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Sloan Valve Co. v. Zurn Industries, Inc.

United States District Court, N.D. Illinois, Eastern Division

March 26, 2014

SLOAN VALVE COMPANY, Plaintiff,
v.
ZURN INDUSTRIES, INC., and ZURN INDUSTRIES, LLC, Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For Sloan Valve Company, a Delaware corporation, Plaintiff: Daniel W. Werly, Jason Andrew Berta, Lisa Marie Noller, Foley & Lardner, Chicago, IL; Richard S. Florsheim, PRO HAC VICE, Foley & Lardner, Milwaukee, WI; Scott Richard Kaspar, Foley & Lardner LLP, Chicago, IL.

For Zurn Industries, Inc., a Delaware corporation, Zurn Industries, LLC., a Delaware limited liability company, Defendants: Bryan C. Clark, Cecilia R. Dickson, Kent E. Baldauf, jr., Steven M. Johnston, Thomas C Wolski, PRO HAC VICE, John W McIlvaine, III, The Webb Law Firm, Pittsburgh, PA; David R. Cross, Quarles & Brady, Milwaukee, WI; John E Conour, Michael Steven Rhinehart, Nicole M Murray, Quarles & Brady Llp, Chicago, IL; Patrick J Murphy, PRO HAC VICE, Quarles & Brady Llp, Milwaukee, WI.

For Zurn Industries, LLC., a Delaware limited liability company, Zurn Industries, Inc., a Delaware corporation, Counter Claimants: Bryan C. Clark, Cecilia R. Dickson, Kent E. Baldauf, jr., Steven M. Johnston, Thomas C Wolski, PRO HAC VICE, The Webb Law Firm, Pittsburgh, PA; Michael Steven Rhinehart, Nicole M Murray, Quarles & Brady Llp, Chicago, IL.

For Sloan Valve Company, a Delaware corporation, Counter Defendant: Jason Andrew Berta, Lisa Marie Noller, Foley & Lardner, Chicago, IL; Richard S. Florsheim, PRO HAC VICE, Foley & Lardner, Milwaukee, WI; Scott Richard Kaspar, Foley & Lardner LLP, Chicago, IL.

For Zurn Industries, LLC., a Delaware limited liability company, Zurn Industries, Inc., a Delaware corporation, Counter Claimants: Bryan C. Clark, Cecilia R. Dickson, Kent E. Baldauf, jr., Steven M. Johnston, Thomas C Wolski, PRO HAC VICE, John W McIlvaine, III, The Webb Law Firm, Pittsburgh, PA; Michael Steven Rhinehart, Nicole M Murray, Quarles & Brady Llp, Chicago, IL.

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MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, United States District Court Judge.

Zurn Industries, Inc. (" Zurn" ) has moved to exclude the testimony of Sloan Valve Company's (" Sloan" ) expert, Richard Bero. For the reasons discussed below, the Court grants Zurn's motion.

BACKGROUND

This is a patent infringement case involving U.S. Patent No. 7,607,635, entitled " Flush Valve Handle Assembly Providing Dual Mode Operation" (the " '635 Patent" ). The '635 Patent " relates to flush valves for use with plumbing fixtures such as toilets, and more specifically to improvements in the bushing of the actuating handle assembly that will provide for user-selectable, dual mode operation of the flush valve." ('635 Patent, col. 1, ll. 6-10.) The improvement is a mechanism that allows a user to select one of two flush volumes based on the direction of actuation of the handle: a full flush volume to evacuate solid waste from the bowl or a reduced flush volume to remove liquid waste.

Sloan filed this lawsuit against Zurn Industries, Inc. and Zurn Industries, LLC alleging infringement. During expert discovery, Sloan disclosed Richard Bero as its expert on the issue of compensatory damages. Sloan asked Mr. Bero to " determine damages in the form of a reasonable royalty and to quantify price erosion damages." (R. 620-3, 4/5/2013 Bero Rebuttal Report, p. 3.) Mr. Bero opined that Sloan is entitled to a per-unit royalty rate of $106 per Accused Product for a total of $7.8 million. In his rebuttal report, he further opined that Sloan has incurred price erosion damages of approximately $2.3 million for the period beginning after the complaint was filed. ( Id. ) At his Daubert hearing, however, Mr. Bero presented re-calculated price erosion damages of $1.2 million. (3/11/14 Bero Hearing Tr. at 10:9-16.) Mr. Bero contends that Sloan is entitled to compensatory damages of $9 million before accounting for pre-judgment interest. Zurn now seeks to exclude Mr. Bero's opinions.

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LEGAL STANDARD FOR DAUBERT MOTIONS

" The admissibility of expert testimony is governed by Federal Rule of Evidence 702 and the Supreme Court's opinion in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993)." Lewis v. Citgo Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009). Rule 702 provides, in relevant part, that " [i]f scientific, technical or other specialized knowledge will assist the trier of fact[,] . . . a witness qualified as an expert by knowledge, skill, experience, training or education, may testify thereto in the form of an opinion. . . ." Id. See also Happel v. Walmart Stores, Inc., 602 F.3d 820, 824 (7th Cir. 2010).

Under the expert-testimony framework, courts perform the gatekeeping function of determining whether the expert testimony is both relevant and reliable prior to its admission at trial. See id.; Power Integrations, Inc. v. Fairchild Semiconductor Intern., Inc., 711 F.3d 1348, 1373 (Fed. Cir. 2013); United States v. Pansier, 576 F.3d 726, 737 (7th Cir. 2009) (" To determine reliability, the court should consider the proposed expert's full range of experience and training, as well as the methodology used to arrive [at] a particular conclusion." ). In doing so, courts " make the following inquiries before admitting expert testimony: first, the expert must be qualified as an expert by knowledge, skill, experience, training, or education; second, the proposed expert must assist the trier of fact in determining a relevant fact at issue in the case; third, the expert's testimony must be based on sufficient facts or data and reliable principles and methods; and fourth, the expert must have reliably applied the principles and methods to the facts of the case." Lees v. Carthage College, 714 F.3d 516, 521-22 (7th Cir. 2013); see also Stollings v. Ryobi Techs., Inc., 725 F.3d 753, 765 (7th Cir. 2013); Power Integrations, 711 F.3d at 1373; Pansier, 576 F.3d at 737.

In assessing the admissibility of an expert's testimony, the Court's focus " must be solely on principles and methodology, not on the conclusions they generate.'" Winters v. Fru-Con, Inc., 498 F.3d 734, 742 (7th Cir. 2007) (quoting Chapman v. Maytag Corp., 297 F.3d 682, 687 (7th Cir. 2002)). See also Stollings, 725 F.3d at 765. " The goal of Daubert is to assure that experts employ the same 'intellectual rigor' in their courtroom testimony as would be employed by an expert in the relevant field." Jenkins v. Bartlett, 487 F.3d 482, 489 (7th Cir. 2007) (quoting Kumho Tire, 526 U.S. 137, 152, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999)). " A Daubert inquiry is not designed to have the district judge take the place of the jury to decide ultimate issues of credibility and accuracy." Lapsley v. Xtek, Inc., 689 F.3d 802, 805 (7th Cir. 2012).

ANALYSIS

I. Mr. Bero is Qualified to Testify as an Expert in This Case

Zurn does not challenge Mr. Bero's qualifications to testify as an expert in this case, but the Court nevertheless summarizes them. Mr. Bero is a certified public accountant, a certified valuation analyst, and the President and Managing Director of The BERO Group. (R. 620-1, 1/28/2013 Bero Report at 4.) Mr. Bero received a bachelor's of business administration in accounting and finance from the University of Wisconsin-Madison. (R. 620-2, Bero CV, p.1.) Mr. Bero has " analyzed economic damages and accounting and financial issues in a variety of litigation matters concerning areas such as patent infringement, trademark infringement, copyright infringement, trade secrets, breach of contract,

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dealership disputes and construction disputes" and has testified as an expert more than 100 times. (Bero Rep. at 4-5.) Mr. Bero has also given presentations and published articles on reasonable royalty damages, the entire market value rule, and other patent damages issues through various organizations and publications. (Bero CV, p. 2-6.)

II. Mr. Bero's Opinions Regarding a Reasonable Royalty Rate

A. Reasonable Royalty Standard

By statute, the " court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." 35 U.S.C. § 284. " Awarding damages through litigation attempts to assess 'the difference between [the patentee's] pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.'" Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009) (citing Yale Lock Mfg. Co. v. Sargent, 117 U.S. 536, 552, 6 S.Ct. 934, 29 L.Ed. 954, 1886 Dec. Comm'r Pat. 172 (1886)). The patentee bears the burden of proving its damages. Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10, 26 (Fed. Cir. 2012); Crystal Semiconductor Corp. v. Tritech Microelectronics Int.'l, Inc., et al., 246 F.3d 1336, 1353 (Fed. Cir. 2001). " Two alternative categories of infringement compensation are the patentee's lost profits and the reasonable royalty he would have received through arms-length bargaining." Lucent, 580 F.3d at 1324.

Several ways exist to calculate a reasonable royalty. One method is known as the analytical method, which focuses on the infringer's projections of profit for the infringing product. Id. (citing TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 899 (Fed. Cir. 1986)). Another method is to base the calculation on an established royalty, if there is one. Versata Software, Inc. v. SAP America, Inc., 717 F.3d 1255, 1267 (Fed. Cir. 2013). If there is not an established royalty, a reasonably royalty may be calculated based on the supposed result of hypothetical negotiations between the plaintiff and defendant. Id. The hypothetical negotiation " attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began." Lucent, 580 F.3d at 1324. One type of royalty resulting from the hypothetical negotiation is the running royalty license, in which " the amount of money payable by the licensee to the patentee is tied directly to how often the licensed invention is later used." Id. at 1326. " When a hypothetical negotiation would have yielded a running royalty, the classic way to determine the reasonable royalty amount is to multiply the royalty base, which represents the revenue generated by the infringement, by the royalty rate, which represents the percentage of revenue owed to the patentee." Whitserve, 694 F.3d at 27. Although a reasonable royalty calculation includes some approximation, " the Federal Circuit requires 'sound economic and factual predicates' for that analysis." IP Innovation LLC v. Red Hat, Inc., 705 F.Supp.2d 687, 689 (E.D. Tex. 2010) (citing Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302 (Fed. Cir. 2002)).

Reasonable royalty damages " must be awarded 'for the use made of the invention by the infringer.'" Laserdynamics v. Quanta Computer Inc., 694 F.3d 51, 66-67 (Fed. Cir. 2012) (quoting 35 U.S.C. § 284). " Where small elements of multi-component products are accused of infringement, calculating a royalty on the

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entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product." Id. Thus, courts generally require " that royalties be based not on the entire product, but instead on the 'smallest salable patent-practicing unit.'" Id. (citing Cornell Univ. v. Hewlett-Packard Co., 609 F.Supp.2d 279, 283, 287-88 (N.D.N.Y. 2009)).

The entire market value rule is an exception to the rule requiring apportionment. The entire market value rule applies if the patentee proves that the " patented feature creates the 'basis for customer demand' or 'substantially create[s] the value of the component parts.'" Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318 (Fed. Cir. 2011) (citing Lucent Techs. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009) and Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995)). Put another way, the patentee may assess damages based on the entire market value of the patented product if it can show that " the patented feature drives the demand for an entire multi-component product." Laserdynamics, 694 F.3d at 67 (citing Rite-Hite, 56 F.3d at 1549).

B. Mr. Bero's Reasonable Royalty Analysis

Mr. Bero based his reasonable royalty analysis on a hypothetical negotiation between Sloan and Zurn based on the fifteen factors set forth in Georgia-Pacific Corp. v. The U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970.). (Bero Rep. at 41.)[1] These factors " are meant to provide a reasoned economic framework" for the hypothetical negotiation. Whitserve, 694 F.3d at 27. Mr. Bero asserts that ...


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