Confidential - Attorney Client Privileged

Damages in Patent Cases New Law – New Checklist August 1, 2010 David Healey Fish & Richardson Confidential - Attorney Client Privileged

Statutory Bases for Damages • For Actual Damages, 35 U.S.C. Section 284: 35 U.S.C. 284 Damages. 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. When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights undersection 154(d) of this title. The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances. (Amended Nov. 29, 1999, Public Law 106-113, sec. 1000(a)(9), 113 Stat. 1501A-566 (S. 1948 sec. 4507(9)).) Confidential – Attorney Client Privileged

Statutory Bases for Damages • 35 U.S.C. 285 Attorney fees. The court in exceptional cases may award reasonable attorney fees to the prevailing party. Confidential – Attorney Client Privileged

Statutory Bases for Damages • 35 U.S.C. 286 Time limitation on damages. Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action. Confidential – Attorney Client Privileged

Statutory Bases for Damages • 35 U.S.C. 287 Limitation on damages and other remedies; marking and notice. Patentees, and persons making, offering for sale, or selling within the United States any patented article for or under them, or importing any patented article into the United States, may give notice to the public that the same is patented, either by fixing thereon the word "patent" or the abbreviation "pat.", together with the number of the patent, or when, from the character of the article, this cannot be done, by fixing to it, or to the package wherein one or more of them is contained, a label containing a like notice…. Confidential – Attorney Client Privileged

Statutory Bases for Damages • 35 U.S.C. 287 Limitation on damages and other remedies; marking and notice. ….In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice. Filing of an action for infringement shall constitute such notice. (additional requirements for 271(g) omitted). Confidential – Attorney Client Privileged

Big Changes In last 6 Months • Damages law has CHANGED in the last six months • Lucent v Gateway, September 11, 2009 • ResQNet.com v Lansa, February 5, 2010 • Innovation IP v Red Hat, March 2, 2010 • Datatreasury v Wells Fargo, March 4, 2010 • Fenner v HP, April 16, 2010 • New Handbook on Compensatory Patent Damages for Federal Judges January 10, 2010. Confidential – Attorney Client Privileged

Trial And Appellate Rulings Pretrial Rulings Federal Circuit • Exclusion of Expert Opinion (Daubert): • Innovation IP v Red Hat • Fenner v HP • Cornell v HP (pre-Lucent) • Evidence of Past Settlements Allowed at Trial: • Datatreasury v Wells Fargo • Reversal and remands: • Lucent v. Gateway • ResQNet.com v. Lansa Confidential – Attorney Client Privileged

Changes In Law OLD Law NEW Law • Georgia-Pacific factors could be based on industry evidence not specific to the dispute • Settlements not admissible • Opinions ok instead of facts on Georgia-Pacific factors • Damages could be based on factors unrelated to the infringement • Georgia-Pacific factors can only be based on facts of the case • Settlements of cases over the same patents in suit are admissible • No opinions or general industry data must be used in factors • Damages must be apportioned to infringement only Confidential – Attorney Client Privileged

Lucent—New Case on Damages • Lucent sued computer makers and Microsoft over features in Microsoft software as installed and used on PCs. • Lucent’s damages expert based his royalty for the “date picker” feature on Outlook on the entire PC, 1-1.5% • This was based on a set of Lucent licenses and a single Microsoft license • District Court disallowed the PC as the base –expert relied on alternative royalty of 8% on software

Lucent on Reasonable Royalties • 2 types of damages in patent cases: • lost profits; and • reasonable royalties • Several ways to calculate reasonable royalties: • 1) Analytical Method; • 2) Hypothetical Negotiation • 3) Established Royalty • 4) Valuation Method

Lucent on Reasonable Royalties:“Same song, second verse” • Lucent re-affirms the Georgia-Pacific case by confirming that : • Reasonable royalty is imprecise, flexible remedy • GP factors are designed to put patentee in approximately the same position it would have been through an ex ante negotiation (negotiation prior to infringement.) • A hypothetical negotiation might be different in some ways than real world negotiations…

ResQNet.com v. Lansa • Plaintiff’s damages expert relied on licenses for software not patents • No evidence the software practiced the patents • Defendant did not put on any expert testimony of damages • Court held: • 1) Plaintiff has sole burden of proof on damages, defendant has no obligation to put on proof of damages • 2) Use of product licenses where no proof of product practicing the patent was insufficient proof of damages as a matter of law • 3) Speculated in dicta that best evidence might be litigation settlements

District Court Cases Since ResQNet.com • Innovation IP v. Red Hat: Struck Plaintiff’s damages expert for using unrelated licenses and industry data. • Datatreasury v Wells Fargo: Permitted discovery of settlement licenses and admission of settlement licenses at trial. • Fenner v HP: Struck parts of expert report that relied on unrelated licenses.

New Check List For Damages • Defendant’s investment in R&D, manufacturing, distribution, etc? • Defendant’s innovations to the product (e.g., its own patents?) • Contribution of the patent to the technical field of the product? • What accused feature in the product requires the patented technology? Confidential – Attorney Client Privileged

New Check List For Damages • What licenses are admissible: Same patents? Technology? Products? Contractual scope and structure? Litigation Settlements? • What declarations or other evidence are needed from technical expert to show the contribution of the invention to the accused feature? • What evidence is needed to show licenses are comparable? • Does consumer testing for the accused feature to show its contribution to the selling price? Confidential – Attorney Client Privileged

Evidence Checklist Item Types of Evidence • What is the defendant’s actual investment in the product? • What are the defendant’s own innovations that add value to the product (e.g., its own patents)? • What is the contribution of the patent to the technology relevant to the product (to “the art”)? • What is in the accused feature in the product that would not otherwise be present but for use of the patented technology? • R&D cost? Cost of building plants? Labor? Equipment? Distribution network? • What patents does the defendant have on the accused feature or device? • What is cost of alternatives, design around? • How does accused feature function in product? Essential? Important? Optional? Confidential – Attorney Client Privileged

Evidence Checklist Item Types of Evidence • Key evidence is patent license on same patents in suit: • Must be same structure (lump sum v running royalty) • Must be same scope • Otherwise facts must explain differences for admissibility • Declarations tying other licenses to facts of case from damages and technical experts, e.g. same feature. • What licenses are admissible: Same patents? Technology? Products? Contractual scope and structure? Litigation Settlements • What evidence is needed to show licenses are comparable? Confidential – Attorney Client Privileged

Evidence Checklist Item Types of Evidence • Declarations will be needed from technical experts and witnesses to show what contribution is to the product by patent, and to show how it compares to other features • Consumer testing if it exists can be powerful evidence of value of feature; but very difficult to do useful survey after feature is in the market • What declarations or other evidence are needed from technical expert to show the contribution of the invention to the accused feature? • Does consumer testing for the accused feature to show its contribution to the selling price? Confidential – Attorney Client Privileged

Looking For Alternatives • Analytical Model – Dura • Lucent specifically “blesses” analytical model as a basis for reasonable royalty. • This might be much better for plaintiff: • Managers projecting big sales and profits • Business plans with inflated promises • Technology is before its time and is commercial failure (e.g., netbook computers in dial-up age). Confidential – Attorney Client Privileged

Looking For Alternatives • Valuation Theory • Valuation theory is familiar to everyone: Compare price of one car to another car to get value; compare one house to another house to get value; projected profit discounted to present value. • This might be much better for plaintiff where feature is successful for other manufacturers but unsuccessful for defendant. Confidential – Attorney Client Privileged

Cost Of Alternatives • Cost of alternatives are a potential limit on damages or royalties • But depends on total cost: Manufacturing, distribution, market acceptance. • Depends on whether cost will increase price: Price and sales generally are “see-saw” • Higher price lower sales Confidential – Attorney Client Privileged

Apportionment v EMV • Lucent makes strong points of apportionment of value of the feature to the device, and of the patent to the feature, relies on Georgia-Pacific factors 10 and 13 • Lucent permits royalty rate to be on entire sales price so long as rate is adjusted to apportion the damages to the value of the invention. Confidential – Attorney Client Privileged

Apportionment v EMV • EMV – Entire Market Rule • Requires showing that the patented feature drives sales of the product. • But EMV likely requires a unique feature based on the patent • All cars must have wheels • No one will buy a car without wheels • Patent on specific feature of wheel or type of wheel that can be replaced with another component is not EMV • But if car requires special wheel (e.g., race car) it may be EMV (e.g., the race car is replaceable but wheel is not) Confidential – Attorney Client Privileged

Apportionment v EMV • Consumer surveys before product launch are very useful to determine value add of invention • Because often new feature needed to avoid price drop (adding features does not always increase price) • But consumer surveys are very hard to replicate value after product launch because survey is too easy to manipulate. All cars must have wheels Confidential – Attorney Client Privileged

Why Focus On Damages? • No more injunctions for most plaintiffs since eBay • Most plaintiffs cannot show prior notice of patent (e.g., willfulness) • Actual loss of licensing revenue is true test: this loss maybe very small depending on licensing history of plaintiff. • Where damages are low: Early Mediation Confidential – Attorney Client Privileged

Impact Of Change In Law • Cases can be valued more accurately • Cases can be evaluated early for infringement, invalidity, unenforceability, and damages • Bad cases can be settled early before “throw good money after bad” • Budgets can be calibrated to case: • Low exposure pick and choose your moves • High exposure consider fall back strategies Confidential – Attorney Client Privileged

Impact Of Change In Law • When you are plaintiff ask about how you can get an injunction? • ITC? • Germany or other EU country? • Injunction will drive settlement above damages • How does change in law impact patent application process? • Claims in injunction countries are important Confidential – Attorney Client Privileged

Preservation Of Error • As Plaintiff, must put on legally proper damages case even if Defendant does not, ResQNet.com • As Defendant, must move to limit discovery: Once a big number is out, it may come in… • Both parties, must make Daubert motion to limit or strike improper expert report Confidential – Attorney Client Privileged

Preservation Of Error • Both parties, must make motions in limine to exclude improper evidence of damages • Both parties must make JMOL on issue of damages at end of opponent’s case raising all grounds • Loser must make JMOL post-trial and for new trial after verdict on damages. Confidential – Attorney Client Privileged

Confidential - Attorney Client Privileged