IP and Patent Presentation 2.0

WWW . E L L I N A N D T U C K E R . C O M 1

IP and Patent Damages

R. Christopher Rosenthal, CPA/ABV/CFF, ASA, AEPZachary Reichenbach, CFA, CPA/ABV

David Konapelsky


Overview

• Introduction to Intellectual Property, Patents, and Damages• Title 35 of U.S.C. Section 284• Lost Profits – Panduit Factors• Reasonable Royalty – 15 Georgia-Pacific Factors• Recent Case Study

– Lucent Technologies, Inc. v. Gateway, Inc.– IP Innovation v. Red Hat, Inc.– Apple v. Motorola


What is Intellectual Property?

• Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.

• Intellectual property consists of patents, trade secrets, copyrights and trademarks, or simply unique ideas

• Sometimes referred to as “hidden value” because many forms of intellectual property cannot be reflected on the balance sheet


Patent Overview• A government license that gives the holder exclusive rights to a process, design or

new invention for a designated period of time. • Grants the right to produce a new product without fear of competition, patents

provide incentive for companies or individuals to continue developing innovative new products or services.

• Term of patent in the U.S.- provided maintenance fees are timely paid– Application filed after June 8th 1995: The patent is valid 20 years from filling date of application– Application filed prior to June 8th 1995: The patent is valid for 17 years from issue date or 20 years

from filing date of application (whichever is longer)• Applications for patents are usually processed by a government agency. In the U.S.

the United States Patent and Trademark Office (USPTO) processes application and documentation.


Importance of IP and Patents

• Companies are investing heavily in intellectual property because it typically has a higher return on investment than other assets

• The importance of IP portfolios such as patent portfolio• Importance of IP is growing tremendously as the economy is

becoming increasingly more knowledge-based• Value of IP portfolios may be greater than the value of the

company itself

WWW . E L L I N A N D T U C K E R . C O M

Median Damage Award

1995-1999

2000-2004

2005-2009

2010-2014

012345678

5.6

7.6

5.3

2.9 Damages (in Million)

NPE v. Practicing Entities

1995-1999

2000-2004

2005-2009

2010-2014

0

2

4

6

8

10

12

NPEsPracticing En-tities

Patent Litigation Trends



• Composition of Damage Awards– 1995-2004

• Price Erosion: 9%• Lost Profits: 34%• Reasonable Royalty: 74%

– 2005-2014• Price Erosion: 2%• Lost Profits: 31%• Reasonable Royalty: 81%



Overall Summary Judgment Trial0%

10%

20%

30%

40%

50%

60%

70%

80%

26%

4%

65%

35%

10%

67%

Success Rate in Litigation

NPEsPracticing Entities


Title 35 of U.S.C. Section 284

• Damages for patent infringement governed under U.S.C. 35, Section 284• This Section provides for two distinct measures of damages in a patent

infringement case- Lost Profits and Reasonable Royalty• Every patent holder that can successfully show infringement is entitled to

compensation but in no event less than a reasonable royalty (a floor)• Title 35 provides for other forms of recovery for the patent holder in

addition to an award of purely economic damages.• Section 284 specifies that courts can increase any damages award

threefold.– Typically awarded where the infringement is found by clear and convincing

evidence to be willful


Forms of Damages in Patent Litigation

Lost Profits• The amount of money the patent owner lost due to the

infringement. • Owner must show a reasonable probability that, “but for”

the infringement, the patent holder would have made the sales that were actually made by the infringer.

• The patent owner bears the burden of proving to a reasonable probability that it would have made additional profit but for the infringement. They must also prove the infringement caused the lost profits. The patent owner bears the burden of proving the amount of lost profits.

• A patent owner may recover a mixed or split award, in which lost profits are used as a measure for some infringing sales, while a reasonable royalty is used as a measure for the remaining sales

• Patent owners can not recover the infringers profits

Reasonable Royalty• A licensing rate which the patent owner and a

licensee would have negotiated and agreed entirely apart from any litigation or damages question.

• Hypothetical negotiation between a willing licensor and willing licensee

• The hypothetical reasonable royalty is the minimum amount of patent damages the patent owner can recover, equal to what the patent owner would have negotiated as a royalty in the first place.

• Typically occurs when lost profits cannot be proven.

• Also known as “Infringer’s Profits”

And/or


Forms of Damages in Patent Litigation

Lost Profits• Typically a more accurate measure of loss• Lost profits damages frequently bring the

patent owner much more than royalty awards.

• Most common way of proving lost profits is with Panduit Factors (described later)

• Can obtain lost profits on unpatented products sometimes known as convoyed sales– Entire market rule: patented features must

be basis of consumer demand. Unpatented components must function together.

Reasonable Royalty• For reasonable royalty

damages, it removes the patent owner’s burden to prove the fact of damage when infringement is admitted or proven.

• Use of the 15 Georgia-Pacific Factors in determining a reasonable royalty

And/or

WWW . E L L I N A N D T U C K E R . C O M 1 2

Lost Profits and Panduit Factors


Panduit Test

• Panduit Test (4 Part Test) – Plaintiff must establish; absent infringement, the patent owner would have made the infringer’s sales

• Most common way for a patent holder to demonstrate the “but for” requirement

• Four part test referred to as the “Four Panduit Factors”


The Four Panduit Factors (#1 and #2)

• Demand for the product or process claimed in the patent• Based for customer demand• How important is the patented technology?

• The absence of acceptable non-infringing substitutes to satisfy demand during the damage period• Market definition• Market share• Available alternatives• Infringer’s alternatives


The Four Panduit Factors (#3 and #4)

• The patent owner had the manufacturing and marketing capability to supply the patented product to the customers who bought the infringing product– Marketing– Manufacturing– Financial

• The amount of profit that would have been available to the patent-holder absent the infringement – Incremental profit– Fixed versus variable costs


Case Law Evolution Post-Panduit• State Industries vs. Mor-Flo Industries Inc., 883 F.2d 1573 (Fed Cir 1989)

– Modified second prong of the Panduit Test –two supplier market not longer required. Lost profits can be based on market share.

– State Industries obtained lost profits on lost sales in proportion to their market share, even when there were alternatives and substitutes.

• BIC Leisure Products v. Windsurfing International Inc., 1 F.3d 1214 (Fed. Cir. 1993)– Patentee must establish it would have made sales in the relevant market but for

infringer– Patentee, a manufacturer of high-end boards, did not establish that it lost sales to

infringing lower-priced competitor because demand for leisure product is elastic and infringer's cost-conscious buyer would not have purchased more expensive boards from patentee


Additional Panduit Consideration

• Must prove the patent owner has the capacity and capability to manufacturer/produce– Plus the capacity to increase sales (that are in line with the cash flow projection)– Patent owner must demonstrate that they had a marketing strategy and the

ability to generate sales– This is consistent with #3 of the Panduit Test

• Need to consider the effects of price erosion – Infringer can sell product at a lower price that patent owner – patent owner is

entitled to receive damages based on their estimate price, but quantity sold might be different due to supply/demand


Additional Method: Two-Supplier Test

• Second method of calculating lost profits• Can be used where:

1. The patentee and the infringer are the only suppliers present in the subject market 2. It is reasonable to assume provided that the patent owner has the manufacturing and marketing capabilities that the patent holder would have made the infringer’s sales

• A patentee must show: 1. The relevant market contains only two suppliers2. Its own manufacturing and marketing capability to make the sales that were diverted to the infringer 3. The amount of profit it would have made from these diverted sales


Reasonable Royalty and Georgia-Pacific Factors


Calculation of a Reasonable Royalty

• For guidance a court may look to:– Previous established royalty rate between the patentee and infringer– Typical industry rates– Databases of actual royalty rates

• If no guidance exists the court must defer to the result of a hypothetical negotiation between the two parties and envision the terms.

• Typically sets floor for patent infringement damages


Georgia-Pacific Royalty Rate Factors

• Case between Georgia-Pacific and United States Plywood

• U.S. Plywood produced Weldtex Plywood, a popular decorative striated fir plywood that was copied without permission by Georgia Pacific

• Established 15 factors to consider when estimating a reasonable royalty and constructing a hypothetical royalty negotiation


Georgia-Pacific FactorsThese 15 Georgia-Pacific royalty rate factors are often considered in patent infringement litigation matters:1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to

prove an established royalty.– Whether the company has licensed the patent historically– If so, what was the royalty rate

2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.– What other comparable patents are in the company’s patent portfolio– Consider comparable license agreements and review the agreement terms– If any comparable exists, what was the royalty rate agreed upon for these comparable licenses

3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.

– Review the historical license agreements as to whether these patents give exclusive or non-exclusive rights– Review who the licensees were and what rights they had to license the patents


Georgia-Pacific Factors4. The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention by granting licenses under special conditions designed to preserve that monopoly.

– Review if any, the company’s licensing policy or strategy

5. The commercial relationship between the licensor and the licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.

– The relationship between the parties (i.e. have they done business in the past)– Do they compete in similar markets and similar places– What state of the product cycle are the subject patents

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.

– Is the patent a business/sales driver of the entire product and/or component– How is the product viewed in the market (favorable or unfavorable)


Georgia-Pacific Factors

7. The duration of the patent and the term of the license.– Patents are typically 20 years in length. Determine how much time left to the patent expires.

8. The established profitability of the product made under that patent; its commercial success; and its current popularity.

– What are its historical profits and profit margins and its projected profits and profit margins

9. The utility and advantages of the patented property over the old modes or devices, if any, that had been used for working out similar results.

– The patent’s functions and utility; what’s its purposes– Upgrades and improvements over older models

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.

– Who has used the patent and what have there benefits been (higher sales, cost cutting, etc.)


Georgia-Pacific Factors11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.

– What extend has the infringer used the patent

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.

– Review historical agreements– Review historical prices paid to use the patent

13. The portion of the realizable 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 infringer.

– Marketing and advertising– Sales force– Any additional elements that the company did to profit from this patent


Georgia-Pacific Factors

14. The opinion testimony of qualified experts.– Financial 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.

– Determining a range or a reasonable royalty


Entire Market Rule

• Judicial doctrine that is used by courts to determine whether the patentee can recover damages based on the entire value of a marketed product or system that includes both patented and unpatented components

• Should the reasonable royalty should be based on the entire market value of a product using a patent.

• This rule was curtailed in Lucent v. Microsoft and the limitations were further clarified in LaserDynamics v. Quanta Computer decision


Entire Market Rule• Federal Circuit found that courts have often applied the entire market value rule for lost

profit purposes to include diverted sales of unpatented components in situations in which the patented and unpatented components were analogous to a single functioning unit

• Federal Circuit also found that courts have typically applied the entire market value rule for reasonable royalty purposes to include in the royalty base unpatented components of a device when the unpatented and patented components are parts of a single assembly or together constituted a functional unit

• Courts ultimately base their decisions on whether the unpatented component functions together with the patented component in a manner to produce a desired end product or result

• The entire market value rule requires a showing that all the components together are analogous to components of a single assembly or are parts of a complete machine, or constitute a functional unit


Case Law Updates


Lucent Technologies, Inc. v. Gateway, Inc.

• In 1986, 3 engineers patented a keyless method of entering info into fields on a computer screen.

• Years later, Lucent had rights to this patent and sued Gateway. Microsoft intervened.

• Microsoft sold 110 million units of 3 software products using the patent for approximately $8 billion



• At trial, Jury awarded Plaintiff $358 million in damages – 2nd largest jury verdict in 2009 and 5th largest patent jury award in U.S. history

• Microsoft appealed• Microsoft argued:

– Lack of evidence to support jury’s award– Improper use of the ‘entire market value’ rule



• Plaintiff’s expert concluded an 8% running royalty for a total of $562 million

• Microsoft expert countered with a lump-sum no greater than $6.5 million

• Jury at trial court based liability on sales of all 3 Microsoft products and set the award as a lump-sum

• In appeals court, Plaintiff had difficulty explaining how:– Consumers might use software– How a reasonable royalty could prove a lump-sum– The use of comparable agreements



• Court ruled that this feature was small in overall Microsoft product

• Court also ruled that other features accounted for customer demand

• Court ultimately reversed the original $358 million verdict• Note: entire market rule only applies when patented feature is

substantial basis for customer demand


IP Innovation v. Red Hat, Inc.• IP Innovation patented a workspace switching feature and then accused the

Defendants of using it in their operating systems.• The plaintiffs retained an expert to calculate damages based on a reasonable royalty

rate. • Because the plaintiff does not manufacture or sell products incorporating its patents,

it did not seek lost profits damages.• The plaintiffs’ expert employed the “entire market value rule” to identify and

calculate the reasonable royalty base. Under this rule, damages are recoverable only if the patented features are of “such paramount importance” that they serve as the basis for customer demand of the entire product.


IP Innovation v. Red Hat, Inc.

• Invoking the entire market value rule, the plaintiffs’ expert included 100% of the defendants’ total revenues from sales of subscriptions to their operating systems, which included the workspace switching feature, in calculating his proposed royalty rate base.



• Expert relied on an online user forum for a third-party product to show that some users touted a desktop switching feature as essential.

• Have to prove that the patent item in an entire market product is a reason that customers buy a product.

• For example: Apple might have patented the “batter life visual” on my iPhone, but I don’t buy the phone for that particular function.

• Expert failed to account for the portion of the product that was sold based on the patented feature



• Expert used questionable royalty data• Market data tough to use as comparable since every

patent is different.• Expert offered no evidence that supported the claim that

the patented feature was a major part of the entire unit• Court denied Plaintiff’s expert conclusions


Apple v. Motorola

• Apple ‘002. This patent feature prevents an application from totally obscuring the toolbar notification window, thus leaving information about the phone’s basic functions

• Apple ‘494. This patent related to a heuristic (instruction to the cell phone) that allows users to “tap for the next item” instead of using a finger swipe.


Apple v. Motorola

• Apple ‘263. This patent ensures the smooth presentation of video and aural material on a cell phone

• Apple ‘647. This patent is related to structure detection and linking


Apple v. Motorola

• To distinguish between a “disabling” problem with the expert’s testimony and a mere weakness, the court should ask “whether the expert employs in the courtroom the same level of intellectual rigor that characterize the practice of an expert in the relevant field.”

• A second test is whether the expert has sufficiently explained the derivation of his or her opinion, i.e., is there an “analytical gap” between the data and the proposed testimony.


Apple v. Motorola

• It is important to survey firms in search of the lowest price to engineer a patent and report back to Motorola – the expert failed to do this.

• Avoid arbitrary guesswork in making adjustments and calculation decisions• If you are going to survey users of a patent product, it must be properly

designed• As a result of its rulings on the parties’ respective Daubert motions, only

their technical experts were left standing in the case. In a subsequent opinion, the court considered their dueling motions on summary judgment and whether—in the absence of any expert damages evidence— any material dispute was left in the case.


Questions

IP and Patent Presentation 2.0

Documents

Transcript of IP and Patent Presentation 2.0