THE LEGAL SYSTEM AND
PATENT DAMAGES
Arguing Your Case On Appeal
October 18, 2010
Moderator:
Gregory Stone, Munger, Tolles & Olson LLP
Speakers:
Michael Ladra, Wilson Sonsini Goodrich & Rosati
Joseph Cianfrani, Knobbe Martens Olson & Bear LLP
Matthias Kamber, Keker & Van Nest LLP
Keith Slenkovich, Wilmer Hale LLP
What Should Trial Lawyers
Know About Patent Damages
On Appeal
October 18, 2010
Presented by:
Matthias Kamber
Procedural Opportunities
• Pre-Trial
– MSJs (FRCP 56)
– Limit expert testimony
(FRE 702/Daubert)
– Motions in limine (FREs)
– Jury instructions (FRCP
51 & 49)
– Verdict form
– Pre-verdict JMOL (FRCP
50(a))
• Post-Trial
– Post-verdict JMOL
(FRCP 50(b))
– Motion for a new trial
(FRCP 59)
– Motion for relief from
judgment (FRCP 60)
Daubert on Damages
• IP Innovation v. Red Hat (E.D. Tex . 2010):
– Excluding testimony re entire market value rule for
lack of a “sound economic connection between the
claimed invention and th[e] broad royalty base”
– Expert also arbitrarily picked a royalty rate much
higher than existing licenses/rates
• Cornell v. HP (N.D.N.Y. 2009):
– Excluding testimony re entire market value rule
where expert could not supply “credible and
sufficient economic proof ”
MILs on Damages
• Fresenius v. Baxter (N.D. Cal. 2006):
– Denying motion to exclude evidence of patient deaths and
recalls because relevant to reasonable royalty negotiations
• Samsung v. Quanta (N.D. Cal. 2006):
– Ruling that pre-litigation settlement negotiations could be
used to prove notice
• Colassi v. Cybex (D. Mass. 2005):
– Excluding undisclosed hearsay testimony re design-around
efforts
JMOLs on Damages
• Lucent: feature not proven to be basis of
consumer demand.
• Wechsler: no lost profits because no sales of
product during period of infringement.
• Integra: use of late hypothetical negotiation date
New Trials on Damages
• Wordtech: evidence did not support high (26%)
lump-sum royalty rate.
• Imonex: jury award included products that were
improperly presented to the jury.
• Polu-America: award included lost profits of sister
corporation
• Shockley: assumptions re lost future profits were
“without factual underpinnings”
Relief from Judgment
• Apotex: fraudulent statements to the court.
• Schreiber: transfer of asserted patents followed by
false statements.
• Fraige: manufactured evidence
Standards
• JMOL
– “a reasonable jury would not have a legally sufficient
evidentiary basis to find for the party on that issue”
• Motion for new trial
– Erroneous (and prejudicial) jury instructions
– Incorrect and prejudicial admissibility rulings
– Verdict contrary to great weight of evidence
• Chiron v. Genentech
Waiver
• Failure to object to admission of evidence during
trial
– In limine rulings are only tentative
• Failure to move for JMOL
– Both before and after the close of evidence
– On the specific theory
• Failure to object to jury instructions
– Must be specific, identifying the error and potential
to prejudicially mislead the jury
Lucent vs. i4i
• Lucent
– JMOL on damages
– Reviewed for sufficiency
of the evidence
• i4i
– No JMOL on damages
(or obviousness)
– Reviewed under the
stricter abuse of
discretion standard
Standards of Review
• De novo
– MSJs
– JMOLs
• Abuse of discretion
– Evidentiary rulings
– Motion for new trial
The Importance Of
Verdict Forms To Appellate
Review Of Damages
October 18, 2010
Presented by:
Joe Cianfrani
i4i Limited Partnership v. Microsoft –
Plaintiff ’s Proposed Verdict form
i4i Limited Partnership v. Microsoft –
Microsoft’s Proposed Verdict form
i4i Limited Partnership v. Microsoft –
Final Verdict form
Cornell v. HP –
Cornell’s Proposed Verdict form
Cornell v. HP –
HP’s Proposed Verdict form
Cornell v. HP – Final Verdict
Cornell v. HP – Final Verdict
Mirror Worlds v. Apple –
Mirror World’s Proposed Verdict Form
Mirror Worlds v. Apple –
Apple’s Proposed Verdict Form
Mirror Worlds v. Apple – Final Verdict
Some Considerations for Damages Verdict Forms
• Consider whether to ask the jury to separately identify the
amount of each type of damages awarded (lost profits,
reasonable royalty, price erosion).
• In a reasonable royalty case, consider whether to ask the jury to
state both the royalty rate and the base, if disputed.
• Where damages are sought based on the entire market value,
consider asking the jury to identify whether the accused feature
is the basis for customer demand.
• Separate damages for each asserted patent.
Some Considerations for Damages Verdict Forms
• Where the date of the hypothetical negotiation is disputed,
consider asking the jury to specify the date.
• Consider whether to ask the jury to state total damages or just
the subtotals.
• In a lost profits case, consider whether to ask the jury to state
the percentage of defendant's sales on which they awarded lost
profits.
Recent Developments In The
Federal Circuit’s Law On
Patent Damages
October 18, 2010
Presented by:
Michael Ladra
The 25% Rule
Definition
• The “25% rule” is “a shorthand phrase for a method of dividing
expected profit between a licensor and licensee ... [by dividing]
net pretax profit with normally 25% of that profit being paid by
the licensor as a reasonable royalty.” Standard Manufacturing
Company, Inc. v. United States, 42 Fed. Cl. 748, 766 (Fed. Cl. 1999).
The 25% Rule
i4i’s Damages Analysis at Trial (i4i v. Microsoft)
• Identified a “benchmark” product as a competitive alternative to the full Word
XML capability  the least expensive software package (XMetal) with a list
price of $499.
• Applied an estimate of Microsoft’s profit margin (around 80%) to the XML list
price  a company selling the benchmark product would have earned $400 in
gross profit on each unit sold.
• Applied the “25 percent rule”: “when an inventor allows someone else to use
[his] invention, [he’ll] keep 25 percent of the profits from the [licensee’s] sale of
that infringing product.”
• 25% percent of the estimated profit margin = a reasonable royalty of ~$100
per unit of any XML editor.
• FORMULA: Reasonable Royalty = List Price of XMetaL x Microsoft’s Percentage Profit
Margin x 25 percent
The 25% Rule
Oral Arguments (i4i v. Microsoft)
• Microsoft argued in front of the Federal Circuit:
– The 25% rule was “improper” as an award basis.
– Even if proper, i4i’s not taking into account the relative contribution of
the i4i’s patent’s inventions to the XML product was improper.
• Two commentators criticized the expert's use of the “25% rule of
thumb” as “economically irrational”: “No rational business
person would agree to license-in a technology for 25 percent of
the profits on its product if the technology only increased profits
by 5 percent.”
• Federal Circuit also criticized the rule – one of the judges
questioned whether the “25% rule” was a methodology that was
“just something pulled out of the air.”
Comparable Patents
Georgia-Pacific Factor #2
•
Factor #2: “The rates paid by the licensee for the use of other
patents comparable to the patent in suit.”
•
The rationale behind: The amounts that parties agreed to pay in
real-world, arms-length transactions to license comparable
technology is probative of the amounts that the parties-in-suit
would have agreed to during the hypothetical negotiation.
Comparable Patents
Lucent Technologies, Inc. v. Gateway, Inc.
•
Parties’ burden to establish that any patent license agreements on which
they seek to rely are comparable to the covered products.
•
The court was critical of the notion that patent licenses that cover
technology broader than the patented technology are relevant.
– Example: Lucent's reliance on an IBM patent license related to PC
technology.
•
Parties should show how the technology licensed under other
agreements relates to the licensed products
– “whether the patented technology [was] essential to the licensed
product being sold, or whether the patented invention [was] only a
small component or feature of the licensed product . . . .”
Comparable Patents
Lucent Technologies, Inc. v. Gateway, Inc.
•
Comparable in Terms of Scope: If only one patent is in suit, the parties
must show how a multi-patent or cross-license agreement can be equated to
a license of the single patent in suit.
– Court was critical of Lucent's reliance on IBM's broad PC patent
portfolio licensing program  a negotiation involving IBM's PC patent
portfolio would be vastly different from the hypothetical negotiation
between the parties in suit involving a single patent covering much more
limited technology.
Comparable Patents
Lucent Technologies, Inc. v. Gateway, Inc.
•
Parties’ burden of explaining the royalty structure in the alleged
comparable licenses and how that structure relates to the
structure and amounts sought in the case.
– Example: Lucent sought to rely on several licenses that set
forth a dollars-per-unit royalty rate as opposed to a
percentage royalty rate. Lucent, however, failed to show
how the dollars-per-unit royalty rate equated to a percentage
royalty rate so that the jury could assess the reasonableness
of the 8% rate that Lucent was seeking.
Comparable Patents
Lucent Technologies, Inc. v. Gateway, Inc.
•
Higher Evidentiary Standard.
•
Testimony related to other license agreements may need to come from
both technical and damages experts.
– The technical experts can explain the technology covered under the agreement and
how that technology relates to the technology claimed in the patent-in-suit/
– The damages expert can testify as to economics and financial terms identified in
the agreements and how those relate to the damages sought.
* Parties cannot rely on:
• License agreements that relate to unspecified or broad technologies
simply because those agreements set out a royalty structure or royalty
rate that the parties find appealing.
•
Industry licensing programs as being probative, unless the patent-in-suit
relates directly to the technology licensed under those programs and
specific analysis is performed to support their use as a benchmark.
Trial Court’s Gatekeeper Role
Daubert v. Merrell Dow Pharmaceuticals
• Federal trial judges are the “gatekeepers” of scientific evidence,
thus they must evaluate proffered expert witnesses to determine
whether that expert testimony is both “relevant” and “reliable,” a
two-pronged test of admissibility.
– Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579
(1993).
Trial Court’s Gatekeeper Role
Lucent Technologies, Inc. v. Gateway, Inc.,
• Highlights the inability of the district court judge to exclude
damages analyses that lack sufficient legal evidentiary basis.
• Federal Circuit noted that Microsoft's brief suggested “that the
district court judge ‘abdicated’ her role as a gatekeeper,” but
concluded that it was the defendant's responsibility to object to
the evidence.
• “In this instance, the district court judge had no independent
mandate to exclude any of that evidence.”
Trial Court’s Gatekeeper Role
Patent Reform Act of 2010
• The proposed 2010 Act emphasizes the role of the district court as
gatekeeper of the methodologies used to prove patent damages.
• The 2010 Act requires the district courts “upon motion of either party or
sua sponte” to “consider whether one or more of a party's damages
contentions lacks a legally sufficient evidentiary basis.”
– In cases where a party's damages contention fails to provide
sufficient evidentiary proof, that party is given an opportunity to
provide further “evidence, briefing, or argument that the court may
deem appropriate.”
– Courts could “identify on the record those methodologies and
factors as to which there is a legally sufficient evidentiary basis”
• Compare: Rigid framework for analyzing patent damages in the 2009 Act
 limits damages “to the portion of the economic value of the
infringing product or process properly attributable to the claimed
invention's specific contribution over the prior art.”
Georgia-Pacific Factors
1.
The royalties received by the patentee for the licensing of the patent in suit, proving or tending to
prove an established royalty.
2.
The rates paid by the licensee for the use of other patents comparable to the patent in suit.
3.
The nature and scope of the license, as exclusive or non-exclusive; or as restricted or nonrestricted in terms of territory or with respect to whom the manufactured product may be sold.
4.
The licensor's established policy and marketing program to maintain his patent monopoly by not
licensing others to use the invention or by granting licenses under special conditions designed to
preserve that monopoly.
5.
The commercial relationship between the licensor and licensee, such as, whether they are
competitors in the same territory in the same line of business; or whether they are inventor and
promotor.
6.
The effect of selling the patented specialty in promoting sales of other products of the licensee;
the existing value of the invention to the licensor as a generator of sales of his non-patented
items; and the extent of such derivative or convoyed sales.
7.
The duration of the patent and the term of the license.
Georgia-Pacific Factors
8.
The established profitability of the product made under the patent; its commercial success; and its current
popularity.
9.
The utility and advantages of the patent property over the old modes or devices, if any, that had been used
for working out similar results.
10.
The 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.
11.
The extent to which the infringer has made use of the invention; and any evidence probative of the value
of that use.
12.
The portion of the profit or of the selling price that may be customary in the particular business or in
comparable businesses to allow for the use of the invention or analogous inventions.
13.
The portion of the realizable profit that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added
by the infringer.
14.
The opinion testimony of qualified experts.
15.
The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed
upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an
agreement; that is, the amount which a prudent licensee--who desired, as a business proposition, to obtain a
license to manufacture and sell a particular article embodying the patented invention--would have been
willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been
acceptable by a prudent patentee who was willing to grant a license.
Guidance to the Jury
Georgia-Pacific Test
• The non-exclusive Georgia-Pacific test that requires
balancing and consideration of the interactions between the
factors gives little or no practical guidance to a jury.
– Juries  finder of facts.
– Weighing the legal significance of those facts once found  the
province of the courts.
Guidance to the Jury
Georgia-Pacific Test
• Unlikely for juries to know whether and how to weigh:
– Georgia-Pacific factor #5: importance of “[t]he commercial relationship between
the licensor and licensee, such as, whether they are competitors in the same
territory in the same line of business; or whether they are inventor and promoter”
against
– Georgia-Pacific factor #7: “[t]he duration of the patent and the term of the
license”
• Result: juries regularly disregard the instructions, following their own
instincts in deciding an appropriate measure of damages.
– Jury verdicts often award reasonable royalty damages as a simple
number – either a percentage of sales or a dollar amount.
Guidance to the Judge
Georgia-Pacific Test
• Difficult for the judge to exercise a gate-keeping function 
a wide range of evidence can be offered in support of one
factor or another.
• Georgia-Pacific provides little guidance as to which factors
must be accorded the most weight.
– Rare for all fifteen factors to point in the same direction.
– Expert's ultimate conclusion, no matter how extreme, can be
justified by at least some combination of the factors.
Guidance to the Judge
Georgia-Pacific Test
• Appellate review or JMOL: Fifteen-factor test makes it extremely
difficult for judges to review a jury damage award for substantial
evidence.
• A court faced with reviewing a damage award may be inclined to defer to
whatever the jury awards.
– With at least fifteen factors, a complex interaction between them,
and little limit on expert testimony on damages, there is likely to be
evidence in the case to be construed to support any number the jury
has chosen.
• If a court attempts to exercise its substantive oversight authority, it will
most likely be rebalancing the factors the jury balanced.
• Choices:
– deference to the jury’s number or
– substituting the judge's view of the evidence for the jury's decision.
Open Issues With Respect To
Components And The Entire
Market Value Rule
October 18, 2010
Presented By:
Keith L. Slenkovich
Cornell Univ. v. Hewlett-Packard Co.,
609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J.)
•
Technology: Out-of-order execution (OOO)
• component of “instruction reorder buffer” (IRB)
OOO
IRB
processor
servers / workstations
•
CPU module
CPU “brick”
Smallest saleable unit: processor
Cornell Univ. v. Hewlett-Packard Co.,
609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J.)
• Cornell’s Damages Position:
– Entire Market Value Rule applies
– Royalty base: Revenues from sales of server and
workstation systems
– Internal HP documents mention that patented invention
“would be a competitive requirement”
OOO
IRB
processor
servers / workstations
CPU module
CPU “brick”
Judge Rader grants HP’s Daubert motion
• Cornell’s damages opinion based on EMVR excluded
• “The Federal Circuit has limited application of [EMVR] to instances where
‘the patent-related feature is the basis for customer demand’ for an accused
product that nevertheless contains other features.”
• “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.”
• “Cornell could have and should have offered evidence as to the server and
workstation market. . . . Dr. Stewart’s inability to link his opinion to the
realities of this case is a prime example of ‘the hypothetical [] lapsing into
pure speculation.’”
Cornell Univ. v. Hewlett-Packard Co., 2009 WL 1082485 (N.D.N.Y. Mar. 30, 2009)
(Rader, J.)
Cornell Univ. v. Hewlett-Packard Co.,
609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J.)
•
Claimed Royalty Base at Trial: EMV of CPU “bricks”
OOO
IRB
servers / workstations
•
•
processor
CPU module
CPU “brick”
Jury Verdict: $184MM to Cornell
• Royalty Rate: 0.8%
• Royalty Base: $23 billion (sales of CPU brick products)
HP moved for JMOL, or in alternative, remittitur
Judge Rader Grants JMOL
• “[Cornell] exceeded again this court’s direction and proceeded to
attempt to show economic entitlement to damages based on
technology beyond the scope of the claimed invention.”
• “Instead of linking its base amount to the processors (of which
the infringing IRB is an important component), Cornell simply
stepped one rung down the [HP] revenue ladder . . . without
offering any evidence to show a connection between consumer
demand for that product and the patented invention.”
• “[N]o reasonable jury could have relied on this royalty base in
determining Cornell’s damages award.”
Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 285-287 (N.D.N.Y. 2009) (Rader, J.)
Cornell Lacked Demand
Side Evidence
•
“Consistent with its admission that there was never a market for Hewlett-Packard's
CPU bricks, Cornell did not offer a single demand curve or any market evidence
indicating that Cornell's invention drove demand for bricks.”
•
Cornell failed to offer “additional market evidence that the claimed invention formed
the basis for demand for the CPU bricks, or even the existence of a market for CPU
bricks.”
•
“Cornell’s failure to connect consumer demand for [HP] machine ‘performance’ to
the claimed invention, or to present a single demand curve (or any other economic
evidence) showing [claimed invention] drove demand for [HP’s] products undermined
any argument for applicability of the entire market value rule.”
Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 287-289 (N.D.N.Y. 2009) (Rader, J.)
Lucent Technologies, Inc. v. Gateway, Inc.,
No. 08-1485 (Fed. Cir. filed Sept. 11, 2009)
• HELD: $ 348MM verdict not supported by substantial
evidence
• “Outlook is an enormously complex software program comprising
hundreds, if not thousands or even more, features.” Slip op. at 49.
• EMVR not supported by substantial evidence and is against clear
weight of evidence
Lucent Technologies, Inc. v. Gateway, Inc.,
No. 08-1485 (Fed. Cir. filed Sept. 11, 2009) (Michel, J.)
• “The first flaw with any application of the entire
market value rule in the present case is the lack of
evidence demonstrating the patented method of
the Day patent as the basis—or even a substantial
basis—of the consumer demand for Outlook. As
explained above, the only reasonable conclusion
supported by the evidence is that the infringing use
of the date-picker tool in Outlook is but a very small
component of a much larger software program.”
Lucent Did Not Carry Evidentiary Burden
• “Lucent did not carry its evidentiary burden of proving that
anyone purchased Outlook because of the patented method.
Indeed, Lucent’s damages expert conceded that there was no
‘evidence that anybody anywhere at any time ever bought
Outlook, be it an equipment manufacturer or an
individual consumer, . . . because it had a date picker.’
And when we consider the importance of the many features
not covered by the Day patent compared to the one infringing
feature in Outlook, we can only arrive at the unmistakable
conclusion that the invention . . . is not the reason
consumers purchase Outlook. Thus, Lucent did not satisfy
its burden of proving the applicability of the entire market
value rule.”
Lessons from Cornell, Lucent
1. Courts should scrutinize damages awards (JMOL)
2. Smallest saleable unit
3. Demand-side evidence
• Evidence that customers value patented invention
• Evidence of customer usage
Will The Supreme Court
Address Patent Damages
October 18, 2010
Presented by:
Keith L. Slenkovich
Ambiguities Post-Lucent
Ambiguity 1
• “The first flaw with any application of the entire market value
rule in the present case is the lack of evidence demonstrating
the patented method of the Day patent as the basis—or
even a substantial basis—of the consumer demand for
Outlook.”
– “the basis” or “a substantial basis”?
Ambiguities Post-Lucent
Ambiguity 2
•What additional damages calculation, if any, is required when EMVR does
not apply?
•“[T]he 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).”
Damages = (royalty rate) x (royalty base) x (apportionment factor)
“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 accounts for the
proportion of the base represented by the infringing component or
feature.”
Ambiguities Post-Lucent
Ambiguity 3
•
How much demand-side evidence is required?
•
What type of evidence?
• Demand curves
• Price elasticities of demand
Frequency of damages questions
•
’09/’10 Term Supreme Court cert denials
• 3 out of 24 patent case cert denials raised damages
questions
•
’09/’10 Fed. Cir. en banc denials
• 1 en banc petition denial raised significant damages
question