Are There No More

Are There No More

Overview• Surveyed recent damages case law – last 2-3 year• 25% Rule of Thumb is deadWould-be licensee to pay 25% of itsanticipated profits of products incorporatingthe IP to the patent holder• Are there no more rules of thumb?• What conclusions can we draw to help us(A) understand the teachings of the courts and(B) present “winning” damages modelsKaren D. McDaniel & Rachel C. Hughey

Uniloc v. MicrosoftFederal Circuit 201125% Rule of thumb is deadProduct activation-software/computerAccused products:Microsoft Windows and Microsoft OfficePatent on product activation system$19.3 billion damages baseKaren D. McDaniel & Rachel C. Hughey

Uniloc v. MicrosoftFederal Circuit 201125% Rule of thumb is deadProduct activation-software/computer• Plaintiff’s Claim: Based on sales of Windows and Office -$19.3 billion damages base @ $2.50/activation -- a“mere” 2.9% of accused sales• Defendant’s Counter: $7 million -Equated to 3/100,000ths000ths% royalty on overall system – Plaintiff called it ‘nuts’• District court: EMVR not appropriate• No evidence that small feature drives demand forsystem• Both parties appealed• Federal Circuit declared 25% rule dead• Wooden methodology not tied to marketplace realities• Remanded for new trial on damagesKaren D. McDaniel & Rachel C. Hughey

Lucent v. GatewayFederal Circuit 2009Date picker – Software/ComputerMicrosoft Outlook + Microsoft Money +Windows Mobile 110 million units• Plaintiff Lucent’s Claim: $8 billion royalty base• Lucent claimed 8% royalty= $562 million in damage• Jury award = $358 million• Federal Circuit: Use of EMVR inappropriate.• Remand for new trial on damagesKaren D. McDaniel & Rachel C. Hughey

Cornellv.HPN.D. N.Y. 2009, Rader, J (by designation)Instruction reorder buffer – software/computerServer / WorkstationCPU “bricks”$23 billion “hypothetical” or“imaginary” revenue = revenuesHP “would have obtained” if soldinfringing processor with CPUbrickProcessor$8 billion “hypothetical”revenue‘115 patentIRB componentKaren D. McDaniel & Rachel C. Hughey

Cornell v. HPN.D. N.Y. 2009, Rader, J (by designation)Instruction reorder buffer – software/computer• Damages base – CPU brick - $23 billion• Jury applied 0.8% RR = $184 million award• Court vacated: EMVR not proven• Over inclusive royalty base “not permissiblesimply because the royalty rate is adjustable”• Royalty base should be “ smallest saleable unitwith close relation to the claimed invention”• Court applied 0.8% RR (jury number) againsthypothetical processor revenue of $8 billion–Awarded $54 millionKaren D. McDaniel & Rachel C. Hughey

Laser Dynamics v. QuantaE.D. Texas, Judge Ward, 2010Disk reading method patent – hardware/computerAssembled computer using drive2% royalty claimed($17.20/computer)Stand-alone drive6 % royalty claimed($1.69/drive)Disk reading method patent• Expert applied entire market value rule• Jury awarded $52 million, accepting plaintiff’s methodology• Court found no basis for EMVR, no evidence patent drovedemand• Used Karen $1.69/drive D. McDaniel for drives and & Rachel computers, C. Hughey awarded $6.2illi

Mirror Worlds v. AppleE.D. Texas, 2011 (post Uniloc)Streaming data – software and hardware/computerHardware and software$72 billion base, seeking $625 million damages$11.26 for $129 operating system upgrade(8.8%)$11.26 for ~$1,200 computer (0.81%)‘227method‘313method‘427systemAsserted claims related to displaying,organizing and accessing data by astreamKaren D. McDaniel & Rachel C. Hughey

Mirror Worlds v. AppleE.D. Texas, 2011 (post Uniloc)Streaming data – software and hardware/computer• Claim lowered to $300 million on JMOL that mobiledevices not included• Jury award $208.5 million• Mirror Worlds claimed it was NOT relying on EMVRbecause its damages expert used “the smallest saleableunits”• Court disagreed because Mirror Worlds “used the entiremarket value of the accused commercial products,” whichcontain accused and non-accused features• Court found EMVR not met b/c no proof that patentscreated demand for system• Patentee must “properly apportion the royalty base toaddress the accused features” if EMVR does not apply• Court also found royalty rate not justified and vacateddamages award in the alternativeKaren D. McDaniel & Rachel C. Hughey

Mondis v. LGE.D. Texas, 2011Post Uniloc and LucentMonitors and televisions1% royalty on monitors0.25% royalty ontelevisionsPatent• Daubert challenge• Court approved use of entire market value of products(NOT entire market value rule)• Undisputed that patented feature did not drive demand• Comparable licenses / industry standard to base royaltieson overall product sales• Damages calculation economically justifiedKaren D. McDaniel & Rachel C. Hughey

Oracle v. GoogleN.D. California, 2011Post UnilocSoftware/computer caseAndroid software platformClaims related to incrementalimprovements in efficiency and securityof JAVA software• Daubert challenge• Plaintiff claimed $0.9 billion - $1.4 billion plus 10-15% onAndroid• Court found no link between patent claims and all of Android• Court allowed plaintiff to re-do damages report• Warned plaintiff on application of EMVR - next reportmust apportion value to infringing features• Criticized the Nash bargaining solution• Directed parties to a comparable real-world licenseagreementKaren D. McDaniel & Rachel C. Hughey

Data Quill v. High TechS.D. California, 2011Computer hardware‘304 and ‘591 patents directed tohandsetsHTC handset devices withAndroid / Windows OS$7.58 billion base, claimed$108 million in reasonableroyalty• Daubert challenge• Patentee asserted not EMVR because claimed entireapparatus• Court agreed claims were to entire apparatus, BUT theclaims covered a “feature” of handset• EMVR “applies when the accused products have bothpatented and unpatented features”• Alternatively, patentee asserted EMVR satisfied• Court found support for EMVR because plaintiffpresented evidence linking patented feature toKaren D. McDaniel & Rachel C. Hugheycustomer demand

Broadcom v. EmulexC.D. California, 2011Standalone productsComputer chip (smallest salable unit?)Damages of $387,922 sought (3%royalty)Core (smallest saleableunit?)‘150 Clock & DataRecovery patent• Jury awarded $388,000• Court determined EMVR DID NOT APPLY because there wasevidence (disputed issue of fact) that chip was smallest saleableunit• “The requirements of the entire market value rule must be metonly if the royalty base is not the smallest saleable unit withclose relation to the claimed invention”Karen D. McDaniel & Rachel C. Hughey

Mformation v. RIMN.D. California, 2012Software/computerAccused devicesClaims relate tomethod of remotecontrol of wirelessdevice• Plaintiff based damages claim on sales base of all devices.• Court excluded this evidence – no reason to allow EMVR –just because devices are capable of infringing i i whenconnected with system at issue does not mean customerdemand was driven by this capability.• Nash bargaining system scrutinizedKaren D. McDaniel & Rachel C. Hughey

Mformation v. RIMN.D. California, 2012Software/computer• Nash bargaining solution - Mathematicalmodel designed to find most beneficialoutcome of two-party transaction.• Judge’s perspective in Mformation: “No jurycould follow this Greek or testimony tryingto explain it. The Nash bargaining solutionwould invite a miscarriage of justice byclothing a 50% assumption in an impenetrablefaçade of mathematics.”Karen D. McDaniel & Rachel C. Hughey

If both the patent holder and theinfringer possess productioncapabilities enabling them to use theinvention, then the patent holder'sdisagreement payoff (what the patentholder could expect without a deal), d 1 ,isd 1 = P 1 Q 1 -C 1 (Q 1 )where P 1 is the profit-maximizing[**27] price for the patent holderabsent the infringer, Q 1 is the profit-maximizing quantity for the patentholder absent the infringer, and C 1 (Q 1 )is the patent holder's cost function.The joint profit from licensing,[#x3a0], is[#x3a0] = P m Q m -C 2 (Q m )where P m represents price, Q mrepresents quantity, C 2 (Q m ) representsthe licensee's cost function, and thesubscript m refers to a monopoly.The bargaining payoff for the licensor,[#x3c0] 1 *, is[#x3c0] 1 * = d 1 + [P m Q m -C 2 (Q m ) -d 1- d 2 ]/2 = rQ mwhere d 2 is the infringer'sdisagreement payoff.The bargaining payoff for the licensee,[#x3c0] 2 *, is[#x3c0]2 * = d 2 + [P m Q m -C 2 (Q m ) -d 1 -d 2 ]/2 = P m Q m -C 2 (Q m ) - rQ m .The total profit from licensing,[#x3a0], is[#x3c0] 1 * + [#x3c0] 2 * = [#x3a0] =P m Q m -C 2 (Q m ).And, finally, the reasonable royalty, r,isr = [P m [#x3a0]- AC 2 ]/2 + [1/2Q m ][d 1-d 2 ].Karen D. McDaniel & Rachel C. Hughey

Apple v. MotorolaN.D. Illinois, 2012 (Posner, J. by designation)Software/computer• Judge Posner excluded in a Daubert ruling much of thetestimony on damages (proffered by both parties)• A month later, the Court ruled that neither party is entitled toan injunction. Damages might have been available, butinadequate proof (including failure to parse out value ofpatented feature from non-patented features) - CASEDISMISSED!!!!• Not unlike Judge Posner’s s treatment of copyright damages –parsing out the innovative piece from the balance• 35 U.S.C. 284 – In no event less than a reasonable royalty???

Conclusion 1No Sea Change in the Law But IncreasedScrutiny• Death of 25% Rule is a change in the law• Most other principles remain unchanged• Courts have become more activist• Even have dismissed an entire case for failureof proof on damages• Patent holders should expect more scrutiny:• On damages base• On royalty rate• On overall methodologyKaren D. McDaniel & Rachel C. Hughey

Conclusion 2RIP 25% Rule• The 25% Rule is dead (Uniloc)• “Fundamentally flawed” tool• Provides an approximation, not tethered to thefacts and circumstances of the givenhypothetical negotiation• Courts are indicating that accuracy ismore important t than an easy toolKaren D. McDaniel & Rachel C. Hughey

Conclusion 3Caution Advised with Abstract ModelingTechniques• Nash bargaining system was strongly criticizedby the court in Mformation• Common sense should be the guide• Regardless of damages modeling techniquesemployed, they must still be explained to ajudge or jury (in English)Karen D. McDaniel & Rachel C. Hughey

Conclusion 4Georgia-Pacificis Alive and Well• Georgia-Pacific is not a “rule of thumb”• Georgia-Pacific provides a construct fordetermining a reasonable royalty under a givenset of facts• Courts more now than ever are demanding thatdamages models be rooted in real-worldmarketplace realitiesKaren D. McDaniel & Rachel C. Hughey

Conclusion 5EMVR is Rarely Accepted in Computer Case• Nearly universally rejected in recent opinions –many involving software and some involvinghardware• Plaintiffs seeking to include value of largercomputer system in damages base were almostalways denied use of the EMVR to expand thebase• Use of EMVR in non-computer arts not clearlyimpacted by casesKaren D. McDaniel & Rachel C. Hughey

Conclusion 6Evidence of Marketplace Realities Crucial• To use EMVR to include value of entire devicecontaining patented component, you mustPRESENT EVIDENCE that:• the patented component drives demand forthe overall device; and• the patented component and overall deviceare part of one functional unit• Uncertain to what extent royalty rate can belowered to fix royalty based on entirecommercial embodimentKaren D. McDaniel & Rachel C. Hughey

Conclusion 7Use of Comparable Licenses Advocated• Use comparable licenses to assess value ofpatented feature• Even those unknown to the parties at the timeof the hypothetical negotiation have beenpermitted• If can show it is “industry standard” to pricelicenses based on overall value of system, thisfact can go a long way in avoiding EMVR andissues relating to whether it is appropriate tobase royalty on entire commercial embodimentKaren D. McDaniel & Rachel C. Hughey

Conclusion 8 –The More Things Change the More theyStay the Same• A solid damages claim is tied to marketplacerealities and is backed by real-world evidenceof how the accused products are marketed andsold.• This is the Gold Standard of damagescalculation.• Even with heightenedht scrutiny, there is stillroom for successfuldamages models.Karen D. McDaniel & Rachel C. Hughey

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