Tuesday, April 12, 2011

Mirror World v. Apple -- The Entire Market Value Rule Strikes Again

For damages purposes, this case is actually known for an apparent mixup, where the jury awarded damages per patent for essentially the same conduct -- a verdict that the plaintiff did not ask for, but later had to defend. However, the more interesting aspect of this decision [at least to me] is a fairly standard application of the entire market value rule.

The patents in this case related generally to the stacking and streaming of data. Virtually all of Apple's various products were accused (at least at first), though for the purposes of this analysis, the important accusation was that of the Mac OS X operating system -- particularly the functions Spotlight, Cover Flow and Time Machine, which the plaintiff claimed used the patented features.

Plaintiff's damages expert used as his royalty base not only the price of the software upgrade (to Mac OS X), but also the price of the hardware running that operating system (totaling $72 billion). He applied a royalty rate of 8.8% for the software upgrade and .81% for the hardware sales.

In analyzing whether the jury had properly considered the totality of Apple's hardware sales to calculate the reasonable royalty, the court examined whether the plaintiff's expert had employed the correct royalty base -- the revenue from the accused products. The court found that, although the plaintiff claimed not to have used the entire market value rule to construct its royalty base, the court found that it had, in fact, done so. Thus, the court had to determine whether this rule had been properly applied.

The plaintiff, in order to show consumer demand for the accused features of the Mac OS X, had commissioned a survey tracking consumer demand for various features of the Tiger-to-Snow Leopard upgrade. However, that survey did not cover two of the accused features -- Cover Flow and Time Machine.

Moreover, the surveys did not show that the patented features drove consumer demand for either the operating system or for the hardware -- thus making the plaintiff's use of the entire revenues for either the software or the hardware inappropriate under the entire market value rule.

Accordingly, the court found, the plaintiff "was obligated to properly apportion the royalty base to address the accused features, which it did not do." The court also found that it was inappropriate for the plaintiff to make such an apportionment simply by lowering the royalty rate (giving the rate a "haircut"), while applying that lowered rate to the revenues for the overall product -- the court thus threw out the damages award in its entirety.

On this last point, I personally disagree with the Mirror World court. I believe, as the Lucent v. Gateway court noted, that a royalty base based on the revenues for the "entire" product may be the only reliable royalty base, as "allocated" revenues are more likely to be speculative and inaccurate. I also do not believe, as the Mirror World court held, that Uniloc compels this result -- the Uniloc court's ruling in that regard, in my opinion, was case specific.