Source: https://www.lesi.org/les-nouvelles/les-nouvelles-article-of-the-month/les-nouvelles-article-of-the-month-archives/les-nouvelles-article-of-the-month-july-2013
Timestamp: 2019-04-23 02:15:07+00:00

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Much has been written about the Federal Circuit Court of Appeal's ("CAFC") decision in the Uniloc1 case eviscerating the 25% Rule, but relatively little about the equally eyebrow-raising decision relating to the Entire Market Value Rule.
While analysts and academics will undoubtedly continue to debate the value of the underlying studies testing the after-the-fact empirical validity of the 25% Rule (in fact see les Nouvelles Mach 2011 issue for such an article), the CAFC's relatively recent "Show Me The License!" mantra will likely be unswayed without specific analysis of comparable licenses. The use of a generalized basket of licenses or general rules-of-thumb, which may have no relation to the patent(s) at issue, are being viewed with much greater scrutiny. After all, in the rare case where an expert may pull together enough data to show that the practice in a particular industry involves the use of the 25% Rule in licensing negotiations, such data will likely already include underlying individual license data which could form a more direct analysis of the hypothetical license at issue.
At the district level in Uniloc , the jury awarded Patentee Uniloc damages of $388 million. The specific calculation wasn't disclosed, but was between the two damages experts' opinions. Microsoft's expert opined that damages could not exceed $7 million under the theory that Microsoft would have paid a lump sum for the use of the patent. On the other side, Uniloc's expert opined that damages were $565 million for reasonable running royalties.
Fourth, the CAFC ruled in Lucent that the entire market value of the products may appropriately be admitted if the royalty rate is low enough.
Even if Uniloc was only using the EMVR as a "check" and the jury's verdict was not based wholly on the entire market value check, the award was based in part on a faulty foundation. The CAFC found that the district court did not abuse its discretion in granting the conditional new trial on damages in violation of the EMVR.
As clear as the CAFC's position was relating to the 25% rule, the ruling presents potentially challenging precedent for future cases regarding use and introduction of the entire market value. While it isn't difficult to see the logic behind the potential jury tainting that might result from bandying about a $19 billion entire market value figure and deriding the opposing expert on the basis of an entire market value argument, the CAFC's decision could be read from one perspective to potentially limit even the introduction the entire market value of a single infringing product (which was $85 in this case). Imagine that Uniloc's expert had calculated his 2.9 percent royalty check simply by dividing his $2.50 royalty into the $85 entire market value of the average infringing unit and avoided any discussion of the vastly larger total sales value figures. While this approach would have yielded the same conclusion for the expert, would the rulings by the District Court and the CAFC have been the same assuming a similar jury award?
This question is worrisome for damages experts as the CAFC's ruling could be construed as prohibiting discussion of the entire market value (the sales price) of an infringing product where the EMVR hasn't been proven applicable. Experts routinely discuss the sales prices of alleged infringing products in their damages reports. For example, Georgia-Pacific factors 8, 12 and 13 all reference the profitability of the product using the patent when performing reasonable royalty damages analyses11. As profits are often calculated and discussed in terms of the difference between sales prices (entire market values) and expenses, it would seem unlikely that an expert could adequately complete a damages analysis without reference to the entire market value, even where the EMVR may not apply.
It is also necessary to discuss sales prices when converting a royalty rate shown in dollars to a royalty rate shown as a percent in order to be able to compare the rate to comparable industry royalty percentages as Uniloc's expert attempted to do (Georgia-Pacific factor 12). Recall that the Uniloc expert opined at 10 percent—11 percent was a reasonable industry royalty rate range. In order to convert his $2.50 reasonable royalty conclusion into a percentage for comparison, the expert needed to use either the average entire market value of a single infringing product ($85) or, as he chose to do, divide his damages conclusion by the entire market value of all infringing products. Either approach would yield the 2.9 percent percentage royalty that the expert needed in order to perform his "check" comparison to industry average rates.12 By remaining silent on these normal and customary uses of the entire market value, many believe that the CAFC has cast some doubt on a simple mathematical calculation that could be essential to compare the opined rate to industry benchmarks.
The CAFC's stated grounds for dismissing Uniloc's alternate argument that the entire market value of the products may appropriately be admitted if the royalty rate is low enough is also potentially problematic. As Uniloc's argument is summarized by the CAFC, it is not surprising that the CAFC would reject a low rate, or any rate for that matter, that was not tied to the facts and circumstances of the case and related to the patent at issue. However, the CAFC's statement that, "the Supreme Court and this court's precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate"13 should not be construed as a blanket prohibition against utilizing the entire market value in cases where the EMVR doesn't apply. As further stated by the CAFC in Lucent, "The license agreements admitted into evidence (without objection from Microsoft, we note) highlight how sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products' sales price. There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature."14 The critical point from the CAFC here was that the royalty rate can, and is, often a function of the entire market value of a product even in situations where the EMVR doesn't apply, but the rate must reflect the value of the patent as compared to the entire product. The CAFC's statement reflects the realities of the licensing marketplace where most running-rate licenses are based on a percentage of revenue and an acknowledgment of Georgia-Pacific factor 13 calling for the apportionment of profit to the patented feature versus other elements.
Given the CAFC's rulings, on remand it may not be surprising to see Uniloc's expert come to the same conclusion or perhaps something even higher, albeit via a different method. Instead of using the 25% Rule to allocate the patent's $10 value between the parties, the expert may simply rely on the other Georgia-Pacific factors in a relative bargaining position analysis. If the expert is feeling particularly adventuresome, he may even re-offer his industry analysis showing that software rates are somewhere around 10 percent—11 percent and sway the relative bargaining position toward $8.50 per unit (based on an average $85 per unit selling price). Given Judge Rader's exclusion of the use of general industry average rates in other matters, it is unlikely that Uniloc's expert would pursue this latter argument without reference to specific comparable licenses.
Uniloc's counsel will also likely criticize Microsoft's expert again, perhaps by showing that the $7 million conclusion translates to 3.1 cents per unit which seems small when compared against a $10 per unit value, which would suggest that the relative bargaining position would be 99.7 percent in favor of Microsoft and 0.3 percent in favor of Uniloc .
Microsoft, on the other hand, may decide to sharpen its attack on the underlying valuation, rebutting the $10—$10,000 per unit conclusion of that valuation, and perhaps focus on design around costs which could serve as a proxy for the value of the overall technology.
Whatever the case, a new jury means a whole new ball game and perhaps the CAFC will take another swing at clarifying some of its original points and the proper use of the EMV even where the EMVR doesn't apply.
Subsequent district court cases post Uniloc have been mixed on the application of the EMVR.16 In Inventio AG v. Otis Elevator Co., 17 the district court, as gatekeeper, denied Otis' motion to exclude Inventio's damages in their entirety, citing Uniloc ; 18 however, the court granted Otis' motion to exclude Inventio's damages expert from proving reasonable royalty damages using the EMVR, citing Lucent. 19 Citing Uniloc, Judge McMahon stated that he personally saw some problems with the expert's analysis that could be highlighted to the jury, but that the expert's starting point for the calculation of a reasonable royalty was not (as alleged by Otis) "untethered from the facts of the case." Inventio's expert selected a starting point royalty rate at which [previous patentee] had licensed the pertinent patent to Inventio. The court noted that although the license was admittedly from a related company rather than a third party, it did not "untether" the license from the facts of the case. Rather, the suitability of the license should go to the weight or lack of weight that the trier of fact might wish to accord the license data.
Judge McMahon opined that Inventio's expert needed to provide evidence that the customer demand for an entire elevator system was based on the patented technology (elevator dispatch system) rather than on other factors, such as "vendor's history, reliability, price or ability to get the job done on time."24 In the present case, the expert was partially excluded because although he was able to provide evidence that the patented technology was a desirable feature, he did not provide a "sound economic connection between the product's desirability and any contention that the [patented technology] was the basis for the public demand for an Otis elevator"25 [Emphasis in the original].
In another recent decision, Man Machine Interface Technologies, LLC v. Vizio, Inc., 26 the district court appears to have accepted yet another variation to the 'substantial basis of customer demand' in allowing the application of the EMVR. This case revolved around a multi-function thumb switch feature of a television remote control. Defendant argued that Plaintiff's expert violated the EMVR by "incorporating into her damages calculations… the estimated revenue based on sales of the entire remote control unit, when the evidence indisputably shows that the allegedly patented feature (i.e., the thumb switch configuration) is not the basis for consumer demand for the remote controls." In partially denying Defendant's motion and allowing the EMVR application, the court ruled that because the thumb-switch was "such a prominent feature in the remote, a reasonable juror could conclude that the thumb-switch is the primary driver of consumer demand for the device." Here, this district court has introduced perhaps yet another shade of consumer demand in terms of a "primary driver."
Interestingly, this court also ruled that Plaintiff failed to "satisfy its burden of showing that the thumb-switch device drove customer demand for Defendant's higher priced remotes" which contained additional non-patented features such as Bluetooth and a full QWERTY keyboard. Instead of disallowing the EMVR application to the higher priced remotes in its entirety, the district court allowed the entire value of the higher priced remotes to be included in the royalty base, but limited the royalty rate to that of the lower priced remotes.
While the Uniloc ruling was clear on the 25% Rule, it may have unintentionally obscured the EMVR. The EMVR basis espoused in Lucent appears clearer as it derives directly from Supreme Court law, albeit old law. There will undoubtedly be continuing confusion at the trial court level until the EMVR standard in Uniloc is readdressed.
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) (damages expert's testimony regarding the 25% "Rule of Thumb" excluded under Daubert).
Uniloc, 632 F.3d at 1315.
Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009); Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995).
While subsequently reduced or reversed, see e.g., the jury awards in Lucent Techs., 580 F.3d 1301, Cornell University v. Hewlett-Packard Company, 609 F. Supp. 2d 279 (N.D.N.Y. 2009), and LaserDynamics v. Quanta Computer, No. 2:06-cv- 00348 TJW, (ED Tex., Marshall Div., 2010), Doc. No. 620.
Uniloc, 632 F.3d at 1311.
Uniloc, 632 F.3d at 1318.
Uniloc, 632 F.3d at 1320.
Id. at 1320 citing Garretson v. Clark, 111 U.S. 120, 121, 4 S.Ct. 291, 28 L.Ed. 371 (1884) and Lucent Techs, 580 F.3d at 1336.
Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
Interestingly, CAFC's Chief Judge Rader (sitting by designation) partially precluded the testimony of the same Uniloc expert in a different matter for use of what appears to be a similar industry range of 10%-11% because the expert "offers no evidence that the alleged industry agreements are in any way comparable to the patents-in-suit." IP Innovation v. Red Hat, Inc., 705 F.Supp.2d 687, 689-690 (E.D. Tex. 2010). However, there is no mention of this particular issue having been argued by the parties or addressed by the CAFC in Uniloc.
Uniloc, 632 F.3d at 1321.
See e.g., Inventio AG v. Otis Elevator Co., 2011 WL 3359705 (S.D.N.Y. June 23, 2011)(damages expert excluded from basing his damages calculation on EMVR); PACT XPP Technologies, AG v. Xilinx, Inc., 2012 WL 1666390 (E.D. Tex. May 11, 2012)(motion to exclude damage expert apportionment did not run afoul of the EMVR where the parties agree that the EMVR does not apply but expert adopts of the opinion that the patented technology accounts for 30% of the value of the accused products without verifying the value or tying it more closely to the value of the patented feature based on the contention that the 30% figure is derived from customer surveys and internal reports").
Inventio AG v. Otis Elevator Co., 2011 WL 3359705 (S.D.N.Y. June 23, 2011).
Id. at *4 (citing two old Supreme Court cases Seymour v. McCormick, 57 U.S. 480, 491 (1853) and Garretson v. Clark, 111 U.S. 12, 121 (1884)).
Id. f1(commenting on the inaccurately paraphrasing Chief Judge Radar's articular of what it means for a patented component to be the basis for customer demand of a product that contains both patented and non-patented elements in IP Innovation v. Red Hat, Inc., 705 F.Supp.2d 687, 689 (E.D. Tex. 2010)(Radar, C.J., sitting by designation)).
Man Machine Interface Technologies, LLC v. Vizio, Inc., et al., No. 8:10-cv-00634-AG-MLG (C.D. Cal February 27, 2012) Omnibus Order Dkt. No. 185.

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