Conference on Evolving Damages Law Hosted By
the Berkeley Center for Law & Technology & The Federal Circuit
Bar Association
Trial Lawyer Panel
Moderator
Yar Chaikovsky, McDermott Will & Emery LLP
Panelists
James Elacqua, Skadden, Arps, Slate, Meagher & Flom LLP
Michael Jacobs, Morrison & Foerster LLP
Eric Lamison, Kirkland & Ellis LLP
Stanley Young, Covington & Burling LLP
October 18, 2010
1:30 PM
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
Royalty Base
2
The Entire Market Value Rule
 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).
3
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
4
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.
5
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
6
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.”
7
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.”
8
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.”
9
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.”
10
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.”
11
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. . .”
12
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
13
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 HewlettPackard's products that are not covered at all by the claimed
invention.”
14
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, judgedetermined $8B base, thereby arriving at a $53M damages
award
15
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 nonpatented 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
16
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
17
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
18
Royalty Rates
19
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
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).

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
* Bolded text indicates factors discussed in more detail.
21
“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).

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.”)
22
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).

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).
23
“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.

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.
•

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.
•

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.”)
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.”)
24
Admissibility Issues Relating to
Expert Opinions and Damages
25
“Where’s the Proof”
District courts are the “gatekeepers” who must exclude unreliable expert testimony on “reasonable royalty”

A court may permit opinion testimony from an expert under Rule 702 of the Federal
Rules of Evidence only if:
1) the testimony is based upon sufficient facts or data,
2) the testimony is the product of reliable principles and methods, and
3) 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
26
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
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
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”
 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 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?



•
Is there a reliable survey? Is there a reliable “demand curve”?
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
Preserving the Trial Record
for Appeal
31
Motions for New Trial on Damages
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)
32
Tale of Two Cases
 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 not JMOL on damages. Motion
denied.
• On appeal, Federal Circuit affirmed, finding that the damages award
“while high, was supported by the evidence.”
33
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
34
Successful JMOLs for Defendants
 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
35
Standards of Review
 Motion for JMOL
• District Court: Substantial evidence

See Cornell 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)
36