Case 1:20-cv-00393-LMB-WEF Document 1469-11 Filed 04/05/23 Page 1 of 5 PageID# 41417
`Case 1:20-cv-00393-LMB-WEF Document 1469-11 Filed 04/05/23 Page 1 of 5 PagelD# 41417
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`EXHIBIT 78
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`Case 1:20-cv-00393-LMB-WEF Document 1469-11 Filed 04/05/23 Page 2 of 5 PageID# 41418
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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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`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`Case 1:20-cv-00393-LMB-WEF Document 1469-11 Filed 04/05/23 Page 3 of 5 PageID# 41419
`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`15. Economic Considerations
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`15.1. Profitability
`(296) The parties at the hypothetical negotiations would have considered the profitability and
`commercial success of the accused VUSE products. For example, Georgia-Pacific factors 8,
`12, and 13 relate to the profitability of the product covered by the patented technology. See
`Section 16.
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`(297) The accused VUSE products have been generally successful in the e-cigarette marketplace,
`as evidenced by their market share. Indeed, a 2015 Reynolds VUSE presentation depicting a
`graph of “Total US Share of Vapor Performance – Top 5 Brands” from February 2014 to
`February 2015 shows that VUSE had increased its market share from 1.94% to 22.46% during
`that year to become the market leader.652 By 2018, despite JUUL surpassing VUSE in market
`share, VUSE maintained the second largest sales volume for both kits and cartridges.653
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`(298) However, despite their success in the marketplace, the accused VUSE products have not been
`significantly profitable. For example, from 2013 to 2020, all VUSE products have generated
`654 Similarly, VUSE Solo, Reynolds’ highest selling product
`a gross margin of
`since its launch in 2013, has generated a gross margin of
` over the same time
`period.655 Further, VUSE Alto, Reynolds’ highest selling product in the three year period from
`2018 to 2020, has earned
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`656
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`(299) The parties at the hypothetical negotiations would take into consideration the
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` of the VUSE product line overall in determining the appropriate reasonable
`royalties for the asserted patents. Specifically, Reynolds would not agree to royalties that
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`VUSE Current Situation, 3/24/2015 (RJREDVA_000833225.pptx, at slide 17).
`February 2019 – Integrated Demand Review, 2/1/2019 (RJREDVA_001616435.pptx, at slides 26–27).
`See Attachment B-1.
`Gross margin percentage = gross margin / net sales =
`See Attachment B-1.
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`See Attachment B-1.
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`652
`653
`654
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`655
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`656
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`Page 140
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`Case 1:20-cv-00393-LMB-WEF Document 1469-11 Filed 04/05/23 Page 4 of 5 PageID# 41420
`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`would account for the majority of gross profits earned on their VUSE devices. However, the
`Meyer Report has perhaps ignored this consideration. For example, the Meyer Report claims
`that Reynolds would be required to pay a cumulative 6.5% royalty on net sales of VUSE Solo
`for the ’545, ’911, and ’374 patents starting on September 24, 2019 (the date of the ’374
`hypothetical negotiation).657 As discussed above, VUSE Solo has only earned about
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` during its commercialization. Moreover, in 2019, VUSE Solo earned
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`.
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`(300) Comparatively, the cumulative royalty rates resulting from the hypothetical negotiations for
`the ’545, ’911, and ’374 patents calculated in my report would total 0.91% on net sales of
`VUSE Solo at the time of the ’374 patent hypothetical negotiation.659
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`15.2. Apportionment
`(301) The parties at the hypothetical negotiations would also consider apportioning the agreed upon
`royalties to the specific contributions of the asserted patents. For example, Georgia-Pacific
`factors 12 and 13 relate to the portion of the profit that allow for use of the invention and the
`profit credited to the invention over non-patented features. See Sections 7 and 16.
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`(302)
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`I have reasonably taken into consideration the economic contributions of the asserted patents
`relative to other contributing factors. In particular, apportionment to the direct value of the
`patents is addressed through my implementation of the market approach and use of the
`Fontem-RJRV agreement for the ’545, ’265, ’374, and ’911 patents. As discussed in Section
`12.2.1, the Fontem-RJRV agreement involves the same VUSE products that would be at issue
`at the hypothetical negotiations. Further, as discussed in Section 13, several of the patents
`licensed in the Fontem-RJRV agreement are technically comparable to, and likely more
`valuable than, the patents-in-suit. Thus, I do not further apportion the royalty rates for the
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`Meyer Report, 2/24/2021, ¶ 28, Table 2.
`The Meyer Report opines that the reasonable royalty rate for the ’545 patent would be 3% when taking into account the
`’545 patent’s alleged importance to Reynolds to obtain PMTA authorization from the FDA.
`Cumulative royalty rate = ’545 rate + ’911 rate + ’374 rate = 3.0% + 2.0% + 1.5% = 6.5%.
`See Attachment B-1.
`See Attachments G-1, G-4, and G-5.
`0.40% + 0.11% + 0.40% = 0.91%.
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`657
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`658
`659
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`________________________________________________________________________________________________________________________________________
`Report of Ryan Sullivan, Ph.D.
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`Page 141
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`Case 1:20-cv-00393-LMB-WEF Document 1469-11 Filed 04/05/23 Page 5 of 5 PageID# 41421
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`Attachment B-1
`VUSE Annual Sales and Profitability (2013–2020)
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`Product
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`Metric
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`2013
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`2014
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`2015
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`2016
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`2017
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`2018
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`2019
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`2020
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`Total
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`Solo
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`Vibe
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`Ciro
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`Alto
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`Total
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`Net Sales
`Cost of Goods Sold
`Gross margin
`Net Sales
`Cost of Goods Sold
`Gross margin
`Net Sales
`Cost of Goods Sold
`Gross margin
`Net Sales
`Cost of Goods Sold
`Gross margin
`Net Sales
`Cost of Goods Sold
`Gross margin
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`Notes and sources:
`2013–2019: equal to sum of Amount from Attachment H-2 for each Product and Year shown using the following values for Metric:
`NET SALES
`Net Sales:
`TOTAL COST OF GOODS SOLD
`Cost of Goods Sold:
`GROSS MARGIN
`Gross Margin:
`Resulting values mutiplied by 1,000. Cost of Goods Sold multiplied by -1,000 to display as a positive number.
`2020: equal to sum of Amount from Attachment H-1 for each Product shown using the following values for Metric:
`RPNT00000 - NET SALES
`Net Sales:
`RPCO00000 - TOTAL COST OF GOODS SOLD
`Cost of Goods Sold:
`RPGM00000 - GROSS MARGIN
`Gross Margin:
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`CONFIDENTIAL BUSINESS INFORMATION, SUBJECT TO PROTECTIVE ORDER
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`Attachment B-1
`Page 1 of 1
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