ResQNet.com v. Lansa: Damage Award Vacated Due to Speculative and Unreliable Methodologies

In ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), the Federal Circuit vacated and remanded a damage award because it was based on unreliable expert witness testimony.  In particular, the damage award was rejected because it was based on “speculative and unreliable evidence divorced from proof of economic harm linked to the claimed invention.” 

At trial, ResQNet asserted two patents against Lansa, including U.S. Patent No. 6,295,075 (the “’075 Patent”).  After a bench trial, the court held that the ‘075 Patent was valid and infringed by Lansa.  In awarding damages, the court adopted the methodology of ResQNet’s damages expert, Dr. David, who opined that ResQNet was entitled to a reasonable royalty of 12.5 % for past infringement.  Applying that rate, the trial court awarded $506,305 plus prejudgment interest for past infringement and imposed a license of 12.5% for Lansa’s “future activity.” 

Dr. David’s royalty opinion was premised on seven ResQNet license agreements – five “re-bundling licenses” and two “straight licenses.”  Dr. David concluded that ResQNet was entitled to a 12.5% royalty rate as “somewhere in the middle” of the re-bundling and straight licenses.  The two straight licenses were executed in litigation involving the patents in suit, and one of them had a running royalty rate of “substantially less than 12.5% of revenues.”  The re-bundling licenses contained no references to any of the patents in suit, and included royalty rates ranging from 25% to 40%.

On appeal, the Federal Circuit held that there was not a sufficient link between the re-bundling licenses and the technology at issue and, therefore, the trial court erred in adopting the methodology underlying Dr. David’s opinion.  Without a sufficient link between the re-bundling licenses and the technology, the finder of fact could not evaluate the probative value of those licenses.  The Federal Circuit found the trial court’s analysis to be “particularly troubling” because of (1) the extremely high royalty rates in the re-bundling licenses compared with the straight licenses, and (2) the unconvincing reasons that Dr. David gave for considering the re-bundling licenses at all.  The

Federal Circuit summarized its scathing assessment as follows: 

The inescapable conclusion is that Dr. David used unrelated licenses on marketing and other services - licenses that had a rate nearly eight times greater than the straight license on the claimed technology in some cases - to push the royalty up into double figures. 

Accordingly, the Federal Circuit vacated and remanded the trial court’s damage award.  

ResQNet is the latest opinion from the Federal Circuit criticizing damages experts for relying upon “speculative and unreliable” evidence in calculating a reasonable royalty.  Last fall, for example, the Court vacated a $358 million damage award when the Federal Circuit, in reviewing the license agreements supporting the patentee’s request for a reasonable royalty, was “unable to ascertain from the evidence presented the subject matter of the [license] agreements.” Lucent Techs., Inc. v. Gateway, 580 F.3d 1301, 1327-28 (Fed. Cir. 2009). 

ResQNet and Lucent illustrate that additional scrutiny that the Federal Circuit is giving to the methodologies underlying damage awards in patent infringement cases.  In light of these opinions, litigants and their counsel should work closely with damages experts to ensure that their opinions are principled, well grounded, and clearly supported by reliable evidence.