MDPA approves smallest salable unit as base; allows lump sum agreements as evidence of running royalty

On May 27, 2014, Judge Caldwell of the Middle District of Pennsylvania issued an opinion on a motion for reconsideration of an earlier Daubert opinion. The case is Kimberly-Clark Worldwide, Inc. v. First Quality Baby Products, LLC, Civil No. 1:09-CV-1685. The court addressed defendants' motion to exclude opinions by plaintiff's damages expert, Julie L. Davis, on two issues: (1) whether Ms. Davis' use of the smallest salable patent-practicing unit ("SSU") as the royalty base violated the entire market value rule ("EMVR"); and (2) whether Ms. Davis' use of lump sum agreements as evidence of a running royalty rate should be allowed. The court ruled in plaintiff's favor on both issues. The court first addressed the question whether the EMVR applies when a royalty is based on the SSU. The court answered the question in the negative (slip op. at 2-3):

The requirements of the entire market value rule need not be met, however, where a reasonable royalty is calculated based on the "smallest saleable unit" with close relation to the claimed invention. Broadcom Corp. v. Emulex Corp., No. 09-01058-JVS, 2011 U.S. Dist. LEXIS 154416, *17-18 (C.D. Cal. Dec. 13, 2011); Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 288 (N.D.N.Y. 2009).

The court did not appear to rule that the SSU is always the proper base when EMVR cannot be satisfied. Rather, it appeared to anchored its opinion on the actual product at issue (slip op. at 3):

Here, Ms. Davis's royalty calculations are based on the smallest saleable unit because the patents-in-suit claim disposable absorbent articles or composites comprising numerous different elements. Defendants have not identified, nor can the court envision, a manner in which the articles could be further subdivided into component parts that still practice the patents at issue. Accordingly, the entire market value rule does not render Ms. Davis's methodology improper. See Broadcom Corp., 2011 U.S. Dist. LEXIS 154416 at *17-18 (finding that Ms. Davis's royalty calculations did not violate the entire market value rule where plaintiff offered sufficient evidence to permit a reasonable jury to conclude that patent-practicing computer chips were, in fact, the smallest saleable unit); Personalized Media Communs., LLC v. Zynga, Inc., No. 2:12-CV-00068-JRG-RSP, 2013 U.S. Dist. LEXIS 160247, *6-7 (E.D. Tex. Nov. 8, 2013) (rejecting defendant's challenge to expert's methodology where defendant provided no explanation of how the smallest saleable unit used by expert could be further subdivided while remaining consistent with plaintiff's theory of infringement).

The court next turned to the issue of comparable licenses. Defendants argued that some of the prior licenses that Ms. Davis examined were not admissible because they did not use the same methodology as she did in her expert report. In particular, the licenses at issue were for lump sum payments regarding the patents-in-suit, and Ms. Davis was advocating a running royalty approach. The court also observed that Ms. Davis had used not just the lump sum agreements, but also running royalty agreements for the patents. The court concluded: "The fact that all prior licenses did not employ a running royalty rate is not fatal to Ms. Davis's methodology. See Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir. 2010) (finding that lump sum and running-royalty agreements can be relevant to each other as long as some basis for comparison exists in the evidence presented to the jury); Broadcom Corp., 2011 U.S. Dist. LEXIS 154416 at *15 (same)." Slip op. at 4.