I/P Engine, Inc. v. AOL, Inc. et al
Declaration re 813 Reply to Response to Motion of Stephen L. Becker, Ph.D. In Further Support Of Plaintiff I/P Engine, Inc.S Motion For An Award Of Prejudgment Interest, Post-Judgment Interest And Damages For Defendants Continuing Infringement by I/P Engine, Inc.. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3)(Sherwood, Jeffrey)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF VIRGINIA
AOL, INC. et al.,
I/P ENGINE, INC.,
Civ. Action No. 2:11-cv-512
DECLARATION OF STEPHEN L. BECKER, PH.D. IN FURTHER SUPPORT
OF PLAINTIFF I/P ENGINE, INC.’S MOTION FOR AN AWARD OF
PREJUDGMENT INTEREST, POST-JUDGMENT INTEREST AND
DAMAGES FOR DEFENDANTS’ CONTINUING INFRINGEMENT
I, Stephen L. Becker, Ph.D., declare as follows:
I submit this declaration in further support of Plaintiff I/P Engine, Inc.’s (“I/P
Engine”) Motion for an Award of Prejudgment, Post-Judgment Interest and Damages, and to
respond to the statements made in the Declaration of Keith R. Ugone submitted in support of
Defendants’ Opposition to I/P Engine’s Motion. I have personal knowledge of the facts set forth
in this Declaration. If called upon to testify, I could and would certify competently to these facts.
As I explained in my November 9, 2012 Declaration, the methodology that I used
in deriving my prejudgment-interest calculation was as follows: (a) I determined the average
prime interest rate, as reported by the Federal Reserve, that prevailed during each quarter of the
period since September 15, 2011 to November 6, 2012; (b) I allocated by Defendant the
proportional damages awarded by the jury to the infringing revenues, by quarter, from the third
quarter of 2011 through the third quarter of 2012; (c) I then determined the number of quarters of
interest that would be due on each of those amounts; and (d) using the average prime interest
rate, as reported by the Federal Reserve, and compounded quarterly, I computed the amount of
interest presently due on the royalties associated with each quarter. Using this methodology I
calculated the prejudgment interest due on the damages awarded by the jury from September 15,
2011 to November 6, 2012 to be $643,084. See Exhibit A of my November 9, 2012 Declaration
In his Declaration, Dr. Ugone does not dispute my ultimate calculation. Instead,
he takes issue with what he calls my “’midpoint’ formula” of calculating the interest. (See Ugone
Decl., ¶ 6.) In arriving at my calculation, I assume that the damages were incurred by Google
and the other Defendants ratably over each quarter and, hence, I/P Engine earned those royalties
ratably over each quarter. My method calculates the interest that is due on the infringement as it
occurred. In my experience, this is an accepted and appropriate method for calculating
prejudgment interest. And it is the only calculation that will fully compensate I/P Engine for
For example, for Google’s infringement from October 1, 2011 through December
31, 2011 (i.e. “Q4 2011”), Dr. Ugone assumes the allocated damages for Google are
$3,805,236.1 He assumes that interest begins to accrue on those damages on the last day of the
quarter, namely on December 31, 2011. He calculates the interest for that quarter’s allocated
damages as 311 days of interest (i.e. the number of days from December 31, 2011 to November
6, 2012) times a daily interest rate. The result of his calculation (in his Prime Rate scenario) is
I note that Dr. Ugone’s allocation of the damages award to various quarters differs slightly, but
not materially, from my allocation method. Dr. Ugone allocates the damages award ratably over
the period from September 15, 2011 through September 30, 2012 based on the number of days in
each quarter. See Ugone Decl., Exhibit 1, footnote (b). In contrast, I allocated the damages
award based on the proportion of the underlying accused revenue of each Defendant in each
quarter. See my November 9, 2012 Declaration, ¶ 4 (Dkt. 794).
$105,374. A consequence of Dr. Ugone’s assumption regarding when interest begins to accrue
is that Google’s infringement that occurred on October 1, 2011, for example, and for which I/P
Engine was awarded damages, accrues no interest until December 31, 2011 and, only after that
date does I/P Engine begin to be credited with interest on those royalties.
In contrast, I assume that the royalties for Q4 2011 are earned ratably over each
quarter which has the result of making the midpoint of the quarter the effective date from which
interested is calculated. For example, for the Q4 2011 allocated royalty, I assumed that I/P
Engine is owed four full quarters of interest at a quarterly interest rate of 0.813% (3.25% annual
rate divided by 4). Using my methodology, the interest for Q4 2011 is $123,310. This is a
common and accepted way to estimate the timing of payments that occur ratably over a period,
such as a quarter. Dr. Ugone does not appear to dispute this.
The difference between Dr. Ugone’s result of $105,374 and my $123,310 in
interest for Google’s allocated damages for Q4 2011 is almost entirely due to the fact that Dr.
Ugone has calculated only 311 days of interest on the $3,805,236 of principal (# of days from
12/31/2011 through 11/6/2012), while I calculate interest on that amount for a full year (i.e., the
Q4 2011 allocated damages is for royalties that royalty were earned in Q4 2011 and we are now
in Q4 2012, a full four quarters later).
Dr. Ugone’s calculation of pre-judgment interest includes interest that is
compounded annually. (See Ugone Decl. ¶ 5.) Dr. Ugone provides no explanation or
justification for the use of annual compounding as opposed to quarterly compounding. His use
of annual compounding is inconsistent with his explicit assumption that the royalties owed to I/P
Engine would have been paid quarterly. (See Ugone Decl. ¶ 5.) In contrast, my approach
includes quarterly compounding, consistent with the assumed timing of the underlying
infringement that was found to have occurred.
Dr. Ugone presents two pre-judgment interest scenarios, one based on the 1-Year
T-Bill Rate and another based on the Prime Rate. Using the T-Bill rate, he calculates total
interest of $27,329. Using the Prime Rate he calculates total interest of $499,197. As reflected
in Dr. Ugone’s calculations, the T-Bill rate has been less than 0.2% over the period from
September 15, 2011 through November 6, 2012. (See Ugone Decl. Exhibit 1). Dr. Ugone
provides no opinion or explanation that would justify the use of the T-Bill rate as a basis to
compensate I/P Engine for the time value of the royalties that it did not, in fact, receive at the
time of the Defendants’ infringement.
It is my opinion that the T-Bill rate does not provide a reasonable basis upon
which to calculated pre-judgment interest in this case. If the purpose of pre-judgment interest is
to make I/P Engine economically and financially “whole” for the lack of use of the royalties that
it was awarded by the jury, the T-Bill rate would not accomplish that goal. Even the Prime Rate
of 3.25% undercompensates I/P Engine for the true cost of its capital. Vringo’s cost of capital
during the PJI period is approximately 21.1% (see Exhibit 1 attached hereto). Thus, applying the
Prime Rate of 3.25% to the damages award is highly conservative, fair and reasonable. Even
from Google’s perspective, the Prime Rate of 3.25% is far less than its cost of capital which,
during the PJI period, has averaged 9.54%. (see Exhibit 2 attached hereto).
In contrast, the T-Bill rate represents the cost of borrowing of the Federal
Government. It is not a reasonable basis upon which to calculate the time value of the royalties
that I/P Engine was awarded by the jury for Google’s and the other Defendants’ infringement.
Dr. Ugone also takes issue with the factors that I would use in calculating
supplemental damages. (See Ugone Decl., ¶ 8).
The parties do not dispute that the appropriate form of damages is a running
royalty. The parties also do not dispute that the jury awarded a royalty rate of 3.5%. The only
disagreement appears to be over the appropriate apportionment factor to use to arrive at the
royalty base to which the 3.5% royalty rate would apply.
In my November 9, 2012 Declaration, I explain that the appropriate
apportionment percentage is 20.9%. This is the flat going-forward apportionment percentage
that I presented at trial (Trial Tr. at 820-21). The 20.9% apportionment factor is applied to
Defendants’ total U.S. revenues from the accused systems, AdWords, AdSense For Search and
AdSense For Mobile Search (derived from the requested accounting) to determine the
apportioned royalty base.
According to Dr. Ugone, an apportionment rate of 2.8%, not 20.9%, should be
used for the calculation of Google’s supplemental damages. He arrives at this figure by visually
estimating the height of bars on a demonstrative exhibit presented to the jury (PDX-441) and
comparing those estimated amounts to the $15.8 million that the jury awarded from Google. (See
Ugone Decl. ¶ 8 and Exh. 2.) Several things are obvious from Dr. Ugone’s calculation and his
resulting opinion that the appropriate apportionment percentage should be 2.8%. Dr. Ugone’s
methodology ignores the fact that the jury awarded damages to I/P Engine from AOL, IAC,
Gannett and Target as well as from Google. Dr. Ugone estimates the ratio of the jury award
against Google as a proportion of the estimated $118 million in claimed damages for the period
September 15, 2011 through September 30, 2011. (See Ugone Decl. Exhibit 2) Even assuming
the premise of his calculation was reasonable (which it is not), the calculation is flawed on its
face. The damages figures presented to the jury in graphical form at PDX-083 and again at
PDX-441 were the total damages for all defendants, not just the damages associated with
Google’s infringement. This can be seen by comparing the bar chart at PDX-083, which is
clearly labeled as totaling $493 million in royalties, to PDX-441, the bar chart used by Dr.
Ugone. Both present identical royalty amounts, with the only difference being that in PDX-441
the bars for Q4 2011 through Q3 2012 have been shaded, reflecting the post-laches time period.
That the total amount of these bars, $493 million in royalties, represents all defendants, not just
Google, is evident from the trial transcript and from PDX-055, a summary of the royalty
damages that I presented to the jury during the trial. (Trial Tr. at 767:20-768-8).
By using only the $15.8 million awarded against Google and ignoring the
$14,696,155 awarded against the other Defendants, Dr. Ugone is suggesting a meaningless and
unreliable apportionment percentage. This can be demonstrated by applying his 2.8%
apportionment factor to the period covered by the actual award. Total accused revenues
(including the Google co-defendants) for the period from September 15, 2011 through
September 30, 2012 were, based on accounting documents produced by Google (and admitted as
trial exhibits?) were $16,181,666,400.
Dr. Ugone’s 2.8% apportionment factor, if applied to
these undisputed amounts of revenue yield total royalties, for all defendants, of $15,858,033, not
the total jury award of $30,496,155.
The only relevant apportionment percentage proffered at trial, however, and the
only apportionment percentage ever suggested to the jury was 20.9%. Neither PDX-441 nor any
other exhibit or demonstrative introduced at trial supports a 2.8% apportionment factor. To
arrive at Dr. Ugone’s conclusion, one must ignore all evidence presented at trial, back into an
implied speculative apportionment factor, and ignore the rest of the jury award.
The likely reason for Defendants’ convoluted apportionment calculation and
exclusion of the damages awarded from the other defendants is the decimal point transposition
error made by the jury in the verdict form. Based on my review of the verdict form and evidence
submitted in this case, it is clear that the jury, in an apparent effort to adjust the total damages
down to just the post-laches damages period, applied a percentage to the originally pre-laches
damages amount of $493 million.2 A simple mathematical calculation bears this out. Using the
$493 million, including the Defendant-specific breakdown as the base, the jury awarded 35% of
the damages I/P engine sought for the original damages period for each of AOL, IAC, Gannett,
and Target. (See attached Exhibit 3) For each of these defendants, there can be no question that
the jury applied its 3.5% royalty rate to the only apportionment factor that was presented at trial:
20.9%. The equivalent damages figure against Google, consistent with this approach, should
have been $158,000,000. However, for Google, the jury awarded $15,800,000. This amount is
simply 3.5% of the damages I/P sought for the original damages period—one tenth the amount
awarded for the other defendants. (See attached Exhibit 3) The evidence of the underlying
revenues for each of these defendants was the same. The apportionment percentage that was
presented to the jury was always the same for all defendants, namely 20.9%. The royalty rate
opinion I offered, 3.5%, was always the same for all Defendants. Thus, the portion of the
amount I/P Engine sought for the original damages period should have been the same for each of
the defendants. Because of the exactness of the numbers being 10 times off, the most plausible
explanation is a simple decimal point transposition.
Again, the only apportionment percentage (relevant to this issue) with which the
jury was ever presented was 20.9%. In contrast, there was no evidence at all of a 2.8% factor
(See PDX-055 for an example of the damages breakdown by Defendant that was presented to
and, in particular, no evidence upon which one could conclude that the intended royalty rate to
be applied to Google was an order of magnitude lower than the other defendants. To arrive at Dr.
Ugone’s conclusion, one must jump through multiple hoops—none of which were ever proffered
I declare under penalty of perjury that the foregoing is true and correct. Signed
December 7, 2012 in Austin, Texas.
__/s/ Stephen L. Becker____________
Stephen L. Becker, Ph.D.
CERTIFICATE OF SERVICE
I hereby certify that on this 7th day of December, 2012, the foregoing DECLARATION
OF STEPHEN L. BECKER, PH.D. IN FURTHER SUPPORT OF PLAINTIFF I/P
ENGINE, INC.’S MOTION FOR AN AWARD OF PREJUDGMENT INTEREST, POSTJUDGMENT INTEREST AND DAMAGES FOR DEFENDANTS’ CONTINUING
INFRINGEMENT, was served via the court’s CM/ECF system, on the following:
Stephen Edward Noona
Kaufman & Canoles, P.C.
150 W Main St
Norfolk, VA 23510
Quinn Emanuel Urquhart & Sullivan LLP
50 California Street, 22nd Floor
San Francisco, CA 94111
Robert L. Burns
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
Two Freedom Square
11955 Freedom Drive
Reston, VA 20190
Cortney S. Alexander
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
3500 SunTrust Plaza
303 Peachtree Street, NE
Atlanta, GA 94111
/s/ Jeffrey K. Sherwood