Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 1 of 35 PageID# 26827
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF VIRGINIA
`ALEXANDRIA DIVISION
`
`RAI STRATEGIC HOLDINGS, INC. and
`R.J. REYNOLDS VAPOR COMPANY,
`
`Plaintiffs and Counterclaim Defendants,
`
`v.
`
`ALTRIA CLIENT SERVICES LLC; PHILIP
`MORRIS USA INC.; and PHILIP MORRIS
`PRODUCTS S.A.,
`
`Defendants and Counterclaim Plaintiffs.
`
`Case No. 1:20-cv-00393-LO-TCB
`
`REDACTED
`
`OPPOSITION TO PM/ALTRIA’S DAUBERT MOTION TO
`EXCLUDE THE TESTIMONY OF RYAN SULLIVAN
`
`

`

`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 2 of 35 PageID# 26828
`
`TABLE OF CONTENTS
`
`
`Page
`
`
`INTRODUCTION ......................................................................................................................... 1
`FACTUAL BACKGROUND ........................................................................................................ 2
`I.
`THE EXPERTS’ REASONABLE ROYALTY ANALYSES. .......................................... 2
`II.
`THE TWO FONTEM AGREEMENTS RELIED UPON BY THE EXPERTS................ 3
`III.
`DR. SULLIVAN’S ANALYSIS AND OPINIONS BASED ON THE MOST
`COMPARABLE LICENSE AGREEMENT. .................................................................... 5
`LEGAL STANDARD .................................................................................................................... 7
`ARGUMENT ................................................................................................................................. 8
`I.
`DR. SULLIVAN’S ANALYSIS OF THE FONTEM–RJRV AGREEMENT IS
`ADMISSIBLE TO ASSIST THE JURY. .......................................................................... 8
`A.
`Dr. Sullivan Appropriately Uses The Most Comparable Fontem–RJRV
`Agreement. ............................................................................................................. 9
`Dr. Sullivan Properly Relied On Reynolds’s 2020 Forecasted Sales. ................. 10
`B.
`DR. SULLIVAN PROPERLY DID NOT RELY ON THE PHANTOM
`
`ANALYSIS. ..................................................................................................................... 18
`DR. SULLIVAN PROPERLY CONSIDERED DESIGN-AROUND OPTIONS. ......... 22
`III.
`CONCLUSION ............................................................................................................................ 28
`
`II.
`
`
`
`
`- i -
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 3 of 35 PageID# 26829
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`
`
`
`
`CASES
`
`TABLE OF AUTHORITIES
`
`Page
`
`Apple Inc. v. Motorola, Inc.,
`757 F.3d 1286 (Fed. Cir. 2014), overruled on other grounds by Williamson v.
`Citrix Online, LLC, 792 F.3d 1339 (Fed. Cir. 2015) .........................................................14, 24
`
`Aqua Shield v. Inter Pool Cover Team,
`774 F.3d 766 (Fed. Cir. 2014)............................................................................................25, 27
`
`AstraZeneca AB v. Apotex Corp.,
`782 F.3d 1324 (Fed. Cir. 2015)................................................................................................27
`
`Baltimore Aircoil Co. v. SPX Cooling Techs. Inc.,
`No. CCB-13-2053, 2016 WL 4426681 (D. Md. Aug. 22, 2016), aff’d, 721 F.
`App’x 983 (Fed. Cir. 2018)......................................................................................................10
`
`Baxter Int’l, Inc. v. Becton, Dickinson & Co.,
`No. 17C7576, 2020 WL 424918 (N.D. Ill. Jan. 27, 2020) ......................................................25
`
`Biedermann Techs. GmbH & Co. KG v. K2M, Inc.,
`No. 2:18cv585, 2021 WL 6034269 (E.D. Va. Dec. 10, 2021) ................................................15
`
`Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd.,
`No. 09-290, 2012 WL 3686736 (W.D. Pa. Aug. 24, 2012) .....................................8, 23, 24, 27
`
`Commissariat a L’energie Atomique v. Samsung Elecs. Co.,
`No. 03-484 KAJ, 2006 WL 8452836 (D. Del. Apr. 13, 2006) ................................................16
`
`Commonwealth Sci. & Indus. Rsch. Organisation v. Cisco Sys., Inc.,
`809 F.3d 1295 (Fed. Cir. 2015)................................................................................................15
`
`Commonwealth Sci. & Indus. Rsch. Organisation v. Mediatek Inc.,
`No. 6:12-CV-578, 2015 WL 12806515 (E.D. Tex. June 29, 2015) ........................................10
`
`Covidien Sales LLC v. Ethicon Endo-Surgery, Inc.,
`No. 1:11-cv-871, 2020 WL 7040643 (S.D. Ohio Dec. 1, 2020) ..............................................25
`
`Datascope Corp. v. SMEC, Inc.,
`879 F.2d 820 (Fed. Cir. 1989)..................................................................................................26
`
`
`
`
`- ii -
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`

`

`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 4 of 35 PageID# 26830
`
`
`DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc.,
`567 F.3d 1314 (Fed. Cir. 2009)................................................................................................26
`
`
`
`ePlus, Inc. v. Lawson Software, Inc.,
`764 F. Supp. 2d 807 (E.D. Va. 2011), aff’d, 700 F.3d 509 (Fed. Cir. 2012) ...........................11
`
`Ericsson, Inc. v. D-Link Sys., Inc.,
`773 F.3d 1201 (Fed. Cir. 2014)................................................................................................28
`
`Fresenius Medical Care Holdings, Inc. v. Baxter Intern., Inc.,
`No. 03-cv-1431, 2006 WL 1390416 (N.D. Cal. May 18, 2006) ..............................................23
`
`Georgia-Pac. Corp. v. U.S. Plywood Corp.,
`318 F. Supp. 1116 (S.D.N.Y. 1970)...........................................................................................7
`
`Grain Processing Corp. v. Am. Maize-Prod. Co.,
`185 F.3d 1341 (Fed. Cir. 1999)................................................................................................26
`
`Honeywell Int’l, Inc. v. Hamilton Sundstrand Corp.,
`378 F. Supp. 2d 459 (D. Del. 2005) .........................................................................................16
`
`i4i Ltd. P’ship v. Microsoft Corp.,
`598 F.3d 831 (Fed. Cir. 2010), aff’d, 564 U.S. 91 (2011) ...................................................7, 14
`
`LaserDynamics, Inc. v. Quanta Computer, Inc.,
`No. 2:06-CV-348, 2011 WL 197869 (E.D. Tex. Jan. 20, 2011), objections
`overruled, 2011 WL 13196509 (E.D. Tex. Jan. 28, 2011) ......................................................27
`
`Lucent Techs., Inc. v. Gateway, Inc.,
`580 F.3d 1301 (Fed. Cir. 2009)............................................................................................7, 16
`
`Mars, Inc. v. Coin Acceptors, Inc.,
`527 F.3d 1359 (Fed. Cir. 2008)............................................................................................8, 25
`
`Meyer Intell. Properties Ltd. v. Bodum, Inc.,
`690 F.3d 1354 (Fed. Cir. 2012)................................................................................................23
`
`Open Text S.A. v. Box, Inc.,
`No. 13-cv-04910-JD, 2015 WL 393858 (N.D. Cal. Jan. 29, 2015) .........................................27
`
`Pavo Sols. LLC v. Kingston Tech. Co.,
`No. 8:14-cv-01352-JLS-KES, 2019 WL 8138163 (C.D. Cal. Nov. 20, 2019) ........................10
`
`
`
`
`- iii -
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`

`

`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 5 of 35 PageID# 26831
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`
`Prism Techs. LLC v. Sprint Spectrum L.P.,
`849 F.3d 1360 (Fed. Cir. 2017)............................................................................................8, 25
`
`
`
`Sherwin-Williams Co. v. PPG Indus., Inc.,
`No. 17-1023, 2020 WL 1283465 (W.D. Pa. 2020) ..................................................................27
`
`Silicon Knights, Inc. v. Epic Games, Inc.,
`551 F. App’x 646 (4th Cir. 2014) ..............................................................................................8
`
`Smart Skins LLC v. Microsoft Corp.,
`No. C15544-MJP, 2016 WL 4148091 (W.D. Wash. July 1, 2016) .........................................26
`
`Summit 6, LLC v. Samsung Elecs. Co.,
`802 F.3d 1283 (Fed. Cir. 2015)..................................................................................................7
`
`SynQor, Inc. v. Artesyn Tech., Inc.,
`709 F.3d 1365 (Fed. Cir. 2013)................................................................................................27
`
`Trans-World Mfg. Corp. v. Al Nyman & Sons, Inc.,
`750 F.2d 1552 (Fed. Cir. 1984)................................................................................................16
`
`Whitserve, LLC v. Computer Packages, Inc.,
`694 F.3d 10 (Fed. Cir. 2012)......................................................................................................9
`
`OTHER AUTHORITIES
`
`Fed. R. Evid. 702 .............................................................................................................................7
`
`
`
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`- iv -
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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 6 of 35 PageID# 26832
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`
`
`INTRODUCTION
`
`Each of PM/Altria’s criticisms of Dr. Sullivan’s opinions is wrong on the facts and the law,
`
`and PM/Altria’s motion should be denied. First, PM/Altria takes issue with Dr. Sullivan’s use of
`
`a 2020 Reynolds1 sales forecast, as opposed to a 2018 forecast used by PM/Altria, to determine
`
`the effective royalty rate under the undisputed most comparable license agreement between
`
`Fontem and RJRV. But, on the facts, Reynolds’s 2020 forecast was created in the ordinary course
`
`of Reynolds’s business (just like the 2018 forecast), and the 2020 forecast provided the most
`
`reliable data for Dr. Sullivan’s calculation in early 2021. And, under the law, Dr. Sullivan was
`
`right to use the 2020 forecast because his task was to calculate, as precisely as possible, the
`
`effective royalty rate that RJRV actually paid under the Fontem agreement. Dr. Sullivan’s
`
`calculation of the effective royalty rate is more than reliable—it is conservative given the modest
`
`royalty base he included. The fact that PM/Altria considers RJRV’s payment to Fontem to be a
`
`relatively low royalty rate simply does not provide a basis to exclude Dr. Sullivan’s opinions.
`
`Next, PM/Altria argues that Dr. Sullivan’s Fontem–RJRV effective royalty rate allegedly
`
`“contradicts the conclusion” of a
`
` of the Fontem–
`
`RJRV agreement. That is pure vapor. Dr. Sullivan has never seen that alleged
`
` analysis
`
`because PM/Altria never produced it, and it is indisputably not in the record. Dr. Sullivan and
`
`PM/Altria’s damages expert have no basis to be certain that an
`
` analysis of the Fontem–RJRV
`
`agreement even exists, let alone whether its analysis or conclusions are reasonable and relevant to
`
`the damages issues in this case. Dr. Sullivan was right not to rely on PM/Altria’s speculation about
`
`the
`
` analysis—to do so would have been an error.
`
`
`1 The term “Reynolds” refers to the plaintiffs and counterclaim defendants, RAI Strategic
`Holdings, Inc. and R.J. Reynolds Vapor Company, collectively. The term “RJRV” refers to R.J.
`Reynolds Vapor Company only, such as in relation to its license agreement with Fontem.
`
`
`
`-1-
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 7 of 35 PageID# 26833
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`
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`Finally, PM/Altria claims Dr. Sullivan should not have considered Reynolds’s design-
`
`
`
`arounds for the ’265 and ’911 patents as part of the reasonable royalty analysis because those
`
`design-arounds had not received regulatory approval as of the date of the hypothetical negotiation.
`
`But the law does not impose such a sweeping prohibition on the consideration of design
`
`alternatives in a reasonable royalty analysis. To the contrary, the caselaw supports Dr. Sullivan’s
`
`consideration of Reynolds’s ’911 and ’265 design-arounds. The parties would take into account
`
`possible alternative designs at the hypothetical negotiation, both because the cost and feasibility
`
`of such alternative designs is relevant to the incremental value of PM/Altria’s patented technology,
`
`and because the hypothetical negotiators would take into account the possibility that alternatives
`
`would become available during the remaining life of the asserted patents. At most, PM/Altria’s
`
`complaints about the design-around evidence should be the subject of cross-examination, and they
`
`provide no basis to exclude Dr. Sullivan’s opinions.
`
`Because Dr. Sullivan’s opinions are based on a reliable methodology and are closely tied
`
`to the facts of this case, they are admissible under Rule 702.
`
`FACTUAL BACKGROUND
`
`I.
`
`THE EXPERTS’ REASONABLE ROYALTY ANALYSES.
`
`PM/Altria bears the burden of proving damages for any Reynolds infringement. PM/Altria
`
`served the Opening Expert Report of Mr. Meyer setting forth its position on February 24, 2021
`
`(the “Original Meyer Report”). In rebuttal, Reynolds served the Expert Report of Dr. Sullivan on
`
`March 24, 2021, discussing the fundamental errors in Mr. Meyer’s opinions as well as Dr.
`
`Sullivan’s opinions regarding damages for any Reynolds infringement (the “Sullivan Report”).
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`
`
`-2-
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 8 of 35 PageID# 26834
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`Mr. Meyer amended his report on April 26, 2021 (the “Meyer Report,”) (Dkt. 892-1).2
`
`
`
`The parties’ experts both agree that damages for the ’545, ’265, ’911, and ’374 patents
`
`should be in the form of a running royalty determined by looking to what PM/Altria and Reynolds
`
`would have agreed to in hypothetical negotiations between the parties on the eve of alleged
`
`infringement of each patent. See Dkt. 892-1, § VI.C; Excerpts of the Sullivan Report (attached as
`
`Exhibit 1), § 9. In other words, the experts considered what Reynolds, as a willing licensee, would
`
`have hypothetically agreed to pay for non-exclusive U.S. licenses to the patents and what
`
`PM/Altria, as a willing licensor, would have agreed to accept: on or around March 2013 for the
`
`’545 patent, on or around August 2018 for the ’265 patent, on or around October 2018 for the ’911
`
`patent, 3 and on or around September 2019 for the ’374 patent. Ex. 1, ¶¶ 183-188; see also Dkt.
`
`892-1, ¶¶ 23, 121-124, 127-128, 130; see also Excerpts of May 7, 2021 Deposition of Paul K.
`
`Meyer (Dkt. 892-3), 52:1-5. Both experts look to other market transactions in determining those
`
`reasonable royalties.
`
`II.
`
`THE TWO FONTEM AGREEMENTS RELIED UPON BY THE EXPERTS.
`
`There are two, and only two, litigation settlement license agreements involving Fontem’s
`
`patent portfolio that are relevant to this motion.4
`
`A. The Fontem–RJRV Agreement. Fontem Ventures B.V. and Fontem Holdings 1 B.V.
`
`(collectively, “Fontem”) and RJRV executed the Fontem–RJRV agreement effective September
`
`
`2 Mr. Meyer also submitted a May 6, 2021 Supplemental Citations and Errata. Dr. Sullivan
`submitted an April 26, 2021 Supplemental Expert Report and a May 8, 2021 Supplemental
`Rebuttal Expert Report.
`3 Mr. Meyer contends that the hypothetical negotiation for the ’911 patent would have taken place
`in August 2018, prior to the issuance of the patent. Dkt. 892-1, ¶¶ 121-124. Dr. Sullivan disagrees
`since there could be no infringement of the ’911 patent before its issuance (Ex. 1, ¶ 190), but that
`disagreement is not relevant to the instant motion.
`4 No other Fontem license agreements were produced in this case.
`
`
`
`-3-
`
`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 9 of 35 PageID# 26835
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`24, 2018. See Fontem–RJRV agreement (Dkt. 892-4). Under the agreement, RJRV paid
`
` for a nonexclusive license to Fontem’s entire patent portfolio,
`
`
`
`
`
`
`
`
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`1, ¶¶ 198, 200; Dkt. 892-4, §§ 3, 5. The term of the Fontem–RJRV agreement extends until the
`
` Dkt. 892-
`
`last to expire of the licensed patents
`
`. See Dkt 892-4, §§ 1.51, 4.1, Ex. A at 35
`
`
`
`
`
`
`
` The licensee of that agreement is RJRV—the same hypothetical licensee of the
`
`patents asserted here. Dkt. 892-1, ¶¶ 215-217, 267; Ex. 1, ¶ 263. The products licensed under that
`
`agreement include all of the same VUSE products accused here. Dkt 892-1, ¶¶ 215-217, 267; see
`
`also id., ¶¶ 218-219 (discussing the other reasons why the Fontem–RJRV agreement is
`
`economically comparable); Ex. 1, ¶ 263.
`
`Both sides’ experts agree that the Fontem–RJRV agreement covers patents that are
`
`technically comparable to the ’545, ’911, and ’265 patents. E.g., Dkt. 892-1, ¶¶ 201-204; Ex. 1,
`
`¶ 263. Reynolds’s experts opine that the Fontem–RJRV agreement also covers patents that are
`
`technically comparable to the ’374 patent, which cites several of the licensed Fontem patents.
`
`Ex. 1, ¶ 263 & n.587, ¶ 266.
`
`B. The
`
` Agreement. The
`
` agreement effective on
`
`, was executed in connection with the settlement of litigation between
`
` See Dkt. 892-5. The licensee was
`
`
`
`
`
`(not the hypothetical licensee here, or even a party here). The products covered by the
`
` which are not at issue in this
`
`
`
`-4-
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 10 of 35 PageID# 26836
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`lawsuit.
`
`agreement also provided for
`
`
`
`
`
`. See Dkt 892-3, 83:21-84:1. The
`
`
`
`. Dkt. 892-5, § 6.3.
`
`III. DR. SULLIVAN’S ANALYSIS AND OPINIONS BASED ON THE MOST
`COMPARABLE LICENSE AGREEMENT.
`
`Dr. Sullivan relied on the indisputably most comparable license agreement between
`
`Fontem and RJRV, involving the same licensee and covering the same VUSE products accused
`
`here, in setting the reasonable royalty for any RJRV infringement of the ’545, ’265, ’911, and ’374
`
`patents. Ex. 1, ¶ 263; see also Dkt. 892-1, ¶ 267 (Mr. Meyer explaining that “the
`
`
`
` is less relevant than the
`
` RJRV paid to
`
`Fontem” because “the
`
` is attributable to the Accused VUSE Products
`
`and therefore reflects more accurate sales levels and market share”). However, there were some
`
`economic differences relating to the form of payment and duration of the license that Dr. Sullivan
`
`needed to account for in using the Fontem–RJRV agreement to set a royalty here.
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`Specifically, because the Fontem–RJRV agreement involved a
`
`
`
`, Dr. Sullivan calculated the effective percentage running
`
`royalty paid by RJRV to Fontem. Ex. 1, ¶¶ 264-265. To do that, Dr. Sullivan took the
`
`
`
`
`
` Id., ¶ 265. In calculating the covered VUSE net sales, Dr. Sullivan added the
`
`actual VUSE sales through December 31, 2020 (the actual sales data available at the time of his
`
`
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`-5-
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 11 of 35 PageID# 26837
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`report) plus Reynolds’s business forecast of VUSE sales for 2021 through 20255 (which was
`
`
`
`actually conservative given that the license term covers many additional years of sales after 2025).
`
`Dr. Sullivan discounted the value of those sales
`
`September 2018. Ex. 1, ¶ 265 & nn. 589-591, Attach. D-4, D-5.
`
`Effective Rate of Fontem–RJRV =
`
`
`
`—
`
`
`
`
`Finally, Dr. Sullivan apportioned the
`
` paid by RJRV to Fontem using PM/Altria’s
`
`experts’ apportionment of value among five of the licensed Fontem patent families.6 Id., ¶¶ 267-
`
`269, 272-273, 276-277, 279-280. Specifically, Dr. Sullivan concluded (based on input from
`
`Reynolds’s technical experts and the apportionment that PM/Altria made among the various
`
`Fontem families): (a) the reasonable royalty for the ’545 patent is
`
` of net sales (i.e.,
`
`x 0.35) (id., ¶ 269); (b) the reasonable royalty for the ’265 patent is
`
`of net sales (i.e.,
`
`x 0.10) (id., ¶ 273); (c) the reasonable royalty for the ’911 patent is
`
` of net sales (i.e.,
`
`
`
`
`
`
`
`x 0.35) (id., ¶ 280); and (d) the reasonable royalty for the ’374 patent is
`
` of net sales (i.e.,
`
`x 0.10) (id., ¶ 277). In total, Dr. Sullivan’s opinions result in an upper limit royalty for the
`
`four asserted patents that is equivalent to 90%7 of the rate RJRV paid for a license to Fontem’s
`
`as of September 2018.
`
`
`5 Mr. Meyer similarly looks at the Reynolds actual sales of VUSE products through December 31,
`2020 as well as forecasted sales through 2023 in attempting to reconcile his royalty opinion based
`upon the
` rate appearing in the
` agreement. See Dkt. 892-1, ¶ 268 & n.409.
`6 While the PM/Altria apportionment of relative values among the five Fontem patent families
`overstates the value of each included family given that the Fontem portfolio included many other
`patents, Dr. Sullivan conservatively adopted the PM/Altria apportionment in his rebuttal opinion.
`7 35% for the ’545 + 10% for the ’265 + 35% for the ’911 + 10% for the ’374 = 90% for the four
`asserted patents collectively.
`
`
`
`-6-
`
`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 12 of 35 PageID# 26838
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`
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`LEGAL STANDARD
`
`
`
`Expert testimony is proper where “(a) the expert’s … specialized knowledge will help the
`
`trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based
`
`on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and
`
`(d) the expert has reliably applied the principles and methods to the facts.” Fed. R. Evid. 702.
`
`“[I]t is not the district court’s role under Daubert to evaluate the correctness of facts underlying
`
`an expert’s testimony.” i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 856 (Fed. Cir. 2010),
`
`aff’d, 564 U.S. 91 (2011). Instead, “where the methodology is reasonable and its data or evidence
`
`are sufficiently tied to the facts of the case, the gatekeeping role of the court is satisfied, and the
`
`inquiry on the correctness of the methodology and of the results produced thereunder belongs to
`
`the factfinder.” Summit 6, LLC v. Samsung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015).
`
`In assessing a reasonable royalty, experts may look to comparable licenses. See, e.g.,
`
`Georgia-Pac. Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (identifying
`
`as the second Georgia-Pacific factor “[t]he rates paid by the licensee for the use of other patents
`
`comparable to the patent in suit”). The analysis properly includes converting a comparable
`
`agreement’s lump sum royalty to a running royalty by calculating an effective royalty. See, e.g.,
`
`Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1330 (Fed. Cir. 2009). Disagreements
`
`regarding the data an expert relies upon in calculating an effective royalty is grounds for cross-
`
`examination, not exclusion. See i4i Ltd. P’ship, 598 F.3d at 855–56 (“[The] expert could have
`
`used other data in his calculations. The existence of other facts, however, does not mean that the
`
`facts used failed to meet the minimum standards of relevance or reliability.”).8
`
`
`8 Emphasis is added and internal citations and quotation marks are omitted throughout, except
`where otherwise noted.
`
`
`
`-7-
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 13 of 35 PageID# 26839
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`
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`Experts may also rely on the existence of non-infringing alternatives as a factor relevant to
`
`
`
`assessing reasonable royalty damages. See, e.g., Prism Techs. LLC v. Sprint Spectrum L.P., 849
`
`F.3d 1360, 1376 (Fed. Cir. 2017) (“A price for a hypothetical license may appropriately be based
`
`on consideration of the costs and availability of non-infringing alternatives.”). Where an alleged
`
`infringer has or “probably could have designed” a non-infringing alternative, that may be a basis
`
`for decreasing the royalty. Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1373 (Fed. Cir.
`
`2008) recalled and amended on other grounds by Mars, Inc. v. Coin Acceptors, Inc., 557 F.3d
`
`1377, 1378 (Fed. Cir. 2009). “[T]he question of whether there is a noninfringing substitute is a
`
`question of fact, such that a court should not determine the issue by way of a Daubert review.”
`
`Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., No. 09-290, 2012 WL 3686736, at *5 (W.D.
`
`Pa. Aug. 24, 2012).
`
`ARGUMENT
`
`I.
`
`DR. SULLIVAN’S ANALYSIS OF THE FONTEM–RJRV AGREEMENT IS
`ADMISSIBLE TO ASSIST THE JURY.
`
`Dr. Sullivan properly looks to the undisputed most comparable license agreement, the
`
`Fontem–RJRV agreement, to calculate a reasonable royalty in this case. Indeed, PM/Altria’s
`
`motion does not challenge Dr. Sullivan’s reliance on the Fontem–RJRV agreement9 or his method
`
`
`9 PM/Altria alludes in a footnote to Dr. Sullivan’s failure to rely on the
`
`agreement, as an additional basis for excluding his opinion. See Dkt. 915, n.9. The fundamental
`error in Mr. Meyer’s use of that agreement to value the ’374 patent is discussed in Reynolds’s
`motion to exclude Mr. Meyer’s testimony. See Dkt. 892. However, Dr. Sullivan properly relied
`on technical expert analysis to conclude that the Fontem–RJRV agreement was technically
`comparable to the ’374 patent. See Ex. 1, ¶ 276. And there is no real dispute that the Fontem–
` Mr. Meyer
`RJRV agreement is much more economically relevant than the
`uses. Because Dr. Sullivan’s use of the Fontem–RJRV agreement to derive a royalty rate for the
`’374 patent is not substantively challenged in PM/Altria’s motion (and is only referenced in a
`footnote), Reynolds does not address this issue in more detail here. See Silicon Knights, Inc. v.
`Epic Games, Inc., 551 F. App’x 646, 650 (4th Cir. 2014) (“[A]n issue raised only in a footnote and
`addressed with only declarative sentences is waived.”).
`
`
`
`-8-
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`

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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 14 of 35 PageID# 26840
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`of calculating the effective royalty for that agreement by looking to the present value (as of
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`
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`September 2018) of covered VUSE sales. Instead, PM/Altria challenges just a part of one input
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`to Dr. Sullivan’s equation—the inclusion of Reynolds’s 2020 forecast of VUSE sales from 2021-
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`2025 as part of the undisputed covered royalty base. PM/Altria’s challenge is misguided.
`
`A.
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`Dr. Sullivan Appropriately Uses The Most Comparable Fontem–RJRV
`Agreement.
`
`As an initial matter, PM/Altria’s motion does not challenge Dr. Sullivan’s use of the
`
`Fontem–RJRV agreement as a comparable license or his methodology in converting the
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`
`
` under that agreement into an effective royalty rate. Mr. Meyer agrees the Fontem–RJRV
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`agreement is both economically and technically comparable to the hypothetical license between
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`PM/Altria and RJRV here, because it covers the same VUSE products and involves the same
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`licensee. See Dkt. 892-1, ¶¶ 216, 267.10
`
`It was also proper for Dr. Sullivan to convert the
`
` by RJRV into an effective
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`running royalty rate, under both the caselaw and accepted practice in the field of economics. See,
`
`e.g., Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10, 30 & n.13 (Fed. Cir. 2012) (citing
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`with approval expert converting lump-sum payment into an effective royalty rate by dividing the
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`license fee by the revenue generated by infringing sales); see also Sidak, G. (2016), “Converting
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`Royalty Payment Structures for Patent Licenses,” The Criterion Journal on Innovation, 1:901–914,
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`at 906 (“Dividing the lump-sum royalty payment by the present value of the licensee’s projected
`
`sales revenue . . . , one can calculate the derived royalty rate of a lump-sum royalty payment.”).
`
`
`10See also Dkt. 892-1, ¶ 193 (concluding the Fontem–RJRV agreement is “highly instructive when
`determining a reasonable royalty for a license to the ’545, ’911, and ’265 Patents.”); see also id.,
`¶¶ 236, 239, 242 (opining that the Fontem–RJRV agreement provides “an accurate and reliable
`indicator of the value of the technology claimed in the [’545, ’911, and ’265 patents]”).
`
`
`
`-9-
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`

`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 15 of 35 PageID# 26841
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`In this case, Dr. Sullivan provides a thorough explanation of his conversion of the Fontem–
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` to an effective running royalty, using data collected and prepared in the
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`
`
`
`
`RJRV
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`ordinary course of Reynolds’s business, making the cases PM/Altria cites inapposite.11
`
`Dr. Sullivan Properly Relied On Reynolds’s 2020 Forecasted Sales.
`
`B.
`Unable to challenge Dr. Sullivan’s methodology, PM/Altria challenges his use of the 2020
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`forecast of VUSE sales covered under the Fontem–RJRV agreement. But PM/Altria’s factual
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`critique is both wrong and insufficient to warrant exclusion of his opinions. See Commonwealth
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`Sci. & Indus. Rsch. Organisation v. Mediatek Inc., No. 6:12-CV-578, 2015 WL 12806515, at *3–
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`4 (E.D. Tex. June 29, 2015) (concluding that issues with effective royalty calculation were “better
`
`addressed by cross examination rather than exclusion”).
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`1. Dr. Sullivan calculated the effective royalty rate using actual sales and an actual
`
`Reynolds 2020 forecast. Dr. Sullivan determined the effective royalty rate paid by Reynolds to
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`Fontem using the best data as of the time he rendered his opinion in March 2021—Reynolds’s
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`actual sales through 2020 and the 2020 sales forecast (forecasting sales from 2021 through 2025).
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`PM/Altria’s complaint is centered around Dr. Sullivan’s use of the 2020 forecast as
`
`opposed to the 2018 forecast that Mr. Meyer used. PM/Altria incorrectly asserts the 2020 forecast
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`was “litigation-inspired” because it was created after this case was filed. Ipso facto, the 2020
`
`
`11 For example, in Baltimore Aircoil Co. v. SPX Cooling Techs. Inc., the expert did not have any
`of the licensee’s sales data to calculate an effective royalty. Instead, he used a different company’s
`sales data without explanation. No. CCB-13-2053, 2016 WL 4426681, at *25 (D. Md. Aug. 22,
`2016), aff’d, 721 F. App’x 983 (Fed. Cir. 2018); see also Pavo Sols. LLC v. Kingston Tech. Co.,
`No. 8:14-cv-01352-JLS-KES, 2019 WL 8138163, at *4-5 (C.D. Cal. Nov. 20, 2019) (excluding
`opinion where expert used the number of a party’s stores as a “stand-in” for actual sales data, but
`explaining that lump sum agreements are nevertheless properly admissible as evidence of a
`running royalty where “experts properly explain their calculations and why they believe that the
`lump-sum agreements apply to the facts of the case.”).
`
`
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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 16 of 35 PageID# 26842
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`forecast was indeed created after this case was filed in April 2020, but it is one of the
`
`
`
`
`
` Excerpts of Apr. 16, 2021
`
`Deposition of John Scott Peddycord (attached as Exhibit 2), 29:25-30:20, 35:13-36:10, 63:24-64:1,
`
`134:15-135:14. Reynolds relies on those
`
` forecasts in making business decisions.
`
`See id., 72:10-16. Thus, while the 2020 forecast was pulled from the Reynolds system and
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`produced as part of this litigation—as was, for instance, all of Reynolds’s financial data in the
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`record—the data was not created for purposes of litigation. See id., 133:18-134:3. Accordingly,
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`there is no difference in the provenance of the 2018 forecast PM/Altria prefers and the 2020
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`forecast Dr. Sullivan used.12
`
`Further, the 2020 forecast is actually a more accurate indicator of Reynolds’s expected
`
`actual sales as of the time of the experts’ reports (including because it is based on an additional
`
`two years of actual sales history). PM/Altria selectively claims that only the September 2018
`
`forecast (Dkt. 915, 1-2) is considered the “best [] forecast data,” when in reality, Reynolds’s
`
`witness explained the
`
`
`
` See Ex. 2, 75:24-76:9 (discussing a forecast prepared in June 2018); see
`
`also id., 77:6-12. PM/Altria also misleadingly emphasizes Mr. Peddycord’s testimony that
`
`
`
` to criticize Dr. Sullivan’s use of the 2020 forecast. Dkt.
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`915, 15. But this criticism is
`
` because
`
` as
`
`explained by Mr. Peddycord. Ex.2, 90:17-21, 90:25-91:9. Accordingly, the 2020 forecast
`
`
`12 The ePlus case, cited by PM/Altria, actually shows why Dr. Sullivan’s approach is proper. In
`that case, the expert relied on outdated sales figures and projections from another litigation, as
`opposed to what Dr. Sullivan relies on—actual sales and actual projections obtained directly from
`Reynolds. ePlus, Inc. v. Lawson Software, Inc., 764 F. Supp. 2d 807, 810–11, 814 (E.D. Va. 2011),
`aff’d, 700 F.3d 509 (Fed. Cir. 2012).
`
`
`
`-11-
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`Case 1:20-cv-00393-LO-TCB Document 962 Filed 02/11/22 Page 17 of 35 PageID# 26843
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`PM/Altria impugns is just as reliable as the 2018 forecast its expert prefers. And, it is even more
`
`
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`accurate because it was the most recent forecast data available at the time the experts prepared
`
`their reports, and therefore provided a more accurate picture of the effective royalty rate Reynolds
`
`actually paid for the Fontem license.
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`PM/Altria’s real complaint is that it contends the 2020 forecast is too high. That, of course,
`
`provides no basis for excluding Dr. Sullivan’s opinion. And as PM/Altria elsewhe