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January 4, 2011

Locking Up Damages

Uniloc sued Microsoft over its product activation software, infringing Uniloc's 5,490,216. Uniloc convinced a jury of willful infringement, to the tune of $388 million, plus $86 million in interest. Microsoft then swayed the district court judge to pitch the jury verdict. The inevitable appeal furthered court reform of the patent laws, particularly damages methodology. Goldscheider and his dedicated flock of followers are belatedly shoved into oblivion, and the whole hog market rule is butchered again.

Uniloc v. Microsoft (CAFC 2010-1035, -1055) precedential

It's not a common event for the appeals court to find abuse of discretion by a district court judge. But here we have it.

Because the jury's verdict on infringement was supported by substantial evidence, this court reverses the district court's grant of JMOL of non-infringement; this court also reverses the district court's alternative grant of a new trial on infringement as an abuse of discretion. Because the jury's verdict on willfulness was not supported by substantial evidence, this court affirms the district court's grant of JMOL of no willfulness; the district court's alternative grant of a new trial for willfulness is thus rendered moot. Because the jury's damages award was fundamentally tainted by the use of a legally inadequate methodology, this court affirms the grant of a new trial on damages. Finally, because the district court did not abuse its discretion in determining that the jury verdict of no invalidity of the '216 patent was supported by substantial evidence, we affirm the district court's denial of Microsoft's motion for JMOL of invalidity

This case has a history of repeated successful appeal over a randomly competent district court judge, Rhode Island's Judge William E. Smith (a Dubya appointee), which in the first round was reversed on summary judgment of non-infringement. The need for a dedicated IP circuit court, or at least training for district court judges, is highlighted by the arduous saga of this case. It also explains plaintiff preference for district courts that are randomly incompetent (i.e. competent, albeit prone to human error) in patent law, e.g. the Eastern District of Texas.

Infringement

To prove infringement, the plaintiff bears the burden of proof to show the presence of every element or its equivalent in the accused device. Lemelson v. United States, 752 F.2d 1538, 1551 (Fed. Cir. 1985). The underlying infringement issue is a question of fact reviewed for substantial evidence. Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323, 1332 (Fed. Cir. 2008).

A weasel in regalia, Microsoft is typically dodgy in its abuse of precedent to back its argument. In this case, arguing non-infringement, the "cases cited by Microsoft involve a procedural posture not present in this case."

Infringement hinged on the use of an algorithmic technique. Rationale also involved claim scope, which was broader than Microsoft or the district court were impressed with. In short, largely irrelevant limitations carry little weight.

First, the breadth of claim 19 is not as narrow as Microsoft argues and the district court concluded. "The literal scope of a properly construed means-plus-function limitation does not extend to all means for performing a certain function. Rather, the scope of such claim lan-guage is sharply limited to the structure disclosed in the specification and its equivalents." J&M Corp. v. Harley-Davidson, Inc., 269 F.3d 1360, 1367 (Fed. Cir. 2001). Nevertheless, in determining equivalence under § 112 ¶ 6, "the range of permissible equivalents depends upon the extent and nature of the invention." IMS Tech., Inc. v. Haas Automation, Inc., 206 F.3d 1422, 1436 (Fed. Cir. 2000) (citing Tex. Instruments, Inc. v. ITC, 805 F.2d 1558, 1563 (Fed. Cir. 1986)). "More particularly, when in a claimed 'means' limitation the disclosed physical structure is of little or no importance to the claimed invention, there may be a broader range of equivalent structures than if the physical characteristics of the structure are critical in performing the claimed function in the context of the claimed invention." Id.

Arguably non-equivalent structures performing an equivalent function are good enough for equivalency in a means-plus-function claim.

As this court noted in IMS Tech., "though two structures arguably would not be considered equivalent structures in other contexts, e.g., if performing functions other than the claimed function," they may nevertheless be equivalent under § 112 ¶ 6 when performing the same function. 206 F.3d at 1436.

The district court abused its discretion in excluding Uniloc's expert witness (Dr. Klausner) testimony based upon not liking what it heard.

The district court improperly rejected Klausner's testimony as "incomplete, oversimplified and frankly inappropriate," justifying its rejection by Klausner's failure to discuss hashing, summation, or left-shifting in his expert report, and his analogizing of an MD5 digest to a Reader's Digest book. Uniloc II, 640 F. Supp. 2d at 170 n.21. In common with the other circuits, First Circuit law does not allow the district court in a jury trial to evaluate "the credibility of witnesses, resolve conflicts in testimony, or evaluate the weight of the evidence." Gibson, 37 F.3d at 735. Under Daubert, the district court must exercise its "gatekeeper" function in ensuring that scientific testimony is relevant and reliable. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 137 (1999) (discussing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 589 (1993)). Here, the district court explicitly noted that Klausner was "qualified." Uniloc II, 640 F. Supp. 2d at 172 n.25. It is decidedly the jury's role to evaluate the weight to be given to the testimony of dueling qualified experts. i4i Ltd. P'ship v. Microsoft Corp., 598 F.3d 831, 856 (Fed. Cir. 2010), cert. granted, 562 U.S. --- (U.S. Nov. 29, 2010) (No. 10-290) ("[I]t is not the district court's role under Daubert to evaluate the correctness of facts underlying an expert's testimony."). The district court's criticism of Klausner's use of the analogy of a digest to a "reader's digest" is also improper, because Microsoft did not object at trial and has used the same analogy in describing the output of SHA1 as a "hash digest, where digest indicates a shortened size, similar to Reader's Digest condensed books."

Klausner's testimony was certainly a simplification of the functioning of MD5, but neither the district court nor Microsoft demonstrate why it was "oversimplified," Uniloc II, 640 F. Supp. 2d at 171 n.21, or even why it was inaccu-rate. Klausner recognized that summation was not all that MD5 did, but opined that it was "a significant portion of the MD5 algorithm."

Finally, Microsoft's attacks on the documentary evidence presented by Uniloc are unwarranted.

District court reversed on its JMOL finding non-infringement.

The district court had, in the alternative, given a new trial. That mulligan met a jaundiced eye on appeal.

"[A] district judge cannot displace a jury's verdict merely because he disagrees with it or because a contrary verdict may have been equally supportable. As we have repeatedly observed, trial judges do not sit as thirteenth jurors, empowered to reject any verdict with which they disagree." Id. (internal citation omitted). Nevertheless, the district court is entitled to deference in granting a new trial motion, and the First Circuit only overturns the grant of a new trial if the district court has abused its discretion. Id. at 435 (citing Gasperini v. Ctr. For Humanities, Inc., 518 U.S. 415, 435 (1996)). As the Supreme Court noted, "[t]rial judges have the unique opportunity to consider the evidence in the living courtroom context, while appellate judges see only the cold paper record." Gasperini, 518 U.S. at 438.

The district court granted Microsoft's motion for a new trial on the infringement issues in the alternative to its JMOL motion, and did not present any analysis apart from its analysis of the JMOL infringement issues discussed above. This court is convinced that the district court's grant of a new trial on infringement has no more merit than the district court's grant of JMOL on infringement. Though it is a close issue, this is not a situation where the evidence falls within the zone where substantial evidence supports the verdict and the district court's discretion in granting a new trial trumps such evidence. This court thus reverses the district court's grant of a new trial on infringement for the same reasons as it reverses the grant of JMOL of non-infringement.

Willfulness

"[T]o establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007) (en banc). This is an objective inquiry. Id. In addition, a patentee must show that this risk "was either known or so obvious that it should have been known to the accused infringer." Id. This is a subjective inquiry.

The district court concluded that no reasonable jury could have found that Microsoft's conduct fell under either Seagate prong. Uniloc II, 640 F. Supp. 2d at 176-77 (objective prong), 177-79 (subjective prong). If the accused infringer's position is susceptible to a reasonable conclusion of no infringement, the first prong of Seagate cannot be met. See Cohesive Techs., Inc. v. Waters Corp., 543 F.3d 1351, 1374 (Fed. Cir. 2008) ("Because 'rigid' was susceptible to a reasonable construction under which Waters's products did not infringe, there was not an objectively high likelihood that Waters's actions constituted infringement.").

The complexity of the claimed technology made willfulness more than problematic.

Uniloc has failed to meet the threshold objective prong of Seagate. Uniloc has not presented any evidence at trial or on appeal showing why Microsoft, at the time it began infringement, [could have construed itself as infringing]. Specifically, infringement of the "licensee unique ID generating means" limitation is a complicated issue, made more so because "equivalence requires an intensely factual inquiry," DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314, 1337 (Fed. Cir. 2009).

Given this court's conclusion that Uniloc failed to show that a reasonable jury could find Microsoft's conduct objectively reckless on the evidence presented, this court need not address the subjective prong of Seagate. This court thus affirms the district court's grant of JMOL of no willfulness, and need not address the district court's alternative grant of a new trial on willfulness.

Damages

Uniloc's expert trotted out the hoary Goldschieder 25% rule of thumb for inventor ROI.

Microsoft had challenged the 25% rule in limine and attempted to exclude Mr. Gemini's testimony. The district court noted that "the concept of a 'rule of thumb' is perplexing in an area of the law where reliability and precision are deemed paramount," but rejected Microsoft's position because the rule has been widely accepted. The district court thus considered the use of the rule of thumb to be reasonable. In Limine, 632 F. Supp. 2d at 151. Microsoft contested Gemini's use of the entire market value rule "check" because Product Activation was not the basis of the consumer demand for Microsoft's Office and Windows products. The district court agreed with Microsoft, and granted a new trial on damages, because the "$19 billion cat was never put back into the bag" and the jury may have "used the $19 billion figure to 'check' its significant award of $388,000,000." Uniloc II, 640 F. Supp. 2d at 185.

On appeal, the parties present the court with three damages issues: 1) the propriety of using the 25 percent rule; 2) application of the entire market value rule as a "check"; and 3) excessiveness of damages. Because this court affirms the district court's conditional grant of a new trial on damages, this court need not reach the last issue.

1. 25 Percent Rule

Section 284 of Title 35 of the United States Code provides that on finding infringement of a valid patent, damages shall "in no event [be] 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." In litigation, a reasonable royalty is often determined on the basis of a hypothetical negotiation, occurring between the parties at the time that infringement began. Wang Labs Inc. v. Toshiba Corp., 993 F.2d 858, 869-70 (Fed. Cir. 1993). A reasonable royalty is the predominant measure of damages in patent infringement cases. William C. Rooklidge and Martha K. Gooding, When Hypothetical Turns to Fantasy: The Patent Reasonable Royalty Hypothetical Negotiation, BNA Insights Vol. 80:1983, at 701 n.10 ("Hypothetical Negotiation") (citing PriceWaterhouseCoopers, A Closer Look: Patent Litigation Trends and the Increasing Impact of Nonpracticing Entities at 5 (2009)).

The 25 percent rule of thumb is a tool that has been used to approximate the reasonable royalty rate that the manufacturer of a patented product would be willing to offer to pay to the patentee during a hypothetical negotiation. Robert Goldscheider, John Jarosz and Carla Mulhern, Use Of The 25 Per Cent Rule in Valuing IP, 37 les Nouvelles 123, 123 (Dec. 2002) ("Valuing IP"). "The Rule suggests that the licensee pay a royalty rate equivalent to 25 per cent of its expected profits for the product that incorporates the IP at issue." Id. As explained by its leading proponent, Robert Goldscheider, the rule takes the following form:

An estimate is made of the licensee's expected profits for the product that embodies the IP at issue. Those profits are divided by the expected net sales over that same period to arrive at a profit rate. That resulting profit rate, say 16 per cent, is then multiplied by 25 per cent to arrive at a running royalty rate. In this example, the resulting royalty rate would be 4 per cent. Going forward (or calculating backwards, in the case of litigation), the 4 per cent royalty rate is applied to net sales to arrive at royalty payments due to the IP owner.

Id. at 124. The underlying "assumption is that the licensee should retain a majority (i.e. 75 percent) of the profits, because it has undertaken substantial development, operational and commercialization risks, contributed other technology/IP and/or brought to bear its own development, operational and commercialization contributions." Id.

The rule was originally based on Goldscheider's observations of commercial licenses entered into by a "Swiss subsidiary of a large American company, with 18 licensees around the world, each having an exclusive territory." Id. The rights transferred were a portfolio of patents and other intellectual property apparently related to the patented products. Id. The term of each of these licenses was for three years, with the expectation that the licenses would be renewed. Id. at 123. The licensees "faced strong competition," and "were either first or second in sales volume, and probably profitability, in their respective market." Id.

According to its proponents, the veracity of the 25 percent rule has been "confirmed by a careful examination of years of licensing and profit data, across companies and industries." John C. Jarosz, Carla S. Mulhern and Michael Wagner, The 25% Rule Lives On, IP Law360, Sept. 8, 2010. Goldscheider published a further empirical study in 2002, concluding that across all industries, the median royalty rate was 22.6 percent, and that the data sup-ported the use of the 25 percent rule "as a tool of analysis." Valuing IP, 37 les Nouvelles at 132-33. Additionally, in a 1997 study of licensing organizations, 25 percent of the organizations indicated that they use the 25 percent rule as a starting point in negotiations. Stephen A. Degnan & Corwin Horton, A Survey of Licensed Royalties, 32 les Nouvelles 91, 95 (June 1997).

The 25% solution is, in a word: arbitrary. Ex-post results do not justify a priori assumption.

The 25 percent rule has, however, met its share of criticism that can be broadly separated into three categories. First, it fails to account for the unique relationship between the patent and the accused product. See Gregory K. Leonard and Lauren J. Stiroh, Economic Approaches to Intellectual Property Policy, Litigation, and Management, 949 PLI/Pat 425, 454-55 (Sept.-Nov. 2008) ("[The 25 percent rule] takes no account of the importance of the patent to the profits of the product sold, the potential availability of close substitutes or equally noninfringing alternatives, or any of the other idiosyncrasies of the patent at issue that would have affected a real-world negotiation."); Richard S. Toikka, Patent Licensing Under Competitive and Non-Competitive Conditions, 82 J. Pat. & Trademark Off. Soc'y 279, 292-93 (Apr. 2000) (arguing that it fails to "distinguish between monopoly and normal profit. . . . Thus for narrow patents, the rule may be overly generous to the patentee, and for broad patents it may be overly stingy"). Second, it fails to account for the unique relationship between the parties. See Ted Hagelin, Valuation of Patent Licenses, Tex. Intell. Prop. L.J. 423, 425-26 (Spring 2004) (noting that the rule should not be used in isolation because it fails to "account[] for the different levels of risk assumed by a licensor and licensee"); Hypothetical Negotiations at 702 ("[T]he rule is unlikely to have any basis in the accused infringer's industry, in the technology involved in either the patent or the accused product or service, or in the claimed invention's contribution to the infringing product or service."). Finally, the rule is essentially arbitrary and does not fit within the model of the hypothetical negotiation within which it is based. See Roy J. Epstein and Alan J. Marcus, Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors, 85 J. Pat. & Trademark Off. Soc'y 55, 574 (July 2003) ("[The 25% and the 5%] rules of thumb are best understood as special cases [] that may be appropriate to a given situation only by chance."); Roy J. Epstein, Modeling Patent Damages: Rigorous and Defensible Calculations (2003) (paper presented at the AIPLA 2003 Annual Meeting) at 22 available at http://www.royepstein.com/epstein_aipla_2003_article_website.pdf (last accessed Nov.19, 2010) (arguing that the 25% rule "shortcut" "is essentially arbitrary. Because it is based on ex post results, it does not necessarily relate to the results of a negotiation that took place prior to the infringement").

Mea culpa for turning a blind eye for a very long time. In other words, long-standing precedent becomes trash talk.

The admissibility of the bare 25 percent rule has never been squarely presented to this court. Nevertheless, this court has passively tolerated its use where its acceptability has not been the focus of the case, see e.g., i4i Ltd., 598 F.3d 831; Fonar Corp. v. General Elec. Co., 107 F.3d 1543, 1553 (Fed. Cir. 1997), or where the parties disputed only the percentage to be applied (i.e. one-quarter to one-third), but agreed as to the rule's appropriateness, Finjan, Inc. v. Secure Computing Corp., slip op. No. 2009-1576, -1594 at 23 (Fed. Cir. Nov. 4, 2010). Lower courts have invariably admitted evidence based on the 25% rule, largely in reliance on its widespread acceptance or because its admissibility was uncontested. See In Limine, 632 F. Supp. 2d at 151 ("The '25% Rule' has been accepted as a proper baseline from which to start [a royalty] analysis." (internal citations omitted)); GSI Grp., Inc. v Sukup Mfg., Co., 641 F. Supp. 2d 732, 745 (C.D. Ill. 2008) (same); i4i Ltd. P'Ship v. Microsoft Corp., 670 F. Supp. 2d 568, 592 (E.D. Tex. 2009), aff'd on other grounds by 598 F.3d 831 ("[i4i's expert] testified that it was customary within his field to apply a '25% rule of thumb' . . . . Thus, considering the foundation laid by [i4i's expert's] testimony, his application of the 25% rule was relevant and appropriate considered."); Static Control Components, Inc. v. Lexmark Int'l, Inc., Nos. 5:02-571, 5:04-84, 2007 WL 7083655 at *13-14 (E.D. Ky. May 12, 2007) ("While Lexmark does not believe the 'rule of thumb' approach is the most appropriate way to calculate 'reasonable royalty,' as SCC correctly notes, case law suggests it is one way of doing so" (citing Standard Mfg. Co. v. United States, 42 Fed. Cl. 748, 766 (1999))); Novozymes A/S v. Genencor Int'l, Inc., 474 F. Supp. 2d 592, 606 (D. Del. 2007) ("While there is no particular analytical justification for [the rule of thumb], it has been used to estimate royalties."); Inline Connection Corp. v. AOL Time Warner Inc., 470 F. Supp. 2d 424, 432 n.38 (D. Del. 2007) (allowing 25% rule be-cause its use was not disputed); Bose Corp. v. JBL, Inc., 112 F. Supp. 2d 138, 167 (D. Mass. 2000) ("Courts have found the 25%/75% approach to be a useful approach to arriving at a baseline royalty rate. . . . [The opposing expert] conceded that this approach is a common and reasonable one, though he has never used that approach in negotiating licenses" (citing Standard Mfg., 42 Fed. Cl. at 764)); Standard Mfg., 42 Fed. Cl. at 766 ("[T]he 25% rule or a close variant of it has been recognized by a number of other federal courts as a 'rule of thumb' or 'typical' in the licensing field."); Procter & Gamble Co. v. Paragon Trade Brands, Inc., 989 F. Supp. 547, 612 (D. Del. 1997) ("Although the Court will consider the Rule-of-Thumb analysis in determining the royalty rate, this approach will not receive substantial weight."); Secure Energy, Inc. v. Coal Synthetics, LLC, No. 4:08-CV-1719, 2010 WL 1692076 at *1 (E.D. Mo. Apr. 27, 2010) ("The parties agree that application of the 25% 'rule of thumb' is acceptable to determine a reasonably royalty case such as this."). See also Paice LLC v. Toyota Motor Corp., 609 F. Supp. 2d 620, 629-30 (E.D. Tex. 2009) (applying 25% rule without discussion); EZ Dock, Inc. v. Schafer Sys., Inc., No. 98-2364, 2003 WL 1610781 (D. Minn. Mar. 8, 2003) (same). In at least one case, the district court admitted the evidence, but refused to give it substantial weight because, "neither expert testified as to the customary profit percentage used to set the royalty rates in licenses in other businesses" and because "[t]here was no testimony advocating the use of the [sic] this approach as an appropriate guidepost for the determination of a royalty rate under a Georgia-Pacific analysis." Procter & Gamble Co. v. Paragon Trade Brands, Inc., 989 F. Supp. at 612.

Daubert is the dog that bites Goldschieder.

In Daubert, 509 U.S. 589 and Kumho Tire, 526 U.S. 137, the Supreme Court assigned to the district courts the responsibility of ensuring that all expert testimony must pertain to "scientific, technical, or other specialized knowledge" under Federal Rule of Evidence ("FRE") 702, which in turn required the judge to determine that the testimony was based on a firm scientific or technical grounding. Daubert, 509 U.S. at 589-90; Kumho Tire, 526 U.S. at 148. "Expert testimony which does not relate to any issue in the case is not relevant and, ergo, non-helpful." Daubert, 509 U.S. at 591 (citing 3 Weinstein & Berger ¶ 702[02], p. 702-18).

If you'd like to get on with your life sooner than later, skip the next paragraph for the summary that follows.

The patentee bears the burden of proving damages. Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). To properly carry this burden, the patentee must "sufficiently [tie the expert testimony on damages] to the facts of the case." Daubert, 509 U.S. at 591 ("An additional consideration under Rule 702--and another aspect of relevancy--is whether expert testimony proffered in the case is sufficiently tied to the facts of the case that it will aid the jury in resolving a factual dispute.") (citing United States v. Downing, 753 F.2d 1224, 1242 (3d Cir. 1985)). If the patentee fails to tie the theory to the facts of the case, the testimony must be excluded. For example, in General Electric Co. v. Joiner, 522 US 136 (1997), the Supreme Court allowed the exclusion of eight of Joiner's experts who opined that polychlorinated bi-phenyls ("PCBs") could cause cancer on the strength of several studies showing that mice receiving high doses of PCB developed cancer. The Supreme Court noted that "[t]he studies were so dissimilar to the facts presented in this litigation that it was not an abuse of discretion for the District Court to have rejected the experts' reliance on them," id. at 144-45, and affirmed the exclusion because Joiner had failed to tie the experts' opinions to the "seem-ingly far-removed animal studies," id. at 144. Likewise, in Kumho Tire, a products liability case arising out of a blown tire, the Supreme Court affirmed the exclusion of an expert opinion that argued that the cause of the accident at issue was a defect in the tire, based on the expert's visual and tactile inspection of the tire. 526 U.S. at 153. The specific issue was not whether the visual and tactile inspection methodology was "reasonable[] in gen-eral," but whether "it was [reasonable to] us[e] such an approach . . . to draw a conclusion regarding the particular matter to which the expert testimony was directly relevant." Id. at 153-54. "The relevant issue was whether the expert could reliably determine the cause of this tire's separation." Id. at 154. The Court held that the expert had failed to reliably opine on this issue under Daubert because his general theory--"that in the absence of at least two of four signs of abuse . . . he concludes that a defect caused the separation," id.--did not take into account the facts of the particular tire at issue: that the tire "had traveled far enough so that some of the tread had been worn bald; it should have been taken out of service; it had been repaired (inadequately) for punctures; and it bore some of the very marks that the expert said indicated, not a defect, but abuse through overdeflection." Id. In responding to the plaintiff's argument, "that a method of tire failure analysis that employs a visual/tactile inspection is a reliable method," based on "its use by other experts and to Carlson's [the expert in the case] long experience working for Michelin," the Court reaffirmed that "the question before the trial court was specific, not general. Id. The trial court had to decide whether this particular expert had sufficient specialized knowledge to assist the jurors 'in deciding the particular issues in the case." Id. at 156. The Court held that he did not.

To hell with rules of thumb. Hard facts and a connect-the-dots rationale are requisite for damage assessment.

The bottom line of Kumho Tire and Joiner is that one major determinant of whether an expert should be excluded under Daubert is whether he has justified the application of a general theory to the facts of the case. Consistent with this conclusion, this court has held that "[a]ny evidence unrelated to the claimed invention does not support compensation for infringement but punishes beyond the reach of the statute." ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010).

In ResQNet, Lucent Technologies, 580 F.3d 1301, and Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010), this court determined that a patentee could not rely on license agreements that were "radically different from the hypothetical agreement under consideration" to determine a reasonable royalty. Lucent Techs., 580 F.3d at 1327. See also ResQNet, 594 F.3d at 870-72 (holding that evidence of royalty rates from licenses without a relationship to the claimed invention could not form the basis of a reasonable royalty calcula-tion). In Lucent Technologies, the patentee's expert relied in large part on "eight varied license agreements," four of which involved "PC-related patents," but either the spe-cific subject matter of the patents was not explained to the jury or the license was "directed to a vastly different situation than the hypothetical licensing scenario of the present case," and four of which Lucent did not describe the relationship between the patented technology licensed therein and the licensee's products. See 580 F.3d at 1328-31. This court noted that the "licenses relied on by the patentee in proving damages [must be] sufficiently comparable to the hypothetical license at issue in suit," id. at 1325, and that the patentee's failure to do so "weighs strongly against the jury's award" relying on such non-comparable licenses, id. at 1332. Similarly, in ResQNet, the patentee's expert "used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels," looking at licenses that did not mention the patents and had no "other discernible link to the claimed technology." 594 F.3d at 870. This court rejected the expert's testimony, holding that the district court "must consider licenses that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology in question." Id. at 872. This court held that on remand, "the trial court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology." Id. at 872-73.

The meaning of these cases is clear: there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement. The rule does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party. Relying on the 25 percent rule of thumb in a reasonable royalty calculation is far more unreliable and irrelevant than reliance on parties' unrelated licenses, which we rejected in ResQNet and Lucent Technologies. There, the prior licenses at least involved the same general industry and at least some of the same parties as the hypothetical negotiations at issue, and in Wordtech even involved licenses to the patents in suit entered into by the patentee-plaintiff. Lacking even these minimal connections, the 25 percent rule of thumb....

It is of no moment that the 25 percent rule of thumb is offered merely as a starting point to which the Georgia-Pacific factors are then applied to bring the rate up or down. Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion. This is reflected in Lucent Technologies, in which unrelated licenses were considered under Georgia-Pacific factor 1, but this court held that the entire royalty calculation was unsupported by substantial evidence.

To be admissible, expert testimony opining on a reasonable royalty rate must "carefully tie proof of damages to the claimed invention's footprint in the market place." ResQNet, 594 F.3d at 869. This court has sanctioned the use of the Georgia-Pacific factors to frame the reasonable royalty inquiry. Those factors properly tie the reasonable royalty calculation to the facts of the hypothetical nego-tiation at issue. This court's rejection of the 25 percent rule of thumb is not intended to limit the application of any of the Georgia-Pacific factors. In particular, factors 1 and 2--looking at royalties paid or received in licenses for the patent in suit or in comparable licenses--and factor 12--looking at the portion of profit that may be customarily allowed in the particular business for the use of the invention or similar inventions--remain valid and important factors in the determination of a reasonable royalty rate. However, evidence purporting to apply to these, and any other factors, must be tied to the relevant facts and circumstances of the particular case at issue and the hypothetical negotiations that would have taken place in light of those facts and circumstances at the relevant time.

Experts are just guys that used to spurt.

In this case, it is clear that Gemini's testimony was based on the use of the 25% rule of thumb as an arbitrary, general rule, unrelated to the facts of this case. When asked the basis of his opinion that the rule of thumb would apply here, Gemini testified: "[i]t's generally accepted. I've used it. I've seen others use it. It's a widely accepted rule." Upon further questioning, Dr. Gemini revealed that he had been involved in only four or five non-litigation related negotiations, and had recommended the 25% rule only once in a case involving a power tool. He did not testify that the parties here had a practice of beginning negotiations with a 25%/75% split, or that the contribution of Product Activation to Office and Word justified such a split. He did not base his 25 percent baseline on other licenses involving the patent at issue or comparable licenses. In short, Gemini's starting point of a 25 percent royalty had no relation to the facts of the case, and as such, was arbitrary, unreliable, and irrelevant. The use of such a rule fails to pass muster under Daubert and taints the jury's damages calculation.

This court thus holds that Microsoft is entitled to a new trial on damages.

2. Entire Market Value Rule

The entire market value rule allows a patentee to assess damages based on the entire market value of the accused product only where the patented feature creates the "basis for customer demand" or "substantially create[s] the value of the component parts." Lucent Techs., 580 F.3d at 1336; Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995). This rule is derived from Supreme Court precedent requiring that "the patentee . . . must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative," or show that "the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature." Garretson v. Clark, 111 U.S. 120, 121 (1884). See also Lucent Techs., 580 F.3d at 1336-37 (tracing the origins of the entire market value to several Supreme Court cases including Garretson).

Applying the entire market value rule to a patented feature that just prevents piracy is found more than a bit rich. Certainly there is no customer demand for what is considered an intrusive feature.

Here's an irrational argument: "Uniloc argues that the entire market value of the products may appropriately be admitted if the royalty rate is low enough."

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. See Garretson, 111 U.S. at 121; Lucent Techs., 580 F.3d at 1336 ("In one sense, our law on the entire market value rule is quite clear. For the entire market value rule to apply, the patentee must prove that the patent-related feature is the basis for customer demand" (emphasis added, internal citations omitted)); Rite-Hite, 56 F.3d at 1549 (same); Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001) (same); TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 901 (Fed. Cir. 1986) ("The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand.").

This case provides a good example of the danger of admitting consideration of the entire market value of the accused where the patented component does not create the basis for customer demand.

This court concludes that the district court did not abuse its discretion in granting a conditional new trial on damages for Uniloc's violation of the entire market value rule.

Validity

Microsoft cross-appealed on validity, blowing its horn for its "preponderance of evidence" standard to invalidate patents. The CAFC told it to pipe down.

Arguing the merits, Microsoft feigned ignorance of the law, to which the CAFC panel replied:

The proper framework for challenging the validity of a patent is not for the accused to show that it is practicing the prior art, but to show that every element of the patent claims reads on a single prior art reference. See Zenith Elecs. Corp. v. PDI Comm. Sys., Inc., 522 F.3d 1348, 1363 (Fed. Cir. 2008) ("[M]ere proof that the prior art is identical, in all material respects, to an allegedly infringing product cannot constitute clear and convincing evidence of invalidity. Anticipation requires a showing that each element of the claim at issue, properly construed, is found in a single prior art reference.").

Though obviousness is a question of law, this court gives the jury its usual deference on the underlying factual questions. What the prior art shows is a question of fact. Graham v. John Deere Co., 383 U.S. 1, 17 (1966). As discussed above, a reasonable jury could have found that the [prior art] '093 reference failed to disclose a licensee unique ID. Microsoft has presented no convincing argument for why incorporating an input into the hash function that is associated with a user would have been obvious to one of ordinary skill in the art. This court thus affirms the district court's denial of JMOL of invalidity on the basis of obviousness.

Conclusion

For the foregoing reasons, this court reverses the district court's grant of JMOL of non-infringement, affirms the district court's grant of JMOL of no willfulness, affirms the district court's grant of a new trial on damages, vacates the district court's grant of an alternative motion for new trial on infringement, and affirms the district court's denial of JMOL of invalidity of claim 19 of the '216. The case is remanded for proceedings consistent with this opinion.

Back to the district court grinder, and no doubt, back to the appeals court after the district court makes its next dish of hash.

Posted by Patent Hawk at January 4, 2011 4:08 PM | Damages

Comments

"The inevitable appeal furthered court reform of the patent laws, particularly damages methodology. "

I loled. Hard.

I also love the actual court reform of the damages methodology in the case. It is as if, gasp, the Fed. Circ. is becoming reasonable! OMFG!

Posted by: 6000 at January 4, 2011 5:16 PM

Seems like we're going to be seeing more such cases -- with this kind of judicially-legislated "patent reform" -- until Congress and/or the courts finally get a handle on acceptable damage award standards for patent infringement cases. The lack of any kind of controlling baseline is worrisome to many; also troubling to me, however, is this kind of ad-hoc approach that we're seeing in the courts. So the 25% rule is out ... but what exactly replaces it?

Posted by: patent litigation at January 11, 2011 1:26 PM

"... but what exactly replaces it?"

Why; the 33.33% rule, of course. ;-)

Posted by: Steve at January 11, 2011 3:35 PM

These comments could be for any type of law. In basic, Judicial Legislation because Legislators are asleep at the wheel. The legislators are too busy figuring out how to get re-elected. Then again, is this anything new?

Posted by: Cheryl R. Figlin at January 18, 2011 11:17 AM