For Discussion and Academnic Purposes Only1 Exploring the New World David Healey, Fish &...

For Discussion and Academnic Purposes Only 1

“Exploring the New World”

David Healey, Fish & Richardson, “a/k/a” Patentmath.com

&For the plaintiff’s perspective, Wendy Boone, Goldstein and

Lipski

For Columbus Day, we embark to the “New World” of Patent Damages

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These slides and this presentation are not legal advice.

These slides and this presentation are not the opinions of the “authors-speakers”, not the opinions of their firms, and not the opinions of any client.

These slides are only for academic discussion.

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Damages Statute – 35 U.S.C. § 284: “…in no event less than a reasonable royalty…”. Lost profits (patented product would be economic

monopoly and patentee can meet demand) Established royalty (royalty established by market

acceptance, e.g. SSO) Reasonable royalty (Fictional royalty) Enhanced damages (up to 3x for willful infringement) Prejudgment interest (discretionary in amount, but

presumed, typically prime compounded quarterly) Damages in lieu of injunction for future

infringement. 35 U.S.C. §283 as applied in Paice v. Toyota, 504 F.3d

1293 (Fed. Cir. 2007). Exceptional Case – 35 U.S.C. § 285 – attorneys’

fees Marking/Notice – 35 U.S.C. § 287

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Big Changes In last 2 Years• Lucent v Gateway, 580 F.3d 1301 (Fed. Cir. 2009)

• Licenses must be comparable in economic form, and for same patents or similar technology. Damages must be apportioned to the infringing part and only compensate for economic harm from infringement.

• ResQNet.com v Lansa, 594 F.3d 860 (Fed. Cir. 2010)

• Comparable licenses only, maybe settlements. See also Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010)(Comparable licenses).

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Big Changes In last 2 Years• Finjan, Inc. v. Secure Computing Corp., 626 F.3d

1197, 1210-11 (Fed.Cir.2010)• Method claims were reversed because no

evidence code could be accessed or was used, but damages upheld based on presence of inaccessible code on media.

• Uniloc v Microsoft, 632 F.3d 1292 (2011)• No 25% Rule (or other arbitrary rules): Royalties

must be based on facts specific to its case. • Tougher EMV: Cannot be mentioned for any

purpose or comparison unless test met for EMV.

Spectralytics, Inc. v. Cordis Corp., ___ F.3d ___, Nos. 2009-1564 & 2010-1004, 2011 WL 2307402 (Fed. Cir. June 13, 2011) Upheld argument that hypothetical royalties

could be based on a rate that is a multiple of actual licenses since the findings of infringement and validity are established in the verdict, while contested in an earlier license (there, 3x).

GP factors specifically applied to the case, illustrating how they might be applied post-Lucent.

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Affinity Labs of Texas LLC v. BMW Motor Cars of North America, Civil Action No. 9:08CV164 (Clark, J.), appeal pending.

Lump sum paid up license for all products for all time for one defendant (Volkswagen).

Where defendant opted for per unit royalty: calculation of damages for future infringement

applying Paice; Application of GP factors to damages for future

infringement. Willfulness enhancement for future damages.

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Damages provisions from proposed legislation in past Congressional Sessions were dropped as moot.

“Virtual Marking”, listing patent numbers on website established as notice, H.R. 1249, Section 16(a), amending 35 U.S.C. § 287(a).

Private false marking claims require proof of competitive injury and actual damages, and marking with a patent that covered the product but has expired is no longer “false marking”, H.R. 1249, Section 16(b), amending 35 U.S.C. § 292(a).

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What is a reasonable royalty? Analytical method: TMW v. Dura, TWM Mfg. Co., Inc. v.

Dura Corp., 789 F. 2d 895 (Fed. Cir. 1986), damages based on business plan and projections at time by the infringer for use of the invention.

Hypothetical negotiation: G-P, Lucent, Spectralytics Requires apportionment of the infringement from the

“whole”. Requires licenses be directly relevant

Same patents Comparable patents Same economic terms (lump sum/running royalty) Comparable terms or conversion of terms Limited to economic harm – estimate of patentee’s actual

injury Can use “whole” as royalty base if amount of royalty is first

calculated and then converted to its portion of selling price of the “whole”.

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Apportionment – Separating the value of the infringing piece from the “whole” Surveys

Mixed results: The closer to the infringing piece the more likely to be admitted

Smallest salable unit where infringement found Cornell v. HP (Judge Rader), Uniloc (Chief Judge Rader)(EMV cannot be used as a check

nor can royalty be amortized over “the whole”, compare Lucent)

Technical expert testimony on infringing functionality to operation of “the whole”.

Difference in selling price between products with/without feature.

Valuation model: Is it a form of apportionment? Developing value from business valuation principles applied

to the infringing feature and/or comparable patents or technology.

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Economically Comparable: Hypothetical license must be in same form or

comparable form to past licenses of the parties. Lump sum and running royalty licenses are

distinct because they are typically based on different economic considerations and risks.

Scope of licenses must be compared to infringing technology

Economics of hypothetical licenses must be grounded in evidence from actual licenses, directly or through fact based extrapolation.

Bottom line is that economics of reasonably royalty must be limited to the economic harm or loss from the infringement.

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Plaintiff’s damages expert relied on licenses for software not patents.

No evidence the software practiced the patents.

Defendant did not put on any expert testimony of damages

Court held: 1) Plaintiff has sole burden of proof on damages,

defendant has no obligation to put on proof of damages

2) Use of product licenses where no proof of product practicing the patent was insufficient proof of damages as a matter of law

3) Speculated in dicta that best evidence might be litigation settlements

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Establishing that a license is comparable: For plaintiff’s licenses, same patent (or similar

patents?) Settlement licenses (dicta)

Traditionally excluded under F.R.E. 408 Violate rule that patent is presumed infringed and

enforceable (settlement’s premise is liability and damages are disputed)

Datatreasury v Wells Fargo: Settlement licenses admitted, impact is tremendous on liability, but minimize damages because jury took settlements as established price.

Appears to be a dying trend… “In like a lion out like a lamb?”

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Where no distinction between method claims and apparatus claims made in the damages question to the jury, presence of inaccessible code on a media will support the damages awarded. Does Finjan require a defendant to object to testimony

and to a jury charge for “unitary damages”? Is Finjan fact specific?

No Daubert motion or other objection to entire market value rule, 25% rule, or “unitary damages” testimony or verdict form.

Evidence that presence of code on media permitted advertisement of complete solution from a single source.

Evidence of replicating function, look and feel of patentee’s product.

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“[T]here must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement.”Where does the hypothetical negotiation start?

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“Nash Bargaining Solution” Economic model based on mathematician John Nash’s

theories Has been studied and applied in some economic scholarship Meant to model behavior of actors in a negotiation not

provide an arbitrary royalty as a start for negotiation (25%) But without evidence it becomes a 50% rule… Rejected in at least one district court case, pending in

others… Survey of industry specific licenses for comparable

technology. Requires evidence on economic and technical comparability. Probably the ideal, but unattainable in most cases.

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“The Supreme Court and this court's precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate. See Garretson, 111 U.S. at 121, 4 S.Ct. 291; Lucent Techs., 580 F.3d at 1336 ”Uniloc bars any mention or test or amortization of royalty over entire product sales or revenues.

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How are per infringement royalties aggregated?

For example, if before you could say: apportionment is 1/10th of the whole, and royalty is

X, then multiply 1/10 * X * (revenue) = total royalty But under Uniloc is this permissible? Semantics may make the difference: Royalty for

infringement of the piece within the whole is X. Multiply X * (unit sales) = total royalty. No mention of total price of whole or revenue of

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June 2011 Federal Circuit Decision affirmed jury charge on damages that put the 15 GP factors into 11 factors grounded in the case:

“The jury was given a non-exhaustive list of eleven factors to consider, as follows:

(1) What royalties did Cordis, Norman Noble, or others pay for licenses to patents comparable to the '277 Patent?

(2) Did Spectralytics have a policy of licensing or not licensing the '277 Patent? What were the terms of those licenses?

(3) Was Spectralytics in competition with Cordis and/or Norman Noble?

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(4) Does the ability to use the patented invention help in selling other products or services?(5) How profitable was the patented device? Was it commercially successful or popular?(6) What advantages and benefits did the patented invention provide over devices not claimed in the '277 Patent?(7) Was an acceptable, non-infringing alternative available to Cordis and Norman Noble in December 1998, when the alleged infringement began?(8) How extensively did Cordis and Norman Noble use the patented invention, and what was the value of that use to them?

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(9) Is there a customary portion or percentage of the profit or selling price that is customarily paid in the field as a royalty for the use of patented inventions comparable to the invention claimed in the '277 Patent?(10) What portion of profit is attributable to the patented invention versus other factors such as unpatented elements or unpatented manufacturing processes, or features or improvements developed by Cordis or Norman Noble?(11) What opinions do experts have as to what would be a reasonable royalty?Trial Tr. 3056-58.

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Whether the “Nash Bargaining Solution” is an acceptable model for use in a reasonable royalty analysis?

Whether a judgment for damages can be both past and future, in effect a paid up license, where the evidence supports this result of a hypothetical negotiation?

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For the Plaintiff – Alternatives?

Analytical Model – TMW v. Dura– Lucent specifically “blesses” analytical model as a

basis for reasonable royalty.– This might be much better for plaintiff:

• Managers projecting big sales and profits• Business plans with inflated promises• Technology is before its time and is commercial failure

(e.g., netbook computers in dial-up age flopped, but are huge in broadband age).

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For the Plaintiff – Alternatives?

Valuation Theory– Valuation theory is familiar to everyone: Compare

price of one car to another car to get value; compare one house to another house to get value; projected profit based on established revenue stream discounted to present value.

– This might be much better for plaintiff where feature is successful for other manufacturers but unsuccessful for defendant.

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For the Plaintiff – Alternatives?

• Costs and disadvantages of alternatives are both a potential theory and possible argument to limit damages or royalties

• But depends on total cost and impact of disadvantages: Manufacturing, distribution, market acceptance.

• Depends on whether cost will increase price: Price and sales generally are “see-saw”

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Why Focus On Damages?• No more injunctions for most plaintiffs since

eBay• Most plaintiffs cannot show prior notice of

patent (e.g., willfulness)• Actual loss of licensing revenue is true test:

this loss maybe very small depending on licensing history of plaintiff.

• Where low damages: other procedures?

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Preservation Of Error• As Plaintiff, must put on legally proper

damages case even if Defendant does not, ResQNet.com

• As Defendant, must move to limit discovery: Once a big number is out, it may come in…

• Both parties, must make Daubert motion to limit or strike improper expert report

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Preservation Of Error• Both parties, must make motions in limine to

exclude improper evidence of damages• Both parties must make JMOL on issue of

damages at end of opponent’s case raising all grounds

• Loser must make JMOL post-trial and for new trial after verdict on damages.

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What to do?

In recent speech at Joint Federal Bar Association – Eastern District of Texas Bar Association, Chief Judge Rader urged early evaluation of damages.

EDTEX Judges already do this:Judge Clark addresses damage range at CMCJudge Davis in Parallel Networks to eliminate the “Hobson’s Choice” of low dollar cases.

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