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

Filing 320

Memorandum in Support re 319 MOTION to Exclude the Testimony of Stephen L. Becker (Public Version) filed by AOL Inc., Gannett Company, Inc., Google Inc., IAC Search & Media, Inc., Target Corporation. (Noona, Stephen)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF VIRGINIA
NORFOLK DIVISION
1/P ENGINE, INC.
Plaintiff,

Civil Action No. 2:1] -cv-512

V.

AOL, INC., et al.,
Defendants.

DEFENDANTS' MEMORANDUM IN SUPPORT OF THEIR MOTION TO EXCLUDE
THE TESTIMONY OF STEPHEN L. BECKER

TABLE OF CONTENTS
Page
1.

INTRODUCTION

1

II.

FACTUAL BACKGROUND

6

111. LEGAL STANDARDS

7

A.

Admissibility of Expert Testimony

7

B.

The Reasonable Royalty Analysis

8

1V. DR. BECKER RELIES ON THE WRONG DATE 'FOR THE HYPOTHETICAL
NEGOTIATION

8

V. DR. BECKER'S ANALYSIS IS PREMISED ON A GROSSLY OVERSTATED
ROYALTY BASE
A.

Dr. Becker Improperly Includes Worldwide Revenue in the Royalty Base

B.

Dr. Becker Incorrectly Applies the Entire Market Value Rule to the
Incremental Revenue for Smart Ads

VI. DR. BECKER ARTIFICIALLY INFLATES THE APPLICABLE ROYALTY
RATE
A.

Dr. Becker Improperly Relies on Non-Comparable Licenses

I.

The Patented Technologies Are Not Even Close to Being
Comparable in Value

2.
3.
B.
C.

13
17

17
18
19

The Overture Licensees Were Not Situated Comparably to Google

")1

Dr. Becker Selectively Ignores Every Real-World Transaction Involving
the Patents in Suit

21

Dr. Becker's Application of a Running Royalty Is Wholly Unsupported

23

VII. CONCLUSION

27

I.

INTRODUCTION
In his report, I/P Engine's damages expert, Dr. Stephen Becker, concludes that a

reasonable royalty in this case is

In order to arrive at this figure,

Dr. Becker grossly inflates the alleged amount of damages by undertaking exactly the kind of
analysis that the Court of Appeals for the Federal Circuit has repeatedly rejected as inherently
unreliable and inadmissible under Federal Rule of Evidence 702 and Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993). As the Federal Circuit has emphasized throughout
its most recent line of cases on this issue, the reasonable royalty analysis must be based on sound
economic principles and tied to the particular facts of the case, which Dr. Becker has altogether
failed to do. Thus, Defendants respectfully request that the Court strike Dr. Becker's expert
report and preclude him from testifying at trial about his inherently flawed damages theory.

•

Hypothetical Negotiation

As an initial matter, Dr. Becker's damages opinion is fundamentally flawed because he
relies on an incorrect date for the hypothetical negotiation. It is black letter patent law that the
date of the hypothetical negotiation is the date that the first infringement began. LaserDynamics,
Inc. v. Quanta Computer, Inc., -- F.3d --, 2012 WL 3758093, at *19 (Fed. Cir. Aug. 30, 2012).
As the Federal Circuit recently confirmed, the correct determination of the hypothetical
negotiation date is "essential for properly assessing damages" because it provides the overall
framework for the reasonable royalty analysis. Id. at *18 (citation omitted).
Here, Dr. Becker relies on an incorrect hypothetical negotiation date in 2004 After Dr.
Becker served his expert report, I/P Engine supplemented its infringement contentions, which
support a date of first infringement only as of 2010. This disconnect between I/P Engine's
allegations of infringement and the date of the hypothetical negotiation pervades virtually every
aspect of Dr. Becker's reasonable royalty analysis, and renders his opinions wholly unreliable.

•

Royalty Base

Dr. Becker completely overstates the applicable royalty base. He assumes that the
royalty base in this case is the incremental increase in worldwide revenue for Google's accused
"Smart Ads" system over its earlier advertisement serving systems. He includes in his
calculations revenue starting in 2005 and continuing to the present.
But Dr. Becker's analysis includ s revenue gene ated prior to the date of the first alleged
infringement. Including revenue generated prior to the 2010 date is incorrect as a matter of law.
I/P Engine is not entitled to damages based on revenue from non-accused (and therefore,
admittedly non-infringing) activities.
Similarly, Dr. Becker includes revenue generated worldwide. But the remedies for
alleged infringement of the asserted U.S. patents in this case must be based on activities
occurring in the United States. Any extra-territorial activities are outside the scope of the U.S.
patent grant, and as a matter of law, cannot infringe. Accordingly, revenue generated from
activities outside the United States cannot be included in the applicable royalty base.
Finally, implicit in Dr. Becker's analysis is the assumption that any incremental increase
in revenue from Google's Smart Ads system arises from the technology in the asserted patents.
Dr. Becker attempts to apportion Google's advertising revenue by including only the incremental
increase that he attributes to the use of Smart Ads and excluding revenue that he attributes to
Google's earlier systems. But that is not enough. Dr. Becker assumes, without basis, that the
entire market value of the improvements in the Smart Ads system arises from the patented
technology. Yet, as Dr. Becker admits, the Smart Ads system includes numerous features and
functionality that add economic value to the new system, but are not accused of infringement.
Nevertheless, Dr. Becker includes the revenue generated by these nonaccused features in the
royalty base. By including revenue generated from both patented and unpatented features, Dr.
2

Becker's attempt to apportion revenue is unavailing, and his analysis runs afoul of the Entire
Market Value Rule.
In order for the Entire Market Value Rule to apply, the patentee must demonstrate that
"the patent-related feature is the 'basis for customer demand." Uniloc USA, Inc. v. Microsoft
corp., 632 F.3d 1292, 1320 (Fed. Cir. 2011); Lucent Thchs., Inc. v. Gateway, Inc., 580 F.3d

1301,1336 (Fed. Cir. 2009) (citations omitted). On the other hand, if multiple features of the
accused system drive customer demand (as is the case here), the accused revenue must be
apportioned between patented and unpatented features. Uniloc, 632 F.3d at 1318. Only that
portion of the accused revenue that is attributable to demand for the patented technology may be
used as the applicable royalty base. Id. Otherwise, the reasonable royalty analysis is premised
on an artificially inflated base that does not reflect the economic contribution of the asserted
patents to the accused system. Id. at 1320-21.
Dr. Becker does not even attempt to make the required showing necessary to apply the
Entire Market Value Rule to the incremental increase in revenue for Smart Ads. Instead, he
simply declares that the incremental increase in revenue is a "reasonable" royalty base without
any factual basis to do so. Dr. Becker's conclusion is flatly inconsistent with his plain
admissions during his deposition that the Smart Ads system includes a wide variety of features
that have nothing to do with the patented technology. Accordingly, Dr. Becker's analysis is
flawed from the outset because he cannot show that the revenue he sweeps into his supposedly
"apportioned" royalty base is related in any way to demand for the technology in the asserted
patents, as opposed to the numerous unaccused features of the Smart Ads system.
The royalty base determination is a threshold issue that renders Dr. Becker's entire
analysis unreliable. The overinflated royalty base may not be cured after-the-fact by adjusting

3

the royalty rate down. Uniloc, 632 F.3d at 1319-20. It is not an issue that can be cured at trial
through cross-examination. Id. at 1320. Instead, the incorrect royalty base infects the entire
analysis and "cannot help but skew the damages horizon for the jury" by exposing them to
calculations based on inflated revenue figures that are plainly disproportionate to the value of the
patented technology. Id. For this reason, Dr. Becker should be precluded from testifying about
his damages opinions at trial.
•

Royalty Rate

Dr. Becker's analysis of the applicable royalty rate is a textbook example of what the
Federal Circuit has said not to do in at least three of its most recent decisions. ResQNet.com , Inc.
v. Lansa, Inc., 594 F.3d 860, 870-72 (Fed. Cir. 2010); Lucent, 580 F.3d at 1327-32;
LaserDynamics, 2012 WL 3758093 at *23. Dr. Becker relies on.. licenses that do not

have any bearing on what a reasonable royalty would be for the asserted patents in this case. The
licenses that Dr. Becker cites involve a completely unrelated patent — U.S. Patent No. 6,269,361
("the '361 patent"). This patent is not at issue here. Indeed, it is not even owned by I/P Engine
or its predecessor in interest, Lycos Inc. And none of the '361 patent licenses that Dr. Becker
relies on involved Google or any of the other Defendants. Nevertheless,

1111111111111111111111111111111.11111111111 of Google's incremental revenue for the Smart
Ads system.
At the same time, Dr. Becker excludes from his analysis actual transactions involving the
asserted patents.
Similarly, I/P Engine purchased
eight U.S. patents (including the patents in suit) from Lyeos in 2011
4

Yet, now, in the context of this litigation, Dr. Becker concludes that a mere license to
the patents in suit would have been a running royalty costing Google
and UP Engine for
rights to the asserted patents (in addition to six other patents), respectively.
This type of cherry picking of unrelated licenses in order to artificially inflate the royalty
rate is exactly what the Federal Circuit has criticized as inherently unreliable because it is
completely detached from the facts of the case. ResQNet, 594 F.3d at 870-72; Lucent, 580 F3d
at 1327-28. Indeed, in ResQWet (a case involving facts remarkably similar to this one), the
Federal Circuit harshly criticized the patentee's damages expert for selectively relying on
unrelated agreements in order to "drive the royalty rate up to unjustified double digit levels."
ResQNet, 594 F.3d at 870. At the same time, the ResQNet expert excluded from his analysis two
other agreements directed to the asserted patents, both of which involved much lower payments
and revealed the inherent unreasonableness of the patentee's damages demand. Id. The Federal
Circuit rejected the expert's testimony, explaining that the district court "must consider licenses
that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff
would be free to inflate the reasonable royalty analysis with conveniently selected licenses
without an economic or other link to the technology in question." Id. at 872.
But that is exactly what Dr. Becker has attempted to do here. By picking and choosing
license agreements to unrelated patents that happen to have a high running royalty rate, Dr.
Becker has detached his reasonable royalty analysis from any measure of economic value
attributable to the patented technology. Thus, Dr. Becker's analysis of the applicable royalty rate
is inherently unreliable, and he should be precluded from testifying at trial.

5

II. FACTUAL BACKGROUND
I/P Engine alleges that Google infringes two patents: U.S. Patent No. 6,314,420, titled
"Collaborative/Adaptive Search Engine" ("the '420 patent") and U.S. Patent No. 6,775,664, titled
"Information Filter System and Method for Integrated Content-Based and Collaborative/
Adaptive Feedback Queries" ("the '664 patent"). According to I/P Engine, "the patented
technology generally relates to using a combination of content-based data and collaborative
feedback data in filtering items for relevance to a query from a user." (See Declaration of Emily
C. O'Brien in Support of Defendants' Motion to Exclude ("O'Brien Dec."), Ex. 1 (7/25/12 Expert
Report of Stephen L. Becker, Ph.D. ("Becker Rep.")), ¶ 43.)

VP Engine alleges that certain aspects of Google's search advertising platforms, known as
AdWords, AdSense for Search, and AdSense for Mobile Search (collectively "the accused
products"), infringe the patents in suit. The AdWords system provides advertisements that may
appear alongside search results on Google.com . AdSense for Search provides advertisements
that may appear alongside search results for third-party websites, such as those operated by the
other Defendants in this case. AdSense for Mobile Search is similar to AdSense for Search, but
for use on mobile website search results pages.
In 2004, Google released an upgrade to the AdWords system, known as the "Smart Ads
Selection System" ("SmartASS" or "Smart Ads"). (O'Brien Dec., Ex. 1, IT I I (d).) Smart Ads is
used as part of the process of returning advertisements.

TIP Engine does not allege that every feature of the accused products infringes the patents
in suit. Instead, T/P Engine only alleges that specific functionalities infringe relating to the use of

(D.N. 240-4 (Expert Report of Ophir Frieder on
Infringement of U.S. Patent Nos. 6,314,420 and 6,775,664 ("Frieder Rep.")), in 55-60.) It is
undisputed, however, that several aspects of the Smart Ads system are not accused, and
therefore, do not infringe the asserted patents. (See, e.g., O'Brien Dec., Ex. 3 (Report of
Defendants' Expert Lyle H. Ungar, Ph.D. Concerning Non-Infringement ("Ungar NonInfringement Rep."), TT 79-83.)

(See, e.g., id., Ex. 2, 15:7-14, 16:1-3, 29:23-30:11,
173:8-24, 176:1-4.)
111. LEGAL STANDARDS
A.

Admissibility of Expert Testimony

Federal Rule of Evidence 702 provides that an expert witness with "scientific, technical,
or other specialized knowledge" may testify in the form of an opinion "if (1) the testimony is
based upon sufficient facts or data, (2) the testimony is the product of reliable principles and
methods, and (3) the witness has applied the principles and methods reliably to the facts of the
case." Fed. R. Evid. 702, see also Daubert, 509 U.S. at 589-92.
7

B.

The Reasonable Royalty Analysis

35 U.S.C. § 284 provides that, upon a finding of patent infringement, the patentee is
entitled to damages "in no event less than a reasonable royalty." "The burden of proving
damages falls on the patentee." Lucent, 580 F.3d at 1324.
One way to calculate a reasonable royalty is to consider a "hypothetical negotiation."
The hypothetical negotiation attempts "to ascertain the royalty upon which the parties would
have agreed had they successfully negotiated an agreement just before infringement began,"
Lucent, 580 F.3d at 1324. "The hypothetical negotiation tries, as best as possible, to recreate the
ex ante licensing negotiation scenario and to describe the resulting agreement." Id. at 1325. In
other words, the hypothetical negotiation attempts to determine "[the amount that a licensor
(such as the patentee) and a licensee (such as the accused infringer) would have agreed upon (at
the time the alleged infringement began) if both had been reasonably and voluntarily trying to
reach an agreement." Georgia-Pacific Corp. v. US. Plywood Corp., 318 F. Supp. 1116, 1120
(S.D.N.Y. 1970). For purposes of the hypothetical negotiation, the asserted patents are assumed
to be valid and infringed. Lucent, 580 F.3d at 1325.
IV. DR. BECKER RELIES ON THE WRONG DATE FOR THE HYPOTHETICAL
NEGOTIATION
A reasonable royalty determination "must relate to the time infringement occurred, and
not be an after-the-fact assessment." LaserDynamics, 2012 WL 3758093 at *19 (citation
omitted). Because the hypothetical negotiation date provides a framework for all aspects of the
reasonable royalty analysis, reliance on an incorrect date is reversible error. Id. at *l 8-20.
At his deposition, Dr. Becker testified that his opinion is based on the assumption that
Google has been infringing UP Engine's patents since the first quarter of 2004 the date that
Google first implemented the Smart Ads system. (O'Brien Dec., Ex. 1, ¶ 11(b), (d); Ex. 2,
8

132:21-133:8, 224:24-225:10.) Based on that assumption, Dr. Becker's analysis is directed to a
hypothetical negotiation between Lycos (the predecessor in interest to the asserted patents) and
Google in 2004. (Id.) At his deposition, Dr. Becker testified that the 2004 date of the
hypothetical negotiation was a "significant premise of [his] analysis." (Id, Ex. 2, 224:24225:10.) As Dr. Becker explained in his report, "[t]he timing of the hypothetical negotiation is
important, as it defines the market conditions and circumstances of the parties as well as the facts
and circumstances that inform the bargaining positions of the two sides." (Id, Ex. 1, ¶ 182.)
Dr. Becker's reliance on the 2004 alleged date of first infringement is wrong. After Dr.
Becker served his expert report on damages, I/P Engine changed its infringement contentions. In
an "Updated" infringement report, UP Engines technical expert, Dr. Frieder, contended that his
(O'Brien

infringement theory is based on Google's use of
Dec., Ex. 4, Frieder Ex. 1, 7; Ex. 5, 303:14-305:12.)

Under 1/P Engine's updated infringement contentions, the 2004 date that Dr. Becker relies
on for the hypothetical negotiation is incorrect. As a result, Dr. Becker's royalty base is
dramatically overstated because it includes r venue from 2005-2010 that was generated by a
version of the Smart Ads system that is not currently accused of infringement. At a minimum,
Dr. Becker should not be permitted to testify about his damages calculation that includes revenue
generated prior to the first alleged infringement.
More than that, Dr. Becker's use of the incorrect date renders his reasonable royalty
analysis based on the hypothetical negotiation completely unreliable. One of the fundamental
premises of his entire analysis is wrong. In addition to the correct royalty base, the hypothetical

9

negotiation date also underlies Dr. Becker's consideration of the fifteen "Georgia-Pacific factors"
that comprise the vast majority of the analysis underlying his reasonable royalty opinion. (See
O'Brien Dec., Ex. 1, III 68-191.) For example, approximately a year after the correct date of the
hypothetical negotiation, Lycos sold eight U.S. Patents, including the patents in suit, to 1/P
Engine

. (Id.,¶ 75.) In his analysis of Georgia-Pacific Factor 1,

Dr. Becker attempts to distinguish this transaction by emphasizing the seven year period of time
that would have elapsed between the incorrect hypothetical negotiation in 2004 and the 2011
date of this transaction. (Id.,¶ 76.) But Dr. Becker's argument regarding the passage of time
does not hold up in light of the correct hypothetical negotiation date in 2010.
Likewise, Dr. Becker's analysis of the other Georgia-Pacific factors is necessarily framed
in terms of the date of the hypothetical negotiation. These factors include at least Factor 5 (the
commercial relationship between the parties at the time of the hypothetical negotiation) (id., ¶11
92-96); Factor 7 (the duration of the patent and the term of the license) (id, 11$ 100-102); Factor
8 (the established profitability of the product made under the patent) (id., Ill 103-112); Factor 11
(the extent to which the infringer has made use of the invention) (Id., V1113-138); and Factor 13
(the portion of the realizable profit that should be credited to the invention) (id., ¶11 171-178).
Indeed, Factor 15 incorporates the concept of the hypothetical negotiation explicitly, including
the requirement that the negotiation occurs at the time the alleged infringement began. (Id., ¶11
180-191.) Because Dr. Becker's entire reasonable royalty analysis is premised on a false
assumption, he should be precluded from testifying at trial.'

l UP Engine may argue that Google should not be permitted to make this argument
regarding the hypothetical negotiation date because, according to Plaintiff, Google supposedly
did not produce certain source code early enough. (See Dkt. Nos. 282-283.) Any such argument
is without merit as the 2010 hypothetical negotiation date did not become an issue until Dr.

10

V. DR. BECKER'S ANALYSIS IS PREMISED ON A GROSSLY OVERSTATED
ROYALTY BASE
Where a patentee seeks to measure its damages in the form of a running royalty, the
patentee must demonstrate the appropriate "royalty base" against which the royalty rate is
applied. The royalty base "represents the revenue generated by the infringement."
computer Packages, Inc.,

Whitserve v.

F.3d 2012 WL 3573845, at 11 (Fed. Cir. Aug. 7, 2012). As the

Federal Circuit has repeatedly held, a damages opinion that relies on an unduly broad royalty
base is unreliable and provides grounds for a new trial. Uniloc, 632 F.3d at 1315-23; Lucent,
580 F.3d at 1336-40.
A.

Dr. Becker Improperly Includes Worldwide Revenue in the Royalty Base

A United States patent does not apply extra-territorially to prohibit use of the claimed
invention abroad. See 35 U.S.C. § 271(a); NTP, Inc. v. Research In Motion, 418 F.3d 1282,
1313 (Fed. Cir. 2005). Even Dr. Becker admits that the royalty base can be no larger than
Google's United States revenue derived from the allegedly infringing products. (O'Brien Dec.,
Ex. 1, I 57; Ex. 2, 104:2-5.) Thus, it is undisputed that I/P Engine's patents are limited
territorially to the United States and cannot reach non-U.S. revenue. Dr. Becker has, however,
included within the royalty base for each of these products Google's worldwide revenues. By
doing so, Dr. Becker has grossly inflated the royalty base and VP Engine's claimed damages.
Dr. Becker states that he derived his revenue figures from documents produced by
Google and identified in Interrogatory responses. (Id., Ex. 1, 16 n.85.) The revenue figures that

Frieder's September 4, 2012 "Updated" Report. But regardless of the outcome of any pending
discovery dispute, Dr. Becker's reliance on a hypothetical negotiation date in 2004 is legally
incorrect in light of 1/P Engine's earliest alleged date of first infringement in 2010 under its
currently expressed theory. LaserDynamics, 2012 WL 3758093 at *18. Dr. Becker's opinion
based on a wrong hypothetical negotiation date is therefore inadmissible under Fed. R. Evid. 702
and Daubert, and should be precluded.
11

Dr. Becker extracts from these documents, however, pertain in many instances to Google's
worldwide revenue, not its U.S. revenue.

(Id , Ex. 1, S1-13-6.) 1111

Id., Ex. 6 24:19-23, 54:22-55:18, Deposition Ex. 2.) 2
On August 29, 2012, following service of Dr. Becker's report, Google produced
supplemental information on its U.S.-only revenue for these products during these time periods.
These figures demonstrate that Dr. Becker's error inflates UP Engine's claimed damages by
approximatelMIIIII (O'Brien Dec., Ex. 71 163, Ex. 9.) Thus, Dr. Becker should not
be allowed to testify at trial regarding his inflated royalty base that includes worldwide revenue,

2 For AdWords, compare Becker Ex. SLB-6 with G-1PE-0867399-400; G-1PE-0218440;
G-1PE-0218437-38. (See, e.g., O'Brien Dec., Exs. 1, 8-10.) For AdSense for Search, compare
Becker Ex. SLB-8 with G-1PE-0218437-38; G-IPE-0867397; G-IPE-0867398. (Id., Exs. I, 1012.) 1/P Engine may argue that Google did not produce certain U.S.-based revenue figures until
after Dr. Becker's expert report was due. (See Dkt. Nos. 277-278.) But regardless of any
objection to the timing of discovery, Dr. Becker's use of Google's worldwide revenues as the
royalty base is legally incorrect and therefore inadmissible. More than that, Dr. Becker could
have apportioned Google's worldwide revenues, but chose not to do so. For example, Dr. Becker
could have apportioned by using the U.S. versus worldwide revenue information from
as a guideline for U.S. revenues generated by AdWords, AdSense for Search, and AdSense
Alternatively, Dr. Becker could have apportioned
for Mobile Search from
worldwide revenues based on information in Google's 10-Ks. Dr. Becker, however, did not
make any attempt to apportion, but instead, merely assumed that all worldwide revenues were
"U.S.-based revenues" for purposes of his analysis, despite clear evidence to the contrary.

Ill

12

B.

Dr. Becker Incorrectly Applies the Entire Market Value Rule to the
Incremental Revenue for Smart Ads

The Entire Market Value Rule "allows a patentee to assess damages based on the entire
market value of the accused product only where the patented feature creates the 'basis for
customer demand' or 'substantially create[s] the value of the component parts.' Uniloc, 632 F.3d
at 1318 (quoting Lucent, 580 F.3d at 1336) (emphasis added). This rule is derived from Supreme
Court precedent requiring that the patentee in every case must "give evidence tending to separate
or apportion the defendant's profits and the patentee's damages between the patented feature and
the unpatented features, and such evidence must be reliable and tangible, and not conjectural or
speculative." Undoc, 632 F.3d at 1318 (quoting Garretson v. Clark, 111 U.S. 120, 121 (1884)).
"At all times, the damages inquiry must concentrate on compensation for the economic
harm caused by infringement of the claimed invention." ResQNet, 594 F.3d at 869. "Any
evidence unrelated to the claimed invention does not support compensation for infringement but
punishes beyond the reach of the statute." ResQNet, 594 F.3d at 869. Thus, to be admissible,
expert testimony on a reasonable royalty must "carefully tie proof of damages to the claimed
invention's footprint in the market place." ResQNet, 594 F.3d at 869; Unilac, 632 F.3d at 1317.
Uniloc explains "the danger of admitting consideration of the entire market value of the
accused [product] where the patented component does not create the basis for customer
demand." 632 F.3d at 1320. Once the patentee's damages expert is permitted to testify about an
inflated revenue base not attributable to the patented technology, it is impossible for the
defendant or the court to "put [the cat] back into the bag" after inflated revenue figures are
presented to the jury, regardless of cross-examination or cautionary instructions from the court.
Id. "The disclosure [of defendant's total revenues] cannot help but skew the damages horizon for

13

the jury, regardless of the contribution of the patented component to this revenue." Id. Dr.
Becker's opinions regarding the applicable royalty base pose the same dangers as Uniloc.
Dr. Becker agrees that Google's advertising revenue is generated as a result of hundreds,
if not thousands, of technologies that are not encompassed by the asserted patents and that the
patented technology is not the basis for customer demand for the entirety of the accused systems.
(O'Brien Dec., Ex. 1, ¶J 65-66, 171-178.) As such, Dr. Becker concedes that the Entire Market
Value Rule does not apply in this case, and he agrees that the revenues for the accused systems
must be "apportioned." Id. at ¶ 46 (citing Uniloc, 632 F.3d 1292), But Dr. Becker's supposed
attempt to apportion revenues to obtain an appropriate royalty base is nevertheless flawed
because he continues to include certain incremental revenue for admittedly unpatented features.
Thus, despite his attempt to apportion, Dr. Becker's analysis runs squarely into the Entire Market
Value Rule and violates the legal standards for reliability under Uniloc.
In his attempt to apportion revenues, Dr. Becker relies on a Google document from 2006
titled "Revenue Force June 26, 2006" and labeled as a "DRAFT" (the "Draft Revenue Force
Presentation").

14

M11.11111s1111111111•1

15

111111=111111111
Despite these plain admissions, Dr. Becker did not make any attempt to apportion the
revenue base to exclude revenue related to the use of these non-infringing functionalities. (See,

e.g, id., 30:12-16; 175:19-176:13.) Instead, he included the entire amount of incremental
revenue for Smart Ads in the royalty base. (Id.) Dr. Becker, therefore, agrees that the patented
technology is not the sole driver of the value of Smart Ads, and I/P Engine is not entitled to
recover damages based on the entire market value of that system, Yet, inexplicably, Dr. Becker
has used all incremental revenue generated by the use of Smart Ads as his revenue base. That is
incorrect as a matter of law. Unitoe, 632 F.3d at 1318-20.

Dr. Becker has therefore impropedy included in his calculations
these additional categories of revenue for features that are not related to the patents in suit and

16

are not accused of infr ngement. Thus, Dr. Becker's damages theory is premised on a legally
flawed analysis of the royalty base and should be precluded.
VI. DR. BECKER ARTIFICIALLY INFLATES THE APPLICABLE ROYALTY
RATE
The Federal Circuit "has long required district courts performing reasonable royalty
calculations to exercise vigilance when considering past licenses to technologies other than the
patent in suit." ResQNet, 594 F.3d at 869 (emphasis in original). "When relying on licenses to
prove a reasonable royalty, alleging a loose or vague comparability between different
technologies or licenses does not suffice." LaserDynamics, 2012 WL 3758093, at *23. A
patentee attempting to rely on unrelated license agreements to support a reasonable royalty has
"the burden to prove that the licenses were sufficiently comparable" to the agreement that would
result from a hypothetical negotiation. Lucent, 580 F.3d at 1329, 1332.
As ResQNet explains, a damages expe -t may not use "licenses with no relationship to the
claimed invention to drive the royalty rate up." ResQNet, 594 F.3d at 870. Instead, the licenses
must be "commensurate with what the defendant has appropriated." Id. at 872. "If not, a
prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently
selected licenses without an economic or other link to the technology in question." Id.
A.

Dr. Becker Improperly Relies on Non-Comparable Licenses

Dr. Becker's royalty rate opinion is largely dictated by his reliance on three licenses that
do not involve the patents in suit and do not involve any of the parties in this case. (O'Brien
Dec., Ex. 1, TT 142-155, 166-170, 184-185.) Those three agreements were all entered into by
Overture Services, Inc ("Overture"), who is not a party, to license a portfolio of patents that is
not at issue here. Based on those agreements, Dr. Becker opines that, in the hypothetical
negotiation,
17

(Id., IN 1 84-185.) But Dr. Becker's
reliance on the Overture licenses is merely an attempt to artificially drive the royalty rate up.
The Overture licenses are in no way comparable to the agreement that would result from a
hypothetical negotiation in this ease. As a matter of law, Dr. Becker's reasonable royalty
analysis based on non-comparable licenses is inherently unreliable and should be precluded.
1.

The Patented Technologies Are Not Even Close to Being Comparable
in Value

Dr. Becker fails to provide any justification for his assumption that the value of the '361
patent is comparable to the technology claimed in the asserted patents. Even patents directed to
similar technologies may enjoy vastly different licensing rates depending on numerous factors,
including the breadth of the claims and the ease with which the patent can be designed around.
Dr. Becker cites no evidence or authority whatsoever that the economic value conferred
by use of the '361 patent is comparable to that of the patents in suit. Indeed, the '361 patent is
widely considered a foundational patent in the field of pay-per-click search advertising. 3 News
reports have referred to it as a "crown jewel" and the "heart" of Yahoo's "revenue engine." The
'361 patent covers the "basic paid-search bid-for-placement advertising model."

Id. As such, the

3 See, e.g., Microsoft's Yahoo! Interest: Patently Paid Search, WebPro News (July 9,
2008), available at http://www.webpronews.com/microsofts-yahoo-interest-patently-paidsearch-2008-07 ("The paid search/bidding for placement technology patent known as '361,
developed by the company that became Overture (later acquired by Yahoo), loomed out of the
past. . . . Microsoft's proposed acquisition of Yahoo gives it control of That valuable patent.").
4 Mohammad Talha, Why Microsoft Really Wants Yahoo's Search, available at
hup://cyberssystem.blogspot.com/2008/12/why-microsoft-really-wants-yahoos.html (describing
the '361 patent as a "crown jewel"); Usman Latif, What Microsoft Wants From Yahoo,
TechUser.net, available at http://techuser.netimicrosoft-yahoo.html ("Also known as the '361
patent, it covered the basic paid-search bid-for-placement advertising model. The '361 patent
effectively granted Overture the right to monopolize the lucrative US paid-search market and
subsequently dictated the evolution of the global paid-search market. . . Yahoo now effectively
dictated what Microsoft could and could not do in the paid-search market. . . . Both companies'
business models depended on having access to '361 patent . . . .").

18

'361 patent was considered a "key competitive barrier" to entry into the paid-search advertising
market.'
Dr. Becker conceded at his deposition that "the '361 patent was sort of widely written
about and a well-known patent . , . that people in the industry who were going to implement that
type of system were going to need to deal with Overturn." (O'Brien Dec., Ex. 2, 96:19-23.)
When asked whether the patents in suit, by comparison, enjoyed "any industry recognition," Dr.
Becker replied "No." (Id., 97:7-10.) Even assuming, therefore, that the patents involve similar
areas of technology, this does not establish that the license agreements are comparable. Indeed,
the overwhelming evidence (and Dr. Becker's own admissions) confirm that the value of the
patented technology in this case is far diffcrent. 6 Dr. Becker's reliance on the Overture licenses
as allegedly "comparable," despite all evidence to the contrary, is merely an attempt to drive the

royalty rate up in exactly the same way that the Federal Circuit has held is impermissible.

To support a reasonable royalty award, a license agreement must convey rights of
comparable scope to the license that would result from the hypothetical negotiation. See Trell v.
5

Credit Suisse Equity Research, Overture Services, The Leading Pay for Peiformance
Search Provider 17 (Apr. 8, 2002).
6

In support of his opinion regarding the comparability of the Overture patents, Dr.
Becker relies exclusively on discussions withl/F Engine's technical expert, Dr. Frieder, (O'Brien
Dec., Ex. 1, IT 142.) In his expert report, Dr. Frieder characterizes the technology of the asserted
atents as relating to filtering for relevance.

(D.N. 240-4,1 71 (emphasis added).) But Dr. Frieder in his
deposition admitted that the '361 patent only related to bids, and did not "deal with filtering for
relevance." (O'Brien Dec., Ex. 5, 285:8-16.) Thus, the sole basis for Dr. Becker's conclusion
regarding the comparability of the Overture technology is completely undermined by Dr.
Frieder's subsequent admissions at his deposition regarding the fundamental distinctions between
the Overture patents and the UP Engine patents in suit.
19

Marlee Elecs. Corp., 912 F.2d 1443, 1446 (Fed. Cir. 1990). Where a license conveys the right to
multiple patents, a damages expert must apportion the royalty rate in that agreement between the
patents to be comparable to the license that would result from a hypothetical negotiation. See
ResQNet.com , Inc. v. Lama, Inc., 828 F. Supp. 2d 688, 694-95 (S.D.N.Y. 2011).

(See, e.g., O'Brien Dec., Ex. 14.) The '361 patent, by itself, resulted in at least nineteen
continuation patent applications and at least eight continuation patents,
.7 (See, e.g., id, Ex. 15.)

Dr. Becker's report fails to make any allowance for the fact that the result of the
hypothetical negotiation would be a license for the two U.S. patents that Google is accused of
infringing,

7

See

en Dec., Ex. 1, 147, 150, 153.)

8 The '361 patent and its subsequent continuation applications had numerous foreign
counterparts, including patents in South Africa (2001/09564), New Zealand (NZ515534),
Mexico (MX PA01012340), Japan (2003-501729), Europe (EP1208500), Germany
(DE20023291), China (CN102136121 & CNI378674), Canada (CA2375132), Brazil
(B120011035), and Australia (AU5171400 & AU769955). (O'Brien Dec., Ex. 16.)

20

3.

The Overture Licensees Were Not Situated Comparably to Google

Dr. Becker has conceded that the licensees in the agreements he relied on — Marchex,
i

nc.,111111111=1111111111 , and Interchange Corp. — were all in radically different negotiating

positions against Overture than Google would have been in a hypothetical negotiation with
Lycos. Yet, Dr. Becker did not account for these differences when he relied on the Overture
, Interchange, and Marchex were

agreements. For example, Dr. Becker concedes

"much smaller compan[iesr than Google. (O'Brien Dec., Ex. 2, 85:5-21.) Dr. Becker testified
that Google's size would have made it "a more attractive licensee to Lycos than Marchex
represented to Overture" and that this "would have given it an edge in the negotiation." (Id.,
94:2-6; see also id., 94:14-17 (Goo& would also have been a more attractive licensee than

1111 .) Dr. Becker further agreed that

, Interchange, and Marchex were enjoying much

slower growth than Google. (ict, 95:3-11.) Indeed, Google was a global technology leader in
the search business, unlike

, Interchange, or Marchex. (Id., 1 I 8:15-119:1.) Becker's failure

to account for these differences in negotiating position further renders his opinion unreliable.
B.

Dr. Becker Selectively Ignores Every Real-World Transaction Involving the
Patents in Suit

Rights in the asserted patents have been traded in arms length transactions several times.
These historic, real-world transactions provide compelling evidence of the value that Google and
Lycos would have placed on a license to the patents in suit. See Georgia-Pacific, 318 F. Supp. at
1120. Indeed, the Federal Circuit has found it "particularly troubling" when a plaintiff's damages
expert eschews actual licenses to the patents in suit and instead relies on "extremely high rates"
in unrelated licenses. ResQNet, 594 F.3d at 870. Here, there are... agreements that
provide objective indications that Dr. Becker's opinion vastly overstates the value
of I/P Engine's patents.
21

NNE He is unable, however, to cite any authority that there must be evidence that a
licensee practices the patent in suit for a license to be relevant to a reasonable royalty
determination. Indeed, Dr. Becker admits that there is no evidence that any licensee to the
Overture agreements actually practiced the '361 patent. (See O'Brien Dec., Ex. 2, 86:23-92:13.)
Thus, Dr. Becker's own rationale for what licenses he relied on and which ones he rejected is
completely inconsistent.
Further, the Federal Circuit has held that reliance on a real world license involving the
asserted patents to settle litigation is appropriate where it is the most reliable evidence in the
record. ResQNet, 594 F.3d at 872. Reliance on licenses to settle litigation may involve
additional considerations that may affect the negotiated amount.

See id.
Second, Dr. Becker ignores the fact that Lycos sold the patents in suit, along with six
. (O'Brien Dec., Ex.

other patents, to 1/P Engine in 2011

22

1 , II 75-76.) In 2011,

Lycos would have been well aware of Google's Smart Ads system, which was a matter of public
knowledge, and any potential patent infringement claims it had based on the patents in suit. 9
Thus, Dr. Becker contends that Lycos sold al.= lawsuit against Google, along with six
other patents, to I/P Engine for111111.111.1111111. Yet, he inexplicably deems that data
point irrelevant to his damages analysis.
Third, Dr. Becker ignores the fact that in 2004, Daum Communications bought Lycos,
which owned the patents in suit at the time, for $95 million. (Id., If 25; Ex. 17, 117:13-15.)
Thus, in the same year as the hypothetical negotiation, when Lycos held the rights to this alleged
MI= lawsuit, all of Lycos, including the patents in suit and the right to sue Google, was
what Dr. Becker now contends is a reasonable royalty for a mere
license to two of Lycos' patents. Dr. Becker's opinion is therefore wildly disproportionate to any
real-world transactions for rights to the patents in suit.
C.

Dr. Becker's Application of a Running Royalty Is Wholly Unsupported

Dr. Becker acknowledges that there are "two primary approaches to specifying a patent
royalty: the lump-sum approach and the running royalty approach." (O'Brien Dec., Ex. I , 1154;
see also Lucent, 580 F.3d at 1326.) In a running-royalty approach, "a licensee makes continuing,

periodic payments based on the extent of use of the licensed patents." (O'Brien Dec., Ex. 1, ¶
54.) In a lump-sum approach, the licensee makes a single payment "for a paid-up license to use
the asserted patents." (Id. ¶ 55.) In paragraph fifty-six of his report, Dr. Becker states, "As
discussed later in this report, it is my opinion that a running royalty is the appropriate structure to

9

See, e.g., Cade Metz, Google Behavioral Ad Targeter Is a Smart Ass, The Register

(Feb. 2, 2010) available atwww.theregister.co.uk/2010/0202/google_smartass_server/
It's Name Is
(describing SmartAds); R. Minerva & T. Demaria, There is a Broker in the Net
Google, Intl Conference on Intelligence in Service Delivery Networks (2007) (describing
Ad Words use of pCTR), available at http://www.icin.biz/files/programmes/SessionIA-1.pdf.
23

be used in the determination of damages in this case." (Id. 1 56.) Nowhere in the remainder of
his report, however, does Dr. Becker ever explain or justify his opinion that a running-royalty,
and not a lump sum, is the appropriate form of payment. And Dr. Becker's conclusion cannot be
reconciled with the actual licensing evidence.
The Federal Circuit's decision in LaserDynamics is instructive. In that case, the Federal
Circuit held that it was error to admit the testimony of plaintiffs expert that a 6% running royalty
was appropriate in part because "the licenses to the patents-in-suit were all for lump sum
amounts not exceeding $1 million" and because a "6% running royalty theory cannot be
reconciled with the actual licensing evidence, which is highly probative of . . . the form that a
hypothetical agreement would likely have taken." LaserDynamics, 2012 WL 3758093 at *24.
By ignoring the undisputed evidence that the hypothetical agreement in this case would be a
lump sum, Dr. Becker makes the same error as the patentee's expert in LaserDynamics.
When asked at his deposition what evidence he had that Google and Lycos would have
agreed on a running royalty, the only basis that Dr. Becker could identify was that,

(O'Brien Dec., Ex. 2, 121:20-122:7.) The fact that the parties might
consider a running royalty during the hypothetical negotiation, however, does not even come

close to justifying a conclusion that the actual result of the negotiation would be a running
royalty. Indeed, all of the evidence is to the contrary.
Dr. Becker acknowledges that
111111111.11111111111111111111111ME. (O'Brien Dec., Ex. 1, 1 70.) NM

(M,1171.) Lycos also sold the patents-in-suit, along with six

24

. (Id., I 75.) And Lycos General Counsel,

others, to 1/P Engine

Mr. Blais, confirmed at his deposition that Lycos never had a strong preference for a running
royalty to license its patents. (O'Brien Dec., Ex. 17, 57:17-22.) Thus, Lycos would have been
willing to license the asserted patents for a lump sum to Google, and Dr. Becker is...

Dr. Becker does not dispute any of this.

25

(O'Brien Dec., Ex. 1, ¶ 185 n.244.) He then concedes that a lump-sum royalty "can
provide some advantages, in particular for a licensee such as Google, such as ease of
administration and protection of confidential business information that otherwise might need to
be revealed to the licensor in periodic royalty reporting." (Id.)
Dr. Becker's explanation for disregarding the overwhelming evidence that Lycos and
Google would have entered into a lump-sum royalty agreement, not a running royalty makes no
sense. Dr. Becker states that despite all this evidence, he will assume that the hypothetical
negotiation would have resulted in a running royalty merely because "the structure of the license
. , does not alter the economic value of the patented technology." (Id.) But it does not follow
that the form of the license is immaterial to the amount of royalties that a licensee would pay to
use that technology. See Lucent Techs., 580 F.3d at 1326 ("Significant differences exist between
a running royalty license and a lump-sum license."). The choice between a lump-sum royalty
and a running royalty dramatically shifts the risks associated with deviations from the expected
revenue that the licensee derives from use of the invention. See id. (explaining differences
between lump-sum and running royalties). Should, for example, the licensee's use or revenue
exceed the parties' expectations, the royalty payment from a running royalty agreement may be
greater, sometimes much greater, than the lump-sum the parties would have otherwise agreed
upon. Simply assuming that the hypothetical negotiation would have resulted in a running
royalty, therefore, has the potential to dramatically increase damages.
An expert is not at liberty to simply assume, without basis, that the hypothetical
negotiation would have resulted in a running royalty and not a lump-sum payment. See
LaserDyncunics, 2012 WL 3758093 at *14 ("LaserDynamics overlooks that a per-unit running
royalty is not the only form of a reasonable royalty that the parties might have agreed to in a

26

hypothetical negotiation."). Dr. Becker's report fails to provide any basis to support his opinion
that a running royalty is appropriate here,
Under these facts, Dr. Becker's opinion regarding a running royalty is error as a matter of law.
See id. at *24.
VII. CONCLUSION
For the foregoing reasons, Dr. Becker's expert report should be stricken, and he should be
precluded from testifying at trial regarding (1) any analysis that relies on an incorrect date for the
hypothetical negotiation in 2004, (2) a royalty base that includes revenue prior to the first alleged
infringement in 2010, (3) a royalty base that includes worldwide revenue, (4) a royalty base that
is derived from the entire market value of the incremental revenue attributed to the accused
Smart Ads system, (5) a royalty rate that is derived from non-comparable licenses to unrelated
technology between parties that are not involved in this case, and (6) a running royalty
framework for the hypothetical license that has no basis in the facts of this case or otherwise,
DATED: September 21, 2012

Is/ Stephen E. Noona
Stephen E. Noona
Virginia State Bar No. 25367
KAUFMAN & CANOLES, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
Telephone: [phone]
Facsimile: [phone]
[e-mail]
David Bilsker
David A. Perlson
QUINN EMANUEL URQUIIART &
SULLIVAN, LLP
50 California Street, 22nd Floor
San Francisco, California 94111
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
27

Counsel for Google Inc., Target Corporation,
IAC Search & Media, Inc., and Gannett Co., Inc.
By: /s/ Stephen E. Noona
Stephen E. Noona
Virginia State Bar No. 25367
KAUFMAN & CANDLES, P.C.
150 W. Main Street, Suite 2100
Norfolk, VA 23510
Telephone: [phone]
Facsimile: [phone]
Robert L. Burns
FINNEGAN, FIENDERSON, FARABOW, GARRETI &
DUNNER, LLP
Two Freedom Square
11955 Freedom Drive
Reston, VA 20190
Telephone: [phone]
Facsimile: [phone]
Cortney S. Alexander
FINNEGAN, HENDERSON, FARABOW, GARRETT &
DUNNER, LLP
3500 SunTrust Plaza
303 Peachtree Street, NE
Atlanta, GA 94111
Telephone: [phone]
Facsimile: [phone]

Counsel fbr Defendant AOL Inc.

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CERTIFICATE OF SERVICE
I hereby certify that on September 21, 2012, I will electronically file the foregoing with
the Clerk of Court using the CM/ECF system, which will send a notification of such filing (NEF)
to the following:
Jeffrey K. Sherwood
Kenneth W. Brothers
DICKSUIN SHAPIRO LLP
1825 Eye Street NW
Washington, DC 20006
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
Donald C. Schultz
W. Ryan Snow
Steven Stancliff
CRENSHAW, WARE & MARTIN, P.L.C.
150 West Main Street, Suite 1500
Norfolk, VA 23510
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
[e-mail]
Counsel fbr Plaintiff I/P Engine, Inc.

ls/ Stephen E. Noona
Stephen E. Noona
Virginia State Bar No, 25367
KAUFMAN & CANOLES, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
Telephone: [phone]
Facsimile: [phone]
[e-mail]

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