In the first en banc decision for a utility patent case since 2018, the Federal Circuit reversed a district court's denial of a new trial on damages in EcoFactor, Inc. v. Google LLC and held that EcoFactor's damages expert's testimony was inadmissible under Federal Rule of Evidence 702 and Daubert.
In 2022, a jury in the Western District of Texas found Google liable for infringing EcoFactor's U.S. Patent No. 8,738,327, directed to smart thermostat technology, and awarded over $20 million in lump sum damages. Google challenged the damages award, arguing that EcoFactor's expert, David Kennedy, based his reasonable royalty opinion on prior lump-sum licenses that did not support his asserted per-unit rate. The district court denied Google's motions for a new trial and JMOL. On appeal, a Federal Circuit panel affirmed. Google petitioned for rehearing en banc, arguing Kennedy's damages testimony was unreliable and inadmissible. The Federal Circuit granted the petition and ordered briefing on the district court's adherence to Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) in admitting Mr. Kennedy's opinion assigning a per-unit value to three licenses in the case.
The majority opinion, written by Chief Judge Moore, determined that the trial court had failed in its gatekeeping role under Rule 702 and Daubert by admitting an expert opinion that was not based on sufficient facts or data. Specifically, the court held that Kennedy's testimony that prior licensees had agreed to an $X royalty rate was not supported by the licenses themselves, and thus failed Rule 702(b). Each license included a recital that EcoFactor believed $X was a reasonable royalty, but none contained language where the licensees agreed to that rate. Despite this, Kennedy opined that the licensees had agreed not only to the lump sum amount, but also to the $X royalty rate. The court disagreed, finding these recitals to merely the licensor's "unilateral" belief and reliance on them as "representing the licensees' agreement to the $X rate was untethered from the licenses." As such, Kennedy's testimony was unreliable and inadmissible.
The court also rejected Kennedy's reliance on testimony from EcoFactor's CEO, who asserted the licensees' agreement to the $X rate could be inferred based on the lump sum and the licensees' sales data. However, EcoFactor's CEO never had access to the licensees' sales data. "In the absence of any evidence, Mr. Habib's testimony amounts to an unsupported assertion from an interested party."
Ultimately, the Federal Circuit determined that the district court's decision to admit Kennedy's testimony was "undoubtedly prejudicial." Because of the prejudicial error, the Federal Circuit held the district court abused its discretion by denying Google's motion for a new trial on damages and remanded for a new trial on damages.
Judges Reyna and Stark each wrote partial dissents. Both primarily disagreed with the majority's holding and found that Kennedy's testimony was supported by sufficient facts or data under Rule 702(b). Judge Reyna added that the en banc court made a "sudden shift" in the scope of the limited en banc review by going beyond Rule 702 and analyzing the licenses on a theory of contract interpretation, which "deprive[d] EcoFactor of notice and an opportunity to be heard." Judge Stark expressed concern that the majority opinion was "so narrow as to have almost no applicability beyond this case," yet also could be "misinterpreted as constraining damages experts in a way not called for by either Rule 702 or Daubert."
The en banc decision reinforces the need for expert damages testimony using prior license agreements to be firmly grounded in sufficient facts or data, and going forward will limit calculations based upon unilateral language in license agreements.