SUSAN ILLSTON, District Judge.
On June 6, 2019, the Court held a hearing on numerous pretrial motions. For the reasons set forth below, the Court GRANTS Micron's motion to exclude the expert testimony of Ronald Epstein pursuant to the Federal Rules of Evidence and Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993).
Mr. Epstein is the Managing Partner of EpicenterLaw, P.C. Epstein's Expert Report ¶ 3 (Dkt. No. 442-9). EpicenterLaw "is the law firm through which [Epstein] provide[s] legal services related to patent monetization." Id. In September 2012, MLC retained EpicenterLaw to "perform legal services related to the monetization of the MLC Portfolio (identified in Exhibit A attached hereto)
Pursuant to the MLC/EpicenterLaw engagement agreement, Epstein represented MLC in licensing negotiations with Micron during 2013-2014. Those negotiations were unsuccessful, and MLC filed this lawsuit against Micron on August 12, 2014.
On November 2, 2018, MLC first identified Epstein as a percipient witness with "Knowledge regarding notice of infringement, and prior efforts to license the '571 patent." MLC's First Amended Initial Disclosures at 3 (Dkt. No. 419-4).
In January 2019, MLC retained Epstein as an expert. MLC states that Epstein is a "licensing expert" and that he will "serve as a testifying expert to explain to the jury the differences between real world and hypothetical licensing negotiations." Opp'n at 1 (Dkt. No. 501). Epstein's description of his expert assignment is as follows: "Given my first-hand involvement in negotiations with Micron with respect to the MLC Patents, including the '571 Patent, I was asked by MLC IP to provide an account of my negotiations with Micron, as well as the facts and issues I considered with respect to said negotiations." Expert Report at ¶ 17. MLC states that Epstein is "not being offered as a damages expert." Opp'n at 23 n.13. Similarly, at his deposition, Epstein repeatedly stated that he was not providing an opinion about damages. See, e.g., Epstein Tr. at 241:10-11 ("Yeah, I make no opinion as to damages in this case."); id. at 269:9-11 ("A: Yeah, I wouldn't propose to testify to the jury — what they should find as — yes, what they should find as damages.").
Micron challenges Epstein's expert testimony on numerous grounds, including that he is essentially providing lay percipient testimony in the guise of expert testimony, and that he is in fact providing damages opinions that are inadmissible. In order to evaluate these arguments, the Court sets forth a detailed description of Epstein's expert opinions as set forth in his report and his deposition.
Epstein first opines about "Real-World Patent Licensing Negotiation Practices." Expert Report at ¶¶ 19-66. In that section of his report, Epstein details the "History of the MLC Patents" and the "Prior Licenses to the MLC Patents, Including the '571 Patent," which is essentially a factual recitation of the ownership and assignment of the MLC patents and the licensing of the MLC patent portfolio. Id. ¶¶ 19-33. Epstein was not personally involved in negotiating the prior licenses (with e.g., Hynix and Toshiba); those licenses were negotiated by BTG (the prior owner of the MLC patent portfolio). Epstein states that in his 2013-2014 negotiations with Micron, he considered those license agreements in determining the appropriate royalty demand offered to Micron. Id. ¶ 33.
Epstein then discusses the "Differences Between a Real-World License Negotiations and a Hypothetical Negotiation in an Enforcement Action," including the "Patent Licensing Market Model" that Epstein created. Epstein states that "[i]n preparing for my negotiations with Micron, I took advantage of the knowledge I had regarding real world patent license royalty negotiations and how they differed from the hypothetical negotiations envisioned by the Georgia-Pacific case." Id. ¶ 35.
Id. ¶¶ 37-38 (emphasis in original).
Epstein then explains that he has "found that the dynamics of real-world licensing negotiation could be best understood using a Patent Licensing Market Model containing three market segments." Id. ¶ 43. Epstein states that the three market segments are "first adopters," "ethical adopters" and "invention plagiarists." Id. ¶ 44. "First adopters are potential licensees that negotiate for a patent license prior to the patented technology being introduced into the marketplace." Id. ¶ 45. The "first adopters" "will not use the technology without a license," are generally "willing to discuss royalties 1% — 10% or more," they evaluate "the potential patent license with regard to the direct economic benefit it will receive from adoption in terms of increasing the potential licensee's ability to (1) gain market share, (2) raise prices and/or (3) to lower costs," and they comprise a very small percentage of the market, of between 1 to 3 players "max." Id. ¶¶ 44-45. In Epstein's opinion, "this segment is the closest to the Georgia-Pacific hypothetical negotiation." Id. ¶ 45.
Epstein states that "the second and third segments, Ethical Adopters and Invention Plagiarists, are based on the fact that there [sic] for all practical purposes, there is an unlimited supply of competent engineering talent in the world, so once a product containing a patented innovation is released in the marketplace, that innovation will be reverse engineered and copied by any who see an advantage to them in adopting that innovation. The two segments differ only as to the willingness of the two parties to engage in negotiations without the necessity of engaging in some form of enforcement action" Id. ¶ 47.
Id. ¶¶ 48-53.
Epstein then reviews the efforts first by BTG, and later Muir Consulting, to license the MLC patents to Micron.
Epstein then discusses EpicenterLaw's licensing negotiations with Micron. Epstein states that in his negotiations with Micron, he presented Micron with a royalty rate ranging between 1% to 3%. Id. ¶¶ 68, 85. Epstein describes his negotiations with Micron, during which he presented infringement and validity charts for the '571 patent, as well as charts showing a "Damages Model" applying different royalty rates to Micron's forecasted worldwide and U.S. revenue.
Epstein provides the following explanation of how he arrived at the 1-3% royalty range:
Id. ¶¶ 85-86.
At his deposition, Epstein provided the following explanation of how EpicenterLaw determined the 1-3% royalty range:
Epstein Tr. at 272:4-273:5.
At his deposition, Epstein was asked about his opinion in Paragraph 81 that the '571 patent was the most important patent in the portfolio. Epstein stated that the reason he reached that conclusion "was the mere idea of how to program a multi-level cell. That was the big challenge to a successful multi-level cell, is how to take something that is traditionally on/off and make it on/off plus, even more on, and — even — even more on. That was a difficult challenge." Epstein Tr. at 185:24-186:5. When he was asked about his conclusion that the programming methodology was the fundamental aspect of the '571 patent, Epstein stated, "Well, if you can't program it, then everything else after that is pointless." Id. at 191:1-2. The questioning continued:
Id. at 191:3-192:13. The questioning about Epstein's opinion about the importance of the '571 patent continued:
Id. at 198:1-201:9.
Federal Rule of Evidence 702 provides that expert testimony is admissible if "scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue." Fed. R. Evid. 702. Expert testimony under Rule 702 must be both relevant and reliable. Daubert, 509 U.S. at 589. When considering evidence proffered under Rule 702, the trial court must act as a "gatekeeper" by making a preliminary determination that the expert's proposed testimony is reliable. Elsayed Mukhtar v. Cal. State Univ., 299 F.3d 1053, 1063 (9th Cir. 2002), amended by 319 F.3d 1073 (9th Cir. 2003). As a guide for assessing the scientific validity of expert testimony, the Supreme Court provided a nonexhaustive list of factors that courts may consider: (1) whether the theory or technique is generally accepted within the relevant scientific community; (2) whether the theory or technique has been subjected to peer review and publication; (3) the known or potential rate of error; and (4) whether the theory or technique can be tested. Daubert, 509 U.S. at 593-94; see also Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999).
Micron contends that Epstein's proposed testimony is irrelevant and unreliable. As a threshold matter, Micron argues that Epstein's "testimony is pervasively and irreparably biased from his close entanglement with the facts of this case." Reply at 2 (Dkt. No. 543). Micron asserts that Epstein's report and proposed testimony largely consist of his factual account of the licensing negotiations he held with Micron in 2013-2014, and that MLC is paying Epstein $1,300 per hour to provide lay percipient testimony recast as expert testimony. Micron argues that "[i]t simply cannot be the case that one can use the guise of expert testimony to reveal an unjustifiably high royalty rate that the `expert' calculated when he stood to receive a portion of the royalty payment that rate would generate." Id. at 10-11. Micron emphasizes the undisputed fact that Epstein formed the 1-3% royalty opinion when he was working as MLC's licensing counsel and when he stood to gain 15-20% of any royalty payment, and that Epstein stated at his deposition that he had not performed any additional analysis regarding that royalty opinion since the 2013-2014 licensing negotiations. See Epstein Tr. at 273:8-16 (Q: "Now, you haven't done anything since — to adjust your opinion based on occurrences after you attempted to license Micron, correct, in that — when your work ended in 2014?" A: "In terms of that, saying that is a reasonable place to start from understanding what the damages at trial might be, we didn't — no, I haven't really looked at that since our negotiations ended.").
Micron also challenges Epstein's Patent Licensing Market Model on numerous grounds. Micron argues that the model is entirely unreliable because it is highly subjective and biased against large corporations. Micron notes that Epstein testified that he created the model to counter the Georgia-Pacific factors which he believes were adopted as a result of lobbying efforts by the patent defense bar, and to correct the perception that "giant corporations are seen as the good guy" in patent litigation. Id. at 232:17-233:19, 234:8-14; 149:19-150:2. Micron cites Epstein's testimony in which he stated that he coined the term "invention plagiarist" because of his belief that "it's weird that in patents is the only field where giant corporations are seen as the good guy and little individuals are seen as the bad guy. It's unique and contrary to normal American morals. So I've been seeking to find terms that will help people see more clearly that rooting for the big guy isn't necessarily an American value. And I use these terms to help them see that." Id. at 149:19-150:2. Micron argues that Epstein's model is highly subjective, citing Epstein's testimony that he would not categorize USAA as an "invention plagiarist" because they are his "friend," and that Epstein is biased against Micron in particular, citing his testimony that although he did not analyze whether Micron was an "invention plagiarist" in this case, he has considered Micron to be an "invention plagiarist" "from the beginning" because he considers Micron to be a "dirty rotten infringer." Id. at 154:23-155:7-9; 152:13-22; 32:11-23.
Micron also argues that Epstein's testimony about the Patent Licensing Market Model is irrelevant because Epstein presents his model in the abstract and he does not apply it to this case. Micron cites Epstein's deposition testimony in which he testified that (1) he did not provide an opinion about damages in this case under either his own model or a hypothetical negotiation, id. at 269:2-11; (2) he did not provide an opinion in his report as to whether Micron was a "first adopter," "ethical adopter" or "invention plagiarist" because he was not asked to, id. at 269:12-25; (3) he did not have an opinion as to whether licensee Hynix would be an "ethical adopter" under his model because he "would need to know more information about them," id. at 254:11-20; (4) he did not have an opinion as to whether Hitachi, as the first licensee of the MLC portfolio, would be a "first adopter" under his model because he would need "additional information," id. at 252:15-22; and (5) he did not apply his real-world licensing labels to any of the MLC patent portfolio licensees. Id. at 254:21-25.
With regard to the remainder of his testimony — the details of EpicenterLaw's negotiations with Micron and the 1-3% royalty that Epstein proposed — Micron argues that this testimony is irrelevant and that the 1-3% figure cannot be relied upon. Micron argues that the details of the parties' failed licensing negotiations are not relevant to any question the jury will be considering, and Micron asserts that MLC's reliance on failed licensing discussions with Micron to prove the amount of Micron's liability violates Federal Rule of Evidence 408 and contravenes the parties' NDA, which explicitly provided for Rule 408 protection. See NDA § 4.6 (Dkt. No. 360-7).
Micron also cites Epstein's testimony in which he states that the 1-3% royalty rate was meant as a "worst case scenario" and "not a proposal in any regard." Epstein Tr. at 278:20-279:1 (Q: "Okay. So thank you for that clarification. So this 1 to 3 percent royalty range would — essentially was presented as a worst case scenario, then, to the potential licensee? Is that fair?" A: "Yes. This was not a proposal in any regard."). Epstein explained that "the 1 to 3 percent is what I argued the alternative to a negotiated agreement is. And the alternative to a negotiated agreement was we would — or the — MLC would have to take them to trial and win." Id. at 271:22-272:3. It was the "worst-case scenario, worst-case scenario in the event of a failure to agree on a behalf of the licensee." Id. at 273:5-7. Micron argues that there is no reliable basis to allow Epstein to testify about the 1-3% royalty rate offer that Micron rejected and that has no basis in record evidence, and Micron contends that such testimony poses a risk of skewing the jury's damages consideration wildly upwards.
MLC responds that Epstein is qualified as an expert on licensing negotiations based upon his 30 year career in the field, and that he will offer relevant testimony "regarding how the considerations of parties in real world negotiations, and those specific to the '571 patent, relate to the Georgia-Pacific framework." Opp'n at 6. MLC asserts that because Epstein is an expert on patent licensing and negotiations, he is qualified to opine about "reasons why companies buy or license patents, the factors used to determine interest, and the process used and the data needed to establish and evaluate value," and that "[a]s such, MLC asked Epstein to `provide an account of [his] negotiations with Micron, as well as the facts and issues considered with respect to said negotiations." Id. at 7. MLC repeatedly asserts that Epstein is not being paid for factual testimony.
MLC argues that evidence from the parties' actual negotiations is relevant to determining a reasonable royalty rate, and MLC argues that "Micron does not deny that Mr. Epstein proposed a 1-3% royalty rate during the 2013-2014 licensing negotiations" and that "Micron has not offered any evidence whatsoever that it disputed [the Damages Model/Impacted Revenue] powerpoint slide" which showed the range of damages under the 1-3% royalty proposal. Id. at 23. MLC also argues that Epstein's testimony "coherently compliments [sic]" the testimony of MLC's damages expert, Mr. Milani. Id. at 24. MLC asserts, "Mr. Milani clearly articulates how Mr. Epstein's opinion will slot in `to account for differences between real-world and hypothetical licenses, such as the assumption of validity and infringement, which is discussed in Mr. Epstein's report.'" Id. (citing Milani's deposition testimony at 42:10; Dkt. No. 442-11).
The Court concludes that Epstein's proposed expert testimony is inadmissible because it is irrelevant and unreliable. Epstein is offered to testify about (1) his Patent Licensing Market Model and the differences between a real-world licensing negotiation and (2) his unsuccessful negotiations with Micron during which he proposed a 1-3% royalty rate as a "worst case scenario." As to the first subject, the Court finds that Epstein's model is unreliable given its highly subjective and biased nature — for example, depending on the motivation and intent of the parties involved in the negotiations — and Epstein's testimony that he considers "most corporations" to be "invention plagiarists," except in certain circumstances such as when he represents them, like USAA who he does not consider to be an "invention plagiarist" "because they're my friend." Epstein Tr. at 152:1-7; 155:6-9. While the Court does not doubt that Epstein's opinions are based upon his experiences negotiating licenses during his career, that does not mean that his assessment of negotiation dynamics can be packaged into an admissible expert opinion containing blatantly pejorative categories such as "invention plagiarists."
More fundamentally, however, Epstein and MLC never explain why it would be helpful to the jury to know about Epstein's Patent Licensing Market Model and his view of the differences between a real-world licensing negotiation and a hypothetical negotiation. MLC asserts that Epstein's testimony relates to the first Georgia-Pacific factor, namely the royalties received by the patent owner for the licensing of the patent-in-suit. Opp'n at 14. However, aside from describing the facts of some of the licenses based upon his reading of some documents, Epstein does not actually apply his "real world" model to those licenses or to the facts of this case, rendering his testimony about the differences between "real world" licensing and hypothetical licensing irrelevant. See Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed. Cir. 2011) ("If the patentee fails to tie the theory to the facts of the case, the testimony must be excluded."). Epstein's report does not apply the model to Micron
MLC claims that Epstein applied his model to the Hynix license, citing his testimony at 299:3-300:3 of his deposition. Opp'n at 23. MLC's selective citation does not support its claim. Earlier in the deposition, Epstein provided the following testimony regarding the Hynix license:
In the section of the deposition MLC cites, Epstein was asked whether he would "be surprised that Mr. Milani included data about the Hynix license, and from that you can calculate an effective royalty rate of 0.11 percent?" Epstein replied, "Well, that would fit within my licensing model; so, no, I wouldn't be surprised." Id. at 299:3-8. Epstein then proceeded to explain why a 0.11% royalty fits within his licensing model, although he does not state under which category Hynix would fall. Id. at 299:9-300:3. Thus, Epstein clearly did not apply his licensing model to any of the licensees or the facts of this case, and instead in the portion of the transcript that MLC cites, Epstein simply says that he is not surprised that the effective royalty rate of the Hynix license is 0.11% because that would be consistent with his model.
MLC asserts that Epstein's testimony about the differences between real world licensing negotiations and hypothetical negotiations will somehow complement Milani's damages testimony. As noted supra, Milani testified that he did not quantify validity and infringement when calculating his royalty opinions. Milani's deposition testimony suggests that he believes Epstein's testimony about "the differences between real-world and hypothetical licenses" would provide a basis for the jury to make an upward adjustment to Milani's proposed royalty rate to account for validity and infringement. It is far from obvious how "the differences between real-world and hypothetical licenses" translate into a valuation or quantification of validity and infringement. In any event, however, Epstein expressly does not provide a damages opinion. See Epstein Tr. at 264:3-25 (Q: "Now, you haven't offered an opinion in your report with respect to the amount of damages Micron should pay if the '571 patent was found valid and infringed, correct?" A: "I have not given a damages opinion, that is correct.". . . Q: "You haven't offered an opinion as to the amount of a reasonable royalty due in this case, have you, in your report?" A: "No, with this proviso: I did provide what I thought might be the range of potential reasonable royalties that I considered when engaging in negotiations with Micron.").
Indeed, it appears that although MLC (and Epstein) repeatedly state that Epstein is "not being offered as the damages expert," Opp'n at 13, Epstein is, in fact, providing damages testimony through the guise of his "licensing expert" testimony, and that the purpose of his proposed testimony is to provide some basis for the jury (assuming a finding of infringement) to upwardly adjust Milani's royalty rate opinions by some unspecified amount. See Expert Report ¶ 86 ("As such, the 1% to 3% royalty range still reflects a discount on what the appropriate royalty rate in the event of an enforcement action where validity was confirmed and definitive proof of infringement exists. In other words, where validity was confirmed and definitive proof of infringement existed, the appropriate royalty rate would be higher than the 1% to 3% royalty range I presented to Micron in 2013."). Among the innumerable flaws with Epstein's proposed testimony, a statement that the appropriate royalty rate "would be higher" than the 1-3% royalty rate is entirely speculative.
Epstein's testimony about the 1-3% royalty range (and upwards) are in the context of his recounting of his failed negotiations with Micron, the second main topic of his proposed testimony. MLC argues that evidence from parties' actual license negotiations is relevant in subsequent litigation arising from those failed negotiations. The Court disagrees and concludes that under the facts of this case, Epstein's proposed testimony about the unsuccessful licensing negotiations and the 1-3% royalty proposal is irrelevant.
In contrast, courts have admitted evidence of a patentee's offer to license where the offer possessed some indicia of reliability and commercial value. See e.g., Atlantic Thermoplastics Co., Inc. v. Faytex Corp., 5 F.3d 1477, 1482 (Fed. Cir. 1993) (affirming reasonable royalty award based on patentee's prior licensing offer to third party because district court found that offer was "consistent with the commercial value and profitability of the [] patent and the extensive remaining life of the patent at the time of infringement."); Stickle v. Heublein, Inc., 716 F.2d 1550, 1561 (Fed. Cir. 1983) (concluding that failed negotiation between the parties was relevant to determining reasonable royalty where plaintiff and defendant had contractual relationship over several years, engaged in negotiations to replace existing agreement with licensing agreement and ultimately could not agree, leading to infringement suit).
Here, Epstein's 1-3% royalty offer does not possess any indicia of reliability that would make this offer relevant to the determination of a reasonable royalty or any other issue in this case.
To the extent MLC asserts that "Micron's then-state of mind" during the failed negotiations is relevant, the Court disagrees. MLC seeks to bolster the 1-3% royalty range proposal based on the fact that the parties' negotiations lasted some time. See MLC's Opp'n to Micron's Damages MIL #1 at 8 ("But the jury is entitled to evaluate and infer Micron's then-state of mind and its interest, and willingness to negotiate and license on certain terms given the fact that Micron, back then, continued negotiations for nearly a year despite knowing from day one the proffered royalty range."). However, the fact that Micron was willing to negotiate pursuant to an NDA says nothing about the validity of Epstein's admittedly "worst case scenario" opening proposal, and MLC does not contend that Micron ever made a counter-proposal or responded in any way that indicated it believed the 1-3% royalty range was reasonable. To the contrary, the record reflects — as Epstein's deposition testimony shows — that Micron rejected the offer. The reasonable inference regarding Micron's "then-state of mind" is that Micron was willing to negotiate pursuant to an NDA, negotiated with MLC, and rejected the opening proposal. This is of no relevance to the issues the jury will be evaluating.
In addition, all of Epstein's testimony regarding his licensing negotiations with Micron and the 1-3% royalty proposal must be viewed through the lens of EpicenterLaw's engagement agreement with MLC under which Epstein stood to receive 15-20% of any licensing revenue. In the Court's view, the fact that Epstein had a direct financial interest in the outcome of those licensing negotiations renders his current "expert" testimony about those negotiations highly suspect. MLC seeks to have Epstein testify about how he, as a licensing expert, arrived at the 1-3% royalty range as if Epstein arrived at that number through an entirely objective analysis based upon his experience in the field, without regard for the fact that Epstein formulated that proposal when he was working as MLC's licensing counsel with a contingent fee agreement. While Epstein may be an expert in patent licensing based upon his experience (a question the Court need not resolve), his testimony in this case regarding the negotiations in which he participated is more properly characterized as lay percipient testimony rather than expert testimony. Indeed, the largely lay percipient nature of Epstein's proposed testimony is demonstrated by the description of Epstein's assignment in his expert report: "Given my first-hand involvement in negotiations with Micron with respect to the MLC Patents, including the '571 Patent, I was asked by MLC IP to provide an account of my negotiations with Micron, as well as the facts and issues I considered with respect to said negotiations." Expert Report at ¶ 17.
MLC states that Epstein is both a percipient and expert witness, and MLC argues that the fact that Epstein has percipient knowledge does not disqualify him as an expert. As a theoretical proposition this is correct, and courts have recognized that an expert (generally a treating physician) may be a "hybrid expert" who provides testimony that is a hybrid of percipient expert information and opinions that are not based solely on percipient observation. See Goodman v. Staples The Office Superstore, LLC, 644 F.3d 817, 826 (9th Cir. 2011) (holding that treating physician who is a "hybrid" expert is exempt from Rule 26(a)(2)(B)'s written report requirement to the extent opinions were formed during course of treatment but that if expert provides testimony beyond the scope of treatment, the expert must provide a written report); see also generally David H. Kaye, David E. Bernstein & Jennifer L. Mnookin,
However, in this case Epstein is more appropriately characterized as a "dual-role" expert who is being offered both for his lay testimony (the licensing negotiations with Micron) and his purported expert testimony (the Patent Licensing Market Model and differences between real world negotiations and hypothetical negotiations). See id. at § 4.2.2.(a) ("Dual Role Experts: Combining Lay and Expert Testimony).
For reasons set forth in this order, the Court concludes that Epstein's proposed expert testimony as set forth in his report and as elaborated and explained in his deposition is irrelevant and unreliable, and therefore Micron's motion to exclude Epstein as an expert is GRANTED.
In order to resolve the present motion, the Court must discuss the under seal material in detail, and the Court finds it appropriate that this order be filed entirely in the public docket. Further, after engaging in an in-depth review of these materials, the Court concludes that while the NDA contains broad confidentiality provisions and limitations on the parties' use of information disclosed pursuant to the NDA, for present purposes in this litigation none of the under seal material — such as Epstein's report and his deposition — is truly confidential. In any event, the parties have put these matters directly at issue in this litigation and the Court cannot rule on the current motion without discussing Epstein's report, deposition testimony, and fee agreements.
At his deposition, Epstein could not remember if he had signed a written expert engagement agreement with MLC, Epstein Tr. at 48:5-53:16, and later stated that that he believes he has a verbal, and not written, agreement with MLC/Polsinelli regarding his expert testimony. Id. at 123:6-124:19. Epstein also stated that he agreed to give MLC a "cut rate" of $1,300 per hour for his expert work. Id.
Id. at 240:21-241:5. This testimony was followed by this colloquy:
Id. at 241:6-11.
Milani's expert report and opinion is the subject of a pending Daubert motion and a pending motion to strike.
Id. at 151:7-152:7.