Foresight Valuation Group

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Tag: Patents

Damages Expert Blog: Let the Jury Select the Royalty Rate

Posted on Modified on by Lynn Dudinsky

 

In this blog, we are discussing the United States Court of Appeals for the Federal Circuit’s March 2021 decision in the Bayer v. Baxalta case and the discretion is provided the jury in selection a reasonable royalty rate for damages calculations. The details of the case involve the Federal Circuit affirming the District Court’s ruling that a treatment for Hemophilia sold by Baxalta infringed claims owned by Bayer. The purpose of this blog is to highlight the Federal Circuit’s opinion as to Bayer’s damages expert and his methodology of determining, or allowing the jury, to determine the appropriate damages.

Bayer’s damages expert submitted an expert report in which he opined that Beyer was entitled to a royalty rate of 23.75%. He determined this royalty rate based on it being the midpoint of a rather large bargaining rate of 5.1% to 42.4%. This midpoint opinion was based on the Nash Bargaining Solution which was developed by the Nobel Prize winning mathematician who made fundamental contributions to game theory and was memorialized in the popular 2001 film A Beautiful Mind. The damages expert’s opinion that a reasonable royalty is the mid-point of the bargaining range was initially excluded by the District Court on a Daubert Order because the District Court concluded that the expert failed to tie his 50/50 split to the facts of the case. The District Court denied Baxalta’s request to prohibit the expert from testifying on the bargaining range of 5.1% to 42.4% and the jury returned a verdict for damages based on a 17.78% royalty rate and the ruling was appealed.

The Federal Circuit addressed the issue of damages on appeal to determine whether the District Court erred in permitting the jury to pick a royalty rate within the range of feasible rates presented by Bayer’s damages expert. In its opinion, the Federal Circuit explained that there is no precedent that requires an expert to provide a single proposed royalty rate and that there is existing precedent entitling juries to choose an award within the amounts advocated by the opposing parties, in a manner that is not bound to accepting a specific rate proffered by one party’s expert. The opinion highlights the main requirement that the expert must adhere to the use of a reliable methodology in determining the range of hypothetical negotiation royalty rates. In discussing the methodology utilized by Bayer’s expert, the opinion describes how the expert’s testimony demonstrated that he considered and discussed the appropriate Georgia-Pacific factors that were used in the determination of the minimum and maximum royalty rates that Baxalta should have expected during licensing negotiations.

An easy take away from this case is that a damages expert has fulfilled his or her obligations by stating, as Bayer’s expert stated, that “as a matter of economics, any of these royalty rates (between 5.1% and 42.4%) would be feasible outcomes” and the “reasonable royalty is the likely outcome within that range”. However, the Federal Circuit made it clear that such a statement is only permissible when supported by reliable methodologies that adhere to established precedents and only then can the expert leave the final determination of the exact royalty rate to be used to calculate damages to the discretion of the jury. Ultimately, the Federal Circuit affirmed the decision of the jury in selecting a royalty rate of 17.78%, a rate within the range outlined by Beyer’s expert and higher than the 1% royalty opined on by Baxalta’s expert.

Centripetal Networks v. Cisco Systems

Posted on Modified on by Lynn Dudinsky

The 22-day bench trial in the District Court for the Eastern District of Virginia concluded last week with a verdict in favor of Centripetal Networks for $1.9 billion in past damages and a running royalty of 10% for three years followed by a 5% royalty for an additional three years. The Centripetal Networks, Inc. v. Cisco Systems, Inc. case involved the assertion of five patents that deal with complex computer networking security functions. Centripetal accused various Cisco network devices of infringing the asserted patents, including Cisco’s Switches, Routers, Digital Network Architecture, Cognitive Threat Analytics as well as other products. Of the five asserted patents, the Court found that each element of the asserted claims in four valid and infringed by one or more of Cisco’s products and that Centripetal had failed to meet its burden of proof on infringement of the asserted claims of the fifth patent.

An interesting aspect of this case was the use of a live video platform used by both parties to present their evidence and the selection, over objections by Cisco, of a platform other than Cisco’s. The reason for the need of a video platform was based on the technologies involved being “at the forefront in protecting intellectual property and confidential personal information” as well as their use in the national defense context. The court believe that it was in the public interest to move forward with the trial rather than waiting until an unknown time when courtrooms would be open for traditional civil trials. The use of this platform ended up being a success and at the end of the last day of trial, both parties “joined in congratulating the Court’s staff for their handling of the trial evidence by means of the video platform.”

Following the Court’s determination on validity and infringement, the issue of damages was discussed. As it related to past damages, Centripetal declined to present evidence of a causal relationship between suspected lost profits and Cisco’s sales of infringing technology and therefore the lost profit method of calculating past damages was not at issue in this case. Rather, the Court adopted the approach based on the reasonable royalty Centripetal would have received through arms-length bargaining. The determination of reasonable royalties can be based on the following methods: (1) the analytical method which focuses on the infringer’s projections of profit for the infringing product and (2) the hypothetical negotiation or the willing licensor-willing licensee approach. The Court stated that insufficient evidence was submitted for the first approach therefore the willing licensor-willing licensee approach as selected.

In accordance with the selected approach, the Court based its economic analysis on the factors laid out in Georgia-Pacific Corp. v. U.S. Plywood Corp. Factors one and two of Georgia-Pacific focus on the presence of existing license agreements for the patents-in-suit and the rates paid by licensees to license other patents comparable to the infringed patents. In this case, the Court had recently heard a case involving Centripetal and Keysight Technologies where an agreement was made related to a Confidential Binding Term Sheet. In this agreement, Centripetal licensed patents that the Court determined to be comparable for a $25 million upfront payment in addition to a 10% royalty on directly competing products and a 5% royalty on non-competing products. The Court determined that the 10% royalty on directly competing products provided “a comparable baseline license from which the Court can determine a reasonable royalty in this case.” Due to the fact that this agreement was the only comparable agreement, the Court was able to overcome the preference to exclude agreements that were obtained in the coercive environment of litigation as opposed to being the result of open negotiation.

The Court discussed the various other Georgia-Pacific factors and, while we will not elaborate on the specific discussion of each factor in this blog, it is important to note that the Court determined that the “weight of the factors as a whole strongly favors Centripetal.” This determination allows the Court to find that the Keysight royalty rate of 10% is a reasonable royalty rate to compensate Centripetal for Cisco’s past infringement. Another discussion (reserved for another blog) relates to the apportionment argument presented by both parties that led to the determination that the apportioned royalty base was $7,558,085,447.

Following the determination of the reasonable royalty rate and the apportioned royalty base, the Court was able to calculate the total past damages award of $755,808,545, before adjusting for enhanced damages. On the topic of enhanced damages, the Court noted that Centripetal and Cisco signed an NDA in 2016 as a result of meetings where Centripetal’s product offerings and the effectiveness of their solutions were demonstrated to Cisco. After additional meetings and further disclosures, Cisco released its “network of the future” products in June 2017, which incorporated Centripetal’s patented technology. The Court outlined enough evidence to support its belief that “this is an egregious case of willful misconduct beyond typical infringement” and determined that enhancing the damages by a factor or 2.5 was appropriate. Applying this factor increased the damages to $1,889,521,362. One of the reasons stated by the Court to use a factor of 2.5 instead of 3 was because Cisco prevailed as to one of the asserted patents, potentially saving the company over $375 million in additional damages.

The Court then turned its attention to future damages where it denied Centripetal’s request for injunctive relief and instead imposed an ongoing royalty obligation. Again, the Court used Georgia-Pacific to find that the Keysight license as a comparable license and selected a 10% royalty for the first three years and extended the three year term of Keysight to 6 years for Cisco with a 5% royalty set for the final three years. The Court also set minimum and maximum annual royalties of $167 million and $300 million, respectively, for the first three years and $83 million and $150 million for the final three years.

The final tally of damages related to this case resulted in Actual Damages of $755 million enhanced to $1.9 billion and Pre-judgement Interest of $13.7 million for a lump-sum award of $1,903239,287 “due on the judgment date.” Additionally, the future damages based on royalties over the next six years will range from $754 million to $1.3 billion. These combined damages awards rank among some of the highest patent damages awarded to date.  Cisco has already announced its plan to appeal this decision to the U.S. Federal Circuit Court of Appeals, and we will update this blog as new information emerges.

Arthrex v. Smith & Nephew: Inter Partes Review and Unconstitutional Appointment of APJs

Posted on Modified on by Lynn Dudinsky

On Halloween, the United States Court of Appeals for the Federal Circuit delivered its opinion in Arthrex, Inc., v. Smith & Nephew, Inc. that the appointment of the Patent Trial and Appeal Board’s Administrative Patent Judges (“APJs”) violates the Appointments Clause of the U.S. Constitution. The background of this case involved Arthrex receiving a final written decision in the inter partes review of its patent finding the claims unpatentable as anticipated. Anthrex subsequently appealed the written decision of the PTAB arguing that the APJs presiding over the inter partes review were not constitutionally appointed.

A brief background on the appointment and power of the APJs is required to understand the potential impact of this decision. APJs are appointed by the Secretary of Commerce in consultation with the Director of the USPTO. This leads to the question of whether the APJs are defined as inferior officers or principal officers. The Court described the functions of APJs in determining how to define these officers and highlighted the significant discretion APJs exercise when carrying out their functions in the inter partes review process. It was noted that their decisions on patentability are final and subject only to rehearing by the Board or appeal to the CAFC. The Court then described the defining characteristics of inferior officers as compared with principal officers as being: (1) whether the officer has a superior, (2) whether the superior was appointed by Presidential nomination, and (3) the level of supervision and direction over the officer by the superior.

The Court then explained that the two presidentially-appointed officers at the USPTO, the Secretary of Commerce and the Director of the USPTO, provide direction to the USPTO. While these officers provide direction, the Court held that neither officer individually nor combined exercised sufficient direction and supervision over APJs to render them inferior officers. The Court’s opinion was based on the lack of independent statutory authority to review the final written decision by the APJs before that decision is issued on behalf of the United States. Another factor considered by the Court was the removal power over an officer, which the Supreme Court described as “a powerful tool for control.” APJs, the court noted, may be removed “only for such cause as will promote the efficient of the service,” meaning that the APJ may be removed when his or her misconduct is likely to have an adverse impact on the agency’s performance. With this in mind, the Court held that APJs are principal officers and thus the current structure of the Board violates the Appointments Clause because the APJs are appointed by the President and confirmed by the Senate.

In an effort to resolve the Constitutional conflict, the Court suggested removal of the employment protections that currently exist and providing the presidentially-appointed officers at the USPTO broad removal powers over APJs. It is unclear what the lasting impact of this decision will be, but recently, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property, and the Internet conducted a hearing that included a discussion of the Arthrex decision. A variety of solutions were presented and discussed to resolve the issue created by the Arthrex decision and time will tell if a legislative fix will soon emerge.

When a Stick Becomes a Carrot: How Toyota’s Royalty-Free Patent Move Impacts The Valuation of Its IP Portfolio

Posted on Modified on by Efrat Kasznik

Toyota has recently announced (April 2019) that it will grant royalty-free licenses on nearly 24,000 patents related to its hybrid electric vehicle (HEV) market. In the announcement, Toyota stated that its goals were to promote widespread adoption of electrified vehicles in an effort to help governments, automakers and society at large accomplish goals related to climate change. Toyota has further noted that it felt now is the time to cooperate with other companies, based on the high volume of inquires it received in connection with its vehicle electrification system from companies who recognize a need to popularize hybrid and other electrified vehicle technologies.

The Toyota announcement comes at the heels of a similar announcement made in January 2015, when Toyota announced at the CES conference that it is going to make its hydrogen fuel portfolio of 5,600 patents available on a royalty-free basis. Toyota’s new patent announcement raises a number of important questions related to the value of these patents and the end goal of Toyota’s move.  In this blog we examine the potential motivations for Toyota’s bold move, its implications on patent valuation and brand valuation, and how Toyota’s patent move is very different from what appears to be a similar move made by Tesla.

From Hybrid Vehicle Pioneer to Market Leader

The Toyota brand is synonymous with the hybrid vehicle. Since the launch of the Prius, with its unique love-it or hate-it design, Toyota has solidified its position as a leading auto company in the pursuit of reduced vehicle emissions. The company’s eco-friendly branding efforts have paid global dividends – in 2017, Toyota surpassed the 10 million cumulative global unit sale mark, with Prius models alone accounting for about 60% of these sales. Though they may be the category leader, however, the hybrid vehicle market is fairly negligible in the total global car market, which is pegged at nearly 79 million unit sales in 2018. With an estimated 4.2 million unit sales in 2018, the hybrid market represents just 5% of the total. With such a strong brand in a minuscule category, it is only natural for Toyota to seek to aid growth in the hybrid market.

With the move to allow royalty-free access to its hybrid vehicle patent portfolio, while selling parts and consulting services on the technology, it seems that Toyota is attempting to advance the hybrid market as a whole. A J.P. Morgan analyst report noted that electric vehicles (including battery EVs, plug-in hybrids, and traditional hybrids) represented just 1% of total global vehicle sales in 2015. The same report estimates that by 2030, this will rise to nearly 60%. It is fair to assume that Toyota will be a major supplier fulfilling this increased global demand.

When a Stick Becomes a Carrot

In an article we published in March 2019, Foresight predicted the return of “Carrot licensing” as one of the trends to watch in 2019.  The Toyota announcement could not have been a more timely validation of that trend.  “Carrot licensing” is a term used to reference licensing activity that is driven by technology transfer, as opposed to licensing driven by enforcement (also known as “Stick” licensing). This form of licensing is more closely associated with emerging technologies, where the licensor is interested in creating markets for new products using an idea protected either by trade secrets or by patents.  A Carrot licensing strategy also has economic advantages: it allows expansion into new regions without bearing the marketing, manufacturing and distribution cost associated with the complementary business assets needed to bring a new technology to market.  In Toyota’s case, the company decided to grant royalty-free license agreements as a way to boost market adoption, which will in turn drive additional revenues from components and technical support.

Given Toyota’s dominance in the hybrid vehicle market, one could easily argue that the time to cooperate has long passed, as major US manufacturers currently offer their own hybrid vehicles, or have announced plans to go all electric in the coming years. With this in mind, it is unlikely that Toyota is seeking to create partnerships with major US manufacturers to expand their hybrid lineups. Instead, this seems to be Toyota’s push to become a component supplier that also provides fee-based technical support to car makers in developed or developing countries that do not have the same access to electric or hybrid vehicle technology. Through component sales and technical support, Toyota can continue to profit from the innovations protected by these patents without having to build, export and market Toyota vehicles.  Since Toyota cannot possibly grow its market share much beyond it already is, it needs to expand the overall pie so others can produce hybrid vehicles, while paying Toyota for parts and knowledge.  It is actually a very smart strategy from an economic and market perspective.

Toyota’s Patent Valuation: Boost or Bust?

Toyota’s announcement raises a number of questions related to the value of the 24,000 patents that were just offered royalty-free to the market. If Toyota is granting royalty-free licenses on a significant portion of its patent portfolio, does this mean that these patents hold no value? According to Toyota’s announcement, an actual license with Toyota is still required to gain access to these patents. This approach is markedly different from that of Tesla which stated they would not initiate patent lawsuits against anyone who, in good faith, wanted to use their patents. Toyota is stating that “contracts for the grants may be issued by contacting Toyota and discussing specific licensing terms and conditions.” This sounds more like Microsoft’s approach to granting access to 10,000 patents to startups to defend against lawsuits, subject to the condition that the startup must qualify based on their preceding three-month Azure spending.

We do not yet know what terms and conditions will ultimately be included in the Toyota license agreements, but the language tends to indicate that one could expect to find a tie-in with Toyota’s services and/or Toyota’s components, which could generate significant revenues for Toyota. The company will most likely still continue to maintain and grow its patent portfolio, even though the patents are offered under royalty-free licenses. Assuming this is the case, Toyota is seeking an alternative route to monetization of their patented technology that extends beyond the market which it already dominates in vehicle sales.  If the patents help drive other types of revenues, then they still have significant value, which could potentially be even higher than the value calculated based on the royalty savings or royalty licensing potential to Toyota.  Patents can also bring strategic value that does not translate directly into a revenue stream.  Toyota holds the IP rights to the technology underlying its massive patent portfolio, and can use these IP rights in whatever way it sees fit.  From an economic and legal perspective, the Toyota Board has a fiduciary duty to its shareholders to utilize corporate assets (including intangible assets, such as patents) in ways that optimize shareholders’ return.  One should assume that careful consideration has been given before 24,000 patents are released royalty-free, as the Board could have left the status-quo as is and have done nothing with the patents; if these patents are indeed worthless, why do anything with them? Let alone offer them free of royalty to the market.

“Toyota Inside”? The Branding Implications for Toyota

Toyota’s gesture also differs from Tesla’s in other important ways. Tesla’s announcement was interpreted as a way to expand adoption of a relatively new market: all-electric vehicles. Tesla viewed its patent portfolio as a road block to the emergence of newcomers in the market.  Toyota, on the other hand, is in a much different position: it holds the lion’s share of the market for hybrid vehicles –  a market it helped create over 20 years ago with the introduction of the first Prius model in 1997. Since that time, Toyota has effectively utilized its portfolio to restrict competition and build its massive market share, and is now facing an inflection point where the market appears ready to abandon hybrid vehicles in favor of all- electric vehicles. It seems clear that Toyota believes major markets are turning away from hybrids, and it now must find a way to monetize its patent portfolio through a new business model. Time will tell whether this approach will suffer the same fate as Toyota’s fuel cell patent offering in 2015, or if the company is able to extend the economic life of these assets through service and component obligations in emerging vehicle markets.

It also seems that Toyota views itself as a key player in enabling this overall growth. The Prius brand has proven itself to be marketable and sustainable; however, no matter how strong the brand, the demand must exist in the market to realize its true value. Perhaps this is why Toyota is seeking to enable its competitors to more readily produce hybrid vehicles. With the competition now armed with the tools to produce competitive hybrids, new markets could begin to open up. Aside from market expansion in territories like the U.S., new demand in markets such as China and India, which each sold around 25 million and 4 million vehicles respectively in 2017, could mean massive revenue potential for Toyota.

Conclusion

Toyota has achieved a dominant market position in the hybrid vehicle market; a position which has awarded Prius a great competitive advantage. We see the move by Toyota to allow royalty-free access to its 24,000 patent portfolio not only as a move to grow the hybrid vehicle market, but also as a way to extract new revenues sources from its patented technology as well as enhance the value of its brand (Toyota is already boasting a brand value of over $53 billion according to brand ranking service, Interbrand). The company may have won the hybrid market battle against traditional competitors such as Ford and Honda, but now it must deal with competition from a new generation of companies that were born all-electric, namely Tesla. With this move, Toyota reminds us that they are the dominant force in hybrid technology and are eager to drive the industry towards an emissions-free future.

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