Classification of Contracts in Business Regulations
Recent Developments in Proving Damages in Intellectual Property Disputes
1. November 13, 2014
12:00 – 1:00 p.m.
Salt Lake City, Utah
Utah State Bar Intellectual Property Section
2. Presenters
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Cory D. Sinclair
J.D., Ph.D. Economics
Parsons Behle & Latimer
John N. Zarian
J.D., M.S. Finance
Parsons Behle & Latimer
3. Overview
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● Trends in patent damages in the
post-Uniloc environment
● New approaches in calculating
patent damages
● Recent developments in damages
awards in trademark cases
● Recent decisions related to proving
copyright damages
● Using alternative theories of
damages in trade secrets cases
4. “Call the patent office. Copyright the
name ‘Green Goblin.’ I want a quarter
every time somebody says it.”
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6. Patent Damages
28 U.S.C. 284
Upon finding for the claimant [patent holder] the court shall award
the claimant damages adequate to compensate for the
infringement, but in no event less than a reasonable royalty for the
use made of the invention by the infringer, together with interest
and costs as fixed by the court. … [T]he court may increase the
damages up to three times the amount found or assessed.
Damages
– Lost Profits (causation requirement)
– Reasonable Royalty (floor)
– Interest and costs
– Attorney fees (exceptional cases)
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7. Lost Profits
– Lost Sales
– Price Erosion
– Unpatented Items
– Future Lost Profits
– Damage to Reputation and Goodwill
– Miscellaneous Business Losses
Reasonable Royalty
– Georgia-Pacific Hypothetical Negotiation
– Analytical Approach (apportion projected profits)
– 25% Rule of Thumb (rejected)
– Established Royalty for the Patent?
– Many Licenses in a Small Range of Rates?
– Cost Savings / Incremental Benefits?
Patent Damages:
Methodologies
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8. Some Key Concepts Relating to
Reasonable Royalty Damages
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Entire Market Value
Smallest Salable
Patent-Practicing
Unit (“SSU”)
Further apportionment?
9. Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed.
Cir. 2009) (The entire market value rule (“EMVR”) allows a patentee to
claim damages based on the entire market value of an accused product
containing patented and non-patented components only where the patented
feature creates the “basis for customer demand.”).
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) (“The
Supreme Court and this Court’s precedents do not allow consideration of
the entire market value of accused products for minor patent improvements
simply by asserting a low enough royalty rate.”).
LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67-68 (Fed.
Cir. 2012) (“The entire market value rule is a narrow exception to this
general rule [that royalties be based on the smallest salable patent-
practicing unit].”) (“It is not enough to merely show that the [patented
feature] is viewed as valuable, important or even essential … . [Rather,
plaintiff must show] “the presence of that [patented feature] is what
motivates consumers to buy a [product] in the first place.”).
Issue #1: Current State of the Entire
Market Value Rule (“EMVR”)
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10. Mirror Worlds, LLC v. Apple, Inc., Case No. 6:08-CV-88 (Dkt. 478)
(EDTX 4/4/11) (JMOL vacating $625M jury award)
– Jury could not have reasonably relied on certain “consumer surveys” to
find that customer demand for patented features created basis for
customer demand for the revenues used in the royalty base
NetAirus Technologies, LLC v. Apple, Inc., Case No. LA CV10-
03257 JAK (CDCA 10/23/13) (granting in part and denying in part
motion to exclude surveys relied upon by plaintiff’s damages experts)
– Rejecting argument that surveys did not attempt to determine if consumers cared
whether data formatted for computer email was sent to and from a local area
network at a lower transmit power level, as required by the asserted claims
– Accepting some questions that appeared to be intended to avoid bias in the
answers, while rejecting a question seeking to value something that was
significantly broader than the claimed invention without adequate justification
– Rejecting a second survey that “was not constructed in a reliable manner”
Issue #2: Using Consumer Surveys
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11. Cornell University v. Hewlett-Packard, 609 F.Supp.2d 279
(N.D.N.Y. Mar. 30, 2009) (J. Rader, by designation) (slashing
$184M jury award to $53M)
– Plaintiff’s expert could not show the patented component was
the basis for demand for servers, workstations, etc.
– Patent was directed to Instruction Reorder Buffer (IRB)
– IRB was only one feature of the CPU
– But CPU was the smallest salable patent-practicing unit (“SSU”)
– Therefore, damages allowed on CPU as a royalty base
Q: Can plaintiff stop at the SSU if the patent is directed to
an SSU feature, or is the SSU just a starting point?
Issue #3: Smallest Salable Patent-
Practicing Unit (“SSU”) & Apportionment
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12. LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67-68 (Fed. Cir.
2012) (“[I]n any case involving multi-component products, patentees may not
calculate damages based on sales of the entire product, as opposed to the smallest
salable patent-practicing unit ….”) (suggesting that apportionment is not required)
Internet Machines LLC v. Alienware Corp., Case No. 6:10-CV-23 (EDTX 6/19/13)
(Dkt. 615) (“Because Mr. Bratic used the smallest unit as his royalty base, additional
apportionment is unwarranted and the narrow exception of the entire market value
rule is inapplicable.”) (holding that apportionment is not required)
AVM Tech., LLC v. Intel. Corp., Case No. 10-610-RGA (DDE 1/4/13) (Dkt. 230)
(“The use of a saleable unit that is greater than the patented feature is going to
introduce Uniloc error … .”) (holding that apportionment is required).
Dynetix Design Solutions, Inc. v. Synopsis, Inc., Case No. C 11-05973, 2013 U.S.
Dist. LEXIS 120403, at *7-12 (NDCA 8/22/13) (“Dr. Black relied on the blanket
assumption that, once he selected the smallest saleable unit – in this case the entire
VCS product – he could end the analysis, his determination of the royalty base is
fundamentally flawed.”) (holding that apportionment is required).
SSU & Apportionment – cont’d
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13. “The basis for” customer demand or “a
substantial basis” of consumer demand?
– LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 63 (Fed.
Cir. 2012) (“basis for customer demand”); Lucent Technologies, Inc.
v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009) (same); Rite-
Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549 (Fed. Cir. 1995) (same).
– Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318 (Fed. Cir.
2011)(EMVR applies “where the patented feature creates the ‘basis for
customer demand’ or ‘substantially create[s] the value of the component
parts’”); Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d at 1337
(suggesting EMVR applies if there is evidence the patent method is “the
basis” or “a substantial basis” of consumer demand).
Issue #4: Efforts to Avoid
EMVR, SSU & Apportionment
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14. Artful claim selection and application
– System-level claims or broad apparatus claims may cover an
entire multi-featured product, e.g., a “computer”
– Univ. of Pittsburgh v. Varian, Case No. 2:08-CV-01307-AJS
(W.D. Pa. Feb. 10, 2012)
• Inventive feature was certain RPM software, but two of the dependent
claims included a linear accelerator (in prior art)
• Varian argued that including the linear accelerator in royalty base was like
including the price of a TV in the royalty base for a patented DVR that
mentions a TV in the claims. The Court stated that the better analogy would
be for a TV that had a built in DVR, where the TV was a critical component
of the whole patented apparatus.
• “[B]ecause the Court has concluded the linear accelerators are a part of the
patented apparatus and not just a mere accessory, the added value of the
linear accelerators may be used in determining the royalty base.”
Efforts to Avoid EMVR, SSU &
Apportionment – cont’d
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15. Licenses Used to Prove Damages Must be “Comparable”
Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc.,
609 F.3d 1308, 1320 (Fed. Cir. 2010) (“comparisons of past patent
licenses to the infringement must account for ‘the technological and
economic differences’ between them”); ResQNet.com, Inc. v.
Lansa, Inc., 594 F.3d 860, 868-69 (Fed. Cir. 2010) (reversing as to
damages) (past license evidence used to calculate royalty rates
must be reasonably related to claimed invention); Lucent
Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed.
Cir. 2009) (“licenses relied on by the patentee in proving damages
[must be] sufficiently comparable to the hypothetical license at issue
in suit.”).
Issue #5: “Comparable” Licenses
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16. Q: If comparable licenses are based on total revenue of devices
similar to accused device, must patentee prove “the basis for
customer demand”?
Mondis Tech. Ltd. V. LG Elecs., Inc., 2011 WL 2417367 (EDTX
6/14/11) (if licenses are truly comparable, royalties may be permitted
based on total product revenue in license agreements without also
proving “the basis for customer demand).
But see Lighting Ballast Control v. Philips Elecs., 2011 U.S. Dist.
LEXIS 96148 (NDTX 6/10/11) (improper to use entire revenue
without proving “the basis for customer demand”).
“Comparable” Licenses – cont’d
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17. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011)
– “[A]s a matter of Federal Circuit law, [ ] the 25 percent rule of thumb is a
fundamentally flawed tool for determining a baseline royalty rate in a hypo-
thetical negotiation. Evidence relying on the 25 percent rule of thumb is thus
inadmissible under Daubert and the Federal Rules of Evidence, because it
fails to tie a reasonable royalty base to the facts of the case at issue.”
WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10 (Fed. Cir. 2012)
– Four patents directed to automated delivery of professional services and
backing up client data; accused products were programs to generate and
send reminders to clients of upcoming patent/trademark deadlines
– On appeal, vacated $8M award and remanded for new trial on damages
– Experts must fully analyze Georgia-Pacific factors, not cursorily recite them
– Considering, without deciding, whether a lump sum award was a fully paid-
up license that would have obviated any ongoing royalties
– Illustrates care that must be taken in presenting a damages case
Issue #6: 25% “Rule of Thumb” &
Other Unsupported Royalty Awards
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19. Protegrity Corporation v. Voltage Security, Inc., Case No.
3:10-CV-755 RNC (DCT 12/21/13) (data encryption)
– Damages for lost profits determined using the Panduit factors
– One factor is “absence of acceptable non-infringing substitutes”
– MSJ granted because expert failed to address whether there
were non-infringing alternatives available in the market
TQP Development, LLC v. Merrill Lynch & Co., Inc., Case
No. 2:08-CV-471-WCB (EDTX 8/10/12) (Dkt. 598)
– Non-infringing alternatives offered on the issue of reasonable
royalty damages; this was not a lost profits case
– Alternative ciphers available at time of hypothetical negotiation
– Defendants’ expert could be allowed to testify that non-infringing
alternatives would impact any hypothetical negotiation
Issue #7: Non-Infringing Alternatives
and Reasonable Royalty Damages
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20. Simply put, the Nash bargaining solution – named after Dr. John Nash (“A
Beautiful Mind”) – is the most mutually beneficial result for both parties.
Oracle America, Inc. v. Google, Inc., 798 F.Supp.2d 1111, 1120 (N.D. Cal.
2011) (rejecting Nash bargaining solution as “impenetrable” and because it
essentially amounts to an assumption of 50% of the infringer’s profits).
Mformation Techs., Inc. v. RIM, 2012 WL 1142537 (N.D. Cal. Mar. 29,
2012) (allowing Nash bargaining solution as a “check” on royalty rate).
Gen-Probe, Inc. v. Becton Dickinson & Co., Case No. 09-CV-2319 BEN
NLS (SDCA 11/26/12) (Dkt. 572) (allowing Nash bargaining solution in
“combination” with real world observations and tied to the facts of the case).
VirnetX Inc. v. Cisco Systems, Inc., Case No. 6:10-CV-00417-LED (Dkt.
745) (EDTX 3/1/13) (allowing Nash bargaining solution profit splitting model).
Suffolk Tech. LLC v. AOL Inc. and Google Inc., Case No. 1:12-CV-625
(EDVA 4/12/13) (Dkt. 518) (rejecting use of Nash bargaining solution
because it was not tied to the facts of the case).
Issue #8: Nash Bargaining Solution
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21. Carnegie Mellon University v. Marvell Technology
Group, Ltd., Case No. 2:09-CV-00290-NBF (MDPA
11/2912) (Dkt. 672) (semiconductor chips made abroad)
– Allowing but not endorsing “novel” theory of damages touching
on foreign sales based on usage in the United States
– Marvell used the patented method during its U.S. “sales cycle”
and argued “but for” that cycle, would not have made sales
Halo Elec., Inc. v. Pulse Elec., Inc., 2012 WL 5267014
(DNV 10/25/12) (chips made and sold abroad)
– Court allowed plaintiff to seek royalties on chips made abroad,
based on evidence of direct sales into the U.S. and estimates
that other chips were making their way into the U.S.
Issue #9: Foreign Sales
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23. McCarthy on Trademarks notes that the public policy and theoretical
basis underlying monetary awards have received inadequate judicial
attention and have remained confused and undefined.
Monetary remedies available under the Lanham Act include
– Defendant’s profits
– Plaintiff’s damages
– Reasonable royalty
– Costs of lawsuit
– Attorneys’ fees (“exceptional cases”)
Between 1947 and 2005, only 5.5% of cases decided obtained
monetary damages
Trademark Damages
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24. Equitable relief:
– Defendant’s profits (flows from infringer’s unjust enrichment and
need for deterrence)
• Tenth Circuit requires showing of willfulness or bad faith for
Defendant’s profits
• However, many circuits do not require a showing of actual
confusion to be awarded defendant’s profits
• Plaintiff’s burden is to establish infringer’s sales. Burden
then shifts to infringer to establish deductions.
– Typical deductions include variable costs (labor, raw materials, COGS)
– Fixed costs, taxes, excessive expenses are not deductible
Trademark Damages (cont.)
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25. Legal relief:
– Plaintiff’s lost profits
• Tenth Circuit allows circumstantial evidence of actual confusion (such as
survey results) to support an award of actual damages
• Recognized methodology includes revenue lost less expenses that would
have been incurred to earn those revenues
– Reasonable royalty
• Unclear in Tenth Circuit whether Reasonable royalty award is allowed when
there is no evidence of plaintiff’s willingness to license.
• Ninth Circuit has previously held no reasonable royalty unless evidence of
past licenses
• Seventh Circuit has held reasonable royalty may be appropriate even if no
evidence of past licenses
• Generally follows Georgia-Pacific factors in determining appropriate rate
Trademark Damages (cont.)
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26. Legal relief cont.
– Attorney fees for prevailing parties in exceptional cases
• Exceptional cases often those defined as purposeful infringement or truly
egregious violations.
– Recovery of costs
• Discretionary with the court, but typically include filing fees, witness fees,
and court reporter fees
– Statutory damages for counterfeiting cases
• Similar to copyright, range of options and increase with a finding of
willfulness.
• Actual damages not required to receive statutory damages
Trademark Damages (cont.)
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27. Is Reasonable royalty the future?
– QS Wholesale, Inc. v. World Marketing, Inc., 2013 WL
1953719 (C.D. Cal. May 9, 2013)
• Reasonable royalty award permitted even though plaintiff had not
previously licensed mark;
• Relied on expert testimony of similarity between mark and other
similar clothing licensing deals
– ITT Corp. v. Xylem Group, LLC, 2013 WL 4011057 (N.D. Ga.
Aug. 5, 2013)
• Plaintiff permitted to present evidence of reasonable royalty damage
calculation even though no license had ever been granted
• Court relied heavily on policy considerations
Trademark Damages (cont.)
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29. Basics:
– Under Section 504 of the Copyright Act, an
infringer is liable for either (i) owner’s actual
damages, or (ii) statutory damages
– Most common form of relief in copyright cases
is equitable, including preliminary and
permanent injunctions
Copyright Damages
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30. 504(b) allows actual damages as a result of infringement and
infringer’s profits attributable to infringement (minus double
counting)
Statutory damages unavailable if material is not registered prior to
infringement
– Not wilfull: $750 < damages <$30,000
– Wilfull: $750 < damages < $150,000
– No guidance on how to choose number within range
Copyright holders can choose between actual damages and
statutory damages up until the court issues a final judgment.
Copyright Damages (cont.)
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31. Getty Images v. Virtual Clinics (W.D. Wash,
March 2014)
– Getty images owned copyrights to numerous pictures of cats and
dogs. 12 pictures at issue in case
– Defendants were a couple from Florida who designed websites
from their home for veterinarians and clinics
– Defendants initially moved to dismiss for lack of personal
jurisdiction, and then stopped defending case
– Court entered default judgment, awarded $21,433 in actual
damages on 10 infringed images, and ordered statutory
damages on remaining 2 images
Copyright Damages (cont.)
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32. “However, because there need not be “actual
evidence” of an infringer’s profits or a plaintiff’s
losses for maximum statutory damages to be
appropriate, the court turns to the remaining two
factors.”
– Public interest and willfulness supported maximum
award despite minimal damages to plaintiff and
negligible cost savings to defendant.
– Willfulness finding supported by evidence of 21 letters
written by defendant’s counsel denying infringement
Copyright Damages (cont.)
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33. Copyright Damages (cont.)
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Dash v. Mayweather, 731 F.3d 303 (4th Cir.
2013)
– Dash created original work but it was not registered (no statutory
damages)
– Mayweather modified work and entered WWE event playing his
modified version
– District court granted S.J. because Dash could not establish
actual damages
– Dash submitted expert report outlining license fees paid to other
artists for use at WWE events
34. Copyright Damages (cont.)
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Fourth Circuit affirmed district court:
– Dash did not establish copyrighted work had market value
(expert report too speculative)
– Evidence of licenses paid to other artists too speculative
– Plaintiff seeking profit damage must prove amount of claimed
revenue streams; and some reasonable relationship between
revenue stream and infringement (“conceivable connection”)
35. Copyright Damages (cont.)
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Where from here?
– Congressional Hearings on Copyright remedies held on July 24,
2014
• Efficacy of statutory damages;
• Explore creation of “small claims” copyright tribunal to permit
copyright holders to seek remedies of smaWhere3ll dollar
infringements outside of federal court
Make sure you advise clients to register
37. Uniform Trade Secrets Act, as adopted by the
states, governs trade secret damages (state law
issue)
– Equitable relief common (preliminary or permanent
injunctions)
– Damages:
• Actual damages (costs incurred and lost profits)
• Unjust enrichment
• Reasonable royalty estimate
Trade Secret Damages
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38. Storagecraft Technology Corp. v. Kirby, 744 F.3d
1183, (10th Cir. 2014)
– Defendant Kirby stole the computer source code that he helped
create after a falling out with co-workers;
– Utah jury awarded $2.92M for misappropriation of trade secrets
based on a reasonable royalty theory;
– Award affirmed by Tenth Circuit in opinion that carefully
reviewed the UTSA and distinguished trade secret damages
from other IP infringement damages.
Trade Secret Damages (cont.)
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39. Kirby made three arguments to Tenth Circuit:
1. Reasonable royalty damages inappropriate without proof of
commercial use by defendant;
• Tenth Circuit rejected, relying on language from UTSA that allows
reasonable royalty damages when misappropriator uses or discloses
trade secret.
2. Amount of award was excessive because he did not benefit
from the “license”
• Citing Georgia-Pacific, the court acknowledged that the scope of the
negotiated license certainly impacts the license fee. However, Kirby
disclosed it to a known competitor, rather than his “long since retired,
seriously aged, and tight-lipped great-grandfather….”
3. Expert testimony was improperly allowed
Trade Secrets Damages (cont.)
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40. Southwestern Energy Prod. Co. v. Berry-Halfand, Case no. 12-
11-00370-CV (Tex. Ct. App. 2013)
– Appellate court affirmed reasonable royalty damage award after defendant used
plaintiff’s trade secret in locating potential sources of natural gas reserves in
Texas
– Rejected disgorgement argument
– Approved royalty of 3%, which was similar to other licenses in industry
Wayman Fire Protection Inc. v. Premium Fire & Security LLC,
Case no. 7866 (Del. Ch. 2014)
– Awarded damages to employer after employee stole “confidential information”
and shared with competitor
– Information was not found to be trade secret and there was no non-compete
agreement in place
– Court found defendant violated Delaware Misuse of Computer Systems
Information Act; applied same methodology as trade secret damages
Trade Secrets Damages (cont.)
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