Katie Karn February 15, 2011

1. Ongoing Royalties in Patent Litigation: The Evolving Case Law on Damages for Post-Verdict Infringement Katie Karn February 15, 2011

2. Does the analysis of reasonable royalty change pre-verdict versus post-verdict? “[P]re-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties’ legal relationship and other factors.” Paice II (Rader, J., concurring). So, what is the change in the parties’ legal relationship? What other factors may be relevant? 2

3. What has changed - Certainty of liability and validity? Courts have suggested that the bargaining positions of the parties change because the jury has determined that infringement occurred and that the patent was valid. “Prior to judgment, liability for infringement, as well as the validity of the patent, is uncertain, and damages are determined in the context of that uncertainty. Once a judgment of validity and infringement has been entered, however, that calculus is markedly different because different economic factors are involved.”Amado v. Microsoft Corp. (Fed. Cir. 2008) (Amado II) 3

4. What has changed - Certainty of liability and validity? Other courts have found bargaining positions do not change based on the determination of infringement and validity. Experts assume findings of validity and infringement when analyzing the hypothetical negotiation. It would therefore be 'logically inconsistent' for experts’ analysis to change “when those assumptions are replaced by jury findings of the same facts.”Ariba, Inc. v. Emptoris, Inc. (E.D. Tex. July 29, 2008) “In determining the reasonable royalty rate during trial, both parties assumed the [patent-in-suit] was valid and infringed. The jury’s verdict has now confirmed this assumption.” (Emphasis in original.)Presidio Components Inc. v. American Technical Ceramics Corp. (S.D. Cal. August 5, 2010) 4

5. Where do these cases leave us?Certainty of liability and validity Ariba (E.D. Tex. 2009) Presidio Components (S.D. Cal. 2010) Amado II (Fed. Cir. 2008) (Stronger bargaining position) (Weaker bargaining position) Plaintiff’s Pre-Verdict Bargaining Position 5

6. What has changed – Is the infringement now willful? Some courts have suggested the royalty should be increased because the infringement is now willful. In Paice, LLC v. Toyota Motor Corp. (E.D. Tex. Apr. 17, 2009) (Paice III), the court noted that the post-verdict infringement by the adjudged infringer would be willful. “Toyota never considers the fact that its continued infringement is willful and that a new lawsuit by Paice would likely result in treble damages and could potentially be considered an exceptional case.” (Paice III) In Bard Peripheral Vascular v. W.L. Gore & Assoc.(D. Ariz. Sept. 8, 2009),the Court determined that an ongoing royalty rate should be higher than the reasonable royalty rate that was set by the jury, stating: “As [plaintiff] has noted, there has been a post-verdict change in the Parties’ legal relationship in that [defendant] is now an adjudged willful infringer...” [Emphasis added] 6

7. What has changed – Is the infringement now willful? Some courts have rejected an approach that focuses on willfulness. In Amado v. Microsoft, the District Court had issued a permanent injunction, but stayed the injunction until appeals were resolved. The District Court later dissolved the permanent injunction and awarded plaintiff damages for sales made during the stay. The Court calculated the award by trebling the jury’s damages award, explaining that the infringement was willful. In rejecting the District Court’s award, the Federal Circuit stated that “willfulness, as such, is not the inquiry when the infringement is permitted by a court-ordered stay.”Amado v. Microsoft Corp. (Fed. Cir. 2008) (Amado II) 7

8. Where do these cases leave us?Willful infringement Paice III (E.D. Tex. 2009) Amado II (Fed. Cir. 2008) Bard Peripheral Vascular (D. Ariz. 2009) (Stronger bargaining position) (Weaker bargaining position) Plaintiff’s Pre-Verdict Bargaining Position 8

9. What has changed - Threat of injunction? The court may find that the threat of injunction strengthens the patentee’s bargaining position, even if it is not imposed. The post-verdict hypothetical negotiation would assume that plaintiff could force defendant’s product off the market (even though this did not happen in the “real world”).Boston Scientific v. Johnson & Johnson (N.D. Cal Apr. 9, 2009) 9

10. What has changed - Threat of injunction? The court may consider the reasons an injunction was not imposed or was stayed in evaluating the parties’ bargaining positions. On remand, the trial court in Amado considered the factors that led to the determination to stay an injunction. “Amado’s bargaining position improved due to the finding of infringement subject to an injunction…. However, this advantage in Amado’s bargaining position was substantially limited due to factors including the evidence and arguments found material to the stay and injunction.”Amado v. Microsoft Corp. (C.D. Cal. Dec. 4, 2008)(Amado III) 10

11. What has changed - Threat of injunction? The court may find that the parties’ bargaining positions are unchanged if no injunction issues. “Where, as here, an injunction is no longer proper, the Court is hard pressed to find in what material respect the situation is different now than it was during trial.” Presidio Components Inc. v. American Technical Ceramics Corp. (S.D. Cal. August 5, 2010) 11

12. What has changed - Threat of injunction? The court may find that the injunction determination has no impact on the parties’ bargaining positions. “Injunction or no injunction, pre-suit and post-judgment licensing negotiations are necessarily different due at least to the change in legal status of the parties.” (Paice III) “In many ongoing royalty negotiations, the threat of permanent injunction serves as a big stick, essentially framing negotiation in terms of how much an adjudged infringer would pay for a license to continue its infringing conduct.” (Paice III) “However, when an injunction is not proper under eBay, the question instead becomes: what amount of money would reasonably compensate a patentee for giving up his right to exclude yet allow an ongoing willful infringer to make a reasonable profit?” (Paice III) 12

13. Where do these cases leave us? Threat of injunction Presidio Components (S.D. Cal. 2010) Paice III (E.D. Tex. 2009) Amado III (C.D. Cal. 2008) Boston Scientific (N.D. Cal. 2009) (Weaker bargaining position) (Stronger bargaining position) Plaintiff’s Pre-Verdict Bargaining Position 13

14. Are Georgia-Pacific factors relevant post-verdict? On remand, the Amado III court rejected the use of the Georgia-Pacific factors and focused on specific factors outlined by the Federal Circuit in Amado II. “By not including any reference to the Georgia-Pacific factors, the Federal Circuit implicitly rejected this approach.” “The Federal Circuit indicated that it was error for the Court to base the reasonable royalty on the pre-judgment award found by the jury … If the Court applies the Georgia-Pacific factors, it runs the risk of skewing the analysis towards a pre-judgment framework.” The Amado court considered such factors as the infringer’s likelihood of success on appeal, the infringer’s ability to comply with the injunction, the parties’ reasonable expectations if the stay was entered by consent or stipulation, as well as evidence found material to the granting of the injunction and stay. 14

15. Are Georgia-Pacific factors relevant post-verdict? Other courts have found the Georgia-Pacific factors to be relevant. A trial court found that submitting a question on future damages to the jury would not increase the complexity of the overall damages analysis.Cummins-Allison Corp. v. SBM Co., Ltd., et. al. (E.D. Texas Nov. 3, 2008) The Georgia-Pacific framework should apply to the determination of future damages just as it does to past infringement damages. Some factors such as the relative importance of the technology or the availability of a design-around may have changed since the date of first infringement, but these factors could be explained to the jury. 15

16. Are Georgia-Pacific factors relevant post-verdict? Some courts consider a modified Georgia-Pacific analysis to be useful. On remand, the Paice court found that “A post-judgment, ongoing royalty negotiation…is logically different from the pre-trial hypothetical negotiation discussed in Georgia-Pacific.”Paice III “It is under [a] modified Georgia-Pacific framework that the Court proceeds.” The court applied the “25% rule of thumb” to the defendant’s profit margin, then lowered the result based on: 1) the jury’s award for past damages, and 2) changed circumstances (post-judgment changes to the defendant’s incremental profit). 16

17. Are Georgia-Pacific factors relevant post-verdict? In Presidio Components Inc. v. American Technical Ceramics Corp. (S.D. Cal. August 5, 2010), the court performed a modified Georgia-Pacific analysis. “[W]hile not controlling, the Court believes an examination of the relevant Georgia-Pacific factors could be helpful in determining the appropriate royalty rate post-judgment.” The Court considered that granting a license would require Presidio to give up the right to offer an exclusive license to a third party in the future and considered that the defendant was a willful infringer. “On the other hand, the Court is not convinced that the parties’ positions have changed to such an extent as to warrant a departure from what Presidio’s own damages expert considered to be a reasonable rate pre-trial.” 17

18. Are Georgia-Pacific factors relevant post-verdict? In Boston Scientific v. Johnson & Johnson (N.D. Cal Apr. 9, 2009), the court applied the Georgia-Pacific factors, but weighed differently the factors that would be changed by a finding of infringement. For example, the Court considered under Georgia-Pacific factor 1 that license agreements entered into by Cordis for the patents-in-suit were negotiated in the absence of a jury verdict. 18

19. Are Georgia-Pacific factors relevant post-verdict? In Creative Internet Advertising Corporation v. Yahoo (E.D. Tex. Dec. 9, 2009), the court applied a modified Georgia-Pacific analysis that considered the changed relationship between the parties. The Court “will apply a modified Georgia-Pacific analysis. As such, the Georgia-Pacific factors will be applied in light of the changed relationship between the parties and will reflect a hypothetical negotiation in which Yahoo is now an adjudged infringer.” The court agreed with plaintiff’s expert who applied the Georgia-Pacific factors and considered Yahoo’s decision not to design around, supporting a higher ongoing royalty rate. 19

20. Where do these cases leave us? Does the Georgia-Pacific framework apply? YES, BUT MODIFIED NO YES Paice III (E.D. Tex. 2009) Presidio Components (S.D. Cal. August 5, 2010) Boston Scientific (N.D. Cal. 2009) Creative Internet Advertising Corp. (E.D. Tex. 2009) Cummins-Allison (E.D. Tex. 2008) Amado III (C.D. Cal. 2008) 20

21. Take Aways Criteria for evaluating parties’ post-verdict bargaining positions vary across venues. Learn what has been decided in the relevant jurisdiction and/or jurisdictions the court may look to for guidance. Consider how to frame the bargaining position of the parties post-verdict. Has it really changed? Has the issue of injunction been decided? Identify what Georgia-Pacific factors differ post-verdict compared to the original hypothetical negotiation. If the jury will be asked for an advisory verdict on post-verdict royalty, consider addressing during trial what circumstances have changed. 21

22. Supreme Court eBay v. MercExchange, LLC, 547 U.S. 388 (2006) Federal Circuit Amado v. Microsoft, 517 F.3d 1353 (Fed. Cir. 2008) (“Amado II”) Paice v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007) (“Paice II”) Cases Cited 22

23. District Court Amado v. Microsoft Corp., No. SA CV 03-242 (C.D. Cal. Dec. 4, 2008) (“Amado III”) Ariba, Inc. v. Emptoris, Inc., 567 F. Supp. 2d. 914, (E.D. Tex. July 29, 2008) Bard Peripheral Vascular, Inc., et. al. v. W.L. Gore & Associates, No. 2:03-cv-00597 (D. Ariz. Sept. 8, 2009) Boston Scientific v. Johnson & Johnson & Cordis Corp., No. C 02-790 SI(N.D. Cal. Apr. 9, 2009) Creative Internet Advertising Corp. v. Yahoo, 674 F. Supp. 2d 847(E.D. Tex. Dec. 9, 2009) Cummins-Allison Corp. v. SBM Co., Ltd., et. al., 584 F. Supp. 2d 916(E.D. Tex. Nov. 3, 2008) Paice v. Toyota Motor Corp., 609 F. Supp. 2d 620 (E.D. Tex. Apr. 17, 2009) (“Paice III”) Presidio Components v. American Technical Ceramics, No. 3:08-cv-335 (S.D. Cal. Aug. 5, 2010) Cases Cited 23

24. Consistent with the educational objective of this presentation, the information contained herein is intended to be illustrative of certain damages concepts and to provoke thought and discussion.  These slides do not represent the speaker’s comprehensive views and assessments of the subjects addressed.  Any analysis of damages must be performed within the context of the specific circumstances of each case including, but not limited to, the particular factual, legal, and regulatory circumstances.  The subjects addressed in this presentation are not intended to reflect a comprehensive review of damage issues related to intellectual property.  The views expressed in this presentation are solely those of the speaker and not necessarily those of Charles River Associates or its employees. Disclaimer 24

25. Kathryn L. Karn Charles River Associates 1 South Wacker Drive, Suite 3400 Chicago, Illinois 60606 (312) 377-2374 kkarn@crai.com 25