This Special Master’s Report has been circulating within the damages community.
Don’t be a footnote to History….
This Special Master’s Report has been circulating within the damages community.
Don’t be a footnote to History….
Although not considered “precedential,” the opinion by the Federal Circuit in this matter merits closer review. Often, damages experts are heard to discuss “freedom to operate” as a consideration at the hypothetical negotiation. The idea of freedom to operate is that one takes a license and then enjoys the freedom to practice any claim in the patent in any existing product and any future product.
The reason this becomes a relevant consideration is because any reasonable licensee would prefer to conduct one negotiation to allow the two companies to walk away and pursue business in any manner the licensee sees fit. This was the analytic approach Defendant’s expert took to damages in this matter, offering an opinion as to the “premium” that might be paid to afford freedom to operate.
The CAFC disagreed. The statutory language specifically states that a royalty rate should be “adequate to compensate for the infringement.” The language is not “adequate to compensate for any use of the patented technology.”
Arguments seeking to link a lump-sum construct to a broader freedom to operate were found unpersuasive, because the estimate relied on non-accused products.
This Enplas opinion is a gentle reminder that the hypothetical negotiation is not a real negotiation, but rather a fake one: one that didn’t happen and one that would never have happened. The CAFC reminded the district court that a damages expert does not enjoy freedom to operate in a manner that includes damages greater than the amount adequate to compensate for infringement.
A2C has been busy with client matters for several months. As anyone functioning in commercial litigation knows, work can be “dead,” “slow,” “busy” or “insane.”
We’ve been “insane.” As soon as the meter moves back toward “busy” or below, we will become regularly active here again. Promise.
In the meantime, when we started this project, we had no idea what interest others might have in its content. None. Zip. Zero. We would ask ourselves, “Does anyone really care about damages?” The motivation was to make available more broadly commentary that heretofore had been distributed privately through email. The larger goal is to develop an online clearinghouse for damages-related analysis.
What have we learned about interest in our first year? We are going to share the numbers. We posted 42 entries in 2018. The generic data-tracker attached to the website indicates that the blog enjoyed 1,211 visitors, who registered 2,195 views. (To answer a privacy concern, “No, we do not possess any personal information about anyone who visits.”) Does that constitute “a lot” of traffic? For a hyper-niche blog? We will let others decide, but we confess that it is more than we would have guessed back when we launched. So, we are happy with that.
The most surprising thing we’ve learned since launch is the international interest in the blog. We never foresaw interest beyond the United States. But such interest exists, and below is the available information we possess about the location of visitors to the blog.
May your practice (and ours…) prove “busy” in 2019!
Delaware District Court Judge Andrews ruled on a very creative damages analysis. And when we say “creative” we mean really, really outlandishly creative.
Plaintiff’s expert, Dr. Christine Meyer, determined the hypothetical negotiation date for her patent infringement damages analysis and then recalculated a jury verdict award from a separate and unrelated patent infringement matter (namely, Uniloc USA, Inc. v. EA) to use as her anchoring point for her Georgia Pacific analysis.
Yes, you read that correctly, and we represented it faithfully:
It appears from Judge Andrew’s opinion that Dr. Meyer attempted to introduce an unrelated jury verdict award as a “comparable license” analog by relying upon a technical expert’s analysis of both the unrelated verdict-patents and their relative value as compared to the patents in suit. Such malarkey was unacceptable and the motion to exclude on this issue was granted.
Apart from this unrelated jury verdict “analytic” sideshow, Judge Andrews offered insight into lump sum and running royalty rates.
Dr. Meyer’s lump sum opinion was not excluded for looking into the future and thereby forecasting hypothetical future sales. But Judge Andrews suggests that such analysis would have been excluded if she had ultimately settled upon a running royalty rate:
Judge Andrews thereby clarifies a subtle, but important (and now specifically-articulated) rule for lump-sum opinions as necessarily distinct from running royalty opinions.
In this matter, Defendant sought to exclude evidence upon which Plaintiff’s damages expert relied for his reasonable royalty analysis. Specifically, Defendant argued that lost profits should not be considered when conducting a reasonable royalty analysis.
The court, however, disagreed and offered a declarative view.
We have seen this Defendant’s argument floated numerous times over the years, and judges reliably explain that consideration of lost profits is rightfully relevant for the hypothetical negotiation construct.
It is relevant to Georgia Pacific Factor #5 (i.e., whether the licensor and licensee are competitors).
It is relevant to Georgia Pacific Factor #13 (i.e., the portion of the realizable profit that should be credited to the invention).
Last year, the Court of Appeals for the Federal Circuit ruled similarly in Asetek v. CMI:
Some subset of attorneys will likely continue to pursue the “No lost profits consideration!” line of attack. We expect them to continue to encounter a judicial wall of adverse rulings that make pointless the time & effort.
This recent opinion is a lesson in, “If at first you don’t succeed, try, try again,” and for defendant Fairchild, the third time proved the charm.
You see, when plaintiff’s damages expert, Dr. Putnam, first offered his opinion that the parties at the hypothetical negotiation would anticipate “lost sales, reduction in price due to competition, and lost licensing fees,” A2C doubted Judge Chesney would approve such methodology. When she did (on two occasions), we figured that the Federal Circuit would finally disapprove of the reduction-in-price analysis.
Alas, the Federal Circuit remanded this matter for a new damages trial… but not on the reduction-in-price analysis issue of interest to us. Rather, the remand was based on misapplication of the entire market value rule.
This litigation began years ago. At the first trial, the jury found that all but one patent was infringed and awarded Power Integrations $105 million. Less than a week after Judge Chesney’s denial of the JMOL on that verdict, the Federal Circuit issued its opinion in VirnetX. Accordingly, Fairchild requested – and was granted – a new damages trial based on violation of the entire market value rule. That ensuing trial, as the Federal Circuit observes in this recent opinion, resulted in a verdict of $139.8 million “based on damages testimony that relied solely on the entire market value rule.” An additional question on the verdict form asked whether the patented feature created the basis for consumer demand, to which the jury marked, “Yes.” After that trial and subsequent denial on JMOL, Fairchild appealed to the Federal Circuit which ruled in favor of Fairchild and remanded for further proceedings.
While much of this Federal Circuit opinion constitutes a summary of past entire market value rule matters, the court did provide the following valuable and pointed guidance for attorneys & damages experts alike:
With regard to the case at hand, Fairchild reaps the reward of determination:
Let’s briefly discuss bonds… so that we can then discuss sovereign debt issued by Argentina*, so that we can turn our ultimate attention to the Western District of Washington.
In exchange for immediate access to cash, a bond-issuer typically promises to return that cash amount at some future specified date, and agrees to provide some additional stream of cash to compensate the lender for the loan.
The date when the borrowed cash is returned is called the bond’s “maturity.”
The stream of cash that forms compensation informs a bond’s “yield.”
For example, if I lend an old college roommate $100 for 10 years, and the ex-roommate agrees to pay me $6 each year on the anniversary of our agreement, the bond is said to have a 10-year maturity and is said to “yield 6%” (i.e., $6/$100 = 6%).
Bonds can be bought & sold on the open market. Using our prior example, let’s say that upon making my $100 loan for 10 years, I immediately turn around and sell the obligation to you for $105. Now, you have paid $105 for the annual $6 anniversary payment from my ex-roommate, and you can be understood to have purchased a bond yielding $6/$105 = 5.7142857%.
This example demonstrates the seesaw relationship between bond prices & yield, and the oft-encountered maxim, “Rising bond prices = lower yields.”
(The counter is also true: “Falling bond prices = higher yields.”)
Presumably, those who would lend money to a borrower will take care to demand a rate of interest/return commensurate with the associated risk. To continue with our example, if I lent my ex-roommate $100 at 6% 20 years ago when we were college roommates, and said-roommate never paid me back, when said-roommate comes to me again looking for another $100 loan, I will reasonably include prior experience with failure-to-pay in assessment of risk of any further loan.
Perhaps now I will insist on $15 per year, for an effective yield of 15%.
This is the relationship between assessed risk and rate of interest/return/yield: the higher the former, so commensurately high should be the latter.
Countries also issue (sovereign) debt. For example, the U.S. Treasury as of June 28, 2018 has issued $21,149,679,487,479.03… or “just over” $21 trillion (to the extent that $149 billion is worthy of rounding…).
Other countries issue debt, too: for example, Argentina!
Argentina is an interesting case, because successive governments there have issued debt, but then failed periodically to pay it back (like our college roommate example above). The history is complicated, and we will not belabor you with details beyond observing that Argentina has defaulted on its external debt (and its internal debt) multiple times throughout its 200 year history, including in 2001, when it defaulted on +$100 billion in what was then the largest sovereign default in history.
Which made it all the more surprising 1 year ago when Argentina successfully issued $2.75 billion in bonds with a maturity of 100 years (a.k.a., “century bonds”). Which is to say that if you participated in that issuance, you were extremely unlikely ever personally to receive back upon maturity the sum of money you originally lent. Because you’ll likely have been dead for decades – so sorry – when the debt matures.
What was the yield demanded by lenders of this 100-year bond issuance from a party that has demonstrated periodic incapacity/unwillingness to make good on its debt obligations? About 7.9%. So, while you are not likely to be around when the debt comes due, at least as a participant you enjoy the promise of a stream of payments worth 7.9%, and that ain’t nothin’.
But alas now (exactly one year later today!), Argentina’s economy is in trouble… again.
And the prospects of timely payment are being drawn into question… again.
And the price of those 100 year bonds is falling in the open market, because investors familiar with the country’s credit history observe its immediate prospects.
And as the price for those bonds falls in the open market, the seesaw of their effective yield is on the rise… approaching 10%.
If you are comfortable with the certainty that Argentina, despite its history of relatively recent (and spectacularly large) default, will pay you back in (now) 99 years, you can enjoy a yield of over 9%!
And that might seem attractive, perhaps especially so in a low-rate world where the 30-year Treasury bond from Uncle Sam yields a paltry ~3.0%.
But you need to ask yourself, “Is the yield commensurate with the risk?”
Which brings A2C back to its park bench with the pigeons….
A recent order from the Western District of Washington caught our attention. Why?
Let’s quickly verify the math…
12% Annual Rate X $66,087.76 = $7,930.53 for an entire year.
132 days/365 days = ~36.1643836% of the year.
$7,930.53 X 36.161643836% = $2,868.027 = $2,868.03.
$2,868.03 + $66,087.76 = $68,955.79.
The math is impeccable! Kudos!
Here’s the thing….
In a world where the effective yield on a serial sovereign defaulter’s 99-year bond remains under 10%, we are hard-pressed to defend on an economic or financial basis 12% statutory rates for prejudgment interest.
* Had Argentina failed to advance to the Round of 16 at the World Cup, A2C would not have piled on needlessly. Instead, we could have used the corporate bonds from some struggling retail chains, such as 99 Cents Store yielding ~11.8% (CUSIP: 65440KAB2), or JC Penny yielding ~11.9% (CUSIP: 708130AC3). Some small distressed energy concerns also have corporate bonds out there with effective yields approaching 12%.
Our previous post concerning this matter only touched upon the extraterritorial application of patent damages because we expected that issue would be dealt with more fully in the future. That future is now our present!
The Supreme Court ruled that WesternGeco could receive lost profits based upon extraterritorial infringement of a U.S. patent.
WesternGeco represents itself to be a company which, “collaborates with you at every stage of the E&P life cycle to accelerate your discoveries in basins spanning the globe. From derisking prospects to optimizing reservoir monitoring, we have the expertise, digital capabilities, and seismic data to help you get to first oil faster and maximize your recoveries.” In plain English, the company makes big equipment used to find and recover oil and offers services towards those ends. Ion Geophysical appears to do the same thing.
The Supreme Court summarized the dispute between the two competitors as follows:
The Supreme Court pointed to a two-factor test. The first factor is “whether the presumption against extraterritoriality has been rebutted.” In this matter, however, the Court sidestepped the first factor, observing, “While ‘it will usually be preferable’ to begin with step one, courts have the discretion to begin at step two ‘in appropriate cases.'”
The second factor is “the  statute’s focus,” concerning which the majority concludes:
What fascinates A2C about this case is the dissenting opinion written by Justice Gorsuch and joined by Justice Breyer. In that dissent, Justice Gorsuch argues that the ruling on lost profits may prove to have reverberations throughout the global patent system and may result in other countries attempting to assert foreign patents in the United States. Justice Gorsuch writes, “Permitting damages of this sort would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets. That, in turn, would invite other countries to use their own patent laws and courts to assert control over our economy.”
Justice Gorsuch’s primary basis for dissent is the notion that U.S patent infringement outside of the United States does not exist. Products assembled abroad and put to use in a manner in line with claims of a United States patent does not constitute infringement because, by definition, infringement cannot occur outside of the United States:
Citing General Motors Corp. v. Devex Corp., Justice Gorsuch argues that the majority opinion on this matter would put “the patent owner in a better position than it was before by allowing it to demand monopoly rents outside the United States as well as within.” Justice Thomas rebutted this view for the majority by stating that the dissent, “wrongly conflates legal injury with the damages arising from that injury.” Citing to General Motors again, he wrote:
If you set aside a park bench for all those people on planet Earth who are utterly fascinated by the topic of prejudgment interest, the authors of A2C – together & alone – would share a quiet lunch, discussing PJI while tossing crumbs to the pigeons.
In that spirit, we report that Senior District Judge Walls from the District of New Jersey recently offered an opinion granting attorneys’ fees & costs, but no prejudgment interest, in a case of alleged infringement brought way back in 2005. In support of the decision, Judge Walls observes:
Judge Walls notes that the attorneys’ fees were reasonable except for those “hours billed due to inexperience, hours billed for tasks that should have been performed by more cost-effective actors, and hours and tasks that took an excessive amount of time to complete.” Included in the opinion, but not replicated here, are details regarding hourly billing.*
As for prejudgment interest, however, Judge Walls provided the following justification for not granting the request:
We sit on our bench feeding pigeons, while struggling mightily to understand the economic logic of this decision. Specifically, Judge Walls finds that there was deceit by the plaintiff over the course of a decade; and that attorneys’ fees are correspondingly justified… but there is no basis for affording the defendant the benefit of any compensation related to the time-value of its money?
Within the confines of the courtroom, this may make sense.
From the purview of our park bench, it is incoherent to us (and the pigeons).
From the opinion, it appears that prejudgment interest is just one in the line of many additional ways to exact money. What appears to have been lost is that if the money was rightfully remitted by the losing party, then the time value of that money should also be considered. If Judge Walls is operating with some conceptual economic cap to compensation (and below we provide evidence to suggest the possibility of such conceptual caps), the attorneys’ fees should arguably have been reduced, and then been adjusted for the time value of money to arrive at roughly the same monetary compensation.
* An interesting side-item from Judge Walls: despite what we would have assumed to be a relatively efficient market for legal services, an economic cap evidently exists on the professional value available from attorneys of $900/hour.
Yesterday, a jury awarded Apple $533 million for the infringement of its design patents. In doing so, the jury appears to afford design patents more value than patents supporting the underlying technology in a smart phone. How could this determination have happened?
We think it useful to provide background to explain how this jury verdict came to be.
First, consider that this case revolves around the definition of the term “article of manufacture.” The Supreme Court explained, “Section 289 of the Patent Act makes it unlawful to manufacture or sell an ‘article of manufacture’ to which a patented design or a colorable imitation thereof has been applied and makes an infringer liable to the patent holder ‘to the extent of his total profit.’ 35 U.S.C. §289.”
Way back in April 2011, Apple sued Samsung for infringement of (among other patents and a trade dress claim) three design patents which roughly cover: 1) a black, rectangular front screen face, 2) a front face with rounded corners and a bezel, and 3) a grid of colorful icons displayed on the screen face. Judge Koh issued opinions on Daubert motions and the case went to a jury trial.
Samsung’s products were found to infringe multiple patents and found to violate trade dress allegations: as a result, a jury verdict awarded Apple close to $1 billion. Judge Koh issued judgment for that jury verdict.
Samsung appealed to the Federal Circuit multiple times, and what remained for this most recent jury was the question of the monetary remedy associated with design patent infringement (N.b., there was an additional patent at issue which we are not discussing here). During the appeals process, the Federal Circuit affirmed that the article of manufacture subject to disgorgement in this design patent matter should be the entire phone, because no portion was sold separately that might constitute a smaller, distinct article of manufacture. Samsung appealed to the Supreme Court, which provided little guidance other than to observe that the Federal Circuit’s definition of the article of manufacture was too narrow. Specifically, the Court found, “Because the term ‘article of manufacture’ is broad enough to embrace both a product sold to a consumer and a component of that product, whether sold separately or not, the Federal Circuit’s narrower reading cannot be squared with §289’s text.”
The Federal Circuit then issued an opinion and remanded the case back to Judge Koh for further proceedings; and specifically to articulate a test to define an article of manufacture. In her order for a new trial on damages, Judge Koh provided the following definition of an “article of manufacture”:
After providing the new definition, expert reports were submitted, subject to new rounds of Daubert motions, resulting in new Daubert rulings. Judge Koh excluded Samsung’s damages expert, Mr. Wagner, for relying on surveys that did not properly tie to the facts of the case or to the patents’ footprint in the marketplace. Ms. Davis, Apple’s damages expert, was allowed to testify, but neither expert could offer opinions regarding the actual “article of manufacture,” which was left to other experts.
The jury instructions arguably led jurors to an inevitable verdict. The instructions specifically guided those jurors through the requisite analysis to arrive at disgorgement of total profits:
No doubt, Samsung will appeal.