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TC Technology LLC v. Sprint Corporation

United States District Court, D. Delaware

June 18, 2019

TC TECHNOLOGY LLC, Plaintiff,
v.
SPRINT CORPORATION and SPRINT SPECTRUM L.P., Defendants.

          Kelly E. Farnan, Katharine L. Mowery, RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; Lawrence J. Gotts, Saswat Misra, LATHAM & WATKINS LLP, Washington, D.C.; Kevin L. Mallen, LATHAM & WATKTNS LLP, New York, NY; Gabriel S. Gross, LATHAM & WATKINS LLP, Menlo Park, CA; Stephanie N. Solomon (argued), QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, NY; David S. Benyacar, Daniel L. Reisner, ARNOLD & PORTER KAYE SCHOLER LLP, New York, NY. Attorneys for Plaintiff.

          Shanti M. Katona, Christina M. Belitz, POLSINELLI PC, Wilmington, DE; Robert Reckers, David Morehan, SHOOK, HARDY & BACON LLP, Houston, TX; Christine A. Guastello, Jordan T. Bergsten (argued), Colman D. McCarthy, Thomas M. Patton, SHOOK, HARDY & BACON LLP, Kansas City, MO. Attorneys for Defendants.

          MEMORANDUM OPINION

          ANDREWS, U.S. DISTRICT JUDGE.

         Presently before the Court are Defendants' motion to exclude expert testimony of Mr. Brett Reed and Mr. Regis Bates (D.I. 260), and Plaintiffs motion to exclude expert testimony of Dr. Alan Cox (D.I. 263). I have reviewed the parties' briefing and related papers. (D.I. 261, 264, 286, 291, 305, 308, 334, 336). I heard oral argument on March 7, 2019.[1]

         I. BACKGROUND

         Plaintiff TC Technology LLC ("TC Tech") filed this action on March 10, 2016, alleging that Defendants Sprint Corporation and Sprint Spectrum, L.P. (collectively, "Sprint") infringed U.S. Patent No. 5, 815, 488 ("the '488 patent") with certain wireless services on its LTE network. (D.I. 1).

         TC Tech was established by cable companies Time Warner Cable LLC ("TWC") and Cox Communications, Inc. ("Cox"). (D.I. 317 ¶ 6). In December 2011, Sprint sued TWC and Cox, among others, for infringement of its Voice over Internet Protocol ("VoIP") patents. (D.I. 162 at 2; D.I. 172 at 2). In March 2012, TWC and Cox formed TC Tech. (D.I. 317 ¶ 6). TC Tech then purchased the '488 patent from CableLabs, a consortium of U.S. cable companies. (Id. ¶¶ 5-6). In March 2017, Sprint won a jury verdict against TWC. Sprint Commc'ns Co. L.P. v. Time Warner Cable, Inc., 2017 WL 978107, at *1 (D. Kan. Mar. 14, 2017). Sprint later settled its suit against Cox and Cox sold its 50% ownership interest in TC Tech to TWC. (D.I. 265, Ex. D ¶ 103 & n.216).

         II. LEGAL STANDARD

         Federal Rule of Evidence 702 sets out the requirements for expert witness testimony:

A witness who is qualified as an expert by. knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert's scientific, technical, or other 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 of the case.

Fed. R. Evid. 702. The trial court has "the task of ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand." Daubert v. Merrell Dow Pharms. Inc., 509 U.S. 579, 594, 597 (1993).

         The Third Circuit has explained:

Rule 702 embodies a trilogy of restrictions on expert testimony: qualification, reliability and fit. Qualification refers to the requirement that the witness possess specialized expertise. We have interpreted this requirement liberally, holding that "a broad range of knowledge, skills, and training qualify an expert." Secondly, the testimony must be reliable; it "must be based on the 'methods and procedures of science' rather than on 'subjective belief or unsupported speculation'; the expert must have 'good grounds' for his o[r] her belief. In sum, Daubert holds that an inquiry into the reliability of scientific evidence under Rule 702 requires a determination as to its scientific validity." Finally, Rule 702 requires that the expert testimony must fit the issues in the case. In other words, the expert's testimony must be relevant for the purposes of the case and must assist the trier of fact. The Supreme Court explained in Daubert that "Rule 702's 'helpfulness' standard requires a valid scientific connection to the pertinent inquiry as a precondition to admissibility."
By means of a so-called "Daubert hearing," the district court acts as a gatekeeper, preventing opinion testimony that does not meet the requirements of qualification, reliability and fit from reaching the jury.

Schneider ex rel. Estate of Schneider v. Fried, 320 F.3d 396, 404-05 (3d Cir. 2003) (footnote and internal citations omitted).[1] At base, "the question of whether the expert is credible or the opinion is correct is generally a question for the fact finder, not the court." Summit 6, LLC v. Samsung Elecs. Co., Ltd., 802 F.3d 1283, 1296 (Fed. Cir. 2015). Indeed, "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Daubert, 509 U.S. at 596.

         III. MR. REED'S DAMAGES TESTIMONY

         Mr. Reed, TC Tech's damages expert, takes three separate approaches to estimating a reasonable royalty. The first approach ("Approach One") is based on the cost savings to Sprint of using LTE versus 3G. The second approach ("Approach Two") is based on Sprint's demands in its prior litigation against TWC ("Sprint v. TWC). The third approach ("Approach Three") is based on "announced" industry royalty rates. (D.I. 262, Ex. A). Sprint moves to exclude Mr. Reed's testimony under each of the three approaches. In addition, Sprint argues that none of Mr. Reed's estimated royalties are admissible in view of the '488 patent's acquisition price of $300, 000. (D.I. 260, 261). For the following reasons, Sprint's motion is GRANTED with respect to Approaches Two and Three. The rest of the motion is DENIED.

         A. Approach One-Cost Savings

         For the following reasons, Sprint's motion is DENIED with respect to Approach One.

         Approach One "addresses a reasonable royalty based on how much money Sprint would have lost if it was not able to launch LTE until the ['488] patent expired in September 2015, and how the parties would have agreed to split the anticipated gains." (D.I. 262, Ex. A at 96). In other words, Approach One "is a comparative analysis of Sprint's costs and revenues in a hypothetical world in which Sprint did not have the ability to do LTE (and so offered primarily a 3G service) to the real world events in which Sprint offered LTE beginning in July 2012." (Id., Ex. I at 119-20). Mr. Reed uses that framework to obtain an initial cost savings range from $7.99 billion to $8.46 billion. (Id., Ex. A at 114). He then excludes two-thirds as attributable to "downlink" functionality on the assumption that the '488 patent only relates to "uplink" functionality. (Id. at 115-20). He excludes 22% of the remaining one-third as being attributable to the unpatented aspects of uplink. (Id. at 120-21). Lastly, he allocates 64% to 74% of what remains to Sprint, based on how the parties to the hypothetical negotiation would have split the cost savings. (Id. at 121-32). The net result is a reasonable royalty range of $540 million[2] to $792 million.[3] (Id. at 130-32).

         Sprint argues that Approach One is inadmissible for failing to apportion damages. Where the accused service has patented and unpatented features, "[t]he essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end [service]." Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). In Sprint's view, Mr. Reed fails to apportion in two ways. First, Mr. Reed fails to exclude the value of LTE as an industry-wide standard. (D.I. 261 at 7-9). Second, Mr. Reed fails to exclude the value of LTE attributable to unpatented technologies. (Id. at 9-14).

         1. Value of LTE as an Industry-Wide Standard

         Sprint asserts, "By following the industry-wide trend of adopting LTE, Sprint benefited from a global LTE ecosystem. But any value to Sprint of adopting the de facto industry-wide standard must be separated from the value of any technological contribution of the '488 patent to the standard." (D.I. 261 at 8 (internal citation and emphasis omitted)). Sprint thus argues that Mr. Reed fails to apportion because he never considers the value contributed by the patented technology to the LTE standard. Rather, Mr. Reed begins his analysis by calculating the total cost savings to Sprint of implementing LTE. (Id. at 8-9).

         TC Tech argues that apportionment is inherently included in Mr. Reed's cost savings analysis. (D.I. 291 at 7-8). TC Tech relies on Prism Techologies LLC v. Sprint Spectrum L.P., 849 F.3d 1360 (Fed. Cir. 2017). In Prism, the Federal Circuit found the district court properly admitted damages evidence based on Sprint's cost savings. Specifically, the costs Sprint "would have incurred if it had chosen not to infringe." Prism, 849 F.3d at 1375. The Federal Circuit rejected Sprint's argument that "Prism's approach was insufficiently tied to the 'footprint' of the invention." Id. at 1375-76.

Although a patentee must carefully tie proof of damages to the claimed invention's footprint in the market place, that requirement for valuing the patented technology can be met if the patentee adequately shows that the defendant's infringement allowed it to avoid taking a different, more costly course of action. A price for a hypothetical license may appropriately be based on consideration of the costs and availability of non-infringing alternatives and the potential infringer's cost-savings.

Id. at 1376 (internal citations and quotation marks omitted); see also Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1240 (Fed. Cir. 2011) ("Reliance upon estimated cost savings from use of the infringing product is a well settled method of determining a reasonable royalty." (quoting Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1090-81 (Fed. Cir. 1983)). Notably, argument at trial was limited to one specific noninfringing alternative, which was the basis of Prism's cost savings analysis. Id.

         Prism makes clear that damages may be based on cost savings from a defendant's infringement without an independent analysis of the claimed invention's "footprint in the market place." See 849 F.3d at 1375-76. As such, I see no problem with Mr. Reed's reliance on cost savings generally. His analysis, however, also assumes that without infringement, "Sprint did not have the ability to do LTE (and so offered primarily a 3G service)." (D.I. 262, Ex. I at 119-20). Thus, the key issue is whether Mr. Reed properly concludes that Sprint's infringement "allowed it to avoid taking [the] different, more costly course of action" of offering 3G rather than LTE. See Prism, 849 at F.3d at 1376. In other words, does Mr. Reed have a reliable basis for finding that Sprint had no noninfringing alternative to implement LTE?

         Mr. Reed relies on testimony from TC Tech's technical expert, Mr. Bates. Mr. Reed states, "Based on my conversations with ... Mr. Bates, ... I understand that the '488 patent was a critical technology for achieving uplink with the LTE network during the damages period, and uplink technology is a necessary element of Sprint's entire LTE network." (D.I. 262, Ex. A at 14). In his expert report, Mr. Bates explains why he believes the '488 patent claims the uplink functionality of Sprint's LTE network, and why he found there was no noninfringing alternative for that functionality. (D.I. 262, Ex. P ¶¶ 205-208). He also provides substantial testimony rebutting the two noninfringing alternatives proposed by Sprint's experts. (Id. ¶¶ 209-274). Thus, I believe Mr. Bates provides a reliable basis for Mr. Reed to assume that Sprint had no noninfringing alternative to implement LTE at the time of the hypothetical negotiation. Therefore, I find Mr. Reed's cost savings analysis is not excludable for failure to apportion . damages.

         2. Value of LTE Attributable to Unpatented Technologies

         Sprint makes two arguments related to Mr. Reed's alleged failure to apportion out the value of unpatented technologies. First, Sprint argues that Mr. Reed improperly calculates the cost savings from implementing the entire LTE standard as opposed to its patented features. (D.I. 2671 at 9-10). Second, Sprint argues that Mr. Reed improperly calculates the portion of uplink value attributable to the '488 patent. (Id. at 11-14).

         Sprint's first argument is unavailing. It is simply a different way of making the same argument as in the preceding section. By using the cost savings analysis to calculate the incremental value of LTE over 3G, Mr. Reed presumably excludes the value of features common to both. (See D.I. 291 at 8). Sprint argues that Mr. Reed fails to identify and quantify a "particular technological contribution of the '488 patent" to the LTE standard. But, as discussed, an expert may apply a cost savings analysis without independently tying "proof of damages to the claimed invention's footprint in the market place." Prism, 849 F.3d at 1376.

         Sprint's second argument addresses Mr. Reed's efforts to further apportion the cost savings to the value of the '488 patent. Mr. Reed "first apportion[s] the entire cost savings to a portion of LTE reasonably associated with uplink capabilities, and then apportion[s] [the remainder] to the specific contribution of the '488 Patent within the upload functionality." (D.I. 262, Ex. A at 115). In the first step, Mr. Reed divides the total cost savings between the value attributable to uplink and downlink, finding 33% attributable to uplink. (Id. at 118-20). In the second step, Mr. Reed divides the remaining 33% between the value attributable to patented features and "certain aspects of uplink that do not involve the transfer of data," finding 78% attributable to the '488 patent's claimed invention. (Id. at 121).

         Sprint first argues that Mr. Reed fails to apportion for unpatented LTE components such as "routers, signaling gateways, and things that happen in an IP network," because he assumes uplink and downlink are the only two features of an LTE network. (D.I. 261 at 10-11). Again, Mr. Reed excludes the value of such features by determining the incremental cost savings between LTE and 3G. (See D.I. 291 at 8 (citing D.I. 262, Ex. I at 119-20 ("In such an analysis, general features of a data or cell phone service that are common to both 3G and 4G [LTE]... would all already be accounted for since I am examining only the incremental benefit of offering an LTE network."))).

         Sprint next argues that Mr. Reed relies on insufficient evidence to determine the portion of uplink associated with the patented technology. (D.I. 261 at 11). Mr. Reed bases his apportionment on Mr. Bates' technical expert opinion:

I understand that there is an important aspect of uplink capability associated with LTE overhead, which should also be viewed as independent of the capabilities associated with the '488 patent. I understand from my discussion with Mr. Bates that LTE overhead refers to certain aspects of uplink that do not involve the transfer of data, such as aspects of the physical uplink control channel ("PUCCH") which conveys control information such as a channel quality indication and uplink scheduling requests. Based on technical input from Mr. Bates, I understand that it is appropriate to further allocate approximately 21% to 23% of LTE uplink capability to LTE overhead, leaving 78% of uplink LTE apportioned to technology associated with the '488 patent.

(D.I. 262, Ex. A at 120). In his reply report, Mr. Reed clarifies that he relies on specific portions of Mr. Bates' infringement report. (Id., Ex. I at 126-27 & n.314 (citing id., Ex. I ¶¶ 352-354)). Sprint argues that Mr. Bates provides insufficient support for Mr. Reed's opinion, because he did not conduct "any analysis to quantify how much of LTE's improved uplink capability resulted from the '488 patent's claimed invention." (D.I. 261 at 11 (citing D.I. 262, Ex. J at 226:6-10, 226:14-19, 228:12-16)).

         I do not find Sprint's argument persuasive. Sprint cites to Mr. Bates' deposition testimony, which merely shows that he did not measure certain particular improvements identified by Sprint. (E.g., D.I. 262, Ex. J at 226:14-19 ("Q: And you didn't quantify to what extent the methods of the '488 [patent] might improve the spectral efficiency of an LTE network versus other types of networks.... [A:] No.")). I believe Mr. Bates provides sufficient explanation in his infringement report and Mr. Reed properly relies on Mr. Bates' opinions to apportion the uplink value attributable to the '488 patent. Mr. Bates' alleged failure to conduct specific measurements goes towards the weight of Mr. Reed's testimony, which can be addressed on cross-examination.

         Sprint's last argument returns to Mr. Reed's apportionment between uplink and downlink. Mr. Reed relies in part on an article in PCMag magazine. The article ranked network providers such that the overall rating was weighted by 40% download speed, 20% upload speed, and 40% other factors related to network reliability. (D.I. 262, Ex. A at 118-19, Tab M16). Sprint argues that Mr. Reed's reliance on PCMag is unreliable because (1) there is no evidence that PCMag measured the value of "upload [uplink] data services" as opposed to uplink speed, (2) there is no evidence that PCMag relied on "sound economic or technical analysis rather than the arbitrary decision of a magazine author or editor," and (3) Mr. Reed ignored the 40% weighted to other factors. (D.I. 261 at 12-14).

         Sprint's first argument is unpersuasive. This step of Mr. Reed's analysis apportions for the value of uplink generally. Mr. Reed's second step then apportions for the value of uplink "data services." Further, TC Tech argues, "The whole objective of the PCMag analysis is to provide an overall ranking to consumers of the best wireless data networks, based on a weighting of the features they care most about." (D.I. 291 at 13 & n.13). The focus on speed reflected that "speed [was] the key feature that consumers demanded in a wireless network in the applicable timeframe" and a "key benefit" of the patented technology. (Id.). Mr. Reed appears to rely on the speed tests to estimate how consumers valued uplink versus downlink functionality. (D.I. 262, Ex. A at 116-19). I think that is a permissible use of the PCMag article.

         Sprint's second argument is directly contrary to Mr. Reed's testimony. Mr. Reed explains why he chose to rely on the PCMag tests, as well the tests' underlying methodology:

First, the PCMag tests are rigorous. The PCMag testers travel to 30 major cities along U.S. and Interstate highways, stopping at smaller cities along the way. In doing so, they take more than 80, 000-90, 000 individual tests of the speed and reliability of mobile networks. Second, PCMag is a neutral, third party industry observer, which has conducted tests over many years and [publicly] disclosed its weighting methodology for its rankings of cellular carriers. Importantly, Sprint monitored the PCMag tests, considered PCMag's findings, and responded to PCMag's results.

(D.I. 262, Ex. I at 123-24). Mr. Reed sufficiently justifies his reliance on PCMag. There is no factual basis for Sprint's suggestion that PCMag relied on "the arbitrary decision of a magazine author or editor."

         Sprint's third argument also fails. As discussed, Mr. Reed already apportioned out general network features in his ...


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