“MLC’s argument that it need not disclose factual underpinnings and evidence underlying its damages theory prior to expert discovery undermines a district court’s discretion to encourage early discovery . . .” – CAFC
On August 26, the U.S. Court of Appeals for the Federal Circuit (CAFC) affirmed the U.S. District Court for the Northern District of California’s decision in an interlocutory appeal brought by MLC Intellectual Property, LLC (MLC) regarding orders that precluded certain opinions of MLC’s damages expert in its infringement suit against Micron Technology, Inc. (Micron). The orders precluded the expert from 1) characterizing specific license agreements as reflecting a 0.25% royalty; 2) discussing a reasonable royalty rate when MLC failed to provide essential information and documents related to its damages theory when requested prior to expert discovery; and 3) discussing the royalty base and rate because the expert did not apportion for non-patented features.
The ‘571 Patent
MLC sued Micron for infringement of U.S. Patent No. 5,764,571, which is directed to methods of programming multi-level cells. Conventionally, single-bit per cell memory devices were used to store one single-bit of information per one memory cell. The specification discloses novel storage for multi-bits of data in a single memory cell, known as a multi-level cell. Previous multi-bit per cell approaches to non-volatile memory involved using mask programmable read-only-memories (ROMs), which required a new batch of semiconductor wafers each time a data pattern needed to be changed. Previous approaches also involved using conventional alterable multi-bit per cell memories to store charge on dynamic random access memory (DRAM) or charge-coupled devices (CCDs), which lost data any time power was removed and required periodic recharging. The ‘571 patent disclosed a multi-bit semiconductor memory cell that has the non-volatile characteristics of a ROM and the electrically alterable characteristics of a multi-bit per cell DRAM, specifically described as a multi-bit per cell electrically alterable nonvolatile memory (EANVM) “where Kn is a base of a pre-determined number system, n is a number of bits stored per cell, and Kn>2.”
MLC only asserted Claim 30 of the ‘571 patent against Micron, a narrow claim directed to an ““[a]pparatus for programming an electrically alterable non-volatile memory cell having more than two predetermined memory states.” Micron manufactures and sells NAND flash wafers and packages, which use non-volatile memory and which are considered the standard for storage. MLC’s damages expert reviewed previously granted, non-exclusive licenses of the ‘571 patent in an attempt to “reconstruct the hypothetical negotiation between MLC and Micron” that he surmised to have occurred in late 2006, when Micron first began selling the accused devices. In response Micron moved in limine to preclude MLC’s damages expert from mischaracterizing previous licensing agreements with Toshiba and Hynix as including a 0.25% royalty rate, as well as his opinions based on facts, evidence, and damages theories that were not provided in discovery. Micron also filed a Daubert motion to exclude opinion on reasonable royalties for failure to apportion out the value of non-patented features. The district court ruled in favor of Micron.
Hynix and Toshiba Agreements
The CAFC agreed with the district court that MLC’s [expert] testimony that the Hynix and Toshiba licenses contained a 0.25% royalty rate was not based on sufficient facts or data, nor was it the product of reliable principles and methods. The court relied on its decision in Whitserve, where it concluded based on similar facts that multiple errors in a royalty rate calculation render an expert’s ultimate opinion to be speculative. Whitserve, LLC v. Comput. Packages, Inc., 694 F.3d 10, 26 (Fed. Cir. 2012). The court noted that neither agreement here discloses any specific royalty rate, and thus the opinion here is also speculative:
Rather than deriving a [royalty] rate from the lump-sum payments and projected sales, [MLC’s expert] testimony rests on an inference from the most favored customer clause that goes well beyond what the clause implies and is incompatible with the Hynix agreement as a whole.
The court rejected the expert’s identification of two lump-sum payments as sufficient evidence to support an increased royalty rate of 19%, because the expert did not testify as to how the payments could be converted to any royalty rate. Recalling Lucent Technologies, the court explained that “for a jury to use a running-royalty agreement as a basis to award lump-sum damages . . . , some basis for comparison must exist in the evidence presented to the jury.” Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009). According to the CAFC, this was not the case here.
Failure to Disclose
The CAFC also agreed with the district court that it was appropriate to strike MLC’s expert testimony for failure to disclose in discovery all the evidence that its expert relied on to support his opinion. Micron’s Interrogatory No. 6 requested “the factual and legal basis and supporting evidence for the relief” sought by MLC, “including but not limited to [MLC’s] contention that [it is] entitled to damages (e.g., a reasonable royalty).” The district court found that in response, MLC failed to identify the Hynix license, the Toshiba license, its reasonable-royalty theory, and any other extrinsic evidence relied on by its expert to support his opinion that both the Hynix and Toshiba licenses reflect a 0.25% royalty rate, despite MLC’s insistence that it identified the licenses. The CAFC acknowledged that the district court erred in finding that MLC did not identify the Toshiba and Hynix licenses, but nevertheless found that the district court did not abuse its discretion in determining that MLC did not properly disclose critical extrinsic documents or its claim that the licenses reflected a 0.25% royalty rate. The CAFC rejected MLC’s argument that it was not required to disclose this information during fact discovery since it was expert opinion, because it still had to disclose that MLC believed the agreements to reflect a 0.25% royalty rate, as well as any extrinsic evidence MLC intended to rely on at trial. Furthermore, the CAFC also rejected MLC’s argument that the interrogatory sought privileged information and thus it was not discoverable, finding that even where certain communications and documents may be privileged, attorney-client privilege does not protect the disclosure of underlying facts in a case. The court explained:
MLC’s argument that it need not disclose factual underpinnings and evidence underlying its damages theory prior to expert discovery undermines a district court’s discretion to encourage early discovery . . . . [It] also undermines Rule 33 of the Federal Rules of Civil Procedure, [which] states that ‘an interrogatory is not objectionable merely because it asks for an opinion or contention that relates to fact or the application or law to fact.’
Failure to Apportion
Finally, the CAFC affirmed the district court’s grant of Micron’s Daubert motion to exclude expert opinion on reasonable royalty, based on the expert’s failure to apportion either the royalty base or royalty rate to account for the patented technology. According to the CAFC, apportionment is required when the accused technology does not constitute the whole of the accused product. MLC argued that apportionment was unnecessary because the licenses are comparable. The CAFC disagreed, finding no evidence that a specific royalty rate derived from the Hynix agreement accounted for the apportionment of non-patented features of the product in this specific case. The CAFC noted that while the Hynix agreement granted a license to the patent at issue, this was only one of forty-one licenses granted within a portfolio. Therefore, due to the difference in circumstances, the license of the ‘571 patent in the Hynix agreement is not sufficiently comparable for evidentiary purposes; thus, apportionment was necessary.
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