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Patent Damages: The Success and Failure of a Theory

December 2, 2015

Litigation Webinar Series: INSIGHTSOur take on litigation and trial developments across the U.S.

Chris MarchesePrincipal, Southern California

Overview

INSIGHTS Litigation Webinar Series

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• INSIGHTS Series

• Key Developments & Trends

• Housekeeping

• CLE Contact: Jane Lundberg

• [email protected]

• #fishwebinar

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Agenda

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1. Background research

2. Apportionment

3. Comparable licenses

4. Extraterritorial issues

5. Book of wisdom

Background Research

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What we’ve done

• Reviewed 100s of district court cases from the past 3+ years

• Identified cases involving today’s topics

• Tried to distill themes, trends, and successful approaches

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Apportionment

Apportionment

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Themes

• Apportionment is hot…but unsettled

• No silver bullets

• Depth of apportionment

• Few bright line rules…except:

• Apportionment required without proving EMVR

• SSPPU no longer the end point of apportionment

• Rate decreases do not justify an expanded base

• Base must be tied to the invention’s “footprint”

Apportionment

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Themes

• Evidence, evidence, evidence…

• Damages expert

• Technical expert

• Subsidiary experts (e.g., survey)

• Fact testimony (plaintiff and defense

witnesses)

• Documents (especially from the

opponent)

• Third parties

• Piggybacking experts

Apportionment

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Trends

• Creative approaches

• Multiple theories, backstops

• Do-overs

Apportionment

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Trends

• “Synergistic” claims – Astrazeneca/Varian

• “Big” claims with novel & conventional features

• Show “synergy” between the novel & conventional features

• Similar to convoyed sales – functional unit test

• Allows damages on patented and unpatented items

• Avoid apportionment?

• Maybe…

Apportionment

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Trends: “synergistic” claims

Astrazeneca v. Apotex, 782 F.3d 1324, 1338-39

(Fed. Cir. 2015)

• Claims covered omeprazole pill No EMVR

• Inquiry shifts to conventional claim elements:

• Account for the patented feature relative “to the

value of the conventional elements recited in the

claim, standing alone.”

• BUT: “It is not the case that the value of all

conventional elements must be subtracted from

the value of the patented invention as a whole

when assessing damages.”

• Novel subcoating sufficiently important not to

exclude conventional drug core from royalty

base

Claim:-Drug core

-Inert water soluble

subcoating

-Enteric coating

Apportionment

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Univ. of Pittsburgh v. Varian, 2:08-cv-01307-AJS (W.D. Pa.

Feb. 10, 2012), aff’d in relevant part, 561 Fed. App’x 934

(Fed. Cir. 2014) (non-precedential)

Linear

Accelerator

RPM system

Apportionment

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• Varian con’t:

• Federal Circuit—non-precedential

• Even with conventional dependent element, if inventive

feature adds value to that conventional element,

damages may reflect that value.

• Astrazeneca, 782 F.3d at 1339 n.5:

• In Varian, “we declined the defendant's invitation to

remove the conventional elements from the overall

value of the combination apparatus; we noted that

guarding against compensation for more than the

added value attributable to the invention ‘is precisely

what the Georgia-Pacific factors purport to do.’”

(quoting Varian)

Linear

Accelerator

RPM system

Apportionment

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Trends: district courts and expansive claims

• SimpleAir, Inc. v. Google Inc., Case No. 2:14-CV-11 (E.D. Tex. 10/5/15) (Gilstrap, J.)

• Dispute over use of phones vs. app in damages computation

• Court: claims included phone plus “central broadcast server,” “information gateway,” and “transmission gateway”

• Court: “Whether some other unit would provide a more perfect estimation of value goes to the weight of the evidence, not its admissibility.”

• ThinkOptics v. Nintendo, Case No. 6:11-cv-455 (E.D. Tex. 6/21/2015) (Davis, J.)

• Patent prosecution: all but 3 claim elements conventional

• Defense expert: excluded conventional elements from base

• Court: exclusion of claim elements does not “carefully tie the proof of damages to the claimed invention’s footprint in the market place.”

• However…

Apportionment

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Trends: district courts and expansive claims

• Cave Consulting Group v. Optuminsight, Inc., Case No. 5:11-

cv-00469- EFD (N.D. Cal. 2/20/15) (Davila, J.) (allowing

defendant’s expert to apportion only for claimed “novel

limitations”)

• Labyrinth Optical Tech. v. Alcatel-Lucent USA, Case No.

SACV 12-0759 AG (MLGx) (C.D. Cal. 3/10/15) (Guilford, J.)

• Denying attempt to use larger product (“line card”) as royalty

base where claim recited steps performed at the front end of the

line card

• “It is often the case that patent claims will be written to require

the presence of, or an input from, a portion of a device that is

not the focus of the claim.”

Apportionment

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• What does this mean going forward?

• Premium on claim/spec drafting in prosecution

• Broad array of claims

• Different types

• Different scope (narrow to expansive)

• Deep dependent claims

• Premium on patent/claim selection in litigation

Apportionment

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Success/failure in apportioning

• Reviewed many cases involving apportionment

• Many do not provide visibility into the methodology

• Following slides address cases that did

Apportionment

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Method #1: Feature counting & isolation

• Mixed bag – worked in ½ the cases reviewed

• 5 failures

• 2 provisional failures (do-over allowed)

• 7 successes

• Common themes

• “Straight up division” is problematic (without justification)

• Need relative importance

• Survey (scaled to importance of feature; binary problematic)

• Technical expert

• Defendant’s documents

• Third party market research

• Combination/triangulate

• Apportion out non-patent attributes (e.g., brand, reputation)?

Apportionment

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Method #2: Related product comparison

• Worked 4 out of 4

• Including Apple Inc. v. Motorola, Inc., 757

F.3d 1286 (Fed. Cir. 2014)

• Limited availability

• Find comparable product without patented

feature

• Determine delta to patented product

• Isolate the patented feature

• If multiple features in delta, account for the

relative value of each such feature and

patented feature

• Again, straight division may be

problematic

Apportionment

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Method #3: “Real estate” approach

• E.g.: lines of code, chip coverage

• Worked 3 out of 3 (one was trade secret)

• Highlights

• Mere add up is dangerous

• Account for relative value of the

patented real estate

• Technical expert can help

• Defendant’s documents may help

Apportionment

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Method #4: Blaming the defendant

• Failed 2 out of 2

• Courts: burden of proof on patentee

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Comparable Licenses

Comparable Licenses

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Themes

• Comparability is a threshold question

• Extent of comparability goes to weight

• Some guidance

• Technical experts must establish technical comparability if the

licenses cover different patents

• Litigation settlements are not always excluded

• Timing of the comparable license has not been a factor

• Converting lump sum licenses into an effective royalty rate

requires more than simple division

• When accounting for differences, show your work

• Comparable licenses must be disclosed

Comparable Licenses

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Trends

• Let’s give it a go

• Concerns are left to cross examination

• Multiple theories, even among the licenses

• Do-overs

Comparable Licenses

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Trends

• Accounting for differences

• The Federal Circuit has “never required identity of

circumstances.” Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d

1308, 1330 (Fed. Cir. 2014).

• Reasonable royalty calculations must “account for differences

in the technologies and economic circumstances of the

contracting parties.” Finjan, Inc. v. Secure Computing Corp.,

626 F.3d 1197, 1211 (Fed. Cir. 2010).

• “The fact that a license is not perfectly analogous generally

goes to the weight of the evidence, not its admissibility.”

Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1227 (Fed.

Cir. 2014).

Comparable Licenses

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Trends

• Accounting for differences

• Same or different patent(s)

• Scope of the license

• World-wide v. US only

• Use of patented methods v. More benefits

• Exclusive v. Non-exclusive

• Payment terms

• Lump sum v. Running royalty

• Market approach

• Patent acquisition agreements

• Joint venture agreements

Comparable Licenses

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Trends: concerns left to cross examination

• CSIRO v. Mediatek Inc., Case no. 6:12-CV-578 (E.D. Tex.

6/29/15) (Schroeder, J.)

• The Court has “serious concerns” with plaintiff’s expert report

• Both sides used licenses to calculate effective royalty rates

• Declined Court’s proposal to exclude effective royalty rates from

all reports

• “Though a close call, the issues with [the] calculation are

better addressed by cross exam rather than exclusion.”

Comparable Licenses

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• CMU v. Marvell, Case No. 09-290 (W.D. Pa. 8/24/2012) (Fischer)

• “[T]he Agreements arguably show a ‘discernable link to the claimed technology,” hence they may be relevant to determining a reasonable royalty in the instant case.”

• Defense expert relied on 3 agreements between CMU and various corporations to participate in CMU’s Data Systems Storage Center (DSSC)

• Agreements included rights to make use of the asserted patents. The licenses were a worldwide, irrevocable right to make, have made for their own use or sell the product of the inventions created at the DSSC during the term of membership.

• Asserted patents did not exist at the time the Agreements were executed, but the Agreements conveyed rights in the patents.

• The expert’s “failure to address the obvious distinctions between these agreements at his projected license in this matter is more appropriately addressed by way of cross-examination than through exclusion.”

Comparable Licenses

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• TVIIM, LLC v. McAfee, Inc., Case No. 13-cv-04545-HSG

(N.D. Cal. 7/9/15) (Gilliam, J.)

• Patent acquisition agreement

• Security software program (never commercialized) and the

pending patent application for $100k and $25k credit

• “Ownership transfers of a patent may be indicative of the

reasonable royalty or payment that would have been agreed to

by the parties for a license to the patent at issue.”

• Court found the transaction involved acquisition of all rights to

the patent and therefore sheds light on the hypothetical

negotiation

• Degree of comparability should be left to the jury

Comparable Licenses

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• TVIIM, LLC v. McAfee, Inc., Case No. 13-cv-04545-HSG

(N.D. Cal. 7/9/15) (Gilliam, J.)

• Plaintiff’s joint venture agreements

• Included 3 patents and 3 applications

• Patent-in-suit included

• Stated that “fair market value” of IP contributed was $10,000

• Court found the joint venture agreements sufficiently

comparable and relevant to the hypothetical negotiation

• Degree of comparability should be left to the jury

Comparable Licenses

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Success/failure

• Exclusive v. Non-exclusive

• Court excluded plaintiff’s expert from testifying that non-exclusive hypothetical license would command a higher royalty rate than an actual exclusive license

• Trustees of Boston Univ. v. Everlight Elecs. Co., Case No. 1-12-cv-11935 (D. Mass. 10/23/15)

• “[D]efendants contend that [plaintiff’s expert] contradicts basic principles of patent law and economics in opining that the non-exclusive hypothetical [party] license could command a higher royalty rate than the [plaintiff-nonparty's] exclusive license because an exclusive license provides the licensee with more rights and benefits than a non-exclusive license. . . . [Plaintiff] bears the burden of showing that [its expert's] testimony is reliable. The Court will not allow [plaintiff's expert] to testify that the non-exclusive hypothetical [party] license would command a higher royalty rate based on surveys he has reviewed because he has not provided citations to any such surveys or demonstrated how they are related to the specific facts of this case.”

Comparable Licenses

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Success/failure

• Settlement Agreement / Cross-license

• Court excluded a settlement agreement resolving prior patent

litigation with one of the asserted patents because it was

“arrived at by an effort to value [non-exclusive] cross-licenses

on the Curtis and the ’700 patents. The mere fact that it

appears to be the only such license available does not justify

its admission under LaserDynamics.”

• Douglas Dynamics v. Buyers Products, Case No. 3:09-cv-261

(W.D. Wis. 4/4/2014)(Conley)

Comparable Licenses

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Success/failure

• Different patents- technical comparability

• Damages expert relies on technical expert

• Freeny v. Murphy Oil Corp., Case No. 2-13-cv-00791 (E.D. Tex.

6/4/15) (Payne, J.)

• “[Plaintiffs' damages expert] is entitled to rely on his discussions

with [plaintiff's technical expert] even if such discussions would be

otherwise inadmissible."

• Damages expert allowed to testify on technical comparability

• Stoneeagle Services, Inc. v. Pay-Plus Solutions, Inc., Case No.

8-13-cv-02240 (M.D.Fla. 6/19/15) (Hernandez, J.)

• Damages expert admitted he was not hired as a technical expert

and lacked specialized knowledge or training in the patented

technology. He had extensive licensing experience

• Court said defendant can challenge qualifications on cross

Comparable Licenses

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Success/failure

• Different patents- technical comparability

• Damages expert not allowed to testify on technical

comparability

• TracBeam v. Google, Case No. 6:13-cv-93 (LED) (E.D. Tex.

5/9/2015)

• Court excluded a license agreement which on its face did not

cover comparable technology and the damages expert was not

qualified to opine as a technical expert.

Comparable Licenses

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Success/failure

• Different patents- accounting for differences

• Radio Sys. v. Tom Lalor, Case No. C10-828RSL (W.D. Wash. 9/12/2014)

• Patented technology was a pet training collar.

• Defendants’ expert relied on 7 licenses plaintiff executed to license technology in the pet products industry.

• 5 of the agreements were not related to training, but to things like litter boxes and ingestible animal temperature sensor.

• Expert acknowledged the differences, but did not say how he accounted for the differences in reaching his royalty rate.

• The Court said: “Without more, [the expert’s] consideration of the 5 unrelated license agreements renders his opinion insufficiently reliable and not helpful to the jury.”

• The Court allowed a do-over report removing the 5 unrelated agreements and re-calculating the royalty rate

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Extraterritorial Factors


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The Accused Products

• Where do they go

• Where don’t they go

• How do they get there

• Who sends them

• Who doesn’t send them

• What happens to them in the US

• What happens to them outside the US

• What can they do in the US

• What can they do outside the US


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Locus of the transaction

• Where was the price negotiated

• Where was the final price approved

• Where were invoices delivered

• Who sent the invoices

• Where were payments made

• Who received the payments

• Is there a contract

• Where was the contract formed/executed

• Who executed the contract


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Locus of the transaction

• Where were the marketing meetings

• Were samples provided

• Who provided the samples

• Where were the sales meetings

• Where were the design meetings


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Estimating imports into the US

• Third party discovery• Manufacturer of end products

• Retailers of end products

• Import agencies

• Component maker• Records from at least some of their customers as to where

their components end up (or at least estimates)

• Estimates from customer contact • Returns, service requests, software updates, etc.

• Estimates from third party market research

• Estimates from a market research consultant hired specially for the case


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Estimating imports into the US

• Halo Elect. v. Pulse Elect., Case No. 2:07-cv-331 (D. Nev. 10/25/2012)(Pro)

• Plaintiff’s expert estimated royalty base, which included US sales of accused products and accused products imported into the US

• No dispute

• Accused products were incorporated into end products and then imported back into the US

• Defendants and its customers did not have import numbers

• Methodology

• End products with the accused product

• Estimated the percentage of worldwide sales in the US

• Sellers of those end products

• Estimated the percentage of worldwide sales in the US

• The Court said that the expert “based his royalty base on sufficient facts considering the evidence available in this case. An estimation was necessary given the lack of specific data showing how much of Pulse’s sales of the accused products outside the US were eventually imported back into the US.” (citing Lucent). “The proper avenue for Pulse to challenge the evidence Halo relied on and the conclusions drawn from that evidence is on cross-examination or otherwise at trial, not at the exclusion of Hansen’s royalty base opinion all together.”

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Book of Wisdom

Book of Wisdom

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Origins

• Exception to Georgia-Pacific hypothetical negotiation (HN),

which focuses on conditions when infringement began

• Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289

U.S. 689, 698 (1933) (Cardozo, J.)

• “[I]f years have gone by before the evidence is offered[,

e]xperience is then available to correct uncertain prophecy. Here

is a book of wisdom that courts may not neglect.”

• HN methodology “permits and often requires a court to look to

events and facts that occurred [after the hypothetical

negotiation] that could not have been known to or predicted by

the hypothesized negotiators.”

• Fromson v. Western Litho-Plate & Supply Co., 853 F.2d 1568,

1575 (Fed. Cir. 1988)

Book of Wisdom

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Themes

• The words rarely appear in

opinions

• But the principle is applied

frequently

• Accepted evidence is pretty

open

• Little guidance from Federal

Circuit on nature and extent of

allowable future acts

• Post-hypo evidence is rarely

excluded on that ground

Book of Wisdom

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Effective evidence

• Explicit in GP factor #11: The extent to which the infringer

has made use of the invention; and any evidence probative of

the value of that use

• Implied in GP factor #8: The established profitability of the

product made under the patent; its commercial success; and

its current popularity

• License and settlement agreements

• Cost savings

Book of Wisdom

45

Effective evidence

• Risky to rely solely on BOW evidence

• Couple with evidence at or before the HN date

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Questions?

Thank you!

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Please send your NY CLE forms or questions about the webinar to Jane Lundberg at [email protected].

A replay of the webinar will be available for viewing at http://fishlitigationblog.com.

Chris Marchese

Principal, San Diego

858-678-4314

[email protected]

mailto:[email protected]

http://fishlitigationblog.com/

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