[00:00:00] Speaker 03:
The first case for argument this morning is 23-1546, Altria Client Services versus R.J.

[00:00:07] Speaker 03:
Reynolds.

[00:00:08] Speaker 03:
Mr. Burnett, whenever you're ready.

[00:00:11] Speaker 03:
And could we just take a couple minutes on the talk with both sides just to

[00:00:15] Speaker 03:
confirm we've gotten a slew of paper in recent weeks about 28J and what's going on in the district court.

[00:00:23] Speaker 03:
It's our preliminary assessment that that doesn't, at least at this point, affect anything we're doing here in this case.

[00:00:31] Speaker 03:
And I wonder if you could confirm that or speak to that very briefly.

[00:00:36] Speaker 00:
Yes, Judge Prose.

[00:00:36] Speaker 00:
So we did move in the district court for relief under Rule 60B on two grounds, through

[00:00:41] Speaker 00:
obtained relief from the past judgment for infringement and damages and for relief from the perspective of ongoing royalty order the district court granted an indicative ruling only as to the latter.

[00:00:52] Speaker 00:
Now the ongoing royalty order is under review in this court but not directly only because the ongoing royalty rate

[00:00:59] Speaker 00:
is based on the rate that was found by the jury and that was applied on a going forward basis.

[00:01:04] Speaker 00:
So you're right, the alternative ground that we asked for, which was to vacate the past judgment for infringement and damages, would directly implicate the issues that are before the court in this appeal.

[00:01:16] Speaker 00:
I think if the court had granted the full relief re-requested for an indicative ruling, we would be here asking the court for a limited remand.

[00:01:24] Speaker 00:
I think a limited remand would be appropriate in these circumstances.

[00:01:28] Speaker 00:
If the court were to send the case back, the district court could hold the evidentiary hearing on the 60B5 issue, the prospective ongoing loyalty.

[00:01:34] Speaker 03:
But it's not necessary or compelled, it doesn't seem to me.

[00:01:38] Speaker 03:
I agree with that, Drew.

[00:01:40] Speaker 00:
I agree, it's not necessary, that is correct.

[00:01:42] Speaker 03:
Okay, and could I ask a friend on the other side if he agrees with that?

[00:01:47] Speaker 02:
Mark Perry, Your Honor, we do agree with that.

[00:01:51] Speaker 02:
Rule 60 motion essentially had two parts, backward looking and forward looking.

[00:01:54] Speaker 02:
The court denied it as to backward looking, which is the only thing that's at issue in this appeal.

[00:01:58] Speaker 02:
Therefore, it's been denied outright.

[00:02:01] Speaker 02:
The district court indicated the desire to hold an evidentiary hearing once the case returns to the district court.

[00:02:09] Speaker 02:
We submit it would be the most efficient to do that after the appeal is concluded.

[00:02:13] Speaker 02:
Once the issues have been resolved, if the judgment's affirmed, then that would be the only thing left.

[00:02:18] Speaker 02:
If the judgment's vacated or reversed, then

[00:02:20] Speaker 02:
anything else can be dealt with at the same time, all in the ordinary course, rather than dividing it up into different pieces.

[00:02:27] Speaker 03:
Thank you, Your Honor.

[00:02:28] Speaker 03:
All right.

[00:02:28] Speaker 03:
So let's proceed with the case as we have it.

[00:02:32] Speaker 00:
Thank you, Your Honor.

[00:02:32] Speaker 00:
May it please the Court.

[00:02:33] Speaker 00:
Good morning.

[00:02:34] Speaker 00:
My name is Jason Burnett.

[00:02:35] Speaker 00:
I'm here on behalf of Archer Reynolds Vapor Company, the appellant.

[00:02:38] Speaker 00:
I reserve three minutes of my time for rebuttal.

[00:02:41] Speaker 00:
The district court in this case entered a judgment for $95 million against Reynolds based on a royalty rate that was not supported by the two prior license agreements that Altria's expert relied on, and that was not a portion to account for admittedly non-infringing features of the views alto.

[00:02:58] Speaker 00:
I'd like to address these two damages issues first and then turn to the exclusion of the wired video evidence and that effect on Reynolds public use defense as to the Juul device.

[00:03:09] Speaker 00:
if time permits, address the non-infringement issue.

[00:03:12] Speaker 03:
And you're going to start with the 5.25 percent?

[00:03:15] Speaker 00:
I was planning to start with the apportionment issue, but I'm happy to start with 5.25.

[00:03:17] Speaker 00:
Why don't you do that?

[00:03:19] Speaker 00:
Start with 5.25?

[00:03:20] Speaker 00:
Yes, Your Honor.

[00:03:20] Speaker 00:
So there was testimony from Dr. Malachowski, Autria's damages expert, that these two prior license agreements, one both with Fontum, a non-party, one with Reynolds, and one with another entity, Newmark,

[00:03:33] Speaker 00:
that both of these agreements supported a 5.25% loyalty rate.

[00:03:41] Speaker 00:
First on the Fontum Reynolds agreement, there's not a rate mentioned in that agreement.

[00:03:45] Speaker 04:
Both of the agreements were to run until 2030, am I correct on that?

[00:03:49] Speaker 00:
Yes, I think it's 2029.

[00:03:50] Speaker 00:
Terminated, well, okay, go ahead.

[00:03:54] Speaker 00:
So they were for the lives of the Fontum patents, which I think was 2029 or 2030.

[00:03:59] Speaker 00:
the Fountain Reynolds agreement and covered all of Reynolds products, e-cigarette products, and there was not a rate in that agreement.

[00:04:08] Speaker 00:
So the agreement there was for a lump sum payment.

[00:04:12] Speaker 00:
Mr. Malachowski

[00:04:13] Speaker 00:
converted that lump sum payment to a royalty rate, but that rate was 2.1%.

[00:04:18] Speaker 03:
Can I just ask you a more preliminary question?

[00:04:21] Speaker 03:
You didn't file a Daubert motion.

[00:04:23] Speaker 03:
There was no attempt to exclude this testimony for the reasons.

[00:04:28] Speaker 03:
And you didn't do a rule 59.

[00:04:31] Speaker 03:
So what we're left with is what?

[00:04:32] Speaker 03:
We've got to find something that we can hang our hat on to support the verdict for the jury, the jury's verdict.

[00:04:40] Speaker 00:
Reynolds did file a Rule 59 motion and a Rule 50B motion as to this testimony about the royalty rate.

[00:04:46] Speaker 00:
Reynolds did not file a Daubert or Rule 702 motion as to the royalty rate.

[00:04:51] Speaker 00:
Reynolds did file a Rule 702 Daubert motion as to the apportionment opinions of these two experts.

[00:04:57] Speaker 00:
Right.

[00:04:57] Speaker 03:
Right.

[00:04:58] Speaker 03:
But not on this rate.

[00:04:59] Speaker 00:
Not on the rate.

[00:04:59] Speaker 00:
That is correct, Your Honor.

[00:05:00] Speaker 00:
So we are asking for the court to reverse the denial of the motion for a new trial and for Rule 50B relief.

[00:05:07] Speaker 00:
because there was not substantial evidence to support the 5.25% rate.

[00:05:12] Speaker 03:
And all along, you were asking your alternative amount was 0.21%?

[00:05:16] Speaker 03:
Yes, Your Honor.

[00:05:18] Speaker 03:
And notwithstanding some testimony, arguably with some heft on cross-examination, that tweaked the rate to 2.1% versus 5.25%.

[00:05:30] Speaker 03:
I didn't see anywhere in your closing argument or elsewhere where you were offering up to the jury

[00:05:35] Speaker 03:
No, this is the alternative rate.

[00:05:38] Speaker 03:
It should have been 2.1 based upon the testimony we've elicited at trial.

[00:05:42] Speaker 03:
Am I correct about my assessment of the record?

[00:05:44] Speaker 00:
That is correct.

[00:05:45] Speaker 00:
Our position was that the appropriate royalty rate was 0.21% based on what Malek held.

[00:05:50] Speaker 00:
We viewed the Fountain Reynolds agreement as the most comparable agreement, so we relied on that.

[00:05:56] Speaker 00:
When you convert the lump sum rate to a royalty rate, you get 2.1%.

[00:06:00] Speaker 00:
And then we apportioned, because the Fontum patents are 63 patents among 12 different patent families, our expert, Mr. Alarcon, viewed one patent family as being the relevant patent family for this technology, the Alto technology.

[00:06:15] Speaker 00:
And that's only 10% of the Fontum patents.

[00:06:19] Speaker 00:
And so 2.1% taking 10% of that is 0.21%.

[00:06:23] Speaker 00:
And that was the rate that we proposed to the jury, Your Honor.

[00:06:25] Speaker 00:
But on the Fontum Reynolds agreement, that rate is not in the agreement.

[00:06:29] Speaker 00:
Mr. Malachowski admitted that.

[00:06:31] Speaker 00:
What he relied on was a stipulation during the course of this litigation that Reynolds was aware that other Fontum licensees were paying 5.25%.

[00:06:39] Speaker 00:
But Mr. Malachowski admitted that he had not reviewed those other license and that he wasn't saying.

[00:06:45] Speaker 00:
He can't say that those prior license agreements with Fontum were technologically or economically comparable.

[00:06:52] Speaker 00:
And that's a minimal requirement.

[00:06:53] Speaker 04:
Did he actually testify that

[00:06:56] Speaker 04:
that based on the Reynolds agreement that 5.25 was the right number, or did he say, as what you just said suggested, that other evidence of 5.25 indicated that that is the right number?

[00:07:18] Speaker 00:
He did rely on the Fountain and Reynolds agreement, but he acknowledged that

[00:07:21] Speaker 00:
the rate was not in the agreement, and he found that it wasn't relevant because it covered multiple products.

[00:07:28] Speaker 04:
I understand that he acknowledged that the arithmetic, as was presented to him on cross-examination, led to a 2.1 percent.

[00:07:36] Speaker 04:
But did he ever say, well, not withstanding that,

[00:07:40] Speaker 04:
that that agreement supports the 5.25.

[00:07:42] Speaker 04:
I guess that's really the thrust of my question.

[00:07:45] Speaker 00:
I don't believe he directly relied on the Fontum Reynolds Agreement to support the rate.

[00:07:48] Speaker 00:
He did rely on the stipulation that Reynolds had entered into during the course of the litigation that it was aware of at the time that it entered into the agreement with Fontum that there were other agreements for 5.25%.

[00:07:59] Speaker 00:
So the only point I'm making about the Fontum Reynolds Agreement is that

[00:08:03] Speaker 00:
Mr. Malachowski's testimony as to that agreement was based on other licenses which are not in the record, which he didn't review, which he couldn't say, that's what he said in court, cannot say that they are technologically or economically comparable.

[00:08:14] Speaker 00:
So that leaves the Fontum-Newmark agreement, which does have a rate on the cover page of the agreement of 5.2.

[00:08:21] Speaker 03:
Is that the one with the $43, $44 million?

[00:08:23] Speaker 03:
Yes, gentlemen.

[00:08:25] Speaker 03:
I found it a little confusing in terms of the timing, in terms of the argument that was made.

[00:08:30] Speaker 03:
that that wasn't really the right number, because the agreement was supposed to go from 2017 to 2029, and it ended.

[00:08:39] Speaker 03:
Can you, because it was most confusing, because when you try to dig deep, the payment was staggered, so that it seems like it's confusing as to what the timing was for the entire agreement and the payment, given the staggered

[00:08:58] Speaker 03:
Do you understand the question?

[00:08:59] Speaker 00:
Absolutely.

[00:09:00] Speaker 00:
So putting the 5.25 on the cover aside, because that applied to other kinds of transactions for overseas, which are not relative, not comparable to the U.S.-based license here.

[00:09:11] Speaker 00:
What you are left with is the $43 million number that was paid over time in fixed payments.

[00:09:15] Speaker 00:
Mr. Malachowski purported to convert that $43 million number to a royalty rate, and he did that based on projected sales.

[00:09:23] Speaker 00:
So they had the documents from Newmark that showed what they were projecting at the time based on the payments.

[00:09:28] Speaker 00:
If you carry the projected sales out to the life of the patents, you get rates at a minimum of $89 million.

[00:09:36] Speaker 04:
So he stopped the assessment at 2023, right?

[00:09:44] Speaker 04:
So he came up with the $44 million as of 2023.

[00:09:48] Speaker 04:
Correct.

[00:09:48] Speaker 04:
And zero, in effect, between 2023 and 2030.

[00:09:53] Speaker 00:
Yes, Your Honor.

[00:09:54] Speaker 00:
And so based on stopping the analysis at 2023, Mr. Malachowski was able to say, well, based on projections through that time period, that's 44 million.

[00:10:02] Speaker 00:
That's very close to the 43 million that Newmark actually paid.

[00:10:05] Speaker 00:
Therefore, that supports a 5.25 rate.

[00:10:07] Speaker 00:
But as your questions indicate, Judge Bryson, there was, when Newmark entered into that license agreement, there was several more years worth of value in those patents than through 2023.

[00:10:22] Speaker 00:
Now, it just so happened that in actuality, Newmark exited the e-cigarette market, so there weren't actual sales past that rate.

[00:10:30] Speaker 00:
And so I think that would be what Mr. Malachowski would say would be the basis for stopping at that point.

[00:10:33] Speaker 00:
But at the time that the agreement was entered in 2016, we have in Newmark some projections about what they were thinking of in terms of the value of entering this agreement for $43 million.

[00:10:43] Speaker 00:
And it's far below 5.25% because that would be at a minimum $89 million for a lump sum payment.

[00:10:51] Speaker 00:
Newmark agreed to pay 43.

[00:10:54] Speaker 00:
And so that doesn't support the 5.25 rate either.

[00:10:56] Speaker 03:
So what number does that lead us to?

[00:10:57] Speaker 03:
I can't do the calculations in my head.

[00:11:00] Speaker 00:
I haven't done the calculation yet.

[00:11:01] Speaker 03:
But it would be pretty, maybe, I don't know if it's 2.1.

[00:11:04] Speaker 03:
Well, how do you reconcile that?

[00:11:06] Speaker 03:
And was it both agreements?

[00:11:07] Speaker 03:
Which agreement had the 3.6 sort of clause?

[00:11:11] Speaker 00:
That's the font of Newmark as well.

[00:11:12] Speaker 00:
OK.

[00:11:13] Speaker 03:
So if, under your calculations, it comes out to a lot less,

[00:11:18] Speaker 03:
even in the 2% range, how do you reconcile that with, if they at the time, based on the projected sales, really thought the rate was something like 2%, there's a clause in there that says that if anybody else gets less than 3.6%, you get a do-over or you get some questioning, how does that make any sense?

[00:11:40] Speaker 00:
Well, it makes sense that if Newmark went into an agreement where it was thinking it was paying 2.1% that it would seek to get the benefit if anybody else was paying less than 3.6%.

[00:11:50] Speaker 00:
That would encompass going down even below the rate that Newmark was thinking it was paying.

[00:11:54] Speaker 03:
Why?

[00:11:55] Speaker 03:
I mean, why does that make sense just walking in?

[00:11:57] Speaker 03:
You could understand.

[00:11:58] Speaker 03:
If you're contemplating a rate that's higher than 3.6, then it makes sense to say, well, wait.

[00:12:05] Speaker 03:
If we find out other people are paying 3.6, we get a do-over.

[00:12:09] Speaker 03:
But if you've agreed to something less than 3.6, why does it make sense that that would result in a do-over in these circumstances?

[00:12:21] Speaker 00:
That's what the parties agreed to.

[00:12:23] Speaker 00:
There's not testimony in the record about that.

[00:12:25] Speaker 00:
The point that was made at trial about why this referee clause supports the rate was that Mr. Malachowski said there's this clause.

[00:12:33] Speaker 00:
There was, in fact, a letter that was purported to trigger the review by the referee.

[00:12:39] Speaker 00:
Mr. Malachowski's testimony was that was the Reynolds-Fontum agreement, and that there was never a reevaluation of the Fontum-Newmark.

[00:12:46] Speaker 00:
So at a minimum, the Fontum-Reynolds agreement must be worth more than 3.6%.

[00:12:51] Speaker 00:
The problem with that is we had Newmark's corporate representative, through videotape deposition, testify at trial.

[00:12:58] Speaker 00:
Do you know what agreement triggered this referee review?

[00:13:02] Speaker 00:
And Autria's corporate representative said, I would be speculating.

[00:13:07] Speaker 00:
They didn't know what agreement had triggered the referees review and whether any rate had ever been calculated based on a subsequent agreement after the Pontam-Newmark agreement.

[00:13:18] Speaker 04:
Was the 3.6 a triggering mechanism for the review?

[00:13:22] Speaker 00:
Yes, Your Honor.

[00:13:23] Speaker ?:
OK.

[00:13:24] Speaker 00:
So we don't know whether it was Fontam Reynolds.

[00:13:26] Speaker 00:
The district court in its post-judgment order acknowledged this.

[00:13:30] Speaker 00:
Mr. Malachowski couldn't say whether it was the Fontam Reynolds agreement that actually triggered the review.

[00:13:36] Speaker 00:
And in any event, 3.6 is not 525.

[00:13:40] Speaker 00:
So the 3.6 rate does not support a 5.25 rate.

[00:13:44] Speaker 03:
Here's the problem I have, in all non-cander, is that they've got 5.25.

[00:13:51] Speaker 03:
Maybe it's shaky.

[00:13:52] Speaker 03:
Arguably, it's shaky.

[00:13:54] Speaker 03:
But if you're sitting in the jury and you've got this testimony about the 5.25 and pointing to various stuff, which you try to shoot down as best you can, and they've got nothing on the other end.

[00:14:05] Speaker 03:
I mean, they've got, you're asking for 0.21,

[00:14:08] Speaker 03:
somebody saying it's 2.1, somebody else is saying maybe it's 3.6.

[00:14:13] Speaker 03:
It doesn't offer much to the jury to say, well, everything's a little shaky and there are various numbers floating around, but I'm going to pick 5.25 because you've got five little pillars there that are pointing in that direction and an expert that's justifying it pretty strongly.

[00:14:36] Speaker 03:
You know, given where we are in terms of reviewing a jury verdict, I'm having a hard time.

[00:14:42] Speaker 03:
So what can you do about that?

[00:14:44] Speaker 00:
Respectfully, Your Honor.

[00:14:45] Speaker 00:
On substantial evidence review after a jury verdict, the court looks to see whether the expert testimony is actually supported by the actual licensing evidence.

[00:14:54] Speaker 00:
This is from the Laser Dynamics case.

[00:14:57] Speaker 00:
In the Lucent case, the court looked to whether the royalty rate was actually

[00:15:01] Speaker 00:
that was stated on the face, or a rate on the face of an agreement was actually supported by that rate.

[00:15:05] Speaker 00:
And the court said, no, if you go and look at the agreement, it's more complicated than that.

[00:15:09] Speaker 03:
But they've got to come up with a number.

[00:15:10] Speaker 03:
So what has stronger support in the record?

[00:15:13] Speaker 03:
There are all these other numbers floating around.

[00:15:16] Speaker 03:
They've got some reason to look at the 5.25.

[00:15:19] Speaker 03:
What other number would, if they had come up with a 2.1, or if they had come up with a 3.6, you could have been here arguing that those are insufficient as well, correct?

[00:15:31] Speaker 00:
Potentially, Your Honor, yes, it's not Reynolds' burden to prove the royalty rate.

[00:15:36] Speaker 00:
It was Altria's burden to prove the royalty rate with substantial evidence.

[00:15:39] Speaker 00:
These five pillars that were mentioned, none of them is supported by the actual licensing evidence.

[00:15:45] Speaker 00:
That's the reason why the rate should not be sustained, Your Honor.

[00:15:48] Speaker 00:
Every one of these bases was based on an interpretation of the rate that's not supported by the two prior license agreements.

[00:15:55] Speaker 00:
When you have the license agreements,

[00:15:56] Speaker 00:
You look to see whether the expert's testimony is actually supported by substantial evidence, and it wasn't in this case.

[00:16:02] Speaker 00:
Therefore, a new trial should have been granted, or J-Mall should have been granted by the district court.

[00:16:06] Speaker 00:
I'm seeing far into my rebuttal time.

[00:16:07] Speaker 03:
Yeah, you are, and my colleagues don't have anything else.

[00:16:10] Speaker 03:
Why don't we save your rebuttal and rest assured that all of the other issues that are here have been briefed in detail, and that will obviously carry the day for us.

[00:16:19] Speaker 00:
OK.

[00:16:20] Speaker 00:
Thank you.

[00:16:20] Speaker 03:
Thank you.

[00:16:25] Speaker 02:
Good morning.

[00:16:26] Speaker 02:
Good morning, your honor.

[00:16:27] Speaker 02:
May it please the court?

[00:16:28] Speaker 02:
We'll start where my friend ended at 5.25%.

[00:16:33] Speaker 03:
Yeah, let's talk about that since in fairness to your friend, we haven't raised the other issue.

[00:16:38] Speaker 02:
We have two comparable licenses in evidence with no objection.

[00:16:43] Speaker 02:
We have Mr. Matichowski's testimony about them in evidence with no objection, right?

[00:16:48] Speaker 02:
There was no Daubert challenge and no trial objection to any of this testimony.

[00:16:51] Speaker 02:
So we have... Well, the absence of a Daubert challenge doesn't...

[00:16:55] Speaker 04:
There was something in your brief that kind of led me to think maybe you were suggesting that the not having challenged on Daubert, they had foregone a challenge to the sufficiency of the evidence.

[00:17:06] Speaker 04:
That's not true, right?

[00:17:07] Speaker 02:
That's not our position.

[00:17:08] Speaker 02:
All right, good.

[00:17:09] Speaker 02:
But we're only in sufficiency, is our point.

[00:17:10] Speaker 02:
We're not in sufficiency.

[00:17:12] Speaker 04:
You're only in sufficiency.

[00:17:13] Speaker 04:
So what do you say about the 2.1%, which does look like that's what the math leads one to conclude?

[00:17:23] Speaker 04:
Why does the Reynolds?

[00:17:27] Speaker 04:
new, not the rent, Fontum Reynolds agreement leads you to 5.25.

[00:17:33] Speaker 02:
Sure, your honor.

[00:17:34] Speaker 04:
Setting aside the stipulation for a moment.

[00:17:37] Speaker 02:
Okay.

[00:17:37] Speaker 02:
So, Mr. Malachowski testified to this in his testimony 28368-69 and his point was that the business made a range of projections in entering into the agreement.

[00:17:48] Speaker 02:
And if I could just take a back a step.

[00:17:51] Speaker 02:
The simple arithmetic doesn't quite work here.

[00:17:54] Speaker 02:
As Mr. Malachowski explained, it's more complicated than that if you look at the business planning

[00:17:58] Speaker 02:
And he looked at the actual planning documents that Reynolds undertook when entering into this agreement and the range of scenarios they plotted out, one of which was 5.25%.

[00:18:06] Speaker 02:
That's the $44 million number.

[00:18:09] Speaker 02:
And that what his testimony was, was that it gave him comfort that in light of first, the Newmark agreement came first.

[00:18:15] Speaker 02:
So these are not unrelated agreements.

[00:18:16] Speaker 02:
Fonten was the party to both of them.

[00:18:18] Speaker 02:
Newmark, which was then Altria, was the counterparty to the first one.

[00:18:21] Speaker 02:
Reynolds was the counterparty to the second one.

[00:18:24] Speaker 02:
Were they essentially a similar structure?

[00:18:27] Speaker 02:
The Reynolds agreement or argument that 2.1 percent is an appropriate number is important because here we have the situation the court has confronted many times where we have a lump sum license that has to be converted in essence by an expert and the court has said there's no one right way to do that.

[00:18:43] Speaker 02:
The court has said on some occasions that you can't convert it, that it can only be considered as a lump sum, but we don't have that in this case.

[00:18:49] Speaker 02:
They agree it can be converted.

[00:18:50] Speaker 02:
So then we have a battle of the experts, right?

[00:18:52] Speaker 02:
We have Mr. Malachowski saying

[00:18:53] Speaker 02:
that the two agreements considered together have multiple paths to 5.25%.

[00:18:58] Speaker 04:
But what's the problem with the way that the reduction of the lump sum to the percentage was done by Reynolds expert, which came to 2.1%?

[00:19:12] Speaker 04:
What's the flaw in that?

[00:19:14] Speaker 04:
The arithmetic looks pretty unimpeachable.

[00:19:16] Speaker 02:
Well, it's hindsight reasoning, Your Honor.

[00:19:19] Speaker 02:
That math was done knowing the actual sales for the period of the agreement.

[00:19:23] Speaker 02:
Remember, the agreement was entered into years previously.

[00:19:27] Speaker 04:
Right, but it's for $79 million.

[00:19:29] Speaker 02:
Yes, Your Honor.

[00:19:30] Speaker 04:
And over a period leading from the time of the agreement until 2030.

[00:19:35] Speaker 04:
So that's an average of 2.1% per year, right?

[00:19:40] Speaker 04:
No, Your Honor.

[00:19:41] Speaker 04:
If you assume... Well, go ahead.

[00:19:43] Speaker 04:
You finish.

[00:19:45] Speaker 02:
Well, I don't mean to interrupt.

[00:19:47] Speaker 02:
The $79 million has to be evaluated ex ante at the time that license was entered into.

[00:19:54] Speaker 02:
That's when Reynolds did the scenario planning that laid out a number of things from a high of hundreds of millions of dollars to a low of tens of millions of dollars with different rates attached to them.

[00:20:03] Speaker 02:
The anticipation at the time as to future sales, unknown of course, was a range.

[00:20:09] Speaker 02:
And one item in that range was 5.25%.

[00:20:11] Speaker 02:
The mathematical certainty that my friend suggests is known only in hindsight, but the jury

[00:20:17] Speaker 02:
would not have known that.

[00:20:18] Speaker 02:
The parties would not have known that at the time of the hypothetical negotiation.

[00:20:21] Speaker 02:
The hypothetical negotiation in this case would have taken place before all those sales occurred.

[00:20:25] Speaker 02:
So it's mixing apples and oranges, if you will, because they're using post-licensing sales that would not have been known to the parties at the time of the hypothetical negotiation to inject that false certainty into the arrangement.

[00:20:37] Speaker 04:
So if the sales were way lower than had been anticipated as a medium level, then the license

[00:20:45] Speaker 02:
would be a higher percentage.

[00:20:47] Speaker 04:
The sales were much higher, lower percentage.

[00:20:49] Speaker 02:
If they never made any sales at all, they paid $79 million for nothing they never used.

[00:20:54] Speaker 02:
And that's why it has to be looked at ex ante rather than ex post.

[00:20:58] Speaker 02:
And in the ex ante scenario, that's where Mr. Malachowski looked at the range of scenario planning done by Reynolds.

[00:21:02] Speaker 02:
And he was extensively cross-examined on this to find where 5.25% lay in there.

[00:21:08] Speaker 02:
And it turned out, under Mr. Malachowski's analysis, that it actually comported with the real world payments.

[00:21:15] Speaker 02:
With the timing issue, the court is noted, right, because of the seizing of the sales.

[00:21:26] Speaker 03:
There's so many numbers, so forgive me if I'm getting this messed up.

[00:21:29] Speaker 03:
But on the other license then, that's the $43 million, $44 million question, right?

[00:21:34] Speaker 02:
Yes, sir.

[00:21:34] Speaker 03:
If you enter a license and it's for a period, which is 2017 through 2029, why don't those figures stick?

[00:21:43] Speaker 03:
I mean, you talk about here, but at the time, they didn't contemplate that this would all be done by 2023.

[00:21:51] Speaker 03:
So how is it appropriate to use a number based on a period of years which were not contemplated in the earlier agreement?

[00:21:58] Speaker 02:
And Judge Prost, I apologize.

[00:22:00] Speaker 02:
The answer I just gave to Judge Bryson, I was actually speaking of the Newmark agreement, not the Reynolds agreement.

[00:22:04] Speaker 02:
OK, well, maybe that's what it is.

[00:22:05] Speaker 04:
Does it all apply to the Reynolds agreement?

[00:22:08] Speaker 04:
The same answer?

[00:22:08] Speaker 02:
The Newmark agreement is the $44 million one.

[00:22:12] Speaker 02:
Right.

[00:22:12] Speaker 04:
Right.

[00:22:12] Speaker 04:
But does it apply equally to the 79?

[00:22:15] Speaker 02:
Yes, Your Honor.

[00:22:15] Speaker 02:
Mr. Malachowski looked at the scenario planning for both of them.

[00:22:18] Speaker 02:
They both have to be considered ex ante for purposes of the hypothetical negotiation, which would have been very close in time to the... All right.

[00:22:24] Speaker 04:
So the same answer.

[00:22:25] Speaker 02:
It is the same answer.

[00:22:26] Speaker 02:
But specifically to the $44 million, Your Honor, the projections actually made by Newmark

[00:22:32] Speaker 02:
showed a range of sales, right?

[00:22:34] Speaker 02:
And that could be based on any number of factors, changes in the market, availability of consumers, and so forth.

[00:22:40] Speaker 02:
It turns out, again, in hindsight, retrospect, that it stopped in 2023 so that the sales fit into that spray chart, that scenario analysis.

[00:22:48] Speaker 03:
Right, but as you said to Judge Bryson earlier, you're not supposed to look at it in hindsight.

[00:22:53] Speaker 03:
You're supposed to look at what the parties contemplated at the time, and that was through 2020.

[00:22:57] Speaker 02:
And at the time they entered it into, Your Honor, one of the scenarios that

[00:23:02] Speaker 02:
Newmark planned for was a $44 million scenario.

[00:23:06] Speaker 02:
It wasn't because of the time, it was because of the number of sales.

[00:23:09] Speaker 02:
And that was a 5.25% rate, which also is reflected in three other places, of course, in that agreement, the first agreement, the face of the agreement, the most favored licensee clause and so forth.

[00:23:18] Speaker 04:
And so- Is there evidence that $44 million was the amount that they anticipated selling throughout the period or until 2023?

[00:23:29] Speaker 04:
I thought that the scenario stopped at 2023.

[00:23:34] Speaker 02:
Your honor, the actual sale stopped at 2023.

[00:23:36] Speaker 02:
The scenario planning was for a range of scenarios that I don't believe was time limited.

[00:23:42] Speaker 02:
It was total sales over the period of the agreement.

[00:23:45] Speaker 03:
I thought they had a renegotiate.

[00:23:47] Speaker 03:
I thought they paid some money upfront and then there was some second stage to this.

[00:23:52] Speaker 03:
Am I misremembering?

[00:23:54] Speaker 02:
To Newmark.

[00:23:54] Speaker 02:
Yes, your honor.

[00:23:57] Speaker 03:
Okay, so how does that affect the discussion we've been having?

[00:24:01] Speaker 02:
So Mr. Malachowski, what he did, again, the $44 million point was a confirmatory point that he said, let's look at what they were planning at the time.

[00:24:11] Speaker 02:
One of the ranges was $5.25 million.

[00:24:13] Speaker 02:
It did not go just Bryson or just gross to the specific of the timing, but rather the total sales.

[00:24:18] Speaker 02:
And as it turned out, the total sales were in that range.

[00:24:24] Speaker 02:
The point about the referee clause, Judge Prost, you asked my friend about, I think is very important because... Which agreement?

[00:24:31] Speaker 03:
You're making me as confused as I am on that.

[00:24:33] Speaker 03:
Which agreement was that?

[00:24:34] Speaker 03:
That wasn't in both, right?

[00:24:35] Speaker 01:
Both have a referee clause.

[00:24:37] Speaker 01:
Counselor, before we move on, let me have a couple of questions about the Newmark Agreement.

[00:24:43] Speaker 01:
Now, it contains a fair assurance clause and a referee clause, right?

[00:24:47] Speaker 02:
Yes.

[00:24:48] Speaker 01:
With those in the Reynolds Agreement?

[00:24:50] Speaker 02:
The referee clause is in the

[00:24:52] Speaker 02:
Reynolds agreement, the Newmark also has a most favored licensee clause.

[00:24:56] Speaker 01:
So when the jury looks at the first year's clause, what is it that they would be thinking?

[00:25:00] Speaker 01:
What does that mean to you?

[00:25:01] Speaker 02:
Well, so what Mr. Malachowski's testimony was at pages 28, 33, 66 to 67 was that no one else in the industry is going to get a better deal than is in the license.

[00:25:16] Speaker 01:
The 5.25%?

[00:25:17] Speaker 01:
Correct.

[00:25:18] Speaker 01:
So what this means to the jury is that 5.25% is a good deal or the best deal?

[00:25:27] Speaker 02:
Essentially as the industry standard was Mr. Malachowski's testimony based both on the MFL clause and on the Reynolds stipulation that it was aware that Fontum had licensed its patents to multiple players in the industry for 5.25%.

[00:25:40] Speaker 02:
So that there was an industry standard evidence in this case based on the internal structure of the licenses.

[00:25:45] Speaker 02:
as well as a stipulation Reynolds entered into for purposes of this case, both of which were before the jury in considering this evidence.

[00:25:54] Speaker 02:
Thank you.

[00:25:54] Speaker 02:
And the referee clause in particular, which says it can't go lower than 3.6%, Judge Proce, there are a lot of numbers flying around, but we know that 2.1% and more importantly 0.21%, which are the numbers suggested by Reynolds, are way below 3.6%.

[00:26:09] Speaker 02:
And we submit, and Mr. Malachowski testified to the jury, that there's no way to read the referee clause as going

[00:26:15] Speaker 02:
below 3.6 percent.

[00:26:17] Speaker 02:
He said it basically has some headroom between 5.25 and 3.6, but that it establishes that we know that these licenses are above 3.6 percent.

[00:26:25] Speaker 02:
Otherwise, the referee clause doesn't really have any function.

[00:26:28] Speaker 03:
Given that's the number that has meaning and more clarity than the 5.25 percent, what if the jury had come back with 3.6?

[00:26:36] Speaker 03:
Would you have any argument there?

[00:26:39] Speaker 02:
I think, Your Honor, the jury would have substantial evidence to select a rate that was supported by the licenses.

[00:26:46] Speaker 02:
3.6 percent absolutely is on both licenses and it is a number that was supported.

[00:26:51] Speaker 02:
Neither expert testified to it, but of course we know from this Court's cases that a jury may go with the evidence even if it's not supported by the expert testimony.

[00:27:00] Speaker 02:
I don't think going below 3.6 percent is supported by anything in either of these licenses.

[00:27:04] Speaker 02:
That's the point of the referee clause and the problem.

[00:27:07] Speaker 02:
with the Reynolds argument because they came to the jury, they didn't offer a number that was supported by the licenses, they used the straight arithmetic approach as to one license and then argued that should be the number discounted by 90%.

[00:27:19] Speaker 02:
And that was not supported by the evidence.

[00:27:22] Speaker 02:
So we think the only number that was supported by the evidence, the jury's number absolutely

[00:27:26] Speaker 02:
In the court's hypothetical, 3.6% could be.

[00:27:29] Speaker 02:
I can't answer definitively, but it's certainly in the agreement.

[00:27:32] Speaker 02:
It wouldn't accord with the stipulation, but it would be there.

[00:27:35] Speaker 02:
It can't be 2.1%.

[00:27:36] Speaker 02:
It can't be 0.21%, because then we would have a conflict with the very evidence on which the jury was asked to make its decision, again, without objection from Reynolds.

[00:27:47] Speaker 04:
Returning, if you could, for just a moment, to the Reynolds agreement.

[00:27:53] Speaker 04:
Now you said that there were various projections that would lead to different percentage royalties.

[00:28:01] Speaker 04:
What was the evidence as to the projection that would have led to a 5.25% royalty?

[00:28:10] Speaker 04:
In other words, that would have been a projection of a very low sales.

[00:28:15] Speaker 04:
What was the internal evidence that you mentioned earlier that led you

[00:28:21] Speaker 04:
to think that 5.25 was one of the numbers that could have been supported.

[00:28:26] Speaker 02:
So, Judge Bryson, Mr. Malachowski had two principal opinions as to the Reynolds Agreement, which was the second of the two agreements.

[00:28:35] Speaker 02:
The first was the stipulation that Reynolds itself entered into that it was aware that Fontum licensed these patents to the industry for 5.25%.

[00:28:43] Speaker 02:
And the second was the referee clause that it would be at least 3.6%.

[00:28:46] Speaker 04:
I guess my question is, was there anything beyond that in the internal materials that he reviewed that suggested if we sell many fewer than we expect to sell, then

[00:29:00] Speaker 02:
the number would be not for Reynolds your honor he had more detailed information for Newmark than he did for Reynolds because Newmark had the low and mid level expectations it actually had a much broader range two of those are mentioned Reynolds brief but it had a range of scenario plannings and Mr. Malachowski had access to all the internal business planning documents from Newmark at the time it was made so it was a much more robust set of information for Newmark than it was for Reynolds and

[00:29:28] Speaker 02:
you know, the Newmark agreement came first and it was really the basis for Mr. Malachowski's opinion, including, you know, the structural features that were then carried over to Reynolds.

[00:29:41] Speaker 02:
So, you know, he treated them paired, not separately, because they were from the same parties, the same thing.

[00:29:51] Speaker 03:
Thank you.

[00:29:51] Speaker 02:
Thank you, Your Honor.

[00:29:57] Speaker 00:
Just want to clarify that the 0.21% was the post-apportionment rate.

[00:30:07] Speaker 00:
So just want to be clear that Reynolds position was that these two agreements, or actually just the one, the Fontum Reynolds agreement being the most comparable, would allow the jury to find 2.1% as the relevant rate.

[00:30:19] Speaker 00:
It's very similar to the

[00:30:20] Speaker 00:
would be supported by the Fontum Newmark if you take half of the low range of sales for 89 million, take that 5.25 down to half of 5.25, you get close to 2.1 again.

[00:30:30] Speaker 00:
We only got to 0.21 through apportionment.

[00:30:33] Speaker 00:
We looked at the Fontum licenses and we said, not all of those patents are relevant to the Altria patents here, only 10% of them.

[00:30:40] Speaker 00:
So that's where that number comes from.

[00:30:42] Speaker 00:
I think what you've heard is that the Fontum Reynolds Agreement doesn't support the rate.

[00:30:47] Speaker 00:
It has a $79 million number in it.

[00:30:49] Speaker 00:
what Mr. Malachowski testified a trial was, we can still take comfort in this agreement because we have the stipulation.

[00:30:56] Speaker 00:
But the stipulation doesn't explain the 79 million number and the stipulation was based on

[00:31:00] Speaker 00:
other FONTUM agreements that are not... I hate to interrupt you, but can I ask a question?

[00:31:04] Speaker 03:
But we've got a black box jury verdict, so if we find one license supports the jury was... there's substantial evidence to support the jury three lines on only one of the two licenses, it's still unaffirmed, correct?

[00:31:16] Speaker 00:
I agree with that, Judge Proust, I agree.

[00:31:18] Speaker 00:
And that's why it's important for the FONTUM Newmark Agreement, that 5.25 number that's on the face

[00:31:23] Speaker 00:
That doesn't apply here.

[00:31:25] Speaker 00:
That was for transfers overseas to a third party for overseas sales.

[00:31:33] Speaker 01:
This is USA-based?

[00:31:35] Speaker 00:
It does, on the face, because there was actually sort of two agreements in one for Font of Newmark.

[00:31:39] Speaker 00:
There was the fixed payments to Newmark, for Newmark to practice.

[00:31:43] Speaker 01:
You meant the references of 5.25.

[00:31:46] Speaker 01:
That clearly was for U.S.

[00:31:49] Speaker 01:
sales, right?

[00:31:50] Speaker 01:
At least that's what the jury would see when they saw U.S.

[00:31:55] Speaker 00:
on there.

[00:31:55] Speaker 00:
Newmark did not pay 5.25% for U.S.-based sales of its products that practiced the patents.

[00:32:02] Speaker 00:
It would have paid 5.25% for transfers overseas for sales of products overseas, or at the lower actually of 6% per cartridge.

[00:32:12] Speaker 00:
So there's even that nuance and complication.

[00:32:16] Speaker 00:
The 5.25% rate that was

[00:32:19] Speaker 00:
paraded before the jury did not apply to what would be the hypothetical comparable license here, which is a US-based license for products sold in the US.

[00:32:28] Speaker 00:
I see I'm over my time.

[00:32:29] Speaker 00:
Thank you, Your Honor.

[00:32:30] Speaker 03:
Thank you.

[00:32:31] Speaker 03:
Thank both sides.

[00:32:31] Speaker 03:
The case is submitted.