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`INTENSITY
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`INTENSITY, LLC
`intensity.com
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`UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF VIRGINIA
`ALEXANDRIA DIVISION
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`Case No. 1:20-cv-00393-LMB-WEF
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`DECLARATION OF
`RYAN SULLIVAN, Ph.D.
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`PHILIP MORRIS PRODUCTS S.A.,
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`Plaintiff,
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`R.J. REYNOLDS VAPOR COMPANY,
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`Defendant.
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`v.
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`CONFIDENTIAL BUSINESS INFORMATION – SUBJECT TO PROTECTIVE ORDER
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`Table of Contents
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`1.
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`2.
`3.
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`4.
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`Introduction .............................................................................................................................................................. 1
`1.1.
`Scope of work ................................................................................................................................................ 1
`1.2.
`Executive Summary ..................................................................................................................................... 2
`Case Background and Framework ................................................................................................................... 3
`Evaluation of Meyer Declaration ...................................................................................................................... 5
`3.1.
`Overview .......................................................................................................................................................... 5
`3.2.
`The Meyer Declaration disregards the running royalty structure that Mr. Meyer testified was
`appropriate at trial ....................................................................................................................................... 6
`The Meyer Declaration provides a limited view of Alto’s profitability .................................... 9
`The jury-determined rate, advocated by PMP and Mr. Meyer at trial, is apportioned for the
`contribution of the ’265 patent ............................................................................................................12
`The commercial relationship has not changed from the first hypothetical negotiation15
`3.5.
`The bargaining positions of the parties are accounted for in the jury-determined rate16
`3.6.
`Adequacy of Royalty Rates Provided to Jury as Ongoing Royalty ....................................................19
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`3.3.
`3.4.
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`Section A
`Attachment A-1
`Attachment A-2
`Attachment A-3
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`Attachment A-4
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`Attachment A-5
`Attachment A-6
`Attachment A-7
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`Section B
`Attachment B-1
`Attachment B-2
`Attachment B-3
`Attachment B-4
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`Section C
`Attachment C-1
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`Attachment C-2
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`Attachment C-3
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`Attachment C-4
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`Attachment C-5
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`Table of Attachments
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`Expert Materials
`Curriculum Vitae of Ryan Sullivan, Ph.D.
`Cited Excerpts from Report of Ryan Sullivan, Ph.D. (“Sullivan Report”)
`Cited Excerpts from Rebuttal Expert Report of Dr. Jeffrey C. Suhling Regarding
`U.S. Patent No. 9,814,265 (“Suhling Report”)
`Cited Excerpts from Responsive Expert Report of Kelly R. Kodama Regarding
`U.S. Patent No. 10,104,911 (“Kodama Report”)
`Cited Excerpts from Opening Expert Report of Paul K. Meyer (“Meyer Report”)
`Alto Fully-Burdened P&L Provided by Robert Ferris
`RJRV Vapor P&L Provided by Robert Ferris
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`Marketplace/Alto Sales and Forecasts
`U.S. E-Cigarette Annual Market Share Estimates: 2013 through July 16, 2022
`2022-H1 Reynolds Net Sales by Product
`Reynolds 2018 Financial Forecasts for VUSE Products (2018–2023)
`Reynolds Forecasted Net Sales and Growth Rate for Alto Cartridges (2021–
`2026)
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`Ongoing Royalties Scenarios
`2022-Q2 Value of Projected Royalties for Alto: Jury-Determined Royalty Rate
`(0.60%)
`2022-Q2 Value of Projected Royalties for Alto: Meyer Proposed Royalty Rate
`#1 (4.46%)
`2022-Q2 Value of Projected Royalties for Alto: Meyer Proposed Royalty Rate
`#2 (11.14%)
`2022-Q2 Value of Projected Royalties for Alto: Meyer Proposed Royalty Rate
`#3 (22.29%)
`2022-Q2 Value of Projected Royalties for Alto: Meyer Proposed Royalty Rate
`#4 (33.43%)
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`Declaration of Ryan Sullivan, Ph.D.
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`2022-Q2 Value of Projected Royalties for Alto: Meyer Proposed Royalty Rate
`#5 (40.11%)
`Potential Ongoing Royalty Summary for Alto
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`Attachment C-6
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`Attachment C-7
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`1.
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`Introduction
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`(1)
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`(2)
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`1.1. Scope of work
`Intensity has been engaged by Jones Day on behalf of R.J. Reynolds Vapor Company (“RJRV”).
`Intensity is being compensated at a rate of $1500 per hour for my work on this matter and at
`lower rates for time spent by others on my team. The compensation of Intensity is not
`dependent on the substance of my testimony or the outcome of this matter.
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`On June 15, 2022, the jury in the above-referenced matter entered a verdict finding that
`RJRV’s Solo G2 infringed certain claims of U.S. Patent No. 10,104,911 (the “’911 patent”) and
`RJRV’s Alto infringed certain claims of U.S. Patent No. 9,814,265 (the “’265 patent”), each of
`which was asserted by Philip Morris Products S.A. (“PMP” or “Plaintiff”).1 The jury awarded
`PMP damages for past sales of the respective products through 2021 in an amount of
`$8,000,000 for the ’265 patent and $2,759,755 for the ’911 patent.2 These awards were based
`on a royalty rate of 0.60% applied to Alto net sales and a royalty rate of 2.00% applied to Solo
`G2’s net sales, which were the rates that PMP, supported by its expert, Paul K. Meyer,
`requested. Using the same royalty rates, the parties have subsequently stipulated
`prejudgment interest and supplemental damages to cover net sales from January 1, 2022
`through the date of the jury verdict. The total award through June 15, 2022 is $10,906,042
`for the ’265 patent and $3,156,700 for the ’911 patent.3
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`(3)
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`For this declaration, I have been asked to provide an economic analysis pertaining to a
`potential ongoing royalty. I have also been asked to review and respond to the declaration of
`Paul K. Meyer (the “Meyer Declaration”) submitted on August 12, 2022 pertaining to an
`ongoing royalty. I have also been asked to respond to certain opinions provided by PMP
`pertaining to an ongoing royalty.4
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`Joint Stipulation for Prejudgment Interest, Post-Judgment Interest, and Supplemental Damages, 6/28/2022, ¶ 1.
`Jury Verdict Form, 6/15/2022.
`Joint Stipulation for Prejudgment Interest, Post-Judgment Interest, and Supplemental Damages, 6/28/2022, ¶ 1.
`Jury Verdict Form, 6/15/2022.
`Amended Judgment, 8/17/2022.
`Brief in Support of PMP’s Motion for a Permanent Injunction or, Alternatively, an Ongoing Royalty, 8/12/2022, at 18–30.
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`Executive Summary
`1.2.
`As discussed in detail below, the jury-determined rate of 0.60%, which was advocated at trial
`by PMP and Mr. Meyer, is an appropriate rate to use for an ongoing royalty for Alto’s
`continuing use of the ’265 patent. An ongoing royalty of 0.60% through the life of the ’265
`patent would generously compensate PMP relative to the comparable value of the Fontem-
`RJRV agreement, which served as Mr. Meyer’s primary basis for the determination of a royalty
`in his testimony at trial. The Meyer Declaration suggests that significant changed
`circumstances exist between the first and second hypothetical negotiations for the ’265 patent
`that would justify a significant rate increase from the jury-determined rate. However, the
`circumstances the Meyer Declaration identifies have either already been accounted for in the
`jury-determined rate or have actually not changed from the information the parties at the first
`hypothetical negotiation would have considered. Indeed, there have been no material changes
`in the Georgia-Pacific factors relative to the first hypothetical negotiation. In relation to Solo
`G2, it is also my opinion that the jury-determined rate of 2.00%, also advocated at trial by
`PMP and Mr. Meyer, should be used as an ongoing royalty rate, as PMP has not identified any
`changed circumstances at the second hypothetical negotiation that would not already be
`accounted for in the jury-determined rate.
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`2.
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`Case Background and Framework
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`(5)
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`At trial, Mr. Meyer testified that a 0.60% rate was reasonable for Alto’s use of the ’265 patent
`and that a 2% rate was reasonable for Solo G2’s use of the ’911 patent.5 Mr. Meyer’s suggested
`rates were derived from his analysis of RJRV’s agreement with Fontem, which was executed
`September 24, 2018, soon after Mr. Meyer’s suggested August 2018 hypothetical negotiation
`date for the ’265 and ’911 patents.6 Mr. Meyer described the agreement as a “spot-on [Georgia-
`Pacific] Factor 2 license.”7 RJRV paid Fontem a lump sum of $79 million for a non-exclusive
`U.S. license to Fontem’s patent portfolio. 8 Mr. Meyer relied on PMP’s technical expert,
`Mr. McAlexander, to apportion 10% of the value of the Fontem-RJRV agreement to the ’265
`patent and 35% of the value of the Fontem-RJRV agreement to the ’911 patent.9 Mr. Meyer
`testified that the lump sum payment in the Fontem-RJRV agreement was based on a 5.25%
`royalty rate.10 Mr. Meyer’s reasonable royalty rates for the ’265 patent and the ’911 patent
`were derived by taking 10% and 35% of that 5.25% rate and then rounding up to 0.60% and
`2.00%, respectively, based on the Georgia-Pacific factors. 11 The jury-awarded damages
`adopted the royalty rates Mr. Meyer presented at trial on behalf of PMP.12
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`(6)
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`I understand that the evaluation of an ongoing royalty can be performed in the context of a
`second hypothetical negotiation occurring on the date of a finding of infringement and validity
`by the fact finder.13 I therefore consider a second hypothetical negotiation involving PMP as
`licensor and RJRV as licensee occurring on June 15, 2022, the date that the jury returned its
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`Paul Meyer, Trial Tr., at 468:6–14.
`Paul Meyer Trial Demonstratives (PDX-5, at PDX-5.036).
`See also: Attachment A-5. (Meyer Report, 2/24/2021, ¶¶ 515, 517, 524.
`Paul Meyer, Trial Tr., at 418:7–419:6.
`Fontem-RJRV US Settlement and License Agreement, 9/24/2018 (RJREDVA_001521385–1559, at RJREDVA_001521395,
`RJREDVA_001521401).
`Paul Meyer, Trial Tr., at 459:5–460:9.
`Paul Meyer Trial Demonstratives (PDX-5, at PDX-5.031).
`Paul Meyer, Trial Tr., at 445:2–452:10.
`Paul Meyer, Trial Tr., at 459:5–468:14.
`Meyer Declaration, 8/12/2022, ¶ 15.
`Cioffi v. Google, Inc., 2017, WL 4011143, at *4 (E.D. Tex. Sept. 12, 2017). (“Although the new hypothetical negotiation
`occurs on the date of the jury verdict…”)
`Apple, Inc. v. Samsung Elecs. Co., 2014, WL 6687122, at *15 (N.D. Cal. Nov. 25, 2014). (“In setting ongoing royalties, courts
`have used a second hypothetical negotiation following the verdict.”)
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`verdict in this matter.14 The parties would negotiate an ongoing royalty for RJRV’s continued
`use of the ’911 patent in Solo G2 and the ’265 patent in Alto.
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`(7)
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`I understand that courts have considered the jury-determined royalty rates as a relevant
`starting point for the second hypothetical negotiation and that the negotiation can consider
`changes in the economic circumstances between the parties relative to the first hypothetical
`negotiations.15 Thus, my analysis uses 0.60% for the ’265 patent and 2.00% for the ’911
`patent as the baseline rates the parties would consider at the second hypothetical negotiation.
`I understand that courts have also used the Georgia-Pacific factors to evaluate the second
`hypothetical negotiation.16
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`Jury Verdict Form, 6/15/2022.
`Apple, Inc. v. Samsung Elecs. Co., 2014, WL 6687122, at *14 (N.D. Cal. Nov. 25, 2014). (“Generally, the jury's damages award
`is a starting point for evaluating ongoing royalties.”)
`Erfindergemeinschaft UroPep GbR v. Eli Lilly & Co., 2017, WL 3034655, at *7 (E.D. Tex. Jul. 18, 2017). (“Recognizing the
`importance of the jury's verdict, courts have uniformly held that the starting point for the Amado analysis of the ongoing
`royalty rate is the royalty rate found by the jury for the pre-verdict infringement period.”)
`Cioffi v. Google, Inc., 2017, WL 4011143 , at *3 (E.D. Tex. Sept. 12, 2017). (“Using the jury's implied royalty rate as a starting
`point, courts conduct a renewed analysis of a reasonable royalty based on a post-verdict hypothetical negotiation. In this
`analysis, ‘courts have often used the so-called Georgia-Pacific factors in assessing how the changed circumstances would
`produce a royalty rate in a hypothetical post-verdict licensing negotiation that was different from the royalty rate the jury
`selected based on a hypothetical licensing negotiation at the outset of infringement … Courts routinely use the royalty
`rate implied by the jury’s verdict as the starting point in determining a forward-looking royalty.”) (citations omitted)
`Apple, Inc. v. Samsung Elecs. Co., 2014, WL 6687122, at *13 (N.D. Cal. Nov. 25, 2014). (“Courts have used the Georgia-Pacific
`factors to evaluate a post-verdict hypothetical negotiation for ongoing royalties.”)
`Cioffi v. Google, Inc., 2017, WL 4011143, at *3 (E.D. Tex. Sept. 12, 2017). (“Using the jury's implied royalty rate as a starting
`point, courts conduct a renewed analysis of a reasonable royalty based on a post-verdict hypothetical negotiation. In this
`analysis, ‘courts have often used the so-called Georgia-Pacific factors in assessing how the changed circumstances would
`produce a royalty rate in a hypothetical post-verdict licensing negotiation that was different from the royalty rate the jury
`selected based on a hypothetical licensing negotiation at the outset of infringement.’”) (citations omitted)
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`(9)
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`3.
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`Evaluation of Meyer Declaration
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`3.1. Overview
`The Meyer Declaration claims that the circumstances between “the Pre-Verdict and Post-
`Verdict Hypothetical Negotiation have materially and significantly changed, such that an
`award of an ongoing royalty equal to the rates that the jury awarded would significantly
`undercompensate Phillip [sic] Morris for being unwillingly deprived of its right to exclusivity
`to the ’265 and ’911 Patents, particularly the ’265 Patent.”17 The Meyer Declaration points to
`claimed changes in circumstances that are consistent with changes in Georgia Pacific factors
`4, 5, 8, and 10: “(1) the Infringing Alto Cartridges have now, for the first time, become
`extremely profitable on an operating margin basis; (2) sales of the Infringing Alto Cartridges
`have significantly increased which, in turn, has helped establish VUSE as the leader of the
`U.S. e-cigarette / e-vapor market, due at least in part to the technology claimed in the ’265
`Patent; (3) U.S. Food & Drug Administration (‘FDA’) denied JUUL Labs, Inc.’s application for
`Pre-Market Tobacco Authorization (‘PMTA’); (4) Philip Morris is currently in the process of
`introducing an e-vapor product, IQOS VEEV or ‘VEEV,’ into the U.S. market; and (5) absent
`injunctive relief, Philip Morris has effectively lost the ability to maintain its patent monopoly
`or offer an exclusive license to the inventive technology claimed in the ’265 and ’911 Patents.”18
`The Meyer Declaration then suggests possible ongoing royalty rates for the ’265 patent ranging
`from 4.46% to 40.11%, claiming that the various rates in the range would allow RJRV to keep
` of Alto cartridge sales.19
`anywhere from
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`I disagree with the conclusions and opinions offered in the Meyer Declaration. There is no
`discernible “negotiation” present in the Meyer Declaration’s analysis. Rather, the Meyer
`Declaration seems to have taken the position that the second hypothetical negotiation for the
`’265 patent is an exercise in calculating how much profit can be extracted from RJRV on sales
`of Alto cartridges. The royalty rates suggested in the Meyer Declaration are not based on any
`economic analysis but are instead set only to leave RJRV with certain predetermined profit
`margins based on a limited view of profitability on sales of Alto cartridges. Accordingly, the
`rates are not tied to the economic contribution of the ’265 patent, and also may reflect
`anomalies in Alto cartridge profits in the limited time period considered by Mr. Meyer that are
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`Meyer Declaration, 8/12/2022, ¶ 21.
`Meyer Declaration, 8/12/2022, ¶ 22.
`Meyer Declaration, 8/12/2022, ¶¶ 63, 64, Table 3.
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`(11)
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`related to RJRV’s business or accounting practices rather than any economic indication of
`long-term profitability.20
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`The rates are also significantly larger than the rate that PMP advocated and that the jury
`awarded for damages through trial, ranging from approximately 7.4 times to 66.9 times
`larger.21 PMP’s proposed rate of 33.5% is approximately 55.8 times larger than the jury-
`determined rate.22 The proposed rates disregard the concept of apportionment and do not
`reflect the economic contribution of the ’265 patent. Further, what the Meyer Declaration
`identifies as changed circumstances are factors already accounted for in the jury-determined
`rate for the ’265 patent. I discuss these and other problems with the Meyer Declaration in
`more detail below.
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`3.2. The Meyer Declaration disregards the running royalty
`structure that Mr. Meyer testified was appropriate at trial
`The Meyer Declaration evaluates net sales of Alto cartridges as a potential factor that has
`changed relative to the first hypothetical negotiation.23 The Meyer Declaration claims that Alto
`cartridge sales have exceeded expectations and that the VUSE product line has increased its
`market share relative to the first hypothetical negotiation for the ’265 patent largely based on
`the success of Alto.24 Additionally, the Meyer Declaration discusses “significant growth” in
`sales of the Alto cartridges based on the most recent financial data provided as well as recent
`commentary from Jack Bowles, the CEO of British American Tobacco (BAT) on the success of
`its “New Category” products, which include Alto, as being demonstrative of “how the economic
`circumstances with respect to the Infringing Alto Cartridges have significantly changed since
`the Pre-Verdict Hypothetical Negotiation in August 2018.”25
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`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
`4.46 / 0.60 ≈ 7.4.
`40.11 / 0.60 ≈ 66.9.
`Brief in Support of PMP’s Motion for a Permanent Injunction or, Alternatively, an Ongoing Royalty, 8/12/2022, at 18. (“If
`the Court denies injunctive relief, the ongoing royalty rates for Reynolds’ ongoing willful infringement should be [] 33.5%
`for the ’265 patent[.]”)
`33.5 / 0.60 ≈ 55.8.
`Meyer Declaration, 8/12/2022, ¶¶ 26–54.
`Meyer Declaration, 8/12/2022, ¶¶ 31–32.
`Meyer Declaration, 8/12/2022, ¶¶ 35–38.
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`(13)
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`I take Mr. Meyer’s position to be that the sales performance of Alto cartridges would justify an
`increase in the royalty rate at the second hypothetical negotiation. I disagree. At trial,
`Mr. Meyer presented sales data for Alto cartridges through 2021,26 so the jury was aware of
`Alto’s recent sales trajectory when determining a royalty rate to use in calculating damages
`for the ’265 patent. Additionally, RJRV’s forecasts from around the time of the initial
`hypothetical negotiation demonstrate that it anticipated rapid growth and success for Alto,
`with Alto predicted to become RJRV’s best-selling VUSE product in its first full calendar year
`in the U.S. marketplace. See Attachment B-3.
`
`The Meyer Declaration also confuses the royalty rate with the royalty base. As I explained in
`my opening report, a running royalty structure benefits the licensor when the licensed product
`turns out to be more successful than originally anticipated.27 This is an economic reality that
`PMP has already benefited from and would likely continue to benefit from should the court
`grant an ongoing royalty, and it is true regardless of the actual contribution of the ’265 patent
`to Alto cartridge sales. Rather than agreeing to a rate increase, the parties at the second
`hypothetical negotiation would recognize that leaving the rate unchanged from the PMP-
`supported and jury-accepted rate of 0.60% would yield a windfall to PMP, with RJRV paying
`considerably more for the ’265 patent than the comparable technology from the Fontem-RJRV
`agreement (see Section 4). Notably, the royalty in the Fontem-RJRV agreement was structured
`as a lump-sum payment such that increased sales did not result in an increased royalty
`payment.
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`(14)
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`In referencing recent uncertainty regarding whether JUUL’s PMTA denial will be overturned
`after JUUL successfully obtained an administrative stay, the Meyer Declaration posits that
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`Paul Meyer, Trial Tr., at 469:9–23.
`Paul Meyer Trial Demonstratives (PDX-5, at PDX-5.039).
`Attachment A-2. (Sullivan Report, 3/24/2021, ¶ 213.)
`See also:
`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 J. (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.”)
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`(15)
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`(16)
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`(17)
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`Alto is likely to benefit if JUUL’s e-cigarette is removed from the market. 28 The Meyer
`Declaration states: “This potential for significant increased sales and financial success would
`be considered by the parties to the Post-Verdict Hypothetical Negotiation and would have
`upward influence on the royalty that would be agreed on at the Post-Verdict Hypothetical
`Negotiation.”29
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`First, the FDA decision that denied JUUL’s PMTA was not made until June 23, 2022,30 which
`is after the Meyer Declaration’s stated second hypothetical negotiation date of June 15, 2022
`for the ’265 patent.31
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`Second, the Meyer Declaration again confuses the royalty rate with the royalty base. If JUUL’s
`e-cigarette is removed from the market thereby shifting sales to Alto, PMP will reap the benefits
`of increased Alto sales through increased royalty payments via the running royalty structure.
`An expected increase in sales is not a valid reason for increasing a royalty rate on a running
`royalty, and an economically prudent negotiator would not agree to such terms.
`
`Additionally, the first hypothetical negotiation for the ’265 patent would have accounted for
`the uncertainty in the marketplace. Regarding regulatory uncertainty, the FDA’s Deeming
`Rule, which granted the FDA regulatory authority over e-cigarettes, went into effect August
`2016,32 approximately two years prior to the first hypothetical negotiation for the ’265 patent.
`The uncertainty in the U.S. e-cigarette marketplace is also reflected in the fluctuating
`marketplace shares in the years leading up to the first hypothetical negotiation for the ’265
`patent, with RJRV taking over as market share leader in 2015 from Imperial/Fontem, followed
`by JUUL’s rapid rise to the leading position in 2018. See Attachment B-1.
`
`(18)
`
`The parties to the first hypothetical negotiation would have also known of Alto’s sales
`trajectory and that it was performing better than expectations from the time of its launch. In
`this respect, the Meyer Declaration contradicts the Meyer Report, which claims that the
`parties to the first hypothetical negotiation “would consider all available information, data and
`
`
`28
`29
`30
`
`31
`32
`
`
`
`Meyer Declaration, 8/12/2022, ¶¶ 50–54.
`Meyer Declaration, 8/12/2022, ¶ 54.
`FDA Press Release, “FDA Denies Authorization to Market JUUL Products,” 6/23/2022, https://www.fda.gov/news-
`events/press-announcements/fda-denies-authorization-market-juul-products.
`Meyer Declaration, 8/12/2022, ¶ 20.
`for E-Cigarettes, Cigars, and All Other Tobacco Products,”
`FDA Website, “FDA's Deeming Regulations
`https://www.fda.gov/tobacco-products/rules-regulations-and-guidance/fdas-deeming-regulations-e-cigarettes-cigars-
`and-all-other-tobacco-products (accessed 8/31/2022).
`
`Declaration of Ryan Sullivan, Ph.D.
`
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`(19)
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`(20)
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`(21)
`
`documents, whether dated before or after the [initial hypothetical negotiation date],”33 which
`would have included sales data through at least 2020.34 Therefore, according to Mr. Meyer,
`the jury-determined rate, which is identical to the rate Mr. Meyer opined would be reasonable
`for the ’265 patent, would have been set with full awareness of the uncertainty in the
`marketplace and Alto’s improved performance relative to initial expectations, items the Meyer
`Declaration suggests now warrant a rate increase.
`
`To illustrate this point further, consider Alto’s own uncertain future in the U.S. marketplace,
`as Alto has yet to receive PMTA authorization from the FDA. Although the Meyer Declaration
`does not address the status of Alto’s PMTA, there is a chance that Alto will have no sales in
`the future should the FDA deny Alto’s PMTA. However, there would be no need to adjust the
`rate downward at the second hypothetical negotiation to account for this potential significant
`decrease in sales, just as there would be no basis to adjust the rate upward should Alto sales
`benefit significantly if JUUL’s PMTA denial is upheld. Should Alto benefit from a removal of
`JUUL’s e-cigarette, such an event will be reflected in increased payments to PMP via the
`royalty base, even if the rate is unchanged.
`
`3.3. The Meyer Declaration provides a limited view of Alto’s
`profitability
`The Meyer Declaration also discusses that the operating profit margin on Alto cartridge net
`sales during the period from January through June 2022 is “by far [RJRV’s] highest net
`operating profit margin since releasing the Alto in August 2018.”35 The Meyer Declaration
`further states that such a change in operating profit margin “materially changes the
`circumstances at the Post-Verdict Hypothetical Negotiation and would place tremendous
`upward pressure on the ongoing royalty rate that would be agreed on for the ’265 Patent.”36
`
`As part of my evaluation of the Meyer Declaration’s claims regarding Alto profitability, I held
`discussions with Robert Ferris, RAI Services Company’s Director of Commercial Finance for
`New Categories.37 I understand that Mr. Ferris’s role provides him with in-depth knowledge
`of the financial performance of RJRV as a company and of each of the VUSE products,
`
`
`
`33
`34
`35
`36
`37
`
`Attachment A-5. (Meyer Report, 2/24/2021, ¶ 128.)
`Attachment A-5. (Meyer Report, 2/24/2021, ¶¶ 485–489, Table 13.)
`Meyer Declaration, 8/12/2022, ¶ 40.
`Meyer Declaration, 8/12/2022, ¶ 41.
`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
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`including Alto. 38 I discussed with Mr. Ferris the operating profits of Alto cartridges as
`referenced in the Meyer Declaration, in addition to the historical operating profits for Alto and
`RJRV generally as well as RJRV’s expectations for future profitability.39 Mr. Ferris provided
`me with a spreadsheet that provides Alto’s fully-burdened operating profitability from 2019
`through June 2022 as well as certain underlying financial data that were used in creating
`that summary. Those data are shown in Attachments A-6 and A-7, respectively. I understand
`that the underlying data that were used to create the spreadsheet Mr. Ferris provided are
`maintained by RJRV in the ordinary course of business, and that Mr. Ferris’s summary for
`Alto was created in accordance with RJRV’s accounting practices.40
`
`(22)
`
`Based on my discussions with Mr. Ferris, I understand that RJRV makes a loss on the sales
`of Alto devices after accounting for device-specific discounts and promotions to enable future
`sales of Alto cartridges, as Alto cartridges cannot be used without an Alto device.41 Thus, from
`an economic point of view, it is inaccurate to look at the operating profitability of Alto
`cartridges as being distinct from the profitability of Alto devices, as a consumer must first
`purchase an Alto device before an Alto cartridge can be used. For January through June
`2022, I understand that RJRV realized
` on
`Alto devices, 42 which is not reflected in the profitability numbers cited by the Meyer
`Declaration. Accounting for these costs would reduce the operating profits for January
`through June 2022 to approximately
` the Meyer
`Declaration calculates.43
`
`(23)
`
`I understand that there are certain other costs that RJRV incurred during the first half of
`2022 that are not reflected on the product-specific financials, including costs pertaining to
`the development and commercialization of the VUSE portfolio (e.g., PMTA costs, R&D costs,
`shared services allocations), the cost of a new ERP system that was implemented, and certain
`
`
`
`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
`Discussion with Robert Ferris, 8/18/2022, 8/25/2022.
`See Attachment