AT&T Settlement Agreement Admissible in Sprint Patent Litigation

Prism Techs. Llc v. Sprint Spectrum L.P., Nos. 2016-1456, 2016-1457, 2017 U.S. App. LEXIS 3916 (Fed. Cir. Mar. 6, 2017) (Before Taranto, Linn, and Chen, J.) (Opinion for the court, Taranto, J.)

Sprint Spectrum L.P. (“Sprint”) challenged the district court’s denial of its motion for a new trial based on a settlement agreement between Prism Technologies LLC (“Prism”) and AT&T Mobility in a related infringement action. Both suits concerned two patents for managing access to protected information provided over “untrusted networks,” i.e., public networks that do not have any controlling organization and where the path to accessing the network and the identity of users are both unknown. Sprint also challenged the district court’s decision not to exclude testimony from Prism’s damages expert. In a cross-appeal, Prism challenged the district court’s denial of its motion for additional damages covering Sprint’s ongoing and future infringement of the asserted patents, after the jury awarded it $30 million in reasonable royalties. The Federal Circuit affirmed the district court’s decision on all grounds.

Sprint’s primary argument on appeal concerned the district court’s admission of a settlement agreement between Prism and AT&T Mobility in an infringement suit filed the same day as Prism’s suit against Sprint. Sprint argued that the district court abused its discretion in admitting the settlement agreement as evidence of a reasonable royalty for the asserted patents under Federal Rule of Evidence 403. Sprint urged the agreement was not relevant and was more prejudicial than it was probative. The Federal Circuit disagreed. Under the Court’s precedent, a licensing agreement entered into as part of settling an infringement suit is likely to be admissible in a later infringement suit if the earlier and later suits concern the same patented technology and address common issues. Before admitting the agreement, the Court must consider each party’s reasons for settling the case, including the probability that the parties faced an adverse judgment, the cost of the potential adverse judgment, and the costs of further litigation, because these factors influence the reliability of the agreement as evidence of the value of the patented technology. For example, if the patent owner’s probability of losing on infringement or validity was very high in the earlier suit, the resulting settlement figure may be too low to reflect a reasonable assessment of the value of the patented technology.

The Federal Circuit found that the district court did not abuse its discretion in admitting the AT&T settlement agreement for several reasons. First, the agreement covered the same patented technology at issue and thus was a reliable estimate of the technology’s value to Prism and potential infringers. Second, though both litigations were commenced the same day, the agreement came from an “earlier” case because it was entered into after all discovery was complete and on a fully developed record. This increased the likelihood that the settlement reflected the value of the patented technology rather than a desire to avoid a potential unfavorable judgment. Finally, the settlement was reached after a large share of litigation costs had already been expended, again reducing the role of litigation cost-avoidance in the decision to settle. These factors tended to show that the settlement reflected the true value of the asserted patents rather than any particular litigation concerns or tactics. The Court also noted that Sprint itself sought admission of settlement agreements between Prism and other accused infringers in the district court, contradicting its arguments on appeal that such agreements are not reliable. Sprint presented two additional arguments — that a Supreme Court case from 1889 barred admission of a patentee’s licenses entered into as part of settling an infringement suit and that the admission of the AT&T settlement agreement was barred by Federal Rule of Evidence 408. The Court rejected both arguments because they were not presented to the district court and were not preserved for appeal.

Sprint further argued that the district court erred in admitting the testimony of Prism’s expert on calculating a reasonable royalty for the asserted patents. At trial, Prism’s expert offered evidence that a reasonable royalty in a hypothetical negotiation between Sprint and Prism would take into consideration Sprint’s cost savings, i.e., the difference between the cost to Sprint in designing around the patented technology by developing its own data transfer networks and the cost to Sprint of infringing the patented technology by leasing third-party “untrusted” networks. The Court found that the expert’s testimony was properly admitted because using estimated cost savings is a well-established method for determining a reasonable royalty and the expert calculations were supported by the evidence.

In its cross-appeal, Prism argued that the district court erred in denying its request for an ongoing royalty because the jury award did not cover Sprint’s future infringement. The Court disagreed, finding that the jury’s award inherently included monetary relief for Sprint’s past, present, and future infringement. In particular, the evidence presented by Prism and Sprint suggested that the $30 million jury award included compensation for future infringement in the form of a fully paid license for the life of the asserted patents. As such, Prism was fully compensated for any past, present, or future infringement and was not entitled to additional damages.

Licenses that are part of a settlement agreement in an earlier patent infringement suit can be reliable evidence of the value of patented technology in a later patent infringement suit. The reliability of the agreement as evidence of value depends on a number of factors, including whether the suits involve the same patented technology and whether the settlement amount in the earlier suit was discounted or enhanced by litigation concerns such as the probability of an unfavorable judgment or the desire to avoid further litigation costs.

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