Philip Brooks' Patent Infringement Updates

Judge's Opinion on Enhanced Damages, Prejudgment Interest and Costs in Krippelz v. Ford

In an update to my August 26, 2009 post on the Krippelz v. Ford, Judge James B. Zagel issued a November 18, 2009 Memorandum Opinion and Order in the Jacob Krippelz, Sr. v. Ford Motor Company case in the Eastern Division of the United States District Court, N.D. Illinois.

Judge Zagel writes:

I am awarding $11,685,957 in prejudgment interest, calculated using an interest rate of prime plus 1%, compounded quarterly, on the first day following the quarter during which the royalties were actually earned. 

• During the ten-year period of infringement, Ford's long-term and short-term borrowing rate has averaged between .7% and 1.47% above prime. Because of the large risk of non-repayment, the rate of prime plus one percent is appropriate here.
• Ford has failed to demonstrate the existence of any special circumstance warranting a deviation from the norm put forth by the Seventh Circuit, and as a result, the interest in this case must be compounded.
•  Because Ford offers no argument as to why annual compounding is more appropriate in this case than quarterly, the interest award to Krippelz will be compounded quarterly.
• Had Ford been making quarterly royalty payments to Krippelz, they would have been based on sales made during each quarter, calculated at quarters' ends, and then paid to Krippelz...For this reason, interest should be compounded at the end of each quarter.
• ...taxes should not be deducted from Krippelz's award of prejudgment interest.

I am granting Krippelz's motion for costs.

In Read Corp. v. Portec, Inc., 970 F.2d 816, 827 (Fed.Cir.1992), abrogated in part on other grounds by Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir.1995) (en banc), the Federal Circuit set forth the factors for consideration in determining whether a plaintiff should be awarded enhanced damages for a defendant's willful infringement. I will discuss each factor in turn.

1. Whether the infringer deliberately copied the ideas or design of another (...this factor weighs against Ford and in favor of enhanced damages.)
2. Whether the infringer, when he knew of the other's patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed (...enhanced damages)
3. The infringer's behavior as a party to the litigation (They do not necessitate the enhancement of damages.)
4. The defendant's size and financial condition (This factor is neutral.)
5. Closeness of the case (...in favor of enhancement.)
6. Duration of the defendant's misconduct (...in favor of enhancement.)
7. Remedial action by the defendant (...in favor of enhancement.)
8. Defendant's motivation for harm (...this factor is neutral.)
9. Whether the defendant attempted to conceal its misconduct (This factor is neutral.)

...of the nine Read factors, I have found that only five weigh in favor of enhancement, and the remaining are neutral. For this reason, I find doubled damages to be appropriate here. Because Ford's willfully infringing sales represent 91.38% of the total accused sales in this case, Krippelz is entitled to an additional $21,017,400, over and above the jury award of $23,000,000.

See the full opinion here.

Estimating Damages of Patent Infringement Seminar

Incremental Advantage will host the above-titled conference in Washington, DC and via webinar:

Patent damages are outlined in the 35 USC § 284 statute and state that a patent holder is entitled to at least a reasonable royalty as damages. This code also defines the compensatory nature of patent damages and allows for any damages necessary to adequately compensate the patent holder. The compensatory damages can include lost profits, price erosion, harm to company’s reputation, harm to company’s relationships with its customers and suppliers, and so on (besides a reasonable royalty).

This course is designed to address the issues that arise in the determination of reasonable royalty damages. We start with the basics of how to determine a reasonable royalty including:

> The Georgia-Pacific factors

• Rates for other similar patents
• Nature and scope of license
• Commercial relationships
• Duration of patent and term of license
• Extent of infringer use of invention
• Other

> Cost of next best alternatives

> Milestone payments

This course will also discuss how to determine the lost sales and associated lost profits using incremental costs approach. It will look into methods used to assess price erosion and other economic harms to the patent holder. Note, patent damages do not allow for disgorgement of the infringer’s profit unless it is a design patent.

This course will be held on:

1. Washington DC - January 28, 2010
2. Webinar - January 28, 2010
3. Webinar - March 23, 2010

Click here for more information, schedule of dates and times and to register!

The State of Patent Damages Law After Lucent v. Gateway

On December 16, 2009, the Section of Intellectual Property Law of the ABA presents the above-titled Teleconference & Live Audio Webcast.

The Federal Circuit's recent decision in Lucent Technologies Inc. v. Gateway Inc. has put the patent damages reform debate in a new light.

In a decision by Chief Judge Michel, the Court vacated a half-billion dollar award against Microsoft, and used that opportunity to opine on the "entire market value" rule, as well as comment upon criticisms in Congress and elsewhere about the Court's prior precedent in this area.

This program will discuss the Lucent v. Gateway and other recent important decisions on patent damages from the perspective of both lawyer and expert. Our panel will analyze the current state of the law and where it might be (and should be) headed particularly in light of these decisions and proposed patent reform legislation.

Faculty

• Brendan Gardiner (Moderator), Caterpillar Inc.
• Gary Griswold, 3M Innovative Properties Company
• Kathleen (Kathi) Kedrowski, Navigant Consulting

More details and registration are available here.

TSMC vs. SMIC Ends with $200M Settlement

The following is excerpted from a November 9, 2009 Semiconductor International article by David Lammers:

Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC, Hsinchu, Taiwan) settled its trade secrets lawsuit with Semiconductor Manufacturing International Corp. (SMIC, Shanghai, China) today, with SMIC agreeing to pay $200M in cash and an undisclosed amount of stock and warrants to TSMC. Judge Steven Brick discharged the jury in the two-month-long civil trial in the California Superior Court in Oakland, Calif., saying that "unexpected news is not always bad."

Keker & Van Nest (San Francisco), the law firm which represented TSMC, said the court-approved settlement awards TSMC "$200M and an undisclosed amount of stock and warrants. The Court will maintain jurisdiction to enforce the judgment until it is finally satisfied. All the other terms of the Settlement are confidential."

While the detailed settlement terms are confidential, SMIC may disclose them in filings with securities regulators. In the case of the December 2005 settlement, SMIC divulged the terms several months later, both with the U.S. Securities and Exchange Commission (SEC), and with the Hong Kong stock exchange.

Read the full article here.

TSMC Court Win a Major Blow to China's Biggest Chip Maker

The following is excerpted from a November 5, 2009 article by Dan Nystedt at Computerworld:

Taiwan Semiconductor Manufacturing (TSMC) has won a major victory over China's biggest chip maker in a court case that could have wide ranging implications for the loser.

A jury at the Superior Court of California in Alameda County voted in favor of TSMC in the case against Semiconductor Manufacturing International (SMIC). TSMC had sued SMIC in a case involving theft of trade secrets, patent infringement and breach of contract over a prior settlement between the two companies.

The next phase of the trial, to assess damages against SMIC, begins Thursday. The damages alone could be enough to force SMIC to seek a buy-out, according to Randy Abrams, research analyst at investment bank Credit Suisse.

TSMC could be awarded up to US$1 billion in damages, and could also win an injunction preventing infringing chips from entering the U.S., Abrams wrote in a research note. Since SMIC ended the third quarter of this year with US$500 million in cash and $1.1 billion in debt, a big financial penalty and an injunction would seriously crimp SMIC's ability to do business, he said.

Read the full article here.

Tax Treatment of Infringement Damages

The following is excerpted from the October 2009 issue of Sunstein's Intellectual Property Update titled, "Tax Treatment of Infringement Damages: Plan Ahead to Improve Your Results" by Thomas C. Carey:

In 1989, Pizza Hut disclosed the C&F trade secrets to IBP, another Pizza Hut supplier, without C&F’s consent, in violation of the confidentiality agreement. C&F became certain of this violation in 1993, when its representatives inspected the IBP production facility. C&F promptly sued Pizza Hut and IBP, alleging patent infringement, fraud, unfair competition and misappropriation of trade secrets. 

In its complaint, C&F stated that, as a result of the defendants’ misdeeds, C&F had suffered “lost profits, lost opportunities, operating losses and expenditures.”

By 1998, the district court had dismissed the claims based upon fraud and unfair competition, and had found the C&F patent to be invalid. After a trial, the court awarded damages to C&F on its remaining claim, for trade secret misappropriation.  In settlement, IBP paid $11 million to C&F and Pizza Hut paid $15.3 million. The settlement agreement with Pizza Hut referred to the “payment of a lump sum payment in full and complete discharge and settlement of the lawsuit,” and contained mutual releases.

C&F was an S corporation, that is, one in which company income is passed through to shareholders, who must report it on their individual tax returns. C&F’s tax returns reported the settlement funds as capital gains realized upon the sale of trade secrets. Relying on K-1s that C&F provided them, the shareholders likewise reported the amounts as long-term capital gains on their personal tax returns. 

The IRS disputed this characterization, asserting that these amounts constituted ordinary income. The taxpayers responded that the settlement was paid for damage to the C&F trade secrets, or, in the alternative, for the sale of the trade secrets to Pizza Hut.  The parties litigated the matter before the United States Tax Court.

The Tax Court began its analysis of these facts by reciting the truism, stated in an earlier ruling, that “the taxability of the proceeds of a lawsuit depends upon the nature of the claim and the actual basis of recovery. . .Where the recovery represents damages for lost profits or other items taxed as ordinary income, it is taxable as ordinary income.  Where the recovery represents damages for injury to, or destruction of, a capital asset, it is taxable as capital gain to the extent it exceeds the taxpayer’s basis in the asset.”  

Read the full article here.

Big Numbers

The above-titled article appears in the Summer 2009 issue of Litigation, the Journal of the Section of Litigation of the American Bar Association and is authored by D. Mitchell McFarland of Harrison, Bettis, Staff, McFarland & Weems, LLP.

In the article titled “Big Numbers” Mr. McFarland details the fictional case of Astrostaff, a Texas PEO that sued its insurance broker, Black & White, when it found that it had been defrauded on the purchase of workers compensation insurance.  The article details the manner by which a party may obtain lost profits and the proof necessary for such claims.

Mr. McFarland writes:

To prove lost profits, you and your hired expert will require in-depth knowledge of the company, its products, markets, and competition, as well as an understanding of the industry in which the company operates and the market forces to which it is subject. Your expert may use data from industry sources, comparable companies, market data, or any other source that could reasonably be expected to predict the company’s financial results.

The discounted cash flow model is the most commonly used accounting method to calculate lost profits. The difference between what “was” and what “should have been” is discounted back to present value to arrive at lost profits damages. Typically, a damages expert estimates the difference between (1) the plaintiff’s cash flow or other measure of economic income in the “but for” world and (2) the plaintiff’s cash flow or economic income in the “actual” world. The difference between these two estimates of economic income is then discounted to present value. Robert F. Reilly & Robert P. Schweihs, The Handbook of Advanced Business Valuation, 274–75 (1999).

The courts have sanctioned three methods for calculating lost profits: (1) before and after; (2) the yardstick; and (3) lost market share model.

The article is available here (subscription or membership required - or you can obtain a copy of Litigation by calling the ABA Service Center at (800) 285-2221).

Patent Logic in Lucent Case May Benefit Microsoft in its Word Appeal

The following is excerpted from an article by Scott M. Fulton, III published in Betanews on September 24, 2009:

Two weeks ago, the Federal Circuit Appeals court struck down a huge jury verdict against Microsoft, on the basis that the jury didn't appear to use a real-world formula for determining infringement damages. If it had, it might not have come up with $357,693,056.18, the judges there stated. In the same appeals court this morning but in a different case, as reported separately by Reuters and by Bloomberg, Microsoft's lawyers were all prepared to argue that they could not have infringed upon a patent for XML tag storage, as former partner i4i alleged, because no one in the company had actually seen the patent.

But they may as well have come to court stone-cold silent, as the issue Judge Kimberly Moore raised, according to both reports, was whether i4i's experts came up with a real-world formula for calculating damages. Citing the very same case that these same judges would cite in overturning the Alcatel-Lucent ruling, i4i argued that its expert figured that a company that borrows a patented invention generally owes the inventor about one fourth of its profits. As i4i's citation explicitly read, "When an inventor allows someone else to use [his] invention, [he'll] keep 25 percent of the profits from the sale of that infringing product."

I4i had produced an XML tag editor that had been used with a previous version of Microsoft Word; Microsoft later replaced it with one of its own in all versions of Microsoft Office, though i4i claims that replacement infringes upon its exclusive patent. Had i4i's product been included instead, that company's expert estimated that it might have been used by some 2.1 million customers. Two-point-one million times about a fourth of the average price per copy of Office -- about $98 -- comes up to about $200 million.

Maybe you've already caught some of the stretches in that formula, and apparently the judges' eyebrows were raised here as well. That would assume that everyone would have been happy to pay at least $400 for Word (or for Office with Word), which is a calculation about "the whole market" (a phrase used in the Alcatel-Lucent analysis) that could be too much of an assumption. "Not everyone who is willing to pay $90 or $200 for a product is willing to pay $500," Reuters quotes Judge Moore as having said.

Read the full article here.

Vacating $357 Million Award, Federal Circuit Addresses Key Patent Damages Issue

I received the following Morgan Lewis intellectual property lawflash yesterday, September 17, 2009:

On September 11, the U.S. Court of Appeals for the Federal Circuit vacated Lucent’s $357 million patent infringement award against Microsoft. Lucent Technologies, Inc. v. Gateway, Inc., Nos. 2008-1485, 1487, 1495 (Fed. Cir. Sept. 11, 2009).

In an opinion by Chief Judge Michel (joined by Judges Newman and Lourie), the court reaffirmed that application of the “entire market value rule,” which allows patent infringement damages to be assessed based on the value of the product into which a patented item is placed, requires a showing that the patented feature is the basis for customer demand. The court, however, reiterated that determination of the “precise methodologies” to be used in determining infringement damages is committed to the district court’s sound discretion and the “base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence).” In its detailed substantial evidence analysis, which emphasizes that “speculation, without more,” and “superficial testimony” are not sufficient, the court provides extensive guidance to litigants regarding necessary damages proofs.

Read the full lawflash here.

Daubert Challenges Of Financial Experts: Keys To Offering & Defending

National Constitution Center is hosting the above-titled audio conference on October 14, 2009.  The speaker for the program is Clifton Hutchinson, a partner in the Dallas office of at K&L Gates, where he specializes in complex litigation and scientific expert issues, and is a frequent speaker and author on expert evidence and Daubert challenges.  Mr. Hutchinson handles a wide variety of litigation matters, including significant intellectual property and trade secrets issues, probate and trust claims, products liability and toxic torts, among others.

SUMMARY

As Daubert financial testimony by financial experts has grown in importance, so too have efforts to challenge and disqualify experts. Do you know the most effective strategies and tactical issues related to the use of financial experts, and how to bring and defend Daubert motions against those experts? Join us for this 60-minute audio conference where you and your colleagues will discover:

• How to bring & defend against Daubert challenges to financial experts
• What financial models are appropriate and how they have been applied
• Solving key discovery issues when dealing with financial experts
• Laws governing admissibility of financial testimony

PROGRAM HIGHLIGHTS

Expert Discovery Issues & Qualifications Of The Financial Expert

• Communicating with financial experts: What must be disclosed & when?
• Keys to determining the scope of relevance in expert discovery requests
• What limitations arise from the expert's practical experience?
• What education and certifications are necessary or beneficial?

Critical Issues With The Financial Expert's Report

• Can counsel assist, and if so, when?
• When are drafts discoverable & how to effectively protect them
• How complete does the report need to be?

Critical Issues with the Expert's Assumptions and Methodology

• When can the expert rely on assumptions form clients or counsel?
• Which models or procedures are essential, which may be rejected?
• Key limitations on financial expert's reliance on staff
• When will courts question an expert's method?

More information and registration are available here.