Split Federal Circuit Decision Emphasizes Need for Skilled Counsel

Complex damages analyses require skilled professionals who understand the law and facts of each case to navigate to success.  The Federal Circuit’s recent en banc ruling in EcoFactor v. Google reiterates that point.  The majority opinion does not clarify damages jurisprudence, instead, as highlighted by the dissent, it will exacerbate confusion about damages to the unprepared. Counsel and experts who have been carefully monitoring the changing tide in damages law over the last 10 years can guard against this confusion and find ways through the treacherous waters.

The full court reversed its own three-judge panel and ordered a new trial, after vacating Google’s $20M loss in the Western District of Texas.  The court based its decision on a deficient expert opinion and unarticulated rationale in the denial of a Daubert challenge.  The decision did not clarify or streamline damages analyses or the standard for determining sufficiency of expert opinions.  In fact, upon a close reading, it did little to upset current law or the available avenues to prove damages.  Judges Reyna and Stark recognized this in their dissents, where they opined that the majority opinion would continue to confuse parties and trial court judges.    

The Federal Circuit’s narrow ruling appears to have augmented two attacks for litigants to deploy when challenging damages verdicts on appeal: one based on comparable licenses and another based on the sufficiency of Daubert opinions.  We summarize the case and key takeaways below.  The guidance from this case reinforces the belt and suspenders strategy that Mintz takes in approaching its damages cases – early development of theories with multiple avenues of support is critical for success. 

Background on Appeal:

In a rare event, the Federal Circuit granted Google’s petition for rehearing en banc, after its trial loss (in 2022) and unsuccessful appeal before a three-judge panel.  The panel originally upheld the district court’s denial of Google’s Daubert motion to strike EcoFactor’s damages expert, after the panel deemed sufficient the expert’s use of three-lump sum licenses to determine a per unit royalty.  For only the second time since 2018, the full Federal Circuit vacated the panel’s order in a patent case, asking the parties to address whether the district court adhered to Federal Rule of Evidence 702 and the Daubert line of cases.  Though the issue on appeal was narrow, many believed the court would take the opportunity to upend damages methodologies and/or give district courts a new mandate for striking expert opinions.    

Ultimately, the en banc panel held that the district court abused its discretion in denying a new trial on damages because: (1) the licenses relied upon by the expert were unambiguous contracts that disavowed the use of a specific per-unit reasonable royalty; and (2) the testimony that the expert relied on to calculate the reasonable royalty was unsupported.  Here, the Federal Circuit seemingly stepped into the role of fact finder in reviewing the language of the contracts, used by the expert in forming his opinion, to determine whether they were ambiguous and/or could support a per unit rate calculus.  The court also took issue with the lack of a written order, or substantive rationale, from the district court (Judge Albright) and warned that “an absence of reviewable reasoning may be sufficient grounds for this court to conclude the district court abused its discretion.”  The court, however, did not upset the entire applecart and left many mechanisms of proving reasonable royalty damages unscathed.   

The Court’s Analysis:

Sufficiency of Support in Expert Opinion

The district court did not provide a rationale for its ruling that EcoFactor’s expert’s testimony was admissible or for denying the motion for a new trial on damages.  This appears to have heavily influenced the Federal Circuit’s decision that the district court abused its discretion.  While the Federal Circuit agreed that the expert appropriately applied the Georgia-Pacific factors, the court could not discern the underlying rationale for whether the expert’s opinion and testimony was based on sufficient facts and data.  This led to the Federal Circuit reviewing the underlying evidence for sufficiency, as required by Rule 702(b), and concluding that the expert’s opinion was not supported by sufficient facts or data. 

Evidence Presented at Trial – Licenses and Testimony Considered

EcoFactor’s expert considered comparable licenses in the form of three lump sum settlement agreements that EcoFactor had previously executed.  Each license contained a preliminary recital stating that EcoFactor believed the agreed upon rate was based on a per-unit royalty; however, the payment provisions expressly disavowed or were silent on use of a per-unit royalty rate.   

Apart from the licenses, the only other evidence the expert relied on were statements from EcoFactor’s CEO about how the lump sum payments were calculated.  EcoFactor admitted, however, it possessed no documentation supporting the calculation nor the licensees’ actual sales data that would be needed to calculate a per-unit royalty.  The Federal Circuit held that the conclusory testimony from EcoFactor’s CEO was self-serving and deficient. 

While EcoFactor argued that there was additional record evidence supporting the damages expert’s opinion, the expert did not directly rely upon it.  The court reiterated that the inquiry is directed to what the expert relied on in forming his opinion and not the record in full.

The Dissents:

Judges Reyna and Stark highlighted the limited applicability of the majority opinion and the likelihood of additional disputes at the district court level.  According to Judge Reyna, “[t]he en banc court does speak to Rule 702 and Daubert, but only when reciting well-known law. The crux of its analysis focuses exclusively on its new theory that this case is about contract interpretation as a question of law.”  Similarly, Judge Stark opined that “the Majority’s holding [is] so narrow as to have almost no applicability beyond this case.”  Additionally, he wrote that “today’s opinion will be misinterpreted as constraining damages experts in a manner not called for by either Rule 702 or Daubert and “the Majority may be misunderstood as inviting district judges, and future panels of this court, to resolve fact disputes under the guise of evaluating whether experts may testify at trial.”

Takeaways:

The Federal Circuit’s opinion may have raised more questions than answers, but there are ways to guard against this vulnerability.  The majority opinion is a narrow ruling on the sufficiency of the specific data and facts underpinning this expert’s opinion based on comparable licenses.  The decision, however, provides no new substantive guidance on Rule 702 or Daubert and leaves numerous mechanisms for calculating reasonable royalty damages unchanged.  The Federal Circuit did not upend calculations derived from consumer surveys, conjoint analyses, non-infringing alternatives, cost savings analyses, or other proxies for determining a reasonable royalty calculation under a hypothetical negotiation approach.  Instead, it bolsters established caselaw regarding the need for comparable licenses to be technically and economically similar to the license that would allegedly result from the parties’ hypothetical negotiation.  In relying on comparable licenses, parties should remain cognizant of any ambiguity in the contract language that could be used to attack the reasonable royalty rate calculated.  In addition, using multiple approaches to calculating damages that support the expert’s opinion on a royalty rate–e.g., consumer surveys, conjoint analyses, non-infringing alternatives, or cost savings analyses–to bolster the expert’s opinions is critical now more than ever. 

There is still no bright line rule as to what renders a damages expert’s opinion admissible. However, this decision serves as a warning that expert opinions must be substantiated by specific and sufficient evidence.  A damages expert must explicitly link their opinion to record evidence, anything less will not save the day.  These are not new axioms, but they highlight the importance of thorough damages calculations in line with current case law. 

The Federal Circuit’s opinion opens the door to disputes over the sufficiency of evidence relied on by experts and may embolden judges to exercise their gatekeeping function based questionable data or self-serving licensing agreements.  At minimum, district courts may feel the need to issue more detailed orders explaining their reasons for excluding, or not excluding, experts.  Approaching damages analyses from multiple avenues that support each other is a necessity.  It remains to be seen if district courts will widely apply the en banc guidance from the EcoFactor decision or not. What is clear, however, is that deploying best practices including partnering with experts early in a case to provide multiple pillars to support their opinion should allow expert opinions to survive whatever increased scrutiny may arise from the application of this decision. 

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