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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

IN RE: ) MDL 2303

) 11 C 9308 and

INNOVATIO IP VENTURES, L.L.C. ) related cases

)

PATENT LITIGATION. ) Chicago, Illinois

) September 9, 2013

) 9:00 o'clock a.m.

VOLUME 1

TRANSCRIPT OF PROCEEDINGS - Trial

BEFORE THE HONORABLE JAMES F. HOLDERMAN

APPEARANCES:

For the Plaintiff NIRO, HALLER & NIRO, LTD.

Innovatio IP Ventures, BY: MR. MATTHEW G. McANDREWS

L.L.C.: 181 West Madison Street, Suite 4600

Chicago, Illinois 60602-4515

(312) 236-0733

McANDREWS, HELD & MALLOY, P.C.

BY: MR. GREGORY C. SCHODDE

MR. RONALD "HANK" SPUHLER

MR. THOMAS J. WIMBISCUS

MR. PETER J. McANDREWS

MS. PATRICIA J. McGRATH

MR. CHRISTOPHER SCHARFF

500 West Madison Street, Suite 3400

Chicago, Illinois 60661

(312) 775-8000

For Cosi, KIRKLAND & ELLIS, L.L.P.

Dominick's, Meijer, BY: MR. ADAM R. ALPER

Cisco Systems, Motorola, MR. MICHAEL W. DeVRIES

and NETGEAR; and a MR. GIANNI L. CUTRI

number of hotel defts.: MR. BRANDON H. BROWN

MR. RAGHAV KRISHNAPRIYAN

MR. ERIC CHENG

MR. TIM G. MAJORS

300 North LaSalle Street

Chicago, Illinois 60654

(312) 862-2000

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APPEARANCES (Continued):

KIRKLAND & ELLIS, L.L.P.

BY: MR. STEVEN C. CHERNY

Citigroup Center

153 East 53rd Street

New York, New York 10022

(212) 446-4965

For SonicWALL, Inc.: WINSTON & STRAWN, L.L.P.

BY: MR. KIMBALL R. ANDERSON

MS. KATHLEEN B. BARRY

20 South Clark Street, Suite 2620

Chicago, Illinois 60603

(312) 447-7217

For Hewlett-Packard BRACEWELL & GIULIANI

Company, Panera, BY: MR. BARRY K. SHELTON

Caribou, HVM, Springhill MR. CONOR M. CIVINS

Suites: MR. ALAN D. ALBRIGHT

111 Congress Avenue, Suite 2300

Austin, Texas 78701-4061

(512) 494-3620

For Wal-Mart: SHEPPARD MULLIN

BY: MR. BRADLEY C. GRAVELINE

Three First National Plaza

70 West Madison Street, 48th Floor

Chicago, Illinois 60602

(312) 499-6316

For Lowe's: HUNTON & WILLIAMS, L.L.P.

BY: MR. MICHAEL A. OAKES

2200 Pennsylvania Avenue, NW

Washington, D.C. 20006

(202) 955-1500

For Dominick's: MANDELL MENKES, L.L.C.

BY: MS. ELIZABETH MORRIS

One North Franklin Street, Suite 3600

Chicago, Illinois 60606

(312) 251-1000

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APPEARANCES (Continued):

Also Present for

Broadcom Corp.: PERKINS COIE, L.L.P.

BY: MS. AMANDA J. TESSAR

1900 Sixteenth Street, Suite 1400

Denver, Colorado 80202-5255

(303) 291-2357

COLLEEN M. CONWAY, CSR, RMR, CRR

Official Court Reporter

219 South Dearborn Street, Room 2144-A

Chicago, Illinois 60604

(312) 435-5594

colleen_conway@ilnd.uscourts.gov

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(Proceedings heard in open court:)

THE CLERK: 11 C 9308, Innovatio IP Ventures.

MR. McANDREWS: Appearances, Your Honor?

THE COURT: Good morning. Yes, please.

MR. McANDREWS: Good morning.

On behalf of the Plaintiff Innovatio IP Ventures,

L.L.C., Matt McAndrews, and I suppose, given the number of my

colleagues here, we should do individual introductions, if that

makes sense with the Court.

THE COURT: If you would. My court reporter can then

make sure we've got all the names with the faces.

MR. SCHODDE: Greg Schodde, Your Honor.

THE COURT: Good morning.

MR. WIMBISCUS: Good morning, Your Honor. Tom

Wimbiscus.

THE COURT: Yes. Good morning.

MR. SPUHLER: Good morning, Your Honor. Hank

Spuhler.

THE COURT: Good morning.

MR. SCHARFF: Your Honor, Christopher Scharff.

THE COURT: Good morning.

All right. Have we got everybody that's appearing on

behalf of Innovatio?

MR. McANDREWS: As of today. We have a few more

members of the team. Why don't we get the final appearances.

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MR. P. McANDREWS: Pete McAndrews, Your Honor.

THE COURT: I'm sorry?

MR. P. McANDREWS: Peter McAndrews.

MS. McGRATH: Patricia McGrath.

THE COURT: All right. Thank you. The older I get,

the harder my hearing is, and so I appreciate everybody keeping

their voices up.

MR. CHERNY: Good morning, Your Honor.

Steve Cherny from Kirkland & Ellis on behalf of

Cisco, Motorola, and NETGEAR.

THE COURT: Good morning.

MR. CHERNY: And we have a number of lawyers

representing a number of parties at our table.

THE COURT: Yes.

MR. ALPER: Good morning, Your Honor. Adam Alper.

THE COURT: Good morning.

MR. DeVRIES: Good morning, Your Honor. Mike

DeVries.

THE COURT: Good morning.

MR. CUTRI: Gianni Cutri, Your Honor. Good morning.

THE COURT: Good morning.

MR. ANDERSON: Kimball Anderson on behalf of

SonicWALL, Your Honor.

THE COURT: Good morning.

MR. CIVINS: Good morning, Your Honor.

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Conor Civins on behalf of Hewlett-Packard.

THE COURT: Good morning.

MR. SHELTON: Good morning, Your Honor.

Barry Shelton on behalf of Hewlett-Packard.

THE COURT: Good morning.

MR. SHELTON: Also in the courtroom is Adam Albright

from my firm for Hewlett-Packard, Your Honor.

MR. ALBRIGHT: Good morning, Your Honor.

THE COURT: Good morning.

Okay. Well, I appreciate all of the endeavors that

you have engaged in. The reason I was running a little late is

I noticed some things were filed even in the early-morning

hours this morning, and I wanted to go through some of those

items before we proceed further.

I know you spent time on Friday preparing the

courtroom, and I appreciate the setup that you have. I

appreciate your working with my court reporter for that purpose

and my other members of my staff.

First of all, let me start out with what you have

agreed upon, and that's the stipulation and the proposed order

of presentation that's been agreed upon.

I agree wholeheartedly. Innovatio is the plaintiff

in the case from the standpoint of how we're going to proceed

with this matter and has both the benefits and the burdens that

come with that position. All right.

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MR. CHERNY: Thank you, Your Honor.

MR. McANDREWS: Thank you.

THE COURT: All right. Now, something that may or

may not be -- you have agreed upon. I know you have submitted

your joint motion to admit exhibits. I know there are some

objections. I appreciate the preciseness with which you have

articulated your respective positions. I have not had a chance

to review all of the exhibits that you have submitted. They're

here arrayed on my bench.

But what I intend to do is to take whatever

objections there are with the trial and make determinations

after I have an opportunity to review the evidence that's been

presented. Okay?

MR. CHERNY: Thank you, Your Honor.

MR. McANDREWS: Okay. Thank you.

THE COURT: All right. Counsel are nodding in

affirmance.

I also want to thank you for submitting very

efficiently your response to my inquiry for input with regard

to the smallest salable patent-practicing unit method of making

a determination. That, of course, concept was first generated

by now Chief Judge Rader when he was sitting by designation in

the District Court in Buffalo in the Cornell University case,

and it is something that we -- because it's been adopted by the

Federal Circuit, continues to be a concept that I need to take

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into account. I appreciate your input on that. And as we move

through the trial, if you have further positions on that, you

certainly can let me know.

All right. Also, with regard to the defendants'

motion to exclude two of Innovatio's witnesses, Larry Evans and

Christopher Bergey, I am going to take those with the case.

You can certainly address those issues as we proceed along so

that we can move efficiently. To some extent, the testimony

that will be presented will be an offer of proof subject to the

objections that the defense will be presenting or have been

presenting. Okay?

MR. McANDREWS: Thank you, Your Honor.

MR. CHERNY: Thank you.

THE COURT: All right? All right. Now, moving on to

a series of motions, some of which are now being withdrawn,

various motions related to that, and that is the network

operator defendants' motions to exclude testimony and evidence

related to what they contend to be undisclosed damages

contentions.

Let me say this. My thought on that, since I know

there may be a disagreement on that point, is to go ahead and,

if I can reach some consensus on this, sever that from this

proceeding today and move with just the manufacturers' issues.

What's Innovatio's position?

MR. McANDREWS: Your Honor --

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THE COURT: Holding it for a later time.

MR. McANDREWS: Yeah. I think you'll find in our

presentation, starting right off with the opening, that the

emphasis today and this week is primarily on the dispute with

the manufacturers.

THE COURT: Yes.

MR. McANDREWS: If you don't mind, I will footnote

the point about the manufacturers and the use-based royalty,

but it is literally just that.

THE COURT: You will footnote the point about the

network --

MR. McANDREWS: Did I say "manufacturers"?

THE COURT: You did.

MR. McANDREWS: I'm sorry. I misspoke.

THE COURT: You are going to footnote the network

defendants.

MR. McANDREWS: The network operator use-based

royalty. And when I say "footnote," that is just a very quick

point that puts in context the broader dispute with the

manufacturers.

THE COURT: Yes. And I understand that. And to the

extent that there are disagreements about what was disclosed or

what is being disclosed, we are going to put those aside and

focus on the issues with regard to the manufacturers and hold

for a later time these issues that were raised by Lowe's and

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Wal-Mart and the other folks that are raising that point.

Because I have obviously read the materials that you previously

had filed and, consequently, I know your focus is going to be

on the manufacturers.

So is that okay with everybody? Let me hear from the

network folks.

MR. CHERNY: Yes.

THE COURT: Basically, I'm granting your motion from

the standpoint -- your motions from the standpoint of severing

those issues at this time.

Anybody want to comment on that from the network

folks?

MR. OAKES: Good morning, Your Honor. Michael Oakes

for one of the network operators, Lowe's.

We're okay with that concept for purposes of this

trial today. We do want to preserve our objections to any

evidence that would come in with respect to use-based damages

for the network operators.

THE COURT: Okay. All right. Does anybody have a

disagreement? You don't have to stand up and concur, but if

anybody in the courtroom has a disagreement about that, let me

know.

All right. Silence is affirmance, and we'll go ahead

and proceed that way.

With regard to the various housekeeping motions about

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withdrawing motions and correcting motions, I will work that

out with my clerk and we'll get an administrative order

addressing that.

Okay. We've got just a couple of other housekeeping

matters. I see that Ms. Tessar on behalf of her client, who is

not a party in this case, desires to file an appearance pro hac

vice. This is document number 906.

And I assume that the person who has risen from the

middle of the audience in the public area is Ms. Tessar.

MS. TESSAR: Yes, Your Honor. My client, Broadcom

Corporation, was asked last week to appear as a witness, and so

they're here. David Djavaherian, who's in the back, will be

testifying this morning.

I put in my application largely because we just want

to be sure that Broadcom's confidentiality interests are

protected.

THE COURT: Okay. Any objection to that?

MR. McANDREWS: No, Your Honor, not on behalf of

plaintiff.

MR. CHERNY: No, Your Honor.

THE COURT: All right. Welcome to the case --

MS. TESSAR: Thank you.

THE COURT: -- for those purposes. Thank you.

All right. I am trying to move efficiently because

of my pausing to review some of these materials that were filed

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late, which delayed me five minutes getting on the bench, and I

want to move through this trial as efficiently as possible

because I want to help you folks come to a resolution.

And I want to emphasize again that we are going to

proceed with the trial today, tomorrow, Wednesday, Thursday,

and then we're going to take a break, and Judge Schenkier has

agreed that he is available on Monday for the purpose of

assisting you in conducting a real negotiation as opposed to

the hypothetical negotiation that I have to evaluate, and

perhaps you can work some resolution out, knowing what will

have been presented this week.

I am not offended if you deny me the opportunity of

issuing an opinion on this point and reach an agreement.

That's perfectly acceptable and, frankly, would be welcomed.

But, otherwise, I'll be ready to go. I am ready to go.

MR. McANDREWS: Thank you.

MR. CHERNY: Thank you, Your Honor.

THE COURT: All right. Anything else we need to take

up before we proceed with opening statements?

My court reporter had mentioned to me, as we were

walking out, that the parties may want to spend a little time

explaining what they have arrayed in my courtroom by way of

exhibits; but if you do, I am perfectly open to that. If

not --

MR. CHERNY: Maybe later.

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THE COURT: -- I probably can figure it out as we go

along.

MR. CHERNY: Steve Cherny on behalf of the

defendants.

THE COURT: Yes.

MR. CHERNY: We're happy to certainly do that. I am

not prepared at the moment because no one has told me all the

things we brought in. But we do have two brief housekeeping

matters.

THE COURT: Okay.

MR. CHERNY: The first one is that, as you heard from

Ms. Tessar, Mr. Djavaherian from Broadcom has graciously

appeared to testify here.

THE COURT: Okay.

MR. CHERNY: As I think the Court knows, the

patents-in-suit were owned by Broadcom previously before they

were sold to Innovatio.

THE COURT: Yes.

MR. CHERNY: He has a scheduling issue requiring him

to go to Europe, and so the parties have discussed it and, if

the Court is amenable, we would like to call him out of order

as the first witness after the openings.

THE COURT: Okay.

MR. CHERNY: Mr. McAndrews does not have any issue

with that. So it's in your court.

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THE COURT: All right. Let me make sure I've got the

spelling of his name for the benefit of my court reporter who

has prepared a glossary for herself, since she's providing

realtime.

And so, Ms. Tessar, your client's name is spelled

how?

MS. TESSAR: There is a silent D at the beginning,

D-j-a-v-a-h-e-r-i-a-n, Dave Djavaherian.

THE COURT: Djavaherian?

MS. TESSAR: Yes.

THE COURT: David?

MS. TESSAR: Yes.

MR. CHERNY: Yes.

THE COURT: All right. Any objection to calling him

so he can go to Europe?

MR. McANDREWS: No, there is not, Your Honor, no.

THE COURT: Okay. All right. It's beautiful in

Europe this time of year. Okay.

MR. CHERNY: One other --

THE COURT: Anything else?

MR. CHERNY: One other issue is that --

THE COURT: Sure.

MR. CHERNY: -- during a short part of my opening,

there will be some third-party confidential information,

actually specifically Broadcom information --

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THE COURT: Okay.

MR. CHERNY: -- and then there is going to be

Mr. Djavaherian's testimony. After talking to Ms. Tessar and

Mr. Djavaherian, I think that as long as people in the court

are either counsel or in-house counsel and agree to be bound by

the protective order, they have no issue.

But to the extent there are people outside this case

-- and I note that we have an array of people from --

THE COURT: We have a pretty full courtroom, yes, we

do.

MR. CHERNY: I actually went through and asked

everybody who they are, and almost all of the people are

related to the case. It's just the case is very large, and the

only people --

THE COURT: Sure.

MR. CHERNY: -- I have been able to identify who are

not lawyers or related to the parties are a contingent from

John Marshall Law School in the background.

So it may be that specifically when we get to

Mr. Djavaherian's testimony, we may need to ask them to leave,

because --

THE COURT: All right.

MR. CHERNY: -- apparently, there is very highly

confidential information of Broadcom's that will be elicited.

THE COURT: All right. Well, let me just ask, is

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Professor Arthur Yuan here?

Yes. Good morning, Professor.

PROFESSOR YUAN: Yes. Good morning, Judge.

THE COURT: You and I, of course, have known one

another for years. We've talked together. We've worked in

China together. And you called my chambers last week and asked

is there a particular day or time that would be better than any

other day or time to come in to allow the folks that are here

from China, from the John Marshall Law School to come in and

visit, and I said to my secretary, whom I assume conveyed to

you, no, there really isn't any one time that I could predict

that would be better than any other.

So I am pleased that you chose this morning. The

difficulty, as you may have heard -- I know you are back in the

public area, Professor. The difficulty is that some of the

information is confidential.

PROFESSOR YUAN: Right.

THE COURT: And perhaps by the time we get to that

confidential information, your folks will have seen enough

anyway to have an understanding of the proceedings that are

taking place.

So let me just ask Mr. Cherny, how soon in your

opening remarks do you think you will get --

MR. CHERNY: I think the opening is not going to be a

big issue. I have actually moved two or three slides that

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address it to the end, and so I will be able to signal at the

end. So they will be able to see, I believe, almost all of the

openings, Mr. McAndrews' and mine.

THE COURT: Okay.

MR. CHERNY: And I think probably the part with most

sensitivity will be Mr. Djavaherian's testimony, which I'm told

is relatively short.

THE COURT: Okay.

MR. CHERNY: So it may just be a matter of asking the

contingent from John Marshall to leave. I mean, as interesting

as Mr. Djavaherian's testimony, I'm sure, would be to them,

perhaps that might be the one part of the day they won't be

able to watch.

THE COURT: All right. Professor, you understand?

PROFESSOR YUAN: Yes, I do.

THE COURT: And you can convey our apologies to the

folks that are with you. But we'll have to ask you and your

folks to step out during that period of time. You're certainly

welcome to come back.

PROFESSOR YUAN: Sure.

THE COURT: And let me just say to those folks, this

happens not too often, but certainly happens in these types of

cases where we have to exclude people from the courtroom

pursuant to a protective order. And so, consequently, some

people need to step out.

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So I will leave it up to you to assist us in that. I

have known you long enough.

PROFESSOR YUAN: All right.

THE COURT: Professor Yuan is a member of the bar --

MR. CHERNY: Yes.

THE COURT: -- and recently a citizen of the United

States, sworn in in this courtroom --

MR. CHERNY: Congratulations.

PROFESSOR YUAN: Thank you.

THE COURT: -- and I have known him for many years.

He was a practicing attorney before he became a professor.

MR. CHERNY: Thank you, Your Honor. We appreciate

your diligence here.

THE COURT: All right. Let me also ask, because I

see some other friendly faces out there as well, how about

witnesses? Are we going to exclude witnesses or not?

MR. McANDREWS: No.

MR. CHERNY: We don't have any intention to invoke

the rule.

MR. McANDREWS: Nor Innovatio, Your Honor.

THE COURT: All right. Then Rule 615 of the Federal

Rules of Evidence will not apply in these proceedings, and

we'll proceed accordingly.

MR. CHERNY: Thank you, Your Honor.

THE COURT: Okay. Anything else?

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MR. McANDREWS: And then a final point. We have just

a couple of Cisco confidential schematics --

THE COURT: Okay.

MR. McANDREWS: -- that we're going to briefly touch

on in the opening. My understanding is with the technical

setup here, we can blank out the Jumbotron, the gallery screen,

and the others. So those exhibits are just published to

counsel and Your Honor.

THE COURT: All right.

MR. McANDREWS: Did I get that right, Mr. Thies?

THE COURT: All right. Well, excellent. I am glad

that technology allows you to do that. And I know that we are

all hard-wired here.

MR. McANDREWS: Yes.

THE COURT: There's no wireless going on. My court

reporter made sure --

(Laughter.)

MR. CHERNY: There will be no request for royalties

from Innovatio for the Court.

THE COURT: Right. I understand.

MR. McANDREWS: So stipulated.

THE COURT: Okay. All right. And just so a

reviewing court would not get the wrong impression, what

Mr. McAndrews referred to as a Jumbotron is a projection screen

that actually isn't as large as some projection screens that

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have been in this courtroom. But last night when the Cowboys

were playing the Giants in Dallas, that's a Jumbotron.

MR. McANDREWS: That's a Jumbotron.

THE COURT: That's 60 yards wide. So --

MR. CHERNY: Perhaps the next hearing, we could

convene in a Texas courtroom.

THE COURT: If you want to, but we'll talk about it.

MR. CHERNY: Okay, Your Honor.

THE COURT: Okay.

MR. McANDREWS: And the larger screen, Your Honor,

was jointly at the request of counsel and the parties, and we

appreciate the accommodation.

THE COURT: Yes. And I fully understand. When we

had the earlier proceeding, it was difficult because we hadn't

considered the audience. And I appreciate your setting up the

flat screen over here to the left of the bench to assist me,

and the projection screen over to the right of the bench

hopefully will assist members of the public --

MR. CHERNY: Thank you, Your Honor.

THE COURT: -- and others sitting in the public area.

All right. Anything else?

MR. CHERNY: Not from our side, Your Honor.

THE COURT: Okay.

MR. McANDREWS: Not from Innovatio, Your Honor.

THE COURT: All right. We'll give the signal when we

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have to. We'll just pause and talk about exclusion when we

have to. But we're ready to proceed with the folks from China,

from John Marshall, as well as everyone else who has gathered

here this morning in the courtroom.

Mr. McAndrews, the floor is yours.

MR. McANDREWS: Thank you, Your Honor.

As an initial matter -- I know I speak on behalf of

Mr. Whitley, Innovatio, and the entire Innovatio legal team --

and I'm sure that I speak on behalf of my colleagues on the

defense team as well -- when I thank Your Honor for all the

time and energy that you and your staff have put in to this,

the complicated issues in this case.

MR. CHERNY: And in this regard, Mr. McAndrews does,

indeed, speak for all of us.

THE COURT: Well, I just want to comment, that I have

commented many times to my staff and to others, what an

excellent job you lawyers are doing. And I know you're

fighting hard and, yet, you were able to resolve issues that

should be resolved so we can get right to the key points, and

that's why I am endeavoring hard to get a resolution to you and

for you and to assist you in that endeavor. But it is

certainly a pleasure to sit in this courtroom in this case

with --

MR. CHERNY: Thank you, Your Honor.

THE COURT: -- the outstanding lawyers that I have

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before me. So thank you.

MR. McANDREWS: We appreciate that, Your Honor. We

have tight disputes.

THE COURT: Right.

MR. McANDREWS: A few areas of agreement. I would

add -- and I think my colleagues know this -- it has also been

a pleasure working with the defense team on this. These are

complex issues. We have issues of first impression at bar, and

we have been, by and large, very pleased to work with them.

THE COURT: Yeah, you folks are a model, I have to

say. I have other cases that aren't quite as good in that

area.

All right. Let's get to the issue at hand.

MR. McANDREWS: Yes. Get down to business.

OPENING STATEMENT ON BEHALF OF PLAINTIFF INNOVATIO

MR. McANDREWS: So how much value do we assign the

creative genius of Ron Mahany and his colleagues from Cedar

Rapids, Iowa? What's his technical legacy worth with respect

to 802.11 technology, the Wi-Fi market, and specifically the

patents-in-suit?

That's what we're here to decide this week. That's

the subject of these very, very important RAND proceedings.

Now, as Your Honor recently pointed out at one of our

status hearings, the issues in this case and how Your Honor

comes down on those issues is not only important to Noel

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Whitley and to Innovatio, but it's important to the future of

science technology -- science and technology in the United

States as well, and it certainly has given the issues at bar.

Now, in many instances, Your Honor, under the patent

law, we're told that we have to disregard the statements and

commentary from inventors, such as Mr. Mahany. I see Mr. Thies

is nodding his head. A couple of examples might be claim

construction, what's the value of the invention, what's the

scope of the invention, damages issues, just by way of example.

In this case, though, something that Mr. Mahany said

back in 1997 is critically relevant to the issues that are now

at bar. Let's take a look.

In June of 1997, on behalf of his company, Norand,

Mr. Mahany submitted a Letter of Assurance to the IEEE with

respect to the then-emerging technology of Norand directed to

the 802.11 products as in technologies.

Importantly, Mr. Mahany's assurance guaranteed that

Norand would make licenses available "on reasonable terms and

conditions." Reasonable terms and conditions.

Now, I suspect that his choice of the term

"reasonable" was not coincidental. It harmonizes quite

perfectly with §284 of the Patent Act, which, of course,

provides that an inventor or a patentholder in the event of

infringement is entitled to no less than a reasonable royalty

for infringement.

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It also squares up very nicely with the IEEE bylaws.

In here, we're referring specifically to Plaintiff's Exhibit

633, and this is Section 6.2(b) of the IEEE Standards Board

Bylaws. And, again, this section of the bylaws provide that in

a Letter of Assurance, the granter or the submitter has to make

licenses for compliant implementations available "under

reasonable rates, with reasonable terms and conditions."

So what do we see here? We see in the Letter of

Assurance from Mr. Mahany, we see in §284 of the Patent Act,

and then, again, we see in the bylaws the term "reasonable."

We don't see anything about nominal cost, we don't see anything

about pennies or fractions of a penny per unit, and we

certainly don't see anything that says that RAND in the context

of essentiality means low.

And, yet, what we're going to see here is an emerging

theme in this case, one of the prevailing themes, to be sure.

The defendants' position is that RAND means low and RAND means

insignificant.

The evidence is going to show -- and you'll hear it

through the testimony of Dr. Teece on behalf of Innovatio and

others -- that RAND, instead, means reasonable and it has to

mean reasonable.

Now, on the issue of nominal cost, I examined the

defendants' expert, Dr. Shoemake, on the very point. And

you'll see in his report he confirmed that his interpretation

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of RAND is that it requires licensing at nominal cost. He even

says in his view, nominal cost is consistent with RAND

obligations.

During his deposition, I probed a little bit further.

I wanted to understand exactly what his interpretation of

nominal cost was, and he told me he believes it means "small or

low cost," and he even used the term "insignificant," or he

agreed with me when I did. Insignificant, low, small. RAND

means low.

And then the final bit of his testimony, again, I

asked whether or not the concept of RAND being low was a

guiding principle for Dr. Shoemake for the purposes of him

forming his opinions in this case. He confirmed that it was.

Now, putting aside for the moment that this is

altogether inconsistent with the purpose -- or the dual

purposes of RAND, on the issue of nominal cost, Dr. Shoemake's

testimony and his opinion don't square with the IEEE

requirements themselves.

What do I mean by that? If we take a look at two

versions of the IEEE Operations Manual. The first is the 1995

version -- and for the record, this is Plaintiff's Trial

Exhibit 642 -- we see that that version specifically referred

to nominal competitive costs. However, by the time we arrive

at the 1997 version of the same section of the Operations

Manual -- and this is 6.3.2, the Submittal section dealing with

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Letters of Assurance and the guarantees that the submitters

make -- the 1997 manual, by the way, for the record, is

Plaintiff's Trial Exhibit 673 -- the IEEE shows decidedly

different language by the time we got to this point. And what

was the language they chose? "Reasonable rates, terms, and

conditions." Again, back in harmony with the Letter of

Assurance Mr. Mahany submitted back in June of 1997, in harmony

with §284 of the Patent Act, and sitting quite squarely -- in

fact, I think using verbatim language -- right out of the IEEE

bylaws.

So we've talked about the general and prevailing

theme that defendants have taken the position that RAND must

mean, it must command an insignificant or low royalty rate, but

let's put that in context. Let's take a look right now at

exactly how low the defendants think the rate ought to be.

In this case, defendants' expert, Dr. Lynde, has

opined that Innovatio is entitled to a royalty in the range of

6/100ths of a cent -- and I have to struggle with that for a

little while with the decimal places and the cent versus the

dollar sign. That is 6/100ths of a cent all the way to 4.16

cents at the high end.

Fair? Not even close. Reasonable? No way. Does it

comply with RAND? No. That is all attorney argument, though.

So let's put it in context.

The evidence will show -- and this is just an

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exemplary example, Your Honor.

There is some confidential information. As I

understand it, in talking to counsel, this is publicly

available in the 10 case.

We see Cisco's sales topping approximately $10.5

billion with estimated profits of just north of $7.5 billion.

Embracing just the low end of Dr. Lynde's proposed

royalty rate here would net Mr. Whitley and Innovatio a royalty

of $71,000, just a hair over $71,000. So what we're talking

about is a royalty rate at the low end that wouldn't even cover

the cost of prosecuting just a handful of these rather complex

patents.

And that puts aside, Your Honor, the issue of the

tens of millions of dollars that companies like Norand and

Cisco and Broadcom dump into research and development to

develop these essential technologies in the first place.

I mentioned earlier the dual purposes of RAND, and

Dr. David Teece from the University of Cal, Berkeley will

testify later this morning on this point. Obviously, one of

the purposes is to make standard-essential technology available

to implementers. And we have to do that, as we've already

seen, in the continuity of the documentary record all the way

back, dating back to the June 20th Letter of Assurance, the

1997 Letter of Assurance. The licenses have to be made

available on reasonable and non-discriminatory terms.

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But also -- and Dr. Teece is going to focus on the

absence of this recognition throughout the defendants' case and

their expert reports -- you've also got to provide adequate

compensation or motivation for inventors like Ron Mahany to

contribute to the standards-setting process. And I would

submit, and I think the evidence is going to show, that a

royalty rate of $71,000 on the low end or even the high end,

numbering in the very, very low single million dollars, isn't

the type of motivation that's sufficient to meet this purpose

of RAND, Your Honor.

Now, without adequate compensation, there are few

obvious consequences. First of all, patentholders of

standard-essential technology may simply opt out of the process

in the first place. Alternatively, they may withhold their

technology from the marketplace altogether, irrespective of the

standards-setting process. And in that case, and in either

event, the standards simply aren't going to include the best

available technology, and we don't want that. We want to

foster creativity, creative genius, ingenuity, all that go into

strong and robust standards. At the same time, we want to

reward the inventors for their incredible contributions to that

standard.

Let's turn to the purpose of 802.11 itself. And, of

course, this comes from the IEEE 2007 version of the standard.

For the record, this is Plaintiff's Trial Exhibit 1.

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In here, in sum and substance, of course, and it's

not surprising, we're focusing on wireless connectivity,

technology that goes to the core of the mobile computing and

mobile communication world that we live in today, that we rely

on, and that is not only essential as a term of art, but is

critical to our day-to-day business and lives.

One of the things that we focus on as well in the

stated purpose of the standard is the concept of use of this

technology, specifically with portable or handheld devices.

I recall one of the hearings, Your Honor talked about

your granddaughter needing the data, I think on the iPad or

another tablet-type device -- and, of course, the data, I

suspect, that your granddaughter needs to access is content

that doesn't inherently reside just on that tablet. Instead,

she accesses it somewhere else. And I would venture a guess

that the iPad she has is not tethered to anything. It's all

wireless connectivity.

Now, what we're here to talk about isn't Wi-Fi in

general, but the importance of the claim technologies of

Innovatio's asserted patents to the Wi-Fi market.

And Your Honor may recall that during the

essentiality phase, at the broadest level, we broke the

Innovatio technologies down into four categories.

We're going to hear testimony from Dr. Ray Nettleton.

Your Honor recalls and is familiar with Dr. Nettleton. He

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testified during the essentiality phase. We will hear

testimony as well from Mr. Chris Bergey, a former Broadcom

marketing executive and an electrical engineer concerning

these.

But just by way of high-level review, we've got the

channel-sharing family, the multi-transceiver/multi-channel,

the sleep family, and then, finally, the mesh family.

And a high-level description again, we will let the

experts get into a lower level of the weeds on this, but the

channel-sharing basically avoids collisions between messages.

One of the things that Dr. Nettleton will talk about

is the hidden node problem, and I think that was addressed

briefly at the essentiality proceeding with some nice

schematics.

The multi-transceiver/multi-channel, the way that my

EE colleagues have explained this to me is let's just think

about all the access points on the market these days that are

dual band or dual radio. It allows operation, the 2.4

gigahertz and 5 gigahertz bands. It makes it

backwards-compatible so you can talk on -- the access point can

communicate with devices on the newer bg channel as well as the

legacy devices in the 802.11a band. I'm sorry, in the 2.4

gigahertz band.

One of the other possibilities with this technology,

and one of the values received, is that you can increase

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significantly the bandwidth of the access point.

The "sleep" family we talked about a good deal during

the essentiality proceeding.

This family of technologies was important to Ron

Mahany and his team at Norand because they implemented this in

wireless barcode systems and inventory management. Those are

battery-operated devices. And in the field, battery

charge/length of use is critical. This technology allows

mobile devices to remain mobile for a much longer period of

time.

And then, finally, the mesh networking that allows

for wireless infrastructure, in applications, perhaps, where a

wired backbone or Ethernet cable is impractical or inefficient,

and that's becoming more popular. Dr. Nettleton is going to

talk about that.

Let's turn to the accused products, which is one of

the main issues, one of the things that gives value to the

Innovatio asserted claims here.

Broadly, the accused products break down, of course,

into two categories, the network devices and the terminal

devices on the other hand.

Within the network device category, we've got the

popular access points. One of the points that I would make

about the access point is that but-for its Wi-Fi functionality,

an access point is nothing. Without Wi-Fi, an access point is

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a coaster or a paper weight.

Similarly with wireless radio modules. These are

aftermarket devices that you might plug into an existing piece

of equipment.

Ms. Conway, if I'm going too fast, just queue me.

You might plug into an existing piece of equipment,

such as a wired router, to make it comply with your wireless

LAN.

And then, of course, we've got hybrid products, such

as some of those offered by Defendant SonicWALL where you

actually combine the functionality of another network device.

In the case of SonicWALL, a good example is a firewall with a

Wi-Fi access point.

One of the points I would make about this, and you

will see this a little later on in the economic analysis, is

that it gives us a very nice comparison or data point. In the

case of SonicWALL especially, they offer versions of their

firewalls that are not wireless and they offer other versions

that do have wireless functionality. And that gives us a nice

price delta for the purposes of comparison in determining a

rate, something that Larry Evans will testify to later on.

Turning to terminal devices, there are many more

representative products in this set. I will go through them

just quickly. A wireless dongle simply turns other devices

into a wireless-compliant device. Wi-Fi printers. Again,

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another good example, Defendant HP makes many, many models of

printers that have a wireless version and a non-wireless

version. It gives us a nice comparison for the purpose of

establishing a proxy or a value, the delta there for the

purposes of determining the royalty in the case.

Laptops today, you virtually can't buy a laptop on

the market that doesn't have Wi-Fi capability, and, yet, you

will see we're not assigning 100% importance to the Wi-Fi in

the laptops.

Tablets. We talked a little bit about the example,

of the importance of Wi-Fi connectivity to the tablet. And I

think the same is true with respect to laptops -- or tablets as

it is with laptops. Virtually no tablets are sold on the

market without connectivity.

Inventory and tracking, much of this equipment on the

market is a follow-on to the early technology created by Norand

back in Cedar Rapids in the mid-1990s.

And then, finally, we've got miscellaneous terminals.

A simple example of this might be a wireless security camera.

And we're seeing more and more of those in the marketplace.

Now, let's briefly introduce Innovatio's experts. I

have mentioned, I think, virtually all of their names so far.

Dr. David Teece is going to be testifying on economic

and RAND policy issues. Dr. Ray Nettleton the Court is

familiar with. He will be touching on the 802.11 technology,

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the accused technologies, and certain of the standards issues.

Chris Bergey is a nine-year veteran of Broadcom. He

no longer works there. As I mentioned earlier, he's an

electrical engineer and worked as a marketing executive at

Broadcom, interfacing on a day-to-day basis with Broadcom's

customers concerning the very features, values, and benefits

that are at issue in this case right now, and he's going to

provide some very insightful testimony concerning that value.

Rick Bero will testify on the accounting issues.

Mr. Bero is going to crunch the numbers for us. And then,

finally, Larry Evans will provide Innovatio's opinion

concerning an appropriate RAND rate in this case.

So where does the rubber hit the road here? Let's

get to the amount.

Here is Innovatio's proposed RAND rate. Innovatio

took a two-step process here. First, it took a look at the

value of its four core technologies to Wi-Fi as a whole, and it

came up, as you'll hear testimony from Mr. Bergey and

Mr. Evans, came up with a 6% rate.

Then Innovatio didn't stop there. Innovatio then

applied that 6% rate and apportioned it according to the

relative importance of 802 functionality to a particular Wi-Fi

device. And we can look at some examples here.

On the -- in the left-hand column in green, you will

see the feature factor that Mr. Bergey determined. And, again,

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when I say "feature factor" here, we're talking about the

importance of Wi-Fi to that particular product set. Access

points, of course, are nothing without it, so it's a very high

feature factor.

In the right-hand column, you will see Mr. Evans'

calculation of the appropriate royalty rate based on

Mr. Bergey's feature factor input.

Very similar for wireless modules. The

multi-function router and firewall, SonicWALL is a really good

example of this. You will see a much lower feature factor.

Why is that? Because wireless in those products is in

everything. You can get a non-wireless version of one of the

SonicWALL firewalls.

And now the feature factor and applicable resulting

RAND rates for other terminal devices. Again, I would point

out, and I'm just repeating here, when it comes to printers,

Wi-Fi is important to a wireless printer, but it is not a

be-all/end-all feature.

One of the nice data points that Mr. Evans calculated

with respect to some of the accused HP printers is a $50

average price delta between a wired and a wireless version. Or

I guess, more appropriately, I would say a non-wireless and a

wireless version of the same product. They offer hundreds of

products that have the dual functionality.

And then with respect to laptops, Mr. Evans also

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picked up on a few other data points. One of them was using

the average sale price of a dongle, and he also considered an

amount that comes out as about twice the average delta of the

printers. The feature factor, of course, as I mentioned

earlier, on laptops is much lower. It's just the 10%. And you

can see it has a corresponding dramatic effect on the proposed

RAND rate.

And we just finish out the list. I won't go through

this in exhaustive detail. But the point here is that you will

see with different product sets within the terminal device

family, you are going to have widely variant and disparate

feature factors applied and, therefore, resulting royalty

rates. Mr. Bergey and Mr. Evans will elaborate on those

points, Your Honor.

Here's the footnote that we're getting to, and I

think to the point perhaps that Your Honor was making. We've

got a couple of conditional red bullet points that I wanted to

emphasize.

There's been a lot of talk about Innovatio's proposed

use-based royalty or per location royalty. That's conditional,

and it's conditioned on the assumption that there would not be

patent exhaustion with respect to the manufacturer defendants.

It is also conditioned on something that I have

discussed with my colleagues, and that is that there would not

be a payment by the manufacturer defendants for the network

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37

operators' past infringement; that is, sales of accused

products that date back or reach back into the past.

And I don't think I need to discuss the per location

amount. We're going to defer that to a later time. I also

think that's pretty well covered in the briefing, Your Honor.

Now, one of the things that Mr. Evans did, of course,

in considering an appropriate RAND rate is he benchmarked. He

went out into the marketplace and he looked -- he took a look

at comparable licenses.

There are a number of them here. I think we list

five. This is just an exemplary list.

A few of the points that I would make here. 

 

 

 

 

MR. CHERNY: I just want to note, Mr. McAndrews did

not -- these are our confidential documents, and they were not

identified that we were going to be addressing this on this --

if you will blank that, I would appreciate it.

MR. McANDREWS: I sure will. I sure will. I am

sorry about that.

THE COURT: Let's move that from the public display

to the more in camera display that is available to counsel.

MR. McANDREWS: And that makes sense. And that was

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one of the points I didn't get to with our colleagues when we

went through the deck.

MR. CHERNY: Thank you.

THE COURT: Thank you.

MR. McANDREWS: The points I want to make on this

particular slide are very general. 

 

 

 

 

 

 

 

 

 

 

 

So one of the other issues in dispute, Your Honor,

when you asked for supplemental input from the parties, is the

issue of the appropriate royalty base or the smallest salable

patent-practicing unit. I tried to break that down into a

convenient acronym, but I got even more confused when I did

that.

So why in this case is the appropriate royalty base

the products or the systems and not the chip that our friends

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on the defense team are so focused on? A couple of reasons.

Numerous of the asserted claims in the

patents-in-suit are directed, specifically directed to systems

or apparatuses that go far beyond the structure and function of

a Wi-Fi chip.

I would make the same point in a more broad -- or in

a broader sense with respect to some of the system claims.

You've got certain claims that would incorporate, in terms of

accused technology, one or more access points with a plurality

of different terminal devices. Certainly in that context, as

in the first, it doesn't make any sense at all to jump down to

a single component of any one of those products when you're

looking at an appropriate royalty base.

As Your Honor mentioned in your opening comments this

morning, we get guidance from Chief Judge Rader in the

LaserDynamics case, and he introduces the concept of the

smallest salable patent-practicing unit.

Now, here are the slides where I will move through

mercifully quick. These are -- I don't think the -- the

initial one doesn't include a schematic, but this is

illustrative of the point, Your Honor.

If I could step over, please?

THE COURT: You may.

MR. McANDREWS: In this instance, by my count, there

are at least seven discrete structural elements in the claim,

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and they are highlighted here in blue, purple, green, and red.

And I say that there are seven because you have dual wireless

radio adapters, so you've got two of each of those.

So out of a total of seven, the defendants' position

in terms of the smallest salable patent-practicing unit is that

it's just one of these components, the MAC processor here.

Clearly with respect to this claim -- and, for the record, this

is Plaintiff's Trial Exhibit 7 -- the smallest

patent-practicing unit cannot be the MAC processor.

Now I will blank the screen for this next slide.

THE COURT: All right.

MR. McANDREWS: This includes some of the internal

Cisco schematics. It's the same claim, Your Honor, and the

same example --

THE COURT: That's the '397 patent, as you indicated.

MR. McANDREWS: This remains Example 1, which is the

'397 patent, Claim 1. And this, again, is Plaintiff's Trial

Exhibit 7, citing Plaintiff's Trial Exhibits 894 and 895, which

are the internal Cisco documents.

 

 

 

 

 

 

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Let me go back on with this. I talk about system

claims. And, very briefly, here's an example of a combination

or system claim where you're talking about, right off the bat

here in the second element, one or more base stations

communicating with plurality of roaming terminals. And, yet,

under defendants' interpretation of the smallest salable

patent-practicing unit, we are jumping down just to the level

of the MAC Wi-Fi chip, disregarding all of the other claimed

structural and functional elements of the asserted claim.

Now, defendants' commentary on the smallest salable

patent-practicing unit is informative here. Each of the

experts distance themselves from the specific definition

provided by Chief Judge Rader in LaserDynamics.

In the case of Dr. Lynde, he seizes on the smallest

salable unit tied to the 802.11 WLAN technology. He doesn't

say anything there about an element-by-element analysis. And

it would seem, from the name of the term itself, smallest

salable patent-practicing, when we hear "patent-practicing,"

you got to remember that that requires an element-by-element

consideration, certainly at the highest level.

Dr. Leonard similarly focuses on the "smallest

salable unit with a close relation to the patented features;"

not with a close relation to an element-by-element analysis,

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just a close relation to the patented features.

Now, Dr. Shoemake has offered the opinion that the

IEEE working group would have rejected any proposal for a

license offered on a per product basis. His opinion in that

regard, though, is directly contradicted by the IEEE's own

documentation.

And in this case, we're looking at Plaintiff's Trial

Exhibit 357. This is the form Letter of Assurance that's

provided by the IEEE to submitters. And in the first case,

we're focusing on the grant clause, again, provides for

"reasonable terms and conditions." We don't see anything about

the old 1995 nominal cost language. And, importantly, under

the grant provision, it gives the submitter the option to grant

a license or spell out a license as a percent "of product

price, flat fee, or per unit." Percent of product price. It

doesn't say anything about percent of chip price. It doesn't

speak of percent of component price. And in this regard, this

language is very, very consistent with the comparable licenses

that Mr. Evans considered, all of which were granted on a per

product basis, not a per chip, not a per component basis.

Now, we'll hear testimony from Dr. Teece concerning

the exemplary distribution chain. This is self-evident, I

think, to the Court; that you've got the Wi-Fi chip

manufacturer on the far end of the chain, then the terminal

device or access point manufacturers, retailers or, in many

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43

cases, of course, wholesalers when we're talking about

industrial implementations of this or enterprise-level

implementations, and then the end users, the companies that

actually implement Wi-Fi or even offer it to the public, as is

the case with many hotels, coffee shops, and whatnot.

There is a corresponding value chain, of course, that

follows or sits on top of the distribution chain. And in this

case, simply you've got Cisco, or any of the other

manufacturers at one level of the value chain, selling you an

access point for an average sale price. In the interim, you've

got businesses such as FedEx that rely heavily on the

technology and their global logistics and shipping operations.

And then, again, the higher end of the example is where you've

got certain customers actually utilizing this to generate

revenue, to bring in more -- to sell more sandwiches or coffee,

or making things convenient for hotel patrons.

A few of the next examples, again, these focus on

value to the network operator. We're not talking right now --

we've deferred our discussion of the appropriate rate with

respect to them. But the value to network operators, as

Dr. Teece will testify, still ought to be very relevant to the

inquiry concerning an appropriate rate with respect to the

manufacturer defendants.

This is just a simple example that I don't need to go

through, but it illustrates the point that network operators

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Colleen M. Conway, Official Court Reporter

44

derive great benefit and frequently revenue itself off of their

use of the infringing technologies.

Now, one of the suggestions or at least the overtones

of the defendants' argument seems to be that Innovatio had an

obligation to bring in or to sue or to approach chip

manufacturers for license. That's not the case for a number of

reasons. It's an issue that Judge Davis actually specifically

addressed -- Judge Davis did address it, and I will get to that

slide. Here we go.

Judge Davis, of course, simply said that as the

master of its case, the plaintiff decides who it sues. There's

no legal requirement that it sue everyone in the distribution

chain.

And I would point out in the context of this case, in

particular, Your Honor, Innovatio, in the first instance,

didn't sue the manufacturer defendants. The manufacturer

defendants brought suits for declaratory judgment. And

obviously it goes without saying there isn't a chip

manufacturer in suit. We're going to hear the testimony from

Mr. Djavaherian from Broadcom, but they simply aren't in suit.

They haven't DJ'd Innovatio. Innovatio, for its part, hasn't

sued a chip manufacturer.

There's discussion concerning the concept of holdup

in the briefing and the dialogue between the parties.

Dr. Teece is going to testify concerning an equally important

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Colleen M. Conway, Official Court Reporter

45

consideration and problem, and that, of course, is that of

reverse holdup.

The ITC recently picked up on this issue in one of

their opinions concerning Apple -- the Apple and Samsung

dispute. They simply define it as circumstances where an

implementer of essential technology uses the technology without

compensating the patent owner. And then although it's not

highlighted, it goes on to point out that it's frequently done

under the guise that the patent owner's offers to license

weren't fair, they weren't reasonable, they didn't comply with

RAND.

Now, in this case -- do you see any problem here,

counsel? I don't think any of this is --

THE COURT: Are you talking about slide 46?

MR. McANDREWS: This is slide 46 --

MR. CHERNY: No, Your Honor.

MR. McANDREWS: -- Your Honor.

THE COURT: All right. Thank you, Mr. Cherny.

MR. McANDREWS: In this instance, Your Honor -- and

we've got four of the representative manufacturer defendants --

they widely advertise, and it's no secret that they practice

the compliant technology. And, of course, one of the disputed

issues in this case is whether or not that's covered by

Innovatio's hundreds of standard-essential claims. We, of

course, contend that it is. So there's no question that

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Colleen M. Conway, Official Court Reporter

46

they're practicing the compliant standard here. They make that

clear.

Now, none of the manufacturer defendants in this case

has applied for a RAND license. And we see language, it's a

re-occurring theme in the IEEE literature and the RAND

commentary, and that is submitters will make licenses available

to all applicants.

The second point, none of the manufacturers, with the

exception of one, has countered Innovatio's opening offer. And

I think we've discussed this in court before. Innovatio has

made an opening RAND offer. It sent out the signal. We're

waiting back for an echo. We've gotten one, one from our

friends at SonicWALL.

And then the final point that I would make -- and

perhaps things will change come this next Monday. But none of

the manufacturers have called up Innovatio, sat down and

engaged in legitimate negotiations or meaningful negotiations

concerning working out a RAND rate on a bilateral basis. And I

know I made that point almost 18 months ago at the time, and I

think my colleague said, "Well, of course Cisco is willing to

sit down." Perhaps Monday we get our opportunity to do just

that.

Now, patent pools are one of the subjects that are

discussed and will be discussed by the defendants' experts in

this case. Dr. Teece is going to provide testimony concerning

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Colleen M. Conway, Official Court Reporter

47

the reasons that patent pool rates are informative in

connection with the RAND analysis here.

Similarly, we hear about the issue of royalty

stacking. In this case, there is no evidence of a royalty

stack that creates a problem.

Now, each of the defendants' experts has admitted as

much. Both Dr. Leonard and Dr. Lynde, during their

depositions, confirmed that they have not calculated a royalty

stack in connection with the facts of this case.

Now, having not done that, that would seem to render

their opinions in this regard theoretical. In theory, of

course, is something that Judge Davis also picked up on in the

recent Ericsson case, Your Honor. And what he said, very

briefly: "The best word to describe Defendants' royalty

stacking argument is theoretical." So, too, in this case. The

concept of there being a problem concerning a royalty stack is

purely theoretical. It is not supported by any evidence of

record.

Now, Dr. Nettleton will provide testimony concerning

the unavailability of non-infringing alternatives, and that is

an issue that, to some degree, was covered during the

essentiality hearing. We're going to hear a more robust

discussion between the parties on that here.

So the bottom line here, Your Honor, is that RAND

means reasonable. It doesn't mean pennies per unit. It

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Colleen M. Conway, Official Court Reporter

48

doesn't mean a license on a per chip basis. It certainly

doesn't mean low.

Nothing about the defendants' proposed royalty range

is fair or reasonable. Fractions of a penny up to 4 cents -- I

can't even say 4 cents and change. 4 cents and a fraction on

the high end.

Innovatio's families of technology are critical and

they are valuable to Wi-Fi. The defendants, of course, have

universally implemented these technologies, smallest salable

unit here. We're talking about products, not chips. And to

comply with the purposes of RAND and the requirement of the

Patent Act, any royalty must be dollars and not cents in this

case.

Does Your Honor have any questions?

THE COURT: Not at this point. I appreciate the fine

presentation.

MR. McANDREWS: Thank you, Your Honor.

THE COURT: Thank you. All right. We will turn it

over to Mr. Cherny.

MR. CHERNY: Thank you, Your Honor. And I have

another notebook.

THE COURT: All right. I think what we'll do, if

it's okay with everybody, we will take a break after

Mr. Cherny's remarks. In fact, I think we should do that

before we proceed with any further -- or any testimony.

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Colleen M. Conway, Official Court Reporter

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MR. CHERNY: That's fine, Your Honor. May it please

the Court.

THE COURT: Mr. Cherny, yes.

MR. CHERNY: And after I go, I believe that some of

the other --

MR. McANDREWS: Steve?

MR. CHERNY: No, no. I put that up there.

MR. McANDREWS: I'm sorry.

MR. CHERNY: Anyway -- thank you. After I go, some

of the other defendants have short presentations, so --

THE COURT: All right. We can break after that.

MR. CHERNY: Okay, Your Honor.

OPENING STATEMENT ON BEHALF OF DEFENDANTS CISCO, MOTOROLA,

NETGEAR, AND OTHERS

MR. CHERNY: Not surprisingly, we have a preset

presentation, much as Mr. McAndrews did, that I would like to

present, but I was struck, as I was listening to Mr. McAndrews'

presentation, about how much his presentation indicates about

why the governing legal principles that the Federal Circuit has

set down regarding standards and damages are important here,

and specifically apportionment, which, of course, the Court has

raised in its inquiry earlier in the case, a couple days ago,

and which is of critical importance.

Mr. McAndrews was confused because I put up the very

first slide of his presentation, and that is the ubiquitous

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Colleen M. Conway, Official Court Reporter

50

Wi-Fi symbol that we're all familiar with. Norand did not

invent Wi-Fi. Innovatio's patents did not invent Wi-Fi. It is

for that reason alone that apportionment is key here.

Throughout Mr. McAndrews' presentation, we heard

about the value of Wi-Fi. There is nobody in this court who's

ever going to say that Wi-Fi isn't wonderful. But that's not

the inquiry here. And what you heard precious little about --

in fact, I don't think anyone heard anything about -- was the

value of the patented features to Wi-Fi and specifically to the

standard that all these claims are essential to.

You saw a slide such as this. We have a picture of a

Marriott. Now, we heard about how valuable Wi-Fi is to the

Marriott. That is wholly irrelevant. What we have to focus on

here in a rigorous fashion and not at a very high level,

30,000-foot fashion is the value of the patented features at

issue in these patents which form a very, very small part of

the mosaic of claims and patents that are essential to 802.11.

And without doing that, we are inviting ourselves error.

This has become a key part, as the Court has seen, in

the cases, such as LaserDynamics, by the way, which was Judge

Rader, not Chief Judge Rader. Chief Judge Rader, as you noted,

spoke sitting by designation, sitting in your chair, so to

speak. Although, I think when he was doing it --

THE COURT: But in Buffalo.

MR. CHERNY: Well, in Buffalo. And I think, although

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51

sitting by designation, feeling as he was speaking on behalf of

a larger audience.

So it's not about Wi-Fi. It is not about the value

of Wi-Fi to Marriott. It is about the value of the patented

features. And you are being invited in an attempt to broaden

out the value of these very, very narrow, focused patents to

give Innovatio a percentage of the value of Wi-Fi. And if

there's anything that the cases show, that is error.

You saw a slide that Mr. McAndrews put up that Cisco

makes $10 billion. And I guess the implication is that Cisco

makes a lot of money selling products. And, therefore, if we

value the patented features accurately and somehow we don't

give a large amount of that to Innovatio, somehow something is

wrong.

Again, this is the reason why we apportion. Cisco

sells many products with many thousands of technologies that

encompass many, many standards, and, therefore, it is wholly

irrelevant that Cisco on the whole is a very successful

company. Innovatio doesn't, by virtue of that fact, get a

percentage of that. It gets the value of the patented features

in the context of RAND.

And that takes me to my next slide and then I will

get to go, hopefully, on to my presentation and stop trying to

put Mr. McAndrews' presentation up on the ELMO.

Mr. McAndrews very clearly is trying to relate this

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52

case to the normal case of reasonable royalty. It is not. The

reason we are here -- and now please switch to my

presentations, Will.

And I'd like to introduce to the Court -- I think you

have seen him before -- Mr. Will Thomas in the back who is

intimately more important than I am about making this happen.

THE COURT: Well, we appreciate the flawless way he

has handled these matters. So thank you.

MR. CHERNY: As do I.

Here is the title of our presentation. I was some

impression RAND is different. Mr. McAndrews spent very little

time -- I don't even know if he mentioned the word standards or

the goals of standards or the problems in standards, but he did

at a certain time tried to liken this to the regular, old

reasonable royalty negotiation that we're all familiar with.

But that is not why we're here, and that's not why this Court

has convened this special hearing, nor why Judge Robart

convened his hearing in Washington, because there is a

recognition now that standards are different, RAND is

different.

So just because both have the word "reasonable" in

their work doesn't mean that we use the same analysis. And so,

what I'd like to do is spend a little time, unlike

Mr. McAndrews, talking about the goals of standards and some of

the problems and some of what RAND was meant to address,

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53

because we are dealing with a very carefully constructed

construct called a standard that benefits us all; and that if

we deviate from the proper licensing structure that has been

rigorously applied, both in licensing and by courts, we

threaten the very structure that we all benefit from.

Why are we here? As the Court knows, we went through

a process of determining how many of the claims that Innovatio

is asserting are, quote-unquote, essential to the standard, and

the Court has determined that they all are essential to the

standard. That triggers now that they are all subject to a

RAND rate, not a reasonable royalty rate that would happen as a

result of a litigation between two competitors.

There is a duty owed here to the standard and the

standards community, and it is the duty that you heard nothing

about from Mr. McAndrews, because, from their perspective, this

is all about maximizing the return to people who purchased

patents as opposed to taking into account where these patents

and these features fall in this carefully constructed

construct.

I'm going to take you through four topics. The first

is standards and RAND so we can actually have the context that

Innovatio studiously ignores. We're then going to talk about

the standard at issue here and where Innovatio's asserted

patents actually fall within there, which is crucially

important to the apportionment that we have to do, and which

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54

was conspicuously absent from Mr. McAndrews' presentation.

We're going to talk about how do we determine the

correct RAND rate here, not in generalities about why it is

that, you know, someone feels aggrieved that the number is

allegedly small, but trying analytically, through a number of

methodologies, to get to the right number, because we all know

that that's what the Court wants to do, is to come up with the

right number, not with a number that is based on an appeal to,

you know, "We deserve more." And then we're going to go

through some of Innovatio's positions and show exactly how it

is these positions offend the notion of RAND and embrace the

problems that courts and others have identified with standards.

Okay. Let's start with standards. And I will go

through this quickly because I know the Court is well aware of

the value of standards in our life. But Innovatio didn't

mention standards at all in its presentation, but that's why

we're here.

Standards allow technology to interoperate, and it

provides a huge benefit to manufacturers and to consumers.

That means, for example, in the context of wireless, we don't

have ten different ways to do wireless.

So, for example, when your granddaughter takes her

tablet -- okay? I don't want to leave your granddaughter out

of my presentation, you know.

(Laughter.)

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Colleen M. Conway, Official Court Reporter

55

MR. CHERNY: And she goes to Starbucks, she can talk

to the router at Starbucks, and --

THE COURT: No, she's not yet at that age, but --

going to Starbucks without parental supervision, but --

MR. CHERNY: I wasn't suggesting she was going by

herself.

THE COURT: All right.

MR. CHERNY: Although, I'm sure she's precocious.

Now, the point being is that all these things can

talk to each other, they're all interoperable, and that is a

huge benefit to the manufacturers, from the chipmaker on,

because they can -- they have a broader audience for their

products, and the consumers benefit greatly. So, therefore,

your computer will work at any wireless place, and vice versa.

So, as the Department of Justice has noted:

"Standards make networks, such as the internet and wireless

telecommunications, more valuable by allowing products to

interoperate."

We all agree. No one is going to dispute that. But

the reason I raise this is because it is the value of standards

and the delicate nature of the construct that requires us to

act to protect that through a proper RAND analysis, not just

some vague notions of one individual contributor's alleged

desire to get paid more than everybody else.

And, in fact, as I'm sure you're familiar, Judge

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56

Robart himself acknowledged, because he understood that the

core issue here is the value of standards, not about

Mr. Mahany's contributions, which no one is denigrating, but

they are one of many contributions in a standard amongst many

standards that go into these products.

Okay. How does a standard take place? There are

numerous members, almost all implementers, of technology who

get together and they submit their contributions. And almost

never, if never, are there just one way of doing things. You

have sophisticated companies, Cisco, Broadcom, all these

companies who submit their offerings, and they're all good

choices, almost always. Because if you only have one choice,

you don't need the standards-setting organization to choose.

That's why the standards-setting organization is there. It's

choosing in order less about, you know, going through the best,

but they're trying to pick amongst different choices so they

can come up with an interoperable set of products. So that,

yes, yours might be good, yours might be good, but we need to

pick one so that we can all interoperate with each other.

And at the end of the day -- and you will see this

motif through my discussion -- you end up with this mosaic

called a standard which represents the contributions of tens

and hundreds of participants and is covered by thousands of

patents.

Because if we lose the concept of the mosaic here,

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57

what there's a tendency to do, while we're in this room in the

litigation, is for the patentee to hyperfocus on their alleged

contribution to the earth, but nobody is here from all the

other contributors saying, "Here's all the things I

contributed. Here's all the parts of the mosaic I

contributed." And so what we'll hear is all about the value of

Wi-Fi and somehow why Innovatio is entitled to some portion of

the value of Wi-Fi in total as opposed to where they fit in the

mosaic of this standard.

So, as I discussed, the participants meet. Numerous

sophisticated companies contribute ideas. The proposals are

reviewed. And then, after a long period of time, many years

often, a standard is assembled.

Now, you've heard me talk about the problems -- I

mean, the benefits of standards, but there are problems that

both this Court and others have recognized inherent in the fact

that we are coming together to cooperate to create this

standard. One of them is called lock-in and holdup.

What is lock-in and holdup? This is something that

Your Honor recognized in the last opinion and that Judge Robart

has recognized, and that pretty much everyone other than

perhaps Innovatio recognizes as a problem.

It is the fact that a priority, a number of people

say, "I'm willing to contribute my technology," but then, upon

the adoption of one amongst many, a huge amount of value is

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Colleen M. Conway, Official Court Reporter

58

created by the fact that everybody now has agreed to

standardize their technology, and they are locked in.

The example that we focus on is instructive, which is

the plug. There are numerous standards within countries. And

thank the Lord that within the country, we don't have different

types of plugs, because we'd be sitting there with adapters and

things wouldn't work together. But each of these plugs works,

you know, in Europe, Asia. None of them are any better or

worse, per se. They're just -- but the point is to just pick

one.

And so, for purposes of this discussion, I have

assigned them a value of one cent. I mean, it's not very

valuable. Because if I don't pick one, I could just adopt the

other. And that, as you will hear from Dr. Shoemake, is often

the case, that you are not picking one amongst a bunch of other

bad ones, but usually the standards-setting organization has

numerous choices that are all equally good, and the point is to

pick one for interoperability.

So here we have -- in our country, we've chosen the

ubiquitous three-prong plug. And in my example, which I'm sure

the Court can figure out where I'm going, now it becomes a

standard. And someone comes along the line and says, "I've got

a patent on the" -- "I contributed to that, and I've got a

patent on the plug. Pay me $5." And if there was nothing to

stop that, he could probably get the $5, because everybody in

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Colleen M. Conway, Official Court Reporter

59

the world or America would have adopted it, put it into their

house, and the cost of taking out all the sockets and getting

adapters and all that is prohibitive.

That is lock-in and holdup. It is a real problem.

It is a primary problem that standards face, and it is one of

the reasons why RAND is different. Because in the regular

patent case, you do not have this problem where it's either

locked in by virtue of the fact that we've bestowed upon you

agreement of the organization to choose your technology amongst

a number of submissions.

In the standard, we go back to the mosaic, there are

literally thousands of contributions covered by patents. And

if you allow holdup, any one of those submissions potentially

could hold up somebody for the value of the standard. That

can't happen. If that happens, there will never be another

standard. If people are allowed to -- no one is ever going to

agree -- Cisco is never going to agree to standardize something

from Alcatel-Lucent if it knows down the road Alcatel-Lucent is

going to say, "Oh, you've adopted our technology? We've got a

patent on that. Pay us."

Another problem in which Mr. McAndrews has described

as theoretical is royalty stacking. It is not theoretical. It

is a real problem. It's been recognized by courts and by the

standards-setting institutions and that Mr. Shoemake -- or Dr.

Shoemake will discuss.

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Colleen M. Conway, Official Court Reporter

60

What is royalty stacking? In fact, although

Mr. McAndrews describes this as theoretical, we take a look at

Microsoft versus Motorola, which is obviously a very relevant

case in the sense that Judge Robart was dealing with many of

the same issues as are before you, Your Honor, and dealing with

the same standard. He said: "The anti-stacking principle is

the primary constraint on the upper bound of RAND." And then

he concluded a royal rate of 1.15% to 1.73 of the end product

price implicates such clear anti-stacking concerns.

What is stacking? When we get together all these

implementers who are now trying to create an interoperable

product and get the benefits of interoperability and

standardization, they realize that with all of these thousands

of contributions, if the price of those contributions is so

much, such that everybody says, "Pay me $5. Pay me $5,"

eventually that, on top of the cost of putting together the

product, plus the fact that there are numerous other standards

often in a product, will eventually so burden the product that

you will have a standardized product that costs $15,000, and

nobody's going to pay $15,000 for a laptop. No one -- so what

they understand is that the value they get as an audience for

their products, that they have a wire audience to sell their

products to, and people like Broadcom derive the benefit,

they're now going to sell a million chips to people because now

everybody is going to need the same type of Wi-Fi as opposed to

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Colleen M. Conway, Official Court Reporter

61

only a small sliver.

Royalty stacking is not theoretical. Now, Innovatio

says, "Well, there's no evidence that royalty stacking has

occurred yet," but the concern with royalty stacking is real.

And if people like Innovatio are allowed to, in a proceeding

like this, end up with a dollar figure that would never have

been adopted by people in the standard, because of their

concern for stacking, it will cause other people to say, "Wait

a second. If you're going to get 6% of a whole product for

your contribution, then I need 6% for my contribution" --

because at some point, I can't have it that I'm only getting 3

cents and you get 6%. And then at that point, the total

royalty burden will dwarf the amount.

I've given you an example of a laptop here, its $300

price with $150 in profit. Now, remember, not only does the

laptop have material costs in it, it also has a number of

standards. And I have simplified this on slide 18 to show four

standards.

The truth is there is evidence that shows that what

goes into a laptop are approximately 251 standards made up of

thousands of contributions, each of whom could easily say, "Pay

me," you know, and go in with a similar type of presentation as

Innovatio and say the value of a laptop to people is wonderful.

They could show Marriott and show someone behind a desk at the

Marriott with a laptop and say, "The laptop is very valuable to

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Colleen M. Conway, Official Court Reporter

62

the Marriott. Give me 6%." Think about it. There are

literally thousands of contributions to multiple standards.

There's the H.264 standard, there's Ethernet, there's USB, and

there are literally hundreds of standards with thousands of

contributions.

Think about 6%, the number they're asking for as a

rate. Think about how fast if everybody who contributed to the

standard asked even vaguely in the realm of what Innovatio is

asking for, how soon the laptop would become unaffordable and

the standard would break, because everybody would then say,

"I'm better off selling a non-standardized laptop for $500

myself and just doing my best with a more limited audience than

trying to sell one with a royalty burden of thousands and tens

of thousands of dollars."

This is the context that Innovatio did not talk about

during its opening. This is the context, though, that makes

RAND different.

And here's the royalty. First, someone says, "Okay.

Give me $30." And $30 is actually the amount that

approximately that Innovatio is asking for on some of these

laptops. So he raises his hands and says, "My contribution is

$30." Okay. Now you've dwarfed the component that actually

has the feature on it. Then another couple people say, "Give

me $30," and you're up to -- you've gone -- the profit on the

computer is gone. And then some more people say, "Give me

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Colleen M. Conway, Official Court Reporter

63

$30," because they all view their contributions exactly the way

Mr. McAndrews views the contributions of Norand. They all view

themselves as valuable contributors to that technology.

And eventually, very shortly, a few tiles of the

mosaic have made the standard unpracticable. We have lost the

value that we sought to get with standardization because

somebody has come in and started a trend by saying, "Give me

$30." It's the mosaic.

How does -- how do we deal with that? We deal with

that with RAND. And what RAND is about is essentially a

priority. Everybody contributes to the standard and

understands that we are creating something bigger than each

individual company could do by itself. We create the

structure, and RAND says, but we all agree as a priority that

we are going to, A, not try to exclude anybody, B, we're going

to offer everybody the same rate, and it has to be reasonable

in the context of the standard, meaning we're not going to

allow each other to hold each other up because we standardized

your technology. We're not going to let the stack go so high

that the standard now is more expense than it's worth.

So it's not just about somebody from a company

saying, "Well, my technology is worth something." It's about

all these technologies and the value we've created by putting

them together and how we can lose that if we allow what

Innovatio wants to happen happen.

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Colleen M. Conway, Official Court Reporter

64

Now, failure to apportion, a key point, as we saw

from the slides from Mr. McAndrews attempting to get the value

of Wi-Fi or some portion of it, failure to apportion is key to

the Federal Circuit across all damages. It is not unique to

standards, but it is uniquely a problem in the standards.

Because in order to get RAND, you have to figure out what are

you applying to, what will be reasonable. So if you just pick

out a number and say, "Well, 2%, that doesn't sound very high,"

2% of what?

And so the reason we apportion is because the Court

has found we have to figure out, from the Supreme Court on

down, that it is important to identify the value of your

contribution. And we do that by identifying the small salable

unit, which I will address in a little bit more detail later on

in response to the Court's inquiry, because the broader we go,

the more danger there is that you will then get the value of

other people's contributions or proprietary contributions and,

as a result, you will end up holding people up and the stack

will get too high.

And you're not entitled to get a percentage of Wi-Fi.

The amount of technology that goes into Wi-Fi is immense.

Innovatio is not entitled to it. And so the reason the courts

have said you got to focus on the small salable unit as a

starting point is to curve the error that would occur from

saying, "Well, the value of Wi-Fi to Marriott is X." How can

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Colleen M. Conway, Official Court Reporter

65

we possibly start with Marriott and then try to apportion down

from there? That's why we have to start at the smallest

salable unit because that constrains the inquiry. So that we

are not going to make the very error that the Federal Circuit

has repeatedly said we must not make.

So let's take a look at the standard here.

Mr. McAndrews briefly touched on it. I'm going to spend a

little more time on it because it provides the context.

You had numerous sophisticated companies contribute

to the 802.11 standard. These people all provided

contributions, many of which provided alternative contributions

to the ones that got standardized all across. Years were taken

to standardize. And the reason it takes years is that they

take this seriously.

And why is that relevant? First of all, later

standards have to be backwards-compatible with earlier

standards. So when you have 802.11n adopted, that still has to

work with 802.11a and b. And so they take it seriously. As

you're going along, there's inertia that builds up.

There was a suggestion at one of the depositions, I

think of Dr. Teece, that if the standard breaks as a result of

stacking, we could just adopt a new standard. That is not the

case.

This process has a huge amount of inertia in it, such

that it has to be guarded all along the way. Because if you

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Colleen M. Conway, Official Court Reporter

66

adopt a new standard, it won't work with all the people who

invested in 802.11a and b. So, as the standard progresses, we

still have to make sure it works with what happened before.

And this compounds the issue of both stacking and holdup and

why RAND is so important.

So here's our mosaic. There are 2,680 technical

sections in 802.11. You didn't hear that from Mr. McAndrews

because he doesn't want to talk about the other contributions

to the standard. He only wants to talk about Norand and

Mr. Mahany. But there are millions of people and there are

companies like Norand and tons of Norands and tons of

Mr. Mahanys out there who are contributing to make our mosaic.

The policy. Before you get something standardized,

you have to make the commitment to RAND, before. That informs

us that this is an ex ante inquiry. The whole point is that if

you do not agree to RAND before it's standardized, we are not

going to standardize your technology because we do not want to

be held up. We do not want you to contribute to the stack.

And here is one of the Letters of Assurance that

Broadcom gave willingly and in good faith, I hope, where they

said that they would provide their technology under reasonable

rates -- reasonable under RAND, not reasonable under some

appeal to §284 -- to an unrestricted number of applicants --

unrestricted -- on a non-discriminatory basis.

Now, in a normal patent case, you can discriminate.

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Colleen M. Conway, Official Court Reporter

67

In fact, that's one of the Georgia-Pacific factors that Judge

Robart presided. You are allowed to discriminate. You are

allowed to try to enjoin somebody. You are allowed to talk

about people's, you know, different status in terms of are you

a competitor or not. But with RAND, you give all that up,

because we are getting together in this cooperative endeavor to

create something that will benefit us all. But you give

something up in that regard, and what you give up is the

ability to try to one on one hold up your competitor, hold up

another contributor, hold up an implementer.

Here's the timeline of these patents, again,

something you didn't hear. First, they were with Norand, who

merged with Intermec, both of whom filed Letters of Assurance.

Then they went to Broadcom, and they were sold -- 

 . And we'll get to this

later. This goes to some of the confidential information. But

the number -- 

 

 

 

 

 

 

 

 

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Colleen M. Conway, Official Court Reporter

68

 . It is not reasonable to believe

that these patents are now worth hundreds of millions of

dollars when these people were provided -- were pricing them

with knowledge of the system.

Broadcom held them for a number of years, and they

got the benefit of many, many of their chips being sold that

were standardized and that had their technology on those chips,

and they were interoperable, and they made a lot of money doing

it, and then they sold these patents near expiration to

Innovatio. We'll talk about the price later as well.

And the reason I have put the confidential

information later as opposed to here, Your Honor, was actually

so that people could stay in the courtroom until the very end.

 

 

 

 

 

 

 

 

 

 

 

 .

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Colleen M. Conway, Official Court Reporter

69

Where do Innovatio's patents fit? You definitely

didn't see anything like this in Mr. McAndrews' presentation

because he doesn't want to give you the context of where they

fit. He just wants to tell you that Wi-Fi is wonderful and

that, "We want our cut." Okay.

There are thousands of contributions to Wi-Fi. This

is one little piece I have blown up of the mosaic of many, many

technologies in the 802.11 standard. And you have four small

parts of this mosaic that are technologies that are relevant to

Innovatio's patents. And even with that, Innovatio's patents

are essential to subparts of these four parts.

And that's what the Court needs to understand when

valuing the patented features, not about Wi-Fi, not about

Marriott, not about how much money Cisco makes. It is

understanding that these were very focused contributions to a

very small part of our mosaic where, as we are going to see,

there are numerous alternatives that could have been adopted as

well, had people understood at the time that there would be an

attempt to hold up the industry.

Innovatio's patents are 23 of over 3,000

standard-essential patents to the 802.11 standard.

Let's put them back in context because we need, as

the Court has commanded us to do, to figure out what is the

value of the features, the patented features, what is

reasonable in the context of the standard. Not let's look at

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Colleen M. Conway, Official Court Reporter

70

them in isolation and let's look at Wi-Fi in general.

Now let's take a look how we determine RAND here

analytically. It was conspicuously absent from Innovatio's

presentation, any analysis. There was literally declarations

that Wi-Fi is worth X to Marriott; therefore, we should take --

I mean, I believe, if I could quote it, Mr. McAndrews said,

"Well, you know, a laptop, we feel that Wi-Fi is 10% of the

value of a laptop. Give us 6% of that." It's not about the

value of Wi-Fi to a laptop. It's about the value of these

features. Let's figure out the right way.

First of all, let me go through the witnesses that

you're going to hear. It's obligatory. We have to introduce

you to them because they're in the courtroom and they would

feel slighted if I don't tell you --

THE COURT: I understand.

MR. CHERNY: -- who they are. Okay. You have met

Mr. Shoemake. Dr. Shoemake, I do not believe I'm exaggerating,

will probably be the most knowledgeable person in the room when

it comes to standards, wireless, 802.11. He actually was there

when 802.11, various sections were adopted. You met him

during, I believe, the hot-tubbing session we had. And for

purposes of the record, that was the session during the

essentiality hearing where the judge took commentary from the

various experts about the process.

He is extremely knowledgeable, and he's going to

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Colleen M. Conway, Official Court Reporter

71

testify about RAND rules, why they were adopted, as someone who

participated in 802.11, to prevent holdup and stacking, how --

the cost of implementing alternatives. Because if you're going

to charge me 6% of a laptop, or 3% of a laptop, and I could

implement an equally good alternative for two cents, there's no

chance I would ever agree to that. And that's why we have to

go back to the hypothetical negotiation at the time and

determine what truly would be the value of Innovatio's alleged

contributions here. That there are thousands of

standard-essential patents and he's going to help us apportion,

he's going to help us do what we need to do.

There's Professor Wicker, who you also met at the

last proceeding, again, an eminent scientist with impeccable

credentials in the area of wireless. He's going to show you

just how minor the features that the patents are directed to

are, and he's going to talk about the numerous alternatives

that were available.

Because, remember, there were literally tens of

companies submitting very, very good alternatives, and the

point is to choose one for interoperability, not because

someone has declared, like a beauty contest, this is the most

beautiful choice. It's just about choosing so that they can

interoperate. And he's going to help us identify the smallest

salable units here, which is the Wi-Fi chip, because that is

what -- first of all, that is why all these patents are

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72

essential to 802.11, because this all resides on the chip.

And, as we'll see in a little bit, yes, the claims

have other structure. And, as this Court has recognized, you

can add other structure to a claim -- you could add a keyboard,

you could add a processor, you could add -- but they didn't

invent any of those things. They don't get the value of that.

So it is a misstatement of the Federal Circuit's

doctrine to suggest that somehow they're requiring you to give

them the value of every element that they throw in. Because at

that point, you are giving an incentive to say -- have my

independent claim, Claim 15, that says "sleep" mode, which

resides in the chip, and then say Claim 30 wherein the "sleep"

mode occurs in a hundred-thousand-dollar super computer.

Mr. McAndrews would say, "They're ignoring my

hundred-thousand-dollar super computer." You know, "I need to

get a part of that." But that's not what the invention is.

And so that's why we need to apportion down.

You'll see today Mr. Djavaherian who's going to

provide real-world objective context to the value of these

patents, because Broadcom owned them for ten years, and they

sold -- they bought them from Intermec and they sold them, and

they are a part of the standard. And they understand a lot

better than Innovatio the value and constraints on this

property.

You're going to hear from Dr. Leonard, an eminent --

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you have not been introduced to him unlike the other experts --

an eminent economist who has specialized in the analysis of

RAND and standardization and why RAND and standardization

require a little bit different analysis than just the regular,

old unmodified reasonable royalty analysis.

And you're going to hear from Dr. Lynde, who HP will

offer, who's actually one of the experts in front of Judge

Robart who he, as you read through the opinion, cites with

great approval.

So, now, let's get down to -- now I have satisfied

the egos of the experts and the witnesses, now let's move on to

how we're going to help you do what you need to do, and what

was conspicuously absent from Innovatio's presentation, which

is how do we do this in an analytical way, not in a

qualitative, you know, "I need to get paid" way.

First, we're going to apportion. And this part of

the presentation is meant, in some respects, to respond to your

inquiry, Your Honor.

So we take a look at LaserDynamics from Judge Rader.

And it says: "Thus, it is generally required that royalties be

based not on the entire product, but instead on the 'smallest

salable patent-practicing unit.'"

Why is that? Why the stuff about the "smallest

salable patent-practicing unit"? Because there's a realization

by the Federal Circuit that you can start anywhere in the

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74

valuation process, but the farther out you go from the patented

feature, the more chance there is of error that's unacceptable

and of giving value for what you did not invent.

And so, take my pointer here, or my clicker. Okay?

And say we have an invention that relates to, I don't know,

this button over here. I mean, it's a fine button. I'm sure

somebody one day will come into your courtroom and tell you

that they deserve the value of everything because of this

button.

But we have this button here. Now, I could start off

by saying: Well, I'm using it in this room. Let's start

apportioning down. I could even say -- I could even claim it

and say the use of this clicker in a courtroom to present

information to a Court, but that wouldn't mean anything,

because what we have to do is say: Okay. The invention really

resides in this button.

And why the Court mandates that we go to the smallest

salable unit is that if we start in the room, I've got to

apportion away those chairs and I've got to get rid of all

these things. And when I'm doing this, there's a chance that

I'm going to give you a percentage of that phone.

But if we start here -- and the reason they go for a

salable unit, because this is something that has been priced.

So we know somewhat concretely what this thing is worth. So we

say maybe this is $6, this clicker. Let's -- but we don't

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75

start -- stop there. We start there. And we say now we start

from $6 and I start apportioning down the value of the button

in there, the patented feature, and the most mistake I could

make, then, is constrained by the fact that I have started at

the $6 thing and not at the $60,000 courtroom.

Now, Mr. McAndrews took Dr. Leonard to task for his

wording of the standard. The wording of the standard here in

terms of small salable unit comes from Judge Rader right there,

"smallest salable infringing unit with close relation to the

claimed invention."

It is an invitation to error to try to suggest to the

Court that smallest salable patented unit somehow means that

every element that I throw in there -- and whereas here the

other side's expert has agreed that it's all the MAC and the

PHY -- that somehow I put up a claim, I identify seven other

pieces that someone has thrown into a claim that he says are

structural, and that, therefore, that means we're not going to

go down to the smallest salable unit that actually has the

patented features, the parts that are essential to the standard

here.

Next slide. Oh, that's me. Now, in response to your

inquiry, we did some looking. And I think we can get to the

heart of this in terms of the Federal Circuit's words on this

point.

The seminal case that led to much of this, other than

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the Supreme Court's original Garrettson case, is the Lucent

case. And when we look at the Lucent case, it clears it all

up. Because the Lucent case, even though it doesn't use the

phrase coined by Judge Rader, every case since then has cited

Lucent as essentially the beginning of the smallest salable

unit doctrine.

In Lucent, you had this invention to a touchscreen

form entry system, but really the inventive aspect was these --

this ability to have a touch-sensitive screen where you had

these fields, that you could choose the fields. It wasn't the

apparatus. It was the software in the computer. Because,

otherwise, if you gave someone the value of the hardware, you'd

have people over and over again re-getting the value of that

computer every time they added software.

Let's take a look at the claim. You asked for a

method claim. That's exactly what was at issue in Lucent, a

method for use in a computer. Okay. Mr. McAndrews would say

we don't want to ignore that valuable piece of hardware, a

computer, having a display. We don't want to, you know, avoid

the display. But these are not part of the invention. These

are just almost the context of the invention. And then you get

displaying a pre-defined tool associated with one of said

fields. Now we have to actually figure out what the invention

is.

So it's not about how much hardware we can work into

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77

the claim. It's about identifying what really is the inventive

feature here and identifying that in the context of the accused

product so we can apportion correctly.

Here's LaserDynamics talking about Lucent. So even

though Lucent didn't specifically say small salable unit, it is

the case that started it.

Judge Rader says: "Our decision in Lucent is

illustrative. There, the patent at issue involved a helpful

and convenient 'date picker' feature that was being used within

the grand scheme of Microsoft's Outlook email software. We

held that because the patented feature was 'but a tiny feature

of one part of a much larger software program,' a royalty could

not be properly calculated based on the value of the entire

Outlook program because 'there was no evidence that anybody

anywhere at any time ever bought Outlook.'"

But what did they do in Lucent? They got down and

started at Outlook and then started apportioning down from

there. They didn't start apportioning down from the computer.

There's no attempt to say, "Well, you could value the display,

the computer."

AVM versus Intel, again, identifying Lucent as the

seminal case in this area. Recently, Judge Andrews in Delaware

Daubert'ed an expert on this very point, and he said: "The use

of a salable unit that is greater than the patented feature is

going to introduce Uniloc error when the patented feature is a

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78

'date picker,'" obviously referring to Lucent, "whether the

salable unit is a computer loaded with 'Outlook' or simply

'Outlook.'" We've got to get down to the date picker. We are

not going to start at the computer.

"Further, as LaserDynamics holds, the difficulty in

determining a royalty base in a situation such as this one with

dynamic logic circuits is not a reason to accept an unreliable

method." It may be difficult, but it requires us to get

together and pick where the actual inventive feature resides.

Now, we are lucky in that regard, because you will

see testimony from both Dr. Wicker and admissions from

Dr. Nettleton that this invention resides on the Wi-Fi chip,

which is not surprising. Each of these claims is essential to

the Wi-Fi standard, all of which resides on the Wi-Fi chip. So

regardless, if it is in different contexts, such as Wi-Fi using

a keyboard, Wi-Fi with a processor, Wi-Fi with something else,

it is on the Wi-Fi chip.

And here's the problem that we are so worried about.

You heard Mr. McAndrews ask you numerous times for the value of

a laptop. He was very explicit about it. There are 251-plus

standards in a laptop. Put aside all the non-standardized

aspects that might be proprietary to someone like HP.

251-plus. And if we start at the laptop by giving Innovatio

1.8% of a laptop, not only -- we are potentially giving them

1.8% of the Bluetooth, 1.8% of the trackpad, 1.8% of the

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79

graphics card, and that is exactly the error the court has held

to be unacceptable, why we have to get down to the smallest

salable unit, why we cannot just say "laptop" and then say,

"Give me a percentage of that."

When you think about the fact that there are 251-plus

standards, all people who have patented -- with thousands of

contributors who have patents, who could all come in and say,

"Give me 1.8%" -- remember 251 standards, each with thousands

of contributors, 1.8, that puts it in context where 1.8% is

huge. That's why if you're going to get 1.8%, you better have

invented the transistor. All the technology is on the Wi-Fi

chip that is relevant here.

And, in fact, you don't just end with a salable unit.

You start with the smallest salable unit, as the Dynetix court

found recently in California. That just starts you at -- we

have now cabined off the value down to my clicker. Now let's

figure out what the value of the button is.

So, here, we have a Wi-Fi chip, a chip. It's got

technology related to the input and the output. It has

semiconductor technology. It has interface logic. It has

memory. Each of these things, by the way, Innovatio could

certainly throw into a claim, but that they had nothing to do

with. There's the RF contribution. And then you have Wi-Fi.

And then you have residing on this chip where the 802.11

standard's physical manifestation exists. And that's where we

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80

have to go to -- and then within that, we have to figure out --

within that 3,000-patent construct, we have to figure out what

the value of Innovatio's contribution or, in this case, really

Norand's contribution, the patents that they hold.

Now, we've heard about the MAC and the PHY. In fact,

at the last hearing, you heard over and over again all about

how this is all about the MAC and the PHY. I think Mr. Schodde

told you this is all about the MAC and the PHY. And Dr.

Nettleton was asked:

"You admit that most, if not all, of the PHY

functionality is on the Wi-Fi chip, right?

"Yes.

"In some instances, all the MAC functionality is

implemented on the Wi-Fi chip?"

He actually said: "Most, if not all, yes."

It's all on the Wi-Fi chip. There may be some tiny

insignificant thing elsewhere, but that's where this technology

resides.

Now, here's what we were talking about before, Claim

15. That's the "sleep" mode, undoubtedly on the Wi-Fi chip.

Then you have Claim 30. Claim 30 is the dependent claim,

narrower, certainly less, quote-unquote, valuable. And now we

have "utilizing a processor." They didn't invent the

processor. But according to Mr. McAndrews, it says the

processor, he should get a portion of the processor.

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Colleen M. Conway, Official Court Reporter

81

It is exactly this type of thing as the reason why

the Court is so careful about asking for apportionment down to

the smallest salable unit.

Claim 82, "further comprising utilizing a keyboard."

They didn't invent a keyboard. And, in fact, as you identified

in the last go-round, much of this basic technology that is

being used is in conjunction with the invention. Because when

we claim we have to provide a context at times, it is not

itself the value of the patented feature. And that's why this

is no different than Lucent, where they couldn't get the value

of the display and the value of the computer, and even the

value of all of Outlook. They got the value of the date

picker.

So we start out and we figure out where to start.

Now, we have to look at where do Innovatio's patents reside in

that.

It is undisputed there are thousands of patents

relevant to 802.11 that are essential. You will hear testimony

about PA Consulting who regularly does this analysis, who said,

from their estimation, 3,106. Another company, Sunlight,

estimates 4,000. Mr. Evans, Innovatio's expert, is at least

willing to acknowledge a thousand or more standard-essential

patents. Remember, they only have 23.

And Judge Robart, on the same standard, thousands of

802.11 standard-essential patents, including the patents at

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Colleen M. Conway, Official Court Reporter

82

issue in his case, which, as we're going to go later on, are a

pretty nice benchmark. And you know something? I bet you

that, you know, the patentee there probably said, "Ours are

worth a lot." And, in fact, we know they did. And guess what?

They were held to exactly the same ranges we're talking here,

because we're all part of this construct, because we have to

put it in context.

And here's the context. If you gave everybody the

value that Innovatio is asking for in the standard, the price

of things, this is where the royalty stack is real. So the

fact that a priority to date, other people haven't gotten this

and haven't been able to burden the standard is not an

invitation for Innovatio to say, "Well, let me begin the

stack."

And right now, we actually have across this land

numerous companies who are asserting patents, each of them in a

courtroom trying to do exactly what the standard was meant to

stop, which is they're trying to stack it up in ways that are

wholly disproportional to the role they play in terms of the

value of the patented feature to the standard.

Dr. Leonard will go through and he'll say, "Look,

average Wi-Fi chip price over 2000-2015 was $4." Actually,

that's pretty high. Nowadays, a chip costs about a dollar.

The profit, 48 cents. Taking a look at the -- you know, the

share of Innovatio's patents to the whole, whether you pick

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83

3,000, 4,000, you multiply that and you get .37 cents to .59

cents, just accepting that all the other people made

contributions. That would be if you treat them all equal,

which, by the way, the evidence is going to show, quite

frankly, these are less than equal. But then he gives them the

benefit of the doubt and he says, "You know something? Let me

value this in a way that actually gives them the benefit of the

doubt," and says, "I'm going to assume that these are in the

top 50%. I'll even assume that they might be in the top 20% of

patents. I'll even go for the top 10%." And he then uses that

to get an approximate range that's relevant. And even at that

level, if they're in the top 10% of patents, standard-essential

patents, the most they could get is 3.09 cents because it's

part of a construct. It doesn't exist in isolation.

And by doing this type of analysis, this rigorous

analysis, we end up with a royalty that is properly apportioned

and that is non-discriminatory. It doesn't say I get a portion

of the chip, gives me this, or I get a different price if I

apply it to the laptop that happens to have the chip. It's all

the same. But going to the smallest salable unit and then

applying this type of logic, we get a rate that's consistent

from the chip user to the chipmaker to the ultimate product

maker.

Ex ante alternatives, a very, very powerful analysis

and, in many ways, actually avoids even the issue of the

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Colleen M. Conway, Official Court Reporter

84

smallest salable unit.

What are ex ante alternatives? You remember when we

talked about RAND, it's a bargain you strike ex ante. You say,

"Before we standardize you, I'm going to give RAND." Why is

that? Because we have options to pick other people at that

time.

Now, if it turns out that you're coming up and

saying, "I want to get a holdup value because I've been

standardized," we go back and take a look at what would it

cost -- if we went to back to the negotiation, if I could go

back and make another choice, how much would it cost me to pick

one of the other alternatives? I would never pay more than it

would cost me to pick one of these five alternatives proposed

by sophisticated companies to do the exact same thing in this

very limited area of the standard.

They say this is complicated. This is exactly the

analysis that's in every hypothetical negotiation that's done

across the land. We go back and say, "Well, you're telling me

that I would pay you a dollar." Yeah, but I could switch for

five cents. I would never pay you a dollar at the hypothetical

negotiation if I had this alternative. In the context of

standards, it's actually more applicable because we're not

positing alternatives. There are alternatives. People have

submitted alternatives because there are all these

possibilities out there, and we're just choosing for

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85

interoperability.

This is particularly important. Here's Dr. Nettleton

in his deposition:

"You agree at the time of Wi-Fi standardization,

there were a number of alternatives available to the patented

technology, right?

"Yes."

You are going to hear that from Dr. Wicker. And each

of these people would have been happy to have their

contributions standardized. And each one of them who wasn't

got nothing. And each of them would have been happy at that

point to say, "Look, I'm happy to take the RAND rate if you

pick me," as opposed to nothing. And each of these are an

alternative that someone says, "Pay me $28," they would have

said, "Well, we would have taken a typical RAND rate of," you

know, 2.6 cents or .8 cents because it's being multiplied times

millions of units of sales.

You are going to hear Dr. Wicker. And, Your Honor, I

appreciate your patience. You know, I'm trying to be very

rigorous in going through this. I only have a short period

more to go.

But you are going to hear Dr. Wicker who's going to

identify rigorously the alternatives that correspond to

Dr. Nettleton's admission, which is that there were numerous

alternatives for the patented technology, each one of them, any

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86

one of them who would have been happy to have their technology

standardized, okay, but who ended up not being standardized

and, as a result, they don't get anything.

And so Dr. Leonard goes through and says, "How much

would it cost if I need to switch over back when? If I was

being held up, what would I" -- "what would be my choice for

the holdup?" And it's about 26 cents -- 2 cents a unit. Not

26, .26 cents. If I said 26 again, my clients are going to

jump over and kill me. Okay? .26 cents a unit. That's

reality. This is the kind of analysis that you're going to see

that people do all the time and that everybody acknowledges is

the most relevant because it doesn't even require you to focus

on the base because it's base independent. Whether it's on the

chip or whether it's on the product, it's the same cost that's

in terms of what would we have paid to do an alternative.

And here's a nice graphic that shows you that here

we're being held up for $28.73, which is a real number -- it's

not a made-up number -- for a product. And my alternative,

going back, I said: Wait a second. Had I known that back

then, I would have just adopted these guys for .26 cents. Why

would I ever have paid any more? I would have taken a

different path.

Okay. Then, of course, I know the Court is aware of

Judge Robart's analysis, which actually, in some respects,

tries to characterize all the things we just talked about and

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87

tries to weed out all the stuff that's being -- Innovatio tries

to consider. It tries to weed out holdup value. It weeds out

the fact that someone's a competitor. It weeds out the fact

that you may have a policy. You know -- and by the time he

goes through the factors, in many ways, he's trying to create a

legal standard to capture the economics of what I have just

discussed, from the smallest salable unit down up to how do you

do a RAND rate.

And when we look at his benchmark factors -- you

heard Mr. McAndrews, with great disdain -- I could talk about

the numbers that were offered here by us in terms of our

identification, and you look at what Judge Robart rigorously

came out with, for patents in the exact same standard -- it

came out to be .8 to 3.47 cents -- I think that's pretty

probative.

I mean, it's easy when you're not providing the

context, and it's easy when you're not providing the fact that

this is over millions and millions of devices to say .8.

That's laughable. Judge Robart didn't find it laughable

because it's real. It's based on the fact that you have

thousands of contributors to a standard who aren't -- we cannot

allow them to be held up and we cannot allow for a stack.

So we follow these rigorous analyses. We end up

all -- and always in the same ballpark, not identical, but

every one of them comes out around the same area, and that's

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88

pretty good evidence that we're probably right.

Okay. Now, let's take a quick breeze through

Innovatio's positions. What's wrong with what they're trying

to do?

You're going to hear from Mr. Bergey. Mr. Bergey is

the fellow who does their feature factor analysis, which is

essentially just a hand wave where he says, here's the value of

Wi-Fi to a laptop. 

 , and so I will then take that and I will give

that to Innovatio and give you part of the value.

And he was asked: "Did you actually offer an opinion

as to whether the difference in price or apportioned value

between different access points," meaning that he actually

takes different access points and because the end price of the

different access points is different -- so, for example, there

might be a hundred-dollar access point and a $20 access point.

And since he applies the same feature factor to both, he ends

up with a different price. Okay? So, for example, he says 95%

of value is Wi-Fi. He then ends up with one price for the $20

access point and one price for the hundred-dollar access point.

He says -- he was asked: "Did you do any attempt to apportion

what difference in the value comes from the actual patented

features?" Meaning that does this -- oops. There we go. You

know, what part of that comes from the patented features? "No,

I did not."

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89

AVM confirms. What we have here? He's embracing

Uniloc error because he didn't apportion it out. He didn't --

he just said you get some percentage of the laptop, you get

some percentage of the access point, and these things all cost

different things.

He does this vague notion where he says -- he starts

off with a 6% base royalty. That's a big part of the problem.

You know how he gets that 6%? He takes the royalty that came

out of the Symbol/Proxim case, which was the actual litigation

between competitors, which was done under an unmodified

reasonable royalty analysis and that Judge Robart explicitly

threw out because it was not RAND. It is in his opinion. He

says, "Let me start with 6%." And then he says, "Okay. I'm

going to tell you that I think that Wi-Fi is worth 30% of the

tablet." And so he comes up with 1.8%. It just goes into the

black box of Mr. Bergey's feature factor and comes out.

He never says anything about the value of Innovatio's

technology or that -- you know, the 2900 other patents. It's

just 1.8%. So at the end of the day, you get 1.8% of a tablet,

5.7% of an access point.

Now, remember, in his prior technology -- in his

prior testimony where he says the access points have different

prices, as they do, Innovatio gets the benefit of that, even

though there's no attempt to figure out how Innovatio in any

way relates the difference between a $20 access point or a

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Colleen M. Conway, Official Court Reporter

90

hundred-dollar access point.

And, in fact, this is exactly the type of analysis

that LaserDynamics criticizes, where they said that Mr. Murtha,

the expert there, using vague qualitative notions of the

relative importance of the ODD technology. I submit that we

have vague qualitative notions from Mr. Bergey of the value of

Wi-Fi, and then he just does that, comes up with these numbers

and says, "Now, give me that percentage of the overall

product." But that's wrong. That leads to error.

And here's how we know. This is what we -- remember

I pointed out his testimony about how he didn't in any way

attribute the difference to the patented features? Here are

two HP accused laptops. They are the same model number, 8770w.

The only differences are, for example, a different graphics

card, a different processor, a different display. It's the

exact same Wi-Fi chip, the exact same one. Okay?

Now, HP sells one for 2,839, sells the other for

$1729 because there's other technology in there, such as the

display and the graphics card, et cetera.

Mr. Bergey says that Innovatio should be paid $16.97

on the first, $10.37 on the second. You now have a tangible

example of the problem when people don't apportion.

So, now, there is -- and there's -- and he does not

claim that somehow any of the value -- the difference between

2839 and 1729, or the 10 to 16, results from Innovatio's

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91

contributions or their patented features in any way.

And, in fact, when you think about 16.97, think about

my prior slide that there are 251 standards embodied in a

laptop with thousands and thousands of contributions. Think

about what 1697, how if everybody started asking for that, how

we wouldn't have any laptops, certainly not standardized ones.

There's another important admission by Mr. Bergey.

"Did you do any analysis of the importance of the patented

features in relation to any other features in 802.11?

"I did not."

Why is that relevant? If you're going to come in and

say that you deserve $16.97, which is wholly disproportional

when you think about the fact that there's 3,000

standard-essential patents, you better do some analysis

explaining why it is that your patented feature somehow

deserves so much more than everybody else's. It's the mosaic

again. He did not.

Remember when we did the mosaic and we saw how narrow

these four little areas were and their contributions were, and

somehow that leads on a laptop to $16.97.

Dr. Nettleton, in his report, talks about how he felt

that Innovatio's patents were as valuable or more valuable than

the legendary Qualcomm patents. He says that. And his

testimony, he was asked: "Isn't it true that you didn't

actually review any of the Qualcomm patents?" It's very easy

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92

to say I believe our stuff is as valuable as the legendary

Qualcomm patents. That's a great standard to start with. And

he said: "That's true. I didn't actually look at any of the

Qualcomm patents." And that led to one of the most amazing

admissions here.

"Okay. And so you don't have to agree with me, Dr.

Nettleton, that your conclusion that the Innovatio patents are

of at least equal to or greater importance to the standard, to

the 802.11 standard as the Qualcomm patents literally has no

defensible basis.

"You could say that."

That is emblematic of the non-rigorous analysis that

we have here, where people just come in and say things like

Wi-Fi -- you know, we get 6% of Wi-Fi or of a laptop. Anyway,

these patents are as valuable as the Qualcomm patents without

ever looking at the Qualcomm patents or without ever looking at

any of the other patents in the mosaic.

In fact, we have actual evidence that they are worth

less. Innovatio represented to you that 95% of Innovatio's

asserted claims cover optional features, 95%. Mr. Bergey did

admit on deposition that "optional features are less valuable."

That's because they're optional. The holdup value certainly is

less when you have an option as opposed to when it's mandatory.

And, in fact, Judge Robart acknowledged that when

apportionment is not used by the implementer, it may have

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Colleen M. Conway, Official Court Reporter

93

little value to the implementer.

If you take a look here, here are some of the

patented features, how often they are used. As you can see

from our very graphic, someone being hit by lightning,

unfortunately, they happen very, very rarely. These patents

are, if anything, worth less -- we actually gave them the

benefit of the doubt in Dr. Leonard's analysis of putting them

in the top 50%. But 95% of these go to optional features, by

their own admission.

They haven't satisfied the entire market value rule,

which is the only thing that would allow them to get up to the

entire product. Because in the entire market value rule, you

have to say that somehow -- if you want to get away from the

smallest salable unit, you got to justify that the demand for

the product is driven by your feature. And, in fact, Judge

Andrews Daubert'ed on that very point. And he said: "Assuming

for the sake of argument that dynamic logic circuits are the

single most important part of Intel's microprocessors" -- he's

willing to say, "I'll give" -- "I'll take the most important

part of the microprocessor," it is still a long haul to

conclude that they drive demand for the entire microprocessor.

So, therefore, you are Daubert'ed because you did not go to the

smallest salable unit.

There is no evidence that anybody goes into a Best

Buy and buys a laptop and says, "I'll take up the cost of the

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Colleen M. Conway, Official Court Reporter

94

Innovatio channel access." That's what they'd have to prove to

get the whole laptop. And LaserDynamics says: "Proof that

consumers would not want a laptop without such features is not

tantamount to proof that any one of those features alone drives

the market for laptop computers."

You want to get the value of a laptop, you don't want

to be on the smallest salable unit, you don't want to be on the

chip where your technology resides, prove that no one is going

in there and saying -- people are going in there and saying,

"I'm not buying a laptop unless it has Innovatio channel

access," as opposed to any other things in the standard or any

of the alternatives.

Now, this is particularly probative. We asked their

licensing expert, Mr. Evans, who was actually the same expert

in Judge Andrews' court in the AVM case, we said: Is it

okay -- you know, patent holdup allows someone to get the value

due to the fact that the patented features are standardized.

And he said: Even without FRAND, the value of the technology

should not be limited to its incremental value. If you are not

limiting to its incremental value, you're holding up.

But we don't have to rely only on Mr. Evans.

Dr. Teece that you heard about was asked: "In your opinion, in

connection with 802.11, there may be circumstances in which a

RAND royalty could include the value of a patented feature due

to its standardization." Yeah, if it's consistent with the

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Colleen M. Conway, Official Court Reporter

95

balancing of interests, it could.

Uh-uh. You gave that up. When the patents were LOA,

you gave that up. And that's exactly what Judge Robart said,

which is: We will "not consider the value associated with

incorporation of the patented technology."

You have here overt holdup, and that's exactly why

this Court has to go back and make sure we give a RAND royalty,

not a royalty that reflects the value of standardization.

We heard about the fact of stacking. I don't need to

dwell on it anymore because I think the Court understands all

the things that goes into the stack here. It is not

theoretical. And here are some of the many people who are

trying in the present day to contribute to the stack. Okay?

That's a big snowball. And, thankfully, it's not

about to hit the courthouse. Okay? But you would think --

THE COURT: Who came up with the snowball there?

(Laughter.)

MR. CHERNY: Who came up with the snowball? There,

that fellow, Tim Majors back there.

THE COURT: All right.

MR. CHERNY: Okay. So you would think with all the

negative press about royalty stacking that Innovatio would

actually distance themselves from royalty stacking. You would

think that -- they say it's theoretical. It's not theoretical.

Look what Dr. Teece says:

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"Once royalty stacking occurs, you believe you can

create a new standard at that point; that's what you need to do

is create a new standard?"

Now, we know that that's not possible because it took

ten years to get to the present -- or now 15 years. And

here's -- this is probative.

"Let's make it clear. Let's distinguish between good

stacking and bad stacking. You know, my fundamental premise

here is that stacking is actually usually something good."

Judge Robart disagrees. He says that "the

anti-stacking principle is the primary constraint on the upper

bound of RAND."

You have them saying that we embrace holdup, we

embrace stacking, because it's not surprising. Because from

their perspective, they bought patents, okay, and all they want

to do is maximize the value for what they purchased, and they

don't want to think about the context of these patents where

we're dedicated, in the sense of the Letters of Assurance,

where everybody in the standard assured each other we're going

to play by the rules and we're going to set the value according

to RAND.

And here's what happens when the stack goes up.

There's 92 -- this is just for Wi-Fi. And this is actually not

even at the chip level. Even if it was the access point, it

would quickly go past if you gave them exactly what they're

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97

asking for, 5.7%. That's explicit, on a hundred dollars.

Okay? If everybody -- and that's, again -- that's even -- not

even using the smallest salable unit. That's using the access

point. You would quickly get to a $524 burden on that.

Remember, they didn't do any analysis to explain why theirs

somehow is better than anybody else's in those 92 contributors.

 

 

 

 

 

 

 

 .

Judge Robart found it not comparable. You didn't

hear Mr. McAndrews tell you that. He just told you, you know,

go with this. This is a comparable license. It is not

comparable. It is not a RAND license.

They cite other non-RAND licenses. And what's even

notable is even those, the rates, the effective rate per unit

is much closer to us than them. They cite to Judge Davis'

Ericsson. In there, 15 cents a unit. 

 ,

amazing where they actually cite to Motorola's offer to

Microsoft, which was rejected and which now is held to be

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Colleen M. Conway, Official Court Reporter

98

breach of a contract by Judge Robart and by the jury.

But the actual amount wasn't 2.25%. It was .8 to

3.471 cents.

They say that -- remember, because they weren't --

they didn't own the patents at the relevant time. They say

that the people owned the patents would have extracted that

value in a hypothetical negotiation. Now, of course, we know

they sold it for far, far less, so it's wholly unbelievable.

But we actually have Broadcom in the modern day

writing to the FTC decrying the problem of holdup. There's no

chance that Broadcom would be a participant to holdup.

Now, at this point, I'd like to ask our colleagues

from John Marshall to leave.

THE COURT: All right.

MR. CHERNY: I have only got like four more slides.

THE COURT: You are welcome to come back, but I think

we will take a break after Mr. Cherny is concluded. So if you

want to hang around the courthouse, we'll take a break and then

you'll know you could come back.

PROFESSOR YUAN: Sure.

THE COURT: Although, I understand that you're

seeking to have exclusion in connection --

MR. CHERNY: With Djavaherian.

THE COURT: -- with the first witness.

MR. CHERNY: Yes.

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99

THE COURT: All right. So I leave it up to you,

Professor.

PROFESSOR YUAN: Sure.

THE COURT: Thank you.

PROFESSOR YUAN: Thank you.

THE COURT: Thank you, all, for coming. Appreciate

it.

(Members of audience exited courtroom.)

MR. CHERNY: I'm told there are also people from

Ericsson in the courtroom. If that's the case, I'd ask them to

leave as well.

I only have three more slides, I think, Your Honor,

so --

THE COURT: Well, let me just make sure, did the

Ericsson people exclude you in Judge Davis' courtroom?

MR. CHERNY: I do not know.

THE COURT: No. I'm joking. That's all right.

MR. CHERNY: Okay.

(Laughter.)

MR. CHERNY: People exclude me all the time for

reasons that have nothing to do with protective orders.

THE COURT: Okay.

MR. CHERNY: Okay. Let's go to the next slide.

(CAUTION: Confidential pursuant to protective order:)

 

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Colleen M. Conway, Official Court Reporter

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Colleen M. Conway, Official Court Reporter

104

 .

Thank you, Your Honor.

THE COURT: All right. I think we will take a break

at this point. Let my court reporter -- let her fingers rest

for a moment.

MR. CHERNY: I apologize.

THE COURT: All right. We will stand in recess for

ten minutes and then I will hear from other counsel.

Let me go off the record on scheduling.

(Discussion held off the record. Recess.)

THE COURT: All right. We are ready to proceed with

further opening remarks.

Mr. Anderson, you may proceed.

MR. ANDERSON: Yes. Thank you, Your Honor. May it

please the Court.

OPENING STATEMENT ON BEHALF OF DEFENDANTS SONICWALL AND HP

MR. ANDERSON: I represent SonicWALL, as you know,

but I've been asked to make basically three points on behalf of

both SonicWALL and the Defendant Hewlett-Packard, HP.

THE COURT: All right.

MR. ANDERSON: And they've contributed to remarks.

I'm not going to rehash ground that has already been covered,

but I want to briefly address three points.

And the first is I'd like to elaborate about the

accused SonicWALL and HP products here. Those are the accused

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Colleen M. Conway, Official Court Reporter

105

products.

THE COURT: All right.

MR. ANDERSON: And let me start with SonicWALL.

SonicWALL, Your Honor, is a firewall company. And

the term "firewall" in the computing world refers to a

software- and hardware-based network security system, and this

security system controls the incoming and outgoing network

traffic by basically looking at each and every data packet.

And the security system has a set of software-based

rules, and these rules tell the system either allow the data

packet to come into the system or allow the data packet to

leave. In short, it is a firewall between a trusted network, a

secure internal network and some other external network like

the internet that is not necessarily secure or trusted. And

I'm sure that this courthouse and most of the companies

represented in this courtroom use some kind of firewall.

And I wanted to share with you -- I'll give you a

preview of some of the testimony by SonicWALL's John Gmeunder.

It's G-m-e-u-n-d-e-r. He is the vice president of engineering.

And he testified about what a firewall is and what the

SonicWALL company does. And I've got his testimony up here on

the screen. And I'm not going to read it. But this question

was asked by Innovatio's lawyer at Mr. Gmeunder's deposition.

He was asked why choose a SonicWALL wireless product, and

Gmeunder answers that for SonicWALL, it's firewall, it's

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Colleen M. Conway, Official Court Reporter

106

security. And then he goes on to explain what the security

system does, as I've explained here today, that it is basically

making a decision whether packets, individual data packets are

allowed to enter the system or exit the system.

And here, on the second slide, Mr. Gmeunder says --

"What's the purpose of a wireless option for a customer's

firewall?"

He says it's "just another form of conductivity,

802.11 conductivity." And, in fact, SonicWALL sells both wired

and wireless firewalls. And when it comes with the wireless

feature, it's just an added chip or module that allows

conductivity wirelessly.

And with that context or background about what a

firewall system is, you have heard from Innovatio's lawyer that

they want to assess a royalty on 20 to 50% of the value of a

firewall. Their expert says that 20 to 50% is the feature

factor of a firewall. And we believe the evidence will show

that that is not a factually-based assertion.

And, of course, even if it were somehow true that 20

to 50% of a wireless firewall was attributable to Wi-Fi

technology, which it's not, the point that Mr. Cherny made

earlier this morning is right on point, namely, that Innovatio,

of course, did not invent wireless.

So I wanted to point out that these firewalls are

complex hardware and network security systems. Wireless is

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Colleen M. Conway, Official Court Reporter

107

just one method of conductivity. And the apportionment

approach that Innovatio takes here is not any kind of an

apportionment approach that has been sanctioned by any of the

courts' precedence in the area.

And the same point could be made about

Hewlett-Packard. That's a very diverse technology company that

makes laptops, desktops, computers, desktops, laptops, and also

printers. And I want to just take printers for example.

Some printers do have wireless conductivity, and

Innovatio is accusing those. And Innovatio is asserting a

feature factor of up to 20% of a printer's value. They say

that up to 20% of a wireless printer is accounted for by 802.11

technology, and they would assess their royalty, their tax on

up to 20% of the price of a wireless HP computer. And, of

course, these HP printers, like HP laptops and HP desktops,

contain a vast universe of technology, much of which is

patented by many, many others, but none of which is patented by

Innovatio.

So let me move on to my second point, and this second

point is just a little bit more preview about a witness that --

Dr. Matthew Lynde. He spells it L-y-n-d-e, but it's pronounced

Lynde. And he will be called by SonicWALL and HP. And

Dr. Lynde is a Ph.D. economist. And you will recall, Your

Honor, that Dr. Lynde did testify in the Microsoft/Motorola

trial with Judge Robart, and Dr. Lynde's testimony is credited

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by Judge Robart.

And a particular fact about which Dr. Lynde is going

to testify that I wanted to highlight is his testimony about

the Via licensing pool. That's V-i-a, V-i-a licensing. It was

a licensing pool formed early in the life of 802.11. It was

formed at a time before there was a huge capital investment by

the major players in Wi-Fi technology.

And, basically, several holders of standard-essential

802.11 patents formed this patent pool and they agreed among

themselves as to what a RAND royalty would look like. And

although no patent pool or any other benchmark is ever perfect,

this is a benchmark that Dr. Lynde thought was a good

benchmark.

And I've put up on the screen paragraphs 554 and 562

from Judge Robart's findings of fact in the Microsoft/Motorola

case, and here you see Judge Robart agreeing "that the Via

Licensing 802.11 patent pool is an indicator of a RAND royalty

rate for Motorola's 802.11 standard-essential patent" -- or

"standard-essential patent portfolio."

So I just wanted to preview that we're going to

present through Dr. Lynde some of the same testimony that Judge

Robart heard about the value of patent licensing pools and

particularly about the value of the Via licensing pool, 802 --

their 802.11 patent licensing pool.

And the final point I want to make -- and I realize

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that time is of the essence here, so I'm going to move through

this -- I want to -- we wanted to comment -- we, SonicWALL and

HP, want to comment on a statement that we saw in Innovatio's

trial brief that we believe is inaccurate.

And I've quoted the statement here, which it appears

in Innovatio's trial brief at page 22. And, as we understand

this argument, which appears several times in Innovatio's trial

brief, Innovatio is arguing that because the patents have been

found by this Court to be essential to the 802.11 standard,

that the Court should not consider, in setting a RAND royalty

rate, whether there were technically feasible alternatives

available to the standards-setting organization, and we would

respectfully suggest that that is incorrect.

And here you can see Innovatio stating that because

the Court held that Innovatio's 23 patents are, in fact,

essential as a matter of law, and then they say parenthetically

"which provides further confirmation that there were no

commercially or technically feasible alternatives at the time

the standard was adopted," and we would suggest that that

doesn't confirm any such thing.

To be sure, the IEEE definition of a

standard-essential patent claim, which I've put up on a slide

here, that definition, under that definition, there can be no

commercially and technically feasible non-infringing

alternative in order to qualify as a standard-essential patent

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under the IEEE standard. But that is a wholly different

question from whether the standard -- whether at a time before

the standard was implemented, the standards-making body had

technology options to choose from before incorporating one of

those options in the standard. I think that was the point that

Mr. Cherny made with his slides about the tollgate and the car

going around the circle and reemerging.

And that, I would respect -- I would respectfully

suggest, is the correct analysis; namely, you have to look ex

ante before the standard was adopted to determine whether or

not the standards-making organization had available to it

reasonable technically feasible alternatives from which to make

a choice.

And the proposition that Innovatio appears to be

making in its brief, namely, that because the Court held that

their patents were standard-essential, there were no --

therefore, there can be no commercially and technically

feasible non-infringing alternative, I think is just an

incorrect proposition.

So, in short, the correct inquiry looks ex ante at

whether or not there were alternatives available to the

standards-making authority, and the evidence will show here

that there were substantial and meaningful and commercially and

technically feasible alternatives.

That completes my remarks. Thank you, Your Honor.

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THE COURT: All right. Well, thank you very much.

All right. Any further comments by way of opening

statement?

MR. McANDREWS: No. I think Mr. Cherny covered an

awful lot of ground, Your Honor. I think some of the

statements, in Innovatio's view, were taken a bit out of

context. We will meet that with a robust rebuttal through

witness testimony and then, of course, during closing.

THE COURT: Yeah. Now you know the roadmap.

Unfortunately, there's no rebuttal argument to opening

statements.

MR. McANDREWS: Right.

THE COURT: But I, of course, haven't heard any

evidence from the witness stand yet, and we're ready to proceed

with that.

MR. CHERNY: Thank you, Your Honor.

THE COURT: All right. If you want to call your

first witness out of order, we'll see if we can get him on and

off the witness stand by his witching hour of 1:00 o'clock.

MR. ALPER: Thank you, Your Honor.

We call David Djavaherian.

THE COURT: Raise your right hand.

(Witness duly sworn.)

THE COURT: All right. Please be seated.

THE WITNESS: Thank you.

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THE COURT: Direct examination. You may proceed.

MR. ALPER: Thank you, Your Honor.

DAVID DJAVAHERIAN, DEFENDANTS' WITNESS, SWORN

DIRECT EXAMINATION

BY MR. ALPER:

Q. Will you please introduce yourself.

A. Yes. My name is Dave Djavaherian.

Q. Where are you currently employed, Mr. Djavaherian?

THE COURT: We will just make sure we got the correct

spelling. It was spelled by your counsel, and I am sure she

spelled it correctly, but let's just make sure.

THE WITNESS: Sure. For the record, it's D, as in

David, j-a-v, as in Victor, a-h-e-r-i-a-n.

THE COURT: And you pronounce it again?

THE WITNESS: Djavaherian.

THE COURT: Djavaherian.

BY MR. ALPER:

Q. Mr. Djavaherian, where are you currently employed?

A. Broadcom Corporation.

Q. How long have you been employed at Broadcom?

A. Just over three years.

Q. Could you please go briefly through your employment history

prior to joining Broadcom.

A. Sure. I came out of law school and went to a law firm

named Irell & Manella and was a litigator there, practiced IP

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litigation, did some transactional work.

In about 2007, I joined a semiconductor company in

the bay area, was there for about three years, and then in

2010, I joined Broadcom.

Q. And where did you go to law school?

MS. TESSAR: I'm sorry to interrupt. But I just

wanted to interject, because I think there have been a lot of

people in and out of the courtroom, and there may be someone

here from Qualcomm who's not a party. And so I want to make

sure on the record that we're clear that this testimony is

sealed and that only outside counsel for the parties, in-house

counsel for the parties and other people authorized under the

protective order are permitted in the courtroom now.

THE COURT: All right. Well, when we get to those

parts -- his background and experience, it seems to me, to be

something that can be available to the public. When we get to

those parts, why don't you point it out.

MS. TESSAR: Perfect.

THE COURT: And, Mr. Alper, maybe you've segregated

those parts in your testimony as well.

MR. ALPER: I have, Your Honor.

THE COURT: I hesitate to put an entire witness'

testimony under seal.

MS. TESSAR: Absolutely agreed. I just thought you

had said earlier to have everybody out. Sorry for the

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interruption.

THE COURT: Well, if you want to scan the room to see

if -- who would be the objectionable people?

MS. TESSAR: Anyone who's not under the protective

order. Someone just passed me a note saying there was someone

from Qualcomm here, but I don't know who it is.

THE COURT: I'm sorry. You did what now?

MS. TESSAR: Someone passed me a note saying there's

someone from Qualcomm here, but I don't know who it is.

THE COURT: Is there anyone here from Qualcomm?

Anyone in the courtroom? You're now ordered to raise your hand

if you're Qualcomm on pain of contempt.

MS. TESSAR: So it should be that everyone in the

room would be under the protective order, then. Thank you.

THE COURT: No one has raised their hand.

Let me just say anyone who remains in the courtroom

for the remainder of this testimony will be held to be under

the protective order that was entered in this case with regard

to parties and counsel.

All right. Someone has left the courtroom now

voluntarily without identifying himself, and we'll proceed with

further testimony.

We'll consider this -- just for purposes of moving

through it efficiently, we'll consider it under seal. And if

there's a request for public disclosure beyond counsel of

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record, which includes counsel for Broadcom, then you'll have

to make a motion before me and we'll address it on notice.

Okay?

MR. ALPER: Thank you, Your Honor.

THE COURT: All right. You may proceed.

So you joined Broadcom in 2010?

THE WITNESS: Yes.

THE COURT: What month?

THE WITNESS: I believe it was July or August.

THE COURT: All right. You may proceed.

MR. ALPER: Thank you, Your Honor.

 

BY MR. ALPER:

Q. Mr. Djavaherian, where did you go to law school?

A. I went to the University of California at Berkeley.

Q. Let's talk about Broadcom and your work at Broadcom.

What are your responsibilities there?

A. So I have a variety of responsibilities. I'm in the legal

department. I'm an attorney. I handle various litigation and

licensing-related issues and negotiations. I handle various IP

matters.

Recently, I've been spending a lot of time handling

IP policy matters relating to standards-setting organizations

and acting as Broadcom's delegate to some of the organizations

that are dealing with RAND issues.

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Q. And I think you just covered this somewhat, but just to be

absolutely clear, in connection with your job, do you have

responsibilities relating to standardized technologies?

A. Yes.

Q. ?

A. 

 

 

 

 

 

 

 

 

 

 

 

 .

Q. And I understand the reason that you need to leave early

today relates to a meeting for a standards-setting

organization?

A. Yes, it does. And I thank the Court for allowing me to be

taken out of order.

I am missing the first day of a three-day meeting at

ETSI, which is a French organization that sets the standards

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relating to cellular communications technology, such as LTE or

3G and various other technologies, and flying out there tonight

to make the meeting for tomorrow.

And then after that, there's a meeting in Geneva with

the International Telecommunications Union, which is a

subsidiary of the UN, where we're also going to be debating

standards policy for standards that the ITU oversees.

Q. 

 

 

A. 

Q. 

A. .

Q. Okay. Well, I'm going to turn back to that in a moment,

but before that, I'd like to ask you a little bit about

Broadcom's business and Broadcom's products.

So let me begin by asking you, what is Broadcom's

business?

A. So Broadcom is a semiconductor company. We specialize in

communications semiconductors, so anything from 802.11, as

we've been discussing today, to Bluetooth to NFC technologies.

We're involved in Ethernet communications, involved in various

infrastructure-type technologies, like switches, cable set-top

boxes, and the sort of -- the communications technologies that

are involved there.

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So basically, you know, our motto is connecting

everything, and basically we play in a variety of markets, all

involving computers or electronic devices talking to each other

and communicating with each other, and that's why it's

communications semiconductors.

Q. Does Broadcom sell 802.11 products?

A. Yes.

Q. And when we talk about 802.11, your -- that's the 802.11

standard. You have familiarity with that?

A. Yes, I do.

Q. Okay. And what are the types of products that Broadcom

sells that have 802.11 functionality?

A. So, as I said, Broadcom's a semiconductor company, meaning

we sell chips, so we design and market and sell semiconductor

chips to customers who then, you know, put them into various,

you know, devices that then sell them to the public.

Q. When it comes to 802.11 products, where does the

functionality that is described in the 802.11 standards go?

MR. SCHARFF: Objection, Your Honor, lack of

foundation. He's an attorney for Broadcom, not a technical,

you know, engineer.

THE COURT: Response?

MR. ALPER: I can establish some foundation, Your

Honor.

THE COURT: All right. Please do.

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BY MR. ALPER:

Q. Are you familiar with Broadcom's 802.11 chip products?

A. Yes, generally.

Q. And are you familiar with -- you attend standards-setting

organization meetings relating to 802.11 standard -- or

relating to IPR policies for the standards?

A. Yeah. I've attended meetings for various organizations,

and IEEE, which sets the 802.11 standard, has been recently

involved in reviewing and revising its IPR policy.

Q. And you have experience with licensing the 802.11 chips?

A. Licensing negotiations and participating in those, yes.

Q. And in the course of that experience, have you become

familiar with the technologies relating to 802.11 and

Broadcom's products?

A. Yes, I mean, to a degree. I'm not an engineer, but

certainly to the degree that I need to.

Q. And what is your understanding of where the 802.11

standards can be found with respect to 802.11 products?

MR. SCHARFF: Your Honor, we're going to maintain our

objection.

THE COURT: Okay.

MR. SCHARFF: We believe that the foundation and his

understanding in standards doesn't give him adequate

qualification to talk about functionality in a chip.

THE COURT: All right. I am going to take your

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objection under advisement and listen to the testimony, and I

will make a determination.

MR. SCHARFF: Thank you, Your Honor.

THE COURT: I don't know that this testimony will be

-- on this point will be dispositive anyway, but let's proceed.

BY THE WITNESS:

A. So my understanding is that the 802.11 technology is

implemented at the chip level.

BY MR. ALPER:

Q. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 .

THE COURT: Okay.

BY MR. ALPER:

Q. Now, Mr. Djavaherian, in the course of your

responsibilities at Broadcom, have you become familiar with the

market for these Wi-Fi chips?

A. Generally, yes.

Q. All right. And based on your work, what is your

understanding of the size of the market for Wi-Fi chips?

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A. It's enormous. So Wi-Fi has been, as I think everyone

knows, as a matter of common knowledge, hugely successful, and

Broadcom and a few other chip manufacturers are sort of the

primary market participants in the 802.11 market, selling chips

to a lot of customers who then put those chips to various uses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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MR. SCHARFF: Objection, Your Honor, same lack of

foundation. He's not a marketing person. He's an attorney.

THE COURT: All right. Lay further foundation for

the witness' knowledge on this point.

MR. ALPER: Sure.

BY MR. ALPER:

Q. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q. Okay. Now, the defendants in this case -- you were here

during the opening, right?

A. I was.

Q. And the defendants in this matter are contending that the

RAND royalty for the Wi-Fi chips -- or the Wi-Fi products at

issue here should be less than a cent. Did you see that?

A. I did.

Q. 

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128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q. I'd like to now turn to the acquisition and sale of the

patents that are at issue by Broadcom.

MR. ALPER: And I think we handled the

confidentiality issue. This would be the segment where I would

get into some confidential information, but I just want to

pause for a moment.

THE COURT: All right. Is there anyone in the

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courtroom that you believe should be excluded? Any party? Is

there anyone that any party believes should be excluded?

And if you want to ask people you don't personally

know who they are and what they're doing, you certainly may.

MS. TESSAR: I think as long as everyone who's here

by remaining seated commits that they are outside counsel to

the parties or in-house counsel and allowed under the

protective order.

THE COURT: All right. Like a RAND obligation, you

folks are now required to maintain the confidentiality. And if

you don't desire to do that, please step out of the courtroom.

All right. One individual has left the courtroom.

Another individual went back and talked to someone, but -- all

right. Everyone else now is bound to the confidentiality

agreement. And if it is later shown that you have violated

that agreement, there is a possibility you could be held in

contempt. You are ordered to now maintain that

confidentiality.

MS. TESSAR: Thank you, Your Honor.

THE COURT: All right. Okay. You may proceed.

MR. ALPER: Thank you, Your Honor.

BY MR. ALPER:

Q. 

 

 

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139

 

 

 

Q. Okay.

MR. SCHARFF: I'd just like to ask how long, counsel,

you think you are keep going? I just want to make sure I have

enough time to cross.

MR. ALPER: Sure. Let's see. How about another ten

minutes or less?

MR. SCHARFF: I was actually anticipating --

THE COURT: What time is your actual witching hour?

THE WITNESS: So my flight is on Lufthansa at 3:45.

THE COURT: At O'Hare?

THE WITNESS: At O'Hare. So I need to be there --

it's an international flight. So an hour, hour and a half

ahead of time. So I probably can go a little past 1:00. I

don't know what traffic is like.

THE COURT: Midday on a Monday, good weather, not

sure.

(Laughter.)

THE COURT: All right. Well, let's see if we can get

it done.

MR. SCHARFF: Your Honor --

THE WITNESS: I appreciate the Court's efforts in

trying to get me off.

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MR. SCHARFF: I anticipate probably about 20, 25

minutes for cross.

THE COURT: Well, let's try to get to the essence of

what it is that both sides desire to elicit from this witness.

MR. ALPER: Okay. I will rapidly go through the

remainder of the questions.

THE COURT: All right.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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THE COURT: All right.

BY MR. ALPER:

Q. I'm going to turn to my final subject --

THE COURT: All right.

BY MR. ALPER:

Q. -- which goes back to your experience and the work that

you're doing in connection with RAND and standards-setting

organizations.

Now, Broadcom is an active participant in

standards-setting organizations like the IEEE; is that right?

A. Yes.

Q. Has Broadcom been an active participant of the development

of the 802.11 standards?

A. Yes, very active. We chaired many of the committees that

led to the development of, for instance, 802.11n. 

 

 

 . You

know, we're -- 802.11 is an important market for us, and we

spend a lot of time on it.

Q. Now, has Broadcom ever taken public positions regarding

RAND licensing?

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A. Yes.

Q. I'm going to show you what we've marked as DTX 668, and

I'll stay zoomed out for just a moment so you can see the whole

thing, and --

THE COURT: Just as we did with the prior exhibit,

unless there is an objection, it will be considered un -- that

there is no objection, and we'll proceed with it being admitted

in evidence.

MR. SCHARFF: There's no objection, Your Honor.

THE COURT: You may proceed. So we'll just --

silence is confirmation that it's admissible. You may proceed.

MR. ALPER: Thank you, Your Honor.

BY MR. ALPER:

Q. What is Exhibit 668?

A. So this is a submission that Broadcom made in 2011 to the

FTC in response to an FTC request for comments on patents

standards issues.

Q. Okay. And so Broadcom made this submission in response to

the Federal Trade Commission's request for positions on IP

licensing and RAND and so forth?

A. Yes.

Q. Okay. I'm going to ask you a few questions about a couple

of pieces of this and then we'll finish up.

So one sentence down here that I want to draw your

attention to says: "In summary, Broadcom believes that many

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companies that have invented the technology incorporated into

standards continue to feel the effects of patent holdup

directly."

And it goes on to say: "Just as important, patent

holdup means higher prices and fewer choices for the many

millions of consumers of standards-based products."

And then you go into a section that says Patent

Holdup is a Real Concern. And my question for you is, why is

patent holdup a real concern for Broadcom?

A. So Broadcom, as I was saying earlier, participates in lots

of markets and is involved in the sale of lots of chips that

are subject to all sorts of different standards bodies.

We have seen, I think, a proliferation of patent

litigation directed, you know, both at our company as well as

our customers, and we've seen a proliferation of claims by

patentholders seeking very high royalties or seeking

injunctions as a way to get very high royalties. And so, just

in general, I think that as a producer in the market with

the -- with sort of the economics that I was referring to

earlier, in terms of profit margins and such, you know, we

think standards need to be, you know, respected and that the

RAND commitment needs to be respected, and it's a threat to

sort of our business and our ability to invest in R&D and our

ability to sell our products at a fair price when, you know, we

have multiple patent assertions by multiple entities all

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seeking very, very high rates that, in our view, don't comply

with RAND.

Q. Is Broadcom concerned that if RAND royalties are too low,

companies will be disincentivized to invest in the research and

development of standardized technologies?

A. So, you know, RAND means reasonable, and setting that rate

is an effort to figure out what a reasonable and

non-discriminatory rate is. We think that if the proper RAND

principles are applied, principles involving, you know,

proportionality and principles involving royalty stacking and

avoiding some of those concerns that have been expressed in

academic literature and by the administrative agencies and by

the anti-trust authorities, that a RAND rate, you know, won't

be too low and that the standard will be allowed to prosper.

I don't think we've been focused on concerns that

RAND rates are being set at a number that's too low. I think

we've seen the opposite problem.

Q. Okay. I'm going to direct you to another piece of this

submission to the FTC, and here on page 3 --

THE COURT: Same exhibit, DTX 668?

MR. ALPER: Yes, 668.

BY MR. ALPER:

Q. On page 3, Broadcom says: "Finally, in 2003, CSIRO

initiated a licensing campaign in which, if adopted by every

patentholder that had provided a RAND assurance, would have

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added more than $100 to each WLAN product."

Can you explain to us the principles that are being

addressed in that sentence?

A. So this sentence relates to the issue that I referred to a

moment ago of royalty stacking. So, you know, the concern is

that if you don't take into account the whole gambit of patents

that may potentially apply to a particular standard, in setting

the rate of any patent within that standard, you can end up

with a situation where the aggregate royalty stack is much,

much higher than would seem to be reasonable and much, much

higher than would be required for the standard to be successful

and to allow companies to invest in, you know, exploitation of

the standard.

Q. All right. And lastly -- well, actually, let me ask you

this. Is royalty stacking a theoretical concern to Broadcom?

A. It's both theoretical and practical, I guess. I mean, I

think that royalty stacking is both something that we have, you

know, seen talked about in academic literature and by the

agencies. It's also something that we've seen, you know, sort

of in practice, for instance, in 802.11 where, you know, you've

got -- we've seen multiple non-practicing entities -- you know,

like CSIRO was mentioned earlier in this document. There's a

company called WiLAN that's been going after 802.11. Mosaid

has been going after 802.11. There are various operating

companies that are not in the 802.11 space, that are in

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different spaces that have tried to apply some of their patents

and seek very high royalties in connection with 802.11.

There's a patent pool that's being developed, called

Via licensing, that relates to 802.11. So there -- you know,

beyond that, there are -- you know, again, we see a lot of

this, not just via direction assertions against Broadcom, but

via assertions against our customers, and, you know, there are,

you know, easily more than ten and maybe dozens of other

assertions that we've seen in the Wi-Fi space directed to

802.11.

Q. Okay. I'm going to lastly direct you to one other area of

this. And I'm not going to get into the details here, but I'm

just going to focus on one -- two words at the beginning of

section ex ante and ask you this question.

THE COURT: What page is that again?

MR. ALPER: I'm sorry. This is page 4 of Exhibit

668.

THE COURT: Thank you.

BY MR. ALPER:

Q. Section B talks about -- uses the word ex ante, and my

question for you, Mr. Djavaherian, is what does ex ante mean in

connection with RAND licensing?

MR. SCHARFF: Objection to the extent it calls for an

expert conclusion.

THE COURT: Well, I will take his understanding,

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provide his understanding, and I will consider your objection.

BY THE WITNESS:

A. So ex ante is a principle that we've talked about a lot in

these SSO meetings that I've been going to and that's addressed

in, you know, a lot of the literature, you know, regarding

RAND, and that I've used in sort of -- in those contexts and in

sort of Broadcom's submissions regarding RAND licensing.

The idea, basically, is you can't -- in determining

RAND or a RAND rate, you can't include value that's

attributable to the fact of standardization. So you need to

look, when you're assessing a RAND royalty, at the inherent

value of the technology as compared to other alternatives that

would be available to, you know, implement a similar or -- you

know, I don't want to say the same standard because it would be

written slightly different, but implement that same idea of a

standard. So 802.11 with a slight tweak to accommodate one

approach rather than another.

And the reason for that is, you know, once you have a

standard set -- you know, before standard setting, you have

lots of options, you have lots of ways to do things, and once

you have a standard set, you have a lock-in, and that allows

for a degree of leverage that has been referred to as, you

know, holdup leverage or other things that can be exploited to

seek royalty rates that are much higher than RAND.

MR. ALPER: All right. Thank you very much,

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Mr. Djavaherian. No further questions.

THE COURT: All right. Cross-examination.

MR. SCHARFF: Thank you, Your Honor.

THE COURT: While counsel is coming up, was Professor

Lemley at Berkeley when you were there?

THE WITNESS: He got there shortly -- like I think a

year after I left, but I had worked with Professor Lemley.

THE COURT: Okay.

THE WITNESS: He sends me all his articles that he

writes in a little care package every once in a while.

THE COURT: You have read the article where he says

there should be some means to evaluate the RAND rate through

arbitration, similar to baseball arbitration?

THE WITNESS: Yeah. I mean, he -- Mark Lemley is a

very prolific writer.

THE COURT: Yes, he is.

THE WITNESS: So I don't know that I can recall that

specific article, but --

THE COURT: Okay.

THE WITNESS: But there have been lots of, you know,

proposals. For arbitration, in particular, the focus has been

on voluntary arbitration as opposed to any sort of mandatory

approach, but certainly I think there are lots of approaches

that might be better than what we are currently doing to set

RAND rates.

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THE COURT: Better than this? All right.

MR. SCHARFF: Your Honor, may I approach? I have a

binder of the exhibits that I can use.

THE COURT: You certainly may.

MR. SCHARFF: Thank you.

THE COURT: Thank you.

THE WITNESS: Thank you.

MR. SCHARFF: I have a copy for the Court.

THE COURT: Thank you. If you've got one for Mr.

Thies, that would be helpful. Thank you.

You may proceed.

MR. SCHARFF: Thank you, Your Honor.

CROSS-EXAMINATION

BY MR. SCHARFF:

Q. Good afternoon, Mr. Djavaherian.

A. Good afternoon.

Q. Now, you're here voluntarily, not subject to any subpoena

from any of the manufacturer defendants; is that correct?

A. I'm not subject to a subpoena from any of the manufacturer

defendants.

Q. 

 

 

 

 

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Djavaherian - redirect by Alper

Colleen M. Conway, Official Court Reporter

160

 

 

REDIRECT EXAMINATION

BY MR. ALPER:

Q. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Discussion held off the record. Recess.)

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Colleen M. Conway, Official Court Reporter

C E R T I F I C A T E

I, Colleen M. Conway, do hereby certify that the

foregoing is a complete, true, and accurate transcript of the

Trial proceedings, Volume 1, Pages 1-164, had in the

above-entitled case before the HONORABLE JAMES F. HOLDERMAN,

one of the Judges of said Court, at Chicago, Illinois, on

September 9, 2013.

/s/ Colleen M. Conway, CSR,RMR,CRR 09/09/13

Official Court Reporter Date

United States District Court

Northern District of Illinois

Eastern Division

Case: 1:11-cv-09308 Document #: 990 Filed: 11/01/13 Page 165 of 165 PageID #:42848