I/P Engine, Inc. v. AOL, Inc. et al
Filing
824
Declaration re 823 Memorandum in Support of Stephen L. Becker by I/P Engine, Inc.. (Sherwood, Jeffrey)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
ALEXANDRIA DIVISION
1/P ENGINE, INC.,
Plaintiff,
v.
AOL,INC.,
GOOGLE INC.,
lAC SEARCH & MEDIA, INC., and
TARGET CORPORATION,
Defendants.
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CIVIL ACTION NO.
2:11-cv-00512-RAJ-FBS
DECLARATION OF STEPHEN L. BECKER, Ph.D.
Regarding
ONGOING ROYALTIES
DATE
[I/P ENGINE v. GOOGLE, ET AL.]
[CONFIDENTIAL – OUTSIDE COUNSEL ONLY]
I. I/P Engine v. Google, et al. – Ongoing Royalties
A. Background
1. I have been asked to render an opinion on the reasonable royalty that would apply to a compulsory
license to U.S. Patent Nos. 6,314,420, entitled “Collaborative/Adaptive Search Engine” (“the ‘420
patent”) and 6,775,664, entitled “Information Filter System and Method for Integrated Content‐
Based and Collaborative/Adaptive Feedback Queries” (“the ‘664 patent”). The ‘420 and ‘664
patents (together referred to as the “Patents‐in‐suit”) were found to be valid and enforceable and
Google and AOL, Target, Gannett, and IAC (collectively, “Defendants”) were found to be infringing all
of the asserted claims of both patents.
2. It is my understanding that determination of a compulsory post‐judgment license can be made by
the Court, and that the court should consider the outcome of a hypothetical negotiation between
the parties as of the date of the final judgment.1
3. The opinions presented in my prior report and testimony provides a thorough analysis of a
hypothetical negotiation between Lycos and Google for a license to the Patents‐in‐suit as of Q1
2004. My prior report and testimony provides an analysis of the Georgia‐Pacific factors and the
resulting reasonable royalty for the license to the Patents‐in‐suit based on that hypothetical
negotiation. My opinion regarding the reasonable royalty based on that negotiation was a running
royalty of 3.5%, applied to an apportioned base of 20.9% of Google’s U.S. revenues from its use of
AdWords, AdSense for Search and AdSense for Mobile Search systems, and U.S. revenues from the
use of AOL’s Search Marketplace system.
4. As noted above, the determination of the reasonable royalty rate for a compulsory license involves
an analysis of a hypothetical negotiation as of the date of the final judgment, which in this case
would be as of November 20, 2012. Many of the same facts and considerations that were discussed
in my prior report and testimony regarding the 2004 hypothetical negotiation between Lycos and
Google would be present in the November 2012 hypothetical negotiation. Some facts and
circumstances would be different. Rather than repeat all of the evidence and opinions expressed in
my prior report and testimony, this declaration provides an analysis of the elements of the
1
See, e.g., Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1315, 1317 (Fed. Cir. 2007) (J. Rader concurring opinion); Amado v.
Microsoft Corp., 517 F.3d 1353, 1361‐1362 n.2 (Fed. Cir. 2008)
APPLIED ECONOMICS CONSULTING GROUP, INC.
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[I/P ENGINE v. GOOGLE, ET AL.]
[CONFIDENTIAL – OUTSIDE COUNSEL ONLY]
negotiation that would be different in November 2012 negotiation for a license to the Patents‐in‐
suit and the effect those difference would have on the reasonable royalty. I incorporate my prior
report and testimony herein.
B. Post‐Judgment Hypothetical Negotiation
5. The hypothetical negotiation over future royalties for the patents would be between I/P Engine and
Google on November 20, 2012, and would provide Google a license to use the patents from the date
of the judgment through the expiration of the patents.2 Thus, the key elements that are different
from the 2004 Hypothetical Negotiation are the licensor (I/P Engine in 2012 instead of Lycos in
2004) and the market conditions present in 2012 versus those in 2004.
6. I have carefully considered any changes to the parties’ bargaining positions and how those changes
would affect the Georgia‐Pacific factors. I do not present an entirely new Georgia‐Pacific analysis in
this report, but rather an analysis of how the parties’ different circumstances at the time of the
judgment would affect the negotiation of an ongoing royalty rate.3 I recognize that although the
negotiation over ongoing royalties is contemplated by the parties post‐judgment, i.e., the licensee is
a known infringer, ongoing royalties are not intended to be punitive4, but should reflect the changed
circumstances implied by the timing of that negotiation.
II. What Would Be Different at This Negotiation?
A. The Parties are Different
7. The hypothetical negotiation contemplated at trial was between Lycos, then‐owner of the patents,
and Google in 2004. As discussed above, the parties to the post‐judgment negotiation would be I/P
Engine, the current owner of the patents, and Google. I/P Engine, and its parent company Vringo,
are sophisticated licensors who invested in the patents with the express intention of monetizing
them through licensing activities. In contrast, Lycos’s parent company in 2004, Terra, was unaware
2
See, e.g., Boston Scientific Corp. v. Johnson & Johnson, No. C 02‐00790 SI, D.I. 882, p. 2 (N.D. Cal. April 9, 2009).
See, e.g., Active Video, No. 2:10cv248, D.I. 1209, p. 21‐26 (E.D. Va November 23, 2011) and Joyal Products, Inc. v. Johnson
Electric North America, Inc., 2009 WL 512156 (D. N.J. 2009).
4
I understand that I/P Engine may be entitled to enhanced damages at the discretion of the court. Such enhancement,
however, is outside of the scope of the analysis and opinions presented herein.
3
APPLIED ECONOMICS CONSULTING GROUP, INC.
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[I/P ENGINE v. GOOGLE, ET AL.]
[CONFIDENTIAL – OUTSIDE COUNSEL ONLY]
and uninterested in the value of Lycos’s patent portfolio.5 Furthermore, Vringo’s current market
capitalization is over $200 million and the company has a strong balance sheet.6
B. Expectation vs. Fact – 2004 vs. 2012
8. In 2004, Google would have had an expectation that the patented invention would positively impact
the revenues of the accused products. In contrast, by 2012, the positive impact of the patented
invention is well known and well documented. Numerous examples of the “mission critical” role of
the infringing technology were introduced at trial. 7 The evidence presented at trial also established
that Google’s implementation of the infringing technology generated an impact of at least 20.9% on
Google’s U.S. revenues.8
C. The Range of Rates is Different
9. As discussed in my prior report with respect to Factors 2, 12 and 15, the parties to the hypothetical
negotiation would have considered rates charged by Overture for licenses to the ‘361 patent as
providing a reasonable starting point for the Google license to the Patents‐in‐suit. Although the
comparable licenses that form the starting point for the negotiation would be the same (Marchex,
eXact, and Interchange), the range of rates that would reasonably result from these licenses would
be different based on the different circumstances of a November 2012 hypothetical negotiation
date.
10. The range of rates presented at trial was 3‐5%. This range was derived from consideration of three
licenses: Marchex, eXact and Interchange.9
5
Deposition of Mark Blais 7/31/2012, p. 30 ‐31.
Data from ThomsonOne database.
7
See, for example, PX‐228 – G‐IPE‐0223566‐599; PX‐32 – G‐IPE‐0224360; PX‐34 – G‐IPE‐0224366; PX‐337 – G‐IPE‐0018963‐968;
PX‐64 slide 38 – G‐IPE‐0484319‐386 at ‐356.
8
See PX‐64 and Trial Tr. 802:24‐803:8. See also PDX‐076 and Trial Tr. 819:20‐821:15
9
PDX‐080.
6
APPLIED ECONOMICS CONSULTING GROUP, INC.
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[I/P ENGINE v. GOOGLE, ET AL.]
[CONFIDENTIAL – OUTSIDE COUNSEL ONLY]
11. Consideration of these licenses in the 2004 negotiation led me to the opinion that Lycos would have
granted Google a “favorable” rate that would have also taken into account the fact that Google and
Lycos had, at the time, an ongoing business relationship.10 Consideration of these factors led me to
the conclusion that a reasonable rate for Google, for a license granted by Lycos to Google in 2004
would have been at a 3.5% rate.
12. The low end of the range of rates considered came from the Marchex agreement. Under that
agreement, Marchex received a “favorable” rate of 3.75% and would be granted an additional 20%
discount, to 3%, as long as the business relationship with Overture (in the form of the Overture
Services Agreement) was in place.11 The remaining two agreements (Exact and Interchange) are at a
5% rate with the rate discounted to 4% if the licensee also had a business relationship with Overture
(in the form of the Overture Services Agreement).12
Outcome of the November 2012 Hypothetical Negotiation
13. Since the negotiation for the compulsory license takes place in 2012, it is unlikely that Google would
be granted favorable “early licensee” discounted rates. It is also clear that, unlike Lycos and Google
in 2004, there is no existing business relationship between I/P Engine and Google. Thus the
10
Trial Tr. 796:12‐797:5
PX‐184.
12
PX‐185 and PX‐424.
11
APPLIED ECONOMICS CONSULTING GROUP, INC.
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[I/P ENGINE v. GOOGLE, ET AL.]
[CONFIDENTIAL – OUTSIDE COUNSEL ONLY]
discounts associated with the presence of an ongoing business relationship would not be relevant to
the I/P Engine‐Google negotiation. Google’s size and any negotiating power implied by that size is
offset by the evidence of the “mission critical” role of the technology to Google’s business.13
14. Taking these two factors into consideration, the changed circumstances of the November 2012
logically lead to the conclusion that a 5% royalty rate is reasonable.
15. As discussed extensively in my prior report and in my trial testimony, the running royalty rate should
be applied to an apportioned royalty base of Google’s revenues from the infringing AdWords,
AdSense for Search and AdSense for Mobile Search systems, and AOL’s infringing Search
Marketplace system. Consistent with that prior testimony, it is my opinion that a reasonable
apportionment factor for the compulsory license from November 2012 through the expiration of the
patents‐in‐suit would be 20.9%.
D. Conclusion
16. In accordance with the Court’s rulings and my assignment, I have considered a hypothetical
negotiation between I/P Engine and Google for ongoing royalties to the two I/P Engine patents
found valid and which Google was found to infringe on November 20, 2012. The parties, facts, and
circumstances of the present negotiation are significantly different from the parties, expectations,
and circumstances present at the hypothetical negotiation contemplated between Lycos and Google
in 2004.
17. Based on my analysis of these differences described above, it is my opinion that a reasonable royalty
for the compulsory license is a running royalty of 5%, applied to an apportioned base of 20.9% of
Google’s U.S. revenues from infringing AdWords, AdSense for Search and AdSense for Mobile Search
systems, and the U.S. revenues from AOL’s infringing Search Marketplace system.
13
PX‐228 – G‐IPE‐0223566‐599; PX‐32 – G‐IPE‐0224360; PX‐34 – G‐IPE‐0224366; PX‐337 – G‐IPE‐0018963‐968; PX‐64 slide 38 –
G‐IPE‐0484319‐386 at ‐356.
APPLIED ECONOMICS CONSULTING GROUP, INC.
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CERTIFICATE OF SERVICE
I hereby certify that on this 18th day of December, 2012, the foregoing
DECLARATION OF STEPHEN L. BECKER, PH.D. REGARDING ONGOING
ROYALTIES was served via the Court’s CM/ECF system on the following:
Stephen Edward Noona
Kaufman & Canoles, P.C.
150 W Main St
Suite 2100
Norfolk, VA 23510
senoona@kaufcan.com
David Bilsker
David Perlson
Quinn Emanuel Urquhart & Sullivan LLP
50 California Street, 22nd Floor
San Francisco, CA 94111
davidbilsker@quinnemanuel.com
davidperlson@quinnemanuel.com
Robert L. Burns
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
Two Freedom Square
11955 Freedom Drive
Reston, VA 20190
robert.burns@finnegan.com
Cortney S. Alexander
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
3500 SunTrust Plaza
303 Peachtree Street, NE
Atlanta, GA 94111
cortney.alexander@finnegan.com
/s/ Jeffrey K. Sherwood
3
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