A software company’s appeal of a $345 million jury verdict for patent infringement has been dismissed because of its failure to properly object to expert testimony regarding damages.
Although the company characterized its appeal as a challenge to the sufficiency of the expert evidence, the Federal Circuit Court of Appeals concluded that it was actually a challenge to its admissibility and therefore should have been raised not on appeal, but in a Daubert motion prior to trial.
The appeal arose out of a complex patent infringement dispute between two technology companies involving software used in commercial markets to set product pricing that is particularized to the customer. The software takes into account various factors – including type of product, size of customer, type of customer, and location of customer – to quickly calculate prices.
The plaintiff in the case, Versata Software Inc., developed and patented its computerized pricing engine in the mid-1990s and marketed it under the name “Pricer.” Pricer used a hierarchical pricing structure that offered dramatic performance improvements over previously available pricing software. The product received praise in the market as a “breakthrough” and achieved fairly rapid commercial success.
While Versata’s patent application was pending, SAP America Inc. began developing its own hierarchical pricing software, which it said publicly would be similar to Pricer. When it released the product in 1998, it bundled it into its broader suite of enterprise software to discourage its customers from using add-on products such as Pricer.
SAP’s launch of its software had a precipitous impact on Versata’s sales of Pricer. While it was able to retain many of its existing Pricer customers, it made no new sales once SAP’s product came out.
Versata Sues for Infringement
In 2007, Versata sued SAP for patent infringement. After a trial, the jury found for Versata and awarded it $139 million in damages. However, based on an intervening change in the governing law, the judge ordered a new trial confined to the issue of damages.
The second trial focused on two theories of damages, lost profits and reasonable royalties. Based primarily on expert testimony, the jury awarded $260 million in lost-profits damages and $85 million in reasonable royalties.
SAP appealed to the Federal Circuit, raising a number of issues. Among them was the sufficiency of the evidence on which the jury awarded lost profits. SAP argued that Versata’s expert used a damages-calculation model that was “inconsistent with sound economic principles” and therefore should have been excluded from evidence. It also contended that Versata’s expert did not conform to the controlling legal framework for establishing causation of lost profits, thereby rendering his analysis legally defective.
Issues Improperly Raised on Appeal
The Federal Circuit rejected both of these arguments as improperly raised. Both arguments, the court said, should have been raised through Daubert challenges prior to trial.
“Under the guise of sufficiency of the evidence, SAP questions the admissibility of Versata’s expert testimony and whether his damages model is properly tied to the facts of the case,” the court said. “Such questions should be resolved under the framework of the Federal Rules of Evidence and through a challenge under Daubert v. Merrell Dow Pharm., Inc.”
Ironically, the court found support for its conclusion in SAP’s own briefs and oral arguments. In its briefs, the court noted, SAP had argued that the expert’s testimony should have been excluded from evidence and that the jury should never have heard the expert’s lost-profits theory. Likewise, in its oral arguments, SAP had asserted that the expert’s testimony should never have been admitted.
Challenges such as these – pertaining to the admissibility of expert evidence – should be decided by the trial court under the rules of evidence and pursuant to Daubert, the court said. However, SAP never raised the issue in a Daubert motion and was not appealing a Daubert ruling.
“Instead, it argues that the jury could have not had sufficient evidence to award lost profits because the expert’s testimony was fatally flawed and should not have been admitted,” the court said. “This is the improper context for deciding questions that, by SAP’s own admissions, boil down to the admissibility of evidence.”
For this reason, the court declined to address SAP’s arguments that this evidence should never have been admitted. The court did go on to address other issues raised by SAP that it found did legitimately relate to the sufficiency of the expert evidence.
In the end, SAP failed to persuade the Federal Circuit that there were any grounds on which to reverse the jury verdict. The court affirmed both the finding of infringement and the damages awards.
The case is Versata Software Inc. v. SAP America Inc., decided May 1, 2013.
Do you agree with the Federal Circuit’s opinion? Do you think there are ever issues as to admissibility of expert evidence that can be raised on appeal absent a Daubert motion made at the trial level?