Need for Close Attention to Proposed Reasonable Royalty Evidence

A recent court decision precluding a patent owner from relying on any of its proffered evidence to support a proposed reasonable royalty rate should be studied carefully by patent owners. See Acceleration Bay LLC. v. Activision Blizzard Inc., C.A. No. 16-00453-RGA, 2018 U.S. Dist. LEXIS 178362 (D. Del. Oct. 17, 2018). The case underscores how closely courts are evaluating evidence put forward to support a proposed reasonable royalty and the need to carefully vet such evidence (and decide who will present it) early in the case.

In Activision, the defendant moved to preclude the plaintiff’s damages theories and supporting evidence. The court granted-in-part defendant’s motion. The plaintiff patentee had sought to support its proposed reasonable royalty rate of 15.5 percent with four pieces of evidence: (1) testimony of its Vice President of Licensing; (2) testimony of its CEO; (3) an industry report; and (4) an agreement between the defendant and a third party. The court precluded all four categories of evidence.

First, the court precluded the testimony of the plaintiff’s licensing executive, stating that a reasonable royalty opinion is necessarily based on specialized knowledge, which the executive lacked. The court also found that the executive lacked personal knowledge of the facts underlying the royalty rate that would allow him to testify on the subject. Id. at *3-*4. Next, the court precluded the testimony of the plaintiff’s CEO, reasoning that he too lacked personal knowledge of facts relevant to a reasonable royalty. For example, he “did not work at the correct company [] at the time of the hypothetical negotiation or any time thereafter[,]” and had never licensed the patents or negotiated a royalty rate for them. Id. at *5-*6. As to the industry report, the court excluded that too as inadmissible hearsay not falling into any hearsay exception. Id. at *7-*8 & n.3. The defendant’s agreement with a third party was likewise excluded by the court on the grounds that it was not a patent license nor comparable to one. Id. at *9-*10 (no “explanation of how the publishing of a videogame might be comparable to the licensing of a patent.”) The court thus precluded the patentee’s proposed 15.5 percent royalty rate and all bases associated with it. Weeks earlier, the court had also excluded the opinion of the patentee’s reasonable royalty expert insofar as it relied on the rate determined by a jury in a district court case in Texas. Id. at *2; see C.A. No. 16-00453-RGA, D.I. 585 at pp. 3-4.

On October 22, 2018, the plaintiff moved for reargument and reconsideration in a sealed court filing. (C.A. No. 16-00453-RGA, D.I. 602) However, assuming the October 17 Activision decision stands, the result underscores the importance of carefully evaluating (i) what evidence litigants will rely on to support a proposed royalty and (ii) which witness(es) will present that evidence. Where litigants intend to rely on an agreement, moreover, best efforts should be used to locate patent license agreements that a court will find “comparable” to a hypothetical license involving the patent(s) at issue. Opinions of judges in the relevant jurisdiction should be studied to maximize the chances that a proposed reasonable royalty, and the evidence to support it, will be accepted by that court.

Wendy R. Stein is a Director in the Gibbons Intellectual Property Department. She litigates patent infringement cases in federal court and has worked with damages experts to devise reasonable royalty rates in patent cases.