RICHARD G. ANDREWS, District Judge.
Presently before the Court are two Daubert motions: Defendant's Motion to Exclude the Testimony ofM2M's Damages Experts Herman "Whitey'' Bluestein and Richard Bero (D.I. 168), and Plaintiff's Motion to Exclude Opinions of [Charles] Donohoe (D.I. 174). The parties argued these motions with their motions for summary judgment during oral argument on October 30, 2015. (D.I. 245). The Court subsequently held a Daubert hearing on January 6-7, 2016. (D.I. 250). For the reasons that follow, the Court will grant both motions to exclude.
On January 13, 2012, PlaintiffM2M Solutions LLC filed five related patent infringement actions asserting infringement of U.S. Patent Nos. 8,094,010 ("the '010 patent") and 7,583,197 ("the '197 patent"). (D.I. 1). After this Court invalidated the '197 patent (D.I. 94), entered final judgment in favor of Defendant Motorola Solutions, Inc. by granting a stipulation (D.I. 158), and granted summary judgment of non-infringement as to Defendant Telit Communications PLC (D.I. 247), all that remains is Plaintiff's claim against Telit Wireless Solutions Inc. for infringement of the '010 patent. The '010 patent claims a "programmable communicator device" that is capable of receiving transmissions, authenticating them using a particular form of coded number authentication, and storing numbers from authenticated transmissions in a list of permitted callers. ('010 patent, abstract & claim 1). The patent further contemplates a device that is remotely programmable and that allows for remote data monitoring, "which can be used to relay information about the status of a remote piece of technical equipment such as a vending machine." (Id. col. 3, 11. 43-47; id. col. 4, 11. 3-7; id. col. 7, 11. 24-30).
In these two motions, the parties do not lay out in any real detail what exactly the accused products do. In the briefing on the parties' summary judgment motions, it is suggested that the accused products have multiple "modes" of operation, only two of which are accused of infringing. (D.I. 177 at 11; D.I. 198 at 11-12 (citing D.I. 199-1 at 20-24, ¶¶ 55-63)). Based on this background, it appears that a significant part of Mr. Bluestein's analysis here aims to approximate how many users of the accused modules actually use the modes or features of these modules that constitute the infringing technology. (D.I. 201-1 at 21-23). It is necessary for him to do so, because the degree of importance of the accused technology will have a significant impact on a reasonable royalty analysis.
Federal Rule of Evidence 702 sets out the requirements for expert witness testimony and states:
FED. R. EVID. 702. The Third Circuit has explained:
Schneider ex rel. Estate of Schneider v. Fried, 320 F.3d 396, 404-05 (3d Cir. 2003) (footnote and internal citations omitted).
The party offering expert testimony bears the burden of proving its admissibility by a preponderance of the evidence. See Daubert v. Merrell Dow Pharrn., Inc, 509 U.S. 579, 592 n.10 (1993). In the context of calculating a reasonably royalty in a patent case under 35 U.S.C. § 284, the Federal Circuit has explained that "damages awarded for patent infringement must reflect the value attributable to the infringing features of the product, and no more." CSIRO v. Cisco Sys., Inc., 809 F.3d 1295, 1301 (Fed. Cir. 2015) (internal quotation marks omitted). "[G]iven the great financial incentive parties have to exploit the inherent imprecision in patent valuation, courts must be proactive to ensure that the testimony presented-using whatever methodology—is sufficiently reliable to support a damages award." Id. Further, the Federal Circuit has "consistently explained that proof of damages must be carefully tied to the claimed invention.itself" Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1324 (Fed. Cir. 2014); see also VimetX Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1327 (Fed. Cir. 2014) ("[T]his court has consistently held that a reasonable royalty analysis requires a court to . . . carefully tie proof of damages to the claimed invention's footprint in the market place." (alteration in original) (internal quotation marks omitted)). "While questions regarding which facts are most relevant for calculating a reasonable royalty are properly left to the jury, a critical prerequisite is that the underlying methodology be sound." VirnetX, 767 F.3d at 1328. "[T]he essential requirement for reliability under Daubert is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product." CSIRO, 809 F.3d at 1301 (internal quotation marks omitted).
As it relates to Mr. Bero, Defendant's motion principally concerns his reliance on the underlying substantive opinions of Mr. Bluestein. Accordingly, I begin by analyzing the opinion of Mr. Bluestein. The crux of Defendant's argument is that Mr. Bluestein is not an expert in the relevant technology and that his expert report relies on surveys ("the Beacham Reports") that are not sufficiently related to the patented technology. (D.I. 169 at 5-6). Defendant points out that the central conclusion of Mr. Bluestein's expert report is that survey respondents in the Beacham Reports who said they use "internal resources" to manage their M2M devices are using the patented technology. (Id. at 9-10). Defendant argues that the Beacham Reports do not discuss M2M device technology at all, but instead relate to the market for services platforms that manage a company's M2M technology, known as Service Enablement Services ("SE Services"). (Id. at 14). Thus, Defendant contends, there is no connection between using "internal resources" to manage M2M technology and the technology claimed in the '010 patent, aside from Mr. Bluestein's unsupported word linking the two. (Id. at 11). Defendant asserts that the technical links crucial to Plaintiff's damages theory-such as the idea that the patented technology appeals to customers who value "security'' and that there is a connection between the use of internal resources and the patented technology-are solely provided by Mr. Bluestein, who admits to not being a technical expert. (Id. at 12). Accordingly, Defendant argues, Mr. Bluestein failed to adequately tie his damages theory to the claimed subject matter of the '010 patent, as Federal Circuit precedent requires. (Id.).
Plaintiff describes Mr. Bluestein as "a machine to machine ('M2M') industry market expert" and describes his expert report as "mak[ing] a reasonable approximation of the importance of the patented technology to Telit's customers based on his own experience, as well as well regarded . . . industry reports and surveys." (D.I. 200 at 4). Plaintiff argues that the two important opinions Mr. Bluestein provides regarding the M2M industry are that "the asserted patented technology provides a number of important advantages to an end-user of M2M modules" and "maintains significant advantages over the next closest alternative, a dedicated cloud-based platform." (Id. at 6). Plaintiff further asserts that, while the Beacham Reports do not concern M2M devices, Mr. Bluestein appropriately connects the reports with the '010 patent because of the advantageous security features of the patented technology and the "almost universal interest in security for the M2M modules." (Id. at 7). Plaintiff summarizes its argument in favor of Mr. Bluestein's methodology as follows: "The Beacham Reports are used to approximate the number of people who buy the accused intelligent M2M modules from Telit who rely on the internal security provided by the patented technology versus the number of people who buy the accused intelligent M2M modules from Telit yet rely on the next best alternative of an external cloud-based platform to provide security." (Id.)
I conclude that Mr. Bluestein's testimony must be excluded for three principal reasons: 1) I do not think that Mr. Bluestein is qualified as an expert to render technical conclusions about the advantageous characteristics of the patented technology, 2) the Beacham Reports are completely unrelated to M2M device technology and any allegedly infringing features of the accused products, and 3) the only link between the Beacham Reports and the patented technology is provided solely by Mr. Bluestein's say-so.
First, I do not think that Mr. Bluestein is qualified as an expert in M2M device technology, security features, or industry surveys. Plaintiff describes Mr. Bluestein as "an expert in the M2M industry with more than 30 years in telecommunications, with a focus on mobile services, virtual mobile operators, and M2M technology." (D.I. 200 at 5). Plaintiff points out that Mr. Bluestein has authored and been quoted by industry publications, has appeared as an industry expert on TV and in various speaking engagements, and consults with young and established companies regarding corporate strategy and development. (Id.). Yet Mr. Bluestein admitted that none of his articles, TV appearances, and speaking engagements were related to the type of M2M device covered by the '010 patent. (D.I. 250 at 128).
While Plaintiff characterizes Mr. Bluestein's testimony as "regarding the M2M industry," the important opinions he provides are technical conclusions about the security benefits provided by the patented technology and security features of other M2M products on the market. Even Plaintiff's own characterization of the importance of Mr. Bluestein's testimony is telling:
(D.I. 200 at 6 (citation and footnote omitted)). When prompted by the Court to clarify the scope of Mr. Bluestein's expertise (D.I. 250 at 264), Plaintiff broadly declared that he is an expert in essentially everything about which he testified:
(D.I. 256 at 4 (citations omitted)). Despite repeatedly stating that he is not a "technical expert" (D.I. 201-1 at 10; D.I. 250 at 127) or a "patent expert" (D.I. 250 at 174), Mr. Bluestein purports to offer important opinions about the technical, security-related advantages of the invention claimed in the '010 patent. (D.I. 201-1 at 11-20). Mr. Bluestein's conclusions regarding the patented technology are sweeping, but his vague reasoning and lack of explanation demonstrate little more than a rudimentary understanding of the invention that the '010 patent claims. More specifically, his descriptions of the '010 patent are limited to broad statements: that it describes a device having built-in security features, that alternative products in the market do not, and that security is a major concern in the M2M industry. (Id.; D.I. 250 at 110-13, 115-16, 200-01). In other words, while Mr. Bluestein may have considerable experience in the industry generally, he does not have the expertise (and he does not rely on others who do) to carefully tie his methodology (or, indeed, any methodology) to the '010 patent's footprint in the marketplace, especially when only providing vague platitudes about what that footprint is. See VirnetX, 767 F.3d at 1327; Apple, 757 F.3d at 1324.
Second, I do not think that the Beacham Reports are a reliable way of determining end-user preferences with regard to M2M device technology generally and the '010 patent's narrower· technology specifically. The '010 patent claims a "programmable communicator device" that that is capable of receiving transmissions, authenticating them using a particular form of coded number authentication, and storing numbers from authenticated transmissions in a list of permitted callers. ('010 patent, abstract & claim 1). The Beacham Reports, however, relate to services platforms within the M2M industry-Service Enablement Services ("SE Services")— rather than the market for M2M devices. (See, e.g., D.I. 201-5 at 31 (concluding that those in the M2M industry are "recogniz[ing] more clearly the need for SE service capabilities to support their connected device designs.")).
The Beacham Reports do not discuss M2M device technology at all, let alone provide any sort of discussion about particular security features of M2M devices. (D.I. 250 at 135). Likewise, neither the claims nor the specification of the '010 patent mentions SE Services or otherwise suggests that an advantage of the patented technology is that it allows users to operate their devices without employing outside service providers. The only connection Mr. Bluestein makes between this device patent and SE Services is his conclusion that a dedicated cloud-based platform-which he equates with using SE Services-is the "next-best alternative" to the patented technology. (D.I. 201-1 at 21-22). However, Mr. Bluestein's conclusion that the next-best alternative to the patented technology is a dedicated cloud-based platform is seemingly plucked out of thin air. (D.I. 201-1 at 21; D.I. 250 at 176). This conclusion requires a level of technical expertise that an admittedly non-technical expert would not have. Simply put, the Beacham Reports' subject matter and conclusions do little to answer-and are quite far afield from-the question of how many users of the accused devices actually use the patented technology. Accordingly, Mr. Bluestein's conclusions, which rely entirely on the Beacham Reports, are certainly not "carefully tied to the claimed invention itself." Apple, 757 F.3d at 1324; see also Fractus, SA. v. Samsung, 2011 WL 7563820, at *1 (E.D. Tex. Apr. 29, 2011) ("[T]he surveys are not tied to the alleged advantageous technical characteristics of the patents-in-suit. . . . Allowing the jury to hear such evidence not tied to the claimed invention risks compensation for infringement [that] punishes beyond the reach of the statute." (second alteration in original) (citations and internal quotation marks omitted)).
Third, the linchpin of Mr. Bluestein's damages theory-that Beacham Report survey respondents who indicated a preference for using internal resources to manage their M2M products use the patented technology-is unsupported by anything other than Mr. Bluestein's say-so. (D.I. 201-1at21-23; D.I. 250 at 164, 200). Indeed, Mr. Bluestein expressly admitted that his opinion provides the only link between the concept of internal resources and the patented technology. (D.I. 250 at 164). Mr. Bluestein broadly declares that survey respondents who prefer to manage their M2M technology in-house-in other words, they prefer to use their own employees and resources versus contracting out for these services-are likely to use the invention claimed by the '010 patent.
The Beacham Reports, however, are not related to M2M device technology or device security features. The survey question in the Beacham Reports that Mr. Bluestein relies upon to calculate how many respondents use internal resources makes no mention of "security" at all and is completely unrelated to M2M device technology. (D.I. 201-4 at 31). Figure 16, which Mr. Bluestein relies upon (D.I. 201-1 at 22), "shows responses to the question `Who is providing Service Activation, Status Monitoring, and Remote Management Activities for these Connected Products/Services Once in Service?'" (D.I. 201-4 at 31). Plaintiff, however, repeatedly attempts to characterize this question as addressing whether a customer uses "internal resources for handling security," when in reality the question was directed to services generally, and makes no mention of security. (D.I. 250 at 110, 115). These shared "security" concerns are simply ari. unreliable construct Mr. Bluestein employs to validate his use of a survey that does not otherwise relate to the '010 patent's invention.
Despite admitting that he is not a technical expert (D.I. 201-1 at 10), Mr. Bluestein purports to provide the missing link between two seemingly unrelated subjects with testimony that requires and implies a quintessentially technical understanding of the invention claimed by the '010 patent. (See, e.g., D.I. 201-1 at 21-22 ("[A] fundamental difference between an intelligent M2M module using the patented technology and an M2M module that is remotely programmable using a dedicated cloud-based platform, is based on the security features enabled by the patented technology.")). Yet Mr. Bluestein's descriptions of the patented technology remain exceedingly general. Perhaps most importantly; he provides no explanation of how the device claimed in the '010 patent eliminates the need to contract out for the broad swath of services that are referenced in the relevant survey question: "Service Activation, Status Monitoring, and Remote Management Activities for These Connected Products/Services Once in Service." (D.I. 201-4 at 31). Such an explanation is critical, as the entire Bluestein/Bero damages theory stems from the purported cost savings of using the patented technology, because it allows users to avoid paying recurring monthly fees for SE Services. The notion that the '010 patent truly obviates any need or inclination to use SE services strikes me as implausible on its face and finds support only in the bald conclusions of Mr. Bluestein.
In sum, Plaintiff asks this Court to allow it to present damages testimony to the jury, whereby a non-technical expert extrapolates from a survey unrelated to the patented invention to calculate how many customers use the patented features of the accused products. Plaintiff certainly has not proven that Mr. Bluestein's underlying methodology is sound or reliable. See VimetX, 767 F.3d at 1328. Instead, Mr. Bluestein presents "evidence unrelated to the claimed invention [that] does not support compensation for infringement but punishes beyond the reach of [35 U.S.C. § 284]." ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). Given Mr. Bluestein's lack of technical expertise, his conclusion that he can use the Beacham Reports to reliably estimate how many Telit customers use the patented technology does not stand up to scrutiny.
With regard to Mr. Bero, Defendant argues that he relies solely on the unreliable substantive opinions of Mr. Bluestein for critical substantive matters underlying his opinions. (D.I. 169 at 9). Indeed, in his expert report, in order to assess how many customers use the patented technology, Mr. Bero relies entirely on the Beacham Reports and Mr. Bluestein's interpretation of those reports. (D.I. 201-6 at 17-19). At the Daubert hearing, Mr. Bero likewise admitted that he relies entirely on Mr. Bluestein's conclusion that use of internal resources can be equated with use of the patented technology. (D.I. 250 at 61-66, 70). Mr. Bero takes the 22% to 37.8% of users that Mr. Bluestein estimates use the patented technology, and multiplies those amounts with recurring monthly Average Revenue Per Unit ("ARPU") for two security-related categories of SE Services
Mr. Bero's opinion, which equates survey results regarding SE services with use of the '010 patent's technology, based solely upon the unsupported opinion of Mr. Bluestein, has not carefully tied proof of damages to the claimed invention. See VimetX, 767 F.3d at 1327; Apple, 757 F.3d at 1324. Mr. Bero is simply the numbers guy here. He takes Mr. Bluestein's stamp of approval for the Beacham Reports and his underlying estimate of how many users employ the patented technology and makes more advanced calculations using additional figures from the · Beacham Reports. Mr. Bluestein's opinion provides the foundation for Mr. Bero's reasonable royalty analysis. Without Mr. Bluestein's conclusions, that foundation crumbles. Accordingly, because I have concluded that the methodology Mr. Bluestein employs is unsound, requiring the exclusion of his testimony, Mr. Bero's damages testimony must be excluded as well.
Plaintiff moves to exclude Mr. Donohoe's opinions on a running royalty rate for relying upon non-comparable license agreements.
(Id. at 37, ¶¶ 123-24).
Plaintiff argues that Mr. Donohoe's running royalty analysis is improper because it is driven exclusively by his analysis of these two large, standard-essential portfolios of patents that are licensed on a FRAND (fair, reasonable, and non-discriminatory) basis. (D.I. 176 at 4). The crux of Plaintiff's argument is that Mr. Donohoe's opinion improperly relies on licenses that are drastically different, both economically and technologically, from the underlying hypothetical negotiation. (Id. at 4, 8-11). Defendant argues that Mr. Donohoe is not using these licenses to estimate a reasonable royalty, but instead only to set an appropriate upper limit to Plaintiff's damages claims. (D.I. 203 at 5). Defendant's theory is that the Company A and B licenses-because they concern large, worldwide portfolios of standard-essential patents-are economically comparable to the '010 patent in the sense that their value compared to a single asserted patent is much greater. (D.I. 203 at 8-10). Defendant argues that these FRAND licenses are technologically comparable because they both cover technology that is exploited by the patent-in-suit, CDMA and GSM/GPRS technology. (Id. at 11).
The second Georgia-Pacific factor looks at "[t]he rates paid by the licensee for the use of other patents comparable to the patent in suit." Georgia-Pacific Corp. v. US. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y. 1970). "This factor examines whether the licenses relied upon . . . in proving damages are sufficiently comparable to the hypothetical license at issue in suit." Lucent Techs, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009). "[T]here must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue." Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1317 (Fed. Cir. 2011). It is improper to "rely on license agreements that were radically different from the hypothetical agreement under consideration to determine a reasonable royalty." Id. at 1316 (internal quotation marks omitted). "[C]omparisons of past patent licenses to the infringement must account for the technological and economic differences between them." Worldtech Sys., Inc. v. Integrated Network Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir. 2010) (internal quotation marks omitted). "When relying on licenses to prove a reasonable royalty, alleging a loose or vague comparability between different technologies or licenses does not suffice." Laser Dynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 79 (Fed. Cir. 2012). "The testimony of a damages expert in a patent suit who relies on non-comparable licenses in reaching his royalty rate should be excluded." DataQuill Ltd. v. High Tech Computer Corp., 887 F.Supp.2d 999, 1022 (S.D. Cal. 2011).
As the above Federal Circuit precedent makes clear, Defendant must show that the prior licenses Mr. Donohoe relies upon are actually comparable to the license that the parties would have negotiated for the '010 patent before introducing this evidence to the jury. Mr. Donohoe has failed to show how these two large, worldwide, standard-essential, FRAND patent portfolios are economically comparable to a license that the parties would have negotiated for a single asserted patent. See Lucent, 580 F.3d at 1328 ("[A] reasonable juror could only conclude that the IBM-Dell license agreement for multiple patents to broad, PC-related technologies is directed to a vastly different situation than the hypothetical licensing scenario of the present case involving only one patent. . . ."); LaserDynamics, Inc. v. Quanta Computer, Inc., 2011 WL 7563818, at *3 (E.D. Tex. Jan. 7, 2011) ("[W]here a license covers a portfolio of patents . . . Plaintiff must present evidence sufficient to allow the jury to weigh the ec;onomic value of the patented feature against the economic value of the features and services covered by the license agreement. It is not sufficient to state that both patents cover [similar] technology."). In DataQuill, the district court excluded expert testimony, in similar circumstances, for comparing the two patents-in-suit to "significant patent agreements" that were not economically comparable. See id. at 1021-25. Specifically, the district court reasoned:
DataQuill, 887 F. Supp. 2d at 1023 (quoting Lucent, 580 F.3d at 1328) (citations omitted).
I agree with Judge Gonzalez's analysis in DataQuill and similarly conclude that Mr. Donohoe's opinion improperly relies on licenses that are not economically comparable to the '010 patent. The negotiations surrounding the Company A and Company B portfolio licenses were undoubtedly "radically different" than the hypothetical negotiation that would have occurred between the parties for a license to a single patent. See Uniloc, 632 F.3d at 1317. While Defendant suggests that Mr. Donohoe "analyzed in detail economic similarities and differences between the two preexisting and hypothetical licenses" (D.I. 254 at 5), the cited paragraphs of his report provide little more than broad conclusions that the Company A and Company B licenses are surely worth more than a single U.S. Patent, which could easily be designed around. (D.I. 204-1 at 36 ¶¶ 127-28; id. at 39, ¶¶ 136-37; id. at 47, ¶ 174). Mr. Donohoe provides no opinion that even attempts to describe the value of the patented technology in any specificity, in order to compare the value of the 010 patent to these large patent portfolios. He simply makes the bare assertion that these standard-essential, FRAND portfolios should intuitively be worth far more than a single asserted patent.
At oral argument, Defendant suggested that cases like DataQuill are inapposite because they involved plaintiff's using large patent portfolios to inflate the reasonable royalty rate, while Mr. Donohoe uses these licenses merely to provide a cap on what a reasonable royalty may be. (D.I. 245 at 65, 76). However, the relevant inquiry is one of comparability, and I see no reason why this standard should apply differently depending on whether a defendant or a plaintiff is relying on incomparable licenses.
For the reasons set forth above, the Court will grant Defendant's Motion to Exclude the Testimony of Mr. Bluestein and Mr. Bero (D.I.168), and will grant Plaintiff's Motion to Exclude Opinions of Mr. Donohoe relating to a running royalty rate (D.I. 174). A separate order, consistent with this Memorandum Opinion, will be entered.
(D.I. 201-1 at 23 (emphases added)).