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When someone doesn’t work but misleads authorities about their income to claim government benefits, it’s called welfare fraud. Similarly, when shell companies don’t work their patents (i.e. use them to make and sell products), but rely on experts to mislead juries and claim inflated infringement damages, that’s a form of welfare fraud too. Lamentably, this type of misconduct has become a regular occurrence in our federal courts.

The Federal Circuit’s recent en banc rehearing of a patent infringement dispute between EcoFactor Inc. and Google presents a rare opportunity for the court to reestablish guardrails for what type of evidence is permissible in infringement cases and in doing so prevent future abuse of increasingly lax judicial standards. 

Non-practicing entities (NPEs), at times called patent trolls, own patents but do not use them to manufacture and sell goods. Instead, they often acquire low-quality patents and use them exclusively to pursue licensing fees or launch patent infringement lawsuits. NPEs sue productive companies in the hopes their nuisance litigation will coerce monetary settlements from successful businesses and independent inventors alike. Sometimes settlements garnered by NPEs take the form of rigged licensing agreements in which small defendants agree to pay royalties to avoid litigation costs, which they wouldn’t be able to recover even if their side prevailed in court. 

Highly sophisticated NPEs then turn around and sue larger, successful, mostly high-tech companies. They often make claims that their vague patent covers one small element out of the thousands of components in a defendant’s successful product and therefore the company owes the NPE an outsized share of the product’s profits. NPEs leverage the royalty payments they previously coerced from smaller, less resourced companies in their damages calculations, arguing those prior agreements somehow reflect the contribution of their patent to the defendant’s profits—even if the prior agreements involve different circumstances or even different patents. Indeed, those prior agreements naturally reflect the value small defendants placed on settling an infringement case, not the value contributed to the product’s sales by one component out of the thousands that comprise it.

Federal judges are supposed to flag the flaws in these inflated damages claims under the Supreme Court’s 1993 decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., in which the Court held that Federal Rule of Evidence 702 demands that, before the testimony of an “expert” can be admitted, trial courts must adopt “a gatekeeping role” to “ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable.” The Daubert Court emphasized that Rule 702 “requires a valid scientific connection to the pertinent inquiry as a precondition to admissibility,” and that, before an expert analysis can be presented to the jury, the court must assess “whether the reasoning or methodology underlying the testimony is scientifically valid” and “properly can be applied to the facts in issue.”

According to David Bernstein, one of the leading legal commentators on the ramifications of the Supreme Court’s decision in Daubert, and Eric Lasker,

Perhaps the worst example of a federal appellate court ignoring the language of amended Rule 702 arose in the 2006 Federal Circuit opinion in Liquid Dynamics Corp. v. Vaughan Co. In this case, the court never referenced the text of Rule 702 . . . To justify its ruling, the court cited a 1986 Eighth Circuit opinion for the proposition that inadequacies in expert testimony are a matter of weight, not admissibility. 

Since then, the Federal Circuit has continued to abandon its gatekeeping function as required by Daubert. For example, it has found that certain “magic words” uttered by expert witnesses are enough to bless previous licensing agreements as accurately reflecting the value of a patent at issue in a case, even when the previous agreements arose out of significantly different factual circumstances.

The Federal Circuit has allowed general phrases such as “built-in,” “essentially embedded,” and “implicitly apportioned” to justify references to prior licensing agreements, including those involving different patents and incorporating nuisance suit values. The Federal Circuit has ignored its responsibility to apply Daubert, resulting in dramatically inflated awards for NPEs and other plaintiffs alleging infringement.

Now, the Federal Circuit is again struggling with Daubert’s meaning. In the dispute between EcoFactor and Google, EcoFactor’s expert witness relied, in making its case for damages, on a prior licensing agreement that didn’t even mention the patent involved in EcoFactor’s suit against Google. Although EcoFactor is not a NPE, the Federal Circuit has an opportunity to reassert judges’ roles as gatekeepers, establishing precedent that will rein in future damages claims across all patent infringement litigation.

Allowing experts to introduce inflated damages figures unchecked by Daubert gatekeeping empowers plaintiffs to set an unfairly inflated ceiling on the jury’s damages assessment. This “anchoring effect” has been shown to significantly, and unfairly, taint jury deliberations. According to researchers, “Numerous studies have shown that the jury’s damages decision is strongly affected by the number suggested by the plaintiff’s attorney, independent of the strength of the actual evidence (a psychological effect known as ‘anchoring’).”

While the Federal Circuit has misused its discretion to enable what amounts to fraud at the hands of NPEs, it can now begin to correct its course and pare back unfairly inflated damages awards by finally applying the Daubert standard as required by the Supreme Court.