NDCA finds EMVR unnecessary for lost profits; allows royalty based on entire revenue without EMVR

On May 15, 2013, Magistrate Judge Grewal of the Northern District of California issued an opinion in Brocade Communications Systems, Inc. v. A10 Networks, Inc., Case No. C 10-3428 PSG (Doc. No. 998), addressing a motion by A10 seeking to exclude evidence from Brocade's damages expert (James Malackowski) in an upcoming retrial. A10 moved to strike Malackowski's lost profits and reasonable royalty theories because Brocade failed to provide evidence sufficient to support an entire market value rule (EMVR) theory. The court denied the motion, finding Brocade's patent damages evidence to be relevant to its damages theories.

The court first addressed a question concerning the intersection of lost profits and EMVR that does not appear to have been squarely addressed by the Federal Circuit or the Supreme Court. In the retrial, Brocade intended to present a Panduit lost profits case, but the court had previously ruled that it could not rely on EMVR in the lost profits context. Accordingly, A10 contended in its motion that Brocade was required to apportion the profits to account for the value of the patented feature. The court remarked that "A10's argument is appealing, but it has not cited any Supreme Court or Federal Circuit case requiring an apportionment when a patentee claims lost profits based on Panduit." Slip op. at 4. The court included a footnote at the end of this sentence noting that the cases cited by A10 (Rite-Hite and Uniloc) did not support A10's argument that apportionment is required for lost profits under Panduit. The court quoted the recent Federal Circuit decision, Versata Software v. SAP, that the Panduit factors "place no qualitative requirement on the level of demand necessary to show lost profits." Slip op. at 4 n. 12. The court concluded this stands for the proposition that "apportionment - at least as consumer demand stands as a way of showing apportionment - is unnecessary under Panduit." Id.

The court also allowed Brocade to offer evidence that the royalty base would be the entire value of the accused product, because, according to Brocade, the accused product was the smallest salable unit. The court expressed "doubts" about this theory based on the evidence, but appeared to rely on Lucent's statement that "the base used in the running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence)." 580 F.3d at 1338-39. Judge Grewal noted that Uniloc and LaserDynamics seemed to disavow this language, but that the Federal Circuit has never expressly overruled this "holding" from Lucent. Slip op. at 5. Again, Judge Grewal noted "doubts" about Brocade's reliance on this passage from Lucent in light of Uniloc's warning against the introduction of entire revenue without proof of EMVR, but allowed Brocade "an opportunity to present a theory that can survive the Federal Circuit's directives and this court's order." Slip op. at 6.