Lucent Technologies, Inc. et al v. Gateway, Inc. et al
Filing
1323
ORDER granting in part and denying in part 1302 Defendant Microsoft's Motion in Limine Concerning Sims' Supplemental Expert Report. The Court grants the motion in limine to exclude Lucents Supplemental Exhibit 5.1, but reserves the right to revisit the ruling. The Court also grants the motion in limine to exclude Lucents alternative analysis of damages. The Court denies the motion to exclude the business realities approach without prejudice to any contemporaneous objections at trial and subject to any post-trial motions. Signed by Judge Marilyn L. Huff on 7/13/2011. (All non-registered users served via U.S. Mail Service)(mtb)
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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LUCENT TECHNOLOGIES, INC.,
CASE NO. 07-CV-2000 H (CAB)
Plaintiff,
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vs.
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MICROSOFT CORPORATION,
Defendant.
ORDER GRANTING IN PART
AND DENYING IN PART
DEFENDANT MICROSOFT’S
MOTION IN LIMINE
CONCERNING SIMS’
SUPPLEMENTAL EXPERT
REPORT
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On June 29, 2011, Defendant Microsoft Corporation filed a motion in limine to limit
Lucent’s damages theories from its expert’s, Raymond Sims, June 23, 2011 supplemental expert
report. (Doc. No. 1302.) On July, 7, 2011, Plaintiff Lucent Technologies, Inc. filed an
opposition. (Doc. No. 1311.) The Court held a motion hearing on July 13, 2011. Luke L.
Dauchot and Jeanne Heffernan appeared on behalf of Plaintiff Lucent. Juanita Brooks, Roger
Denning, Francis Albert, and Michael Rosen appeared on behalf of Defendant Microsoft. After
due consideration, the Court GRANTS in part and DENIES in part the motion in limine.
DISCUSSION
Microsoft brings this motion in limine to challenge the supplemental report on damages
submitted by Lucent’s expert Raymond Sims as in violation of Daubert v. Merrell Dow
Pharms., Inc., 509 U.S. 579, 597 (1993), and the entire market value rule. Uniloc USA, Inc. v.
Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011).
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1
The Court has already ruled on two sets of motions in limine filed by the parties. (See
2 Doc. Nos. 1179-80, 1284-85.) The first motions in limine were filed on December 7, 2010.
3 (See Doc. Nos. 1008-1013, 1020-1032.) On the day of the motion hearing, January 4, 2011,
4 the Federal Circuit rendered its opinion in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292
5 (Fed. Cir. 2011). In Uniloc, the Federal Circuit rejected the 25% rule of thumb under Daubert
6 holding that the rule “fails to tie a reasonable royalty base to the facts of the case at issue” and
7 further clarified the entire market value rule. 632 F.3d at 1315. In light of the impact of the
8 Uniloc opinion on the damages analysis in this case, the Court permitted the parties to update
9 their damages expert reports and submit additional briefing.
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The parties filed their second set of motions in limine on May 13, 2011. (Doc. Nos.
11 1219-22; 1224-25.) On June 16, 2011, the Court issued its order denying in part and granting
12 in part the motions. (Doc. Nos. 1284-85.) In its order regarding Lucent’s damage calculations,
13 the Court stated that “[i]n summary, the Court concludes that Lucent fails to properly apportion
14 its damages calculation to separate between the patented features and unpatented features of
15 Microsoft Outlook. Lucent must perform an additional apportionment in order to introduce a
16 proper royalty base for its damages calculation or meet the three factored test for the entire
17 market value rule if it seeks to use all revenue from infringing copies of Outlook as its base.”
18 (Doc. No. 1284 at 14.) In light of the rulings in its order, the Court granted the parties another
19 opportunity to supplement their damages expert reports to comport with the rulings. (See Doc.
20 Nos. 1284-85.) In addition, the Court allowed further objections to be filed on modified expert
21 reports. (Id.) On June 23, 2011, Lucent’s expert Raymond Sims supplied his supplemental
22 expert report. Microsoft brings this present motion on the grounds that the supplemental expert
23 report fails to comport with the Court’s previous ruling on apportionment.
Legal Standard under Daubert
24 I.
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Under Daubert, the court is charged with a “gatekeeping function” to ensure expert
26 testimony is both reliable and relevant. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579,
27 597 (1993). Courts have the “responsibility of ensuring that all expert testimony must pertain
28 to ‘scientific, technical, or other specialized knowledge.’” Uniloc, 632 F.3d at 1315. The court
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1 must decide if such testimony is based on a “firm scientific or technical grounding” as required
2 under Federal Rule of Evidence 702. Id. Under Rule 702, a witness qualified as an expert by
3 knowledge, skill, experience, training or education can testify in opinion or otherwise if: (1) the
4 testimony is based on sufficient facts or data; (2) the testimony is the product of reliable
5 principles and methods; and (3) the witness has applied the principles and methods reliably to
6 the facts of the case. Fed. R. Evid. 702. Rule 703 of the Federal Rules of Evidence permits
7 experts to render opinions even if based on inadmissible evidence so long as the inadmissible
8 evidence is of the type reasonably relied on by experts in that field. Daubert, 509 U.S. at 595.
9 Such inadmissible facts or data may be admissible as the basis for an expert’s opinion if their
10 “probative value in assisting the jury to evaluate the expert’s opinion substantially outweighs
11 their prejudicial effect.” Fed. R. Evid. 703.
In addition to reliability and relevancy, “the patentee must sufficiently tie the expert
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13 testimony on damages to the facts of the case.” Uniloc, 632 F.3d at 1315 (citing Daubert, 509
14 U.S. at 59)). “[O]ne major determinant of whether an expert should be excluded under Daubert
15 is whether he has justified the application of a general theory to the facts of the case.” Id. If
16 the expert methodology is sound and the evidence relied upon sufficiently relates to the case
17 at hand, disputes about the degree of relevance or accuracy may go to the testimony’s weight
18 but not its admissibility.
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For a proper calculation of patent damages, the Federal Circuit requires “sound economic
20 and factual predicates.” See Riles v. Shell Exploration and Prod. Co., 298 F.3d 1301, 1311
21 (Fed. Cir. 2002); see also Grain Processing Corp. v. American Maize-Products Co., 185 F. 3d
22 1341, 1350 (Fed. Cir. 1999) (“To prevent the hypothetical from lapsing into pure speculation,
23 this court requires sound economic proof of the nature of the market and likely outcomes with
24 infringement factored out of the economic picture.”); Crystal Semiconductor Corp. v. TriTech
25 Microelectronics Intern., Inc., 246 F.3d 1336, 1355 (Fed. Cir. 2001) (“Such market
26 reconstruction, though hypothetical, requires ‘sound economic proof of the nature of the
27 market.’”).
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Accordingly, any economic expert testifying about patent damages must base the opinion
2 on sound economic principles meeting the test in Daubert and Rule 702 of the Federal Rules
3 of Evidence. A trial court’s decision to admit expert testimony under Daubert follows the law
4 of the regional circuit. Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1390-91 (Fed. Cir.
5 2003). A trial court has broad discretion in assessing the relevance and reliability of expert
6 testimony. United States v. Finley, 301 F.3d 1000, 1007 (9th Cir. 2002). The requirement of
7 Rule 702(1) “is not intended to authorize a trial court to exclude an expert’s testimony on the
8 ground that the court believes one version of the facts and not the other.” Fed. R. Evid. 702,
9 Adv. Comm. Note (2000). The inquiry into admissibility of expert opinion is a “flexible one,”
10 where “[s]haky but admissible evidence is to be attacked by cross examination, contrary
11 evidence, and attention to the burden of proof, not exclusion.” Primiano v. Cook, 598 F.3d 558,
12 564 (9th Cir. 2010). “Under Daubert, the district judge is ‘a gatekeeper, not a fact finder.’
13 When an expert meets the threshold established by Rule 702 as explained in Daubert, the expert
14 may testify and the jury decides how much weight to give that testimony.” Id. (quoting United
15 States v. Sandoval-Mendoza, 472 F.3d 645, 654 (9th Cir. 2006)). As the Supreme Court noted
16 in Daubert, “[v]igorous cross-examination, presentation of contrary evidence, and careful
17 instruction on the burden of proof are the traditional and appropriate means of attacking shaky
18 but admissible evidence.” 509 U.S. at 596.
There are two alternative categories of infringement compensation: the patentee’s lost
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20 profits and the reasonable royalty the patentee would have received through arms-length
21 bargaining. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009).
22 “Determining a fair and reasonable royalty is often . . . a difficult judicial chore, seeming often
23 to involve more the talents of a conjurer than those of a judge.” ResQNet.com Inc. v. Lansa,
24 Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). To ascertain the reasonable royalty, patentees
25 commonly consider a hypothetical negotiation, in which the asserted patent claims are assumed
26 valid, enforceable, and infringed, and attempt to ascertain the royalty upon which the parties
27 would have agreed had they successfully negotiated an agreement just before infringement
28 began. Lucent, 580 F.3d at 1324–25; Georgia–Pacific Corp. v. U.S. Plywood Corp., 318 F.
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1 Supp. 1116, 1120 (S.D.N.Y.1970); see also Rite–Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554
2 n.13 (Fed. Cir.1995) (en banc). Thus, the hypothetical negotiation which “attempts to ascertain
3 the royalty upon which the parties would have agreed had they successfully negotiated an
4 agreement just before infringement began,” necessarily “involves an element of approximation
5 and uncertainty.” Lucent, 580 F.3d at 1324-25.
A lump sum license is a “upfront, paid-in-full royalty.” Lucent, 580 F.3d at 1326. A
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7 lump sum royalty benefits the licensor by raising a substantial amount of money quickly. Id.
8 On the other hand, a lump sum royalty benefits the licensee by limiting its liability and allowing
9 it to use the patented technology without any concerns of further expenditure. Id. Furthermore,
10 a lump sum royalty removes inherent risks in such negotiations, such as the risk of
11 underreporting of actual usage of the patented technology by the licensee, and eliminates
12 administrative burdens of having to monitor usage. Id. A lump sum royalty also eliminates any
13 ability for the licensee to reevaluate the usefulness and value of the patented technology—the
14 licensee is obligated to pay the agreed-upon lump sum royalty regardless of whether the
15 patented technology is successful or even used. Id. While a lump sum royalty may eliminate
16 risks for both parties, it may also create risks. If either party forecasts the popularity or use of
17 the patented feature incorrectly, a licensee may end up paying a lump-sum far in excess of what
18 the patented invention is later shown to be worth or a licensor may end up accepting a
19 lump-sum that is far less than what the patented invention is later shown to be worth. Id.
During negotiation for a lump-sum royalty figure, the parties may “consider the expected
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21 or estimated usage” of the patented invention. Lucent, 580 F.3d at 1327. Generally, a more
22 frequently used invention is more valuable and commands a high lump-sum royalty. Id.
23 Conversely, a minimally used feature will command a lower lump-sum payment. The lump sum
24 analysis does not require the parties to precisely calculate the use of the patented feature, unlike
25 a running royalty license. In a typical running royalty, the license is tied to the use of the
26 patented feature standing alone or incorporated into other products. “Royalties are dependent
27 on the level of sales or usage by the licensee.” Lucent, 580 F.3d at 1326. In a lump sum
28 calculation, the parties agree on a fully paid up amount based on “expected or estimated usage.”
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1 Id. at 1327. “Running-royalty agreements can be relevant to lump-sum damages, but ‘some
2 basis for comparison must exist in the evidence presented to the jury.’” Wordtech Systems, Inc
3 v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir. 2010)(quoting Lucent,
4 580 F.3d at 1330). There must be some link between the licensed patent and the infringed
5 patent in order to properly consider royalties received for the licensed patent. ResQNet.com,
6 Inc., 594 F.3d at 869; Lucent, 580 F.3d at 1329.
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The entire market value rule “recognizes that the economic value of a patent may be
8 greater than the value of the sales of the patented part alone.” See King Instruments Corp. v.
9 Perego, 65 F.3d 941, 951 n.4 (Fed. Cir.1995). “The entire market value rule allows a patentee
10 to assess damages based on the entire market value of the accused product [if] the patented
11 feature creates the ‘basis for customer demand’ or ‘substantially create[s] the value of the
12 component parts.’” Uniloc USA Inc. v. Microsoft Corp., 632 F.3d 1292, 2011 (Fed. Cir.2011)
13 (citing Lucent, 580 F.3d at 1336; Rite–Hite, 56 F.3d at 1549–50). “[T]he patentee ... must in
14 every case give evidence tending to separate or apportion the defendant’s profits and the
15 patentee’s damages between the patented feature and the unpatented features, and such evidence
16 must be reliable and tangible, and not conjectural or speculative,” or show that “the entire value
17 of the whole machine, as a marketable article, is properly and legally attributable to the patented
18 feature.” Uniloc, 632 F.3d 1292, 1318 (citing Garretson v. Clark, 11 U.S. 120, 121 (1884)); see
19 also Lucent, 580 F.3d at 1336–37. For minor patent improvements, a patentee cannot justify
20 using the entire market value of an accused product simply by asserting a low enough royalty
21 rate. Mirror Worlds, LLC v. Apple, Inc., --- F. Supp.2d ----, 2011 WL 1304488, at *16 (E.D.
22 Texas., April 4, 2011) (citing Uniloc, 632 F.3d 1292, 1320. Although a reasonable royalty
23 analysis “necessarily involves an element of approximation and uncertainty,” Unisplay, S.A.
24 v. Am. Elec. Sign Co., 69 F.3d 512, 517 (Fed. Cir.1995), the Court must ensure that the jury
25 verdict is supported by sufficient evidence.
26 II.
Analysis
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Lucent’s damages expert presents three “approaches” to damages calculation—the
28 Georgia-Pacific Approach, the Business Realities Approach, and the Alternative Analysis.
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1 (Doc. No. 1302, Ex. A.) Microsoft challenges all three approaches and moves to exclude Sims’
2 supplemental report. (Doc. No. 1302.)
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A.
Lucent’s “Georgia-Pacific Approach”
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Lucent’s supplemental report now includes a new section, titled “Supplemental Analysis
5 that Accounts for Lucent’s Actual Licensing Policy and Executed Agreements.” (Doc. No.
6 1302, Ex. A, Supplemental Expert Report of Raymond Sims (“Sims Supp. Report”).) Within
7 that section, the first subsection is titled “The Georgia-Pacific Approach.” (Id. at 6). Microsoft
8 objects to this subsection as a violation of the entire market value rule to the extent that it
9 applies a royalty rate of “1% per patent to their fair market value of the end product sold by the
10 licensee.” (Id. at 6.) Microsoft is really objecting to the calculation it contends underlies this
11 subsection, presented in Supplemental Exhibit 5.1. (See Doc. No. 1302, at 7.)
“The entire market value rule allows a patentee to assess damages based on the entire
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13 market value of the accused product only where the patented feature creates the ‘basis for
14 customer demand’ or ‘substantially create[s] the value of the component parts,’” Uniloc, 632
15 F.3d at 1318 (citing Lucent, 580 F.3d at 1336; Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d
16 1538, 1549-50 (Fed. Cir. 1995)), or where the patented feature was of “such paramount
17 importance that it substantially created the value of the component parts,” Rite-Hite, 56 F.3d
18 at 1549. Application of the entire market value rule requires adequate proof of three conditions:
19 “(1) the infringing components must be the basis for customer demand for the entire machine
20 including the parts beyond the claimed invention, Fonar Corp. v. Gen. Elec. Co., 107 F.3d 1543,
21 1552 (Fed. Cir. 1997); (2) the individual infringing and non-infringing components must be sold
22 together so that they constitute a functional unit or are parts of a complete machine or single
23 assembly of parts, Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed.
24 Cir. 1984); and (3) the individual infringing and non-infringing components must be analogous
25 to a single functioning unit, Kalman v. Berlyn Corp., 914 F.2d 1473, 1485 (Fed. Cir. 1990).
26 Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 286-87 (N.D.N.Y. 2009). It is not
27 enough that the infringing and non-infringing parts are sold together for mere business
28 advantage. See Rite-Hite, 56 F.3d at 1549-50.
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Unless a party satisfies the entire market value test, a patentee seeking damages for a
2 component cannot use the entire market value of the larger product as a royalty base. Uniloc
3 clarified that it is not enough to simply assert a low enough royalty rate and be able to use the
4 entire market value of the product without showing that the patented feature is the basis—or a
5 substantial basis—for consumer demand. 632 F.3d at 1319-20. It rejected the argument that
6 “the base used in a running royalty calculation can always be the value of the entire commercial
7 embodiment, as long as the magnitude of the rate is within an acceptable range as determined
8 by the evidence.” See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1338-39 (Fed. Cir.
9 2009). Instead, in Uniloc, the Federal Circuit noted that the qualifying language in the Lucent
10 case just before this statement that forecloses this argument: “[t]he first flaw with any
11 application of the entire market value rule in the present case is the lack of evidence
12 demonstrating the patented method of the Day patent as the basis—or even a substantial
13 basis—of the consumer demand for Outlook.” Uniloc, 632 F.3d at 1219-20; see Lucent, 580
14 F.3d at 1338. If the patentee cannot meet this test, then “the patentee . . . must in every case
15 give evidence tending to separate or apportion the defendant’s profits and the patentee’s
16 damages between the patented feature and the unpatented features.” Uniloc, 632 F.3d at 1318
17 (citing Garretson v. Clark, 111 U.S. 120, 121 (1884)).
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In its previous February 4, 2011 expert report, Lucent’s expert uses the following
19 apportionment methodology:
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“Under this apportionment analysis, the base (revenue from Outlook) would be
multiplied by 83% of users who use Outlook Calendar to manage work appointments,
events, or meetings. The discounted base would be further adjusted to account only for
the 84% of Calendar users who set up new appointments or meetings, an activity that
implicates the Day patented technology. The base would then be further adjusted to
account only for the 77% of Outlook Calendar users who use the patented technology
when entering the date of a new appointment.
24 (Doc. No. 1302 Ex. B, Expert Report of Raymond Sims, at 61.) The Court concluded that this
25 apportionment does not properly apportion between the patented and unpatented features of
26 Outlook in a way that separates out from the royalty base the portion that can be attributed to
27 the Day patent technology. See Uniloc, 632 F.3d at 1318. In particular, the Court pointed out:
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Though Lucent discounts the base to include only the revenue from Outlook where a
user uses the Day patent technology, Lucent fails to show that it is entitled to capture this
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entire market value as the base. Specifically, Lucent has not shown that the Day patent
technology is the basis for consumer demand for most Outlook users. At best, Lucent
has introduced evidence to show that the Day patent technology is the basis for
consumer demand for about 7% of users based on the Jay survey. (See Doc. No. 1226
Ex. L, Deborah Jay survey report; Doc. No. 1252 Ex. G, Deborah Jay survey report App.
E at Table 15.) For a product that is feature-rich like Outlook, use as a proxy for value
does not appropriately account for all the other unpatented features that consumers use
besides the Day patent technology even when consumers invoke the Day patent
methods. See IP Innovation LLC v. Redhat, Inc., 705 F. Supp. 2d 687, 689-90 (E.D.
Tex. 2010).
For example, every time a user invokes the Day patent technology to schedule a
new appointment or meeting, the user may contemporaneously use several other
patented features. Moreover, just because a user of Outlook uses the Day patent
technology does not mean that the user does not at other times use the other patented
features of Outlook. Thus, under Lucent’s argument, if a user uses the Day patent
technology, revenue from the sale of Outlook to this user is included in the royalty base.
The user may also use Outlook for email or tasks or the other features in calendar.
Lucent does not show why it is entitled to a royalty base for the 43% of customers who
use the Day patent technology where other features, in addition to the Day patent
technology, are used. Put into concrete terms, if a sample user uses the infringing Day
patent technology but also uses many other features in Outlook, Lucent has not shown
that it is entitled to include in the royalty base all $67 of revenue generated from this
sample user.
13 (Doc. No. 1284 at 12-13.)
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Accordingly, the Court concluded that “Lucent fail[ed] to properly apportion its damages
15 calculation to separate between the patented features and unpatented features of Microsoft
16 Outlook. Lucent must perform an additional apportionment in order to introduce a proper
17 royalty base for its damages calculation or meet the three factored test for the entire market
18 value rule if it seeks to use all revenue from infringing copies of Outlook as its base.” (Id. at
19 14-15.)
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Microsoft contends that even after the Court’s order, Lucent still fails to apportion. After
21 a review of Sims’s new damages calculations, the Court agrees. Sims now purports to do a “per
22 unit analysis.” (Sims Supp. Report at 3, Ex. 5.0-5.1.) The calculation that Sims now performs
23 is as follows:
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$67.39
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(per unit price
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x
109,537,000
x
of Outlook)
(total # units)
1%
=
$73,820,500
(royalty rate)
27 (Id. at Ex. 5.1.)
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Numerically, this yields the same results as if Lucent were to perform the following
3 calculation:
$7,382,046,800
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x
1%
=
$73,820,500
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(total revenue of Outlook)
(royalty rate)
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The first equation (which Lucent now urges the Court to accept) is less prejudicial than
7 the second in that it breaks the $7,382,046,800 figure into its constituent parts–the per unit price
8 of Outlook and the total number of units. However, while the Uniloc court was concerned about
9 the prejudicial effect of letting the entire revenue number out in front of the jury, it further
10 stated that unless the patentee can show that the component was the basis or a substantial basis
11 for consumer demand, then “the patentee . . . must in every case give evidence tending to
12 separate or apportion the defendant’s profits and the patentee’s damages between the patented
13 feature and the unpatented features.” Uniloc, 632 F.3d at 1318 (citing Garretson v. Clark, 111
14 U.S. 120, 121 (1884)). Lucent’s per unit analysis still relies solely on the whole per unit price
15 of Outlook—$67.39—without apportioning this to account for all the other unpatented features
16 that consumers use besides the Day patent technology even when consumers invoke the Day
17 patent methods.
Lucent contends that it should be allowed to introduce the entire market value of Outlook
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19 because such consideration is rooted in its license practices, as shown through the Acer and
20 Locus licensing agreements. As the Court has previously recognized, these licenses may be
21 relevant to Georgia-Pacific factors 1, 4, and 12. (Doc. No. 1284 at 15-16.) However, the Court
22 explicitly stated that “Lucent may introduce its “Alternative Apportionment” on a unit price of
23 Outlook. Lucent needs to further apportion by some measure to separate between the patented
24 and unpatented features as tied to the facts of this case and economic realities.” (Id. at 14.)
25 Lucent has failed to apportion by any further measure contrary to the Court’s June 16, 2011
26 Order. Accordingly, the Court GRANTS Microsoft’s motion to exclude Supplemental Exhibit
27 5.1 of Sims’ Supplemental Report (Sims’ Supp. Report at 15) for failure to apportion, but
28 reserves the right to revisit this ruling at trial if Lucent meaningfully apportions the per unit
price of Outlook, or otherwise convinces the court outside the presence of the jury that Exhibit
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1 5.1 is permissible.
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B.
Lucent’s Business Realities Approach
Microsoft further objects to Lucent’s business realities approach. Lucent’s business
5 realities approach methodology considers the negotiation between Microsoft and Lucent,
6 assuming that Microsoft would want a royalty as close to zero as possible and Lucent would
7 want a royalty rate as close to the full value of the Day patent technology as possible. (Sims
8 Supp. Report at 8.) Sims values the full value of the Day patent technology at $138.7 million
9 based on the results of his Results Analysis. The Court previously allowed this analysis and
10 stated that it was an attempt to show the value of the Day patent technology to consumers as
11 suggested by the Federal Circuit in Lucent. (Doc. No. 1284 at 20-21.) The Court further noted
12 that Microsoft’s objections are not appropriate as going to the weight of the evidence, not its
13 admissibility and allowed Microsoft to challenge the results on cross-examination. (Id. at 2114 22.)
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In Lucent, the Federal Circuit stated that “[l]itigants routinely adopt several approaches
16 for calculating a reasonable royalty.” 580 F.3d at 1324. One approach, “the hypothetical
17 negotiation or the ‘willing licensor-willing licensee’ approach, attempts to ascertain the royalty
18 upon which the parties would have agreed had they successfully negotiated an agreement just
19 before infringement began.” Id.; see also Rite-Hite, 56 F.3d at 1554; Radio Steel & Mfg. Co.
20 v. MTD Prods., Inc., 788 F.2d 1554, 1557 (Fed. Cir. 1986); Georgia-Pacific Corp. v. U.S.
21 Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). The hypothetical negotiation
22 attempts to create the “ex ante licensing negotiation scenario” between the two parties. Lucent,
23 580 F.3d at 1325 (“In other words, if the infringement had not occurred, willing parties would
24 have executed a license agreement specifying a certain royalty payment scheme.”).
The Court previously allowed Sim’s business realities negotiation theory as reliable and
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26 concluded that Microsoft’s objections were related more to the math and not the methodology.
27 (See Doc. No. 1284 at 23 (“Microsoft disputes Lucent’s values obtained under the add-ins
28 analysis, the time savings analysis, and the survey results analysis—not the methodology of
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1 the negotiation.”).) Contrary to Microsoft’s objection, Sims does not “rel[y] exclusively on
2 [Lucent’s] licensing policy to conclude that it would not have been willing to accept less than
3 $65 to $75 million.” (Doc. No. 1302 at 10). Rather, Sims’s range is based on the parties’
4 “knowledge of their respective bargaining positions,” influenced by a host of factors apart from
5 Lucent’s licensing policy, including Microsoft’s competitors in the marketplace, and the risk
6 of negotiations breaking down (Sims Supp. Rep. at 9, 11.) Georgia Pacific endorses this kind
7 of multi-factorial approach to evaluating the hypothetical negotiation, including among its
8 eponymous factors “the competitive relationship between licensor and licensee . . .[and] the
9 amount that licensor and licensee would have agreed upon .” Georgia-Pacific, 318 F. Supp. at
10 1120. Indeed, Sims’ business realities approach does not differ significantly from Professor
11 Mnookin’s real world negotiation theory, in that both take into account factors that would
12 influence the hypothetical negotiation. Compare (Sims Supp. Report at 8-11), with (Doc. No.
13 1293 at 7.) Sims puts forth a range of agreement–$65 to $75 million– that accounts for a
14 variety of negotiating factors, without resorting to a rate times base calculation. (Id. at 11.)
15 At trial, Lucent will still need to demonstrate that Sims’ business realities analysis is not in
16 violation of the entire market value rule. Lucent will also need to prove that the factual
17 predicates for its calculations, such as the Jay survey’s 7% multiplier and the $67 unit price of
18 Outlook, are credible. Accordingly, the Court DENIES the motion in limine to exclude the
19 business realities approach without prejudice to any contemporaneous objections at trial and
20 subject to any post-trial motions.
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C.
Lucent’s Alternative Analysis
22
Lucent’s supplemental report also includes a new section, titled “Alternative Analysis
23 Without Lucent’s Actual Licensing Policy and Executed Agreements.” (Sims Supp. Report
24 at 11-13.) Microsoft objects to this section as not based on sound economic principles.
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In his report, Sims asserts that even without the value as calculated from the previous
26 section of his report based on the 1% royalty rate, he still would come to the same final
27 conclusion that Microsoft and Lucent would agree on about $70 million as the lump sum
28 royalty. (Id. at 12.) Sims reaches this value by considering that Microsoft would want a
royalty as close to $0 as possible and Lucent would want a royalty as close to $138.7 million
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1
2 as possible—as calculated through his survey result analysis, which the Court has permitted
3 and allows Microsoft to challenge on cross examination. Id. Sims then posits that around $70
4 million, both Lucent and Microsoft would realize that they would be giving up too much if
5 they held out any longer and would therefore agree to meet in the middle of the $0 to $138.7
6 million range. (Id.) Finally, Sims states that even if his numbers based on the 1% royalty rate
7 were excluded, “other Georgia-Pacific factors and Business Realities considerations are key
8 components of my analysis.” (Id. at 13.)
The Court agrees that this analysis is not based in sound economic principles and factual
9
10 predicates as required under the law. See Riles v. Shell Exploration and Prod. Co., 298 F.3d
11 1301, 1311 (Fed. Cir. 2002); see also Grain Processing Corp. v. American Maize-Products Co.,
12 185 F. 3d 1341, 1350 (Fed. Cir. 1999) (“To prevent the hypothetical from lapsing into pure
13 speculation, this court requires sound economic proof of the nature of the market and likely
14 outcomes with infringement factored out of the economic picture.”); Crystal Semiconductor
15 Corp. v. TriTech Microelectronics Intern., Inc., 246 F.3d 1336, 1355 (Fed. Cir. 2001) (“Such
16 market reconstruction, though hypothetical, requires ‘sound economic proof of the nature of
17 the market.’”). Sim’s single page analysis does not provide any explanation for why—even
18 if he could not consider the $73.82 million number that the Court found above to violate the
19 entire market value rule— he concludes that the parties would meet around $70 million versus
20 any other number in the range between $0 and $138.7 million. Furthermore, Sims’s vague
21 statement on his reliance on “other Georgia-Pacific factors and Business Realities
22 considerations” are not tied to any factual predicates. It is unclear to the Court what else he
23 relies on as part of these other factors to arrive at the $70 million number, apart from
24 consideration of the 1% royalty rate. Accordingly, the Court GRANTS Microsoft’s motion
25 to exclude Lucent’s “Alternative Analysis.”
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CONCLUSION
After due consideration, the Court GRANTS in part and DENIES in part Defendant
28 Microsoft’s motion in limine. The Court GRANTS the motion in limine to exclude Lucent’s
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1 Supplemental Exhibit 5.1, but reserves the right to revisit this ruling. The Court also GRANTS
2 the motion in limine to exclude Lucent’s alternative analysis of damages. The Court DENIES
3 the motion to exclude the business realities approach without prejudice to any
4 contemporaneous objections at trial and subject to any post-trial motions.
5
IT IS SO ORDERED.
6 DATED: July 13, 2011
7
______________________________
8
MARILYN L. HUFF, District Judge
UNITED STATES DISTRICT COURT
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