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Oracle v. Google - The Court Questions Oracle's Damages Report
Monday, July 11 2011 @ 09:00 AM EDT

It would appear that Judge Alsup is having his doubts about Oracle's "entire market value" theory of damages. He has issued an order [PDF] directing counsel (presumably Oracle counsel) to
address whether the Oracle damages report was deficient for failing to cover “all of its damages report” as required by paragraph 9 of the case management order (Dkt. No. 56) inasmuch as it omits any basis for its application of the “entire market value” theory, saying that “others” will cover this important premise.

Does this mean the theory fails? No, but it does mean that Oracle has, to quote I Love Lucy character Ricky Ricardo, "some 'splainin' to do."

Paragraph 9 of the Case Management Order [PDF] reads:

Any party seeking monetary damages must serve all of its damages report SEVENTY CALENDAR DAYS before other non-damages opening reports are due. Within FOURTEEN CALENDAR DAYS of receipt of such damages reports, the opposing side must file any Daubert or other motion directed at the methodology, reliability or other defect, said motion to be heard on a normal 35-day track. The opposition report will be due FOURTEEN CALENDAR DAYS after the ruling on such motion with any reply due SEVEN CALENDAR DAYS thereafter. One purpose of this timing is to give the party seeking damages a brief window in which to cure (if possible) any flaws in the study.

Judge Alsup clearly believes the Oracle damages report provided by Prof. Iain Cockburn has failed to provide a basis for applying the "entire market value" theory of damages. So what is the "entire market" theory of damages?

To understand the theory one first needs to understand how royalties work. A royalty is determined by two components, a base and a rate. The royalty base is the object of the royalty and may consist of income from the sale of a product or the number of units sold. The base normally needs to have some association with the asserted patent and provides a reasonable basis for valuing the patent. The royalty base is then the factor that represents the value of the patent as a proportion of that base. Rate is usually expressed as a percentage or as a fixed dollar amount, for example, 5% of gross income from the sale of widgets or, in the alternative, $0.05 per widget.

“The entire market value rule has typically been applied to include in the compensation base unpatented components of a device when the unpatented and patented components are physically part of the same machine.” Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1548 (Fed. Cir. 1995) (en banc). The rule only allows recovery from unpatented components in an apparatus if the patented feature forms the “basis for customer demand” for the entire apparatus. Id., at 1549 (Fed. Cir. 1995), quoting State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989).
[quoting from Changing Law of Patent Damages in the U.S., E. Robert Yoches, Finnegan Henderson]

At least theoretically, under the "entire market" approach there needs to be some nexus between the patented component and customer demand.

In recent years the entire market value approach has come under a great deal of scrutiny.

In Lucent Technologies Inc. v. Gateway Inc., 580 F.3d 1301 (Fed. Cir. 2009), the jury awarded $385 million in damages for infringement of a patent for picking a date from a pop-up calendar by Microsoft Corp.’s Outlook e-mail program. The jury based its award on revenues from the sales of Outlook. The Federal Circuit remanded for a new trial on damages, finding “the infringing use of Outlook’s date-picker feature is a minor aspect of a much larger software program and... the portion of the profit that can be credited to the infringing use of the date-picker tool is exceedingly small." Id. at 1333. The court also noted, “There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.” Id. at 1339.
[Yoches]

In Uniloc USA v. Microsoft Corp., 2011 U.S. App. LEXIS 11 (Fed. Cir. Jan. 4, 2011) the Federal Circuit found the use of the EMV rule improper because the patentee failed to prove that the patented feature was the basis for customer demand. The use of Microsoft’s total revenues, even with a low royalty rate, tended to skew the jury’s appreciation of the value of a license, and was therefore improper. [Yoches]

In a case well known to many of us, IP Innovation, L.L.C. v. Red Hat, Inc., 705 F.Supp.2d 687, 689-90 (E.D.Tex.2010), Judge Rader of the Federal Circuit, sitting by designation in this district court proceeding, asserted the entire market value rule may only be invoked where the patented feature forms “the basis for customer demand” for the larger accused device. In the instant case “[t]he claimed invention is but one relatively small component of the accused operating systems."

The rule was also rejected in Phillip M. Adams & Assoc. LLC v. Winbond Electronics Corp., Case No. 1:05-CV-64 TS (D. Utah, Sept. 8, 2010) where the patents covered only a feature of the chips present in Sony's computers and the plaintiff was seeking to use the entire value of the computer as the base.

In contrast, the court in Mondis Technology Ltd. v. LG Electronics, Inc., et. al., Case No. 2-07-cv-00565 (E.D. Tex. June 14, 2011) recently allowed the use of the entire market rule because there was no satisfactory other means for determining the royalties. It is worth noting that in Mondis the patent holder had a substantial track record of licenses covering the subject patents that relied upon the entire market rule.

Clearly, each of these cases is fact specific, but with the Lucent holding of the Federal Circuit as controlling, district courts will, as here, proceed with caution when the plaintiff advances the entire market rule as the basis for damages.

Judge Alsup's order:

***************

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA

ORACLE AMERICA, INC.,
Plaintiff,
v.
GOOGLE INC.,
Defendant.

No. C 10-03561 WHA

NOTICE RE QUESTION FOR JULY 21 HEARING

At the hearing on July 21, counsel shall please address whether the Oracle damages report was deficient for failing to cover “all of its damages report” as required by paragraph 9 of the case management order (Dkt. No. 56) inasmuch as it omits any basis for its application of the “entire market value” theory, saying that “others” will cover this important premise. Please do not file more submissions but address this point orally. This is without prejudice to addressing other questions raised.

IT IS SO ORDERED.

Dated: July 8, 2011.

/s/William Alsup
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE


Latest filings:

07/08/2011 - 207 - NOTICE RE QUESTION FOR JULY 21 HEARING. Signed by Judge Alsup on July 8, 2011. (whalc1, COURT STAFF) (Filed on 7/8/2011) (Entered: 07/08/2011)

07/08/2011 - 208 - MOTION for Leave to File Supplement Invalidity Contentions filed by Google Inc.. (Attachments: # 1 Affidavit Declaration of Mark Francis in support of Motion for Leave to Supplement Invalidity Contentions, # 2 Proposed Order Proposed Order Granting Google Inc's Motion for Leave to Supplement Invalidity Contentions)(Sabnis, Cheryl) (Filed on 7/8/2011) (Entered: 07/08/2011)


  


Oracle v. Google - The Court Questions Oracle's Damages Report | 112 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections here
Authored by: jplatt39 on Monday, July 11 2011 @ 09:13 AM EDT
If any. Please use the format:
incorrect form -> correct form
in your title.

[ Reply to This | # ]

Off Topic Here
Authored by: jplatt39 on Monday, July 11 2011 @ 09:14 AM EDT
Please make links clickable. Preview is your friend. Please read the important
stuff at the bottom of the Post a comment page. On-topic comments will be
ignored.

[ Reply to This | # ]

Newspicks Here
Authored by: jplatt39 on Monday, July 11 2011 @ 09:16 AM EDT
Please use the title of the newspick you are commenting on for the title of your
comment.

[ Reply to This | # ]

Comes here
Authored by: jplatt39 on Monday, July 11 2011 @ 09:16 AM EDT

[ Reply to This | # ]

Thank you!
Authored by: capt.Hij on Monday, July 11 2011 @ 09:51 AM EDT

Thank you for the very clear explanation. I get lost in a lot of the legal mumbo-jumbo, but this is very helpful. Even a dunderhead like me can make sense of it. :-)

[ Reply to This | # ]

In other words ...
Authored by: cricketjeff on Monday, July 11 2011 @ 11:09 AM EDT
If nobody gives a mosquito's buzz that the OS of the phone they buy was written
in a language related to Java, you cannot assume the phones only sold because of
that.
Seems amazingly sensible!

---
There is nothing in life that doesn't look better after a good cup of tea.

[ Reply to This | # ]

"all of its damages report"?
Authored by: rsteinmetz70112 on Monday, July 11 2011 @ 11:47 AM EDT
That seems a curious phrase as used in the Judges letter seems odd. As I read
the rule it requires a single complete Damages Report, that covers the entire
basis for damages. The Judge's phrase 'failing to cover "all of its damages
report"' is a little jarring, a more comprehensible phrase might have been
"filing an incomplete Damages Report".

Of course this may be some "term of art" that eludes me.

---
Rsteinmetz - IANAL therefore my opinions are illegal.

"I could be wrong now, but I don't think so."
Randy Newman - The Title Theme from Monk

[ Reply to This | # ]

Did Oracle knock once too often?
Authored by: jsoulejr on Monday, July 11 2011 @ 11:56 AM EDT
"Please do not file more submissions but address this point orally."

[ Reply to This | # ]

Entire Market Value? What entire market is that? Where's the nexus?
Authored by: Ian Al on Monday, July 11 2011 @ 12:06 PM EDT
I was just about to comment when I read cricketjeff's comment which rather set
me back.

My line of thought was centered on the proportion of Android that used the
patents. He points out that 'it's telephones, stupid!'.

What is the entire Google market value for Android? Well, there are the Android
phones they sell or sold. Is that all there is? Perhaps it is all of the Android
mobile phones. All other Android devices must be excluded because Oracle give
those a licence. When it comes to other mobile phones, is there a legal
principle that says that Oracle must pay a licence fee for, say, each HTC
Android phone? What is the market financial value to Google for each of the HTC
Android mobile phones that are sold?

Cockburn claimed that Google stood to earn billions over the next ten years and
this was the basis of the damages he calculated. So, how is the jury to have
proven to them how many Android phones will be sold over the next ten years?
Supposing they are not sold, will Google be given a rebate?

Oracle USA say that java is freely licenced for any mobile computer as long as
it is not a mobile phone with a general purpose computer. However, the computing
part of a smartphone is not the main reason for selecting a phone otherwise
customers would rather buy a laptop, netbook or tablet computer. That means that
even the entire computing aspect of smartphones is a small part of the
importance of the phone to the customer.

The parts of Android that use (allegedly) the Oracle patents are Dalvik and the
apps. The Linux kernel is not covered. The apps are, largely, not of Google's
making. The use of the java language is not a nexus to the working of the apps
since they can be written in C++. Dalvik may or may not use the 'just in time'
features and the security features (it cannot because the security features are
incompatible with Dalvik). Would the customer notice if the features were not
used? No, because there are an infinite number of prior art alternative methods
to get the effect, and anyway the effects are not that significant.

What I would like to know is how the judge happened on this thought. Could it be
that he noticed that Android is free? Could it be that he noticed Dalvik is not
Java? Could it be that he noticed that Cockburn was citing damages that are
based on a future entire market value and not even the entire market value of
Android to Google? Whatever, I think this expert report has the lifetime of a
plate in a Greek restaurant.

---
Regards
Ian Al
OK, Just one more article and then I'll seek help.

[ Reply to This | # ]

When will a victim claim unpatentable subject matter?
Authored by: kawabago on Monday, July 11 2011 @ 01:34 PM EDT
I don't see why at least one of these victims doesn't claim all these patents
are worthless because they claim excluded subject matter. Google has only
asserted it's patents defensively so they would do fine without them, it would
be a lot cheaper for them if they didn't have to file for software patents in
the first place. Someone please attack software patents directly!

[ Reply to This | # ]

Mondis Technology Ltd. v. LG Electronics, Inc. et al
Authored by: Anonymous on Monday, July 11 2011 @ 08:40 PM EDT

Here's some additional information about that ruling from the blog of a patent attorney covering cases in the Eastern District of Texas.

Motion to Strike Expert's Use of Entire Market Value Rule Denied; Weight of Evidence as to Uncertainty for the Jury

"Indeed," Judge Everingham observed, "the fact that the patented feature does not provide the basis for the customer demand is largely undisputed." But he believed that Dr. Magee should be permitted to offer opinion regarding the reasonable royalty based on the entire market value of the accused products because Plaintiff contended that is the industry standard and that nearly every comparable license in this case is based on a percentage of the total accused product (or licensed product) sales price. "This is a case where it is “economically justified” to base the reasonable royalty on the market value of the entire accused product," he concluded, noting that the defendants' royalty analysis was based on licenses that used the entire value of the accused products. Defendants' position was that the defendants can use the entire market value of the accused products for their damages analysis, but that the Plaintiff could not.. he noted. "If this rule were absolute, then it would put Plaintiff in a tough position because on one hand, the patented feature does not provide the basis for the customer demand, but on the other hand, the most reliable licenses are based on the entire value of the licensed products."

The Court concluded that "[u]nder the facts in this case, Plaintiff may base its reasonable royalty analysis on the entire value of the accused products, despite not showing the accused features provide the basis of the customer demand. In this Court's view, Federal Circuit jurisprudence regarding the “entire market value rule” allows for this result, and further, Federal Circuit damages jurisprudence encourages this result by placing a large emphasis on comparable licenses of the patents-in-suit."

Of course, in the Oracle v. Google case we have the additional factor that the patents in question were not being offered for licensing in isolation. It can be assumed that Google and Oracle were negotiating for a license to use all of Oracle's Java technology that might be applied to Android, of which the patents formed only a (potentially small) part. What exactly would constitute comparable licenses for a subset of a patent portfolio that was applicable to only one element in a far larger market?

In another ruling on the same case, the judge also made a decision about allowing the plaintiff's damages expert to give his opinion that standard royalty rates might be tripled after a successful finding of patent validity and infringement.

[A]lthough the jury may find that there should be no tripling of the standard rates, there is nothing inherently wrong with Dr. Magee giving an opinion that the rates should be increased for the lack of “uncertainty.” The licenses at issue all appear to be executed before litigation (or at least before there was an adjudication regarding validity and infringement). At that time, the parties executed the license in the “real-world” with uncertainty regarding the validity of the patents and infringement of the licensed products. In the hypothetical negotiation, however, the patent is assumed to be valid and the accused products are assumed to infringe. Therefore, as compared to the “real-world” in which the licenses to the patents-in-suit were negotiated, the patentee in the “hypothetical-world” is in a better bargaining position. How much better is debatable, but that decision is for the fact-finder. Accordingly, it is rational and economically sensible, due to this fact alone, that the patentee in the “hypothetical-world” may receive a more favorable royalty rate than in the “real-world.”

Even the choice of three times standard rates seems arbitrary. What's to prevent another expert from using an even higher multiplier? Deciding whether any number is reasonable seems to be left up to a jury to decide. Such is life as a defendant to patent infringement charges in the Eastern District of Texas. It goes to show that damages experts may get a pretty free hand in how they estimate damages, depending on whose court they are appearing in.

Note: the same author reports on his blog that Mondis wound up winning their case in part, getting a $15 million dollar award.

Split Decision in Mondis v. LG in Marshall

--bystander1313

[ Reply to This | # ]

Why the Order?
Authored by: DaveJakeman on Tuesday, July 12 2011 @ 08:26 AM EDT
What I haven't seen anyone question is why Judge Aslup felt the need to issue
this order in the first place. He could have just brought it up at the hearing,
but chose not to. Instead, he's giving Oracle ample time to concoct their
'splanation.

So I assume he's trying to be as fair as possible to them in advance of
launching the projectile likely to cripple their ship. Should be an interesting
hearing.

[ Reply to This | # ]

  • Why the Order? - Authored by: Anonymous on Thursday, July 14 2011 @ 09:01 AM EDT
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