NDCA excludes expert testimony for failure to apportion (including addressing claim scope argument)

The Northern District of California, in Nortek Air Solutions, LLC v. Energy Lab Corp., No. 14-cv-02919-BLE (July 15, 2016) (Judge Beth Labson Freeman), granted Energy Labs' Daubert motion to exclude testimony of Nortek's damages expert, Dr. Stephen Prowse, regarding reasonable royalty damages. The motion included three reasons; we address the first one here: "Dr. Prowse's royalty analysis fails to apportion the value of the allegedly patented features from the unpatented features in the accused products ...." Slip op. at 8. The accused products were air handling systems.

In response to the motion, Nortek argued that Dr. Prowse had properly relied on the value of the accused air handling system as a whole rather than a smaller component for several reasons: (1) "because the asserted claims are directed to the entire air handling unit rather than any individual features," and (2) because "the air handling unit is the smallest saleable unit and thus an appropriate royalty base." Id.

The court rejected Nortek's arguments and excluded Dr. Prowse's reasonable royalty opinions because "he did not engage in any apportionment or attempt to separate the value of the patented features from the unpatented features." The court first addressed Dr. Prowse's expert report, in which he stated there was no need to apportion.

In Dr. Prowse's expert report, he states that there is no need to apportion the revenue base because there is "substantial evidence that the patented features do in fact drive demand and motivate buyers to purchase air-handling units." Exh. 1 to MIL No. 2 at ¶ 135, ECF 224-24. However, Dr. Prowse's basis for concluding that the patented features drive demand is insufficient. He relies on the fact that Nortek chooses to highlight the patented features in its marketing to conclude that the patented features drive consumer demand. See, e.g. id. at ¶ 118. However, the fact that a company chooses to advertise its products in a certain way says nothing about why a customer chooses to purchase a particular product. He also relies upon the fact that the accused features are the "heart" of the system or essential to the use of the system and therefore, must have driven customer demand. This theory of customer demand runs afoul of the Federal Circuit's ruling in LaserDynamics v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) [quotation omitted]. ... Dr. Prowse and Nortek also assert that based on a comparable license, Dr. Prowse is entitled to use the air handling system as a damages base. A comparable license is not enough to justify the use of the entire market value rule where "there was no evidence that the patented feature was the basis of consumer demand." Digital Reg. of Texas v. Adobe Sys, Inc., Case No. 12-cv-1971-CW, 2014 WL 4090550, at *3 (N.D. Cal. Aug. 19, 2014) (citing Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1319-20 (Fed. Cir. 2011). As a result, Dr. Prowse does not have the foundation to opine that the patented features drove customer demand.

Slip op. at 9.

Second, the court addressed an argument it said was not in Dr. Prowse's report, but had been raised by Nortek in its briefing namely, that the claim scope covered the entire air handling system, making apportionment unnecessary. The court rejected this argument finding that it "overstate[d] the scope of the claims and the nature of Nortek's infringement theory. An air-handling system is made of up of several different components and Nortek is not accusing every component of the system of infringing its patents." Slip op. at 10. The court also observed, in any event, that "the claims do not cover the entire system," citing as an example a claim that only covered "the fan array fan [sic] section of the air handling system." Id.

Third, the court rejected Nortek's argument that apportionment was not required because the air-handling system was the smallest saleable unit. The court reasoned that the air handling systems are made up of several components, including some that were not accused of infringement. Citing, VirnetX, 767 F.3d 1308, 1327-28 (Fed. Cir. 2014), the district court concluded that "Dr. Prowse needed to do more than just stop his analysis at the level of the smallest saleable unit and instead, needed to apportion the value between the patented and unpatented features." Id.

The court concluded that Nortek had not supported use of the entire market value rule and therefore granted the motion to exclude Dr. Prowse's opinions on reasonable royalty. Id. at 11.