The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM OF DECISION AND ORDER
In this patent infringement case, the Plaintiff Luciano F. Paone ("Paone" or the "Plaintiff") alleges that the Defendant Microsoft Corporation ("Microsoft" or the "Defendant") has infringed United States Patent 6,259,789 (the "789 Patent"), held by Paone.
Pursuant to Federal Rule of Evidence ("Fed. R. Evid. 702"), the Defendant Microsoft now moves to exclude the testimony of the Plaintiff's damages expert, Wayne Hoeberlein ("Hoeberlein").
Microsoft contends that Hoeberlein's testimony should be excluded "for any one of five separate and independent reasons, as follows: (1) his royalty base is unreliable because it includes 'sales units' not part of an allegedly infringing system and never used to allegedly infringe; (ii) his royalty base is unreliable because it includes 'sales units' that -- if part of or used in an allegedly infringing system -- are found and used in such systems outside the United States (beyond the reach of the U.S. patent law); (iii) his royalty base is unreliable because it includes access rights (which have no software functionality) and overcounts periodic payments for single 'sales units' as if they were multiple "sales units"; (iv) his methodology for valuing TKIP (an alleged feature of the systems Paone accuses of infringement) is itself unreliable and based on unreliable data; and (v) his royalty rate is unreliable because, under controlling Federal Circuit case precedent, it is based on draft license offers that are not comparable to the license that Paone and Microsoft would have reached under a hypothetical license negotiation on the facts of this case."
In response, Paone denies Microsoft's allegations with regard to its damages expert, Wayne Hoeberlein. Paone contends that Hoeberlein is a certified public accountant who has worked extensively in the area of litigation consulting for almost thirty years. Hoeberlein has provided financial consulting, damage analysis and expert testimony in connection with commercial litigation. In addition, Paone goes into an extensive response in his contention that Microsoft's arguments in opposition to Hoeberlein's testimony, "are based on incorrect legal standards and/or inaccurate or disputed statements of fact." (Pltf's Memorandum in Opposition at 1). In sum, Paone asserts that Microsoft's arguments are "directed to disagreements with Mr. Hoeberlein's conclusions, rather than his methodology; they only go to the weight of his testimony, not its admissibility under Rule 702." (Pltf's Memorandum in Opposition at 1).
While the Court agrees that most of Microsoft's contentions go to the weight of the testimony rather than its admissibility, because the subject of this litigation is complicated and requires a nuanced interpretation of the relevant technology, and because the Court has some questions as to the admissibility of the Hoeberlein testimony, the Court will grant Microsoft's request for a Daubert hearing.
The '789 Patent and the Plaintiff's infringement claims have been discussed at length in prior decisions from this Court, namely the Court's order on the Defendant's motion for summary judgment, dated July 30, 2012. Therefore, the Court need not repeat those facts.
The most important thing to note for purposes of the present motion is that Paone's remaining infringement claims are apparently based on one type of technology---- Temporal Key Integrity Protocol ("TKIP"). TKIP is an industry-standard data encryption protocol used to encrypt and decrypt data that is transmitted over wireless local area networks. TKIP technology improves on prior wireless encryption standards by using a dynamic keying scheme in which the encryption key changes from one block of data to the next. The Defendant Microsoft implements or supports TKIP in many of its products, including Windows Vista, XP and 7, and Xbox 360. TKIP is incorporated in both Microsoft's hardware, which contain everything necessary to perform TKIP encryption and decryption, and in Microsoft's software, which includes dedicated TKIP functionality for configuring and driving wireless networking hardware to perform TKIP encryption and decryption.
Wayne Hoeberlein was retained by Paone as an expert in the area of damages and financial analysis. He submitted an expert report, on which his testimony is based, with regard to his opinions as to the amount of reasonable royalty damages owed to Paone by Microsoft due to Microsoft's alleged infringement of the '789 patent.
A. Hoeberlein's Qualifications
Hoeberlein has a Bachelor of Business Administration in Accounting from Hofstra University. He also received a J.D. from the Hofstra University School of Law in 1977. He is a Certified Public Accountant and a member of the American Institute of CPAs. Since 1982, he has worked exclusively in the area of litigation consulting, providing financial consulting, damages analysis, and expert testimony in connection with commercial litigation. Currently, he is a Director with Berkeley Research Group, LLC ("BRG") in New York, New York. BRG carries out financial, economic and accounting research and consulting services for firms, companies and government bodies on a variety of issues, including the analysis of damages in connection with intellectual property disputes, which accounts for a substantial amount of his work. Hoeberlein has testified numerous times in federal court in matters relating to intellectual property.
B. Basis and Summary of Hoeberlein's Expert Opinion
Hoeberlein's opinions are based on his professional training and experience and his review and analysis of documents and information produced in the course of this litigation, including: various deposition transcripts; responses to interrogatories; responses to document requests; and other expert reports. His amended expert report is approximately 100 pages in length, and discusses both his opinions and his methodology.
Hoeberlein's analysis is an evaluation of Microsoft's allegedly infringing activity with regard to certain software products, assuming that the accused products are found to infringe the '789 patent after a trial. Under the provision of 35 U.S.C. § 284, a court shall award a patent owner damages adequate to compensate for infringement, no less than a reasonable royalty rate for the use made of the invention by the infringer. The Hoeberlein expert report explains that a reasonable royalty represents the payments that the alleged infringer should have made to the patent owner for the use of the patented technology. The reasonable royalty is usually determined by making reference to what the patent owner and infringer would have agreed to at the time of first infringement.
In Hoeberlein's opinion, the hypothetical arm's length negotiation in March 2003 between Paone and Microsoft would have resulted in a reasonable royalty of $0.13 applied to each of Microsoft's sales of the products incorporating the accused TKIP technology during the period beginning March 8, 2004, the date at which Microsoft allegedly knew or should have known of the infringement. Thus, the total reasonable royalties, calculated on this basis, is the sum of $110,843,334.
In order to assess the value of the '789 patent, Hoeberlein looked at the importance of the patent to Microsoft and its customers, especially in the respect that the TKIP feature provides positive security benefits to users of the accused Microsoft products. In particular, TKIP provides important data encryption enhancements which address known vulnerabilities of the previous wireless encryption technique-Wired Equivalent Privacy (WEP). Hoeberlein found that the value that the parties would have ascribed to TKIP at a hypothetical negotiation can be estimated through a price differential analysis of products both with and without support for TKIP. Thus, he reviewed a May 1, 2004 article from a magazine entitled Computer Shopper, which listed various pieces of wireless networking hardware that were available in or before 2004-close to the date of the first hypothetical negotiation in this case. Based upon his review of these products, their features, and their prices, he concluded that the difference in price between wireless adapters that supported the TKIP technology in 2003/2004 and those that did not was $35.21. Accordingly, he found that it was reasonable to conclude that some portion of this $35.21 difference represented the value of TKIP that Paone and Microsoft would have considered at a hypothetical negotiation, and ultimately concluded that $5.34 represents the value of TKIP functionality that the parties would have considered at a hypothetical negotiation.
Next, Hoeberlein assessed the likely royalty rate for a hypothetical negotiation between Paone and Microsoft in 2003. He explained that the rate for particular intellectual property rights may be based on the royalties paid for similar intellectual property in actual licensing transactions. He noted that the degree of reliance on comparable licensing transactions depends upon an assessment of whether the transactions are sufficiently similar to provide an indication of the value of the assets in question. In this regard, he searched publicly available data for information concerning license agreements for intellectual property that may be analogous to the patent-in-suit. He identified several agreements that likely would have been considered by the parties at a hypothetical negotiation between Paone and Microsoft. After reviewing these particular policies, and determining that they were relevant to the hypothetical negotiations in this matter, Hoeberlein concluded that the running royalties that Microsoft apparently deems reasonable for its own patented technology range from 1% to 5% of net sales for software products and 0.5% to 2.5% of net sales for embedded products.
Finally, Hoeberlein reviewed the factors that can and should influence the outcome of a negotiation and help define the parties' bargaining positions, as set forth in Georgia-Pacific Corp. v. United States Plywood Corp., 18 F. Supp. 1116, 1120 (S.D.N.Y. 1970). He considered all fifteen factors in light of the information he claimed was available in order to determine what Paone and Microsoft, as willing licensor and licensee, would have agreed to at the time the infringement began.
In the end, Hoeberlein opined that a hypothetical negotiation between Paone and Microsoft would have resulted in a reasonable royalty of $0.13 applied to each product incorporating the accused TKIP technology beginning on March 8, 2004, the date at which Microsoft knew or should have known of the infringement. The royalty was calculated by applying a rate of 2.5% to the value of TKIP that the parties would have considered at a hypothetical negotiation, which would have been $5.34. ...