How to Prove Reasonable
Royalty Damages after Uniloc
March 3, 2011
Statutory Basis for
Reasonable Royalty Damages
and How to Prove Them
• 35 U.S.C. § 284:
“[T]he court shall award damages adequate
to compensate for the infringement, but in
no event less than a reasonable royalty for
the use made of the invention by the
infringer.”
“The court may receive expert testimony as
an aid to the determination of damages or
of what royalty would be reasonable under
the circumstances.”
Two kinds of recognized patent damages:
(1) Lost profits for sales the patentee
would have made (e.g., as a competitor)
(2) Reasonable royalty for sales the
patentee would not have made
Reasonable Royalty Methodologies
• Three basic types of methodologies have been accepted
by CAFC:
(1) “Established” royalty (forget this one)
(2) Analytical method (TWM v. Dura)
(3) Hypothetical royalty negotiation using
Georgia Pacific factors (with patent assumed valid
and infringed)
Recent CAFC Reasonable Royalty
Decisions
• Lucent Tech., Inc. v. Gateway, Inc., 580
F.3d 1301 (Sept. 2009)
• i4i Ltd. Partnership v. Microsoft Corp., 598
F.3d 831 (Dec. 2009)
• ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d
860 (Feb. 2010)
• Wordtech Sys., Inc. v. Integrated Network
Sol’n, Inc., 2010 WL 2384958 (June 2010)
• Microsoft v. Uniloc, __ F.3d ___ (Jan. 2011)
Lucent Tech. v. Gateway, Inc.
• Lucent accused Gateway and others of infringing a
number of patents, including the Day ‘356 patent.
• 􀂃 Microsoft intervened and its products, including
“date picker” feature of Outlook, were accused.
• 􀂃 Lucent prevailed against Microsoft at trial
and obtained a jury award of ~$360 million.
• 􀂃 Validity and infringement decisions upheld on
appeal, but damages award remanded as lacking
sufficient evidentiary support.
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Lucent Tech. cont.
Reasonable Royalty Analysis
The Federal Circuit considered whether the lump
sum jury award of ~$360 million was a
“reasonable royalty.”
􀂃 Lucent had argued for a running royalty based
award (8% of accused products including
Microsoft Outlook) totaling ~$562 million.
􀂃 Microsoft had argued for a lump-sum royalty
payment of $6.5 million.
􀂃 The jury’s lump sum award was much closer to
Lucent’s number but NOT based upon Lucent’s
expert’s running royalty theory.
Lucent Tech. cont.
Reasonable Royalty Analysis
• Georgia Pacific Factor 2 -- “[t]he rates paid by the licensee for
the use of other patents comparable to the patent in suit” -weighed against jury award.
• 􀂃 There was no evidence in the record to support jury
determination that the parties would have agreed to a lump
sum payment. The lump sum and running royalty approaches
to a license agreement necessarily involve different
considerations.
• 􀂃 The 4 “comparable” lump-sum agreements were either
“vastly different” or were presented with no explanation as to
subject matter.
• 􀂃 For the 4 running-royalty agreements presented, there was
no evidence in the record about why they would have been
probative of the amount of a lump-sum payment.
• 􀂃 Jury award was 3-4 times average amount of lump-sum
agreements in evidence.
Lucent Tech. cont.
Reasonable Royalty Analysis
• Georgia Pacific Factors 10 and 13 – “[t]he nature of the
patented invention; the character of the commercial
embodiment of it as owned and produced by the licensor;
and the benefits to those who have used the invention;”
“[t]he portion of the realized profit that should be credited to
the invention as distinguished from non-patented elements,
the manufacturing process, business risks, or significant
features or improvements added by the infringers.” -- did not
support jury award
• 􀂃 These factors concern how the parties would have valued
the patented feature during the hypothetical negotiation.
• 􀂃 The record evidence showed that the infringing date picker
feature was “but a tiny feature” in the larger Outlook software
program.
Lucent Tech. cont.
Reasonable Royalty Analysis
• Georgia Pacific Factor 11 – “[t]he extent to
which the infringer has made use of the
invention and any evidence probative of
the value of that use” – weighed against
jury award.
• Lucent failed to prove how many Outlook
users used the patented method or how
often.
• Factor 11 cannot be satisfied by use of
accused product generally without regard
to infringing feature.
i4i v. Microsoft
• i4i accused Microsoft’s custom XML editor in Microsoft
software of infringement.
Word
• i4i’s damages expert (Mike Wagner) opined that i4i’s damages
were in the range of $200-207 million based upon a hypothetical
reasonable royalty analysis. Microsoft’s expert opined that
Microsoft paid royalties ranging from $1-5 million for comparable
licenses.
• i4i prevailed against Microsoft on liability at trial and
obtained a jury award of $200 million with an additional $40
million of enhanced damages for willful infringement.
• Mike Wagner overcame EMVR problems by a novel approach. He
applied Microsoft’s overall profit margin of 76.6% to a
“benchmark XML editor product” Microsoft bought for $499/unit
before the infringement.
• He applied the 25% Rule of Thumb to determine the baseline
royalty rate ($96)
i4i Reasonable Royalty Analysis
• Mike Wagner overcame EMVR problems by a novel approach. He
applied Microsoft’s overall profit margin of 76.6% to a
“benchmark XML editor product” Microsoft bought for $499/unit
before the infringement. He applied the 25% Rule of Thumb to
determine the baseline royalty rate ($96). He then adjusted the
rate upward by $2 using the GP factors and applied the $98 rate
to 2.1 million infringing uses (businesses only) as ascertained
thru a market survey that determined what portion of Microsoft
business customers were using the editor feature.
i4i cont.
Reasonable Royalty Analysis
The CAFC viewed Microsoft's disagreement with i4i's
damages expert as an issue with conclusion not
methodology. "Daubert and Rule 702 are safeguards
against unreliable or irrelevant opinions, not
guarantees of correctness.“
• Unfortunately for Microsoft, it did not file a pre-verdict
JMOL on damages, so the CAFC refused to review
whether there was a sufficient evidentiary basis in
Wagner’s analysis to support the jury's award.
• To add insult to injury, the CAFC observed that "had
Microsoft filed a pre-verdict JMOL, it is true that the
outcome might have been different.“ (Oh boy, here is
the template for Microsoft’s strategy in Uniloc!)
ResQNet.Com v. Lansa
• ResQNet accused Lansa’s terminal emulator
program of infringement.
• ResQNet prevailed at trial on one of the patents
and obtained a jury award of ~$500,000 based
upon a hypothetical royalty of 12.5%.
• Validity and infringement decisions upheld on
appeal.
• The CAFC vacated and remanded the damages
award.
ResQNet.com cont.
Reasonable Royalty Analysis
• ResQNet’s expert relied upon 7 licenses – 5
rebranding/re-bundling licenses with no relation
to claimed invention and 2 licenses that arose out
of litigation relating to patents-in-suit.
• CAFC rejected reliance on rebranding/
re-bundling licenses because they did
not cover the asserted claims and included
irrelevant services and other items such as code.
• CAFC criticized lower court’s refusal to rely on
litigation settlement agreements covering
asserted claims stating the district court “must
consider licenses that are commensurate with
what the defendant has appropriated.”
Wordtech v. Integrated Networks
• Wordtech accused Integrated Networks and 2 officers of
infringing patent for automated duplication of CD’s.
• Wordtech asked jury for 12% royalty on $950,000 in sales
($114,000) through non-expert testimony of its president.
• Integrated Networks calculated damages at $17,114.
• Wordtech’s President relied on 13 patent licenses (2 lump sum
and 11 running royalty) granting rights to some or all of its
patents (including the patent found infringed).
• Jury awarded $250,000 in damages.
• CAFC determined that Wordtech licenses suffered similar flaw
as in Lucent and ResQNet and was “little more than a recitation
of royalty numbers” and remanded case for a new trial on
damages (CAFC couldn’t figure out how jury came up with
$250K verdict).
Microsoft v. Uniloc
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Uniloc alleged Microsoft (ironically) copied its patented product activation
(“PA”) key invention used to deter “casual copying” of software and used
it in Microsoft’s Windows XP and Office XP products.
Uniloc sought damages of $565 million based on a reasonable royalty.
Uniloc’s expert calculated the damages using the low end appraisal
amount ($10) for product activation keys contained in a Microsoft
document and applying the “25% Rule of Thumb” to derive a $2.50 unit
royalty. This royalty was applied against 225,978,803 Microsoft Windows
and Office products.
Microsoft’s expert calculated damages based on a lump sum royalty to
derive a royalty of $3-7 million.
The jury found Microsoft willfully infringed and awarded damages of $388
million.
The trial court granted JMOL of no willful infringement.
The CAFC affirmed the trial court’s finding of no willful infringement and
vacated the jury’s damages award. CAFC concluded as a matter of law
that the “25% Rule of Thumb” is a “fundamentally flawed tool for
determining a baseline royalty rate in a hypothetical negotiation” and is
inadmissable under Daubert standards “because it fails to tie a
reasonable royalty to the facts of the case in issue.”
The Remand – What’s the Strategy Now?
What Uniloc should consider doing:
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Dump its discredited damages expert and hire a new one.
Uniloc’s new expert should hopefully not come up with the same number as
the prior expert (like happened in Lucent)
Continue to use the Microsoft appraisal but support it with other evidence if
possible.
Consider avoiding EMVR problems by not relying on a royalty base in the
damages calculation (use “analytical approach”). Alternatively, use the
Microsoft appraisal to value the “Product Key” and make the Product Key (as
opposed to the entire software product) the royalty base.
Don’t rely upon a “hypothetical negotiation” methodology as the only
approach. Instead, determine the incremental revenue received by Microsoft
due to installation of PA software resulting in reduction in “casual copying”
piracy by legitimate software purchasers (thru survey or other market study).
Use 100% of the incremental revenues (Microsoft estimated this at $5 billion)
to derive incremental anticipated net profits under the “analytical approach”
approved by the CAFC in TWM Manufacturing Co. v. Dura Corp., 789 F.2d
895, 899 (1986) as the high number in a damages range (could use the
“hypothetical negotiation” number as the low number in the range).
The Uniloc Remand – cont.
What Microsoft should consider doing:
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Dump its discredited damages expert and hire a new one (preferably
credible, if possible).
Settle – if possible. A new trial doesn’t benefit Microsoft because this time
around the jury will be instructed that Microsoft has already been found to
infringe, so no opportunity to mix in any liability defenses.
Interpose Daubert challenges to Uniloc’s new damages expert on “junk
science” methodology grounds.
If a “hypothetical” lump sum license cannot be supported by comparable lump
sum licenses, seek a running royalty damages award based on EMVR rule to
establish a really small royalty base linked to the PA (“product activation”)
component of the overall product and apply a hypothetical negotiation
scenario to derive a royalty percentage to be applied against that royalty
base.
Apportion the royalty between Uniloc’s patented invention and Microsoft’s
patented PA invention (a survey might be used here).