THE LEGAL SYSTEM AND PATENT DAMAGES Arguing Your Case On Appeal

1. THE LEGAL SYSTEM AND PATENT DAMAGESArguing Your Case On Appeal October 18, 2010 Moderator: Gregory Stone, Munger, Tolles & Olson LLP Speakers: Michael Ladra, Wilson Sonsini Goodrich & Rosati Joseph Cianfrani, Knobbe Martens Olson & Bear LLP Matthias Kamber, Keker & Van Nest LLP Keith Slenkovich, Wilmer Hale LLP

2. What Should Trial LawyersKnow About Patent DamagesOn Appeal October 18, 2010 Presented by: Matthias Kamber

3. Pre-Trial MSJs (FRCP 56) Limit expert testimony (FRE 702/Daubert) Motions in limine (FREs) Jury instructions (FRCP 51 & 49) Verdict form Pre-verdict JMOL (FRCP 50(a)) Post-Trial Post-verdict JMOL (FRCP 50(b)) Motion for a new trial (FRCP 59) Motion for relief from judgment (FRCP 60) Procedural Opportunities

4. Daubert on Damages • IP Innovation v. Red Hat (E.D. Tex . 2010): • Excluding testimony re entire market value rule for lack of a “sound economic connection between the claimed invention and th[e] broad royalty base” • Expert also arbitrarily picked a royalty rate much higher than existing licenses/rates • Cornell v. HP (N.D.N.Y. 2009): • Excluding testimony re entire market value rule where expert could not supply “credible and sufficient economic proof”

5. MILs on Damages • Fresenius v. Baxter (N.D. Cal. 2006): • Denying motion to exclude evidence of patient deaths and recalls because relevant to reasonable royalty negotiations • Samsung v. Quanta (N.D. Cal. 2006): • Ruling that pre-litigation settlement negotiations could be used to prove notice • Colassi v. Cybex (D. Mass. 2005): • Excluding undisclosed hearsay testimony re design-around efforts

6. JMOLs on Damages • Lucent: feature not proven to be basis of consumer demand. • Wechsler: no lost profits because no sales of product during period of infringement. • Integra: use of late hypothetical negotiation date

7. New Trials on Damages • Wordtech: evidence did not support high (26%) lump-sum royalty rate. • Imonex: jury award included products that were improperly presented to the jury. • Polu-America: award included lost profits of sister corporation • Shockley: assumptions re lost future profits were “without factual underpinnings”

8. Relief from Judgment • Apotex: fraudulent statements to the court. • Schreiber: transfer of asserted patents followed by false statements. • Fraige: manufactured evidence

9. Standards • JMOL • “a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue” • Motion for new trial • Erroneous (and prejudicial) jury instructions • Incorrect and prejudicial admissibility rulings • Verdict contrary to great weight of evidence • Chiron v. Genentech

10. Waiver • Failure to object to admission of evidence during trial • In limine rulings are only tentative • Failure to move for JMOL • Both before and after the close of evidence • On the specific theory • Failure to object to jury instructions • Must be specific, identifying the error and potential to prejudicially mislead the jury

11. Lucent JMOL on damages Reviewed for sufficiency of the evidence i4i No JMOL on damages (or obviousness) Reviewed under the stricter abuse of discretion standard Lucent vs. i4i

12. Standards of Review • De novo • MSJs • JMOLs • Abuse of discretion • Evidentiary rulings • Motion for new trial

13. The Importance Of Verdict Forms To Appellate Review Of Damages October 18, 2010 Presented by: Joe Cianfrani

14. i4i Limited Partnership v. Microsoft – Plaintiff’s Proposed Verdict form

15. i4i Limited Partnership v. Microsoft – Microsoft’s Proposed Verdict form

16. i4i Limited Partnership v. Microsoft – Final Verdict form

17. Cornell v. HP – Cornell’s Proposed Verdict form

18. Cornell v. HP – HP’s Proposed Verdict form

19. Cornell v. HP – Final Verdict

20. Cornell v. HP – Final Verdict

21. Mirror Worlds v. Apple – Mirror World’s Proposed Verdict Form

22. Mirror Worlds v. Apple – Apple’s Proposed Verdict Form

23. Mirror Worlds v. Apple – Final Verdict

24. Some Considerations for Damages Verdict Forms • Consider whether to ask the jury to separately identify the amount of each type of damages awarded (lost profits, reasonable royalty, price erosion). • In a reasonable royalty case, consider whether to ask the jury to state both the royalty rate and the base, if disputed. • Where damages are sought based on the entire market value, consider asking the jury to identify whether the accused feature is the basis for customer demand. • Separate damages for each asserted patent.

25. Some Considerations for Damages Verdict Forms • Where the date of the hypothetical negotiation is disputed, consider asking the jury to specify the date. • Consider whether to ask the jury to state total damages or just the subtotals. • In a lost profits case, consider whether to ask the jury to state the percentage of defendant's sales on which they awarded lost profits.

26. Recent Developments In The Federal Circuit’s Law On Patent Damages October 18, 2010 Presented by: Michael Ladra

27. The 25% RuleDefinition • The “25% rule” is “a shorthand phrase for a method of dividing expected profit between a licensor and licensee ... [by dividing] net pretax profit with normally 25% of that profit being paid by the licensor as a reasonable royalty.” Standard Manufacturing Company, Inc. v. United States, 42 Fed. Cl. 748, 766 (Fed. Cl. 1999).

28. The 25% Rule i4i’s Damages Analysis at Trial (i4i v. Microsoft) • Identified a “benchmark” product as a competitive alternative to the full Word XML capability  the least expensive software package (XMetal) with a list price of $499. • Applied an estimate of Microsoft’s profit margin (around 80%) to the XML list price  a company selling the benchmark product would have earned $400 in gross profit on each unit sold. • Applied the “25 percent rule”: “when an inventor allows someone else to use [his] invention, [he’ll] keep 25 percent of the profits from the [licensee’s] sale of that infringing product.” • 25% percent of the estimated profit margin = a reasonable royalty of ~$100 per unit of any XML editor. • FORMULA: Reasonable Royalty = List Price of XMetaL x Microsoft’s Percentage Profit Margin x 25 percent

29. The 25% RuleOral Arguments(i4i v. Microsoft) • Microsoft argued in front of the Federal Circuit: • The 25% rule was “improper” as an award basis. • Even if proper, i4i’s not taking into account the relative contribution of the i4i’s patent’s inventions to the XML product was improper. • Two commentators criticized the expert's use of the “25% rule of thumb” as “economically irrational”: “No rational business person would agree to license-in a technology for 25 percent of the profits on its product if the technology only increased profits by 5 percent.” • Federal Circuit also criticized the rule – one of the judges questioned whether the “25% rule” was a methodology that was “just something pulled out of the air.”

30. Comparable PatentsGeorgia-Pacific Factor #2 • Factor #2: “The rates paid by the licensee for the use of other patents comparable to the patent in suit.” • The rationale behind: The amounts that parties agreed to pay in real-world, arms-length transactions to license comparable technology is probative of the amounts that the parties-in-suit would have agreed to during the hypothetical negotiation.

31. Comparable PatentsLucent Technologies, Inc. v. Gateway, Inc. • Parties’ burden to establish that any patent license agreements on which they seek to rely are comparable to the covered products. • The court was critical of the notion that patent licenses that cover technology broader than the patented technology are relevant. • Example: Lucent's reliance on an IBM patent license related to PC technology. • Parties should show how the technology licensed under other agreements relates to the licensed products • “whether the patented technology [was] essential to the licensed product being sold, or whether the patented invention [was] only a small component or feature of the licensed product . . . .”

32. Comparable PatentsLucent Technologies, Inc. v. Gateway, Inc. • Comparable in Terms of Scope: If only one patent is in suit, the parties must show how a multi-patent or cross-license agreement can be equated to a license of the single patent in suit. • Court was critical of Lucent's reliance on IBM's broad PC patent portfolio licensing program  a negotiation involving IBM's PC patent portfolio would be vastly different from the hypothetical negotiation between the parties in suit involving a single patent covering much more limited technology.

33. Comparable PatentsLucent Technologies, Inc. v. Gateway, Inc. • Parties’ burden of explaining the royalty structure in the alleged comparable licenses and how that structure relates to the structure and amounts sought in the case. • Example: Lucent sought to rely on several licenses that set forth a dollars-per-unit royalty rate as opposed to a percentage royalty rate. Lucent, however, failed to show how the dollars-per-unit royalty rate equated to a percentage royalty rate so that the jury could assess the reasonableness of the 8% rate that Lucent was seeking.

34. Comparable PatentsLucent Technologies, Inc. v. Gateway, Inc. • Higher Evidentiary Standard. • Testimony related to other license agreements may need to come from both technical and damages experts. • The technical experts can explain the technology covered under the agreement and how that technology relates to the technology claimed in the patent-in-suit/ • The damages expert can testify as to economics and financial terms identified in the agreements and how those relate to the damages sought. * Parties cannot rely on: • License agreements that relate to unspecified or broad technologies simply because those agreements set out a royalty structure or royalty rate that the parties find appealing. • Industry licensing programs as being probative, unless the patent-in-suit relates directly to the technology licensed under those programs and specific analysis is performed to support their use as a benchmark.

35. Trial Court’s Gatekeeper Role Daubert v. Merrell Dow Pharmaceuticals • Federal trial judges are the “gatekeepers” of scientific evidence, thus they must evaluate proffered expert witnesses to determine whether that expert testimony is both “relevant” and “reliable,” a two-pronged test of admissibility. • Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993).

36. Trial Court’s Gatekeeper RoleLucent Technologies, Inc. v. Gateway, Inc., • Highlights the inability of the district court judge to exclude damages analyses that lack sufficient legal evidentiary basis. • Federal Circuit noted that Microsoft's brief suggested “that the district court judge ‘abdicated’ her role as a gatekeeper,” but concluded that it was the defendant's responsibility to object to the evidence. • “In this instance, the district court judge had no independent mandate to exclude any of that evidence.”

37. Trial Court’s Gatekeeper RolePatent Reform Act of 2010 • The proposed 2010 Act emphasizes the role of the district court as gatekeeper of the methodologies used to prove patent damages. • The 2010 Act requires the district courts “upon motion of either party or sua sponte” to “consider whether one or more of a party's damages contentions lacks a legally sufficient evidentiary basis.” • In cases where a party's damages contention fails to provide sufficient evidentiary proof, that party is given an opportunity to provide further “evidence, briefing, or argument that the court may deem appropriate.” • Courts could “identify on the record those methodologies and factors as to which there is a legally sufficient evidentiary basis” • Compare: Rigid framework for analyzing patent damages in the 2009 Act  limits damages “to the portion of the economic value of the infringing product or process properly attributable to the claimed invention's specific contribution over the prior art.”

38. Georgia-Pacific Factors • The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. • The rates paid by the licensee for the use of other patents comparable to the patent in suit. • 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. • The licensor's established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. • The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promotor. • 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. • The duration of the patent and the term of the license.

39. Georgia-Pacific Factors • The established profitability of the product made under the patent; its commercial success; and its current popularity. • The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. • 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. • The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. • 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. • 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. • The opinion testimony of qualified experts. • 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.

40. Guidance to the JuryGeorgia-Pacific Test • The non-exclusive Georgia-Pacific test that requires balancing and consideration of the interactions between the factors gives little or no practical guidance to a jury. • Juries  finder of facts. • Weighing the legal significance of those facts once found  the province of the courts.

41. Guidance to the JuryGeorgia-Pacific Test • Unlikely for juries to know whether and how to weigh: • Georgia-Pacific factor #5: importance of “[t]he commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter” against • Georgia-Pacific factor #7: “[t]he duration of the patent and the term of the license” • Result: juries regularly disregard the instructions, following their own instincts in deciding an appropriate measure of damages. • Jury verdicts often award reasonable royalty damages as a simple number – either a percentage of sales or a dollar amount.

42. Guidance to the JudgeGeorgia-Pacific Test • Difficult for the judge to exercise a gate-keeping function  a wide range of evidence can be offered in support of one factor or another. • Georgia-Pacific provides little guidance as to which factors must be accorded the most weight. • Rare for all fifteen factors to point in the same direction. • Expert's ultimate conclusion, no matter how extreme, can be justified by at least some combination of the factors.

43. Guidance to the JudgeGeorgia-Pacific Test • Appellate review or JMOL: Fifteen-factor test makes it extremely difficult for judges to review a jury damage award for substantial evidence. • A court faced with reviewing a damage award may be inclined to defer to whatever the jury awards. • With at least fifteen factors, a complex interaction between them, and little limit on expert testimony on damages, there is likely to be evidence in the case to be construed to support any number the jury has chosen. • If a court attempts to exercise its substantive oversight authority, it will most likely be rebalancing the factors the jury balanced. • Choices: • deference to the jury’s number or • substituting the judge's view of the evidence for the jury's decision.

44. Open Issues With Respect To Components And The Entire Market Value Rule October 18, 2010 Presented By: Keith L. Slenkovich

45. Cornell Univ. v. Hewlett-Packard Co.,609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J.) • Technology: Out-of-order execution (OOO) • component of “instruction reorder buffer” (IRB) OOO IRB processor CPU module servers / workstations CPU “brick” • Smallest saleable unit: processor

46. Cornell Univ. v. Hewlett-Packard Co.,609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J.) • Cornell’s Damages Position: • Entire Market Value Rule applies • Royalty base: Revenues from sales of server and workstation systems • Internal HP documents mention that patented invention “would be a competitive requirement” OOO IRB processor CPU module servers / workstations CPU “brick”

47. Judge Rader grants HP’s Daubert motion • Cornell’s damages opinion based on EMVR excluded • “The Federal Circuit has limited application of [EMVR] to instances where ‘the patent-related feature is the basis for customer demand’ for an accused product that nevertheless contains other features.” • “Cornell did not offer a single demand curve or attempt in any way to link consumer demand for servers and workstations to the claimed invention.” • “Cornell could have and should have offered evidence as to the server and workstation market. . . . Dr. Stewart’s inability to link his opinion to the realities of this case is a prime example of ‘the hypothetical [] lapsing into pure speculation.’” Cornell Univ. v. Hewlett-Packard Co.,2009 WL 1082485 (N.D.N.Y. Mar. 30, 2009) (Rader, J.)

48. Cornell Univ. v. Hewlett-Packard Co.,609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J.) • Claimed Royalty Base at Trial: EMV of CPU “bricks” OOO IRB processor CPU module servers / workstations CPU “brick” • Jury Verdict: $184MM to Cornell • Royalty Rate: 0.8% • Royalty Base: $23 billion (sales of CPU brick products) • HP moved for JMOL, or in alternative, remittitur

49. Judge Rader Grants JMOL • “[Cornell] exceeded again this court’s direction and proceeded to attempt to show economic entitlement to damages based on technology beyond the scope of the claimed invention.” • “Instead of linking its base amount to the processors (of which the infringing IRB is an important component), Cornell simply stepped one rung down the [HP] revenue ladder . . . without offering any evidence to show a connection between consumer demand for that product and the patented invention.” • “[N]o reasonable jury could have relied on this royalty base in determining Cornell’s damages award.” • Cornell Univ. v. Hewlett-Packard Co.,609 F. Supp. 2d 279, 285-287 (N.D.N.Y. 2009) (Rader, J.)

50. Cornell Lacked DemandSide Evidence • “Consistent with its admission that there was never a market for Hewlett-Packard's CPU bricks, Cornell did not offer a single demand curve or any market evidence indicating that Cornell's invention drove demand for bricks.” • Cornell failed to offer “additional market evidence that the claimed invention formed the basis for demand for the CPU bricks, or even the existence of a market for CPU bricks.” • “Cornell’s failure to connect consumer demand for [HP] machine ‘performance’ to the claimed invention, or to present a single demand curve (or any other economic evidence) showing [claimed invention] drove demand for [HP’s] products undermined any argument for applicability of the entire market value rule.” Cornell Univ. v. Hewlett-Packard Co.,609 F. Supp. 2d 279, 287-289 (N.D.N.Y. 2009) (Rader, J.)