throbber
Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 1 of 30
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`IN THE UNITED STATES DISTRICT COURT
`MIDDLE DISTRICT OF NORTH CAROLINA
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`)
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`OPTOLUM, INC., )
`
` Greensboro, North Carolina )
` Plaintiff, October 27, 2021
` )
` vs. )
`
`)
`CREE, INC., )
`
` Case No. 1:17CV687 )
` Defendant. )
`_________________________________ )
`
`
`
`TRANSCRIPT OF TRIAL DAY 3
`BEFORE THE HONORABLE WILLIAM L. OSTEEN, JR.
`UNITED STATES DISTRICT JUDGE
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`
`APPEARANCES:
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`For the Plaintiff: ROBERT BROOKS
`LEAH R. MCCOY
`MCCARTER & ENGLISH, LLP
`265 FRANKLIN STREET
`BOSTON, MA 02110
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`
`
`JACOB S. WHARTON
`WOMBLE BOND DISKINSON (US) LLP
`1 W. 4th STREET
`WINSTON-SALEM, NC 27101
`
`
`For the Defendant: BLANEY HARPER
`JONES DAY
`51 LOUISIANA AVE., N.W.
`WASHINGTON, DC 20001
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`
`
`PETER D. SIDDOWAY
`SAGE PATENT GROUP
`4242 SIX FORKS ROAD, SUITE 1550
`RALEIGH, NC 27609
`
`Joseph B. Armstrong, FCRR
`Court Reporter:
` 324 W. Market, Room 101
`Greensboro, NC 27401
`
`
`
`Proceedings reported by stenotype reporter.
`Transcript produced by Computer-Aided Transcription.
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`October 27, 2021 - Trial Day 3
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 2 of 30
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`P R O C E E D I N G S
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`(At 10:10 a.m., proceedings commenced.)
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`THE COURT: All right. Good morning, everyone.
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`We will take up whatever issues are appropriate,
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`particularly outside the presence of the jury this morning, and
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`see what we can get done.
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`Mr. Harper, you mentioned Scally remaining issues, so
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`if you will just kind of, without argument initially -- just
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`tell me what we're going to be addressing today, and then we'll
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`get to it.
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`MR. HARPER: Sure. There are five sort of discrete
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`pieces of evidence that Cree believes are inappropriate.
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`THE COURT: All right.
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`MR. HARPER: The first one is the starting point of
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`$10 million that was brought up in the Scally Daubert motion.
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`The second one is the Scally sensitivity analysis, which was
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`also brought up in the Daubert motion. And then there are
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`three sources of evidence that are -- that were brought up in
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`Cree's MIL No. 2 that the Court hasn't dealt with, and one of
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`them is the Degnan & Horton Survey; the other one is the
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`Licensing Economics Review survey; and the third one is the
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`royalty source agreements that Mr. Scally relied on.
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`address.
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`THE COURT: Okay.
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`MR. HARPER: Those are the ones I had intended to
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`October 27, 2021 - Trial Day 3
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 3 of 30
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`THE COURT: All right. Anything the Plaintiffs are
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`going to want to address today?
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`MR. WHARTON: No, Your Honor.
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`THE COURT: Okay. Give me just a moment.
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`All right. All the issues have been, I think, pretty
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`thoroughly briefed; and although I've entered only an order
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`relating to the testimony, I agree these specific items were
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`not -- at least not addressed specifically in that order, so
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`they're still open.
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`And so if there's anything you want to add to what's
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`been provided, I'll hear from you at this time.
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`MR. HARPER: Well, I think there's just a couple of
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`things to add, and I'll be short.
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`First of all, with regard to the starting point, we
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`contested that both in our Daubert -- in the Daubert motion on
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`Scally, and what I would say about it is that, in addition to
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`the fact that it was an unconsummated transaction, that is, the
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`license, the purported $10 million licensing point was never an
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`actual agreement.
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`We heard yesterday from Mr. Dry that that number --
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`there was no basis for that number in fact. It was a complete
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`guess. He said he didn't have a document to support it. He
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`didn't have an analysis to support it.
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`THE COURT: Kind of a roundtable discussion with the
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`other partners -- kind of a roundtable discussion with the
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`October 27, 2021 - Trial Day 3
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 4 of 30
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`other partners is basically what he testified to, but he
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`couldn't remember the specifics.
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`MR. HARPER: He couldn't be more specific. And I
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`think that given the fact that what we're talking about is a
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`license agreement that never occurred, never actually happened,
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`and we don't have a basis for it, it's particularly unreliable
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`and shouldn't be admitted.
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`Beyond that, you know, Your Honor, I just want to
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`point out that the reasonable royalty analysis in this case has
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`a starting point of 2013, and the Degnan & Horton Survey is
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`1997. I think if you look at the case law that we cite in the
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`brief, that's one of the factors that makes that evidence
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`particularly unreliable for the facts of this case, in addition
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`to the fact that Mr. Scally doesn't have the licenses, doesn't
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`know if there -- has no basis to compare the licenses to the
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`facts of this case. So I think that that makes it more
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`unreliable than it otherwise would be.
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`Other than that, I think the rest of the points are
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`addressed pretty well in the briefing, as you indicated.
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`THE COURT: All right.
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`MR. WHARTON: Good morning, Your Honor.
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`THE COURT: Good morning.
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`MR. WHARTON: With respect to the 10 million, OptoLum
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`submits that Cree opened the door on that by discussing it with
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`Mr. Dry in cross. If my memory serves me correct, Mr. Harper
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 5 of 30
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`actually had to offer up the $10 million figure to Mr. Dry to
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`get him to that point. So the jury has already heard it. And
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`to the extent Mr. Scally uses it as a data point, I can safely
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`predict that it's going to be a quick data point, if any, and
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`he'll move on.
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`As Your Honor may know from reviewing Mr. Scally's
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`report, the bulk of it lies elsewhere, especially with respect
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`to Factors 11 and 12, 6, use of the invention, et cetera.
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`So at the end of the day, I don't think this is a
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`major issue, but because Cree has already brought it into the
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`case, I think Mr. Scally has a right to at least note it.
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`On the Degnan & Horton and the other survey evidence,
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`that really is a con -- that really sets the context is what
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`Mr. Scally is using those for. If Cree believes that it's old
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`or outdated, they can certainly cross-examine Mr. Scally, ask
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`him why he didn't use something more relevant -- or more
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`recent, along those lines.
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`But what Mr. Scally is doing there is looking to some
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`general publications that those in his industry rely upon so
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`that they know that when they do land on a 5 percent, let's
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`say, royalty rate, they know that they're in the right context.
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`So he's using those as bookend-type references, and that's how
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`the testimony would be presented is by saying, Did you rely on
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`industry guidelines? Did you rely on publications that at
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`least set a high and a low so that you knew that your 5 percent
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 6 of 30
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`was within those bounds?
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`THE COURT: Anything in response?
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`MR. HARPER: Just two things.
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`If the starting point is a non-issue, then we should
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`take it out. If what we're hearing is that these are
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`bookends -- that we're using these licenses as bookends for the
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`high and the low, well, that's only appropriate if they're
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`comparable to the situation at hand, and there's no basis for
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`saying that. There's no basis that you can compare that. And
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`so I think that before you get to the bookend part that you
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`need to have -- it has to be comparable to begin with.
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`And the last point I'll make is the bookend part is
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`particularly appropriate because they want to use the
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`sensitivity analysis to take it from, you know, 8 percent to
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`20 percent. What they're trying to do here -- that's the
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`sensitivity analysis. What they're trying to do here is raise
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`the bar for the jury, raise -- and I think we cite this in our
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`brief -- raise the damages horizon, and I think that's
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`particularly inappropriate when there's no basis for doing so.
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`And so that's my problem with the bookend approach.
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`THE COURT: All right.
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`MR. WHARTON: Your Honor, if I may be heard just
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`briefly on that?
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`THE COURT: You may.
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`MR. WHARTON: Just quickly. The Fed Circuit law is
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 7 of 30
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`clear that the expert's opinion as to the reasonable royalty
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`rate is the floor, not the ceiling. And there are some Fed
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`Circuit cases that even support experts giving a range, and
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`there are some cases that also have a jury coming in with an
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`amount that was above even the top suggested rate from the
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`expert. And as long as that's supported, the Fed Circuit will
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`allow the jury to go there.
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`Now, I'm not suggesting that we need to push some
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`false number. I think the sensitivity analysis done by
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`Mr. Scally still fits well under Factor 15, which talks about,
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`you know, would the royalty rate have been reasonable -- would
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`a prudent licensee have agreed to that? Well, that's how
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`Mr. Scally figures out whether it's prudent or not is to test
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`it as to a higher royalty. Would they still have had the
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`margins that they needed?
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`THE COURT: So that's -- I think with respect to that
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`20 percent -- let's see. "Shown in the figure below, if Cree
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`paid a 20 percent royalty rate, the median gross profit margin
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`of Cree remains constant at 30 percent. And if I narrow the
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`profit sensitivity analysis to only the consumer lighting
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`segment, and if Cree paid a 20 percent rate on the accused
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`sales, the median gross profit margin only drops by 2 percent."
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`So I agree with you that if the expert -- well, I say
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`I agree with you. I don't know what position Mr. Harper would
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`take. But if it goes to the jury on the question of
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`October 27, 2021 - Trial Day 3
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 8 of 30
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`5 percent -- that's what your expert says is a reasonable
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`royalty rate on the evidence that's been presented -- and the
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`jury comes back and awards 20 percent, while I think it's
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`entirely within the jury's prerogative to weigh the expert
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`testimony and accept or reject that testimony just like any
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`other witness, what's the basis for finding that the 20 percent
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`is supported by the evidence in the case? Because the
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`20 percent that he used is just to say under any circumstances
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`a royalty rate that was as high as 20 percent wouldn't affect
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`Cree's bottom-line profit margin.
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`And so that's my concern about the 20 percent, a
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`little bit like the thing we talked about during the hearings
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`specifically, and, that is, there's -- it carries a little
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`suggestion to it that this is what we think a hypothetical
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`negotiation would ultimately result in, but, on the other hand,
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`you know, if you want to award 20 percent, you can. I'm not
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`sure what evidence supports that 20 percent award if they were
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`to do that.
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`MR. WHARTON: I understand your concern, Your Honor.
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`I believe the testimony from Mr. Scally -- I don't believe, I
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`know the testimony from Mr. Scally will be that he will be
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`using that only for testing the reasonableness. So he's not
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`going to suggest a 20 percent. He's going to suggest at least
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`a 5 percent.
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`THE COURT: Right, and I understand his analysis. It
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 9 of 30
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`makes -- logically, it makes perfect sense. You know, this is
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`why I think it's reasonable. We could have gone to 20, and 20
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`still doesn't have much effect on the bottom line; so,
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`therefore, 5 percent doesn't -- affects the bottom line even
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`less, and, therefore, my 5 percent calculation is reasonable.
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`All fine and good. At the end of the day, if the jury found
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`infringement and awarded 5 percent, we know what the jury did.
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`But if the -- at the end of the day, if the jury
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`awards 6 percent, then maybe you can say, well, they thought he
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`didn't weigh the factors properly. But if they come back and
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`award 20 percent, now we've got a problem because I don't know
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`what evidence would justify 20 percent even if the jury is free
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`to go forward, except, it seems to me, that that was an
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`indirect punishment of Cree. We're taking away all your
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`profits up to this -- what did he say, 3 percent effect on --
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`MR. WHARTON: Correct.
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`THE COURT: -- total and 2 percent on the lighting
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`division, whatever --
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`MR. WHARTON: It was 3 percent total company sales,
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`1 percent of gross margin.
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`THE COURT: Yeah. And then I've got additional
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`issues to worry about, I guess you might say.
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`MR. WHARTON: I understand, Your Honor. And I think
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`that can be solved -- I don't want to give Mr. Harper a game
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`plan here, but, you know, he could -- Mr. Scally could be
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 10 of 30
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`cross-examined as to, you know -- as to where that 20 comes
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`from. Why did you use that number? There's no evidence for a
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`reasonable royalty of 20 percent. That's not what you're
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`saying.
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`THE COURT: Yep.
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`MR. WHARTON: My concern is -- Mr. Scally, and you'll
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`see this when he's on the stand, wants to have his opinions
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`grounded in something. You know, that's why he went to those
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`trademark classes is --
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`THE COURT: I get the reasoning on the sensitivity
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`analysis, because if, let's say, hypothetically he would run
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`5 percent and does the sensitivity analysis, and, in turn, it
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`turns out Cree takes a loss, then he's going to have to say,
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`you know what? This is too high because the market sensitivity
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`analysis suggests they would have lost money on this paying
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`this 5 percent.
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`So I think the sensitivity analysis itself makes
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`perfect sense. It's the 20 percent -- let me ask -- let me
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`pose it this way. What is added to the evidence if he does the
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`sensitivity analysis at 5 percent instead of 20 percent? What
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`does 20 percent add to the probative force of his sensitivity
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`analysis?
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`MR. WHARTON: So the 5 then becomes more reasonable.
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`I mean, at the end of the day, what he's trying to deliver is a
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`reasonable royalty. So if he just says 5 is reasonable, I
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 11 of 30
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`don't know that he could back it up without using the
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`sensitivity analysis.
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`THE COURT: But why didn't he use 5 percent in the
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`analysis itself? That's what I'm trying to get to.
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`MR. WHARTON: Well, I think he does. I mean, in the
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`sense that -- now, do we have the data in here? I would have
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`to double-check, Your Honor.
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`THE COURT: See, if he runs -- this is the way I
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`understand it, and maybe I'm misunderstanding what I'm reading
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`here. But if he runs the sensitivity analysis at 20 percent,
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`basically what he's saying is this was the range of stuff I
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`could have considered. Here's the highest number. I run it
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`against their numbers. That's reasonable. Therefore,
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`5 percent is eminently reasonable.
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`MR. WHARTON: Correct.
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`THE COURT: Isn't that the way it works?
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`MR. WHARTON: Correct.
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`THE COURT: So why if -- why not run the analysis
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`just at the 5 percent he calculated, because the -- so -- I'll
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`put it to you this way. You run it at 20 percent, and from
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`that you conclude 5 percent is eminently reasonable just on the
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`basis of what 20 percent did. If you run it at 5 percent and
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`you come up with the exact effect, it's still the same
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`conclusion, even less effect on this. And if -- and if the
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`jury should say -- come back with a verdict of 10 percent,
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`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 12 of 30
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`well, they just rejected the expert's opinion at 5 and went
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`with their own 10, and we're done, if that makes any sense to
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`you.
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`That's -- my only -- in all candor, my only concern
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`with the sensitivity analysis is it puts another number in the
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`jury's mind as a reasonable number to use in calculating
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`royalties without defending -- justifying that number.
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`MR. WHARTON: So what Ms. McCoy and I are thinking
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`here is, with Your Honor's concern, it would be useful if
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`Mr. Scally could discuss his sensitivity analysis but not use
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`the 20 percent.
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`THE COURT: I mean, I think if he's going to do a
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`sensitivity analysis, which I think is appropriate, I think it
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`ought to be at 5 percent, not 20 percent, because that's the
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`number he arrived at.
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`MR. WHARTON: Well, and I think the direct
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`examination of him will bring that out certainly. I mean, I
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`would certainly -- since the whole point here is to get to a
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`reasonable royalty, I would be asking him why 5 is reasonable.
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`I mean, that's what the whole 15 Georgia-Pacific factors
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`hopefully get us to.
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`So the 5 percent will be discussed and why it's
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`reasonable. We still want to talk about him using the
`
`24
`
`sensitivity analysis so there's greater confidence in his
`
`25
`
`testimony when he reaches that 5 percent. I mean, Mr. Scally
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 13 of 30
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` 13
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` 1
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`has explained to us that that's not uncommon to do those tests
`
` 2
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`to see when they're valuing IP.
`
` 3
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` 4
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` 5
`
`THE COURT: Yeah --
`
`MR. WHARTON: And that's why he did it. I mean --
`
`THE COURT: -- but it depends on the circumstances
`
` 6
`
`under which you're evaluating the IP. If I'm making a report
`
` 7
`
`to the chairman of the board on why I think they ought to pay
`
` 8
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`X, I'm going to show them, look, you can pay up to 20 percent,
`
` 9
`
`and you'd still be fine, or vice versa, if you represent the
`
`10
`
`buyer, whatever. So it all depends on the circumstances.
`
`11
`
`When it comes to a jury -- jury testimony, then
`
`12
`
`there's not only relevance, which I think the sensitivity
`
`13
`
`analysis is relevant, but then there's also the danger of
`
`14
`
`unfair prejudice. And when you run your analysis at
`
`15
`
`20 percent, pulling that number out, it's just -- I mean, at
`
`16
`
`the end of the day, it's just a higher number than 5 percent.
`
`17
`
`When you do that, then it seems to me implicitly with that is a
`
`18
`
`suggestion that could have found up to 20 percent, I arrived at
`
`19
`
`5, but you can do up to 20 percent and not affect them at all.
`
`20
`
`And if the jury takes that and awards 20 percent,
`
`21
`
`then I think Cree's got a very good argument that their verdict
`
`22
`
`is not based upon the evidence in the case, because there was
`
`23
`
`no evidence to support a 20 percent award. They took -- they
`
`24
`
`did what the Circuit forbids, which is they just took a number
`
`25
`
`and went across the board without justification, almost like
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 14 of 30
`
` 14
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` 1
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`the 25 percent thing. That's kind of -- that's my concern.
`
` 2
`
`Let me run through this. You all can think about
`
` 3
`
`this is a little bit, and then we'll talk a little bit more
`
` 4
`
`while I'm running through my various findings.
`
` 5
`
`You can have a seat, unless you wanted to add
`
` 6
`
`something to what I just said.
`
` 7
`
`MR. WHARTON: No. No, Your Honor. I understand the
`
` 8
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`concern. I think -- and we can provide some case law on this,
`
` 9
`
`but the cases we're focusing on are those that allow the jury
`
`10
`
`to go above what the expert suggests.
`
`11
`
`THE COURT: Which I think they can for the right
`
`12
`
`reasons.
`
`13
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`14
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`MR. WHARTON: Correct.
`
`THE COURT: I think when we start allowing in
`
`15
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`evidence that might suggest you go above without evidentiary
`
`16
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`support, then we have a prejudice problem --
`
`17
`
`18
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`19
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`MR. WHARTON: Understood.
`
`THE COURT: -- from my perspective.
`
`MR. WHARTON: Yeah, I think the only thing I would
`
`20
`
`add is hopefully under the other factors Mr. Scally will point
`
`21
`
`to the evidence that the jury can rely upon. Whether they come
`
`22
`
`in at 5 percent or 6 or 7, that will all be in the record
`
`23
`
`through the other factors.
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`24
`
`THE COURT: Yeah, as long as you're not -- I'll say
`
`25
`
`the inverse. If they came in at 20 percent, and evidence --
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 15 of 30
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` 15
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` 1
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`all the evidence had been presented, but Scally hadn't done
`
` 2
`
`anything to suggest 20 percent was a reasonable royalty as
`
` 3
`
`opposed to just a reasonable number to evaluate his 5 percent
`
` 4
`
`calculation, we might be stuck with that. I'm not sure what I
`
` 5
`
`could do to change that because the evidence was properly
`
` 6
`
`before the jury. But if they come in at 20 percent and Scally
`
` 7
`
`has testified you could go up to 20 percent and not affect
`
` 8
`
`their bottom line and keep it in that range of reasonableness,
`
` 9
`
`then I think we're approaching a problem with respect to the
`
`10
`
`25 percent issue.
`
`11
`
`Let me run through the other stuff. You all can
`
`12
`
`think about this is a little bit.
`
`13
`
`All right. So the other factors, getting away from
`
`14
`
`the sensitivity analysis for just a minute, the starting point
`
`15
`
`for the $10 million offer to sell, that offer certainly, I
`
`16
`
`agree, in terms of the evidence that's been presented, is not
`
`17
`
`well supported. There was -- what did I understand? There was
`
`18
`
`an 800-and-something-thousand-dollar offer or something from
`
`19
`
`somebody who was interested in buying. That went to 2 million.
`
`20
`
`And then Mr. Dry and Ms. Baker and the third partner -- was it
`
`21
`
`Gonzalez? Is that his name?
`
`22
`
`23
`
`MR. HARPER: Just Mr. Dry and Ms. Baker.
`
`THE COURT: Dry and Baker were sitting around the
`
`24
`
`coffee table, and for reasons neither seemed to be able to
`
`25
`
`remember, they came up with a figure of 10. So is it
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 16 of 30
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` 16
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`reasonable for him to rely on the 10?
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` 2
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`I thought, in reading the report -- let me find it.
`
` 3
`
`I didn't really, in reading the report, understand that Scally
`
` 4
`
`was using the $10 million offer as a starting point, but only
`
` 5
`
`as consideration of Georgia-Pacific Factor No. 1. And
`
` 6
`
`Mr. Scally noted that the asserted patents had never been
`
` 7
`
`licensed, but there was an unsolicited offer to acquire rights
`
` 8
`
`to five of those patents. And then he goes on to note that
`
` 9
`
`because OptoLum has never licensed the asserted patents and
`
`10
`
`because the offer from Intellectual Ventures was not accepted,
`
`11
`
`he rated the influence of this unconsummated transaction as
`
`12
`
`neutral.
`
`13
`
`So I think usage -- the 10 million is now out on the
`
`14
`
`table. Whether Scally would have addressed that at trial from
`
`15
`
`the 850,000 or the 2 million or the 10 million, it doesn't
`
`16
`
`really matter. At the end of the day, he rated that factor as
`
`17
`
`neutral. It's a factor he considered. My take on rating it as
`
`18
`
`neutral is to say I've considered it, and I reject it because I
`
`19
`
`don't find that it affects the analysis either upwardly or
`
`20
`
`downwardly; it's just a fact that I looked at in performing
`
`21
`
`this analysis.
`
`22
`
`Kind of similarly with the Degnan & Horton Survey, no
`
`23
`
`question that Mr. Scally does not know the technologies,
`
`24
`
`licenses, and parties on which that survey is based. He's
`
`25
`
`considering it under Factor 12. I think he reasonably, at
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 17 of 30
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` 17
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` 1
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`least, took a look at and considered publicly available
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` 2
`
`information in marketing surveys.
`
` 3
`
`And to flip it around a little bit, if there are
`
` 4
`
`marketing surveys out there that are potentially relevant to
`
` 5
`
`Mr. Scally's analysis, and he didn't look at them -- and I
`
` 6
`
`don't attribute any bad motive to Mr. Harper for this, just
`
` 7
`
`this is what lawyers do when they're looking for weaknesses in
`
` 8
`
`expert reports -- he'd be challenged on why he didn't check the
`
` 9
`
`reasonably available material that at least seemingly addresses
`
`10
`
`those things.
`
`11
`
`And I'm bearing in mind, at least in my analysis
`
`12
`
`under the VirnetX, Inc. versus Cisco Systems case, that "the
`
`13
`
`licenses...must be sufficiently comparable to the hypothetical
`
`14
`
`license in suit," and "loose or vague comparability between
`
`15
`
`different technologies or licenses does not suffice." That's
`
`16
`
`the LaserDynamics case. But the Federal Circuit has "never
`
`17
`
`required identity of circumstances." That's VirnetX, or
`
`18
`
`whatever it is.
`
`19
`
`20
`
`MS. McCOY: I think it's VirnetX.
`
`THE COURT: Ah, I see that. Rather, the Federal
`
`21
`
`Circuit has "long acknowledged that 'any reasonable royalty
`
`22
`
`analysis necessarily involves an element of approximation and
`
`23
`
`uncertainty.'"
`
`24
`
`I thought, at least in my read of it, that
`
`25
`
`Mr. Scally, with respect to the Degnan & Horton Survey, at
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 18 of 30
`
` 18
`
` 1
`
`least in analyzing that particular information, looked at what
`
` 2
`
`appeared to me to be relevant facts, revolutionary development,
`
` 3
`
`major improvement or minor improvement, took into account
`
` 4
`
`Cree's statements about the technology and that it was
`
` 5
`
`game-changing, and so on and so forth. And then he appears to
`
` 6
`
`me to have used that survey as evidence of a range of real --
`
` 7
`
`reasonable royalty for patented technology that is a major
`
` 8
`
`improvement. I thought he explained it. Whether he was right
`
` 9
`
`or wrong, I'm sure mister -- or I'll say it in terms of I'm
`
`10
`
`sure Cree will attack that in terms of the weight to be
`
`11
`
`assigned and the accuracy of his analysis. But, ultimately, I
`
`12
`
`think, taking into consideration that survey for the purposes
`
`13
`
`that it was is sufficiently tied to the evidence by way of the
`
`14
`
`analysis by Mr. Scally.
`
`15
`
`In terms of the Licensing Economics Review article,
`
`16
`
`Mr. Scally considered this under Georgia-Pacific Factor No. 12,
`
`17
`
`28 years' worth of licensing agreements broken down by
`
`18
`
`industry. He looked at the median royalty range for electrical
`
`19
`
`and electronics and the median royalty range for the consumer
`
`20
`
`goods, retail, and leisure industry of 4.3 and 5 percent,
`
`21
`
`respectively, in those two industries after -- I think
`
`22
`
`lightbulbs -- or white light lightbulbs, I think at least from
`
`23
`
`a logical standpoint in reviewing Mr. Scally's report, could
`
`24
`
`reasonably be compared -- they're not identical to necessarily,
`
`25
`
`but I don't see anything in what Mr. Scally explains to suggest
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 19 of 30
`
` 19
`
` 1
`
`that his consideration of those Licensing Economics Review
`
` 2
`
`article is unreasonable. And, more particularly, what we're
`
` 3
`
`looking at -- what I'm looking at as a court is whether or not
`
` 4
`
`as a matter of law the evidence should be excluded.
`
` 5
`
`But I think he looked at that data. He explains what
`
` 6
`
`about that data he found significant, how it relates to the
`
` 7
`
`case, and I'm unable to say as a matter of law that under
`
` 8
`
`either Daubert or some type of relevance analysis that that
`
` 9
`
`should be excluded. I think that is appropriate fodder for
`
`10
`
`cross-examination of the experts.
`
`11
`
`A few other cases in addition to the VirnetX case we
`
`12
`
`looked at, we looked at ActiveVideo Networks versus Verizon,
`
`13
`
`and I, therefore, don't think those should be excluded.
`
`14
`
`Similarly, the royalty source licenses in terms of
`
`15
`
`those may not be -- ultimately, the jury may reject a finding
`
`16
`
`that those were sufficiently comparable licenses. But as a
`
`17
`
`matter of law, I don't find that that should be struck from his
`
`18
`
`opinion.
`
`19
`
`He -- Mr. Scally explains how he determined the
`
`20
`
`degree of comparability between the royalty source licenses and
`
`21
`
`the hypothetical negotiation, and he also explained in his
`
`22
`
`report that the terms and technology of the license agreement
`
`23
`
`identified via royalty source do not precisely align with the
`
`24
`
`patented technology asserted in this matter, nor the terms of
`
`25
`
`the hypothetical negotiation, but they do provide a
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 20 of 30
`
` 20
`
` 1
`
`representative range of customary royalty rates actually paid
`
` 2
`
`by companies licensing technology related to LED lighting.
`
` 3
`
`So at the end of the day -- you all know the report
`
` 4
`
`better than I do, I'm sure. But at the end of the day, he took
`
` 5
`
`these various points of information, explained why he used them
`
` 6
`
`and then explained, based upon his expertise and experience,
`
` 7
`
`why he adjusted the royalty rate up or down in terms of
`
` 8
`
`significant factor, neutral factor, or however he did it. And
`
` 9
`
`so I think under those circumstances, I don't see anything to
`
`10
`
`require exclusion.
`
`11
`
`The tougher question is whether or not all that
`
`12
`
`hearsay information should be, under Rule 703, admissible. And
`
`13
`
`here, it seems to me, under Rule 703 -- or when I say
`
`14
`
`"admissible," the expert can rely upon otherwise inadmissible
`
`15
`
`evidence, but I think under Rule 703 -- "But if the facts or
`
`16
`
`data would otherwise be inadmissible, the proponent of the
`
`17
`
`opinion may disclose them to the jury only if their probative
`
`18
`
`value in helping the jury evaluate the opinion substantially
`
`19
`
`outweighs their prejudicial effect." That's Rule 703.
`
`20
`
`All that stuff that he relied on -- the $10 million
`
`21
`
`is already before the jury. Much of this is, like, 4.3 to 5.6
`
`22
`
`in this particular field, and I understand the concern over
`
`23
`
`allowing the expert to talk about rates that are above the
`
`24
`
`5 percentage -- 5 percent that he -- that he used to calculate
`
`25
`
`this damages award. Or what if they just pull one thing out of
`
`October 27, 2021 - Trial Day 3
`
`

`

`Case 1:17-cv-00687-WO-JLW Document 376 Filed 08/09/22 Page 21 of 30
`
` 21
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` 1
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`his report and use that to assess damages? I think they're all
`
` 2
`
`close enough that they offer a pretty reasonable explanation as
`
` 3
`
`to why he arrived at this five-point -- 5 percent figure.
`
` 4
`
`And with respect to numbers like -- you know, they
`
` 5
`
`range from 4 percent to 6 percent or 8 percent and stuff like
`
` 6
`
`that. I don't find that to be unfairly prejudicial. I think
`
` 7
`
`his testimony in and of itself is going to suggest that this is
`
` 8
`
`an approximate -- or an opinion based on a potential range of
`
` 9
`
`percentages.
`
`10
`
`But with respect to the sensitivity analysis, the
`
`11
`
`20 percent, as I see it, bears no -- I don't see how that bears
`
`12
`
`any relationship to, number one, reasonably explaining his
`
`13
`
`opinion, or, two, how that number doesn't inject a level of
`
`14
`
`unfair prejudice into the testimony, because I think it
`
`15
`
`potentially provides the jury a basis upon which to award a
`
`16
`
`royalty of 20 percent, and I don't see any evidence to
`
`17
`
`support -- that that could be a reasonable award.
`
`18
`
`So I think he can do the sensitivity analysis. I
`
`19
`
`think he can do it at 5 percent, show the jury that his
`
`20
`
`5 percent conclusion is reasonable, but I'm not persuaded
`
`21
`
`20 percent -- at this point that 20 percent works.
`
`22
`
`Again, let me explain this. Obviously -- to explain
`
`23
`
`the difficulty in trying to rule

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