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october 18 2010 1 30 pm

Conference on Evolving Damages Law Hosted Bythe Berkeley Center for Law & Technology & The Federal Circuit Bar Association Trial Lawyer PanelModeratorYar Chaikovsky, McDermott Will & Emery LLPPanelistsJames Elacqua, Skadden, Arps, Slate, Meagher & Flom LLPMichael Jacobs, Morrison & Foerster LLP Eric Lamison, Kirkland & Ellis LLPStanley Young, Covington & Burling LLP

October 18, 20101:30 PM

overview of topics for discussion
Overview of Topics for Discussion
  • Royalty Base
    • Explore issues such as apportionment, the entire market value rule, and the Georgia Pacific factors that affect the royalty base
  • Royalty Rates
    • Explore issues such as settlement agreements, the 25 % rule, and the Georgia Pacific factors that affect the royalty rates
  • Admissibility issues relating to expert opinions and damages
    • Explore evolving Daubert challenges and related issues
  • Preserving the trial record for appeal
    • Explore issues such as JMOL’s, moving for a new trial, etc.
  • Open Discussion

1

the entire market value rule
The Entire Market Value Rule

3

Allows for the recovery of damages based on the value of the entire apparatus containing several features, when the feature patented constitutes the basis for customer demand. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549 (Fed. Cir. 1995).

apportionment
Apportionment

Several recent decisions have considered the question of apportionment: what portion of the revenue or profit associated with an accused product should be used as the base for a royalty calculation?

Two of those decisions involved the same trial issue—deciding how to present a revised expert opinion after the District Court has excluded an initial expert opinion regarding the proper royalty base:

Lucent v. Gateway

Cornell v. Hewlett-Packard

lucent technologies inc v gateway inc
Lucent Technologies, Inc. v. Gateway, Inc.

580 F.3d 1301 (Fed. Cir. 2009)

Lucent’s patent claimed methods of entering information into fields on a computer screen without using a keyboard.

Lucent proved infringement by Microsoft’s Outlook, Money, and Mobile software.

The jury awarded over $350 million in damages:

Lucent had argued for $561 million (8% of $8 billion in sales plus a discount).

Microsoft had argued for $6.5 million.

lucent v gateway emvr application tested
Lucent v. Gateway: EMVR Application Tested

The Federal Circuit vacated the award as unsupported by substantial evidence:

The math “strongly suggests that the jury must have used some calculation of a rate applied to the entire market value of the software”

Reliance on the entire value of the Outlook software was flawed for two reasons

lucent v gateway first flaw
Lucent v. Gateway: First Flaw

There was no evidence that the accused date-picker feature in Outlook drove customer demand.

It was “but a very small component of a much larger software program”

“The vast majority of the features, when used, do not infringe”

Must consider “the relative importance of certain other features, e.g., e-mail”

The accused feature “is not the reason consumers purchase Outlook.”

lucent v gateway second flaw
Lucent v. Gateway: Second Flaw

Expert tried to gain back via the royalty rate what he lost in the royalty base when his original theory was rejected

Initially argue for a 1% rate applied to sale of entire computer

In limine order precluded use of entire computer as base

Expert then applied a higher, 8% rate to just the software

“Lucent’s expert tried to reach the damages number he would have obtained had he used the price of the entire computer as a royalty base.”

“This cannot be an acceptable way to conduct an analysis of what the parties would have agreed to in the hypothetical licensing context.”

lucent v gateway relation of base and rate
Lucent v. Gateway: Relation of Base and Rate

Court recognized “a fundamental relationship between the entire market value rule and the calculation of a running royalty damages award.”

The “base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence).”

“Thus, even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price or number of units sold can be economically justified.”

lucent v gateway emvr lives
Lucent v. Gateway: EMVR Lives

The Federal Circuit affirmed the viability of the entire market value rule:

The rule realistically simulates a hypothetical negotiation.

Licenses to patents often grant a percentage of sales of the entire product incorporating the patented feature.

“There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier [i.e., the royalty rate] accounts for the proportion of the base represented by the infringing component or feature.”

cornell u v hewlett packard co
Cornell U. v. Hewlett-Packard Co.

609 F. Supp. 2d 279 (N.D. NY 2009); argued at the Federal Circuit on April 6, 2010

Cornell’s patent claimed “a method for instruction issuance within a computer processor” - not a whole computer system

The patent is practiced in the instruction reorder buffer (IRB) of the processor

Processors are combined with other elements to make CPU modules; CPU modules are combined to make CPU bricks; CPU bricks are combined with other elements to make servers

“In the anatomy of a Hewlett-Packard server, the processor is the smallest salable patent-practicing unit.”

cornell v hp trial events
Cornell v. HP: Trial Events

“In anticipation that Cornell would assert entitlement to damages beyond the claimed invention, this court repeatedly advised before trial that it would scrutinize the damages proof.”

“To this court\'s surprise, when the trial commenced, Cornell had not revised its attempts to prove entitlement to damages far beyond the scope of the claimed invention” by using the revenue for servers and workstations

“. . . this court interrupted the trial to conduct a Daubert hearing to determine whether Cornell\'s damages expert . . . had properly applied the entire market value rule. . .”

cornell v hp trial events14
Cornell v. HP: Trial Events

“At that hearing, neither Cornell nor [the expert] offered credible and sufficient economic proof that the patented invention drove demand for Hewlett-Packard\'s entire server and workstation market.”

“Cornell did not offer a single demand curve or attempt in any way to link consumer demand for servers and workstations to the claimed invention.”

Court barred EMVR, but “offered an opportunity” for a return the following day with a revised damages opinion that did not use the whole system as the royalty base

cornell v hp trial events15
Cornell v. HP: Trial Events

Cornell came back using the CPU brick sales as a royalty base

Jury awarded over $ 184M to Cornell, finding

a 0.8% royalty rate

a $ 23B royalty base

The base consisted of CPU bricks, which “included earnings from the sale of many components of Hewlett-Packard\'s products that are not covered at all by the claimed invention.”

cornell v hp the jmol
Cornell v. HP: The JMOL

“[T]his court faults Cornell for using the CPU brick as the royalty base without credible and economic proof that damages on the unpatented portions of this technology was necessary to compensate for the infringement.”

The District Court:

Reduced the royalty base to an estimation, $8B, of what the revenues would have been if the processors had all been sold separately

Applied the jury’s .8% royalty rate to the lower, judge-determined $8B base, thereby arriving at a $53M damages award

cornell v hp on appeal
Cornell v. HP on Appeal

On appeal, Cornell argued that the jury’s verdict was supportable on either of two independent grounds

The jury had already accounted for the value of the non-patented features by discounting the royalty rate, OR

The jury’s application of the EMVR was appropriate and supported by sufficient evidence.

Hewlett-Packard argued that there was no question that the jury applied the EMVR, and that there was insufficient evidence to support the “CPU brick” royalty base

cornell v hp federal circuit argument
Cornell v. HP: Federal Circuit Argument

The judges inquired as to:

whether there had been any instruction that the jury could adjust the royalty rate to compensate for a larger base.

the sufficiency of the evidence supporting an EMVR application

significance of the District Court’s striking of the expert’s opinion

what to do at trial
What To Do At Trial?

Evidence: “Demand curves”, “customer surveys”, “sound economic testimony”

Jury instruction: In Cornell, “A royalty base generally includes only revenue generated by the allegedly infringing component. That is, where a patent creates only part of the value of a larger product, a patentee’s damages are generally limited to the part of the value created by the patent.”

Verdict form: Separate interrogatories for rate and base in Cornell, but not in Lucent

topics addressed
Topics Addressed
  • A Reasonable Royalty Rate under the Georgia-Pacific Factors
  • Relevant Case Law
  • The 25% Rule
  • The Future of the Reasonable Royalty Rate Analysis

20

slide22

The Georgia-Pacific Factors“In applying the formulation, the Court must take into account the realities of the bargaining table and subject the proofs to a dissective scrutiny.” Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1122 (S.D.N.Y. 1970).

* Bolded text indicates factors discussed in more detail.

21

  • 15 factors that may have an upward or downward impact on a reasonable royalty rate at the hypothetical negotiation.*
    • 1) An established royalty rate for the patent-in-suit
    • 2) Rates paid by the licensee for use of similar patents
    • 3) Nature and scope of the license
    • 4) Licensor’s licensing policy
    • 5) Commercial relationship between the licensor and licensee
    • 6) Effect of selling the patented feature in promoting sales of other products, including derivative or convoyed sales
    • 7) Duration of the patent and the term of the license
    • 8) Profitability of the product made under the patent and its commercial success/popularity
    • 9) Utility and advantages of the patented technology, especially over the prior art
    • 10) Nature of the patented invention
    • 11) Extent to which the alleged infringer has made use of the patented technology
    • 12) Portion of the profit that may be customary in the industry
    • 13) Portion of realizable profit that should be credited to the patented technology
    • 14) Opinion of experts
    • 15) Result of the hypothetical negotiation
slide23

“Hot” Factors“The focus of a reasonable royalty determination is on the value of the invention in the marketplace.”Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1576 (Fed. Cir. 1995).

22

  • Factor 6: Upward impact based on evidence of non-infringing products that can be linked, even loosely, to infringing products. See, e.g., Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387 (Fed. Cir. 2003) (“[T]he reasonable royalty on the defendant\'s infringing systems would increase because their placement in customers\' feedlots would promote sales of the defendants\' other products.”)
  • Factor 8: Upward impact based on evidence of popularity. See, e.g., Paymaster Techs., Inc. v. United States, 180 Fed. Appx. 942, 949 (Fed. Cir. 2006) (“What no one can dispute is that offering the money order service was popular enough that in a ten-year period the USPS had to purchase 1.5 billion forms. We hold this equates to commercial success.”)
  • Factor 9: Upward impact based on evidence that the patented technology is a “must-have.” i4i Ltd. P’ship v. Microsoft, 598 F.3d 831, 854 (Fed. Cir. 2010) (noting evidence that defendant described the patented technology as “the glue that holds the [Microsoft] Office ecosystem together.”)
  • Factor 11: Downward or no impact based on failure to present evidence of a customer’s amount of use of the product containing the patented feature. See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1334-35 (Fed. Cir. 2009) (“No evidence describes how many Microsoft Outlook users had ever performed the patented method or how many times.”)
  • Factor 13: Downward impact where there is evidence of non-infringing features of a product driving demand. See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1333 (Fed. Cir. 2009) (“[N]umerous features other than the date-picker appear to account for the overwhelming demand and therefore significant profit.”)
slide24

The 25% Rule“The concept of a ‘rule of thumb’ is perplexing in an area of the law where reliability and precision are deemed paramount . . .” Uniloc USA, Inc. v. Microsoft Corp., 632 F. Supp. 2d. 147, 151 (D. R.I. 2009).

23

  • In 1971, Robert Goldscheider first wrote about using the “25% rule” – a rule-of-thumb that assumes a patentee will keep 25% of the profits of all covered sales – to value intellectual property in licensing negotiations and litigations.
  • In a 2002 article entitled “Use of the 25 Per Cent Rule In Valuing IP,” Goldscheider himself sought to breathe new life into this rule of thumb, testing its “factual underpinnings” and finding that it is still “a valuable tool.”
  • However, the 25% rule suffers from incurable weaknesses:
    • Not tied to the patent-in-suit
    • Not even tied to the industry of the patent-in-suit
    • Based on a study of commercial licenses from the 1950s
  • Although the Federal Circuit had a recent opportunity to reject the rule, it declined to even address it directly, summarily approving the overall methodology of the expert. See i4i Ltd. P’ship v. Microsoft, 598 F.3d 831, 856 (Fed. Cir. 2010).
slide25

“Just the Facts Ma’am”“Having examined the relevant Georgia-Pacific factors, we are left with the unmistakable conclusion that the jury’s damages award is not supported by substantial evidence, but is based mainly on speculation and guesswork.”Lucent, 580 F.3d at 1335.

24

  • Contentious Georgia-Pacific factors usually involve the “Book of Wisdom,” which relates to evidence of factual developments that arose after the date of the hypothetical negotiation.
    • Lucent, 580 F.3d at 1333 (The analysis “permits and often requires a court to look at events and facts that . . . could not have been known to or predicted by the hypothesized negotiators.”); Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 698 (1933) (“[A] different situation is presented if years have gone by before the evidence is offered. Experience is then available to correct uncertain prophecy. Here is a book of wisdom that courts may not neglect. We find no rule of law that sets a clasp upon its pages, and forbids us to look within.”)
  • Even facts once deemed too prejudicial to a damages analysis, such as an actual license of the patent-in-suit resulting from a settlement agreement, have become part of the Book of Wisdom.
    • ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 872 (Fed. Cir. 2010) (“This court observes as well that the most reliable license in this record arose out of litigation.”)
  • The “Book of Wisdom” rules: As litigants and courts struggle with the hypothetical negotiation framework, real-world facts, when available, become essential to a party’s damages case.
    • ResQNet.com, 594 F.3d at 869 (“[T]he trial court must carefully tie proof of damages to the claimed invention’s footprint in the market place.”)
slide27
“Where’s the Proof”District courts are the “gatekeepers” who must exclude unreliable expert testimony on “reasonable royalty”

26

  • A court may permit opinion testimony from an expert under Rule 702 of the Federal Rules of Evidence only if:
    • the testimony is based upon sufficient facts or data,
    • the testimony is the product of reliable principles and methods, and
    • the witness has applied the principles and methods reliably to the facts of the case.
  • As gatekeepers, district courts must exclude expert testimony that fails to meet the requirements of Rule 702.
    • Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L.ED.2d 469 (1993)
  • Just as courts and lawyers have come to understand “causation” as a key focus of Daubert scrutiny in complex tort litigation, damages is re-emerging as a key focus of Daubert scrutiny in complex patent litigation.
  • Although a number of decisions address the “entire market value” rule, the evidentiary principles underpinning those decision should have broader applicability
application of daubert to patent damages sound economic and factual predicates
Application of Daubert to Patent Damages“sound economic and factual predicates”
  • The Federal Circuit has provided a helpful legal standard to guide trial courts and lawyers as to the admissibility of damages evidence and opinions
    • “A ‘reasonable royalty’ contemplates a hypothetical negotiation between the patentee and the infringer at a time before the infringement began. Again, this analysis necessarily involves some approximation of the market as it would have hypothetically developed absent infringement. This analysis, in turn, requires sound economic and factual predicates.”
      • Riles v. Shell Exploration & Production Co., 298 F.3d 1302, 1311 (Fed. Cir. 2002) (citations omitted)
    • “But for” inquiry in lost profits claim requires “[r]econstructing the market, by definition a hypothetical enterprise, [that] requires the patentee to project economic results that did not occur. To prevent the hypothetical from lapsing into pure speculation, this court requires sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture.”
      • Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1350 (Fed. Cir. 1999)
  • Although these decisions have been on the books for years, application of them to proposed expert testimony on patent damages could be on the rise
  • Indeed, in addition to guidance Federal Circuit decisions, Judge Rader has served as a trial court judge by designation and issued some interesting opinions as “gatekeeper”

27

slide29
What We Can Learn When A Federal Circuit Judge Serves As Our “Gatekeeper” Applying Federal Circuit Authority

I.P. Innovation LLC v. Red Hat, Inc., 705 F. Supp. 2d. 687 (E.D. Tex. 2010)

“A reliable reasonable royalty calculation depends on trustworthy evidence of both the royalty base and the royalty rate.” “Some approximation is permitted”, but there must be “sound economic and factual predicates.” Red Hat, 705 F. Supp. 2d at 689.

Judge Rader precluded the expert’s proposed “entire market value” royalty base because the opinion’s methodology “[did] not show a sound economic connection between the claimed invention and this broad proffered royalty base.” Id. at 689-91.

Selected statements by users of a system that “tout” a feature failed to show “an accurate economic measurement of total market demand” for the feature “let alone its contribution to the demand for the entire product”. This “proffered evidence has no economic foundation.” Id. at 689-91.

Expert’s failure to factor out of his analysis a number of facts contrary to the opinion showed “inattention to the economic and factual data necessary for a reliable assessment.” Id. at 689-91.

“Cherry-picking” licensing agreements that are neither technically nor economically comparable is arbitrary and provided “[a]nother reason for excluding” the expert’s testimony

The burden is on the expert to come forward and establish “some plausible economic connection” for his opinion. It is not the defendant’s burden to provide the economic framework.

28

slide30
What We Can Learn When A Federal Circuit Judge Serves As Our “Gatekeeper” Applying Federal Circuit Authority

Cornell University v. Hewlett-Packard Co., 2008 WL 2222189 (N.D. N.Y. 2008), judgment amended, 2009 WL 1405208 (N.D. N.Y. 2009)

Reiterates requirement that an expert must come forward with “economic evidence”, i.e. “proof” to support opinions by a “preponderance of the evidence”

For example, expert testimony on EMV is only appropriate “when it has been demonstrated, by a preponderance of the evidence” to meet the EMV standard.

Cornell’s expert “could have and should have offered evidence as to the service and workstation market”, “could have offered marketplace-wide evidence of demand sensitives for both the price sensitive and the performance sensitive,” and “could have analyzed demand” for those products

Instead, Cornell’s expert “did not offer a single demand curve or attempt in any way to link consumer demand” for the accused products to the claimed invention.

Cornell’s revised theory that went to the Jury also lacked necessary support, leading to successful JMOL and slashing of the award.

29

where s the proof
“Where’s the Proof”
  • Defendants may wish to challenge sufficiency of economic and technical proof and factual predicates for proffered damages opinions
    • Is there “economic proof” with “factual predicates” for the proposed royalty base?
      • Is there a reliable survey? Is there a reliable “demand curve”?
    • Is there proof proposed licenses are technically & economically comparable for factors 1-3?
      • How were the parties situated? What was the nature and scope of the license – e.g., is it a pure patent license or something else? Is the licensed technology comparable in kind and scope?
    • Is there “economic proof” with “factual predicates” for GP factors?
      • Factor 6: Effect of selling the patented feature in promoting sales of other products
      • Factor 11: Extent to which the alleged infringer has made use of the patented technology and the value of that use
      • Factor 13: Portion of realizable profit that should be credited to the patented technology as opposed to non-patented elements
    • Is there “economic proof” with “factual predicates” for Factor 12 as to portion of profit or selling price that may be customary to allow for use of analogous inventions?

30

motions for new trial on damages
Motions for New Trial on Damages

32

Motion for new trial is traditional mechanism via which courts review damages awards

  • Hetzel v. Prince William County, 523 U.S. 208 (1998) (finding that the Seventh Amendment requires that a court offer new trial in the alternative when reducing damages award)
  • Minks v. Polaris, 546 F.3d 1364 (Fed. Cir. 2008) (finding that district court inappropriately reduced damages award when granting JMOL motion without offering new trial)
tale of two cases
Tale of Two Cases

33

  • Lucent v. Microsoft
    • Jury awarded $358M in reasonable royalty.
    • Microsoft moved for JMOL and new trial on damages. Motions denied.
    • On appeal, Federal Circuit found that “damages award [wa]s not supported by substantial evidence” and remanded for new trial on damages.
  • i4i v. Microsoft
    • Jury awarded $200M in reasonable royalty.
    • Microsoft moved for new trial, but notJMOL on damages. Motion denied.
    • On appeal, Federal Circuit affirmed, finding that the damages award “while high, was supported by the evidence.”
jmol motions on damages
JMOL Motions on Damages?

Fed. R. Civ. Pro. 50(a) Judgment as a Matter of Law.

(1) In General.

If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may:

(A) resolve the issue against the party; and

(B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.

(2) Motion.

A motion for judgment as a matter of law may be made at any time before the case is submitted to the jury. The motion must specify the judgment sought and the law and facts that entitle the movant to the judgment.

But how to do you move for JMOL on damages before a damages verdict?

See B. Baum & D. Falk, The Importance of Preservation, The Recorder, Feb. 10, 2010, http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202443041228

successful jmols for defendants
Successful JMOLs for Defendants

35

  • Lucent v. Gateway, 580 F.3d 1301 (Fed. Cir. 2009)
    • No substantial evidence under Georgia-Pacific supported damages award as a matter of law
    • Application of entire market value rule unsupported as a matter of law
    • Award vacated; remand for new trial
  • Integra Lifesciences v. Merck KGaA, 331 F.3d 860 (Fed. Cir. 2003)
    • No substantial evidence supported damages award as a matter of law as record did not provide hypothetical negotiation date and district court incorrectly considered certain other licenses
    • Award vacated; remand for new trial
  • Cornell v. HP,609 F. Supp. 2d 729 (N.D.N.Y. 2009) (Rader, J.)
    • Application of entire market value rule unsupported as a matter of law
    • Reduced award of $184M to $53.5M
standards of review
Standards of Review

36

  • Motion for JMOL
    • District Court: Substantial evidence
      • SeeCornell v. HP, 609 F. Supp. 2d 729 (N.D.N.Y. 2009) (Rader, J.) (granting JMOL as substantial evidence did not support damages award)
    • Appeal: De novo; substantial evidence
      • See Lucent v. Gateway, 580 F.3d 1301 (Fed. Cir. 2009) (reversing denial of JMOL as substantial evidence did not support damages award)
  • Motion for New Trial
    • District Court: Excessiveness
      • See LaserDynamics v. Quanta, Civ. No 06-cv-348-TJW (granting motion for new trial or, in alternative, remittitur of award from $52M to $6.2M as damages award excessive)
    • Appeal: Highly deferential; abuse of discretion
      • See i4i v. Microsoft, 598 F.3d 831 (Fed. Cir. 2010) (affirming denial of new trial on damages as court did not abuse its discretion)
      • But see Shockley v. Arcan, 248 F. 3d 1349 (Fed. Cir. 2001) (reversing denial of new trial on damages after reviewing evidence to determine damages award was excessive)
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