Case 1:15-cv-00842-RGA Document 481 Filed 02/04/20 Page 1 of 6 PageID #: 28123
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
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`IN RE CHANBOND, LLC
`PATENT LITIGATION
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`C.A. No. 15-842-RGA
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`CONSOLIDATED
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`MEMORANDUM ORDER
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`Pending before the Court is Plaintiffs Motion to Exclude Certain Opinions and
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`Testimony of Defendants' Damages Expert. (D.I. 370). I have reviewed the parties' briefing
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`and heard oral argument. (D.I. 371,398, 409,471).
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`Defendant's damages expert, Mr. Bakewell, offers three quantitative analysis approaches
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`in his 200 page "Rebuttal Expert Report," one of which is the "market approach." (D.I. 399, Ex.
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`A at~ 171 ). Plaintiff argues that Mr. Bakewell' s market approach opinions should be excluded
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`because Mr. Bakewell does not use reliable principles or methods. (D.I. 371 at 1). Plaintiff
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`contends that Mr. Bakewell fails to establish that the evidence he relies on is comparable to a
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`hypothetical licensing negotiation in December 2012 for the patents-in-suit. (Id.; D.I. 339, Ex. A
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`at ~164).
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`Mr. Bakewell' s market approach is based on three valuation datapoints : (1) "pre-DOCSIS
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`3.0 investment solicitations for technology disclosed in the patents-in-suit," (2) "2014-2015
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`contemporaneous valuations," and (3) "2012 AST offer to sell." (D.I. 399, Ex. A at~ 287).
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`Plaintiff argues that each should be excluded, and thus I should exclude Mr. Bakewell' s entire
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`market approach opinion. (D.I. 371 at 8).
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`1.
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`Pre-DOCSIS 3. 0 investment solicitations for technology disclosed in the patents-in-suit
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`The "Pre-DOCSIS 3.0" datapoint relies on investment solicitations by Z-Band, the
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`company formed by the inventors of the patents-in-suit. In December 2000, Z-Band sought
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`between $2 million and $5 million in venture capital funding. In 2001 , Z-Band received an offer
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`for $5 million from an unidentified foreign company for a "minority interest," which it rejected.
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`(D.I. 399, Ex. A at 11 178-79). Mr. Bakewell concludes from these two facts that a lump sum
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`royalty in the "mid seven figures" would be appropriate. (Id. at 1 287). Plaintiff argues that the
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`investment solicitations and rejected offer are not technologically or economically comparable to
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`a hypothetical negotiation for a license to the patents-in-suit. (D.I. 371 at 9). I agree. The
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`solicitations and offer occurred approximately ten years before the first of the patents-in-suit
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`issued on May 10, 2011. (Id.). The solicitations cannot be representative of a hypothetical
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`negotiation for a license to the patents-in-suit when the patents-in-suit did not yet exist.
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`Therefore, Mr. Bakewell's opinion based on "pre-DOCSIS 3.0 investment solicitations for
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`technology disclosed in the patents-in-suit" is irrelevant and excluded.
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`Further, any marginal relevance that such an analysis might have, even if it specifically
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`related to a license for the patents-in-suit, is minimized by the fact that no agreement was
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`reached and that the investment opportunity took place some ten to twelve years before the date
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`of the hypothetical negotiation. A non-agreement at a distant time period has so little probative
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`value that its probative value is substantially outweighed by the danger of unfair prejudice
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`caused by the failure to interest anyone in the technology at the time and the waste of time
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`needed to explain why the non-agreement is uninformative. I would thus also exclude the 2000-
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`2002 evidence under Federal Rule of Evidence 403 .
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`2.
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`2014-2015 contemporaneous valuations
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`The lawsuit in this case was filed September 21 , 2015.
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`Mr. Bakewell opines that the "2014-2015 contemporaneous valuations" datapoint reflects
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`a reasonable royalty of "less than $20 million." (D.I. 399, Ex. A at ,i 287). I am unsure why he
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`uses the word "contemporaneous," but I assume he means valuations contemporaneous with
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`each other rather than with the hypothetical negotiation date.
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`The contemporaneous valuations datapoint is recited in the narrative of the expert report.
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`It seems to consist of two transactions in which ownership of the patents-in-suit changed hands,
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`and various statements made by interested parties during negotiations for the two successful
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`transactions as well as ones that did not take place. (See D.I. 399, Ex. A at ,i,i 210-286; D.I. 371
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`at 16-20; D.I. 398 at 5-7). The terms of the first completed transaction-
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`sale by CBV to
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`ChanBond on April 9, 2015-stated that the purchaser would pay an upfront fee and a
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`percentage payout based on the recoveries associated with the enforcement of the patents-in-suit.
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`(See D.I. 399, Ex. A at ,i,i 232-233). These transaction terms are not representative of a
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`hypothetical negotiation because they base the payment for the patents on the outcome of
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`litigation. The parties to the transaction are not valuing the patents; rather they are valuing the
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`potential outcomes of litigation. Thus, the estimates by the parties of the likely outcomes of
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`litigation are now offered to prove what the outcome of the litigation should be.
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`The second completed transaction is the October 27, 2015 sale of ChanBond, a month
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`after the lawsuits in this case had been filed, to UnifiedOnline. (D.I. 399, Ex. A at ,i,i 244-248).
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`ChanBond' s only assets were the patents-in-suit, two other patents, two patent applications, and
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`this litigation. (Id. at ,i 244). To purchase ChanBond, UnifiedOnline paid $5 million and 44.7
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`million shares of its common stock. 1 (Id.) . Thus, as with the earlier 2015 transaction, and as the
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`expert report makes clear, the thing being valued in the transaction was this litigation. This
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`transaction therefore is not comparable to the hypothetical negotiation. A licensing transaction
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`values the patents. All other things being equal, a licensing transaction is much preferred over a
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`settlement agreement that licenses a patent. See Laser Dynamics, Inc. v. Quanta Computer, Inc.,
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`694 F.3d 51, 77-78 (Fed. Cir. 2012). Estimating the hypothetical negotiation, that is, what a
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`willing licensee and a willing licensor would agree to, is one step further removed from being
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`comparable than a settlement agreement. Instead of its being an agreement between a party who
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`has a patent and a party that wants to be able to use the patent, it is an agreement between two
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`parties who want to be on one side of that transaction, that of the licensor. There has been no
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`showing, and I doubt that there could be, that the agreement between two parties who want to be
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`on one side of either a litigation-influenced settlement or a trial is a reliable basis as an input for
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`determining the outcome of the hypothetical negotiation. Thus, the "contemporaneous
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`valuations" including not only the two completed transactions but the various statements during
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`the same time period are excluded as unreliable.
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`Further, any marginal relevance that the two transactions and the related statements might
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`have has so little probative value that the probative value is substantially outweighed by the
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`danger of unfair prejudice and confusion of issues inherent in bringing into the litigation how
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`trials are financed. Thus, even if there were any relevance to this analysis, I would exclude it.
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`Fed. R. Evid. 403 .
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`1 Mr. Bakewell assigns negligible value to the 44.7 million shares of UnifiedOnline on the basis of the par value of
`the stock. I assume it did not have any known market value. At least at this stage, the value of the shares is not at
`issue.
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`3.
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`2012 AST offer to sell
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`Mr. Bakewell's market approach opined that the 2012 offer to sell the patents by non(cid:173)
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`party Allied Security Trust ("AST") reflected a reasonable royalty of "high seven figures." (D.I.
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`399, Ex. A at, 287) . AST is a cooperative that helps member companies secure rights to
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`patents. (Id. at, 192). Rights to the patents-in-suit were offered to AST member companies for
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`"high seven figures ." (Id. at, 198). While the fact that rights to the patents-in-suit were offered
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`for "high seven figures" is relevant to the valuation of the patents-in-suit, this datapoint alone
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`cannot serve as the basis for Mr. Bakewell's market approach opinion. Neither Defendants nor
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`their expert have shown that a single offer to sell rights to patents is a viable basis for a market
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`approach calculation of a reasonable royalty. (See D.I. 470). The 2012 AST offer is therefore
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`excluded from Mr. Bakewell 's market approach opinion.
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`I am not concerned about excluding this last remaining datapoint of Mr. Bakewell's
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`market approach, and thus his entire market approach opinion, because Mr. Bakewell offered
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`two other damages theories aside from the market approach. The market approach is not
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`essential to Defendants' damages analysis. See United States v. Driggs, 823 F.2d 52, 54-55 (3d
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`Cir. 1987).
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`Outside of the market approach, the 2012 AST offer itself is independently relevant to the
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`valuation of the patents-in-suit and may come in as evidence of such.
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`A word of caution. The fact that no company responded to the 2012 AST offer is not only
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`irrelevant to a reasonable royalty analysis but also would be unfairly prejudicial to Plaintiff,
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`confuse the issues, and mislead the jury. A hypothetical negotiation assumes that the parties are
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`a willing licensor and a willing licensee and that the patents are valid and infringed. Lucent
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`Techs., Inc. v. Gateway, Inc. , 580 F.3d 1301 , 1324-25 (Fed. Cir. 2009). Because no company
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`responded to the 2012 AST offer, the situation does not represent a hypothetical negotiation with
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`a willing licensee. Therefore, the fact that no company responded to the 2012 AST offer is
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`irrelevant and inadmissible under Federal Rule of Evidence 402.
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`Further, even if the nonresponse to the 2012 AST offer were relevant to a reasonable
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`royalty analysis, any possible probative value it might have would be substantially outweighed
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`by the danger of unfair prejudice and confusion of the issues that would result from evidence that
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`AST' s offer was not accepted. Thus, even if there were any relevance to this analysis, I would
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`exclude evidence that the offer was not accepted. Fed. R. Evid. 403 .
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`For the reasons above, Plaintiffs Motion to Exclude Certain Opinions and Testimony of
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`Defendants' Damages Expert (D.I. 370) is GRANTED .
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`IT IS SO ORDERED this Jf_ day of February 2020.
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