ePlus v. Lawson Software -- ResQNet Doesn't Let You Pick and Choose

As the ResQNet decision continues to roll on through the world of patent damages, the scope of how and when to use settlement agreements to calculate a reasonable royalty is becoming, if anything, even more confusing.

In January, Judge Payne of the Eastern District of Virginia was presented with a plaintiff's expert who picked just the settlement licenses he liked as part of his reasonable royalty analysis -- and was confronted with a Daubert motion to exclude all of his testimony.

In this case, the plaintiff's expert had five settlement agreements that had previously been entered into by the plaintiff as part of the data he could use to make a determination under Georgia-Pacific factor 1 -- whether there was an established royalty.

Three of those agreements, with Verian, SciQuest and Perfect Commerce, were entered into shortly after the patent litigation began and were for relatively low amounts. The plaintiff's expert chose not to rely on them.

Instead, the plaintiff's expert relied on two other agreements, one of which (Ariba) was entered into after a jury returned a verdict of infringement and the other (SAP) was reached after a hung jury mistrial. Both of these settlements were for substantial amounts (10-20 times the amount of the other settlements). These were the settlements the plaintiff's expert chose to use, converting these two lump sum amounts to a running royalty.

On the Daubert challenge, the court hammered the plaintiff's expert.

First, the court condemned the plaintiff's choosing only to rely on the high value settlements, while ignoring the low ones -- no reason, the court noted, was given for this picking and choosing of data.

The court also criticized the expert's using the later (post-verdict) settlements at all, since they were entered into well after the date of the hypothetical negotiation. The court also noted that these licensing agreements contained extensive cross-licensing provisions which made them quite different than the hypothetical license being constructed for the litigation.

Finally, the court criticized the use of lump-sum licenses as a basis for determining a "running" reasonable royalty -- especially without a rigorous economic analysis as to how to convert one to the other (which the court found lacking here).

Finding that the plaintiff's damages expert's opinion was without sufficient economic basis, the court excluded it.

Note -- at trial, ePlus later got a verdict of infringement, but -- because its damages expert's testimony had been excluded -- no damages.

Sanofi-Aventis v. Glenmark -- After Uniloc, Where Does an Expert Start the Reasonable Royalty Analysis?

In Uniloc, the Federal Circuit struck down the disfavored 25% "rule of thumb" (which held that, as a "starting place" an expert could start his or her reasonable royalty analysis by presuming that the plaintiff would take 25% of the infringer's profits on the infringing product). This rule had been kicking around for years, surviving almost universal condemnation from the academic community, by sheer inertia, until the Federal Circuit finally put it out of its misery, holding that using it would get a quick Daubert exclusion.

But where is an expert to start the Georgia-Pacific analysis (i.e. a staring point from which the factors could be applied, plus and minus) without walking into the same trap?

In Sanofi, the expert presumed that the parties would have split the profits 50-50 and was met with an objection that this analysis was just as arbitrary as the "25% rule" struck down in Uniloc. The Court noted the problems the Federal Circuit had with the 25% rule: 1) "it fails to account for the unique relationship between the patent and the accused product," 2) "it fails to account for the unique relationship between the parties," and 3) "the rule is essentially arbitrary and does not fit within the model of the hypothetical negotiation within which it is based."

In this case, however, the court noted that the expert had relied on game theory to come up with his 50-50 split and that he had considered "the facts of the case, specifically the relationship between the parties and their relative bargaining power, the relationship between the patent and the accused product, the standard profit margins in the industry, and the presumed validity of the patent."

Thus, even after Uniloc, an expert can pick a "starting point" for his or her reasonable royalty analysis, but must be careful to have a rational, economically sound, basis for it.

LaserDynamics v. Quanta -- Limits to Grain Processing's Non-Infringing Alternative

In this case, LaserDynamics sued Quanta for infringing a patent for automatically determining the type os disk being used in a optical disk drive.

In the first trial, LaserDynamics received a verdict of $52 million, but could not hold on to it. Quanta filed and won a remittitur motion after which the court gave LaserDynamics a choice -- take $6.2 million or a new damages trial. LaserDynamics took the new trial.

In the new trial, Quanta's damages expert argued that the reasonable royalty would be relatively modest because Quanta had available to it an "acceptable non-infringing alternative," which would consequently have lowered the amount it would have licensed the patent for. The issue for the Court was whether the alternative was "available" to Quanta at the time of infringement under the Federal Circuit's decision in Grain Processing [which, although originally only applicable to lost profits analyses, has been used as part of a reasonable royalty analysis]

The LaserDynamics Court applied the Grain Processing test -- (1) could the defendant have readily obtained all of the material needed to implement the non-infringing alternative; (2) was the non-infringing alternative well known in the field at the time of infringement; and (3) did the defendant had all of the necessary equipment, know-how, and experience to use the non-infringing alternative.

The Court found that Quanta's expert had not shown that (1) the purported alternative was even on the market; or (2) even if it was on the Market, Quanta could have used it. The Court therefore excluded all of Quanta's damages expert's opinions to the extent they relied on an "acceptable non-infinging alternative" analysis.

Lear Automotive v. Johnson Controls -- Live or Die by the Survey?

Although the Federal Circuit has stated repeatedly that surveys -- when done properly -- can provide valuable evidence for patent damages analysis, litigants must be careful of how they use them, lest their opponents turn the tables on them.

In Lear Automotive v. Johnson Controls, the patent involved garage door openers and the programming of such units -- the issue being whether users programmed one or two buttons (the latter infringing, while the former did not).

Johnson Controls' damages expert relied on a survey provided him by the company which polled customers as to how they used the allegedly infringing units. He opined, based on that survey, that the infringing use was not very popular with consumers and that, in the hypothetical negotiation, JCI would have only agreed to a "modest" royalty rate.

Lear, however, had a quite different problem. To show direct infringement (which would support its claim for inducement against JCI) it had to show that at least one consumer used the allegedly infringing item in an infringing manner -- programming more than one button. however, it had no direct evidence than any consumer had done so. Thus, it turned to JCI's survey, arguing that this survey, which showed that a modest percentage of users programmed more than one button, nevertheless satisfied its burden, at least circumstantially, that one user employed this feature.

JCI was put in the position of arguing that the very evident it had submitted and on which its expert relied was inadmissible hearsay and was too unreliable to support Lear's claim of infringement. The court disagreed, finding that the survey data was admissible under the "adoption by use" doctrine and allowed Lear to use the survey to prove infringement.

So, although surveys can be useful for a defendant trying to show that a patent is not valuable, that defendant needs to look over his shoulder to make sure it can't be turned against him.

The Continuing Saga of ResQNet -- How Discoverable are Patent Settlement Negotiations?

Since the Federal Circuit's decision in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), holding that "litigation based" settlement agreements were at least potentially relevant to the determination of a reasonable royalty, there has been a substantial amount of controversy in the district courts as to how to apply it, or whether the issue could even be ignored altogether.

Since ResQNet represented a stark reversal of decades of authority holding that licenses entered into as settlement of actual or threatened litigation were somehow so "tainted" that they could not be used in any way in determining a reasonable royalty, there has been an understandable resistance to suddenly allowing parties to use these agreements at trial -- especially where sensitive settlement negotiations may be revealed. Indeed, defendants have started asking for -- any in some cases receiving -- discovery of settlement negotiations between plaintiffs in their own cases involving the very patents they were sued on.

This issue arose recently in two decisions by Magistrate Ashman of the Northern District of Illinois in MSTG, INC. v. AT&T Mobility LLC.

MSTG is what could broadly be described as a "patent troll" in the sense that it makes no products and its income is derived solely from licensing its patents (which are products of the research arm of the South Korean government). In discovery, it produced licenses for three of the patents-in-suit. AT&T, however, requested that it also produce documents relating to the settlement negotiations for those licenses. Judge Ashman held, however, that although ReQNet made the license agreements themselves relevant, AT&T had failed to show that ResQNet required the disclosure.

Now here's where it gets interesting.

Not to be dissuaded, AT&T moved for reconsideration -- and won.

AT&T's argument was that, because MSTG's expert stated that the prior license agreements should not be used as part of the hypothetical negotiation analysis because the rate was too heavily discounted, the actual settlement negotiations which led up to that agreement were relevant because they might show why the parties agreed on that rate. The court agreed.

This decision makes it clear that any settlement negotiations may be subject to discovery and that and plaintiffs in multi-defendant cases need to be extremely careful that their negotiations do not come back to bite them later, since they may not be able to hide behind carefully crafted agreements.

MasterObjects sues Google and Amazon on Instant Search Patent -- If It's Instant, What Took You So Long?

This week, a Netherlands company called MasterObjects (not a troll -- they actually appear to have a product) finally got around to suing Amazon.com and Google for infringing their patent on "instant search" -- the function which annoyingly "guesses" what your search is going to be while you are still typing it in.

It's no big surprise that companies go after Google and Amazon for patent infringement -- they're big targets that can well afford to pay for that license you wanted. What's surprising is that they didn't choose to go after Apple and eBay, who also employ the same function (as the Techcrunch article on teh subject pointed out). They also waited almost nine months since their patent issued to bring suit. And, when they did sue, they filed in the Northern District of California -- instead of the fashionable Eastern District of Texas.

I'm sure that this delay is mostly explained by (finally) busted license negotiations, but you wouldn't think it would take almost a year to figure out that Amazon and Google aren't handing out bags of gold and they aren't very afraid of your threats of injunction.

Or maybe the Dutch are just too polite to play smashmouth patent litigation with the rest of us. Join the party, boys -- dutch treat!