Collateral damages: how the smartphone patent wars are changing the landscape of patent infringement damages calculations.

• Author: West, Martin

ABSTRACT

This Note addresses the diverging approaches to patent infringement damages calculations. Judge Alsup of the Ninth Circuit recently took a rare approach and selected Dr. James Kearl to testify as an independent damages expert in Oracle v. Google under Rule 706 of the Federal Rules of Evidence. In contrast, Judge Posner of the Seventh Circuit recently dismissed the Apple v. Motorola lawsuit, finding that each party failed to present adequate evidence of their respective damages claims. Judge Koh of the Ninth Circuit took yet another approach using a more relaxed level of admissibility for expert testimony relating to infringement damage calculations. This Note analyzes all three approaches in the context of the suits at issue and proposes that Judge Alsup's approach is the best, for numerous reasons.

TABLE OF CONTENTS Introduction I. Patent Damage Calculations: A Legal Background A. Damage Approaches B. Two Roads Diverged: Analytical Approach and Hypothetical Negotiation Scenario C. Witness Standards 1. Rule 702 2. Rule 706 3. Expert Calculations in Light of Unilocand Lucent II. Three Case Studies A. Procedural History 1. Oracle v. Google 2. Apple v. Motorola 3. Apple v. Samsung B. Who Can Rely on What? 1. Defining the Alleged Infringement 2. Information Generated After the Date of the Hypothetical Reasonable Royalty Negotiation 3. Reliance on Potentially Biased Sources 4. Surveys 5. Royalties Based on Similar Products and Software C. The Results Are In III. Everybody Comes Out Ahead A. Fallout B. Congress C. Judges D. Fears Resolved 1. Advocacy 2. Infallibility 3. Counter-Productivity 4. Cost E. Benefits Realized F. So Happy Together Conclusion "Then you do make a profit for yourself," Yossarian declared

"Of course I do. But it all goes to the syndicate. And everybody has a share, Don't you understand? It's exactly what happens with those plum tomatoes I sell to Colonel Cathcart."

"Buy," Yossarian corrected him. "You don't sell plum tomatoes to Colonel Cathcart and Colonel Korn. You buy plum tomatoes from them."

"No, sell," Milo corrected Yossarian. "I distribute my plum tomatoes in markets all over Pianosa under an assumed name so that Colonel Cathcart and Colonel Korn can buy them up from me under their assumed names at four cents apiece and sell them back to me the next day for the syndicate at five cents a piece. They make a profit of one cent a piece, I make a profit of three and a half cents apiece, and everybody comes out ahead." (1)

INTRODUCTION

The goal of the United States Patent system is to "promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries...." (2) The hope is that granting creators of patentable inventions a monopoly on their "discoveries" will promote a paradigm in which people are encouraged to invent and develop without fear of having their ideas stolen. Incentivizing innovation would thus result in the rapid development of technology in such a way that "everybody comes out ahead." (3)

The recent growth of litigation surrounding the smartphone patent wars has called into question the need for and the utility of patents. (4) While the patent system is no stranger to the public spotlight, recent developments have been so widely discussed that the head of the Patent and Trademark Office, David Kappos, came forward to make a public statement telling critics to "[g]ive it a rest already." (5) While this Note cannot possibly discuss all of the alleged problems surrounding software patents, it will attempt to discern an underlying problem stemming from infringement damage calculations in light of three recent cases: Oracle America, Inc. v. Google Inc. (Oracle v. Google), (6) Apple, Inc. v. Motorola, Inc. (Apple v. Motorola), (7) and Apple Inc. v. Samsung Electronics Co. (Apple v. Samsung). (8) These calculations can be as complicated as every other phase of patent litigation and thus deserve equal discussion.

This Note therefore consists of three parts. Part I provides the background principles underlying damage calculations in patent infringement cases. Part II describes the way these principles have been applied in three recent patent disputes involving smartphone components. Finally, Part III argues that the approach adopted by Judge Alsup in Oracle v. Google is, currently, the best approach available and should be more widely adopted.

While such an approach is unprecedented, it provides the best answer to the problems underlying software patent infringement damage calculations in cases where a single product contains hundreds, if not thousands, of patented components. This Note also contends that stricter evidentiary standards leave lawyers in a quagmire when trying to predict a lawsuit's chance of success.

1. PATENT DAMAGE CALCULATIONS: A LEGAL BACKGROUND

   1. Damage Approaches

      Damage awards in patent infringement cases are governed by 35 U.S.C. [section] 284, which requires courts to award damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer" in cases where infringement is found/ Under this standard, district courts are given broad discretion to assess and compute damages. (10)

   2. Two Roads Diverged: Analytical Approach and Hypothetical Negotiation Scenario

      A frequently used methodology of damage calculation under [section] 284 is the reasonable royalty analysis. (11) The reasonable royalty analysis has two approaches. The first is the "analytical approach," which requires "subtract[ing] the infringer's usual or acceptable net profit from its anticipated net profit realized from sales of infringing devices." (12) Put more concretely, this approach involves subtracting overhead expenses from the infringer's expected gross profit. (13) The industry standard net profit is then subtracted from the difference of the original equation. (14) The result of that calculation is the reasonable royalty. (15)

      The second, and more common, (16) approach to a reasonable royalty analysis is the willing-licensor-willing-licensee approach. (17) The objective of this approach is to arrive at the royalty rate the patentee and the accused party would have agreed to if they had negotiated a royalty for the patent at the time the alleged infringement began. (18) While there are a multitude of factors that could be involved in hypothetical negotiations, courts "have consistently upheld experts' use of a hypothetical negotiation and [the fifteen] Georgia-Pacific factors (19) for estimating a reasonable royalty."

   3. Witness Standards

      1. Rule 702

         The complex nature of reasonable royalty calculations has caused many parties to enlist the help of expert witnesses to guide the fact-finder to a proper damages award. (20) The standard of review for the admissibility of expert testimony is governed by Rule 702 of the Federal Rules of Evidence (21) and the case law interpreting that rule. In Daubert v. Merrell Dow Pharmaceuticals, Inc., the Supreme Court held that expert testimony is admissible if it is relevant and reliable. (22) The Court further elaborated that a trial court should consider (1) whether the theory or technique "can be (and has been) tested," (2) "whether the theory or technique has been subjected to peer review and publication," (3) "the known or potential rate of error," and (4) whether it is generally accepted in the scientific community. (23) While other cases have further articulated the standard of admissibility, ultimately the district court judge is charged with a flexible "gatekeeping role" which allows "shaky but admissible evidence" to reach the jury. (24) Evidence that is allegedly weak should not be excluded; instead the opposing party must attack the evidence with "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof...." (25) Ultimately the jurors, as fact-finders, are tasked with deciding how much weight to give to the expert testimony. (26)

      2. Rule 706

         Additionally, courts may appoint their own witness or witnesses. Rule 706 of the Federal Rules of Evidence governs court-appointed expert witnesses. (27) It allows a court to appoint any expert that the litigating parties can agree to or one of its own choosing so long as the expert consents to accepting the role. (28) According to Rule 706 the court-appointed expert must advise all parties of any findings he or she makes; be available to be deposed by any party; be called on to testify by the court or a party; and be cross-examined by any party. (29) While the power of the court to appoint experts of its own choosing is unquestioned, (30) it remains largely unused. (31)

      3. Expert Calculations in Light of Uniloc and Lucent

         To calculate a reasonable royalty, experts would often employ the twenty-five percent rule. (32) This "rule of thumb" generates a royalty rate by multiplying the alleged infringer's profit rate by twenty-five percent. (33) The rule gained "widespread acceptance" for its ease of use (34) and was "passively tolerated" by the courts until Uniloc USA, Inc. v. Microsoft Corp., (35) overruled it. (36) The court called the rule "fundamentally flawed" because it "fails to tie a reasonable royalty base to the facts of the case at issue." (37)

         Uniloc also prohibited the use of the entire market rule, which is another commonly used royalty calculation. (38) Experts calculating infringement damages would use the entire market value of the infringing product as a baseline number, then multiply that figure by a very small percentage (sometimes less than a hundredth of a percent) to arrive at a potential royalty rate. (39) The Uniloc court clarified that the holding in Lucent Technologies, Inc. v. Gateway, Inc. (40) does "not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough...