence received from defendants' lawyers and engineers; and that he relied on various public documents. The court concluded that the expert's "reliance on these various sources indicates that his methodology was reliable and reproducible."

Finally, the court accepted the expert's cost estimate of $900k to $1M to implement the change to the substitute. The court cited two cost components generated by the expert: $100k to implement the change and $800-900k to purchase upgraded equipment that might be necessary to maintain transaction speed and efficiency.