Court refuses to strike damages expert’s report

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Where the damages expert in an infringement action properly included non-infringing support and maintenance revenue in his royalty base, the defendant’s motion to strike his report was denied.

Background

Daedalus Blue LCC alleges that products offered by defendant MicroStrategy Incorporated infringe on its ’172 and ’076 patents. Defendant filed a motion to exclude the expert report of plaintiff’s damages expert, Jim Bergman. The court-appointed special master issued a report and recommendation, or R&R, that the court deny the motion to exclude. Defendant has filed objections to the R&R.

Royalty base

Defendant’s motion to exclude rests on the position that Bergman improperly considered value-factors beyond those directly associated with the allegedly infringing software functionality, “resulting in an inflated value of the claimed inventions.” The special master, however, concluded that Bergman reliably and validly calculated a royalty base, apportioned that base and extrapolated a hypothetical profit-split, and thus he recommended that the motion be denied, with cross-examination available to the defendant at trial to address any perceived methodological issues.

The court agrees with the special master’s analysis and with the ultimate conclusion that Bergman properly included non-infringing support and maintenance revenue in his royalty base. Defendant attempts to frame Bergman’s analysis as a deficient “entire market value” analysis, repeatedly citing analytical standards drawn from entire market value-based cases, when Bergman in fact conducted an equally valid but distinct “convoyed sales” analysis.

Bergman included the revenue of MicroStrategy’s support and maintenance products in the royalty base calculations because they were sold together with the patented products in question. Specifically, Bergman cited to the fact that “customers are either required to purchase a standard one-year product support package or the standard product support is an embedded cost as part of the licensing model.” Bergman further relied on the fact that users can only obtain access to new versions and software updates if they pay (either directly or through their licensing agreement) for a support package.

Based on these statements, Bergman demonstrates that the convoyed sale—the support package—has no use or market independent of the patented device, because it serves simply to prolong the lifespan of the patented products. A service package that provides updates and new versions is no use if someone does not have the underlying software.

And vice versa: software that goes un-updated will eventually be rendered obsolete or compromised, supporting the finding of a necessary functional relationship between the two products rather than just a strategic or convenience-driven pairing. While defendant argues that customers have the option not to purchase add-on service packages after their first year, such a choice cuts off access to software updates and new versions of the software.

Patent ’076 apportionment

The special master determined that Bergman’s apportionment approach was not arbitrary with respect to patent ’076. The special master supported Bergman’s conclusion as to the ’076 patent based on Bergman’s consideration of multiple factors—including defendant’s own documents—and on the fact that Bergman relied on testimony from plaintiff’s technical expert that supported an apportionment value greater than simply one-eighth of the accused product’s value.

The court finds that Bergman’s apportionment figure for the ’076 patent is reliably achieved and not arbitrary, and his testimony on that subject should therefore be preserved for trial, where it can be challenged during cross-examination and/or counterbalanced by alternative expert testimony.

MicroStrategy 7i

Defendant finally objects to the special master’s recommendation rejecting its argument that Bergman’s apportionment approach was faulty for failing to apportion-out the value of defendant’s non-infringing prior art product, MicroStrategy 7i. The special master concluded that Bergman was entitled to rely on the determination by plaintiff’s technical expert, Dr. Malek, that there were in fact no non-infringing alternatives to the ’172 and ’076 patents.

The court agrees with the special master and plaintiff that Bergman is entitled to rely on the opinion of Dr. Malek as to the respective functionalities of the various products in question, particularly where defendant did not raise any Daubert challenges to Dr. Malek’s report or testimony.

Report and recommendation adopted. Defendant’s objection to the R&R overruled. Defendant’s motion to exclude denied.

Daedalus Blue LCC v. MicroStrategy Incorporated, Case No. 2:20-cv-551, Aug. 29, 2023. EDVA at Norfolk (Young). VLW 023-3-521. 20 pp.