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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
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).
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
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.
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
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.”
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.”
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.”
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.”
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.”
“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. . .”
“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 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.”
“[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
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
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
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
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.
“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).
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).
“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.
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.
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.
Motion for new trial is traditional mechanism via which courts review damages awards
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.
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