Polaris Industries, Inc. v. Arctic Cat Inc.

         FILED UNDER SEAL

          NATHAN LOUWAGIE & SAMUEL T. LOCKNER, CARLSON CASPERS VANDENBURGH LINDQUIST & SCHUMAN PA, FOR PLAINTIFF/COUNTER DEFENDANT.

          JOSEPH A. HERRIGES, JOHN C. ADKISSON, & MARIA ELENA STITELER, FISH & RICHARDSON PC, FOR DEFENDANTS/COUNTER CLAIMANTS.

          MEMORANDUM OPINION AND ORDER

          JOHN R. TUNHEIM CHIEF JUDGE

         Polaris Industries Inc. (“Polaris”) brings these infringement actions against Arctic Cat Inc. and Arctic Cat Sales Inc. (collectively “Arctic Cat”). Polaris alleges Arctic Cat's Wildcat Trail vehicles infringe on its ‘449 and ‘501 Patents for side-by-side all-terrain vehicles.

         Polaris has moved to Exclude Certain Expert Testimony of Christopher Bakewell. (Docket No. 212, Case No. 15-4129; Docket No. 320, Case No. 15-4475.) Because Bakewell's opinions are properly supported under Federal Rule of Evidence 702, the Court will deny Polaris's Motions.

         BACKGROUND

         This series of patent cases arises from Arctic Cat's alleged infringement of Claim 1 of Polaris's '449 Patent in November 2015 (Case No. 15-4129) and infringement of Claims 1, 10, and 11 of Polaris's '501 Patent in December 2015 (Case No. 15-4475).

         The ‘449 Patent involves the positioning of a generally U-shaped sway bar in side by side off-road vehicles. (Decl. of Joseph A. Herriges in Supp. of Def.'s Opening Claim Construction Brief (“Herriges Decl.”), Ex. A, Mar. 31, 2017, Case No. 15-4475, Docket No. 137.) The ‘501 Patent involves the placement of air inlets relative to a continuously variable transmission engine in side by side off-road vehicles. (Herriges Decl., Ex. B.)

         Polaris moves to exclude the expert testimony of W. Christopher Bakewell related to his opinion on reasonable royalty damages for the ‘449 and ‘501 Patents. (Mot. to Exclude Expert Test. of W. Christopher Bakewell, July 20, 2018, Docket No. 320, Case No. 15-4475.) Bakewell is a Managing Director of Duff & Phelps, LLC, an international consulting firm specializing in financial advisory services. (Decl. of Samuel T. Lockner (“Lockner Decl.”) ¶ 3, July 20, 2018, Docket No. 324, Case No. 15-4475; Ex. B (“Bakewell Report”) ¶ 7, July 20, 2018, Docket No. 326, Case No. 15-4475.) At Duff & Phelps, LLC Bakewell's primary responsibility is to provide consulting services involving valuation and related issues in connection with technology-rich businesses and intellectual property. (Bakewell Report ¶ 7.)

         Bakewell used a two-step analysis to form his opinion on reasonable royalty damages. (Id. ¶¶ 204.) First, Bakewell used three intellectual property valuation methodologies to determine a baseline of valuation for the patents-in-suit. (Id..) These methodologies include (1) the market approach, (2) the income approach, and (3) the cost approach. (Id.) Second, Bakewell analyzed qualitative factors known as the Georgia-Pacific factors. (Id. ¶ 5.)

         The market approach values assets based on comparable arm's-length transactions between unrelated parties. (Id. ¶ 209.) Under this methodology, Bakewell considered agreements between Polaris and third parties, and Arctic Cat and third parties. (Id. ¶¶ 216-89.) Bakewell determined that agreements between Polaris and Vaughn North (“North Agreement”), and Polaris and CFMOTO (“CFMOTO Agreement”) were comparable to a hypothetical license between Polaris and Arctic Cat for the ‘449 and ‘501 Patents from a technical and economic standpoint. (Id. ¶¶ 218, 280.)

         The North Agreement XXXXX Bakewell based his opinion that the North Agreement is comparable to the hypothetical license at issue on several factors. First, XXXXX (Id. ¶ 220.) XXXXX (Id. ¶ 226.) Third, XXXXX and explained why he still considered the North Agreement comparable despite this fact. (Id. ¶ 228.)

         The CFMOTO Agreement XXXXX (Id. ¶ 239.) Bakewell based his opinion that the CFMOTO Agreement is comparable to the license at issue on several factors. First, XXXXX Second, XXXXX Third, XXXXX Fourth, (Id. ¶¶ 238-39, 262-64.) Fifth, XXXXX (Id. ¶¶ 266-75.) XXXXX

         The income approach involves analyzing the incremental value of the economic benefits associated with the ‘449 and ‘501 Patents. (Id. ¶ 318.) Bakewell opined that the ‘449 and ‘501 Patents had little value under this approach. This conclusion is based on both patents relating to features rather than to the entirety of the accused Arctic Cat products and the fact that next-best alternatives exist for both patents. (Id. ¶ 320.) Bakewell also relied on discussions with Dr. Greg Davis, Arctic Cat's technology expert, regarding the benefits and uses of each patent. (Id. ¶¶ 45-49, 57, 59-60.)

         The cost approach involves estimating the costs associated with creating the assets at issue, or an acceptable substitute. (Id. ¶ 292.) Bakewell opined that inexpensive noninfringing alternatives for the '449 and '501 Patents exist. (Id. ¶¶ 182-85, 313-14.) To reach this conclusion, Bakewell relied on a Polaris expert's opinion that XXXXX For the '501 Patent, Bakewell relied on Dr. Davis's expert opinion that the air inlet could be moved without impact on the performance of the accused vehicles. (Id. ¶¶ 182-85.) Further, because the air inlet could have been moved when the accused vehicles were first designed, Bakewell opined that the new design would have inclined no incremental cost. (Id. ¶¶ 315-16.)

         Bakewell used the valuations he found through the market, cost and income approaches to establish baseline values for the '449 and '501 Patents and create the table below, (Id. ¶¶ 322-23.)

         (Image Omitted)

(Id.)

         Bakewell also opined that the total lump-sum royalty would not exceed XXXXX (Id.) Bakewell allocated to the ‘449 Patent the baseline royalty of XXXXX, and to the ‘501 Patent XXXXX (Id.) The allocation was made, in part, based on the weight that Polaris's damages expert, Dr. Timothy J. Nantell, assigned to each patent. (Decl. of Maria Elena Stiteler (“Stiteler Decl.”) ¶ 4, Aug. 16, 2018, Docket No. 385, Case No. 15-4475; Ex. 3 at 13, Aug. 16, 2018, Docket No. 388, Case No. 15-4475.) The value of the ‘449 Patent is also equivalent to the value derived from the cost ...