Gradient Enterprises v. Skype: The Geek's Revenge?

Last week was a bad week for Skype, it's true. A full day outage caused angry worldwide anguish ("What do you mean, my free international telephone system isn't working!?!?"). And they were sued for patent infringement by a company no one ever heard of by the name of Gradient Enterprises.

Although Gradient suffered the standard condemnation by the usual suspects (TechCrunch, who labelled it an "obnoxious troll," I'm looking at you), the truth is a lot more obscure than that.

The first clue is the venue -- the Northern District of New York. Doesn't this troll know that the epicenter of the patent world is Marshall Texas?

The second clue is its almost complete lack of any presence online. Even tiny trolls can be found with a little digging.

The truth appears to be that Gradient appears to be the creation of the inventor of the patent, Kristeps Johnson, a proud resident of Rochester, NY, where the complaint was filed. He appears to be a talented computer engineer, known for developing something known as Sysjail, which enables computer processes to be put in "jail" so that they can only access part of the file system.

So, it may be true that Mr. Johnson is seeking to hold up Skype for millions of dollars for infringing what looks to be a pretty broad patent, but an "obnoxious troll" he is not.

Infoblox figures out how to skin a Bluecat

On Monday, one of the largest companies in the network infrastructure field, Infoblox, sued one of its smaller competitors, Bluecat Networks .for infringing its "Domain Name Service Server" patent. Evidently, Bluecat has been competing with Infoblox in the IP address management system field in a way that Infoblox found threatening. Infoblox was ready and wasted no time in bringing this suit -- the patent was only issued in October.

The rise of the non-profit troll -- Excelsior!

Now, anyone who's been around patent litigation for even a few years gets used to Marshall, Texas being the center of the universe (check out Bodacious Bar B Que -- you'll thank me) and get's used to patent trolls from all over California setting up a shell company in Longview or Tyler to sue a bunch of Taiwanese and Korean electronics companies on another WiFi or smartphone patent. That's old hat these days.

But I must admit that the two cases brought the other day by a troll called Azure Networks against Nokia, H-P and the usual suspects surprised me. Named as a co-plaintiff (and, evidently the owner of the patent) is the non-profit Tri-County Excelsior Foundation, described as a "supporting organization" to a very worthy charity -- CASA of Harrison County (which helps abused kids). I don't know whether this is part of Azure's owner's tax planning strategy, a fundraising mechanism for CASA or both, but I did find this pretty unusual.

China comes to Tennessee to attack California spas

In what has to be one of the odder patent lawsuits (or at least the one with the most exotic name) filed in the District of Tennessee, Zhongshan Rising Dragon Trading Company has sued Jacuzzi, the famous spa manufacturer, for infringing its patent (for which it is the exclusive licensee) for a jet barrel for a spa jet.

Although you certainly wouldn't know it from the name, Zhongshan (a Chinese spa manufacturer) is engaging in blatant "hometowning" -- with its US warehouse located in Sweetwater, Tennessee. Here's hoping that the Chinese pick up a little US litigation culture and learn that, sometimes the best way to break into a market is to sue your competitors.

But, by the way guys, if you're going to do business in Tennessee, you might think of renaming your US subsidiary "Bob's Screaming Eagle" instead. Just sayin'.

Battle of the Golf Bags-- Party at Club Glove!

Today, two of the titans of golf bag manufacturing -- West Coast Trends (maker of the "Club Glove Last Bag," evidently used by most professional golfers) and Ogio International (who makes golf bags which, according to the company's website, can be strapped to a motorcyclist's back) -- have faced off in the Eastern District of Texas in a patent infringement lawsuit brought by West Coast. The patent, obtained in 2003 by West Coast's founder Jeffrey Herold, apparently enables to bag to resist wear, while still remaining flexible.

In a real departure for the Eastern District, the plaintiff is actually a company that makes and sells a product covered by its patent who has sued a competitor (and every retailer who sells its products) for the purpose of obtaining a competitive advantage by (a) holding a (supposedly) broad patent and (b) suing its competitor for infringement. Since around here, this is what we think patents are for -- we applaud you, Club Glove!

Apple's "Sexting" Patent: Parental Protection or Tool of Tyranny?

Apple has gotten a lot of publicity over the last few days for a patent which many have applauded as supposedly enabling parents to prevent "sexting" by their children. This patent, US. Patent No 7,814,163 enables a user to "control the content of text-based messages sent to or from an administered device." In some embodiments, a message will be blocked if it contains "forbidden content" and in other embodiments the "objectionable content" will simply be removed.

Although Apple sells this technology in the patent by promoting the embodiments which allow parental control of a smartphone or which enable parents to help their children learn Spanish, John Dvorak, writing in PC Magazine, points out the darker side of this patent - the real potential for this technology to be used as a tool of political oppression.

Although one can certainly see this technology being used in a business setting -- with companies using their "administrator" privileges to block or censor text messages and emails -- this is at least understandable. If you don't want your emails censored, don't use your company's BlackBerry. A company may very well have a valid business reason for censoring communications on company-owned devices -- from combatting corporate espionage to preventing an HR disaster from "sexting" by adults who should know better.

However, once a country like Iran, China or Saudi Arabia decides that it wants to use a "super-administrator" privilege to simply block all political communications it does not like, this just becomes another way for such authoritarian regimes to shut down one of the few ways insurgents have to get their word out. As Dvorak notes, in many such countries, enabling "administrator control" by the government will quickly become a condition for selling these mobile devices at all.

What is tragic here, of course, is that this represents yet another surrender by a company who wants to be thought of as "cool" to the tyrants of the world just to make a buck [see, of course Google's capitulation to China]. In this case, Apple is not just knuckling under to pressure it is inventing a tool for governments to silence dissent. But, just look at the market for iPhones!

To bring it home, if this technology were widely available today, would you be able to text the phrase "Liu Xiaobo" in China? I think you know the answer to that one.

Microsoft's Strategic Alliance in the Smartphone Wars

Preparing for the entry of Windows 7 Phone into the marketplace next week, Microsoft showed that it is more interested in protecting itself from the plethora of lawsuits in the smartphone market than taking an ideological stand against patent trolls. Microsoft this week licensed from a subsidiary of noted NPE Acacia Research a portfolio of patents which included smartphone patents from Palm and Palmsource.

Now, what does this mean for the smartphone wars? It may mean that the players may find it more useful to form strategic alliances with third parties who can help them. We may see more patent trolls making their money by licensing before suing rather than after.

Laserdynamics v. Quanta -- The Continuing Slow Death of the Entire Market Value Rule

Last September in Lucent v. Gateway, the Federal Circuit finally took control of the law of patent damages by, with one hand, upholding the entire market value rule and, with the other hand, killing it. Former Chief Judge Michel made it clear that, before the courts were going to allow damages for infringement of a patent covering a small component or feature of a larger product to be based on the revenues for the sale of the entire product, the plaintiff had to prove that the patented technology was the reason that customers bought the product in the first place, i.e. that the "entire market value" of the product was the patented technology.

The Lucent decision has had a pretty good run since last September -- although it has mainly come up in decisions where new Chief Judge Rader has taken the district court bench.

However, last week, Judge Ward of the normally plaintiff-friendly Eastern District of Texas applied the new strict standard to cut Laserdynamics' $52 million award down to a mere $6 million.

In this case, the patent covered an optical disk reading method enabling a computer to identify an inserted disk and find the appropriate software to read or play it. The plaintiff’s expert testified the royalty should be 6% on stand-alone disk drives ($1.69/disk drive) and 2% on assembled computers containing the disk drive ($17.20/computer), using the entire market value rule. The jury’s verdict of $52 million was based on this analysis

Judge Ward held that the application of the entire market value rule was improper and ruled that the price of the finished computer should not be included in the verdict. He held that Laserdynamics had presented no evidence that its patented method drove the demand for QCI’s finished computers and noted that “the claimed invention embodied in the disc-drive is but one relatively small component of the entire assembled computer."

Ward further observed that “there is nothing in the record that shows the demand for QCI’s assembled computers was in any way driven by LaserDynamics’ disc-discrimination method patent” and that LaserDynamics “did not carry its evidentiary burden of proving that anyone purchased [the assembled computer] because of the patented method.”

Indeed, LaserDynamics pointed to no evidence that Quanta sold more of the assembled computers because it included drives practicing LaserDynamics’ patent.

So, if your patent covers the bell on the bicycle instead of the bicycle itself and you can't show that customers are streaming into the shop asking for your special bell, don't think you will get any sympathy from the bench. Because if a plaintiff can't cut a break in EDTex, it isn't going to happen anywhere.

Dow "Bags" a $62M Verdict From Nova Chemicals -- But Will it Hold Up on Appeal?

Dow Chemicals convinced a Delaware jury today to award it $61.7 million in damages in its patent infringement lawsuit against rival Nova Chemicals in a lawsuit which involved Dow's patents for super-strong thin-film plastics used in grocery bags.

As readers here know, I applaud any damages award in patent infringement cases between competitors. In fact, $57.5 million of the award was for profits Dow claimed it lost because of Nova's sales of competing plastic products.

However, there is some reason to think that the Dow lost profits award may not hold up on appeal -- or even on a challenge in the District Court.

In order to obtain an award of lost profits, a plaintiff must satisfy the so-called Panduit test -- which requires the plaintiff to prove that there were no non-infringing alternatives to the infringing product. The theory behind this requirement is that, to be awarded lost profits, a plaintiff must show that, if the infringer's customer did not buy the infringing product, it would have bought the plaintiff's product instead -- thus, the infringement caused the sale to be "lost." [If the "alternative" is also infringing -- even if sold by another company -- it does not "count"]

According to Nova, in presenting its damages case, Dow did not properly consider the existence of alternatives to the infringing Nova product which Nova's customers could have selected. Dow's own expert, in fact, conceded that Exxon made a non-infringing alternative and that, in fact Nova also sold an alternative product which Dow admitted did not infringe.

Dow also based its claim that it would have captured 80% of Nova's sales of its infringing product, not on rigorous market research, but on the testimony of "enthusiastic" Dow salesmen -- not the kind of solid economic data the Federal Circuit demands.

It remains to be seen whether the economic testimony supporting this verdict will hold up at the Federal Circuit or whether the District Court itself may strike down the award.

Though Dow seems to think it has this verdict in the bag, it might want to check for holes in the bottom.

Marketing and Enforcing Your Intellectual Property – An Inventor’s Manifesto

It is truthfully said that a piece of property, whether tangible or intangible, is only worth what someone will pay for it. However, if potential customers do not know the piece of property exists or how good it is, or how they can use it to their best advantage, the piece of property is still worthless.

Likewise, if a piece of property can be stolen or misappropriated by anyone without payment to the owner, that property is equally worthless – no one will pay for something they can get for free, without fear that anyone will pursue them for payment.

This principle is as true for patents and other forms of intellectual property as for a piece of land or a car – perhaps even more so. An inventor might have the best idea in the world and think that, as a result the world will come to his door with bags of gold for the right to use his invention, but as he will quickly discover, until he markets his invention – just like any other product – no one will pay him for his fantastic invention. And, until he decides to enforce his patent rights, the world will rip him off with impunity.

Far too many inventors spend years developing their inventions and thousands of dollars applying for patents without aggressively pursuing the next step – marketing their invention like they were selling a product. Far too many patent owners look helplessly on while large companies use their inventions without paying the “reasonable royalty” the U.S. Congress mandates.

The only solution is for inventors, the companies and universities that employ them to take action to ensure that their rights are fully protected and theat they get all the compensation they are entitled to for their invention.

Accordingly, I propose the following principles for this inventor manifesto:

1. Every invention must be protected from those who would steal it.

It is the job of the inventor and his employer to make sure that every available form of intellectual property protection is employed to ensure that no one uses the invention without payment. If you don’t know how to protect your invention – whether it’s a patent, trade secret or copyright – find out and get it done. If it was worth putting the time into developing, it’s worth spending the money to protect.

2. Every invention must be marketed like Apple

If no one knows about your great idea, no one will buy it or license it – simple as that. If the invention is not being used exclusively to support the inventor’s company monopoly in its product, it is the job of the inventor or his company to find the very best home for that invention -- someone who can utilize that idea for the greatest possible product. Being shy about promoting yourself or your great idea betrays the hard work you put into developing this idea in the first place and deprives the marketplace of the use of your great idea. Steve Jobs isn’t shy about finding the best possible market for Apple’s innovations – you should have the same enthusiasm for yours.

3. Intellectual property rights must be decisively enforced

Intellectual property rights – particularly patent rights – give the owner a monopoly on their use. However, those rights are worthless if they are not enforced. You may need to hire a lawyer to inform those who are using your patent that they are in violation of your sole rights and that they must “cease and desist” immediately. You may need to sue these infringers to protect your rights in your invention. You must be prepared to do this – and do it firmly and decisively – if you take your invention seriously and are willing to stick up for your rights in that invention.

Infringers and their flacks in the media will call you a “patent troll” and claim that you are “abusing the system” by asserting your legal right to stop infringers from stealing your invention and to be compensated for their infringement. Ignore them. These epithets should be reserved for those companies who scoop up other people’s patents for the sole purpose of bringing a lawsuit – people who have contributed nothing to the economy. The true innovators should proudly assert their patent rights against those who would appropriate them without compensation.

Patent owners who are not willing to let their years of work go to waste and be freely appropriated by their competitors and other sharks in the marketplace must sign on to and dedicate themselves to following this manifesto.

Hasbro v. Buzz Bee: Nerf Wars and Super-Soaker Nausicaans

In a patent litigation development that I applaud, Hasbro sued two of its competitors -- Buzz Bee Toys and Lanyard Toys -- for what appears to be flat out copying of its Nerf-N-Strike and Super Soaker products. Whatever the merits of the patent claims, I have to look kindly on a competitor using its patents the way they were intended to be used -- to exclude a competitor from a market that the patent holder has legitimately monopolized. Hasbro is actually using its patents to protect its very profitable market segment and is punishing companies who are competing without expending the time and effort necessary to develop their own products.

Is Hasbro being a bully by using its patents to beat up on its smaller rivals? I don't think so. If you believe that patents have any economic worth, their primary utility is to enable a company to protect its competitive place in the market and that the damages caused by the infringement of a patent by a competitor are competitive injuries. This is how we know how much a patent is really worth -- by how much infringement of that patent harms the competitive position of the patentholder. It is this kind of patent lawsuit -- between competitors -- which validates the patent system in the first place. If a patentholder cannot use its patent to maintain the competitive position it gained by its patented innovation in the first place, I do not see much point in the patent system at all.

So, bravo, Hasbro -- just don't put these weapons into the wrong hands!

Microsoft vs. Salesforce.com: Troll, Alley Thug or Patent Warrior?

Microsoft doesn't sue people very often for patent infringement -- at least not unless someone else sues them first.

Thus, it was quite an event when Microsoft chose to honor Salesforce.com with a patent lawsuit this week. Although the complaint alleges infringement of nine patents from to , what is really going on is that Microsoft has decided to use the hammer of patent litigation to achieve competitive ends, rather than simply throwing its weight around in the marketplace.

Although a lot of press on this case chooses not to focus on the particular patents involved and to concentrate on the particular market segment Microsoft is attempting to muscle into [customer relationship management] and noting that this shows that Microsoft is serious about something called "Dynamics, CRM and cloud computing" [a really good article on this subject is available here and here], this post chooses to focus on neither.

What is kind of exciting is that Microsoft has chosen, at long last, to actually use its patents to compete in the marketplace. Apparently Salesforce.com and Microsoft are hot competitors in the CRM marketplace and Microsoft is using this lawsuit to boost its presence in this market, to show that its product is innovative (and that Salesforce's is not). Microsoft is also using this lawsuit to create doubt in the marketplace about Salesforce's product and perhaps give Salesforce's customers pause before they deal with the company. Microsoft is using this lawsuit to trumpet its competitive position in the CRM and cloud computing marketplace and to show everyone else that it means business.

Not surprisingly, Salesforce.com's stock immediately dropped 5%.

Now, why is this a good thing? Maybe not a good thing for Salesforce.com (who knows whether they are infringing Microsoft's patents or not), but for the patent world? To answer this question, we have to look at what has happened to patent litigation lately

It is no mystery that in the past few years, patent litigation has largely been taken over by patent trolls -- companies that make no products and whose only economic interest in the patents they own is to sue. They create nothing and are nothing but an economic drain -- rewarding nobody other than the lawyers who litigate their case and the hotel and restaurant owners of Marshall and Tyler, Texas. These patents have no economic utility and are employed for no useful purpose.

Microsoft, whatever you may think of its competitive tactics, is actually using the patents it is suing on and is actually competing in the marketplace with the party it is suing. In doing so, it is using the patents for their proper purpose -- to exclude others from practicing the patented technology -- rather than simply to extort a license which no one really wants.

Salesforce.com's CEO, Mark Benioff, obviously also in a fighting mood, called Microsoft a "patent troll" and an "alley thug" for bringing this lawsuit. Whether or not you think that Microsoft is a "thug," (I think you'd get a lot of Microsoft's vanquished competitors to sign on to that description) there is no question that it is not a patent troll -- since Microsoft -- unlike the trolls, actually participates in the marketplace with its technology and uses its patents as a competitive weapon. For this, Microsoft should be congratulated.

So, three cheers for Microsoft -- patent warrior!

Turn Your Intellectual Property Into a Competitive Weapon

“When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." – Samuel Johnson

The meltdown in the financial markets, the drying up of credit and the scarcity of investment capital makes it paramount that companies, particularly in the technology sector, “concentrate their minds” on immediately deploying their most valuable assets – their intellectual property.

A technology company’s patent and trade secret portfolio is the image that the company has of itself. These technological assets are what make their products prized in the marketplace. They are the product of millions of dollars and years of work spent on research and development. They are the most valuable assets the company has – and they are right at hand.

A technology company executive must ask him or herself -- How much is my patent portfolio worth? Have the R&D expenses and the lawyers’ fees been worth the investment? Can I get some competitive advantage – or, even better, some cold, hard cash, for my patents -- or are they just going to decorate the walls of the company headquarters?

Any rational businessperson will ask these questions -- and one more: How can I make the most money possible from my patent portfolio, whether through licensing or, if necessary, a lawsuit? Here are some suggestions of ways a company can maximize the value of its intellectual property portfolio and the return on that investment:

• Concentrate on features your competitors need Contrary to what many think, a patent does not give the inventor “ownership” of an idea – just the right to exclude others from using the invention. The value of a patent, then, is what someone will pay to not be prevented from using the patent. The damages a patent infringer will be required to pay is directly related to how much that infringer needs that patent to stay in business. Thus, if you choose to wield your critical patent against your competitors, make sure that they know that you could easily shut them down and make them pay well for any license. The latest court decisions make it clear that the risk an infringer runs from using your patent is directly related to the value that patent has to that infringer.
• Focus on features that are virtually impossible to design around A corollary to the first rule is to make it difficult, if not impossible, for an infringer to “design around” your patent. If a competitor can easily and cheaply gain the same competitive advantage by tweaking your invention in a way that does not infringe, your patent is virtually worthless. Make sure your engineers and patent attorneys anticipate these loopholes.
• Make your patent part of a standard Making sure your patent is part of an industry standard is, obviously, easier said than done. However, the effect of the inclusion of your patent in such a standard can be a goldmine, as anyone who wants to practice the standard has to license your patent or else be barred from the market altogether. If possible, establish your own standard (Blu-ray, for example). Be careful, however, about properly disclosing your patents or “pooling” your patents with others who may be part of the standard -- the FTC has been known to cast a very dim eye on such practices.
• Make a possible injunction devastating Many economists have decried the effect of “patent holdup” – where a patent is given a value far in excess of its intrinsic worth because of the threat of an injunction. If you can bar your competitors from selling their products because of your patent on one specific feature that cannot be removed or avoided, the amount you can demand for a license (or as damages in a lawsuit) can skyrocket.
• Act like a troll Although so-called “patent trolls” have gotten a lot of bad publicity, especially in the technology sector, you may notice that many of them are quite successful in exacting quite substantial monetary returns from their patents. They pursue a profit-maximizing strategy which includes identification of vulnerable, profitable targets, relentless pursuit of those targets for possible licensing and a willingness to sue whenever necessary to exert maximum pressure. Indeed, if you actually use your patent in your product, you are in an even more powerful position than a troll. Although the courts have recently made it harder for companies who do not practice the patents they assert to get an injunction, an infringer’s competitor, on the other hand, has very little trouble obtaining this devastating relief from the court.

For the next few years, your company may be in survival mode. It may need to use whatever tools it has at its disposal to bring in cash and disrupt the activities of its rivals. Your IP portfolio – assets you have already paid for – may be the best and most effective weapon you have to weather the storm.

So, Why Doesn't Conan Own Pimpbot 5000?

In the war between Conan O'Brien and NBC, the real orphans may not be Conan, his staff or even the viewers -- but may be an innocent bear, a dog and a robot, who may never have a home.

NBC is apparantly taking a hard line as to the characters created by Conan and his writers over the years and may try to prevent him from taking those characters to another show. Whether or not this is a good idea [what's NBC going to do with these puppets after he's gone -- give them to Brian Willliams?], how can NBC do this? Aren't these characters Conan's property if he and his production company created them?

Apparantly, this represents a failure of drafting of Conan's initial contract. Since the shows were broadcast on NBC, unless Conan had specifically reserved the right to ownership of these characters, they would revert to NBC on Conan's departure. The fate of Triumph the Insult Comic Dog, who was originated by writer Robert Smigel, is less clear.

This is not the first time such has dispute has arisen because of a departing NBC host, however.

In 1993, NBC attorneys tried to prevent David Letterman from taking intellectual property originated on "Late Night" to CBS. Letterman solved the problem by simply renaming bits "Viewer Mail" became "CBS Mailbag" and Larry "Bud" Melman began referring to himself by his real name, Calvert DeForest.

So this dispute may end up with an embarrassing bear in some NBC exec's closet or Conan may have to pay to bail him out.

However, it works out, it shows that you've got to read that contract carefully before you sign it!

Patent Owners Can Use Recent Patent Damages Allocation Rulings to Maximize Their Return

Most of the efforts to “reform” the patent damages laws in the past few years have been designed to reduce the recovery patent owners can receive. The courts and Congress seem to believe that patentholders are engaged in a game in which they somehow trick juries into giving them much more than their patent is worth.

The present stick these reformers are using to reduce plaintiff’s damages awards is “damages allocation” and their strategy is to eviscerate what is known as the “entire market value rule.” This question boils down to one issue: how should infringement damages be awarded when a patent only covers a component of a larger product?

Many patentholders, in the press and before Congress, argue that there should be no such limits, arguing that, otherwise, the patentholder is not being properly compensated.

I believe, however, that this view is not politically viable, either in the courts or the Congress and will eventually lead to even more draconian measures being taken to reduce damage awards and the risk to technology companies.

However, the courts may have solved the allocation “problem” in a way which benefits patent owners by enabling them to receive full value for the value of the patent to each individual infringer and maximize a patentholder’s leverage in negotiations with prospective licensees.

The issue can be demonstrated by an example from the software industry.

Say you are a small software developer who has invented (and patented) a word processing program feature that enables the user to change the color of the font on a selected passage with just a keystroke, rather than laboriously highlighting the text and using the menu.

In Microsoft’s last version of Word, the company implemented this feature, along with 1200 other changes, some of which were intended to provide new functions to the user and others that, behind the scenes, made the software work more efficiently.

Assume further that the latest version of Word is held to infringe this patent and that the product sold 300 million copies with a retail price was $100.

What is the most equitable way of awarding damages in this situation that fully compensates the inventor for the value of his invention and still makes economic sense?

Clearly, the best way would be to determine the “value” of the patented feature to Microsoft and its customers. The more valuable Microsoft would have considered the feature to be to the users of Word, the more Microsoft would have paid the patentholder to be permitted to use it.

The parties could have determined the value (or the popularity) of this feature in a number of ways. They could have looked at Microsoft’s advertising and marketing literature to see if Microsoft highlighted the “color changing” feature as a way of selling its product. They could look at reviews of the product to see if the press thought that the feature was valuable or would be popular with consumers. They could commission consumer surveys to determine the importance Word customers gave to this feature and whether the presence or absence of this feature made any difference to their buying decision or to the price they would have paid to buy the product.

If including the patented feature increased Microsoft’s profits on Word by 2%, there would be a solid basis to argue that Microsoft would have paid a royalty representing half of those profits to the patentholder. Such a result would be equitable, sensible and would make complete economic sense.

Nobody does this.

Nobody.

This year, however the courts took a big step in solving the allocation problem in two cases – one involving Cornell University’s case against H-P and the other pitting Lucent against Microsoft.

The patent in the Cornell case claimed technology that covered an “instruction reorder buffer,” which was part of a computer processor, which , in turn, was part of a CPU module that, combined with other components, became a “CPU brick.” Sets of CPU bricks were , in turn, incorporated into a “cell board,” which was then inserted into H-P’s server.

Judge Rader, future Chief Judge of the Federal Circuit, sitting by designation, became frustrated with Cornell’s insistence that damages be based on the price of the server when Cornell made no effort to show how valuable the buffer was to H-P or its consumers or any reason why Cornell should be able to collect damages on the entire H-P product instead of the component alone. Judge Rader threw out the expert’s testimony and, on his own, based Cornell’s damages award on the “hypothetical revenues” of the processor – a speculative figure, given that the processor had never been sold alone.

Thus, Cornell’s initial $900 million damages claim was reduced to $54 million.

The Lucent v. Gateway case presented allocation issues even more severe than those in the Cornell case. The patent covered a method for entering information into fields without using a keyboard. The "date-picker" calendar tool in Microsoft Outlook was held to infringe this patent and Lucent was awarded $357 million in damages.

In striking down the award, the Federal Circuit court set a theme that provides the rationale for the entire opinion on damages – the critical importance of consumer choice and the consequent value of the patented technology to the parties to the license agreement.

Most important was Judge Michel’s discussion of the entire market value rule. Like Judge Rader in Cornell, Judge Michel took particular offense at the results-oriented testimony of Lucent’s damages expert. Initially, Lucent had taken the position that the proper royalty base for Outlook’s date-picking feature was the entire price of the computer in which it was installed -- $1000 on average – employing a royalty rate of 1%.

Once that royalty base was struck down, Lucent’s damages expert changed his focus, testifying that the proper royalty base was, instead, the market value of Outlook, but increased the royalty rate to 8%, unsurprisingly, reaching exactly the same total royalty amount he had come up with in the first place.

To Judge Michel’s obvious irritation, Lucent’s expert could not provide any economic justification for choosing the larger royalty base, the smaller royalty base or either royalty rate. He could not explain the importance of the date-picking feature to Microsoft or its customers or even its importance to the functioning of Outlook .

The court put the focus of the reasonable royalty analysis where it should be – on the actual value of the patented feature to Microsoft and its customers and how often they use that feature. As the court made clear, “the damages award ought to be correlated, in some respect, to the extent the infringing method is used by consumers.”

Judge Michel, instead, applied an economically realistic approach that could actually be employed by courts and juries. He noted that, in the real world of licensing, the parties do not lock themselves into preconceived notions of what royalty rates “ought to be” and then construct complicated scenarios to calculate hypothetical revenues for the patented feature to determine the proper royalty vase to apply this royalty rate to.

Instead, they just take the royalty base for which figures are most easily obtained and which are easiest to verify – the revenues for the “entire commercial embodiment” -- and simply adjust the royalty rate to reflect the actual value of the patented feature. As the court noted, “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.”

How does this help patent owners who are trying to get a fair return from an infringer?

When attempting to license his patent every patentholder must focus on is the value of his patent to each individual licensee. He must not only “sell” the value of his patent to that target, but must develop a convincing case that, because of this particular target’s use of the patent owner’s particular technology that the licensee is particularly at risk. The patent owner must do its research and determine how the prospective licensee actually uses its technology and the extent to which consumer demand is based on this use.

In sum, every patent owner, when licensing its patent or suing an infringer, must make sure that when damages are “allocated,” those damages are allocated to the patent owner’s technology. In that way, patent holders can use the Cornell and Lucent opinions to make sure that they receive the highest possible return for their technology.