NDCA addresses damages based on entire chip; royalty rate; estimates of importation

On June 20, 2014, Judge Gonzalez Rogers of the Northern District of California issued an opinion on defendant Freescale's motion to exclude certain testimony of plaintiff's damages expert, Catharine M. Lawton. MediaTek, Inc. v. Freescale Semiconductor, Inc., Case No. 11-cv-5341 YGR. Freescale moved on three issues: "(1) [Lawton's] apportionment analysis; (2) her royalty rate estimate for certain patents-in-suit; and (3) her opinion on the U.S. share of Kindle e-reader sales." Slip op. at 1. The court denied the motion on each issue.

• Apportionment analysis

Freescale moved to exclude Lawton's opinion that damages should be based on the entire market value of Freescale's chips rather than apportioning for the value of the patented contributions. MediaTek countered by arguing that both parties used the entire chip price as the royalty base and that, in any event, Lawton's analysis supported such a base.

The court cited the usual law on smallest salable patent practicing unit and entire market value rule, observing that the latter is an exception to the former. Slip op. at 3-4. The court made the following statement concerning the interplay of these principles: "Cases following from Laser Dynamics have emphasized the requirement that the royalty base be the "smallest salable patent-practicing unit" to the effect that the smallest salable unit must be "closely tied to the patent" or else an apportionment of the value of the patent-practicing technology to the alleged infringing product is still required, even if the patentee is not invoking the entire market value rule expressly. Slip op. at 4-5 (the following string cite is a direct quote from the opinion: Dynetix Design Solutions, Inc. v. Synopsys, Inc., C 11-05973 PSG, 2013 WL 4538210 at *3 (N.D. Cal. Aug. 22, 2013) ("This court sees no logical basis to depart from an apportionment requirement in a case, such as the present one, where the alleged smallest salable unit plainly is not closely tied to the patented feature"); Network Prot. Sciences, LLC v. Fortinet, Inc., C 12-01106 WHA, 2013 WL 5402089 at *7 (N.D. Cal. Sept. 26, 2013) ("When using a multicomponent product as a royalty base, even if it is the smallest salable unit, a patentee must still show that the patented feature drives demand for the entire product.") (emphasis in original)); Golden Bridge Tech. v. Apple Inc., 5:12-CV-04882-PSG, 2014 WL 2194501 (N.D. Cal. May 18, 2014) ("Even if the accused products were the smallest salable unit, this court has previously explained that, under the Circuit's case law, relying on the smallest salable unit does not relieve a patentee of the burden of apportioning the base")).

MediaTek defended Lawton by arguing that there was no way, "conceptually or practically," to separate the value of the patents from the accused chips. MediaTek cited its technical experts to support this conclusion. Lawton piggy-backed on these technical experts, reasoning that the entire accused processor chips were the smallest salable unit. Lawton concluded that "currently available information is insufficient to estimate the amount of profit that can be properly attributed to the patented inventions." Slip op. at 5.

Freescale contended, in effect, that Lawton could have apportioned. It cited, for example, the ARM cores that are used in the processors and Lawton's alleged failure to account for Freescale's use of alternatives to the patented technology. The court observed that Lawton had also failed to compare the accused chips to certain chips that were undisputedly noninfringing. Slip op. at 6. The court cited Apple v. Motorola as support for denying the motion:

The Court finds that there is a disputed issue requiring further evidence to determine whether, in light of the nature of the patented technologies at issue and their use on the alleged infringing chips, it would be possible to apportion the value of the patent-practicing technology compared to that of the apparent smallest salable unit here, the chip. Though Freescale disagrees with Lawton's conclusions, and has raised some questions their factual underpinnings, those issues bear on the weight to be accorded the testimony than its reliability or probative value. Given the state of the record, the Court declines to exclude the testimony. Cf. Apple Inc. v. Motorola, Inc., 2012-1548, 2014 WL 1646435 (Fed. Cir. Apr. 25, 2014) (reversing decision to exclude expert testimony where challenge to basis for royalty rate went to evidentiary weight, not admissibility, which could be dealt with on cross-examination). Slip op. at 6.

• Royalty rate

On this issue, the court reached the same conclusion that Freescale's arguments went to the weight and not admissibility. The court cited a number of specific facts supporting this conclusion. One of the issues was that MediaTek sought a significantly lower royalty on one patent than on another set of patents, but the court noted that the hypothetical negotiations were separated by several years and a number of factors showed that the circumstances between the parties had changed significantly.

• Estimating importation

The third issue estimating for the royalty base the quantity of accused products entering the U.S. is a common issue in semiconductor cases. Chip makers generally make and sell their chips to overseas customers, and the customers incorporate the chips into finished products and ship those products all over the world, including into the U.S. However, the chip makers generally do not have access to their customers' U.S. importation data. Accordingly, a plaintiff, without discovery quantifying imporation, must resort to estimating those numbers. That is what MediaTek did in this case, relying as have other plaintiffs on third party market research data. Lawton used such data and then estimated the number of products containing the Freescale accused chips that had entered the U.S. The court found this analysis sufficiently reliable for the jury, noting that Freescale did not challenge the reliability of the data source, but only Lawton's conclusions and opinions. "Unlike Power Integrations, where the source of the expert's data was unclear and his estimates were based upon improper assumptions about the accused products themselves, here it is an undisputed fact that the source of the ratio estimate is based upon disclosed, publicly available data and that Amazon Kindles incorporate Freescale's accused chips. Id. at 1373. Freescale's quarrels with this evidence are not a basis for its exclusion, but are disagreements and credibility challenges that can be clarified on cross-examination." Slip op. at 7-8.