Holding: A court plays a gatekeeping role to ensure that expert testimony on patent damages is only admissible if the testimony is based on sufficient factual evidence and reliable methodology. When relevant evidence is contrary to a critical fact on which the expert relied, the expert’s testimony is not admissible.
EcoFactor sued Google alleging infringement of US Pat. No. 8,738,327 directed to the operation of a smart thermostat. After a six-day jury trial, the jury found the ‘327 Patent infringed and awarded damages to EcoFactor in the amount of $20M. Before trial, Google moved to exclude testimony from EcoFactor’s damages expert, David Kennedy, under Federal Rule of Evidence 702 and Daubert, but this motion was denied. Google argued that Mr. Kennedy’s testimony, which asserted that a redacted value of $X per unit constituted an extablished royalty, lacked reliable methodology and sufficient factual support. In a decision on June 3, 2024, a panel of the Federal Circuit affirmed denial of Google’s motion for a new trial on damages. Google petitioned for rehearing en banc, and the Federal Circuit granted this motion on September 25, 2024, limiting the rehearing to the Court’s decision allowing testimony from Mr. Kennedy regarding a reasonable royalty rate based on a hypothetical negotiation analysis in view of Rule 702 and Daubert.
Mr. Kennedy’s expert opinion stated that Google should pay as damages a reasonable royalty in the amount of $X per infringing unit. This opinion used a hypothetical negotiation framework, in which Mr. Kennedy attempted to determine a reasonable royalty based on what the parties would have agreed to if a royalty agreement was reached just before infringement began. As part of his analysis, Mr. Kennedy considered lump-sum settlement licenses between EcoFactor and three other licensees, testifying that these lump-sum amounts reflected the $X per unit royalty that he recommended in his opinion. Each of these licenses included a whereas clause that stated that EcoFactor believed that the lump-sum payment was based on a reasonable royalty calculation of $X per unit. However, the licensees never agreed to this royalty rate, and in two of the licenses, it was later stated that the lump-sum amount was not based on sales and did not reflect a royalty.
Federal Rule of Evidence 702 states that an expert is allowed to testify if the (a) expert’s knowledge will help the trier of fact understand the evidence or determine a fact in issue; (b) the testimony is based on sufficient facts and data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case. In Daubert, the Supreme Court explained that the judge plays a gatekeeping role to determine whether scientific testimony or evidence is admissible and reliable. These determinations of admissibility are separate from the determination of weight and credibility of expert testimony, which are to be determined by the jury.
Expert testimony is especially important for assisting the trier of fact with the determination of complex, technical issues such as patent damages. Estimating a reasonable royalty almost always involves some uncertainty. Therefore, the record of a case may support a range of reasonable royalties or may support more than one viable method for estimating a reasonable royalty. However, in this case, the en banc panel of the Federal Circuit found that Mr. Kennedy’s calculation of a royalty of $X per unit was not supported by the third-party licenses on which he based his analysis.
The en banc panel found Mr. Kennedy misinterpreted the licensing contracts between EcoFactor and the third-party licensees. The unilateral clauses in the three licenses stating that EcoFactor believed the lump-sum was based on a royalty rate of $X per unit was only evidence that EcoFactor would seek that royalty rate as a licensor. These licenses do not provide a basis for assuming that the hypothetical licensee would also accept this royalty rate. Additionally, since two of the licenses include a clause that states that the lump-sum amount is not based upon sales and does not reflect a royalty, these licenses directly contradict that the lump sum was based upon any particular royalty rate. Therefore, these licenses do not provide support for Mr. Kennedy’s conclusion that $X per unit was a reasonable royalty.
Other than the third-party licenses, the only other evidence that Mr. Kennedy relied upon was the testimony of EcoFactor’s CEO, Shayan Habib. Mr. Habib stated that, from his general understanding, the lump-sum payments in the comparable licenses were calculated by multiplying the licensee’s past and future projected sales by the $X per unit rate. However, Mr. Habib had not been given access to the licensee’s sales data. The en banc panel found this testimony to be an unsupported assertion by an interested party in the case, and ruled that Mr. Habib’s testimony could not provide sufficient factual basis for Mr. Kennedy’s assertion of a $X per unit royalty rate.
Given the above, the en banc panel found that Mr. Kennedy’s expert testimony was not based on sufficient facts or data as required by Rule 702. Mr. Kennedy’s reliance on the unilateral whereas clauses indicating that EcoFactor believed the lump sums to be based on a royalty rate of $X per unit failed to provide adequate support for the determination that both EcoFactor and a potential licensee would be willing to agree to an $X per unit royalty. Since Mr. Kennedy’s analysis was not based on any further analysis of relevant sales data, his calculation was inadequately supported. When the relevant evidence is contrary to a critical fact upon which an expert relied to develop their opinion, it is the duty of the court as the gatekeeper to disallow this opinion to be introduced at trial.
The dissenting opinions expressed concern that the majority opinion will be misread as requiring district court judges to step into the role of the jury and resolve factual disputes as part of their gatekeeping duties. In the view of the dissent, Rule 702 recognizes that there may be multiple versions of the facts and the trial court should not exclude expert testimony solely on the grounds that the court believes one version of the facts over another.
Federal Circuit Precedential 
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