Delaware Court Decides Multiple Issues Involving Admissibility of Expert Opinions on Lost Profits and Reasonable Royalty Claims

 

Zimmer Surgical, Inc. and Dornoch Medical Systems, Inc. v. Stryker Corporation and Stryker Sales Corporation v. Zimmer, Inc., Zimmer Surgical, Inc., Dornoch Medical Systems, Inc. and Zimmer U.S., Inc., Civil Action No. 16-679-RGA (D. Del.), Memorandum Opinion, March 7, 2019

Zimmer moved to exclude Stryker’s damages expert’s opinions due to reliance on settlement agreements, an incorrect damages start date, and certain estimations and assumptions used in the expert’s analysis.

The court found that Stryker’s expert failed to demonstrate the technologically and economically comparability of the settlement agreement to the patent at issue and precluded the expert’s reliance on the license. As to the incorrect start date, the court determined that exclusion was unwarranted because Zimmer offered no objection to the underlying damages methodology.  Finally, the court found that the expert had sufficiently supported the expert’s estimations and analysis.

On the other hand, Stryker moved to exclude Zimmer’s damages expert’s opinions for a failure to appropriately apportion and for including additional damages in the expert’s reply report.

Addressing apportionment, the court stated, “The Federal Circuit does not limit apportionment to specific methodologies because flexibility is required to determine fact-dependent damages,” and ruled that Stryker’s apportionment argument in this case is an issue of weight of the evidence and witness credibility. (1) On the second issue, the court agreed with Stryker that the expert’s additional damages disclosure was untimely, however, the court, citing the Pennypack factors, elected not to exclude the expert’s additional damages opinions.

Stryker also moved to exclude Zimmer’s technical expert’s opinions regarding noninfringing alternatives under Daubert because the expert assessed noninfringing alternatives in view of the allegedly infringing products instead of Zimmer’s products. The court agreed and precluded the technical expert from offering opinions as to noninfringing alternatives.

In addition, Stryker argued in a motion for summary judgment that Zimmer was not entitled to lost profits because of its failure to establish the absence of noninfringing alternatives and it was not entitled to damages for certain product sales because these products are not required for infringement and are unpatented products.

The court denied summary judgment on both issues, finding the questions to involve a dispute of fact.  However, the court found that if the subject products were determined not to be part of the infringing system, Zimmer was not entitled to lost profits on these products for lack of evidence that the patented features drove customer demand.

On August 8, 2016, Zimmer Surgical, Inc. and Dornoch Medical Systems, Inc. sued Stryker Corporation and Stryker Sales Corporation in the U.S. District Court for the District of Delaware for infringement of U.S. Patent No. RE 44,920 (“the ‘920 patent”). (2) The technology of the ‘920 patent involves “a fluid waste management system combining a movable waste fluid collection cart with a waste fluid disposal unit.”(3) Zimmer claimed that Stryker’s Neptune 2 and Neptune 3 waste management systems infringe the ‘920 patent. (4) On May 22, 2018, Stryker filed counterclaims alleging infringement of U.S. Patent No. 9,579,428 (“the ‘428 patent”) by Zimmer Surgical, Inc., Dornoch Medical Systems, Inc., Zimmer Inc., and Zimmer U.S. Inc. (5) The technology of the ‘428 patent involves “a waste collection system having a removable intake manifold that prevents the release of uncollected waste still in the manifold. (6) Stryker claimed that Dornoch’s Transposal® UltrafleX Fluid Waste Management System and IntelliCart system infringe the ‘428 patent. (7)

On November 5, 2018, the parties filed Daubert motions and motions for summary judgment seeking exclusion of certain opinions offered by both damages and technical experts. (8) In its March 7, 2019 memorandum opinion, the court chose to exclude some expert opinions while finding that others were sufficient or subject to a determination of fact.

Zimmer requested that the court exclude Stryker’s damages expert’s opinions due to the expert’s reliance on certain settlement licensing agreements between Dornoch Medical Systems, Bemis Manufacturing Company, and the Educator Partnership to establish a reasonable royalty rate. (9) Zimmer also asked the court to exclude Stryker’s damages expert’s opinions on the damages for alleged infringement of the ‘428 patent calculated from an incorrect start date. (10) Zimmer further moved the court to exclude Stryker’s damages expert’s opinions on calculations that Zimmer claimed used “speculative manifold-per-day-rates, assumed equipment life expectancies, or unestablished discount rates.” (11)

Stryker opposed the motion by responding that the Bemis licensing agreement “is the most relevant in the record and is technically and economically comparable to the accused products and the patents-in-suit,” and by arguing that its damage expert’s calculations “are legally proper and disagreements between experts are a matter of weight.” (12)

Bemis License

Under the Bemis License Agreement, which occurred eight to eleven years before the hypothetical negotiation, Dornoch agreed to pay two lump sum payments and a royalty on licensed product sales with the minimum annual royalty for a non-exclusive worldwide license for three patents in relation to specific products. (13) The court noted that the Bemis Agreement arose from litigation as a follow-on to a previous settlement agreement. (14) Further supporting the litigation context surrounding the agreement, the court pointed to the history of infringement allegations against Dornoch; Dornoch’s assertions of invalidity and non-infringement; and language contained in the agreement itself.(15)

Zimmer moved to exclude the Stryker damages expert’s opinions that relied on the Bemis License agreement arguing that the license was not technologically or economically comparable to the ‘920 patent.(16) Zimmer claimed that Stryker’s expert failed to provide a basis for technological comparability and that the Bemis license was not economically comparable to the ‘920 patent or the ‘428 patent because it licensed patent rights to multiple patents, set multiple royalty rates, was a settlement agreement, was entered eight to eleven years before the hypothetical negotiations, and was in “a much different context than a hypothetical negotiation.”(17) Stryker responded that its damages expert, relying on its technical expert, established the Bemis License to be the most relevant license in the record and economically and technologically comparable to the accused products and the asserted patents. (18)

Citing W.L. Gore & Assocs., the court stated, “‘In determining the reasonable royalty, an expert witness may rely on existing royalty agreements entered into at arms-length as long as those agreements are sufficiently comparable to the hypothetical license at issue in suit.’” (19) The court also quoted Lucent Techs. and ResQNet.com: “To show that a license is ‘sufficiently comparable,’ the expert must demonstrate ‘how similar or dissimilar the patented technology’ covered by the prior licenses is to the patents-in-suit …and ‘account for the technological and economic differences’ between the patented technology covered by the licenses and the patent-in-suit.”(20) From AstraZeneca and LaserDynamics, the court stated, “Though ‘there is no per se rule barring reference to settlements simply because they arise from litigation,’ … the Federal Circuit has questioned ‘the propriety of using prior settlement agreements to prove the amount of a reasonable royalty.’ … (noting ‘longstanding disapproval of relying on settlement agreements to establish reasonable royalty damages’).” (21) Further, quoting M2M Sols, the court stated, “’Federal Circuit precedent is hostile toward using litigation settlement agreements in proving a reasonable royalty, except in limited circumstances.’”(22)

The court cited to Lucent in opining that Stryker’s damages expert “has not established ‘that the technology and value of the patents licensed in the prior agreements are comparable to the technology and value of the patent-in-suit.’”(23) Instead, the court found that Stryker’s expert “use[d] broad and nebulous language to describe the technological comparability of the patents in the Bemis license.”(24) The court observed that Stryker’s technical expert also failed to provide any analysis of comparability but instead merely provided a general identification of the Bemis patents.(25) Citing LaserDynamics, the court stated, “’[A]lleging a loose or vague comparability between different technologies or licenses does not suffice.’” (26) Thus, the court determined that Stryker’s damages expert failed to establish technological comparability of the Bemis license. (27)

The court additionally found that Stryker’s damages expert did not show the Bemis license to be economically comparable to the patents-in-suit. (28) Referencing MAZ Encryption Techs., the court stated that the Bemis license was “’made in the context of settling a litigation dispute, and thus did not reflect the royalty the parties would have reached just before infringement began.’”(29) Citing AVM Techs., the court stated, “’Without analysis of the litigation, the conclusion cannot be based on ‘sound economic and factual predicates.’”(30) The court determined that Stryker’s damages expert “engage[d] in no analysis of the underlying litigation and how it may have affected the royalty rate” and failed to “address the effect of the fixed payments in addition to the royalty rate, the effect of multiple patents being included in the license, or the fact that this license was one of a series of licenses.”(31)

Accordingly, the court precluded Stryker’s damages expert’s reliance on the Bemis license in the reasonable royalty analysis for lack of demonstrated technical and economic comparability. (32)

Start Date on Damages

Zimmer asked the court to exclude Stryker’s damages expert’s analysis for the ‘428 patent as unreliable arguing that the expert used an incorrect starting date for the damages calculation. (33) Stryker responded that its expert’s methodology was reliable and it was a matter of accounting to adjust the calculation to the correct start date.(34) Agreeing with Stryker, the court stated that “[t]he start date for damages, at least in this case, is a legal issue.”(35) The court also noted that Stryker’s damages expert, in a reply report, agreed with Zimmer’s damages expert’s adjusted damages calculation using Stryker’s damages expert methodology and the proper start date.(36) Citing to Sys. Dev. Integration, the court determined that exclusion was unwarranted because there was no objection to the underlying methodology.(37)

Calculations Regarding Intervening Rights Defense

Stryker asserted an intervening rights defense, arguing that Zimmer is only entitled to damages on manifolds used with accused systems sold after the ‘920 patent issued, and provided expert testimony based on underlying data to establish the number of manifolds it believes will be subject to intervening rights.(38) Zimmer requested that the court preclude Stryker’s damages expert from testifying on calculations derived from certain manifold-per-day rates, equipment life expectancies, or discount rates. (39)Zimmer argued that Stryker’s damages expert’s opinions regarding these manifold-per-day use rates and equipment life expectancies “’are unreliable because they are premised on speculation and incorrect assumptions.’” (40) Stryker countered that its damages expert’s use rate was based on Stryker data as well as Stryker witnesses testimony and that the equipment lifespan used by its expert was based on Stryker witness testimony.(41)

Quoting Sensonics, the court stated, “’[I]f actual damages can not be ascertained with precision because the evidence available from the infringer is inadequate, damages may be estimated on the best available evidence.’”(42) However, citing to Oiness, the court noted, “’[E]ven where defendant’s records are not complete, damages may ‘not be determined by mere speculation or guess.’”(43)

In denying this portion of Zimmer’s motion to exclude, the court found that the expert pointed to specific evidence to support the expert’s estimations and determined that, to the extent Zimmer disputes Stryker’s damages expert’s analysis, the issue is one of weight appropriate for cross-examination.(44) The court also found that Stryker’s damages expert sufficiently identified the basis and source for the expert’s discount rate and that this issue was also one of weight rather than admissibility.(45)

Stryker moved the court to exclude Zimmer’s damages expert’s reasonable royalty calculations arguing that the expert failed to perform a proper apportionment analysis. (46) Stryker also moved to exclude the addition of lost profit and reasonable royalty damages related to additional products as these damages were included for the first time in the expert’s reply report, which Stryker argued was an untimely disclosure.(47)

Apportionment

While Stryker argued that Zimmer’s damages expert had failed to perform a proper apportionment analysis, Zimmer countered that its damages expert had considered changes between Neptune 1 (non-accused prior-generation products) and Neptune 2 (accused products) in the expert’s apportionment analysis.(48)

In denying Stryker’s motion to exclude, the court found that Zimmer’s damages expert “applies a legally sound and verifiable methodology and appropriately relies on … technical opinions regarding the differences between the Neptune 1 and Neptune 2.” (49) Citing to Ericsson and Commonwealth, the court stated, “The Federal Circuit does not limit apportionment to specific methodologies because flexibility is required to determine fact-dependent damages.” (50) The court found, “To the extent that Stryker disagrees with [Zimmer’s damages expert’s] apportionment analysis, it is an issue of the weight of the evidence and witness credibility.”(51)

Timeliness of Additional Damages

Stryker asked the court to exclude Zimmer’s damages expert’s opinion on damages for specimen collection manifolds on the basis that the disclosure in the expert’s reply report was untimely and legally flawed. (52) Zimmer responded that the damages claim was not untimely, did not prejudice Stryker, and was proper. (53)

The court found that Zimmer’s damages expert’s inclusion of an additional component of damages in the expert’s reply report did violate rule 26(a) because it did not “solely ‘contradict or rebut’ evidence raised in Stryker’s rebuttal report.”(54) However, citing the Pennypack factors addressing “whether a violation of Rule 26(a) was substantially justified or harmless,” the court  noted the existence of little prejudice to Stryker, as Stryker’s own damages expert included the subject manifolds in the expert’s damages calculations. (55) The court further stated, “To the extent there is any prejudice, that prejudice may be cured by permitting Stryker to file a sur-reply report.”(56) The court also noted an absence of bad faith in the untimely disclosure.(57)

Stryker asserted that Zimmer’s technical expert’s opinions regarding noninfringing alternatives should be excluded because the expert “’wrongly assessed [noninfringing alternatives] in view of the allegedly infringing products’” rather than Zimmer’s products.(58) Zimmer argued against exclusion because its expert “’analyzed whether Stryker’s proposed noninfringing substitutes had the features demanded by customers and were acceptable alternatives to the system claimed in the ‘920 patent.’”(59)

Citing Grain Processing, the court stated, “’To recover lost profits, the patent owner must show ‘causation in fact,’ establishing that ‘but for’ the infringement, he would have made additional profits.’”(60) Pointing to Micro Chem. and Presidio, the court stated, “A patentee may show causation by either establishing a two-supplier market … or the absence of noninfringing alternatives in the market” and “[t]o establish the absence of noninfringing alternatives, ‘[t]he correct inquiry . . . is whether a noninfringing alternative would be acceptable compared to the patent owner’s product, not whether it is a substitute for the infringing product.’” (61) The court observed that “Zimmer asserts that Presidio is inapposite as [Zimmer’s technical expert’s] analysis reflects the two-supplier market for high fluid waste management systems.(62) HHowever, the court noted that the “parties appear to dispute whether a two-supplier market exists” in this case.(63)

The court acknowledged that Zimmer’s technical expert’s opening report and rebuttal report discuss noninfringing alternatives by comparing them to the accused infringing product and to the patented system.  (64) The court observed that Zimmer’s technical expert, however, “then stated at deposition that [the expert] did not compare the purported non-infringing alternatives to Zimmer's products in determining whether the purported alternatives would be acceptable.”(65) The court determined this to be “a legally incorrect analysis” and precluded Zimmer’s technical expert from offering opinions on noninfringing alternatives.(66)

Despite the exclusion related to noninfringing alternatives, the court ruled that Zimmer's damages expert would not be precluded from relying on Zimmer’s technical expert’s opinions related to the differences between the non-accused Neptune 1 and accused Neptune 2 products as part of the expert’s apportionment analysis.(67)

Stryker argued that Zimmer did not establish the absence of noninfringing alternatives and was not entitled to lost profits on the ‘920 patent.(68) Zimmer responded that a presumption of causation for lost profits exists in a two-supplier market and a factual dispute existed about the number of suppliers in the relevant market.(69) Zimmer also asserted that Stryker had “opted to assert supposed noninfringing alternatives that Stryker itself refused to market during the FDA recall” of its accused infringing product.(70) The court denied Stryker's motion for summary judgment of no lost profits, finding material disputes of fact as to whether noninfringing alternatives existed.(71)

In seeking to preclude Zimmer damages on manifold sales, Stryker argued that its manifold products were unpatented products not required for infringement. (72) Zimmer opposed the motion arguing that its technical expert had testified that the manifolds were part of the claimed infringing system.(73)

The court observed that Zimmer’s technical expert offered two alternate theories on infringement and found that a reasonable jury could find that the manifold is part of the infringing system. (74) Therefore, the court denied Stryker’s motion for summary judgment on this issue.(75)

In the alternative, Zimmer argued that even “if a manifold is not necessary for infringement, [Zimmer] is still entitled to damages for the manifold sales under a functional and economic ‘single-unit’ theory.”  (76) The court, referring to Rite-Hite and Juicy Whip, stated, “[T]he Federal Circuit ‘explained that the entire market value rule was a principle of patent damages that defined a patentee’s ability to recover lost profits on unpatented components typically sold with a patented item.’”(77) Citing Am. Seating, the court further explained, “The entire market value rule ‘permits recovery of damages based on the value of a patentee’s entire apparatus containing several features when the patent related feature is the basis for customer demand’… Thus, ‘[a] patentee may recover lost profits on . . . a convoyed sale[] if both the patented and unpatented products ‘together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit’ and the patent-related feature drives demand for the functional unit as a whole.’”(78)

The court found Stryker’s manifolds and the fluid carts are “‘analogous to parts of a single assembly or a complete machine,’” but noted an absence of evidence that the patented features drove demand “for the functional unit as a whole.” (79) Accordingly, the court found that if Stryker’s manifolds are not part of the infringing system, Zimmer is not entitled to lost profits damages for the manifolds as ‘convoyed sales’ on the basis that Zimmer cannot show that its patented features drive customer demand.(80)

Author(s): Armando C. Chavez  

Editor(s):  Barry L. Bell  

Cases Referenced:

Am. Seating Co. v. USSC Group, Inc.,

514 F.3d 1262, 1268 (Fed. Cir. 2008) (quoting Rite-Hite, 56 F.3d at 1550)

AstraZeneca AB v. Apotex,

782 F.3d 1324, 1336 (Fed. Cir. 2015)

AVM Techs., LLC v. Intel Corp.,

927 F. Supp. 2d 139, 143 (D. Del. 2013)

Commonwealth Sci. & Indus. Research Org. v. Cisco Sys.,

809 F.3d 1295, 1301 (Fed. Cir. 2015)

Ericsson v. D-Link Sys., Inc.,

773 F.3d 1201, 1226 (Fed. Cir. 2014)

Grain Processing Corp. v. Am. Maize-Prod. Co.,

185 F.3d 1341, 1349 (Fed. Cir. 1999)

Juicy Whip, Inc. v. Orange Bang, Inc.,

382 F.3d 1367, 1371 (Fed. Cir. 2004)

LaserDynamics, Inc. v. Quanta Comp., Inc.,

694 F.3d 77-79 (Fed. Cir. 2012)

Lucent Techs., Inc. v. Gateway, Inc.,

580 F.3d 1301, 1331 (Fed. Cir. 2009)

M2M Sols. LLC v. Enfora, Inc.,

167 F. Supp. 3d 665, 678 (D. Del. 2016)

MAZ Encryption Techs. LLC v. Blackberry Corp.,

2016 WL 4490706, at *1 (D. Del. Aug. 25, 2016)

Meyers v. Pennypack Woods Home Ownership Ass’n,

559 F.2d 894, 904-05 (3d Cir. 1977)

Micro Chem., Inc. v. Lextron, Inc.,

318 F.3d 1119, 1125 (Fed. Cir. 2003)

Oiness v. Walgreen Co.,

88 F.3d 1025, 1030 (Fed. Cir. 1996)

Presidio Components, Inc. v. Am. Tech. Ceramics Corp.,

875 F.3d 1369, 1381 (Fed. Cir. 2017)

ResQNet.com, Inc. v. Lansa, Inc.,

594 F.3d 860, 873 (Fed. Cir. 2010)

Rite-Hite Corp. v. Kelley Co. Inc.,

56 F.3d 1538 (Fed. Cir. 1988)

Sensonics, Inc. v. Aerosonic Corp.,

81 F.3d 1566, 1572 (Fed. Cir. 1996)

Sys. Dev. Integration, LLC v. Comput. Sci. Corp.,

886 F. Supp. 2d 873, 887 (N.D. Ill. 2012)

W.L. Gore & Assocs. v. C.R. Bard,

2015 WL 12731924, (D. Del. Nov. 4, 2015)

1 Memorandum Opinion, Zimmer Surgical, Inc. and Dornoch Medical Systems, Inc. v. Stryker Corporation and Stryker Sales Corporation, Civil Action No. 16-679-RGA (D. Del.), March 7, 2019, at 39.

2 Complaint for Patent Infringement, Zimmer Surgical, Inc. and Dornoch Medical Systems, Inc. v. Stryker Corporation and Stryker Sales Corporation, Civil Action No. 16-679-RGA (D. Del.), August 8, 2016.

3 Memorandum Opinion, Zimmer Surgical, Inc. and Dornoch Medical Systems, Inc. v. Stryker Corporation and Stryker Sales Corporation, Civil Action No. 16-679-RGA (D. Del.), March 7, 2019, at 2.

4 Id. at 3.

5 Id. at 2.

6 Id. at 3.

7 Id. at 3.

8 (e.g., D.I. 321, 322, 327). Id. at 2.

9 Id. at 31.

10 Id. at 31.

11 Id. at 31-32.

12 Id. at 32.

13 Id. at 33.

14 Id. at 33-34.

15 Id. at 33-34.

16 Id. at 33.

17 Id. at 33.

18 Id. at 33.

19 Id. at 32.

20 Id. at 32.

21 Id. at 32.

22 Id. at 32.

23 Id. at 34.

24 Id. at 34.

25 Id. at 34.

26 Id. at 34.

27 Id. at 34.

28 Id. at 34.

29 Id. at 34.

30 Id. at 34.

31 Id. at 34-35.

32 Id. at 35.

33 Id. at 35.

34 Id. at 35.

35 Id. at 35.

36 Id. at 35.

37 Id. at 35.

38 Id. at 21, 35.

39 Id. at 35.

40 Id. at 35.

41 Id. at 35-36.

42 Id. at 36.

43 Id. at 36.

44 Id. at 36.

45 Id. at 36.

46 Id. at 38.

47 Id. at 38-39.

48 Id. at 3, 39, 45.

49 Id. at 39.

50 Id. at 39.

51 Id. at 39.

52 Id. at 39.

53 Id. at 39-40.

54 Id. at 40.

55 Id. at 40.

56 Id. at 40-41.

57 Id. at 41.

58 Id. at 44.

59 Id. at 44.

60 Id. at 44.

61 Id. at 44-45.

62 Id. at 45.

63 Id. at 45.

64 Id. at 45.

65 Id. at 45.

66 Id. at 45.

67 Id. at 45.

68 Id. at 24.

69 Id. at 24.

70 Id. at 51.

71 Id. at 24.

72 Id. at 24.

73 Id. at 24

74 Id. at 25.

75 Id. at 25.

76 Id. at 24.

77 Id. at 25.

78 Id. at 25.

79 Id. at 26.

80 Id. at 26.

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