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Limelight Networks, Inc. v. XO Communications, LLC

United States District Court, E.D. Virginia, Richmond Division

February 2, 2018

LIMELIGHT NETWORKS, INC., Plaintiff,
v.
XO COMMUNICATIONS, LLC, and AKAMAI TECHNOLOGIES INC., Defendants.

          OPINION

          JOHN A. GIBNEY, JR. UNITED STATES DISTRICT JUDGE.

         The parties in this patent infringement litigation each operate a content delivery network designed to accelerate the delivery of information and electronic content over the internet. Each company uses different methods to achieve increased speed and reliability over their respective networks, and they cross-allege patent infringement violations based on their competing products. The parties in this case have submitted expert reports on the technical issues of the patents at issue and the appropriate damages resulting from the alleged patent infringement.[1]To no one's surprise, they each have raised objections to the proposed testimony of the other side's experts.

         The parties have moved to exclude testimony of one another's expert witnesses, and the Court entered an Order on these motions on March 13, 2017 (the "Original Order"). (Dk. No. 420.) The parties have submitted supplemental briefs on the issues, which the Court addresses in this Opinion.

         For the reasons given below, the Court rules as follows:[2]

1) Dr. Stephen Prowse, the damages expert for the plaintiff, Limelight Networks, Inc. ("Limelight"), may not testify about royalties and license fees for the '324, '155, 577, and '002 Patents.
2) Prowse may testify on the topic of lost profits for the '324, ' 155, and '002 Patents, although the Court has grave doubts about whether he will be able to create a viable issue to present to the jury for decision.
3) Paul Meyer, the damages expert for the defendant, Akamai Technology, Inc. ("Akamai"), may not testify on damages.
4) The defendant's technical experts, Meyer, Dr. Samrat Bhattacharjee, and Dr. Nader Mir, may testify on the topics in their expert reports.

         I. STANDARD OF REVIEW

         Under Federal Rule of Evidence 702, an expert must base his testimony on sufficient facts, use reliable principles and methods, and reliably apply the principles and methods to the facts of the case. See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597 (1993). This standard places a "special obligation upon a trial judge to ensure that any and all [expert] testimony ... is not only relevant, but reliable. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999) (internal quotations and citation omitted). Further, due to the difficulty in evaluating expert testimony and the risk of misleading a jury, trial courts exercise more control over experts than lay witnesses when weighing the probative value of an expert's opinion against its potential prejudice. Daubert, 509 U.S. at 595. A party must establish the admissibility of its expert's testimony by a preponderance of the evidence. Maryland Cas. Co. v. Therm-O-Disc, Inc., 137 F.3d 782, 783 (4th Cir. 1998).

         Successful plaintiffs in patent cases are entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty." 35 U.S.C. § 284. The plaintiff may show a reasonable royalty by pointing to a royalty paid in a prior license for the technology at issue or for a comparable technology. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 (Fed. Cir. 1995) (citations omitted). If such a license does not exist, a party can show a reasonable royalty by looking to the result of a hypothetical negotiation between the parties to license the allegedly infringed technology. Courts also consider the extent to which the infringer has used the patent, the relationship between the parties, and other factors.

         II. DISCUSSION

         A. Damages Experts

         The patents in this case form small parts of larger systems that combine dozens, if not hundreds, of patented items or methods. Since the alleged infringement only applies to part of a greater process, the parties' claims raise the issue how to allocate profits or damages among the small parts of a large whole. Judge Learned Hand characterized the problem as "unanswerable." Cincinnati Car Co. v. New York Rapid Transit Corp., 66 F.2d 592, 593 (2d Cir. 1933). Notwithstanding Judge Hand's candid and perceptive comment, litigants have come up with formulas and theories to answer the unanswerable question. Most, if not all, of these inventions would be laughed out of court in run of the mill cases. Apparently, not so in patent cases.

         The parties in this case have explained that they have to prove damages, that it is a hard thing to do, so we have to resort to the kinds of theoretical concoctions discussed below. Courts have accepted some of these theories, so this Court will allow testimony about them. But allowing the witness to speak does not mean that his testimony will meet an ultimate burden of proof, or even a burden of going forward. Whatever testimony comes in may not justify submitting an issue to the jury in this case.

         1. Limelight's Damages Expert Dr. Stephen Prowse

         a. Reasonable Royalty on Limelight's'324, '155, and '577 Patents

         Dr. Stephen Prowse attempts to develop a reasonable royalty for Limelight's '324, '155, and '577 Patents by creating a hypothetical negotiation between the parties to estimate what Akamai would have negotiated to pay Limelight for a license on the patents instead of infringing. The Court must examine this kind of testimony particularly closely, since it relies on an expert's willingness to offer an opinion on what would have occurred in a negotiation that did not occur and never would have occurred, since the parties show no willingness to negotiate.

         Prowse uses a potentially admissible bargaining model developed by Dr. Ariel Rubinstein, [3] but he impermissibly fails to tie the model to the facts of this case. The Court will not allow Prowse to present his methodology to a jury.

         Experts may use economic models to predict the outcome of hypothetical negotiations, but the expert must at least tie the model to the facts of the case. VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1332 (Fed. Cir. 2014) (rejecting a model because "[i]t itself asserts nothing about what situations in the real world fit [its] premises" and stating that "[a]nyone seeking to invoke [a] theorem as applicable to a particular situation must establish that fit"). Further, "[beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion." Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1317 (Fed. Cir. 2011).

         As Prowse explained during the evidentiary hearing, he took a number of steps to determine a reasonable royalty for the '324, '155, and '577 Patents. First, Prowse determined how much Akamai benefited from its alleged infringement on Limelight's patents by computing the portion of Akamai's revenue attributable to the specific patents at issue. Through his calculations, he determined that 5.9%-8.4% of Akamai's revenues stemmed from infringement on the '324 and '155 Patents and that $63.3 million stemmed from infringement on the '577 Patent. Next, Prowse assumed that the parties, as rational actors, would agree to a license to split these revenues so that each party could make more money than it would in the absence of a license. To determine how the parties would split the revenues, Prowse relied on Rubinstein's model, which essentially stands for the idea that the more patient party in a negotiation will fare better than the less patient party. Prowse determined he could appropriately use the Rubinstein model because the parties are rational economic actors with similar levels of negotiating skill. Prowse then looked to Bloomberg, a financial news and reporting source, for each company's weighted average cost of capital ("WACC") as a proxy for each party's relative patience.[4] Next, Prowse applied a modified version of the Rubinstein model to predict the results of the hypothetical negotiation and determine how the parties would split Akamai's benefit from infringing on the '324, '155, and '577 Patents.

         Prowse's method is simply fancy guesswork. His use of the Rubinstein model fails Akamai's challenge because it contains almost no basis in facts relevant to this case. Although Prowse's method is not, as Akamai argues, a rule of thumb or a 50-50 split, Prowse does not tether the methodology to the facts of this case. As Prowse explained, many factors go into calculating a company's WACC such as its debt, cash flows, the company's size, and its assets. Using WACC as a proxy for patience in the Rubinstein model does not consider the actual stakes in the hypothetical negotiation or even the specific patents negotiated.[5] As a result, Prowse's model would split the gains in the same way for a fundamental patent at the core of a company's technology and for a piece of technology that the company might consider not at all valuable. Indeed, the model would split any negotiation between the parties in the same way, no matter the stakes. Limelight argues that a jury can determine whether Prowse chose the right WACC in his analysis, but this argument misses the point. It is not that Prowse chose the wrong WACC as an input-it is that using WACCs the way he does has no relationship to the patents in this case and cannot reliably show how the parties would negotiate over these patents. Although Prowse later adjusts his initial split according to the Georgia-Pacific factors, he adjusts an unsubstantiated, wholly unreliable number. Such analysis fails to reliably apply the facts of the case to the methodology selected.

         b. Reasonable Royalty on Limelight's '002 Patent

         Prowse develops a royalty rate for Limelight's '002 Patent by analyzing Akamai's acquisition of Cotendo. His royalty rate for the '002 Patent, however, fails to adequately apportion the total value of the technology from that acquisition to the technology in the '002 Patent. The Court rejects his analysis because the Federal Circuit has cautioned trial courts against presenting juries with such potentially prejudicial analysis.

         When a patent's claims comprise only an individual component of a larger multi-component product, "it is the exception, not the rule, that damages may be based upon the value of the multi-component product." VirnetX, 767 F.3d at 1326 (stating that "only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts" may an expert compute damages using the entire market value of an accused product). Damages analysis must therefore apportion the value of a multi-component product attributable to the patent or patent claims at issue as opposed to other patents used in the product. Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014) ("The essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product."). The Federal Circuit instructs courts and experts to apportion damages by first determining the portion of a company's revenues attributable to the alleged patent (known as the "damages base") and then applying a reasonable royalty to that base. Id. at 1227. Courts should avoid using the entire revenues of a multi-component product and adjusting the reasonable royalty rate downward. Id.[6] Adjusting a royalty rate, rather than the base, runs the risk of misleading a jury. Id.

         To determine damages for Akamai's alleged infringement on Limelight's '002 Patent, Prowse looks to Akamai's acquisition of Cotendo. There, Akamai paid Cotendo a 15% royalty on all of the acquired technology, including the '571 Patent which he compares to Limelight's '002 Patent.[7] Prowse then determines that the '571 Patent acquired in the deal (which he claims is comparable with the '002 Patent), comprised 59% of the total value of Cotendo's technology. He next multiplies 59% by the 15% royalty paid in the acquisition to get 8.9%, which he argues shows that Akamai paid an 8.9% effective royalty for technology comparable to the ...


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