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District of Delaware Grants Motion to Exclude Lost Profits Testimony

In Immersion Corp. v. HTC Corp., et al., 2015 WL 834209 (D. Del Feb. 24, 2015), the District of Delaware granted in part a Daubert motion allowing testimony regarding a reasonable royalty, but excluding Plaintiff’s expert’s testimony on lost profits.

Plaintiff’s expert based his lost profits theory on a negotiated, but never entered into, license agreement between the parties.  Under that agreement, the patents-in-suit would have been licensed, along with some additional software belonging to Plaintiff, at a per-unit royalty rate of $.12.  Plaintiff’s expert calculated lost profits by applying that rate to Defendants’ sales on the premise that but for infringement, Defendants would have entered the agreement.

As a starting point, a “patent owner who has suffered lost profits is entitled to lost profit damages regardless of whether the patent owner has made, used, or sold the patented device.”  So while the fact that Plaintiff did not manufacture the patented device is not dispositive in a lost profit analysis, “[t]hat does not mean . . . that recovery can be based on revenue lost from any product related to the patents-in-suit.”  Moreover, the Court held that merely because the patent license and software license were once subject to negotiations for a single contract that fact “is insufficient to base lost profits on revenue that would have been derived from the software.”  “To recover for lost sales of unpatented components sold with a patented product, ‘[a]ll the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit.”  Where patented and unpatented products can function independently, the products are not a functional unit.  It is not enough that the patented and unpatented products are sold together.  Here, the software was not the only means of implementing the patented products, thus a functional relationship did not exist.

In addition, the Court held that Plaintiff’s expert’s opinion was based on a faulty premise.  Under the lost profit analysis, the analysis is focused on the question of “what would have happened if the infringer had not violated the patentee’s right to exclude?”  The analysis then “flows from the hypothetical situation where the infringer was excluded.”  Contrary to the lost profit analysis, Plaintiff’s expert first assumed that the infringer had a license (at a $.12 per-unit royalty rate) and “then asks, what else would the infringer have bought from the patent holder?”  For this reason and the lack of the functional relationship, the Court excluded the lost profits testimony.

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