I/P Engine, Inc. v. AOL, Inc. et al

Filing 1086

MEMORANDUM OPINION & ORDER. Signed by District Judge Raymond A. Jackson on 1/21/14. (tbro)

FILED
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA

JAN 2 1 2014

Norfolk Division

CLERK, U.S. DJS1HIC1 COURT
NORFOLK, VA

I/P ENGINE, INC.,
Plaintiff,
v.

CIVIL ACTION NO. 2:llcv512

AOL INC., et aL,
Defendants.

MEMORANDUM OPINION & ORDER

Before the Court is Plaintiffs Opening Brief on Post-Judgment Royalties, Dkt. Nos. 1028
(public version), 1038 (sealed version), Defendants' Opening Brief on Issues Raised in the
Court's August 14 Order, Dkt. Nos. 1020 (public version), 1033 (sealed version), and the parties'

responsive briefs. The Court has carefully considered the parties' pleadings and FINDS that
Defendants' modified product is nothing more than a colorable variation of the infringing
system. The Court DEFERS ruling on the royalty rate pending the parties' settlement
conference scheduled for January 22, 2014.
I. BACKGROUND

On September 15, 2011, Plaintiff I/P Engine, Inc. filed a complaint against Defendants
AOL, Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc. and Target
Corporation in which I/P Engine alleged that the Defendants had infringed several of its patents
through their AdWords system. On November 6, 2012, a jury reached a verdict finding that the

Defendants had infringed the asserted claims of two of I/P Engine's patents. See Verdict Form,
Nov. 6, 2012, Dkt. No. 789. The jury awarded I/P Engine damages in the amount of

$30,496,155, which did not include interest. Id. The jury also awarded I/P Engine a running
royalty rate of 3.5%. Id. On November 20, 2012, the formal judgment of the Court was entered
into the record. See Judgment of the Court, Nov. 20, 2012, Dkt. No. 801.
As a result of this favorable verdict, on December 18, 2012, I/P Engine asked this Court

for an award of post-judgment royalties from the date of entry of final judgment, November 20,
2012, until Defendants ceased infringing or until the infringed patents expire on April 4, 2016.
Dkt. No. 822. Further, it contended that the appropriate royalty base for an award was 20.9%,

and the appropriate royalty rate was 7% based on changed circumstances post-judgment. The

Court deferred ruling on I/P Engine's motion until after it ruled on various post-trial motions,
and on May 13, 2013, Defendants filed their Opposition to I/P Engine's Motion. Dkt. No. 938.

Defendants argued that I/P Engine was not entitled to any post-judgment royalties as a matter of

law, that in any event Defendants had ceased infringing even before the entry ofjudgment
because they had modified AdWords, and that if royalties were warranted, it should be in a lump
sum. On August 14, 2013, the Court entered an Order finding that I/P Engine was entitled to an
ongoing royalty with a royalty base of 20.9%, and that royalty payments should be made on a
quarterly basis. Dkt. No. 963.

The Court deferred ruling on two other issues. First, it ordered the parties to meet to

negotiate an appropriate ongoing royalty rate and to schedule a settlement conference if they
were unable to come to an agreement. On November 18, 2013, the parties notified the Court that

they were unable to resolve the rate issue, Dkt. No. 1060, and on December 11, 2013, Magistrate
Judge Lawrence R. Leonard entered a Settlement Conference Order for January 22, 2014. Dkt.
No. 1061. Second, the Court ordered further discovery and briefing as to Defendants' contention

that they had ceased infringement on May 11, 2013, finding that the relevant legal standard was

whether Defendants' modified version of AdWords ("new AdWords") was nothing more than a
colorable variation of the infringing product ("old AdWords"). The parties conducted discovery
per the Court's Order, and filed their opening briefs on October 30, 2013, Dkt. Nos. 1020, 1028,
and their responsive briefs on November 11, 2013, Dkt. Nos. 1048, 1052.

On November 7, 2013, the Court ordered the parties to each provide the name of two
independent experts unaffiliated with the parties whom the Court might appoint to assist it in
determining whether new AdWords is nothing more than a colorable variation of old AdWords.

Dkt. No. 1044. The parties complied with that Order, but after reviewing the submissions of the

parties on this issue, including the expert reports initially submitted on this issue, see Dkt. Nos.
822, 938, and accompanying exhibits, the Court concludes that the parties do not disagree on the
essential features of new AdWords. Rather, they have thoroughly explained the relevant features
of new AdWords and the differences between the two systems. The sole dispute between the

parties is the application of the colorable variation standard to those facts. The Court, which is
well-versed in the patents' claims and in I/P Engine's theory of infringement after presiding over
the lengthy proceedings in this case, therefore finds it unnecessary to appoint an independent
expert to resolve this matter.
II. DISCUSSION

A. Duration of Royalty Rate

In its August 14, 2013 Order, the Court concluded that the burden was on the patentee to
demonstrate that Defendants' new version of AdWords is no more than a colorable variation of

the adjudicated product. "This can be achieved by making a comparison between the original
product, the modified product, and the claims." Dkt. No. 963, at 7 (quoting Creative Internet

Advertising Corp. v. Yahoo! Inc., 614 F. Supp. 2d 847, 855 (E.D. Tex. 2009)). Should the Court

conclude that new AdWords is no more than a colorable variation of old AdWords, the Court

must then determine whether or not it infringes. XpertUniverse, Inc. v. Cisco Sys., Inc., CV 09157-RGA, 2013 WL 6118447 (D. Del. Nov. 20, 2013) ("A party seeking to include a new

product version in post-verdict relief must prove that the new version is not more than colorably

different from the product found to infringe, and that the newly accused product actually

infringes." (citing TiVo Inc. v. Echostar Corp., 646 F.3d 869, 882 (Fed. Cir. 2011))). In doing

so, the Court may "utilize principles of claim and issue preclusion ... to determine what issues
were settled by the original suit." TiVo Inc., 646 F.3d at 884 n.4.

In its previous Order, the Court did not decide the applicable burden of proof.
Defendants now argue that I/P Engine must show that new AdWords is no more than a colorable

variation by clear and convincing evidence. Dkt. No. 1020, at 5-6. They rely on nCube Corp. v.

SeaChange Int 'I, Inc., 732 F.3d 1346 (Fed. Cir. 2013), but that case addressed the colorable
variation question in the context of the enforcement of a permanent injunction through a

contempt motion. And contempt "is a severe remedy." TiVo Inc., 646 F.3d at 881-82 (quoting
Cal. Artificial Stone Paving Co. v. Molitor, 113 U.S. 609, 618 (1885)). I/P Engine does not

address the appropriate burden to be applied, but Creative Internet Advertising Corp., which this
Court relied upon in its August 14, 2013 order, implied that a preponderance standard should
apply in the ongoing royalties context. 674 F. Supp. 2d, at 855. The clear and convincing
standard is typically used when enhanced damages are to be applied—for example, to prove a
claim of willful infringement. In re Seagate Technology, LLC, 497 F.3d 1360, 1371 (Fed. Cir.
2007). But because the result would be the same under either standard, the Court will assume
without deciding that the clear and convincing standard applies.

"[I]n determining whether more than colorable differences are present the court focuses

on those elements of the adjudged infringing products that the patentee previously contended,
and proved, satisfy specific limitations of the asserted claims." nCube Corp., 732 F.3d at 1349
(quotations omitted). At the trial in this case, I/P Engine's infringement expert, Dr. Ophir
Frieder, testified that old AdWords infringed I/P Engine's patents at multiple points in the
process of selecting which ads would be displayed for a given query. Trial Tr. 494-97, 576-77.

Specifically, this occurred at two so-called "disabling" steps and one "promotion" step, all of
which occurred prior to the auction for ad space. Id. Each step used a "predicted click-through

rate," a quality score based on the combination of content and collaborative data. Trial Tr. 462.
The selection of ads based on this combination was Dr. Frieder's central theory of infringement

at trial. Ads, however, were not selected based only on this predicted click-through rate; instead,

that score formed part of the "long term value," or LTV score, which included data on the quality

of the webpage, the minimum bid, and other factors. Trial Tr. 697-99. For an ad to proceed to

the next step, it was required to have an LTV score greater than zero. Trial Tr. 1105. Dr. Frieder
testified that the "filtering" component of the patents was satisfied by this step. Trial Tr. 618.
The Court will not delve into the details of new AdWords in this Order because the

parties have redacted most of those details in the public version of their briefings pursuant to the
protective order in this case. The Court has, however, thoroughly reviewed the experts'

descriptions of new Adwords and the ways in which it differs from old AdWords, and is
confident that I/P Engine has shown that new AdWords is no more than a colorable variation of
old AdWords. Suffice it to say that it is undisputed that new Adwords continues to use a

candidate advertisement's LTV score that includes a predicted click-through rate in the process
of choosing which advertisement will ultimately be shown to the individual performing the

query. Dkt. No. 1020, at 5. The only differences between the two systems that are potentially

relevant in light of I/P Engine's theory of infringement at trial is that the LTV score is no longer

used at the multiple steps just described, and occurs once at a different point in the process of
selecting which advertisements will ultimately be shown to users. Defendants do not contend
that the number of times the LTV score is used is relevant. And at which point in the process
this filtering occurred was irrelevant to I/P Engine's theory of infringement. E.g., Trial Tr. 439
(describing the final filtering step as "[y]ou basically eliminate a poor quality ad, i.e., keep the

higher quality ad"). On cross-examination, Dr. Frieder agreed with Defendants' counsel that the
"[p]atents-in-suit don't say anything about an auction system." Trial Tr. 710.
To hold otherwise would contravene the Federal Circuit's guidance that "[t]he analysis

must focus not on differences between randomly chosen features of the product found to infringe
in the earlier infringement trial and the newly accused product." TiVo Inc., 646 F.3d at 882.

While Defendants may have made significant amendments to AdWords as a whole, it has not

modified it in a way that affects I/P Engine's theory of infringement. Defendants point to nCube
as standing for the proposition that an infringing element must serve an identical function in both
the old and modified systems to be nothing more than a colorable variation. To the contrary,
functionality in isolation from the theory of infringement was not dispositive in that case.
Responding to one of the patentee's arguments, the court agreed with the district court that a
modification was significant when an element "still performs the same relevant functions ... but
does so in a way that all parties admit puts [the element] outside the claim." 732 F.3d at 1351.

Importantly, the court emphasized, "the colorable-differences standard focuses on how the
patentee in fact proved infringement." Id.

For largely the same reasons, I/P Engine has also proven that new AdWords, like old
AdWords, infringes its patents by filtering based on the combination of collaborative and content

data. See Dkt. No. 1038, Attachment 1 (sealed) (Declaration of Dr. Ophir Frieder). Defendants'
argument to the contrary focuses on the patents' filtering limitations. As noted in the Court's
claim construction opinion entered on June 15, 2012, the parties ultimately did not ask the Court
to construe any of the patents' terms regarding filtering. Dkt. No. 171, at 2 & n. 1. The patents'
key claims use the term filtering on multiple occasions. Principally, they require "the filter
system combining pertaining feedback data from the feedback system with the content profile

data in filtering each informon for relevance to the query," and "a content-based filter system for
combining the information from the feedback system with the information from the scanning

system and for filtering the combined information for relevance to at least one of the query and
the first user." Dkt. No. 171, at 3-5. Defendants contend that the term filtering presupposes a

plurality of items, with some passing through and some being excluded, whereas new AdWords
only compares the LTV score of a single ad to the threshold of zero. Further, Defendants
contend that new AdWords now uses a comparative process, rather than filtering against a fixed
criterion, which they say contradicts I/P Engine's theory of validity.

Neither argument is persuasive. As to the first, even accepting Defendants' definition of
filtering, new AdWords still satisfies it. Although each candidate advertisement is considered
individually in new AdWords, the comparison to the LTV score still serves to determine the final
set of advertisements shown to a user in response to a given query, and in the process may likely
exclude certain candidate advertisements and reduce the initial number of candidate

advertisements. In any event, Defendants' definition appears to conflict with its second

argument. Defendants argue that I/P Engine should be bound by its expert's testimony that

"filtering is a 'one by one' process in which each candidate item is compared to a standard to
determine whether it should be kept or discarded." Dkt. No. 1020, at 11. New AdWords clearly
performs this function. See Dkt. No. 1053 (sealed), at 4-6.
B. Ongoing Royalty Rate

In its August 14, 2013 Order, the Court noted that Federal Circuit precedent suggests

that parties should be given the opportunity to set their own royalty rate. Therefore, the Court
DEFERS deciding this issue until after the parties' settlement conference scheduled for January
22,2014.
III. CONCLUSION

For the reasons stated above, the Court FINDS that Defendants' modified system is

nothing more than a colorable variation of the system adjudged to infringe. Accordingly,
Plaintiff is entitled to ongoing royalties as long as Defendants continue to use the modified
system. The Court DEFERS ruling on the appropriate royalty rate in light of the parties'
upcoming settlement conference.

The Clerk is DIRECTED to send a copy of this Order to the parties.
IT IS SO ORDERED.

Norfolk, Virginia

January^/ ,2014

Raymond A Tackson

United States District Judge