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Attorneys for Microsoft Corporation - page 12 / 74





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The Decision’s Admissibility Analysis Conflicts With The Daubert Trilogy And Decisions Of The Regional Circuits

The panel decision held that the district court properly admitted the testi- mony of i4i’s damages expert, Mr. Wagner, that, in a hypothetical negotiation, Mi- crosoft and i4i would have begun negotiations at a “baseline royalty rate” of $96 per copy of Word used in an infringing manner—i.e., a royalty rate of 42 to 99 per- cent of the retail price of Word. See slip op. 28 (Word “could be as little as $97”); Red Br. 70 (arguing that “most” infringing units “cost[] $229”).1 The decision’s holding that this evidence was admissible conflicts with controlling Supreme Court decisions in two respects, each of which independently warrants en banc review.

First, the decision upended the requirement that an expert’s conclusions must be “the product of reliable principles and methods,” Fed. R. Evid. 702, de- claring Rule 702 “satisfied” merely because Mr. Wagner had employed “a hypo- thetical negotiation and Georgia-Pacific factors for estimating a reasonable roy- alty.” Slip. op. 31. Yet, numerous decisions of the Supreme Court and other cir- cuits confirm that use of even a “consistently upheld” general methodology cannot insulate from review the more specific methods used to determine the inputs for the expert’s opinions. Daubert’s reliability analysis applies not just to the expert’s

To locate that “baseline royalty rate” of $96, Mr. Wagner hypothesized that Mi- crosoft and i4i would have agreed upon the following variation of the so-called 25- percent “rule of thumb”: First, take the $499 list price of a third party’s XML au- thoring tool, XMetaL; second, multiply that third-party list price by Microsoft’s 76% profit margin for Word products to obtain the hypothetical profit of $382 that “Microsoft … would stand to reap” if it had developed XMetaL ex ante, sold it at the third party’s list price, and still somehow maintained Word’s profit margin; and finally, take 25% of that hypothetical $382 profit to get a baseline royalty rate of $96. A3943-44; see also slip op. 29. 1


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