Royalty Analysis Conducted by Finance Expert Witness Deemed Reasonable

Royalty Analysis Conducted by Finance Expert Witness Deemed Reasonable

On June 11, 2021, Utherverse filed a patent infringement complaint against Epic, alleging that four Fortnite events (the “Accused Events”) violated the ‘071 Patent and the ‘605 Patent, collectively known as the “Asserted Patents.” These patents relate to enabling numerous participants to connect in a virtual computer-generated environment for shared virtual experiences. The current issue before the Court involves Epic’s Daubert motion to exclude Utherverse’s damages expert, Michele Riley. Judge Theresa L. Fricke, United States Magistrate Judge, issued a Report and Recommendation, which pushed for denying the motion to exclude the testimony of Michele Riley.

Finance Expert Witness

Michele Riley is a Managing Director at Stout, specializing in complex litigation consulting for breach of contract, unfair competition, investigations, and compliance. She holds certifications as a Certified Public Accountant, Certified Fraud Examiner, and is Certified in Financial Forensics.
Riley specializes in assessing intellectual property damages and valuation. She has testified in cases involving patent, trademark, and copyright infringement, as well as trade secret misappropriation.

Discussion by the Court

According to the Court’s decision in Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d 1332, 1347 (Fed. Cir. 2018), it was established that when reviewing damages in patent cases, the Federal Circuit applies regional circuit law to procedural issues and Federal Circuit law to substantive and procedural issues related to patent law. In reviewing motions to exclude expert testimony related to patent royalties, the Federal Circuit has applied its own law.

Judge Fricke, citing Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed.Cir.2009), observed that two alternative methods exist for calculating damages in a patent case; they “are the patentee’s lost profits and the reasonable royalty he would have received through arms-length bargaining.” To calculate the reasonable royalty, patentees generally consider a hypothetical negotiation, in which the asserted patent claims are assumed valid, enforceable, and infringed, and attempt “to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.” This hypothetical negotiation “necessarily involves an element of approximation and uncertainty.” In determining the reasonable royalty that would have been agreed to at the hypothetical negotiation, parties in patent cases frequently utilize the fifteen factors enunciated in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y.1970).

In Lucent Technologies Inc. v. Microsoft Corporation, 580 F.3d at 1326, it was established that a hypothetical negotiation can result in either a lump-sum license or a running royalty license. A lump-sum license is an up-front payment in full for the invention that involves uncertainty about “whether the technology is commercially successful or even used.” In contrast, a running royalty license is directly tied to how often the invention is incorporated into products by the licensee and is calculated by multiplying the proposed royalty rate by the proposed royalty base. The burden of proving damages falls on the patentee.” To properly carry this burden, the patentee must sufficiently tie the expert testimony on damages to the facts of the case. 

Judge Fricke stated that Riley’s analysis began with a general overview of the parties’ industries, the parties themselves, and the Accused Events. She explained that, based on her discussions with Craig Rosenberg, Utherverse’s technical expert, she understood that the Asserted Patents involved enabling a large number of participants to connect in a virtual computer-generated environment for shared virtual experiences. She calculated the royalty base by determining the revenue attributable to the Accused Events, including microtransaction purchases made by Fortnite users through the in-game currency. This encompassed items specifically available for the Accused Events in the Fortnite Item Shop, incremental revenue from microtransaction purchases related to the Accused Events, and the value to Epic of new and returning users due to the Accused Events.

For determining the royalty rate, Riley analyzed Utherverse Digital agreements, explaining their relevance in a hypothetical negotiation. After reviewing various data points and assessing their significance in a hypothetical negotiation, Riley made her conclusions about the royalty rate range known. She partially relied on the 2020 Royalty Rate Industry Summary from IPSCIO Reports.

Georgia-Pacific factor 1 considers: “The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.” Judge Fricke citing Wordtech Sys. v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed.Cir. 2010), held that a patentee may not rely on license agreements that are ” ‘radically different from the hypothetical agreement under consideration’ to determine a reasonable royalty.” Further, “comparisons of past patent licenses to the infringement must account for ‘the technological and economic differences’ between them.”

Ephere was engaged in computer graphics and software development, specializing in designing and implementing software solutions for computer graphics, film, and games, extending existing software for new functions, and providing consulting and support in the film and games industry. Epic argued that Riley inappropriately used the Ephere license as a substitute for apportionment, as she did not demonstrate sufficient comparability. Specifically, Epic contended that Riley failed to analyze the technological comparability between the ‘962 Patent from the Ephere license and the Asserted Patents. The Court was urged to conclude that Riley had not established a baseline comparability between the technology in the Ephere License and the Asserted Patents.

But Judge Fricke observed that in addition to providing a summary of the ‘962 Patent and the background of the invention itself, Riley also discussed the relationship between the patent from the Ephere license and the Asserted Patents. Judge Fricke determined that, according to Federal Circuit precedent, Riley needed to demonstrate baseline comparability between the ‘962 Patent and the Asserted Patents. It was noted that she had fulfilled this requirement in her report. Any further examination of the similarities and differences between the two was considered a factual matter rather than a methodological one and could be addressed during cross-examination.

Epic asserted that Riley couldn’t rely on Epic’s internal document about payment to an artist of one of the Accused Events, Epic’s merchandise agreements, a published industry report, and a Utherverse Digital license agreement to establish her royalty base. Judge Fricke, referencing Microsoft Corp. v. Motorola, 904 F.Supp.2d 1109, 1118 (W.D. Wash. 2012), found that these documents provided some indication of the appropriate initial royalty rate, making Riley’s testimony admissible. For instance, the merchandise agreements involved Epic and certain artists linked to the Accused Events, while the Utherverse Digital agreement supported Riley’s opinion on a suitable royalty rate.

Regarding Epic’s internal document and the IPSCIO industry report, these were among various data points Riley used in her royalty rate analysis. Judge Fricke asserted that she clarified the relevance of these documents and their connection to her analysis, leaving the degree of comparability for cross-examination rather than a Daubert motion.

Defendant Epic Games, Inc. (“Epic”) respectfully objected to the Report and
Recommendation concerning the motion to exclude the testimony of Riley on the following grounds:

  1. The R&R had erroneously recommended that the Court find Riley demonstrated the required baseline technological comparability between the license agreement she relied on and the technology at issue in this case. The record did not support such a finding, and holding otherwise on this record would have been contrary to binding Federal Circuit precedent.
  2. The R&R had not addressed Epic’s motion to exclude Riley’s royalty rate opinion for failing to apportion damages. Adopting the R&R and allowing Riley to present a damages theory that failed to apportion damages would have been contrary to established Federal Circuit law.
  3. The R&R’s finding that certain “comparable transactions” would inform the starting point of a royalty rate was clearly erroneous because those transactions were not patent licenses and were in no way economically or technologically comparable to the facts of this case.

After reviewing the Report and Recommendation of Judge Fricke as well as the objections to the Report and Recommendation, the Court adopted the Report and Recommendation.


The Court denied Epic Games, Inc.’s motion to exclude Utherverse Gaming, LLC’s damages expert, Michele Riley. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

Key Takeaways:

The Court scrutinized Riley’s analysis, noting her thorough examination of industry, parties, and events involved. The analysis included determining the royalty base and rate, involving a hypothetical negotiation and reliance on Utherverse Digital agreements. The Court acknowledged the inherent approximation and uncertainty in such assessments but deemed Riley’s methodology admissible. This demonstrates the Court’s consideration of the application of established principles in patent cases.

Concerns were raised by Epic regarding Riley’s use of the Ephere license and other documents for establishing the royalty base. The Court, citing Federal Circuit precedent, required Riley to demonstrate baseline technological comparability, which was found to be fulfilled in her report. The Court acknowledged that further exploration of similarities and differences could be addressed during cross-examination, highlighting the importance of factual matters in such evaluations.

Epic’s objection to the use of certain documents, including an internal document, merchandise agreements, and industry reports, was addressed by the Court. The Court, referencing relevant legal precedent, found these documents provided indications of an appropriate initial royalty rate, supporting the admissibility of Riley’s testimony. The Court emphasized the role of cross-examination in assessing the degree of comparability, showcasing a balanced approach to the admissibility of evidence.

In summary, the Court’s decision underscores the importance of adherence to established legal principles in patent cases, including the use of regional circuit law and Federal Circuit law, the consideration of two primary methods for calculating damages, and the scrutiny of expert testimony methodologies. The decision reflects a nuanced approach, allowing for cross-examination to address factual matters while ensuring the admissibility of expert opinions based on sound methodology.

Case Details:

Case Caption:Utherverse Gaming Llc V. Epic Games Inc
Docket Number:2:21cv799
Court:United States District Court, Washington Western
Citation:2023 U.S. Dist. LEXIS 232999
Order Date:January 12, 2024


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