Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 1 of 8 PageID# 34883
`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 1 of 8 PagelD# 34883
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`EXHIBIT 4
`EXHIBIT 4
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 2 of 8 PageID# 34884
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`INTENSITY, LLC
`12730 High Bluff Drive, Suite 300
`San Diego, California 92130
`telephone 858.876.9101
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`www.intensity.com
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`I N T E N SI T Y
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`UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF VIRGINIA
`ALEXANDRIA DIVISION
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`RAI STRATEGIC HOLDINGS, INC. and
`R.J. REYNOLDS VAPOR COMPANY,
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`Plaintiffs and Counterclaim
`Defendants,
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`v.
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`ALTRIA CLIENT SERVICES LLC; PHILIP
`MORRIS USA, INC.; and PHILIP
`MORRIS PRODUCTS S.A.,
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`Defendants and Counterclaim
`Plaintiffs.
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`Case No. 1:20-cv-00393
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`REPORT OF
`RYAN SULLIVAN, Ph.D.
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`____________________________________
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`Ryan Sullivan, Ph.D.
`March 24, 2021
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 3 of 8 PageID# 34885
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`11.4. Royalty structure
`(211) As discussed in Section 1.3, a reasonable royalty is designed to compensate the patent owner
`for the accused infringement. Thus, it is the amount of total royalties, not the royalty
`structure per se, that is relevant for an evaluation of economic damages. As described herein,
`reasonable royalties are calculated by “applying sound economic principles to case-specific
`facts.”438
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`(212)
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`In theory, a reasonable royalty could be determined using different royalty structures, yet as
`a practical matter, licenses often have a defined royalty structure, such as a lump-sum
`payment, a per-unit royalty, a percentage royalty, or some combination of these.
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`(213) Several factors indicate that a running royalty is the economically appropriate royalty
`structure in this case. A running royalty structure allows for payments to be commensurate
`with the actual value contribution of the technology over time as sales may grow or shrink
`due to marketplace factors and/or other factors. A running royalty also allows for the sharing
`between licensor and licensee of risks associated with overpayment or underpayment relative
`to the value earned in the marketplace on licensed products.439 Furthermore, Reynolds tracks
`revenues and unit sales for the accused products, facilitating application of a running
`royalty.440
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`(214) Accordingly, it is likely that the parties at the hypothetical negotiation would have agreed to a
`running royalty, either as a percentage of net sales or as a per-unit royalty.
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`438 Sullivan, Ryan and John Scherling (2011), “Rational Reasonable Royalty Damages: A Return to the Roots,” Landslide 4(2): 1–
`4, at 1.
`439 Razgaitis, Richard (2003), Valuation and Pricing of Technology-Based Intellectual Property, New Jersey: John Wiley & Sons,
`Inc., at 299. (“[Running royalties] provide an opportunity for the seller to receive more than the parties would have or could
`have expected because the outcome of the license has been greater than expected. Likewise, they can be an advantage to
`the buyer if the market turns out to be much smaller than expected.”)
`Teece, David (2002), Managing Intellectual Capital, New York: Oxford University Press Inc., at 153. (“The payment mechanism
`itself (up front lump sum versus royalties) may also impact the amount actually paid, as it may significantly impact risk
`sharing. An attractive feature of a licensee running with a royalty on sales is that the licensee does not have to pay unless
`it is successful with the licensed technology and/or intellectual property. As compared to a lump sum, the running royalty
`tends to delay the payment of cash and results in risk sharing between licensor and licensee.”)
`440 Nicholas Gilley, Dep. Tr., 12/3/2020, at 26:23–28:22. (“Q. Okay. RJRV uses Sap for its accounting system; is that right? A.
`That is correct. . . Q. SAP tracks the number of units of Vuse products sold, right? A. Volumes would also be tracked in the
`SAP system. Q. And SAP tracks the volume of units sold on a product-by-product basis, right? A. That is correct. Q. And
`that’s true within the Vuse portfolio of products as well? A. That is correct. Q. And the SAP system tracks revenue and
`costs associated with particular SKUs for products within the Vuse line, right? A. Yes.”)
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`Page 98
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 4 of 8 PageID# 34886
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`i. Royalty structure. The Fontem-RJRV agreement involved a lump sum payment. See
`Section 12.2.1. As I explain below, I convert the lump sum royalty described in the
`Fontem-RJRV agreement into a percentage royalty that can be applied to the period over
`which damages are calculated.
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`13.2. The ‘545 patent
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`Page 129
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 5 of 8 PageID# 34887
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`13.3. The ’265 patent
`(272) To determine a reasonable royalty for the ’265 patent, I begin with the $7,900,000 lump sum
`royalty the Meyer Report attributes to the ’265 patent based on the Fontem-RJRV agreement.
`This lump sum royalty is applicable over the entire duration of the Fontem-RJRV agreement,
`i.e., until patent expiration.609 I understand that the last to expire patent in the Air Channel
`family marked on VUSE products expires on January 28, 2030.610
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`(273)
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`I translate the lump sum payment in the Fontem-RJRV agreement attributable to the Air
`Channel family into a percentage running royalty by dividing the $7,900,000 lump sum
`payment attributable to the Air Channel family by the present value of VUSE sales, evaluated
`as of 2018-Q4, from 2013 through 2025 of $6,902,496,088. This results in a percentage
`royalty rate of 0.11% for the ’265 patent. See Attachment D-7.
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`(274) Similar to the ’545 patent analysis, I utilize the present value of VUSE sales through 2025
`(rather than through patent expiration, as described in the Fontem-RJRV agreement) because
`Reynolds’ profit and loss forecasts only extend through 2025. As such, sales projections over
`this time period are more reliable.
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`(275) Utilizing sales projections through expiration of the last to expire patent in the Air Channel
`family marked on VUSE products would result in a lower royalty rate of 0.06% for the ’265
`patent. See Attachment D-7.
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`As discussed in Section 12.2.1, the term of the license was set to last through the expiration of the last valid claim in all
`licensed patents.
`See also: Sidak, Gregory J. (2016), “Converting Royalty Payment Structures for Patent Licenses,” The Criterion Journal on
`Innovation, 1:901–914, at 903. (Indicating that the licensing parties “typically calculate a lump-sum payment in advance
`by using the licensee’s projected sales revenue or unit shipments for the duration of the license.”)
`See Attachment D-1.
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`609
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`610
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`Page 130
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 6 of 8 PageID# 34888
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`13.5. The ’911 patent
`(279) To determine a reasonable royalty for the ’911 patent, I begin with the $27,650,000 lump sum
`royalty the Meyer Report attributes to the ’911 patent based on the Fontem-RJRV agreement.
`This lump sum royalty is applicable over the entire duration of the Fontem-RJRV agreement,
`i.e., until patent expiration.616 I understand that the last to expire patent in the Shell Design
`family marked on VUSE products expires on June 13, 2028.617
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`(280)
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`I translate the lump sum payment in the Fontem-RJRV agreement attributable to the Shell
`Design family into a percentage running royalty by dividing the $27,650,000 lump sum
`payment attributable to the Shell Design family by the present value of VUSE sales, evaluated
`as of 2018-Q4, from 2013 through 2025 of $6,902,496,088. This results in a percentage
`royalty rate of 0.40%. See Attachment D-8.
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`(281) Similar to the ’545 patent, ’265 patent, and ’374 patent analyses, I utilize the present value of
`VUSE sales through 2025 (rather than through patent expiration, as described in the Fontem-
`RJRV agreement) because Reynolds’ profit and loss forecasts only extend through 2025. As
`such, sales projections over this time period are more reliable.
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`Utilizing sales projections through expiration of the last to expire patent in the Shell Design
`family marked on VUSE products would result in a lower royalty rate of 0.25%. See
`Attachment D-8.
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`As discussed in Section 12.2.1, the term of the license was set to last through the expiration of the last valid claim in all
`licensed patents.
`See also: Sidak, Gregory J. (2016), “Converting Royalty Payment Structures for Patent Licenses,” The Criterion Journal on
`Innovation, 1:901–914, at 903. (Indicating that the licensing parties “typically calculate a lump-sum payment in advance
`by using the licensee’s projected sales revenue or unit shipments for the duration of the license.”)
`See Attachment D-1.
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`616
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`617
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`Report of Ryan Sullivan, Ph.D.
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 7 of 8 PageID# 34889
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`the same licensee or products as the hypothetical negotiations would and is thus less
`comparable than the Fontem-RJRV agreement.
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`(311)
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`I utilize the Fontem-RJRV agreement to arrive at reasonable royalties for the ’545, ’265, ’374,
`and ’911 patents.
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`(312) The considerations of Georgia-Pacific factor 2 are thus quantitatively reflected in the
`reasonable royalties calculated in my report.
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`16.3. Georgia-Pacific factor 3
`(313) Georgia-Pacific factor 3 reads as follows:662
`The nature and scope of the license, as exclusive or non-exclusive; or as
`restricted or non-restricted in terms of territory or with respect to whom the
`manufactured product may be sold.
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`(314)
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`I have addressed Georgia-Pacific factor 3 in passages including Section 11.
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`(315)
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`It is likely that the parties at the hypothetical negotiation would have agreed to a running
`royalty, either as a percentage of net sales, or as a per-unit royalty.
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`(316) Counterclaim Plaintiffs would likely grant Reynolds a non-exclusive license to the patents-in-
`suit at the hypothetical negotiations. The reasonable royalties herein do not include any value
`attributable to excluding others from practicing the claimed technologies.
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`(317) The hypothetical negotiations would result in licenses for the asserted patents would grant
`Reynolds rights to the technology to import, make, and/or sell products in the United States.
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`(318) The considerations of Georgia-Pacific factor 3 are thus quantitatively reflected in the
`reasonable royalties calculated in my report.
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`16.4. Georgia-Pacific factor 4
`(319) Georgia-Pacific factor 4 reads as follows:663
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`Georgia-Pacific Corporation v. United States Plywood Corp., 318 F. Supp. 1116, at 1120 (S.D.N.Y. 1970).
`Georgia-Pacific Corporation v. United States Plywood Corp., 318 F. Supp. 1116, at 1120 (S.D.N.Y. 1970).
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`662
`663
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`Report of Ryan Sullivan, Ph.D.
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`Page 144
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`Case 1:20-cv-00393-LMB-TCB Document 1398-4 Filed 07/20/22 Page 8 of 8 PageID# 34890
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`17. Reasonable Royalties
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`(365) Based upon the entirety of research and analysis contained throughout my report, including
`attachments and referenced materials, I have determined reasonable royalties for the patents
`in-suit as set forth below. I have qualitatively and quantitatively addressed the Georgia-Pacific
`factors throughout my report. Section 16 of my report outlines how I have addressed each
`Georgia-Pacific factor, with references to other parts of my report that provide additional detail
`on the impact of the factor on the determination of a reasonable royalty. The approach
`detailed in my report demonstrates that the reasonable royalties set forth herein represent an
`upper bound.
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`(368) As discussed in Section 13.3, 0.11% is an appropriate percentage running royalty rate for the
`’265 patent. Applying this percentage royalty rate to net sales of VUSO Alto cartridges over
`the damages period results in reasonable royalties for the ’265 patent of $672,450. See
`Attachment G-3.
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`(369) As discussed in Section 13.5, 0.40% is an appropriate percentage running royalty rate for the
`’911 patent. Applying this percentage royalty rate to net sales of VUSE Solo, VUSE Vibe,
`VUSE Ciro, and VUSO Alto cartridges over the damages period results in reasonable royalties
`for the ’911 patent of $3,320,350. See Attachment G-4.677
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`677
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`Attachment G-6 shows reasonable royalties attributable to Solo G1 vs. Solo G2.
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`Page 151
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