WI-LAN Inc. v. Alcatel-Lucent USA Inc. et al

Filing 287

Letter Brief filed by Alcatel-Lucent USA Inc., Ericsson Inc., Exedea INC., HTC America, Inc., HTC Corporation, Sony Mobile Communications (USA) Inc., Sony Mobile Communications AB, Telefonaktiebolaget LM Ericsson (Attachments: # 1 Exhibit A)(Findlay, Eric)

EXHIBIT A

The Honorable Leonard Davis
United States District Court for the Eastern District of Texas
200 W. Ferguson, Third Floor
Tyler, TX 75702
Re: Wi-LAN, Inc. v. Alcatel-Lucent et al., C.A. No. 6:10-cv-521
Dear Judge Davis:
Defendants respectfully submit this letter brief requesting permission to file a Daubert motion
regarding Wi-LAN’s damages expert, John Jarosz.1
I.
Mr. Jarosz Misapplies the Hypothetical Negotiation and Book of Wisdom
Constructs. Wi-LAN acquired the patents-in-suit in April 2009 from Airspan. Mr. Jarosz
asserts that Airspan would negotiate at hypothetical negotiations with Alcatel-Lucent and
Ericsson in 2005 and with HTC in 2008. (Jarosz Rep. at 43–44.) But throughout his report, Mr.
Jarosz places Wi-LAN at the table instead of Airspan, and evaluates Wi-LAN licenses and events
that post-date the hypothetical negotiation by several years. (Jarosz Rep. at 56–70, 94–95, 102–
103, 113–114, Tabs 50–51.) At his deposition, Mr. Jarosz admitted giving little, if any, weight
to who the licensor is at the hypothetical negotiation or the year in which the negotiation takes
place. (Jarosz Dep. Tr. at 255:2–256:20, 408:12–409:4, 422:23–424:22.) Mr. Jarosz justifies his
approach by appealing to the so-called “book of wisdom.” (Id.) Mr. Jarosz claims that
Airspan—a company that had never licensed or monetized the patents-in-suit prior to selling the
patents to Wi-LAN—would have knowledge of Wi-LAN’s subsequent license agreements and
even of what Wi-LAN negotiators were thinking at the time. (Id. at 34:10–36:20, 256:21–
257:10, 433:4–437:2.) On that basis, Mr. Jarosz uses information he obtained from
conversations with current Wi-LAN employees to manipulate license data, claiming that the
terms of the licenses do not reflect the value Wi-LAN actually attributed to the licenses. (Id. at
34:10–36:20, 114:15–115:8, 124:18–128:9, 162:13–163:21, 256:21–257:10, 433:4–437:2; Jarosz
Rep. Tab 50.)
II.
Mr. Jarosz Violates the Entire Market Value Rule. Mr. Jarosz undertakes two basic
sets of calculations in his report, both of which misapply the entire market value rule (“EMVR”).
The first set of calculations cherry-picks royalty rates from unrelated running royalty licenses
between Wi-LAN and third parties and applies those rates to the entire market value of
Defendants’ accused products (WCDMA base stations and handsets).2 (Jarosz Rep. Tab 51; id.
at 66–69.) The second set of calculations does the same for select lump-sum royalty licenses.
(Id. Tabs 49–50; id. at 66–69.) Critically, the accused technology resides in a software upgrade
1

In this letter, Defendants set forth the primary grounds for their anticipated Daubert motion. Additional grounds
exist for moving in limine to exclude other aspects of Mr. Jarosz’s expert report and anticipated trial testimony.
2

Mr. Jarosz’s use of these licenses is not economically or technically comparable to this case, rendering his opinion
unreliable. See, e.g., Wordtech Sys., Inc v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir.
2010); ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 870–71 (Fed. Cir. 2010). For instance, his misuse of
selected licenses results in a stated “range” of damages for HTC of $0.5 million to $47 million. (Jarosz Rep. Tab
49.) This inflationary “range” is unhelpful to a jury.

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for base stations and a portion of a chipset for handsets. (See, e.g., Wicker Rep. at 83.) Instead
of using these smallest salable units, Mr. Jarosz uses entire product revenue in his royalty base—
inflating the value of the base by over 250% for handsets and including billions in revenue from
unrelated hardware and software for base stations. Because he lacks evidence that the patented
features drive consumer demand for the entire accused products, Mr. Jarosz’s calculations run
afoul of Federal Circuit law regarding EMVR and should be struck from his expert report. See,
e.g., Mirror Worlds, LLC v. Apple, Inc., 784 F. Supp. 2d 703, 721, 724–27 (E.D. Tex. 2011).
“[I]t is generally required that royalties be based not on the entire product, but instead on the
smallest salable patent-practicing unit.” LaserDynamics, Inc. v. Quanta Computer, Inc., 694
F.3d 51, 67 (Fed. Cir. 2012) (internal quotations omitted). “The entire market value rule is a
narrow exception to this general rule,” but it may only be invoked when “it can be shown that the
patented feature drives the demand for an entire multi-component product.” Id. It is not
sufficient to show that the allegedly patented feature is “valuable, important, or even essential”
to the accused product. Id. at 68 (emphasis added). Nor is it enough to show that the absence of
the feature would make the overall product commercially unviable. Id.
A.
Mr. Jarosz’s Running Royalty Analysis Violates EMVR. In his running royalty
analysis, Mr. Jarosz applies certain royalty rates to Defendants’ entire accused product revenue.
(Jarosz Rep. at 68–69, Tab 51.) Mr. Jarosz includes in his royalty base non-accused Release 99
and HSUPA software as well as unrelated hardware components that make up a complete base
station. (Id. Tabs 23–26, 51–53, 76.) Indeed, Mr. Jarosz includes in his royalty base
miscellaneous items such as hardware cabinets, power supplies, ancillary equipment, and other
components of the base stations that have nothing to do with the HSDPA software. (Jarosz Dep.
Tr. at 208:8–13; Jarosz Rep. at 32 n.205; id. Tabs 23–26, 52–53, 76.) Moreover, the record
evidence indicates that the patented features do not drive demand for the entire base station,
given that WCDMA base stations have been sold without the HSDPA software upgrade. (See,
e.g., Jarosz Dep. Tr. at 144:24–145:6, 205:21–207:16.)
Recognizing that the Court might exclude his EMVR-based calculations, Mr. Jarosz provides
alternate calculations that employ an allegedly “apportioned” base. But Mr. Jarosz did not use
revenues from the HSDPA software upgrade to arrive at a properly apportioned base. Rather, his
allegedly “apportioned” base includes non-accused software and hardware. (Jarosz Rep. Tabs
26, 51, 52; Jarosz Dep. Tr. at 139:3–8, 144:24–145:6, 205:21–207:16, 210:13–24.) In addition,
even the HSDPA software component is broader than the patented inventions; Wi-LAN
concedes that only 2 of 4 features of HSDPA relate to the patents-in-suit. (Jarosz Rep. at 112;
Jarosz Dep. Tr. at 96:25–97:13, 100:17–19.) Thus, even his alternative calculation is flawed.
Mr. Jarosz’s Lump-Sum Royalty Calculations Violate EMVR. Mr. Jarosz’s second
B.
set of calculations also violates EMVR. Mr. Jarosz uses certain Wi-LAN lump-sum agreements,
which he “adjusts” using various market share calculations to determine a lump-sum royalty
allegedly applicable to Defendants. (Jarosz Rep. Tabs 49–50.) As a first step, Mr. Jarosz takes
the lump-sum payments made by third parties and multiplies those amounts by a sizing factor.
Next, Mr. Jarosz multiplies that amount by “the percentage of accused sales” for Defendants.
(Id. Tabs 49–50, 79.) Mr. Jarosz calculates these amounts by taking the entire market value (i.e.,
all revenue) for Defendants’ accused products and dividing by Mr. Jarosz’s estimate of
Defendants’ total product sales revenue (for base stations and handsets respectively) for all

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wireless technologies in North America. (Id. Tab 79.) Mr. Jarosz does this even though he has
no proof that the patented features drive demand for the entire accused products.
III.
Mr. Jarosz Values the Wireless Standard Rather than the Alleged Invention. Key to
his opinion, Mr. Jarosz erroneously assumes that (i) the patents-in-suit are “essential” to
practicing the HSDPA portion of the HSPA “standard” and (ii) Defendants could not sell nonHSDPA-compliant products because consumers demand compliance with the standard.3 (Jarosz
Dep. Tr. at 53:12–55:25, 103:21–104:18, 230:17–23, 246:16–247:8.)
A reasonable royalty must carefully tie proof of damages to “the claimed invention’s footprint in
the market place.” LaserDynamics, 694 F.3d at 67 (internal citations omitted). Mr. Jarosz failed
to do so because he valued a standard rather than the patents. According to Mr. Jarosz, in order
to be HSDPA-compliant, one must infringe the patents-in-suit. (Jarosz Dep. Tr. at 53:12–55:25,
103:21–104:18, 246:16–247:8.) Mr. Jarosz holds this opinion even though no independent party
has ever found the patents-in-suit to be standard-essential. (Id. at 153:2–154:6.) Indeed, neither
Airspan nor Wi-LAN has ever declared the patents-in-suit to be essential to the relevant
standard-setting body. (Id. at 154:7–15, 239:19–25.) Mr. Jarosz, with no empirical support,
alleges that Defendants would suffer tens of millions of dollars of lost profits if their products did
not include HSDPA functionality because consumers demand standards-compliance. (Jarosz
Rep. at 74–78; Jarosz Dep. Tr. at 230:17–233:13.) But even if a consumer would not purchase a
product without a particular feature, that fact does not show that the feature at issue drives
demand for the end product. LaserDynamics, 694 F.3d at 68; see also Mirror Worlds, 784 F.
Supp. 2d at 721, 724–27. Moreover, the HSDPA feature set was “frozen” in 2002. (Jarosz Rep.
at 19.) Thus, Mr. Jarosz also improperly values the “lock-in” or “hold up” that Defendants
would experience, having already committed resources to HSDPA years prior to the date of the
hypothetical negotiation. Mr. Jarosz also fails to take into account the thousands of patents that
read on the standard and the hundreds of thousands of patents that are embodied in a handset.
(Id. at 50–51.)
IV.
Mr. Jarosz’s Opinion Contains Other Errors. Mr. Jarosz misapplies the hypothetical
negotiation by asserting damages into the future. Future “damages” are an equitable
determination to be made by a judge, not a jury. See Suffolk Co. v. Hayden, 70 U.S. 315, 320
(1865); see also Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1316 (Fed. Cir. 2007).
Moreover, future infringement calculations are speculative as such use may never occur. For
example, Mr. Jarosz’s future “damages” for HTC are twice as large as his calculation of past
damages. (Jarosz Rep. Tab 3.)
Mr. Jarosz also claims that Wi-LAN is entitled to pre-filing damages despite lack of notice. WiLAN failed to prove that it satisfied the marking requirements of 35 U.S.C. § 287, thus making
the start of the damages period October 2010, when Wi-LAN filed suit.

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Mr. Jarosz concludes that the amount of the reasonable royalty would not vary even if two of the three patents
asserted against Alcatel-Lucent and Ericsson were found not infringed or invalid. This is so, according to Mr.
Jarosz, because if a single patent is found infringed, that patent would still be essential to practicing the standard.
(Jarosz Dep. Tr. at 250:21–252:8; Jarosz Rep. at 4.) This confirms that he values the standard, not the patents.

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Dated: January 4, 2013

Respectfully submitted,
By:
/s/ Eric H. Findlay___
Eric H. Findlay
State Bar No. 00789886
Findlay Craft LLP
6760 Old Jacksonville Highway, Suite 101
Tyler, Texas 75703
Telephone: [phone]
Facsimile: [phone]
Email: [e-mail]
Martin R. Bader
Sheppard Mullin Richter & Hampton LLP
12275 El Camino Real, Suite 200
San Diego, California 92130
Telephone: [phone]
Facsimile: [phone]
Email: [e-mail]

ATTORNEYS FOR DEFENDANTS
HTC CORPORATION, HTC AMERICA, INC.,
EXEDEA, INC.

/s/ (with permission)
Gregory S. Arovas (pro hac vice)
Robert A. Appleby (pro hac vice)
Akshay S. Deoras (pro hac vice)
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, NY 10022
Tel: [phone]
Fax: [phone]
[e-mail]
Michael E. Jones
Allen F. Gardner
POTTER MINTON PC
110 N. College, Suite 500 (75702)
P.O. Box 359
Tyler, Texas 75710
[phone]
[phone] (Facsimile)
[e-mail]

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[e-mail]
ATTORNEYS FOR DEFENDANT ALCATELLUCENT USA INC.

/s/ (with permission)
Bruce S. Sostek (Lead Attorney)
State Bar No. 18855700
[e-mail]
Richard L. Wynne, Jr.
State Bar No. 24003214
[e-mail]
THOMPSON & KNIGHT LLP
1722 Routh Street, Suite 1500
Dallas, Texas 75201
214.969.1700
214.969.1751 (facsimile)
ATTORNEYS FOR DEFENDANTS
TELEFONAKTIEBOLAGET LM ERICSSON,
ERICSSON INC., SONY MOBILE
COMMUNICATIONS AB, and
SONY MOBILE COMMUNICATIONS (USA) INC.

cc:

Clerk of the Court
Counsel of Record

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