Contract analysis

I. EXECUTIVE SUMMARY On February 14, 2025, Hugh Danaher, CFA, Senior Managing Director at Keystone Valuation Advisors LLC (1700 Market Street, Suite 3100, Philadelphia, PA 19103), served his expert damages report on behalf of plaintiff Apex Surgical Innovations, Inc. ("Apex") in the above-captioned matter. Mr. Danaher was retained by Apex's litigation counsel, Hargrove, Tate & Bennington LLP, to provide opinions rega

II. OVERVIEW OF DANAHER'S REPORT STRUCTURE A. Report Organization Mr. Danaher's report is organized into seven substantive sections, with eleven appended exhibits (Exhibits A through K). The report spans 127 pages of text, exclusive of exhibits, and is supported by 38 footnotes and extensive citations to both documentary evidence produced in this litigation and published economic and financial literature. The princip

Section I: Qualifications and Assignment. Mr. Danaher sets forth his professional qualifications, including his CFA designation, his tenure as Senior Managing Director at Keystone Valuation Advisors LLC, and his prior experience as a damages expert in patent infringement actions involving medical device technology. He identifies that he was retained by Hargrove, Tate & Bennington LLP on behalf of Apex and describes t

Section II: Background on the Parties, Accused Products, and Asserted Patents. This section provides an overview of the business operations of Apex and Solstice, the commercial history of the accused PrecisionEdge™ products, and a brief summary of the three Asserted Patents. Mr. Danaher describes the technology at issue, drawing primarily from the patent specifications and Apex's technical expert, Dr. Calvin Ng of Ve

Section III: Reasonable Royalty Methodology Under 35 U.S.C. § 284. Mr. Danaher sets forth the legal framework for reasonable royalty damages, citing Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), and subsequent Federal Circuit decisions. He describes the hypothetical negotiation construct and states that he has considered all fifteen Georgia-Pacific factors in arriving at his

Section IV: Georgia-Pacific Factor Analysis. This section comprises the bulk of the report, spanning approximately 55 pages. Mr. Danaher addresses each of the fifteen Georgia-Pacific factors and reaches conclusions regarding whether each factor favors a higher or lower royalty rate. His overall conclusion is that the balance of factors supports a "substantial" royalty rate reflecting the significant value contributed

Section V: Royalty Base Calculation. Mr. Danaher calculates his royalty base as the total U.S. invoiced revenue from sales of the accused PrecisionEdge™ PE-5000, PE-12000, and PE-15000 Series products from CY 2021 through Q3 2024, totaling $74,600,000. He asserts that the use of total product revenue as the royalty base is appropriate because the patented features are integral to the accused products.

Section VI: Royalty Rate Determination. Mr. Danaher derives his blended royalty rate of approximately 42.6% through an analysis of (i) Apex's internal licensing guidelines, (ii) purported comparable license agreements, (iii) the profit margins earned by Solstice on accused products, and (iv) a "cross-check" against the 25% rule of thumb. He applies this rate to the entirety of the royalty base without disaggregation

Section VII: Damages Computation and Summary. Mr. Danaher multiplies his royalty base of $74,600,000 by his blended royalty rate of approximately 42.6% to arrive at total reasonable royalty damages of $31,800,000. He further opines that pre-judgment interest should be applied from the date of first infringement, which he places in early CY 2021. Mr. Danaher does not separately calculate pre-judgment interest but iden

III. ANALYSIS OF ROYALTY BASE A. Danaher's Royalty Base Methodology Mr. Danaher employs the total invoiced revenue from the accused PrecisionEdge™ PE-5000, PE-12000, and PE-15000 Series product lines as his royalty base. He includes all U.S. sales from CY 2021 through September 30, 2024, arriving at a total royalty base of $74,600,000. This approach treats the entire trocar assembly—inclusive of the cannula, the obtu

IV. ANALYSIS OF ROYALTY RATE A. Danaher's Rate Derivation Mr. Danaher arrives at an effective blended royalty rate of approximately 42.6%, calculated as $31,800,000 divided by $74,600,000. This rate is exceptionally high by any measure and is particularly anomalous in the context of surgical device patent licensing, where royalty rates typically range from 2% to 10% of product sales, depending on the scope and signif

V. PRE-JUDGMENT INTEREST AND OTHER REMEDIES A. Danaher's Pre-Judgment Interest Calculation Mr. Danaher opines that pre-judgment interest should be applied from the date of alleged first infringement, which he places in early CY 2021, using the prime rate compounded quarterly. While Mr. Danaher does not calculate a specific dollar figure for pre-judgment interest in his report, the amount would be substantial given th

VI. DAUBERT CHALLENGES A. Potential Grounds for Exclusion Based on our review of Mr. Danaher's report, we have identified four principal grounds for a Daubert challenge to his damages testimony:

1. Exclusion of the 25% Rule of Thumb Methodology. As discussed in Section IV.B, Mr. Danaher's use of the 25% rule as a "cross-check" on his royalty rate is inadmissible under Uniloc USA, Inc. v. Kestrel Partners LLC, 632 F.3d 1292 (Fed. Cir. 2011). The Federal Circuit has held that the 25% rule is fundamentally flawed and inadmissible in any form, whether used as a starting point, a corroborating benchmark, or a "sa

2. Exclusion of Non-Comparable License Agreements. At least two of the five license agreements relied upon by Mr. Danaher as "comparables" involve Apex's insufflation equipment patents, which are technologically distinct from the trocar patents at issue. The inclusion of non-comparable licenses as a basis for the royalty rate violates the requirement of Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325

3. Challenge to Failure to Apportion the Royalty Base. Mr. Danaher's use of the entire revenue from the accused products as his royalty base, without apportionment to the patented features, fails to satisfy the requirements of LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012), and VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014). The absence of apportionment renders the royal

4. Challenge to the Entire Market Value Theory. Related to the apportionment issue, Mr. Danaher's invocation of the entire market value rule is unsupported by evidence that the patented features drive demand for the entire PrecisionEdge™ product. The market survey data (SBD-023841 through SBD-023919) affirmatively contradicts Mr. Danaher's assumption, and his failure to address this evidence undermines the reliabilit

VII. COMPARISON TO DR. MARCHETTI'S DAMAGES ANALYSIS Dr. Elena Marchetti of Pinnacle Economics Group LLC served her own expert damages report on behalf of Solstice on February 14, 2025—the same date as Mr. Danaher's report. Dr. Marchetti's report sets forth her independent assessment of the reasonable royalty damages, if any, owed by Solstice for the alleged infringement of the Asserted Patents. In contrast to Mr. Dan

VIII. RECOMMENDED REBUTTAL STRATEGY A. Dr. Marchetti Rebuttal Report The deadline for service of rebuttal expert reports is March 3, 2025, which is 14 calendar days from the date of this memorandum. Dr. Marchetti should prepare a comprehensive, point-by-point rebuttal of Mr. Danaher's report, addressing each of the following topics:

1. The Royalty Base. Dr. Marchetti should demonstrate that the smallest salable patent-practicing unit for each of the Asserted Patents is the relevant patented sub-component—the seal assembly, the blade mechanism, or the valve assembly—rather than the entire trocar device. Her rebuttal should present the SSPPU analysis in detail, using Solstice's cost accounting data to isolate the cost and value attributable to eac

2. The Royalty Rate. Dr. Marchetti should anchor her rebuttal rate analysis in Apex's actual licensing history, demonstrating that Apex has consistently licensed individual patents in the Trocar Patent Family at rates of 3–6%. She should disaggregate the lump-sum and running royalty components of the litigation-driven licenses cited by Mr. Danaher, showing that the effective running royalty rates in those agreements

3. Georgia-Pacific Factors. Dr. Marchetti should provide a balanced factor-by-factor analysis demonstrating that the majority of the Georgia-Pacific factors favor a significantly lower royalty rate than the 42.6% proposed by Mr. Danaher. Her analysis should give particular attention to the factors identified in Section IV.E above—Factors 1, 2, 4, 8, 9, 10, and 13—where the evidence most clearly supports a lower rate.

4. Pre-Suit Damages. Dr. Marchetti should challenge the inclusion of CY 2021, CY 2022, and CY 2023 sales in the royalty base, absent proof that Apex satisfied the marking requirements of 35 U.S.C. § 287(a) or that Apex provided actual notice to Solstice prior to the filing of the complaint on May 9, 2024. Dr. Marchetti should present an alternative damages calculation that limits the relevant revenue period to the po

5. Pre-Judgment Interest. Dr. Marchetti should argue for a later accrual start date for pre-judgment interest, consistent with the § 287 analysis above. If damages are limited to the post-complaint period, pre-judgment interest should accrue from May 9, 2024, at the earliest. Dr. Marchetti should also evaluate whether the prime rate compounded quarterly is the most appropriate methodology or whether an alternative in