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

Filing 950

Declaration re 949 Response in Support of Motion of Dr. Stephen L. Becker, Ph.D. Regarding Ongoing Royalties 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

SECOND DECLARATION OF STEPHEN L BECKER, Ph.D.
Regarding

ONGOING ROYALTIES

I
L BECKER, Ph.D.

DATE

I

[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 was previously 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, AOL, Target, Gannett, and IAC (collectively, “Defendants”) were found to be infringing
claims of both patents.1 I submitted a declaration providing my opinions on the ongoing royalty for
the patents-in-suit on December 18, 2012.2
2. Google’s damages expert, Dr. Keith Ugone, filed a declaration in support of Google’s position
regarding the structure and amount of a compulsory license on May 13, 2013 (the “Ugone
Declaration”).3 In that declaration, Dr. Ugone offers the opinion that the reasonable outcome of the
negotiation between I/P Engine and Google for a compulsory license to the patents-in-suit for the
period beginning November 20, 2102, the date of the final judgment, through April 4, 2016 (the
expiration date of the last to expire of the patents-in-suit; hereafter referred to as the “remaining
term of the patents-in-suit”) is a lump-sum payment of no more than $3.5 million.4 Despite the fact
that Dr. Ugone steps through a Georgia-Pacific analysis based on the changed circumstances of the
new hypothetical negotiation date, his opinions remain unchanged from those he offered at trial that
were soundly rejected by the jury.

Similarly, his support for those opinions remains largely

unchanged from the evidence he relied on at trial, which again was soundly rejected by the jury. In
the few instances, discussed below, where Dr. Ugone attempts to rely on new evidence, or to put a
new spin on old evidence, his opinions are unreasonable and misguided.
3. As in the trial, Dr. Ugone repeatedly argues in his declaration that Google’s strong preference for a
lump-sum royalty, together with other evidence he points to as probative, indicate that a lump-sum

1

Document 789.
Declaration of Stephen L. Becker, Ph.D. in Further Support of Plaintiff I/P Engine, Inc.’s Motion for an Award of Prejudgment
Interest, Post-Judgment Interest and Damages for Defendants’ Continuing Infringement.
3
Declaration of Keith R. Ugone, Ph.D. on Post-Judgment Royalties, 5/13/2013.
4
Ugone Declaration at ¶45.
2

APPLIED ECONOMICS CONSULTING GROUP, INC.

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structure is appropriate.5 The only “new” evidence or arguments I see in Dr. Ugone’s current opinion
are his assertions that:
a. The 2011 sale of the patents-in-suit by Lycos to Smart Search Labs for a lump-sum of
$3.2 million should now be viewed as providing support for Dr. Ugone’s opinion that a
license to the patents-in-suit to Google covering the remaining term of the patents-insuit is a lump-sum of less than $3.5 million;6
b. The Overture licensing program for the ‘361 patent is not technologically comparable
and is less relevant to a November 2012 negotiation between I/P Engine and Google;7
c. I/P Engine would have viewed Google as a more favorable licensee, in part because
Google had been a contentious adversary in the immediately concluded lawsuit, thus
leading I/P Engine to acquiesce to a small lump-sum payment for the patents-in-suit;8
d. The purported existence of non-infringing alternatives as of the November 2012
negotiation would lead the parties to agree to a lump-sum structure in an amount of no
more than $3.5 million;9 and,
e. Dr. Ugone contends that the 20.9% apportionment factor presented at trial would not be
relevant to the November 2012 hypothetical negotiation, and further contends that the
jury “rejected” the 20.9% apportionment factor and instead used a 2.8% factor.10
4. Each of these points will be discussed below.
The 2011 Sale of the Patents-in-Suit by Lycos to Smart Search Labs
5. Dr. Ugone spends a good deal of time in his declaration discussing the fact that the patents-in-suit
were sold by Lycos to Smart Search Labs for $3.2 million and suggesting that this sale should drive
both the structure and the amount of the license payment in the hypothetical negotiation.11 I
disagree with Dr. Ugone’s opinion that the change in the hypothetical negotiation date renders the
sale of the patents in suit to Smart Search Labs for $3.2 million more probative of the value of the

5

Ugone Declaration at ¶11, ¶15, ¶16, ¶21.
Ugone Declaration at ¶10.
7
Ugone Declaration at ¶39.
8
Ugone Declaration at ¶21.
9
Ugone Declaration at ¶44-45.
10
Ugone Declaration at ¶36.
11
Ugone Declaration at pp.4-5.
6

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[I/P ENGINE v. GOOGLE, ET AL.]
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patents. As Dr. Ugone and I both agree, the hypothetical negotiation is assumed to take place with
no doubts by either party to the transaction regarding the validity and infringement of the patents.
6. In contrast, the sale of the patents by Lycos to Smart Search Labs cannot be assumed to have
occurred under those circumstances.

As evidenced by these proceedings, Google vigorously

contested both the validity and infringement of the patents-in-suit. That vigorous challenge to the
validity and infringement of the patents-in-suit began shortly after the transaction that Dr. Ugone
suggests should be used as a benchmark for the value of the patents absent such risks. The jury
verdict and award itself, namely that the reasonable structure should be a running royalty of 3.5%
and that for a period of 12.5 months (September 15, 2011 to September 30, 2012), the amount of
those reasonable royalties were $15,800,000 (Google only) $30,496,155 (all Defendants combined).12
The fact that the patents-in-suit were found to be worth almost ten times the $3.2 million amount
paid by Smart Search Labs, even for the limited time period covered by the jury award, clearly
demonstrates that Dr. Ugone’s opinions regarding the sale of the patents in 2011 are wrong.
7. Similarly, Dr. Ugone’s suggestion that the $3.2 million sale price “likely overstates the value for a
license to the patents-in-suit because the sale of a patent family commands a higher value than a
license to the two patents at issue13” is clearly wrong. The jury determined that a license to the
patents-in-suit covering only the period from September 15, 2011 September 30, 2012 was worth
almost ten times the sales price to Smart Search Labs. This clearly demonstrates that the parties to
the Smart Search Labs transaction could not have understood, as we must assume for the
hypothetical negotiation, that Google was infringing the patents-in-suit and that the patents were
valid and enforceable, and that a running royalty of 3.5% had been found to be reasonable.
8. Dr. Ugone further states that “[r]elative to a 2004 hypothetical negotiation, more emphasis would be
placed upon I/P Engine’s purchase of the patents-in-suit from Lycos – which occurred close to the
time of the 2012 hypothetical negotiation and would be aligned more closely with current underlying
economic and technological conditions.14”

Dr. Ugone attempts to link the 2012 hypothetical

negotiation to I/P Engine’s purchase of the patents as support for a lump-sum structure and for his
opinion that the amount of that lump-sum should be no more than $3.5 million. As discussed in the
preceding paragraphs, the amount of the jury award alone demonstrates the fallacy in Dr. Ugone’s
position. Furthermore, Dr. Ugone ignores the fact that the parties to the negotiation would have
12

Document 789, p.11.
Ugone Declaration at ¶10.
14
Ugone Declaration at ¶12.
13

APPLIED ECONOMICS CONSULTING GROUP, INC.

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[I/P ENGINE v. GOOGLE, ET AL.]
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been aware of an even more recent “transaction” involving the patents-in-suit, namely the
determination by a jury and the entry of a final judgment that the appropriate structure for a license
to the patents-in-suit was a running royalty.
9. I/P Engine would enter the negotiations with full knowledge that it had, up to the point of that
negotiation, received a running royalty from Google and the other defendants for a license to the
patents-in-suit. It is simply unreasonable to suggest that with such knowledge in hand, I/P Engine
would be willing to enter into a new license with Google and the other defendants using a lump sum
structure, especially at an amount that represents a small fraction of the royalties that it had
received for the patents-in-suit in the immediately prior period.
Relevance of Overture Licensing Program for the ‘361 Patent
10. Dr. Ugone suggests that the change in hypothetical negotiation date to 2012 renders the Overture
licensing program that I relied on at trial for the 3.5% royalty rate no longer relevant to the
hypothetical negotiation.15 Dr. Ugone correctly points out that the three licenses that were given the
most weight in terms of the 2004 hypothetical negotiation, namely those with Marchex, eXact and
Interchange, were all in 2005 and, thus, would have been over six years prior to the 2012
hypothetical negotiation.

As discussed in my prior declaration, it is my opinion that these

agreements are still highly relevant and indicative of a reasonable royalty rate.16 The term of each
agreement is for the entirety of the term of the last to expire patent.17 Additionally, the parties to
the 2012 negotiation would have been aware that both the structure (running royalty) and the rates
(5% or higher for the undiscounted royalty rate) were still relevant well past 2005. As pointed out in
my earlier reports in this matter, Overture had an ongoing licensing program for the ‘361 patent that
resulted in a patent license agreement between Yahoo/Overture and Adknowledge in February
2009. That agreement uses the same structure as the prior agreements and contains running
royalties that range from 3.25% to 5%.18
11. Dr. Ugone also opines that he is “not aware of any credible evidence that the Overture patents are
comparable to the patents in suit.19” However, I/P Engine’s technical expert provided testimony at
trial that established that there was sufficient technical comparability to render the licenses to the

15

Ugone Declaration at ¶5.
Becker Declaration at ¶9.
17
YAHOO-000036; YAHOO-000086; YAHOO-000121.
18
YAHOO-000001 to 000012.
19
Ugone Declaration at ¶39.
16

APPLIED ECONOMICS CONSULTING GROUP, INC.

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[I/P ENGINE v. GOOGLE, ET AL.]
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‘361 patent relevant.20 Dr. Ugone also suggests that these licenses “did not involve either Google or
I/P Engine.21” Licenses to the ‘361 patent, however, are highly relevant to Google, since Google itself
licensed the ‘361 patent from Overture as well.22 It is misleading for Dr. Ugone to suggest that the
‘361 licensing program would not be relevant to Google in light of this fact.
12. Dr. Ugone returns to the position he took at trial that Google’s purchase of patents from Carl Meyer
in December 2008 for $3.55 million is the most probative indicator of both the structure and value of
a license to the patents-in-suit.23 Neither Google nor Dr. Ugone has ever established any economic
comparability between the Carl Meyer patents and the patents-in-suit. There is no evidence that
Google ever used the technology covered by the Carl Meyer patents, nor is there any evidence in the
record (or otherwise) of the economic benefits of that technology, outside the fact that Google was
willing to purchase them.
13. In contrast, the jury determined that Google was using the patents-in-suit in its Smart Ads system
that was placed into service in 2004. We have to assume for the purposes of the 2012 hypothetical
negotiation that Google was, at least as of November 2012, continuing to use the I/P Engine
technology covered by the patents-in-suit. In fact, it is my understanding through the Declaration of
Bartholomew Furrow, a staff software engineer at Google, that Google admits continuing to use the
adjudged infringing Smart Ads system at least until May 11, 2013. Extensive evidence was presented
at trial that this technology was “mission critical” to Google’s business and that the Smart Ads system
that was found to infringe was responsible for a 20% to 40% increase in Google’s advertising
revenues.24
14. Furthermore, Dr. Ugone’s suggestion that the $3.55 million purchase price of the Carl Meyer patents
is a reliable and reasonable indicator of the value of the patents-in-suit is ridiculous in light of the
jury’s reasonable royalty award. As Dr. Ugone points out, the Carl Meyer patents had over 10 years
left before expiration at the time of the Google purchase.25 Simple math tells us that those patents
were purchased for approximately $350,000 per year of patent life remaining. The jury award of
over $30 million for a period of 12.5 months as the reasonable royalty for the patents-in-suit
provides the clearest indication that the Carl Meyer patents are in no way economically comparable.
20

Trial Tr. at 630.
Ugone Declaration at ¶39.
22
G-IPE-0220601-637.
23
See, e.g., Ugone Declaration at ¶17, ¶23, ¶39 and see also, e.g., Trial Tr. at 1595-98.
24
See, e.g., PX-32, PX-34, PX-64, PX-228, and PX-337.
25
Ugone Declaration at ¶23.
21

APPLIED ECONOMICS CONSULTING GROUP, INC.

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[I/P ENGINE v. GOOGLE, ET AL.]
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Relationship Between I/P Engine and Google as Licensor and Licensee
15. Dr. Ugone’s declaration contains the somewhat ironic suggestion that I/P Engine would be favorably
disposed to grant Google a lump sum license at a fraction of the amount it had just been awarded by
the jury:
Further, by the time of the verdict in this case, I/P Engine and Google had been
adversaries in a contentious lawsuit. This consideration provides additional
support that the parties would have agreed to a lump-sum royalty because a
lump-sum structure reduces the likelihood of further disputes between the
26
parties.

16. He further suggests that “I/P Engine would have recognized the advantages of licensing the

patents-in-suit to Google in the form of licensing revenue and benefits from Google’s strong
brand name and commercial success…27”
17. Both of these suggestions from Dr. Ugone are without merit and are illogical. As to the first point,
Dr. Ugone correctly points out that the lawsuit was highly contentious. That fact alone suggests that
I/P Engine would not view Google as a party to which it should grant a highly discounted paid-up
license as compared to the value that had just been established by the jury. Furthermore, we must
assume for the purposes of this analysis that the parties enter the hypothetical negotiation as willing
licensor and licensee with no contention regarding the validity, enforceability and infringement of
the patents-in-suit. Thus, the implication (if not veiled threat) in Dr. Ugone’s position that Google
would continue to be a contentious counter-party absent a one-time payment is misguided and
improper.
18. As to the second point, there is no basis to suggest that I/P Engine would derive more benefit from
granting a lump-sum license to Google than it would from insisting on a license of the same form as
awarded by the jury.
Impact of Purported Non-Infringing Alternatives on the Compulsory License
19. Dr. Ugone’s declaration relies in part on purported design around efforts by Google as evidence of
both a lump-sum license and as support for an amount far less than was awarded by the jury.28 It is
my opinion that the alleged design-around efforts of Google are, in fact, more supportive of an
ongoing running royalty than a lump-sum structure. Under the running royalty structure, if and when
26

Ugone Declaration at ¶21.
Ugone Declaration at ¶20.
28
Ugone Declaration at ¶¶31-33 and ¶37.
27

APPLIED ECONOMICS CONSULTING GROUP, INC.

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[I/P ENGINE v. GOOGLE, ET AL.]
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Google removes the infringing functionality from its systems, royalties would no longer be due.
Conversely, for whatever time period the infringement continues after the final judgment, the
running royalty would apply.
20. Dr. Ugone suggests that I/P Engine would have been willing to accept, as of the November 2012
negotiation date, Google’s representation that it would remove the functionality at some future date
and that the system change would be agreed by all parties to no longer be infringing. If I/P Engine
were to accept such a proposition, Google would then have a paid-up license to the patents for their
remaining life and would be free, if it chose, to continue to use I/P Engine’s patented technology
with no further compensation and with no obligation to go forward with the purported designaround efforts.

If, conversely, Google believed that it would in fact remove the infringing

functionality by some date certain in the near future, there is no rational basis for Google to oppose
the running royalty other than to use that opposition as a means to argue for a lower overall
payment.
21. Stated differently, if Google in fact believes that it has a design-around that will be found to be no
longer infringing, then there is no rational basis for Google to oppose a running royalty structure for
the compulsory license.
20.9% Apportionment Factor
22. Dr. Ugone suggests that there is no support in the record for a 20.9% apportionment factor and that
the verdict indicates that the jury instead determined that a 2.8% apportionment factor was
reasonable.29

As I explained in my November 9, 2102 Declaration (paras. 13-18), Dr. Ugone’s

assertion is not based on any evidence, but rather an incorrect methodology that requires ignoring
the jury’s total jury award, the evidence at trial and backing a percentage out of a portion of the
jury’s verdict, then speculating as to what the jury actual did.
23. In my November 9, 2012 Declaration, I explain that the appropriate apportionment percentage is
20.9%. This is the flat going-forward apportionment percentage that I presented at trial (Trial Tr. at
820-21). In my December 7, 2012 Declaration at paragraphs 13-18, I explained that Dr. Ugone’s 2.8%
apportionment percentage is pure conjecture. A 2.8% apportionment percentage is not supported
by any of the evidence. Indeed, the 20.9% apportionment factor presented at trial was conservative
in view of the evidence discussed above in paragraph 13.

29

Ugone Declaration at ¶36.

APPLIED ECONOMICS CONSULTING GROUP, INC.

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[1/P ENGINE v. GOOGLE, ET AL.)
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*

*

.

I declare under penalty of perjury that the foregoing is true and correct. Signed May 20, 2013 in
Austin, Texas.

APPLIED ECONOMICS CONSULTING GROUP, INC.

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CERTIFICATE OF SERVICE
I hereby certify that on this 20th day of May, 2013, the foregoing SECOND
DECLARATION OF STEPHEN L. BECKER, Ph.D. REGARDING ONGOING
ROYALTIES ISO I/P ENGINE, INC.’S REPLY IN SUPPORT OF ITS MOTION FOR
AN AWARD OF POST-JUDGMENT 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
[e-mail]
David Bilsker
David Perlson
Quinn Emanuel Urquhart & Sullivan LLP
50 California Street, 22nd Floor
San Francisco, CA 94111
[e-mail]
[e-mail]
Robert L. Burns
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
Two Freedom Square
11955 Freedom Drive
Reston, VA 20190
[e-mail]
Cortney S. Alexander
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
3500 SunTrust Plaza
303 Peachtree Street, NE
Atlanta, GA 94111
[e-mail]
/s/ Jeffrey K. Sherwood

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