The Federal Circuit’s recent decision in Elbit Systems Land & C4I Ltd. v. Hughes Network Systems, Inc., No. 2018-1910, slip op. (Fed. Cir. June 25, 2019), which affirmed a $21 million judgment, demonstrates the challenges an appellant faces when seeking to reverse a jury verdict in a patent case, but the case offers some lessons on appellate preservation for litigants in district court.
We’ve identified three takeaways from the decision, which we describe in more detail following the case background:
A party making a substantial evidence challenge alone will face difficulty reversing an infringement verdict.
A Rule 403 objection to a damages opinion is distinct from a Rule 702 challenge, and the Rule 403 objection must be separately preserved.
Patentees seeking to avoid reversal of a damages verdict under the entire market value will likely tie their model to a purportedly comparable license.
Background
The appeal involved the single patent (U.S. Patent No. 6,240,073) on which the jury found infringement following a trial before the Hon. Robert W. Schroeder III in the Eastern District of Texas. The patent relates to communications from a user terminal to a central hub using satellite communications. The jury found one independent claim and two dependent claims were infringed. The claims, which were construed to include several means plus function limitations, were directed to the user terminal switching between a “first communications means” for transmitting “short bursty data” and a “second communications means” for “continuous transmission of data.” The claims also required a “switching means” for switching between the first (bursty) and second (continuous) transmission means. The plaintiff presented a damages model that relied on patent licenses entered into by defendant Hughes and argued for a per-unit royalty based on that license, with certain further adjustments.
On appeal, Hughes challenged the infringement finding for lack of substantial evidence and challenged the damages model on several grounds: lack of license comparability, violation of the entire market value rule, and improper reliance on total revenue evidence. Hughes did not appeal any claim construction rulings.
Analysis
A party making a substantial evidence challenge alone will face difficulty reversing an infringement verdict. In this case, Hughes argued that substantial evidence did not support a finding that the second communications means existed because the accused devices did not have continuous transmission. On appeal, the Federal Circuit acknowledged the testimony from Hughes’ expert that the accused devices may have “guard” times when the accused device has turned off transmission, meaning that transmission by the device is not continuous. The Federal Circuit nonetheless concluded that Hughes could not establish a lack of substantial evidence, pointing to testimony from Elbit’s expert that a POSITA would consider the particular manner of operation to constitute continuous transmission despite the guard times. Hughes similarly argued that two other claim limitations were not met, and the Federal Circuit, after pointing to competing expert testimony from both sides, concluded that substantial evidence supported the verdict.
The Federal Circuit deferred heavily to the jury where there existed expert testimony to support the jury’s conclusion. (Here, the finding was that a limitation was met, though in the case of a non-infringement verdict, the Circuit might have deferred to a finding that a limitation was not met.) That deference was given even where the expert testified that “continuous” allowed pauses or breaks for “guard” times. Without a claim construction that clearly excluded such guard times, the Defendant was left with only a jury verdict to appeal on substantial evidence grounds.
The reality is that an appellant has much better odds of reversing a claim construction than a jury verdict. This informs a phenomenon we’ve seen often: a claim construction victory may win the “battle,” but the compromises made to achieve that win could end up causing a party to lose the “war,” if the claim construction doesn’t lead to judgment as a matter of law. Although each case is different, when representing accused infringers in district court, our usual tendency is to push for a claim construction that is narrow enough to provide a path to judgment as a matter of law on infringement or broad enough to lead to judgment as a matter of law on validity--rather than an in-between position. The in-between position may not be especially helpful in persuading a jury on a technical point, and at the same time it may forego any appellate claim construction challenge. This principle applies on the patentee side as well, albeit primarily on invalidity. For infringement, patentees will often prefer simply to press for a plain meaning approach.
A Rule 403 objection to a damages opinion is distinct from a Rule 702 challenge, and the Rule 403 objection must be separately preserved. In his damages presentation, plaintiff Elbit’s expert told the jury that the “revenue Hughes receives from service fees for an average customer over the course of that customer’s time buying the relevant service from Hughes” was $2,500, even though the expert’s proposed reasonable royalty was $18. The Federal Circuit concluded that this reference did not fall into any of the prohibited uses of total revenue, and thus declined to find that admitting the testimony was automatically reversible. Instead, the Court suggested that the proper rubric for considering such testimony would have been a Rule 403-type analysis of the prejudice balanced against probative value. But the Court concluded no such objection was preserved at trial. While the Court did not indicate how it might have ruled had that objection been made, what is clear is that a Rule 403 objection needs to be made separately from a challenge to the expert’s methodology under Daubert. Some courts may require the Rule 403 challenge to be included in Daubert briefing. But even if the Rule 403 challenge is denied at the motion stage, it would still be prudent to re-urge the 403 objection at the time of trial testimony. Doing so will avoid the need, on appeal, to show that the re-urging the objection during the trial would have been futile.
Patentees seeking to avoid reversal of a damages verdict under the entire market value will tie their model to a purportedly comparable license. The requirement for apportionment has existed in patent damages for a long time, and since the Federal Circuit’s decision in Laser Dynamics v. Quanta, 694 F.3d 51, 67 (Fed. Cir. 2012), courts have generally held to the idea that a low royalty rate cannot substitute for apportionment. While not expressly abrogating that principle, the Elbit decision seems to affirm a tactic we’ve seen used in district court to evade LaserDynamics. Patentees, including in this case, have argued that when their damages model relies on a comparable license to establish the license rate, they need not apportion the royalty base to the patented feature, because the comparability exercise already takes that apportionment into account. Whatever the soundness of this rule as a policy matter may be, both patentees and accused infringers should expect that courts will apply it.
For accused infringers, one potential approach here is to dive deep into the purportedly comparable license when taking discovery of the damages expert, to show that the rate the expert has derived does not incorporate an apportionment to the patented feature. This strategy is likely to be more effective when the purportedly comparable license involves multiple patents or a broad set of products or product-features, or both. In other words, the party seeking apportionment can argue that the general notion of comparable licenses incorporating apportionment doesn’t apply in the specific situation, rather than, or in addition to, attacking the principle head on.
Published by Law360 on August 29, 2019