The Federal Circuit has taken the unusual step of granting en banc review in EcoFactor Inc. v. Google LLC to address fundamental questions about patent damages. The order vacates the previous decision and calls for new briefing on whether the district court properly applied Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc. in its allowance of testimony from EcoFactor’s damages expert. This is the first time since 2018 that the Federal Circuit has taken an en banc case involving a utility patent.

The dispute centers on testimony from EcoFactor’s damages expert, David Kennedy. Google was found by a jury to infringe EcoFactor’s patent related to smart thermostat technology. Mr. Kennedy opined that Google should pay a specific per-unit royalty rate for infringement, a rate spelled out in three license agreements between EcoFactor and three other companies. Each agreement contained a “whereas” clause stating that EcoFactor “believes” that the royalty payment was based on a particular per-unit rate, and the operative provisions of the agreements explicitly stated that the payment is not based upon sales and does not reflect or constitute a lump sum. Despite these arguably contradictory provisions, and without analyzing any underlying sales data or documentation showing how the lump sums were calculated, Mr. Kennedy testified that the licenses reflected an agreed-upon per-unit license rate applicable to Google.

Google challenged this methodology.  Google argues that the royalty rate does not reflect the value of the asserted patent but instead reflects the value of EcoFactor’s entire portfolio. The licenses included all of EcoFactor’s patents and patent applications. Google further argues that the expert failed to properly apportion the royalty rate to just the asserted patent.

EcoFactor argues that the case is a poor candidate for en banc review, and that the majority properly applied the deferential standard of review to find that the district court did not abuse its discretion in admitting the damages opinion. EcoFactor argues that the per-unit royalty rate is spelled out in three different arms-length patent license agreements. EcoFactor further argues that the agreements settled infringement allegations involving comparable patents against specific smart thermostat features, making them sufficiently comparable to the case at bar. EcoFactor argues that Mr. Kennedy did apportion between the asserted and non-asserted patents.

The Federal Circuit’s decision in this case is likely to have some impact on the way damages are calculated in patent cases in the future. The court is being asked to clarify when damages theories “cross the line” from permissible approximation to unreliable speculation. The court has requested briefing limited to the narrow issue of the admissibility of the expert’s testimony. However, the amicus briefs raise broader policy issues. The briefs in support of Google or a neutral position emphasize:

• the importance of rigorous application of Federal Rule of Evidence 702 and *Daubert* to ensure that only reliable and relevant expert testimony is presented.
• the need for damages experts to appropriately apportion the value of the patented technology.
• concerns about “royalty stacking,” where combined royalties on a product could exceed the product’s total value.

The briefs highlight a fundamental tension in patent damages: while estimation is inherent in the hypothetical negotiation framework, that framework must be grounded in the analysis of prior licenses and sound economic reasoning. They urge the court to balance the need for flexibility while ensuring reliability and ensuring fair compensation for the patent holder. Ultimately, the decision will likely shape how courts evaluate the use of prior licenses in damages, particularly in the context of patent portfolios.

Case History:

• EcoFactor initially sued Google over Nest thermostats in the Western District of Texas.
• The case went to trial and a jury found Google liable for infringement. The jury awarded EcoFactor \$20 million in damages.
• Google appealed the judgment, arguing in part that EcoFactor’s damages expert opinion was based on an unreliable methodology.
• A panel of the Federal Circuit affirmed the district court’s decision, finding that the expert opinion was admissible.
• Google petitioned for en banc rehearing, and the full court granted the petition limited to the issue of the damages expert testimony.

What’s next…

• Google’s opening brief is due 45 days from September 25, 2024.
• Amicus briefs supporting Google are due 14 days after service of Google’s opening brief.
• Amicus briefs supporting EcoFactor are due 14 days after service of EcoFactor’s response brief.

Issues to watch for:

• How will the court balance the need for flexibility in damages calculations with the requirement of reliability?
• Will the court adopt a more stringent standard for the admissibility of damages expert testimony?
• What guidance will the court provide on the use of prior licenses in calculating damages?
• How will the decision impact the calculation of damages in cases involving patent portfolios?

This case is being closely watched by patent practitioners and academics, as it could have a significant impact on patent damages law. The outcome is likely to have implications for both patent holders and accused infringers.

By Charles Gideon Korrell