But It’s Only A Drop in the Bucket! A Primer on Patent Damages

1. But It’s Only A Drop in the Bucket!A Primer on Patent Damages The Judge Paul R. Michel Intellectual Property Inn Team 3 // November 22, 2011

2. Senate Judiciary Committee on Patent Reform • Legislative Hearing Prior to the America Invents Act • Attendees: • Senator Patrick Leahy,Senate Judiciary Committee • Ms. Vivian Lee, Representative for Macrosoft Corporation • Mr. Jonathan Statman, Representative for Inventors’ Association • The Hon. S. James Otero, District Judge of the United States District Court for the Central District of California

6. Patent Damages 101 Captain Luke Dauchot

7. Statutory Mandate 35 U.S.C. Section 284: “Upon finding for the claimant 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.”

8. Supreme Court: No arbitrary limits on mandate • Aro Mfg. Co. v. Convertible Top Replacement Co. 377 U.S. 476, at 507 (1964), (pluralityopinion) (citations omitted) • The question to be asked in determiningdamages is "how much had the Patent Holder and Licensee suffered by the infringement. And that question [is]primarily: had the Infringer not infringed, what would the Patentee Holder-Licensee have made?“ • General Motors Corp. v. Devex Corp., 461 U.S. 648 (1983) • In enacting § 284, Congress sought to "ensure that the patent • owner would in fact receive full compensation for 'any • damages‘ [the patentee] suffered as a result of • the infringement.“ • "When Congress wished to limit an element of • recovery in a patent infringement action, it said so • explicitly."

9. Federal Circuit: Treat Like Tort Damages (almost) Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1546 (Fed. Cir. 1995) “But-for” + …. reasonable, objective foreseeability. If a particular injury was or should have been reasonably foreseeable by an infringing competitor in the relevant market, broadly defined, that injury is generally compensable absent a persuasive reason to the contrary.

10. Two Models: (1) Lost Profits; (2) Reasonable Royalty • “But for” infringement, patentee would have earned more profits • “Panduit”* – four factor test • lost sales caused by demand for patented feature • Must be in competition with accused product • account for acceptable non-infringing substitutes • Establish that there are none, or deduct infringer’s portion of sales that would have been captured by substitutes • capacity to handle “but-for” sales • amount of lost profit • *Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir.1978)

11. Lost profits on what? • Easy • Patented product that competes with accused product, e.g. • patent covers catheter “X,” patentee sells X; accused infringer sells X. • Unpatented product that competes with accused product, e.g. • patentee sells catheter “Y” that competes with X

12. Lost profits for what? • More difficult • Components sold with or part of competing products • Catheter sold with inserter: can you recover on inserter? • “Entire Market Value Rule” - can’t recover for entire value unless you prove that patented part drives demand for the whole • “Functional unit” test – will one sell w/o other? • DePuy v. Medtronic, 567 F.3d 1314 (2009) • Infringer’s activity deprived competitor not just from selling competing patented products, but as well other “pull through” products not functionally related to patented product • Jury finds reasonable foreseeability and awards “pull-through” damages • CAFC reverses

13. Two Models: (1) Lost Profits; (2) Reasonable Royalty • Compensation when not in competition with accused product or otherwise cannot/do not wish to pursue lost profits • What royalty would parties have agreed to? • Hypothetical negotiation at time infringement begins • Patent assumed valid and infringed • Georgia Pacific factors (what parties would have considered) • comparable licenses, value of invention, etc. • Other methodologies

14. Measuring Reasonable Royalty • Scenario • Entity owns patent to technology, but does not practice or compete against technology • Complications • Technology part of a greater whole • Technology not sold commercially (no market price) • Issue • How do you value?

15. Recent Case Law • Lucent v. Gateway, 580 F.3d 1301 (Fed. Cir. 2009) • Reasonable royalty on patented part must be predicated on the value of the part as distinct from whole unless EMV is met (i.e. sales for whole driven by demand for part) • OK to predicate royalty rate for part based on revenue for whole if EMV is not met as long as rate reflects value of part (e.g. .05% of whole revenue) • How do you value the part? • usage • consumer surveys • comparable licenses

16. Recent Case Law • Uniloc v. Microsoft, 632 F.3d 1292 (Fed. Cir. 2011) • Cannot use 25% rule of thumb to divvy up profits between licensor (inventor) and licensee (commercializer) • Cannot use royalty rate for part based on revenue for whole unless EMV is met • What about Lucent statement that it is OK as long as rate reflects value of part? • What if you have historical licensing policy that used rate over value of whole? • Cannot introduce evidence of revenue/profits for whole unless EMV is met • How do you apportion for part if you can’t mention value of the whole ??

17. Case Study • Lucent v. Microsoft: Round 2

18. Day Patent Technology in Outlook

19. Valuing the Invention $ • What is the invention worth? • Importance of technology to Microsoft • Expected financial impact on Microsoft • Value to Microsoft’s customers Reasonable Royalty Reasonable Royalty Value

20. Value to Microsoft: Internal Documents

21. Expected Financial Impact: Outlook 109.5M Infringing licenses sold to purchase decision makers 3% Of purchase decision makers would not have bought 3.3M Expected licenses that would not be sold $67 Average revenue for Outlook $221.4M Expected forgone Outlook revenue 76.2% Profit margin $168.8M Expected forgone profit

22. Time Savings Analysis: Outlook 1 second of time saved per use of Day Patent technology 7 average number of appointments per week 104 life of product (in weeks) $0.00336 money value of time saved per use 65.7M number of Day Patent technology users $160.7M value of the time savings to consumers

23. Hypothetical Negotiation $ ? $0 $138.7M Reasonable Royalty Reasonable Royalty Georgia-Pacific Business Realities

24. Hypothetical Negotiation Georgia-Pacific Business Realities $0 $138.7M $65M $75M $ Reasonable Royalty

25. Conclusion $ Reasonable Royalty Reasonable Royalty $70 MILLION

26. Jury awards $70 Mil; Court reduces verdict

27. Jury awards $70 Mil; Court reduces verdict ?

28. STAY TUNED! The Judge Paul R. Michel Intellectual Property American Inn of Court Tuesday, November 22, 2011

30. This is Macrosoft:

31. Out View w/o Notification

32. Out View w/ Notification

33. Macrosoft Makes A LOT!

34. 1% is Nothing for Macrosoft Today 1% Less

36. Innovator, Inc. v. Macrosoft Corp. JMOL / New Trial Hearing For Innovator, Inc. – Mr. Erol Basol For Macrosoft Corp. – Mr. Frank Kang

40. Georgia Pacific Factors: 1% Is Reasonable Royalties patentee receives for licensing the patent in suit Rates licensee pays for use of other comparable to the patent in suit Nature and scope of license in terms of exclusivity and territory / customer restrictions Licensor’s established policy and marketing program to maintain patent monopoly by not licensing others to use the invention Commercial relationship between licensor and licensee, such as whether they are competitors or inventor and promoter 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 Duration of patent and term of license Established profitability of the products made under the patent, its commercial success and its current popularity

41. Georgia Pacific Factors:1% Is Reasonable Utility and advantages of patent property over old modes and devices The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefit of those who have used the invention The extent to which the infringer has made use of the invention and the value of such use The portion of profit or selling price customarily allowed for the use of the invention The portion of realizable profit attributable to the invention as distinguished from non- patented elements, significant features / improvements added by the infringer, the manufacturing process or business risks Opinion testimony of qualified experts Outcome from hypothetical arm’s length negotiation at the time of infringement began

42. 1% = Drop in the Bucket

43. Lucent v. MicrosoftFed. Cir. 2009 “Simply put, the 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.”

44. Uniloc v. MicrosoftFed. Cir. 2011 • Entire market of Out View (“base”) IS derived from the inventor’s high-priority notification • Stolen invention is THE CENTRAL feature of marking an email as urgent