NDCA excludes damages expert because EMVR not satisfied for smallest salable unit; revised report not allowed

On September 26, 2013, Judge Alsup of the Northern District of California issued an opinion in Network Protection Sciences, LLC v. Fortinet, Inc., No. C 12-01106 WHA (Doc. No. 334), addressing a Daubert motion to exclude the patentee's expert's damages testimony. Fortinet argued that NPS's damages expert (John Jarosz) improperly based royalties on the entire value of the accused products. The court agreed and excluded Mr. Jarosz's opinion in its entirety and refused to give NPS a second bite at the apple to submit a revised report for Mr. Jarosz.

An initial observation by the court the entire market value rule (EMVR) "has been a highly criticized and highly-litigated methodology." Slip op. at 10. The court noted that the Federal Circuit "restricted its use" most notably in LaserDynamics (quoting portion where Federal Circuit observed that royalties must be based "not on the entire product, but instead the smallest salable patent-practicing unit").

According to the court, although Mr. Jarosz did not admit to using EMVR, he based royalties on the entire accused products on the ground that they were the "smallest salable units." The court reasoned that "[h]is analysis was therefore based on the entire market value of the overall unit." Slip op. at 10.

Mr. Jarosz's analysis was rejected because NPS failed to provide sufficient evidence that the patented features drive demand for the any of the accused Fortinet products, let alone the 70+ products that were accused by NPS. The court concluded that use of EMVR would not be allowed, making the following statements concerning the smallest salable unit issue:  

NPS replies that Mr. Jarosz "correctly performed the apportionment analysis required by the Federal Circuit by first ascertaining the smallest salable patent-practicing unit, and then analyzing the proportion of product value derived from the allegedly infringing technology" (Dkt. No. 261 at 5). Analytically, this statement is incomplete. When using a multi-component 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.

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Here, NPS contends that because the accused products are the smallest salable unit, Mr. Jarosz "permissibly used the market value for the entirety of each Fortinet product that infringes . . . taking into account the proportion of the product represented by the allegedly infringing technology." Applying LaserDynamics to the summary judgment record, this order disagrees.

Mr. Jarosz concluded in his report that the "patent in suit either directly or indirectly drives demand for products running the FortiOS operating system." "Indirectly" is not good enough. And, Mr. Jarosz also admitted that "product attributes enabled by the patented technology are not the only drivers of demand for the accused products." Mr. Jarosz further admitted that the accused Fortinet products contain numerous, valuable unpatented features, and that not all customers use the accused products in an infringing manner i.e., for some users, the accused features are not even significant (Jarosz Rpt. at 24-25, 62, 75-76). Accepting these admissions as true, it cannot be the case that the accused features drive demand for the accused products within the meaning of LaserDynamics. Put differently, NPS has not shown (and a jury could not reasonably find on this record) that the patented components drive demand for any accused products. Using the accused products as a royalty base therefore raises the same specter of error and jury prejudice as in LaserDynamics and runs afoul of the entire market value rule. Under a straightforward application of LaserDynamics, Mr. Jarosz's analysis cannot be presented to the jury.

Slip op. at 12-13.

The court also refused to allow NPS an opportunity to "have a second bite at the apple." Slip op. at 13. Judge Alsup observed: "Over the course of many years and more than a dozen patent trials, the undersigned judge has concluded that giving a second bite simply encourages overreaching on the first bite (by both sides)." Id. The judge also noted that trial was only four days away, and that the parties and the court had built their calendars around that date. The court left open the possibility that NPS could "cobble together a royalty case based on other disclosed witnesses and evidence." Id. at 14.