Summit 6, LLC v. Samsung Electronics Company, Ltd.

IP Alert: Federal Circuit Upholds Expert Apportionment Methodology to Prove Reasonable Royalty Damages for Individual Features of Complex Technology

--Written by Fitch Even attorneys Steven C. Schroer and Christian C. Damon

On September 21, 2015, in Summit 6, LLC v. Samsung Electronics Company, Ltd., the Court of Appeals for the Federal Circuit added a new chapter to rapidly developing jurisprudence addressing the kinds of evidence admissible to prove the reasonable royalty value of patents drawn to individual features of a multi-element technology. Explaining its holding by reference to long-established Georgia-Pacific principles, the court upheld a jury verdict awarding a royalty based on opinions of a damages expert whose methodology rested on the premise that a “feature’s use is proportional to its value” and allocating infringing versus non-infringing use of the multi-element technology. The court affirmed the admission into evidence of the expert’s opinions based on usage surveys conducted by the infringer in the ordinary course of its business. In doing so, the Federal Circuit liberalized the admission of expert testimony that relies “on a methodology not previously used or published in peer-reviewed journals.” The court held that such opinions do not per se run afoul of guidelines established in Daubert v. Merrell Dow Pharmaceuticals. Finally, the Federal Circuit determined that based on the particular facts present and the manner the issue was presented at trial, a jury’s lump-sum damages award could compensate the patent owner for past and future damages and that a going-forward royalty was unnecessary.

The case came to the Federal Circuit from the U.S. District Court for the Northern District of Texas. Summit 6 sued Samsung (and other defendants who settled before Samsung’s trial) for infringement of a method patent relating to the processing of digital photos. The preferred embodiment described in the specification was directed to “software that allows a user to place the photo into a website form either by dragging and dropping the photo from the user’s computer or by using a mouse click within the website.” Summit alleged infringement resulting from “the process of sending photographs via the multimedia messaging service . . . as used by smartphones and tablets designed, manufactured, and sold by Samsung.”

At trial, the plaintiff’s damages expert, Paul Benoit, testified that the value of the infringing feature was proportional to the feature’s use within the larger system of which the patented method was only a part. He also acknowledged during his testimony that the methodology he employed in his calculations had not previously been used or published in a journal. At the conclusion of the trial, Summit 6 sought damages of $29 million, but the jury rendered a damages award of $15 million, adding a notation to the special verdict form stating that the royalty was a “lump sum.” The trial judge denied Samsung’s motion to vacate the damages award, and also declined Summit 6’s request for additional royalties for ongoing infringement. Both Summit 6 and Samsung appealed to the Federal Circuit.

Evaluating Benoit’s testimony, the Federal Circuit recognized that “estimating a reasonable royalty is not an exact science,” and that just as there may be a range of reasonable royalties, “there may be more than one reliable method for estimating a reasonable royalty.” Explaining Daubert’s “gatekeeping” role, the Federal Circuit reiterated that “where the methodology is reasonable and its data or evidence are sufficiently tied to the facts of the case, the gatekeeping role of the court is satisfied.” In such cases, held the court, “the inquiry on the correctness of the methodology and of the results produced thereunder belongs to the factfinder.” The jury’s award of only about half of Benoit’s estimated royalty suggests that the jury was substantially persuaded by Samsung of weaknesses in Benoit’s methodology or his application thereof, but the court was unpersuaded that Benoit’s testimony could not support the verdict.

Benoit testified that he determined that the infringing feature was contained within the functioning of the cameras included in the Samsung phones, and that cameras were responsible for a calculable portion of the revenue, specifically $14.15, which cell phone carriers paid for the camera feature in each Samsung phone. Further, analyzing Samsung’s annual reports and related internal accounting data, Benoit determined that “the camera component accounted for 6.2% of the phone’s overall production cost,” from which he opined (without foundation explained by the Federal Circuit) that the camera component also should be deemed to generate 6.2% of Samsung’s revenue per phone. In order to “apportion the camera-related revenue further,” Benoit then applied the conclusions of usage surveys “commissioned by Samsung in the ordinary course of its business” and an additional independent survey to estimate the portion of Samsung camera users (20.8%) who “used the camera to perform the infringing methods rather than for other purposes.” He then parsed Samsung’s profits based on this apportionment, concluding that 20.8% of Samsung’s per-phone revenue ($2.93 per phone) was attributable to the infringing feature, which resulted in profits of $0.56 per phone for the infringing feature. His ultimate conclusion, then, was that a reasonable royalty would be half of the net profit. According to Benoit, following the Georgia-Pacific hypothetical royalty negotiation, “because neither party had a stronger negotiating position,” the hypothetical negotiators “would have split the $0.56 evenly to derive a reasonable royalty of $0.28 per device.”

Upholding this methodology, the Federal Circuit determined that it “was based on reliable principles and was sufficiently tied to the facts of the case.” Further, the fact that Benoit’s methodology had not been peer-reviewed or published “does not necessitate its exclusion,” but rather went to its weight, a matter for the trier of fact. The court further rejected Samsung’s argument that the expert should not have been permitted to testify that an infringing feature’s value is proportional to its use, observing based on earlier case law that “‘an invention used more frequently is generally more valuable than a comparable invention used infrequently’ and ‘frequency of expected use and predicted value are related.’”

Finally, the Federal Circuit rejected Summit 6’s argument that the jury’s “lump-sum” damages award should not be deemed to compensate Summit 6 for future infringement. The Federal Circuit determined there was sufficient evidence in the record to support the trial court’s determination that the lump sum provided compensation for both past and future infringement.

With its ruling, the Federal Circuit added understanding to the problem of allocating a reasonable royalty to technology that incorporates both infringing and non-infringing aspects. The court endorsed a novel employment of usage surveys to estimate value of an infringing feature, and thereby to allocate among infringing and non-infringing aspects. The court also reaffirmed that expert testimony may be deemed reliable under Daubert and therefore admissible, even where such testimony relies on unpublished and previously unused methodologies. In addition, the court provided guidance for parties who seek or oppose the imposition of an ongoing royalty as a part of the damages case.

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