Expert’s opinion of a 0% royalty is unreliable, despite non-infringing alternative

By John Paul, Brian Kacedon, Cecilia Sanabria        

Edited by John Paul, Brian Kacedon, Cecilia Sanabria, and Clara Jimenez

Abstract: The damages expert for a patent infringer claimed that a 0% royalty was proper based on the existence of a non-infringing alternative that had not yet hit the market. The court disagreed, concluding there was sufficient evidence in the case to support a reasonable royalty and the record did not demonstrate the infringer considered the patent valueless.

Background
Tinnus Enterprises and Zuru sued Telebrands Corp., Bulbhead.com, and Bed Bath & Beyond for infringing two patents.

The alleged infringers' damages expert submitted an opinion as to the proper damages for two scenarios.  The first scenario assumed the existence of a potential non-infringing alternative and concluded that a 0% royalty would be the appropriate measure of damages.  The second scenario assumed that no non-infringing alternatives exist.  The patent owner asked the court to strike both these portions of the report as unreliable and untimely.

As to the first scenario, the patent owner argued the expert should not be permitted to rely on the existence of a non-infringing alternative because that alternative was not disclosed to the patent owner during discovery in a timely manner. The patent owner also argued that the expert's opinion of a 0% reasonable royalty was improper and a misstatement of the damages law. The infringers disagreed, contending (1) the non-infringing alternative came up during depositions and was disclosed in a supplemental interrogatory response, and (2) a 0% reasonable royalty was proper where the defendants view the patent as worthless and could design around without additional costs.

As to the second scenario, the patent owner argued the expert provided contradictory testimony about demand of the patented product that amounted to misstatements of law.

The Tinnus Decision
Regarding the first scenario, the court found that the non-infringing alternative came up during discovery and the infringers supplemented their interrogatory responses shortly after expert reports. Because the non-infringing alternative was developed during the course of discovery, whether or not it was disclosed in a timely fashion was a difficult question. Nonetheless, the court explained the patent owner had an opportunity to depose the infringers' witnesses on the development of the product as well as the infringers' expert on his opinions about the product. And the court emphasized that the fact the product was not on the market did not make it a per se unacceptable alternative.

The court, however, expressed deeper concern regarding the expert's opinion that a 0% royalty was appropriate. In doing so, the court cited case law explaining a 0% royalty could be appropriate in cases lacking any evidence on which to base a damages award or where the evidence shows the infringer considered the patent valueless at the time of the infringement. The court then distinguished the current case based on the fact that the alternative product had not yet entered the market and the accused products were the infringers' third attempt at a design around, all of which have been subject to an injunction. Thus, the court found the opinions relating to a 0% royalty unreliable and struck them from being considered.

Regarding the second scenario, the court ultimately found the contentions regarding the expert's conclusory or contradictory testimony went to weight rather than admissibility of that testimony, and refused to strike that portion of the testimony from being considered.

Strategy and Conclusion
In determining the proper reasonable royalty, products that have not hit the market can be considered as non-infringing alternatives. The mere existence of a non-infringing alternative, however, may not support a 0% royalty where other evidence supports a damages award or where the record does not show the infringer considered the patent valueless at the time of infringement.

Further Information
The Tinnus decision can be found here.

Editors and Authors

The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP.

This article is for informational purposes and does not constitute legal advice.
The views expressed do not necessarily reflect the views of LES or Finnegan.