On January 5, 2023, in the matter of Willis Electric Co., Ltd. v. Polygroup Limited, et al., Judge Wilhelmina M. Wright of the United States District Court for the District of Minnesota denied a motion to exclude expert testimony that relied on a license agreement post-dating the hypothetical negotiation.1
In this matter, Plaintiff Willis Electric asserted that Defendant Polygroup Limited infringed its patents pertaining to pre-lit artificial holiday trees. Defendant Polygroup’s damages expert, Julie L. Davis, as part of her reasonable royalty analysis, relied on a 2020 agreement between Loominocity, Inc. (Loominocity), and Belgravia Wood Limited (Belgravia), a Polygroup subsidiary. This agreement was entered into more than six years after the hypothetical negotiation date of June 2013. Plaintiff Willis Electric argued that Davis’s analysis should be excluded as it “ignores the date—and the relevance of that date—of the hypothetical negotiation.”
In its opinion, the court noted that:
- “[T]he hypothetical negotiation analysis permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.” Lucent, 580 F.3d at 1333 (internal quotation marks omitted). Although a reasonable royalty analysis requires “consideration of a hypothetical negotiation on the date of first infringement,” the analysis does not “automatically exclud[e] evidence of subsequent events.” Harris Corp. v. Ericsson Inc., 417 F.3d 1241, 1257 (Fed. Cir. 2005). […] And “the purpose of looking at future events is ‘to bring out and expose to light the elements of value that were there from the beginning.’” Id. (quoting Sinclair Refin. Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 698 (1933)).”
The court determined that Ms. Davis “expressly considered the date of the hypothetical negotiation” and properly tied the 2020 agreement to the June 2013 hypothetical negotiation by “asserting that certain facts underlying the 2020 agreement would have been known and relevant to Polygroup during a hypothetical negotiation in 2013.” More specifically, the court noted that Ms. Davis opined that the 2020 agreement was representative of the amount that would be paid for a “bare patent license” to the patented technology, separate from features unrelated to the asserted patents. Furthermore, Ms. Davis considered that Defendant had the ability to implement a non-infringing design at the time of the hypothetical negotiation, which it began selling in 2019. As such, Ms. Davis considered that “the amount that Polygroup would have been willing to pay in 2013 is comparable to the amount that Belgravia [the Polygroup subsidiary] actually paid as part of its 2020 agreement with Loominocity to avoid the effort and costs associated with a redesign.” Given the above, the court found that there is a factual basis to support Ms. Davis’s opinion that the post-hypothetical agreement is probative of the reasonable royalty that the parties would have hypothetically negotiated six years prior.
However, just because damages experts may rely on post-hypothetical agreements doesn’t mean that courts require them to do so. As illustrated in the matter Genuine Enabling Technology LLC v. Sony Corporation, a recent case in the United States District Court for the District of Delaware, disregard of comparable licenses post-dating the hypothetical negotiation does not render the damages expert’s opinion inadmissible.2 In this dispute, Plaintiff Genuine Enabling Technology alleged that Defendant Sony Corporation’s video game controllers and gaming consoles infringed on its patent covering data transmission. Defendant Sony argued that the court should exclude the reasonable royalty analysis of Plaintiff’s Genuine Enabling’s damages expert, Gregory Urbanchuk, because he did not consider comparable license agreements post-dating the hypothetical negotiation. In its ruling, the court relied on MicroStrategy Inc. v. Bus. Objects, S.A., stating that an expert is not required to “consider every possible factor to render a ‘reliable’ opinion” and found that Mr. Urbanchuk’s testimony met the threshold for admissibility under Daubert.3
As shown by these rulings, damages experts should consider the case-specific facts and circumstances in establishing whether such post-hypothetical negotiation agreements are probative in determining a reasonable royalty under a hypothetical negotiation construct. An analysis of post-hypothetical agreements should establish if the amount is representative of a royalty to the patented technology separate from other unrelated features. Additionally, consideration of the licensee’s ability to design around the patented technology can help establish the probative nature of a post-hypothetical agreement. However, experts still can use his or her own discretion as to whether post-hypothetical agreements need to be considered in forming the expert opinion.
1 Order, Willis Electric Co., Ltd. v. Polygroup Limited (Macao Commercial Offshore) et al., 0-15-cv-03443 (DMN Jan. 5, 2023).
2 Memorandum Opinion, Genuine Enabling Technology LLC v. Sony Corporation and Sony Interactive Entertainment LLC, 1-17-cv-00135 (DDE Nov. 28, 2022).
3 MicroStrategy Inc. v. Bus. Objects, S.A. 429 F.3d 1344, 1355 (Fed. Cir. 2005).