But I thought you might like to see what Newegg did just prior to that victory, something that is still pending. In early December, Newegg filed an amicus brief [PDF] in the appeal of Apple v. Motorola, the Illinois litigation that Judge Richard Posner tossed out with prejudice, saying neither side had proven damages. He never let the case go to a jury. Part of what Newegg asks the Federal Circuit to do is to remind district courts of the need to take seriously their gatekeeper role and act more like Judge Posner did in that case. The brief asks for more than just the need for establishing a causal nexus. Jury awards, they argue, are preposterously high and totally unpredictable. They have some suggestions on how to bring damages awards out of the stratosphere and back to realistic earthly levels.

Wouldn't it be ironic if the courts were to respond to the smartphone patent wars -- which Apple and Microsoft got into to try to destroy Android -- by reevaluating how patent infringement damages awards are calculated, so that such litigation tactics no longer paid off and companies had to go back to innovating and competing in the marketplace instead of trying to clobber each other with questionable patents in courtrooms?

Jump To Comments

Here's their suggestion: to "set aside the traditional Georgia-Pacific factors and the entire market value rule as unreliable methodologies for calculating damages in cases involving complex products or processes; and expressly to replace them with the more rigorous methodologies the Court has begun to articulate for determining damages in patent cases." The brief asks the court to abolish the entire market value rule:

Reasonable royalty awards often turn on the identification of an appropriate revenue base. But the determination of a proper revenue base is particularly difficult--and accordingly becomes ripe for abuse--when the inventive aspect of a patented technology is only one feature of an accused product or process that may include tens or even thousands of features. Although this Court recently has clarified that the entire revenue associated with an accused product rarely should be used, amici respectfully submit that the entire market value rule has become an unwarranted and unnecessary complication in patent damages analysis, and it should presumptively be abolished.

As technology has evolved--and products and processes have become increasingly complex--many litigants and courts have lost sight of this basic principle that a reasonable royalty analysis must be based on the value of the patented invention, not the revenue associated with the accused product or process.

As such, amici respectfully submit that reasonable royalty damages should be capped at the "incremental value" of the patented invention over the best non-infringing alternative.

While neither Google or Motorola helped with the brief, one of the companies involved, Nest Labs, informs the court that a venture arm of Google owns more than 10% of Nest Labs. And you'll recognize the argument: drugs may have only one ingredient driving customer demand, but when a smartphone may be using 200,000 or more patents, deciding what patent drives customer demand or to what degree ends up confusing juries, who end up awarding unrealistically high damages awards that are utterly unpredictable and economicially unsound.

They ask the Federal Circuit to "encourage district courts to play an early and proactive role--just as the district court did here..." and they sum up:

Amici respectfully submit that two of the approaches traditionally utilized by litigants to calculate a reasonable royalty--use of the Georgia-Pacific factors and the entire market value rule--have become increasingly divorced from an economically sound framework tied to the value of the patented invention and have limited utility in the context of today's complex products and processes. Amici submit that this Court should formally set aside those traditional approaches in favor of a more rigorous economic analysis that focuses upon the value of the patented invention, rather than the revenue associated with the accused product or process.

Here's the amicus brief, as text, followed by the Newegg decision in the Soverain case:

2012-1548, -1549

______________

UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

______________

APPLE INC. and
NEXT SOFTWARE, INC. (formerly known as NeXT Computer, Inc.),

Plaintiffs-Appellants,

v.

MOTOROLA, INC. (now known as Motorola Solutions, Inc.)
and MOTOROLA MOBILITY, INC.,

Defendants-Cross Appellants.

________________

Appeals from the United States District Court for the Northern District of
Illinois in case no. 11-CV-8540, Judge Richard A. Posner

_______________

(CORRECTED)
BRIEF OF AMICI CURIAE ALTERA CORPORATION, CISCO SYSTEMS, INC., CME GROUP, INC., GARMIN INTERNATIONAL, INC., HEWLETT-PACKARD COMPANY, LOGITECH INC., NEST LABS, INC., NETGEAR, INC., NEWEGG, INC., RACKSPACE HOSTING, INC., SAFEWAY INC., SAS INSTITUTE INC., SYMANTEC CORPORATION, WAL-MART STORES, INC., AND XILINX, INC. REGARDING STANDARDS ON DAMAGES IN SUPPORT OF NEITHER PARTY

Debra J. McComas
Davild L. McCombs
HAYNES AND BOONE, LLLP
[address, phone, emails]
Counsel for Amici Curiae: Altera
Corporation; CME Group, Inc.; Cisco
Systems, Inc.; Garmin International,
Inc.; Hewlett Packard Company;
Netgear, Inc.; Newegg Inc.; Rackspace
Hosting, Inc.; SAS Institute Inc.;
Safeway Inc.; Symantec Corporation;
Xilinx, Inc.; and Wal-Mart Stores, Inc.

Marta Beckwith
CISCO SYSTEMS, INC.
[address, phone, email]
Counsel for Amicus Curiae
Cisco Systems, Inc.

Richard J. Lutton, Jr.
NEST LABS, INC.
[address, phone, email]
Counsel for Amicus
Curiae News Labs, Inc.

Elizabeth Launer
LOGITECH INC.
[address, phone, email]
Counsel for Amicus Curiae
Logitech, Inc.

December 4, 2012

_______________

CERTIFICATE OF INTEREST

Pursuant to Circuit Rules 21(a)(2) and 47.4(a)(1), counsel for the amicus curiae certify the following:

1. The full name of every party represented by me is:

Logitech Inc.

2. The name of the real party in interest (if the party named in the caption is not the real party in interest) represented by me is:

n/a

3. All parent corporations and any publicly held companies that own 10 percent or more of the stock of the party represented by me are:

Logitech Inc. is a wholly-owned subsidiary of Logitech International S.A. No public company owns more than 10% of the stock of Logitech International S.A.

4. The names of all law firms and the partners or associates that appeared for the party now represented by me in the trial court or agency or are expected to appear in this court are:

Elizabeth Launer, Logitech Inc.

Dated: December 4, 2012

by: /s/ Elizabeth Launer
Elizabeth Launer

i

CERTIFICATE OF INTEREST

Pursuant to Circuit Rules 21(a)(2) and 47.4(a)(1), counsel for the amicus curiae certify the following:

1. The full name of every party represented by me is:

Nest Labs, Inc.

2. The name of the real party in interest (if the party named in the caption is not the real party in interest) represented by me is:

n/a

3. All parent corporations and any publicly held companies that own 10 percent or more of the stock of the party represented by me are:

None, except as follows:
A venture investment arm of Google, Inc. owns more than 10% of Nest Labs, Inc.

4. The names of all law firms and the partners or associates that appeared for the party now represented by me in the trial court or agency or are expected to appear in this court are:

Richard J. Lutton, Jr., Nest Labs, Inc.

Dated: December 4, 2012

by: /s/ Richard J. Lutton, Jr.
Richard J. Lutton, Jr.

ii

CERTIFICATE OF INTEREST

Pursuant to Circuit Rules 21(a)(2) and 47.4(a)(1), counsel for the amicus curiae certify the following:

1. The full name of every party represented by me is:

Altera Corporation; CME Group, Inc.; Cisco Systems, Inc.; Garmin International, Inc.; Hewlett Packard Company; Netgear, Inc.; Newegg Inc.; Rackspace Hosting, Inc.; SAS Institute Inc.; Safeway Inc.; Symantec Corporation; Xilinx, Inc.; and Wal-Mart Stores, Inc.

2. The name of the real party in interest (if the party named in the caption is not the real party in interest) represented by me is:

n/a

3. All parent corporations and any publicly held companies that own 10 percent or more of the stock of the party represented by me are:

None, except as follows:
Garmin International, Inc. is a wholly-owned subsidiary of Garmin Ltd. FMR, LLC owns more than 10% of Netgear, Inc.'s stock.

4. The names of all law firms and the partners or associates that appeared for the party now represented by me in the trial court or agency or are expected to appear in this court are:

Debra J. McComas, Haynes and Boone, LLP
David L. McCombs, Haynes and Boone, LLP
Marta Beckwith, Cisco Systems, Inc. (on behalf of Cisco Systems, Inc. only)

Dated: December 4, 2012

HAYNES AND BOONE, LLP

by: /s/ Debra J. McComas
Debra J. McComas

iii

TABLE OF CONTENTS

CERTIFICATE OF INTEREST ........................................ i

CERTIFICATE OF INTEREST .................................. ii

CERTIFICATE OF INTEREST ....................................iii

TABLE OF AUTHORITIES ........................................... iv

INTERESTS OF AMICI CURIAE ............................. 1

INTRODUCTION ......................................... 1

ARGUMENT .......................................... 3

I. Generalized Methodologies Currently Used To Calculate
Reasonable Royalty Damages Lead To Inconsistent And Unreliable
Results Because They Are Not Sufficiently Tied To The Patented
Invention.................................................... 3

A. The Fifteen Georgia-Pacific Factors Fail To Provide
Meaningful Guidance And Are Not A Reliable Methodology
For Calculating Reasonable Royalty Damages. ......................... 4

B. Use Of The "Entire Market Value Rule" Should
Presumptively Be Abolished. ......................... 6

II. This Court Should Affirm That Reasonable Royalty Damages Must
Focus On The Value of the Patented Invention At The Time Of The
Design To A Reasonable Licensor and Licensee........................ 9

III. To Provide Further Guidance To District Courts, This Court Should
Establish Three Methodologies For Determining The Value Of The
Patented Invention ..................................... 11

A. Where It Can Be Determined, Reasonable Royalty Damages
Should Be Capped At The Incremental Value Of The
Patented Invention Over The Next Best Alternative. ............... 12

B. Proper Apportionment May Be Used As A Basis To
Approximate The Value Of The Patented Invention .................. 15

C. In Certain Circumstances, Evidence Of An Established
Royalty May Be Considered In The Determination Of The
Value of the Patented Invention...................... 19



iv

IV. This Court Should Reaffirm District Courts' Gatekeeping Function
To Ensure That Only Scientifically Reliable Damages Evidence And
Methodologies Are Presented To The Jury................................... 21

CONCLUSION .............................................. 23

CERTIFICATE OF SERVICE ............................ 26

CERTIFICATE OF COMPLIANCE .................................. 28

ECF CERTIFICATION............................................ 29

v

TABLE OF AUTHORITIES

Page(s)

CASES

Apple, Inc. v. Motorola, Inc.,
No. 1:11-cv-08540, 2012 WL 1959560 (N.D. Ill. May 22, 2012) ........ 14, 22, 23

Apple, Inc. v. Motorola, Inc.,
No. 1:11-cv-08540, 2012 WL 2376664 (N.D. Ill. June 22, 2012) ......................4

Cornell Univ. v. Hewlett-Packard Co.,
609 F. Supp. 2d 279 (N.D.N.Y. 2009)............................16

eBay Inc. v. MercExchange, L.L.C.,
547 U.S. 388 (2006)..............................................20

Garretson v. Clark,
111 U.S. 120 (1884)...............................................9

Georgia-Pacific Corp. v. U.S. Plywood Corp.,
318 F. Supp. 1116 (S.D.N.Y. 1970) .......................................passim

Grain Processing Corp. v. Am. Maize-Prods. Co.,
185 F.3d 1341 (Fed. Cir. 1999) .................................13, 14

Hanson v. Alpine Valley Ski Area, Inc.,
718 F.2d 1075, (Fed. Cir. 1983) .............19

Hughes Tool Co. v. G.W. Murphy Indus., Inc.,
491 F.2d 923 (5th Cir. 1973).............................12

IP Innovations L.L.C. v. Red Hat, Inc.,
705 F. Supp. 2d 687 (E.D. Tex. 2010)............................ 9-10

LaserDynamics, Inc. v. Quanta Computer, Inc.,
694 F.3d 51 (Fed. Cir. 2012)................................passim

Lucent Techs., Inc. v. Gateway, Inc.,
580 F.3d 1301 (Fed. Cir. 2009) ............................... 2, 6, 9, 11

Mars, Inc. v. Coin Acceptors, Inc.,
527 F.3d 1359 (Fed. Cir. 2008) .....................................15

vi

Mirror Worlds, LLC v. Apple, Inc.,
784 F. Supp.2d 703 (E.D. Tex. 2011), aff'd on other grounds, 692 F.3d
1351 (Fed. Cir. 2012)............................................8

Monsanto Co. v. Ralph,
382 F.3d 1374 (Fed. Cir. 2004) .....................................15

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.,
575 F.2d 1152 (6th Cir. 1978)...................................12

ResQNet.com v. Lansa, Inc.,
594 F.3d 860 (Fed. Cir. 2010)...............................passim

Riles v. Shell Exploration & Prod. Co.,
298 F.3d 1302 (Fed. Cir. 2002) .....................................13

Rite-Hite Corp. v. Kelley Co., Inc.,
56 F.3d 1538 (Fed Cir. 1995).................................6

Smithkline Diagnostics, Inc. v. Helena Labs. Corp.,
12 U.S.P.Q.2d 1375 (E.D. Tex. 1989), aff'd, 926 F.2d 1161 (Fed. Cir.
1991) .......................................................12

Uniloc USA, Inc. v. Microsoft Corp.,
632 F.3d 1292 (Fed. Cir. 2011) ................................. 2, 7, 9, 17

Whitserve, LLC v. Computer Packages, Inc.,
694 F.3d 10 (Fed. Cir. 2012)............................. 5, 6, 18, 22

Zygo Corp. v. Wyko Corp.,
79 F.3d 1563 (Fed. Cir. 1996).................................13

STATUTES

35 U.S.C. § 284 ......................................18

Fed. Cir. R. 32(b)........................................27

Fed. R. App. P. 29.....................................1

Fed. R. App. P. 32(a) ......................................27

vii

OTHER AUTHORITIES

Federal Judicial Center, Compensatory Damages Issues in Patent
Infringement Cases: A Pocket Guide for Federal District Court Judges
(2011). ..............................21

FEDERAL TRADE COMMISSION, The Evolving IP Marketplace: Aligning
Patent Notice And Remedies With Competition (March 2011) ..................passim

J. Bessen and M. Meurer, The Direct Costs from NPE Disputes, Boston
Univ. School of Law Working Paper No. 12-34 (June 28, 2012), ..............2

Joan L. Eads, Commentary, Does Grain Processing Apply in a Reasonable
Royalty Damage Analysis?, 10:26 ANDREWS INTELL. PROP. LITIG. REP. 13
(April 13, 2004) ............................14

John W. Schlicher, Measuring Patent Damages by the Market Value of
Inventions -- The Grain Processing, Rite-Hite, and Aro Rules, 82 J. PAT.
& TRADEMARK OFF. SOC'Y 503 (2000) ..............................14

Liane M. Peterson, Grain Processing and Crystal Semiconductor: Use of
Economic Methods in Damage Calculations Will Accurately Compensate
For Patent Infringement, 13 Fed. Circuit B.J. 41 (2003) ....................14

Thomas F. Cotter, Patent Holdup, Patent Remedies, and Antitrust
Responses, 34 J. Corp. L. 1151 (2008-2009)...............................10

viii

INTERESTS OF AMICI CURIAE

Amici curiae span a broad range of industries--from grocers and retailers to leading high-technology, software, and financial services companies. Each of amici has faced or is facing patent infringement actions in which the patent owner seeks damages far in excess of the value of the patented invention. Amici file this brief with the consent of all parties to this appeal.

For purposes of Rule 29 of the Federal Rules of Appellate Procedure, no party's counsel played any role in authoring this brief, no party or party's counsel contributed money that was intended to fund preparation or submission of the brief, and no person other than the amici curiae, their members, or their counsel, contributed money that was intended to fund preparation or submission of this brief.^N1

INTRODUCTION

A consistent and economically rational framework for calculating patent damages--one that rewards innovation based on its contributed value, but not based on attributes unrelated to that contributed value--is a necessary component of a modern and effective patent system. Yet current damages methodologies frequently lead to unreliable, uncertain, and speculative outcomes. This

1

unpredictability, and the excessive damages that often result from use of these methodologies, allocate resources away from innovation and implementation of new technologies and create obstacles to the negotiation of licenses and settlement of litigations.^N2 This problem has become acute because the products and processes used, developed, or sold by amici and other leading companies have evolved, often encompassing thousands of inventions in a single product or process.^N3

This Court has grappled with these issues in recent years and has begun to demand that patentees utilize rigorous, economically-sound methodologies in determining appropriate damages in patent cases. See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009); ResQNet.com v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010); Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011); LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012). This case presents an opportunity for this Court further to clarify that reasonable royalty patent damages should measure the value of the patented invention at the time of design; to set aside the traditional Georgia-Pacific factors

2

and the entire market value rule as unreliable methodologies for calculating damages in cases involving complex products or processes; and expressly to replace them with the more rigorous methodologies the Court has begun to articulate for determining damages in patent cases. Furthermore, this Court should encourage district courts to play an early and proactive role--just as the district court did here--to ensure the appropriate development and presentation of parties' damages theories.

ARGUMENT

I. Generalized Methodologies Currently Used To Calculate Reasonable
Royalty Damages Lead To Inconsistent And Unreliable Results Because
They Are Not Sufficiently Tied To The Patented Invention.

As this Court has recognized, the calculation of a reasonable royalty is "often a difficult judicial chore," but at all times "the damages inquiry must concentrate on compensation for the economic harm caused by infringement of the claimed invention." ResQNet.com, 594 F.3d at 869. Amici respectfully submit that two of the approaches traditionally utilized by litigants to calculate a reasonable royalty--use of the Georgia-Pacific factors and the entire market value rule--have become increasingly divorced from an economically sound framework tied to the value of the patented invention and have limited utility in the context of today's complex products and processes. Amici submit that this Court should formally set aside those traditional approaches in favor of a more rigorous economic analysis

3

that focuses upon the value of the patented invention, rather than the revenue associated with the accused product or process.

A. The Fifteen Georgia-Pacific Factors Fail To Provide Meaningful
Guidance And Are Not A Reliable Methodology For Calculating
Reasonable Royalty Damages.

This Court regularly has emphasized that a damages inquiry must be carefully tied to the value of the patented invention. More than forty years have passed since the Southern District of New York's identification of fifteen non- exclusive factors that may be relevant in determining a reasonable royalty. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). But the list of fifteen factors provides little, if any, guidance to juries (or courts) on how they are to be applied. As the District Court below noted:

This [the Georgia-Pacific factors] is a formidable list. The "some" in the second sentence is particularly rich-- how many additional factors may be lurking somewhere? And could a judge or a jury really balance 15 or more factors and come up with anything resembling an objective assessment?

Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540, 2012 WL 2376664, at *9 (N.D. Ill. June 22, 2012); see also ResQNet.com, 594 F.3d at 869 (describing the list of Georgia-Pacific factors as "unprioritized and often overlapping" and that application of the factors "seem[s] often to involve more the talents of a conjurer than those of a judge"). That concern is particularly acute in the context of modern information technology and consumer electronics products, which can encompass

4

hundreds or even thousands of inventions. Juries tasked with considering a complete (or even partial) list of the Georgia-Pacific factors are given little guidance on their application, permitting patentees to introduce evidence and arguments untethered to any economically sound analysis of the value of the patented invention--in effect, "provid[ing] a grab bag for use by parties seeking to establish whatever reasonable royalty serves their purposes."^N4

Amici respectfully submit that it is time for this Court definitively to state that use of the Georgia-Pacific factors is not an appropriate damages methodology and generally does not result in an economically sound assessment of the value of the patented invention. Rather, this Court should clarify that the fifteen Georgia-Pacific factors represent a non-exhaustive list of potential evidence that may be-- but is not necessarily--relevant to a damages analysis in any given case. Indeed, a proper reasonable royalty analysis need not take into consideration any of the fifteen Georgia-Pacific factors. Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10, 31 (Fed. Cir. 2012).

Moreover, this Court should emphasize that district courts must not treat evidence as admissible simply because it corresponds to one of the Georgia-

5

Pacific categories.^N5 District courts instead must ensure that the evidence is sufficiently tied to the value of the patented invention and the specific facts of the case, and that it is also a reliable source of information that can aid the factfinder in the determination of a reasonable royalty. See, e.g., Whitserve, 694 F.3d at 31 (explaining that superficial recitation of the Georgia-Pacific factors, followed by conclusory remarks, cannot support the jury's verdict).

B. Use Of The "Entire Market Value Rule" Should Presumptively
Be Abolished.

Reasonable royalty awards often turn on the identification of an appropriate revenue base. But the determination of a proper revenue base is particularly difficult--and accordingly becomes ripe for abuse--when the inventive aspect of a patented technology is only one feature of an accused product or process that may include tens or even thousands of features. Although this Court recently has clarified that the entire revenue associated with an accused product rarely should be used,^N6 amici respectfully submit that the entire market value rule has become an unwarranted and unnecessary complication in patent damages analysis, and it should presumptively be abolished.

6

First, as this Court repeatedly has recognized, the overall revenue associated with a complex product or process has no demonstrated correlation to the value of the patented invention when that invention covers only a small part of that product or process. See, e.g., LaserDynamics, 694 F.3d at 68. In reality, customer demand for complex products and processes--such as smartphones, computers, and the software and methods that run on them or are run by them--is driven by myriad considerations.

In this context, allowing patentees to argue that any single feature drives demand can only lead to jury confusion and impermissibly skewed damages awards. See Uniloc, 632 F.3d at 1320 (explaining that evidence presented as part of an entire market value theory "cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component, to th[e] revenue [generated by the overall product]"); LaserDynamics, 694 F.3d at 67, 68 (holding that "calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product" and "only serve[s] to make a patentee's proffered damages amount appear modest by comparison, and to artificially inflate the jury's damages calculation beyond that which is 'adequate to compensate for the infringement'") (citing 35 U.S.C. § 284) (emphasis added). Reference to the overall revenue associated with

7

a complex product or process therefore should be eliminated, as it is typically more prejudicial than probative of the value of the patented invention.^N7

Moreover, a separate rule for the use of the entire market value is wholly unnecessary if appropriate damages methodologies (as discussed further below) are properly utilized. For instance, the use of an overall product's or process's profit to determine a reasonable royalty may be appropriate if, after apportionment, all or most of the profit of the accused product or process is attributable to the patented invention--which may be the case for a single-component product or process, such as a pharmaceutical. But in this circumstance, there is no need to ask the separate question of whether the patented feature drove demand for the accused product or process. On the other hand, if applying the appropriate damages methodology results in something less than the entire profit being attributable to the patented invention, inquiry into the purported "basis for demand" will have been wasteful, confusing, and potentially prejudicial to the accused infringer. Indeed, the ongoing difficulties in applying the entire market value rule have led to jury confusion and inconsistent results in the district courts and justify its elimination. See, e.g., Mirror Worlds, LLC v. Apple, Inc., 784 F. Supp.2d 703, 724-27 (E.D. Tex. 2011)

8

(district court vacating jury's more than six hundred million dollar damages award in part because of the patentee's improper use of the entire market value rule), aff'd on other grounds, 692 F.3d 1351 (Fed. Cir. 2012); see also, e.g., Lucent Techs., 580 F.3d at 1337 (appellate court vacating damages award due to "lack of evidence demonstrating the patented method of the [asserted patent] as the basis--or even a substantial basis--of the consumer demand for [the accused product]").

II. This Court Should Affirm That Reasonable Royalty Damages Must
Focus On The Value Of The Patented Invention At The Time Of The
Design To A Reasonable Licensor And Licensee.

The crucial issue in calculating a reasonable royalty begins with determining the value of the patented invention. Garretson v. Clark, 111 U.S. 120, 121 (1884) ("The patentee . . . must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features."). As technology has evolved--and products and processes have become increasingly complex--many litigants and courts have lost sight of this basic principle that a reasonable royalty analysis must be based on the value of the patented invention, not the revenue associated with the accused product or process. Patentees bear the burden of establishing the value of the patented invention.^N8 See, e.g., ResQNet.com, 594 F.3d at 872; IP Innovations

9

L.L.C. v. Red Hat, Inc., 705 F. Supp. 2d 687, 690 (E.D. Tex. 2010) (Rader, J., sitting by designation) (rejecting plaintiff's contention that it had "no way to value the accused feature separately" and reiterating that the burden is on the patentee).

Amici respectfully submit that this Court should affirm certain guidelines for conducting a sound and reasonable royalty analysis. First, the value of the patented invention must be established by the patentee using a rigorous methodology that meets acceptable accounting standards and is based on reliable, admissible evidence. See ResQNet.com, 594 F.3d at 868 (vacating damages award because it "relied on speculative and unreliable evidence divorced from proof of economic harm linked to the claimed invention.").

Second, that value should be measured, and the hypothetical negotiation must be focused, on the time of design--not necessarily the time of first infringement by the accused infringer. The hypothetical negotiation paradigm is intended to prevent patent damages from reflecting the value of any sunk investment, or the "lock in" difficulty of changing designs after adoption.^N9 In some circumstances, this will lead to a hypothetical negotiation right before first infringement by the accused infringer. In other circumstances, the date of design

10

might be the date just before a feature or function was adopted into a standard, or the date just before a supplier to the accused infringer adopted a feature or function into its product or process, which later was incorporated into the accused product or process.

Third, a reasonable royalty analysis must address the fair distribution of the value of the patented invention to a licensor and licensee if the licensor and licensee were both willing and reasonable in their negotiations. In other words, a reasonable royalty analysis must address how much of the value of the patented invention would be allocated to the licensor, and how much would be retained by the licensee, if the licensor and licensee were both willing and reasonable in their negotiations. See, e.g., Lucent Techs., 580 F.3d at 1337.^N10

III. To Provide Further Guidance To District Courts, This Court Should
Establish Three Methodologies For Determining The Value Of The
Patented Invention.

Amici submit that there are three primary methodologies to value a patented invention that this Court should adopt in lieu of the traditional Georgia-Pacific and entire market value approaches: (1) determination of the incremental value of the

11

patented invention over the next best alternative; (2) determination of the patented invention's value through apportionment; and (3) consideration of an established royalty for the patented invention to determine its economic value.^N11 Regardless of which of these methodologies is applicable in a particular matter, the reasonable royalty still must be based on reliable and admissible evidence and on accepted accounting standards to ensure that a reasonable royalty award is tied to the specific facts of the case and accurately reflects what the parties would have agreed to if they had willingly entered into negotiations at the time of design.

A. Where It Can Be Determined, Reasonable Royalty Damages
Should Be Capped At The Incremental Value Of The Patented
Invention Over The Next Best Alternative.

Courts have long considered the availability of non-infringing alternatives relevant to the determination of damages in patent cases.^N12 Economic theory supports such a consideration; indeed, it would be irrational for an accused infringer to pay more for a license to a patent than he would pay to implement a technically equivalent--but non-infringing--alternative to the patented

12

technology. As such, amici respectfully submit that reasonable royalty damages should be capped at the "incremental value" of the patented invention over the best non-infringing alternative.

This Court has endorsed a similar approach in the context of a lost profits damages analysis. For instance, in Grain Processing, this Court recognized that "a fair and accurate reconstruction of the `but for' market also must take into account, where relevant, alternative actions the infringer foreseeably would have undertaken had he not infringed." Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1350-51 (Fed. Cir. 1999).^N13 The same economic considerations warrant application of Grain Processing to the reasonable royalty context. See, e.g., id. at 1347 (holding that the difference in production costs between infringing and non-infringing products "effectively capped the reasonable royalty award"); Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302, 1312 (Fed. Cir. 2002) ("The economic relationship between the patented method and non-infringing alternative methods, of necessity, would limit the hypothetical negotiation.").^N14 Numerous

13

commentators also have urged that the practical realities favor the application of the "incremental value" cap to the reasonable royalty context. See, e.g., FTC REPORT at 189 ("Courts should recognize that when it can be determined, the incremental value of the patented invention over the next-best alternative establishes the maximum amount that a willing licensee would pay in a hypothetical negotiation. Courts should not award reasonable royalty damages higher than this amount.").^N15

This Court should apply the reasoning of Grain Processing to the reasonable royalty context and limit any reasonable royalty award to the aggregate cost associated with implementing a technically and commercially feasible non-infringing alternative in place of the accused instrumentality.^N16 Such a rule would

14

be consistent with economic realities and, accordingly, the prospective nature of the hypothetical negotiation: to the prospective licensee, the marginal value of the patented invention is the difference between the values of the inventive improvement and available alternatives.

B. Proper Apportionment May Be Used As A Basis To Approximate
The Value Of The Patented Invention.

Many factors contribute to the revenue and market success associated with a product or process. Those factors include, among other things, features covered by other patents, non-patented features and components, reliability, brand reputation, marketing, sales efforts, and manufacturing quality and capability. This Court should reiterate that, if the revenue associated with the accused product or process is to be used to approximate the value of the patented invention, the starting point for any reasonable royalty analysis must involve "apportionment"--a determination as to what value the patented invention actually contributes to the overall accused product or process.^N17 In other words, if revenue associated with

15

the accused product or process is used as the basis to determine the value of the patented invention, all other factors that contribute to that revenue must be apportioned out of that revenue so that what remains approximates the value of the patented invention.

For example, in some circumstances, an appropriate starting point for an apportionment analysis may be the incremental difference in value between a product or process containing or utilizing the patented invention and a similar product or process that does not include or utilize the patented invention. In other circumstances, an appropriate starting point may be the "smallest saleable unit" containing or utilizing the patented invention.^N18 The smallest saleable unit might be something sold by the accused infringer or it might be the value of a component containing the allegedly inventive functionality that is sold to the accused infringer for incorporation into the accused product or process.

16

Regardless of the starting point used, the objective of the analysis should be to apportion the royalty base as closely as possible to reflect the portion of the value attributable to the patented invention--and to exclude all other aspects of the accused product or process that contribute to its revenue.^N19 This generally will require apportionment beyond whatever starting point is used. For example, if the smallest saleable unit is used as the starting point--but that unit also contains non-patented components, features, or other value beyond that attributable to the patented invention--then the value attributable to those additional factors must be further apportioned out of the royalty base. Proper apportionment should ensure that a patentee receives fair value for the patented invention while preventing a reasonable royalty calculation from including, among other things, non-patented features or processes, or implementation and manufacturing costs that factor into a

17

product's sales price and revenue but are wholly unrelated to the patented invention.^N20

Finally, in assessing revenue base apportionment, this Court should emphasize that the focus must remain on the inventive aspect of the claims--not necessarily the device recited in the asserted claims. The fact that patent claims may be expressed in different formats, and of different scope, should not allow the patent owner to avoid apportionment and point to the revenue associated with an overall accused product or process as the proper revenue base. As the Federal Trade Commission explained in its March 2011 Report:

Another artificial construct for identifying the base that courts should reject is always to equate it with the device recited in the infringed claim. In many cases, there will be an easy correspondence between the inventive feature, the device recited in the infringed claim, and the appropriate base. In other cases, the correspondence will not be so clear. For example, a software invention for rendering video images can be recited in a claim covering video software, or in a claim covering a standard personal computer running the video software. . . . The real focus ought to be on the economic realities and not

18

the vagaries of claim drafting, particularly because the way claims are drafted [is] . . . so manipulable.^N21

C. In Certain Circumstances, Evidence Of An Established Royalty
May Be Considered In The Determination Of The Value of the
Patented Invention.

Evidence of an established royalty may be relevant to the reasonable royalty analysis if it can be shown that the established royalty reflects the economic value of the patented technology.^N22 But--as this Court has noted--that is not always the case. For instance, licenses may reflect the value of litigation avoidance, not the value of the claimed invention.^N23 Similarly, licenses entered into after an accusation of infringement may reflect the patent's hold-up value--including the threat of an injunction--and thus be of little use in determining a reasonable

19

royalty.^N24 Further, a license's terms may be artificially inflated for purposes of use in litigation, such as by applying a nominally high rate on an extremely narrowly-defined set of products or by having a high rate but capping the amount paid, and therefore bear little relation to the value of the patented invention (or even the amount actually paid by the licensor). Accordingly, this Court should clarify that, in limited circumstances, evidence of an established royalty for the patented invention (outside the context of litigation) may inform an assessment of the economic value of a patented invention and, accordingly, the determination of a reasonable royalty. Conversely, evidence concerning royalties or royalty rates with no link to the patented invention, which are of questionable merit in determining the value of the patented invention, or which have indicia of unreliability for other reasons including, in almost every circumstance, those that are in settlement of litigation, must be excluded. See ResQNet.com, 594 F.3d at 872.

20

IV. This Court Should Reaffirm District Courts' Gatekeeping Function To
Ensure That Only Scientifically Reliable Damages Evidence And
Methodologies Are Presented To The Jury.

As a recent handbook for federal district court judges explained, "[n]o issue in a patent trial cries out for strict application of [a district court's] gatekeeping tools . . . more than damages."^N25 Regardless of this Court's ultimate determination in this case, amici urge this Court once again to remind the district courts that they must exercise their gatekeeping role--as the district court did here--to prevent unreliable damages methodologies and evidence from reaching the jury.

To be most valuable, such gatekeeping should be done at an early stage. In most circumstances, expert reports concerning damages issues are not disclosed until the end of discovery--often near (or even after) summary judgment deadlines. Furthermore, disputes regarding damages issues are raised in at least three different contexts: summary judgment motions, Daubert challenges, and motions in limine. Such variability causes significant inefficiencies, as a party might have to file--and the court consider--three separate motions at different times challenging different but often intertwined aspects of an expert's testimony and conclusions. While amici believe that the procedures for damages challenges should be determined by each district court, amici submit that this Court should

21

strongly encourage district courts to consider reliability and admissibility of damages related methodologies, theories, evidence, and expert opinions at the same time and early, just as the district court did here. Appropriate gatekeeping reduces jury confusion and excessive results by ensuring that unreliable conclusions, evidence, and methodologies are not presented to the jury. It also streamlines the damages case presented at trial.

Amici also urge this Court to clarify that evidence is not reliable or admissible merely because it happens to correspond to one of the Georgia-Pacific factors. Nor can mere recitation of the factors or other "superficial testimony" be permitted. Whitserve, 694 F.3d at 32. Further, although amici endorse the three methodologies described above in the appropriate circumstances, it is the responsibility of the district court actively to ensure that the methodology used in a particular case is based on sound economic and factual predicates and is carefully tied to the value of the patented invention and the facts of the specific case. LaserDynamics, 694 F.3d at 67; see also Apple, 2012 WL 1959560, at *7-*11 (recognizing that lowest cost of avoiding patent infringement would be the "ceiling on [a potential infringer's] willingness to pay for a patent license", but ultimately rejecting expert testimony of both parties concerning that theory as unreliable under the circumstances of this case). In addition, district courts must ensure that all admitted evidence be reliable and not be more prejudicial than probative. See,

22

e.g., id. at 68 ("Admission of . . . overall revenues, which have no demonstrated correlation to the value of the patented feature alone, only serve to make a patentee's proffered damages amount appear modest by comparison, and to artificially inflate the jury's damages calculation beyond that which is adequate to compensate for the infringement." (internal quotations omitted)).

CONCLUSION

Amici respectfully urge this Court to provide further clarification and guidance, as set forth in this brief, concerning the proper methodologies and procedures for calculating reasonable royalty damages. Additional clarity will benefit district courts and a wide variety of business and consumer interests, appropriately and fairly reward innovation, and foster implementation of new technologies.

23

Dated: December 4, 2012

Respectfully submitted,

/s/ Debra J. McComas
Debra J. McComas
David L. McCombs
HAYNES AND BOONE, LLP
[address, phone, email]

Counsel for Altera Corporation; CME Group,
Inc.; Cisco Systems, Inc.; Garmin
International, Inc.; Hewlett Packard
Company; Netgear, Inc.; Newegg Inc.;
Rackspace Hosting, Inc.; SAS Institute Inc.;
Safeway Inc.; Symantec Corporation; Xilinx,
Inc.; and Wal-Mart Stores, Inc.

Marta Beckwith
Cisco Systems, Inc.
[address, phone, email]

Counsel for Cisco Systems, Inc.

24

/s/ Elizabeth Launer
Elizabeth Launer
Logitech Inc.
[address, phone, email]

Counsel for Logitech, Inc.

/s/ Richard J. Lutton, Jr.
Richard J. Lutton, Jr.
Nest Labs, Inc.
[address, phone, email]

Counsel for Nest Labs, Inc.

__________________
^N1 One amici, Nest Labs, Inc., is owned, in part, by a venture investment arm of Google, Inc. Google, Inc. is the parent company of one of the Defendants- Appellants, Motorola Mobility, Inc. Neither Google, Inc. nor Motorola Mobility, Inc. took any part in drafting this brief.

^N2 See generally, e.g., J. Bessen and M. Meurer, The Direct Costs from NPE Disputes, Boston Univ. School of Law Working Paper No. 12-34 (June 28, 2012), available at http://www.bu.edu/law/faculty/ scholarship/workingpapers/documents/ BessenJ_MeurerM062512rev062812.pdf.

^N3 The terminology "product or process" as used in this brief is intended broadly to cover products, components, apparatus, methods, processes, systems and anything else amenable to patenting. Amici believe that the principles articulated herein apply regardless of the type of patent claim asserted and regardless of what is accused of infringement.

^N4 FEDERAL TRADE COMMISSION, The Evolving IP Marketplace: Aligning Patent Notice And Remedies With Competition at 184 (March 2011) (hereinafter "FTC REPORT"), available at http://www.ftc.gov/os/2011/03/110307patentreport.pdf.

^N5 As the Federal Trade Commission has explained, blanket admission of all evidence that may correspond to any of the Georgia-Pacific factors leads to jury confusion, unreliable results, and substantial difficulty in appellate review. FTC REPORT at 184.

^N6 See, e.g., LaserDynamics, 694 F.3d at 66-68; see also Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1549, 1551 (Fed Cir. 1995); Lucent Techs., 580 F.3d at 1336-38.

^N7 See also FTC REPORT at 211 ("Courts should eliminate the entire market value rule and the question of whether the patented feature was the `basis for customer demand' from the determination of the appropriate base in a reasonable royalty damages calculation. It is irrelevant and it risks injecting significant confusion that threatens to produce inaccurate awards.").

^N8 Moreover, a patentee cannot avoid the fundamental task of determining the value of the patented invention by using a small enough royalty rate. See Uniloc, 632 F.3d at 1320.

^N9 See FTC REPORT at 190 ("A reasonable royalty damages award that is based on high switching costs, rather than the ex ante value of the patented technology compared to alternatives, overcompensates the patentee. It improperly reflects the economic value of investments by the infringer rather just than the economic value of the invention."); see also, e.g., Thomas F. Cotter, Patent Holdup, Patent Remedies, and Antitrust Responses, 34 J. CORP. L. 1151 (2008-2009).

^N10 Amici submit that an appropriate jury instruction on reasonable royalty damages might simply state that reasonable royalties are intended to compensate for the value of the patented invention at the time of design to a willing and reasonable licensor and a willing and reasonable licensee. Such simplification could reduce jury confusion and lead to more reliable damages awards, particularly in comparison to instructions that merely list the fifteen Georgia-Pacific factors without guidance or elaboration.

^N11 Amici do not mean to suggest that all three of these methodologies will apply in every case. Instead, amici submit that at least one of these methodologies can be applied in almost every circumstance. Of course, which of the methodologies to apply in a particular matter will depend on the type and substance of the admissible evidence.

^N12 See, e.g., Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1159 (6th Cir. 1978); Hughes Tool Co. v. G.W. Murphy Indus., Inc., 491 F.2d 923, 931 (5th Cir. 1973); Smithkline Diagnostics, Inc. v. Helena Labs. Corp., 12 U.S.P.Q.2d 1375, 1379 (E.D. Tex. 1989), aff'd, 926 F.2d 1161 (Fed. Cir. 1991).

^N13 See also id. at 1351 ("Without the infringing product, a rational would-be infringer is likely to offer an acceptable noninfringing alternative, if available, to compete with the patent owner rather than leave the market altogether. The competitor in the `but for' marketplace is hardly likely to surrender its complete market share when faced with a patent, if it can compete in some other lawful manner.").

^N14 See also, e.g., Zygo Corp. v. Wyko Corp., 79 F.3d 1563, 1571-72 (Fed. Cir. 1996) (vacating and remanding the district court's damages determination where both lost profits and reasonable royalty failed to take into account non-infringing alternatives that would have given the alleged infringer a "stronger position to negotiate for a lower royalty rate); Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540, 2012 WL 1959560, at *7 (N.D. Ill. May 22, 2012) (explaining that the lowest cost of avoiding patent infringement, either by "invent-around software development or in loss of consumer goodwill (resulting in a loss of sales revenue)," would be the "ceiling on [a potential infringer's] willingness to pay for a patent license.").

^N15 See also, e.g., Joan L. Eads, Commentary, Does Grain Processing Apply in a Reasonable Royalty Damage Analysis?, 10:26 ANDREWS INTELL. PROP. LITIG. REP. 13 (April 13, 2004); Liane M. Peterson, Grain Processing and Crystal Semiconductor: Use of Economic Methods in Damage Calculations Will Accurately Compensate For Patent Infringement, 13 FED. CIRCUIT B.J. 41 (2003); John W. Schlicher, Measuring Patent Damages by the Market Value of Inventions -- The Grain Processing, Rite-Hite, and Aro Rules, 82 J. PAT. & TRADEMARK OFF. SOC'Y 503 (2000).

^N16 Amici recognize that this Court previously has rejected the notion that reasonable royalty damages should be capped at the cost of implementing a non-infringing alternative in place of the accused instrumentality. Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1373 (Fed. Cir. 2008) (citing Monsanto Co. v. Ralph, 382 F.3d 1374, 1383 (Fed. Cir. 2004)). But neither Mars nor Monsanto considered reasonable royalty awards in the context of non-competing entities. Amici respectfully submit that, at the very least, where competitive considerations are absent, the incremental value of the patented invention over the next-best alternative establishes the maximum amount a willing licensee would pay in a hypothetical negotiation.

^N17 See, e.g., ResQNet.com, 594 F.3d at 869 ("[T]he trial court must carefully tie proof of damages to the claimed invention's footprint in the market place.").

^N18 See, e.g., Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 287-88 (N.D.N.Y. 2009) (Rader, J., sitting by designation) (explaining that "counsel would have wisely abandoned a royalty base claim encompassing a product with significant non-infringing components" and that "[t]he logical and readily available alternative was the smallest salable infringing unit with close relation to the claimed invention"); LaserDynamics, 694 F.3d at 67 ("Where small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product. Thus, it is generally required that royalties be based not on the entire product, but instead on the smallest salable patent-practicing unit.") (internal quotations omitted).

^N19 As discussed further below in Section IV, this Court should insist that district courts carefully review damages theories--and ensure that proper apportionment measures have been utilized--before trial, to minimize the very real risk of "skew[ing] the damages horizon for the jury." Uniloc, 632 F.3d at 1320. Evidence of the total revenue associated with the accused product or process should not be presented to the jury; rather only the properly apportioned amount that approximates the value of the patented invention should be presented. LaserDynamics, 694 F.3d at 68 ("Admission of . . . overall revenues, which have no demonstrated correlation to the value of the patented feature alone, only serve to make a patentee's proffered damages amount appear modest by comparison, and to artificially inflate the jury's damages calculation beyond that which is adequate to compensate for the infringement." (internal quotations omitted).

^N20 Associated revenue in a reasonable royalty calculation should factor out any material costs, labor costs, overhead, or costs of inventory, e.g., it should factor out the cost-of-goods sold or services provided. These types of costs relate to creating a usable product or process for the marketplace, not to the value of the patented invention. See, e.g., ResQNet.com, 594 F.3d at 869 ("Any evidence unrelated to the claimed invention does not support compensation for infringement but punishes beyond the reach of the statute."); Whitserve, 694 F.3d at 33 ("35 U.S.C. § 284 requires that patentees be compensated for the infringement, not that their entry into the industry be fully financed.").

^N21 FTC REPORT at 211 (emphasis added, internal quotations omitted).

^N22 In the same vein, if the patent has been purchased rather than internally developed, the price paid for the patent generally is relevant evidence of the maximum value of the patented invention. It would be economically irrational for a licensee to pay more to license a patent than it would have cost to purchase the patent outright.

^N23 See, e.g., LaserDynamics, 694 F.3d at 77 (noting that "[t]he propriety of using prior settlement agreements to prove the amount of a reasonable royalty is questionable" and that the "notion that license fees that are tainted by the coercive environment of patent litigation are unsuitable to prove a reasonable royalty is a logical extension of Georgia-Pacific, the premise of which assumes a voluntary agreement will be reached between a willing licensor and a willing licensee"); ResQNet.com, 594 F.3d at 872 ("[L]icense fees negotiated in the face of a threat of high litigation costs may be strongly influenced by a desire to avoid full litigation.") (citing Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078-79 (Fed. Cir. 1983)).

^N24 This is particularly true of licenses agreed to before the Supreme Court's 2006 eBay decision. See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). Pre-2006 licenses--particularly those granted by non-practicing entities--may be inflated by the fear of an injunction that the Supreme Court has since determined should be unavailable. Indeed, even post-eBay, this "injunction premium" may be present in existing licenses.

^N25 Federal Judicial Center, Compensatory Damages Issues in Patent Infringement Cases: A Pocket Guide for Federal District Court Judges at 28 (2011), available at http://www.fjc.gov/public/pdf.nsf/lookup/ damagespatent.pdf/$file/damagespatent.pdf.

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United States Court of Appeals for the Federal Circuit APPLE INC. v MOTOROLA, INC., 2012-1548, -1549 CERTIFICATE OF SERVICE I, John C. Kruesi, Jr., being duly sworn according to law and being over the age of 18, upon my oath depose and say that: Counsel Press was retained by HAYNES AND BOONE, LLP, Attorneys for Amicus Curiae to print this document. I am an employee of Counsel Press. The brief was original filed and served via the CM/ECF system on December 4, 2102 (in the same manner listed below). I hereby certify that on December 5, 2012, I electronically filed the foregoing (corrected) BRIEF OF AMICI CURIAE ALTERA CORPORATION, et al. with the Clerk of Court using the CM/ECF System, which will serve notice of such filing to any of the following counsel registered as CM/ECF users: E. Joshua Rosenkranz David A. Nelson Orrick, Herrington & Sutcliffe LLP Stephen A. Swedlow 51 West 52nd Street Amanda S. Williamson New York, NY 10019 Quinn Emanuel Urquhart 212-506-5380 & Sullivan, LLP jrosenkranz@orrick.com 500 West Madison Street, Suite 2450 Chicago, IL 60661 312-705-7465 davenelson@quinnemanuel.com stephenswedlow@quinnemanuel.com amandawilliamson@quinnemanuel.com

26

Mark S. Davies Brian C. Cannon Katherine M. Kopp Quinn Emanuel Urquhart Rachel M. McKenzie & Sullivan, LLP T. Vann Pearce, Jr. 5th Floor Orrick, Herrington & Sutcliffe LLP 555 Twin Dolphin Drive Columbia Center Redwood Shores, CA 94065 1152 15th Street, N.W. 650-801-5000 Washington, DC 20005 briancannon@quinnemanuel.com 202-339-8400 mark.davies@orrick.com kkopp@orrick.com rmckenzie@orrick.com vpearce@orrick.com Matthew D. Powers Raymond N. Nimrod Tensegrity Law Group, LLP Quinn Emanuel Urquhart Suite 360 & Sullivan, LLP 555 Twin Dolphin Drive 51 Madison Avenue Redwood City, CA 94065 22nd Floor 650-802-6010 New York, NY 10010-1601 matthew.powers@tensegritylawgro 212-849-7000 up.com raynimrod@quinnemanuel.com As the paper copies have not yet been requested of the originally filed brief, only the current, corrected version will be mailed to the above counsel at the time paper copies are sent to the Court. Upon acceptance by the Court of the e-filed document, six paper corrected copies will be filed with the Court, via Federal Express, within the time provided in the Court's rules. December 5, 2012 /s/ John C. Kruesi, Jr. Counsel Press

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CERTIFICATE OF COMPLIANCE In accordance with Fed. R. App. Proc. 32(a)(7)(C), the undersigned certifies that this brief complies with the type-volume limitations of Fed. R. App. Proc. 32(a)(7)(B). Excluding the exempt portions of the brief (as provided in Fed. R. App. Proc. 32(a)(7)(B)(iii) and Fed. Cir. R. 32(b)), this brief includes 6,005 words. This brief has been prepared in a proportionally spaced typeface using Microsoft Word 2003 in 14 point Times New Roman font. As permitted by Fed. R. App. Proc. 32(a)(7)(C), the undersigned has relied upon the word count of this word-processing system in preparing this certification. HAYNES AND BOONE, LLP /s/ Debra J. McComas Debra J. McComas Dated: December 4, 2012

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ECF CERTIFICATION I hereby certify (i) the required privacy redactions have been made pursuant to Federal Rule of Civil Procedure 5.2; (ii) the electronic submission is an exact copy of the paper document; (iii) the document has been scanned for viruses using Symantec Endpoint Protection active scan and is free of viruses; and (iv) the paper document will be maintained for three years after the mandate or order closing the case issues. HAYNES AND BOONE, LLP /s/ Debra J. McComas Debra J. McComas Dated: December 4, 2012

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Here is the order in the Soverain v. Newegg case, as text:

UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

______________________

SOVERAIN SOFTWARE LLC,
Plaintiff-Appellee,

v.

NEWEGG INC.,
Defendant-Appellant.

______________________

2011-1009

_____________________

Appeal from the United States District Court for the
Eastern District of Texas in case no. 07-CV-0511, Judge
Leonard Davis.

_____________________

Decided: January 22, 2013

_____________________

ROBERT B. WILSON, Quinn Emanuel Urquhart & Sul-
livan, LLP, of New York, New York, argued for the plain-
tiff-appellee. With him on the brief were DAVID NELSON
and NEIL G. CAVE. Of counsel was PAUL J. RIPP, Williams
Montgomery & John Ltd., of Chicago, Illinois.

EDWARD R. REINES, Weil Gotshal & Manges, LLP, of
Redwood Shores, California, argued for the defendant-
appellant. Of counsel on the brief were KENT E. BALDAUF,
JR., DAVID C. HANSON and DANIEL H. BREAN, The Webb
Law Firm, of Pittsburgh, Pennsylvania; and CLAUDIA W.

FROST and KEVIN M. FONG, Pillsbury Winthrop Shaw
Pittman, LLP, of Houston, Texas.

______________________

Before NEWMAN, PROST, AND REYNA, Circuit Judges. NEWMAN, Circuit Judge.

Soverain Software LLC brought this patent infringement suit against Newegg Inc. for infringement of specified claims of United States Patent No. 5,715,314 ("the '314 patent"), its continuation Patent No. 5,909,492 ("the '492 patent"), and Patent No. 7,272,639 ("the '639 patent"). The patents relate to electronic commerce, wherein a merchant's products are offered and purchased online, through computers interconnected by a network. The patents arise from a software system called "Transact" that was developed in 1996 by a company named Open Market, Inc. The Abstract of the '314 and '492 patents describes the subject matter as follows

A network-based sales system includes at least one buyer computer for operation by a user desiring to buy a product, at least one merchant computer, and at least one payment computer. The buyer computer, the merchant computer, and the payment computer are interconnected by a computer network. The buyer computer is programmed to receive a user request for purchasing a product, and to cause a payment message to be sent to the payment computer that comprises a product identifier identifying the product. The payment computer is programmed to receive the payment message, to cause an access message to be created that comprises the product identifier and an access message authenticator based on a cryptographic key, and to cause the access mes-

2

sage to be sent to the merchant computer. The merchant computer is programmed to receive the access message, to verify the access message authenticator to ensure that the access message authenticator was created using the cryptographic key, and to cause the product to be sent to the user desiring to buy the product.

Figure 1 in the '314 and '492 patents is:

In 2001 Open Market was sold, with the Transact software and patents, to a company named Divine, Inc. Former Divine employee and current Soverain President Katharine Wolanyk testified that the Transact software was "a very complex product" that required constant support services and engineering development, that Divine was unable to provide the necessary support and development, and that Divine declared bankruptcy after fifteen months. Soverain acquired the Transact software and patents. Soverain then sued seven online retailers, including Newegg, for patent infringement. The record states that all of the defendants except Newegg took paid-

3

up licenses to the patents. Trial Tr. 47 ll.7-25, ECF No. 392.

Newegg declined to pay for a license, stating that its system is materially different from that described and claimed in the patents, and that the patents are invalid if given the scope asserted by Soverain. Newegg pointed out that similar electronic commerce systems were known before the patented system, that the Transact software was generally abandoned, and that Newegg's system, which is based on the different principle of using "cookies" on the buyer's computer to collect shopping data, is outside of the claims.

Suit against Newegg proceeded in the United States District Court for the Eastern District of Texas.¹ The jury found Newegg liable for infringement of the '314 and '492 patents, and awarded Soverain damages of $2.5 million. The jury found that Newegg did not infringe the '639 patent, but the district court granted Soverain's motion for JMOL of infringement of the '639 patent, and ordered a new trial to assess damages for the '639 patent, to be tried after the completion of appeals. The district court awarded Soverain post-verdict damages and an ongoing royalty.

After the close of evidence the district court removed the question of obviousness from the jury, the court stating: "I don't think there's sufficient testimony to present an obviousness case to the jury. I think it would be very confusing to them." Trial Tr. 3 ll.9-12, ECF No. 395. The district court then held that the claims are not invalid on the ground of obviousness. Op. at 478-79. Newegg's motions for JMOL or a new trial were denied.

4

OBVIOUSNESS

Obviousness is a question of law based on underlying facts, as set forth in Graham v. John Deere Co., 383 U.S. 1 (1966). The Graham factors are (1) the scope and content of the prior art, (2) the difference between the prior art and the claimed invention, (3) the level of ordinary skill in the field of the invention, and (4) any rele- vant objective considerations. The Graham Court explained that "the ultimate question of patent validity is one of law." Id. at 17. Thus on appellate review, the question of obviousness is decided de novo. See Vulcan Eng'g Co. v. Fata Aluminium, Inc., 278 F.3d 1366, 1372 (Fed. Cir. 2002) (district court's application of the law of obviousness to the found facts is reviewed for correctness); C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1351-52 (Fed. Cir. 1998) ("The ultimate determination of obviousness vel non is a legal conclusion.").

Newegg argues that it was wrongfully deprived of a jury determination of the question of obviousness, pointing to the extensive testimony on this issue at trial. However, Federal Rule of Civil Procedure 50 "allows the trial court to remove cases or issues from the jury's consideration `when the facts are sufficiently clear that the law requires a particular result,'" Weisgram v. Marley Co., 528 U.S. 440, 448 (2000) (quoting Wright & Miller, Federal Practice and Procedure (2d ed. 1995)). The Court has explained that the purpose of Rule 50 is "to speed litigation and avoid unnecessary retrials." Neeley v. Martin K. Eby Const. Co., 386 U.S. 317, 326 (1967).

Although here both sides had presented witnesses and evidence on the question of obviousness, the district court's removal of the legal question from the jury did not violate the right to jury trial. See Markman v. Westview Instruments, Inc., 517 U.S. 370, 389 (1996) ("[A]ny credi-

5

bility determinations will be subsumed within the necessarily sophisticated analysis of the whole document."). In KSR International Co., v. Teleflex, Inc., 550 U.S. 398, 427 (2007), the Court applied similar principles in its determination of the question of obviousness, stating that: "Where, as here, the content of the prior art, the scope of the patent claim, and the level of ordinary skill in the art are not in material dispute, and the obviousness of the claim is apparent in light of these factors, summary judgment is appropriate" and remand unnecessary.

However, questions of law must be correctly decided, and the district court's determination of the question of obviousness as a matter of law receives de novo determination on appeal. See Western Union Co. v. MoneyGram Payment Sys., Inc., 626 F.3d 1361, 1369 (Fed. Cir. 2010) (reversing judgment of nonobviousness when "[t]he parties' disputes revolve around whether the prior art taught three specific elements of the claimed inventions, whether there was a motivation to combine these elements with the prior art system, and whether secondary considerations support a finding of nonobviousness."); Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318, 1327 (Fed. Cir. 2008) (reversing judgment of nonobviousness when defendant "clearly and convincingly established a prima facie case that [the] claims [were] obvious as a matter of law."); Inventio AG v. Otis Elevator Co., No. 2011-1615, 2012 WL 5907489, at *5 (Fed. Cir. Nov. 27, 2012) (non-precedential) (reversing judgment of nonobviousness when patent was "a clear example of a `combination of familiar elements according to known methods [yielding] no more than . . . predictable results.'" (citations omitted)).

On these premises, we determine the question of obviousness. Newegg relied primarily on a prior electronic commerce system called "CompuServe Mall." The

6

district court, sustaining validity of all claims in suit, did not discuss the claims or the prior art; the court stated that Newegg's expert had not presented a prima facie case of obviousness, and criticized Newegg for not presenting "some articulated reasoning with some rational under- pinning to support the legal conclusion of obviousness." Op. at 479.

The parties divided the claims in suit into three groups, and presented evidence and argument, including expert and other witness testimony, for the claims as grouped. We retain the parties' groupings, as follows:

A

The '314 and '492 patents the "shopping cart" claims

Soverain asserted claims 34 and 51 of the '314 patent and claim 17 of the '492 patent as a group called the "shopping cart" claims. These claims are directed to the overall system wherein products are offered online by a merchant, a buyer designates products for purchase, and payment for the designated products is initiated upon the buyer's request for checkout, all operating through a computer network. The parties agreed that claim 34 of the '314 patent is representative of this group. Claim 34 follows (with bracketed numbers added):

34. A network-based sales system, comprising:

[1] at least one buyer computer for operation by a user desiring to buy products;

[2] at least one shopping cart computer; and

[3] a shopping cart database connected to said shopping cart computer;

[4] said buyer computer and said shopping cart computer being interconnected by a computer network;

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[5] said buyer computer being programmed to receive a plurality of requests from a user to add a plurality of respective products to a shopping cart in said shopping cart database, and, in response to said requests to add said products, to send a plurality of respective shopping cart messages to said shopping cart computer each of which comprises a product identifier identifying one of said plurality of products;

[6] said shopping cart computer being programmed to receive said plurality of shopping cart messages, to modify said shopping cart in said shopping cart database to reflect said plurality of requests to add said plurality of products to said shopping cart, and to cause a payment message associated with said shopping cart to be created; and

[7] said buyer computer being programmed to receive a request from said user to purchase said plurality of products added to said shopping cart and to cause said payment message to be activated to initiate a payment transaction for said plurality of products added to said shopping cart;

[8] said shopping cart database being a database of stored representations of collections of products, and said shopping cart computer being a computer that modifies said stored representa- tions of collections of products in said database.

At the trial the CompuServe Mall system was the primary reference against the shopping cart claims, including two books describing the system: Bowen & Peyton, How to Get the Most Out of CompuServe (4th ed. 1989) and Ellsworth & Ellsworth, Using CompuServe (1994). Newegg presented testimony of CompuServe's

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former Chief Technology Officer Alexander Trevor, Newegg's expert witness Mr. Edward Tittel, and Newegg's Chief Technology Officer James Wu, who designed the Newegg system.

Mr. Tittel compared claim 34 with the prior art system, element by element. Trial Tr. 55-81, ECF No. 394. Mr. Tittel testified that the CompuServe Mall was a "network-based sales system" (claim preamble) in which the buyer computer (clause [1]) interacted with a CompuServe server computer (clause [2]) that stored buyers' product selections in "shopping carts" called personal holding files (clause [3]), all via a computer network (clause [4]). Id. 57-60. Mr. Tittel explained that products were added to the personal holding files when the buyer computer sent an order command "O" to the CompuServe server, at which time the server would "update" the personal holding file for each such selection (clauses [5], [6] and [8]). Id. 61-63. When the buyer was ready for checkout, the buyer typed "checkout" and was presented with a screen to review the designated items, and with a request to initiate payment (clause [7]). Id. 64-65. Mr. Tittel concluded that all of the elements and limitations of Soverain's shopping cart claims were "shown or apparent" in the prior art CompuServe Mall. Id. 67 l.25.

Mr. Trevor testified as to the CompuServe Mall system, for which he had been the Chief Technology Officer. According to Mr. Trevor, the CompuServe Mall provided the buyer with access to over a hundred online stores. Trial Tr. 32 ll.21-23, ECF No. 396. Within each store, products were presented in menus. When a buyer found a product of interest, the buyer selected the product from the store menu and a detailed description would be displayed, in some cases with a photograph. Id. 33 ll.9-13. If the buyer wanted to purchase the product, the buyer would type the order command "O" and CompuServe

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would store the product in the buyer's personal holding file on the server. Id. 33 ll.14-17. The buyer could designate up to forty items for placement in the personal holding file. Id. 34 ll.8-11. By typing "checkout," the buyer could review selections and modify or delete items in the personal holding file, or proceed to purchase. Id. 43 ll.8-17.

Soverain's expert witness Dr. Michael Shamos stated that the Newegg witnesses' description of the CompuServe Mall was "consistent with my understanding," but presented the argument that the CompuServe Mall lacked two elements of the shopping cart claims: first, that the CompuServe system lacked the "shopping cart message [that] comprises a product identifier" of claim clause [5]; and second, that CompuServe lacked the "shopping cart database" of clause [3]. Trial Tr. 154-69, ECF No. 397. Dr. Shamos did not dispute that the other elements of claim 34 were embodied in the CompuServe Mall. We have given particular attention to the two aspects on which the witnesses stated divergent views.

1. the product identifier message, clause [5]

Dr. Shamos did not disagree with Mr. Tittel that the CompuServe Mall's "order command" was a "shopping cart message" as in clause [5], and agreed that when a CompuServe Mall buyer entered the order command, the CompuServe server computer would identify the product and place it in a personal holding file for that buyer. Trial Tr. 155 ll.24-25, ECF No. 397; id. 165 ll.5-9. However, Dr. Shamos argued that the CompuServe Mall was different because the "product identifier" in the CompuServe Mall was not "in the message." Id. 154 ll.9-17. Dr. Shamos stated that the CompuServe Mall system of product identification was based not on the order command itself, but on what the server "knew" based on "previously sent"

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messages. Id. "It was just an indication that the order key had been--had been hit at that time." Id. 156 ll.2-3. Thus Dr. Shamos argued that the CompuServe order command was not a "message . . . which comprises a product identifier" as required by claim clause [5]. id. 155 ll.2-7.

The distinction proposed by Dr. Shamos and advanced by Soverain is not embodied in the claims and not reflected in the claim construction. It was not disputed that the CompuServe Mall order command designated a specific product for placement in the buyer's personal holding file, or shopping cart, as recited in claim clause [3]. See Trial Tr. 54, ECF No. 394; Trial Tr. 165 ll.5-9, ECF No. 397. Nor was it disputed that, regardless of how the order command was structured, it conveyed the requisite information to the CompuServe server computer. Id. The message set forth in the claims is not distinguished from the message in the CompuServe Mall. The term "product identifier" was not given a special meaning in the specification or through claim construction, and contains no designated format requirements. "No principle of law . . . authorize[s] . . . read[ing] into a claim an element which is not present, for the purpose of making out a case of novelty . . . ." E.I. DuPont de Nemours & Co. v. Phillips Petroleum Co., 849 F.2d 1430, 1433 (Fed. Cir. 1988) (quoting McCarty v. Lehigh Valley R. Co., 160 U.S. 110, 116 (1895)).

Soverain also argues that its system is superior to the CompuServe "order command" because the system of the patents in suit is adapted to the Internet, whereas the CompuServe Mall operated on a pre-Internet network. Trial Tr. 159-162, ECF No. 397. In Muniauction this court held that "conducting previously known methods through an Internet web browser was obvious because it amounted to no more than applying the use of the Inter-

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net to existing electronic processes at a time when doing so was commonplace." 532 F.3d at 1327. Precedent agrees with Newegg that a person of ordinary skill² could have adapted the CompuServe order command to known browser capabilities when these capabilities became commonplace, and that it was obvious to do so. The product identifier message term does not distinguish the shopping cart claims from the prior art CompuServe Mall.

2. the shopping cart database, clause [3]

Dr. Shamos also stated his opinion that the CompuServe Mall did not have a "shopping cart database" as in the claims in suit. Dr. Shamos agreed with Newegg's expert Mr. Tittel that the CompuServe Mall system included "personal holding files," and Dr. Shamos agreed that a shopping cart database "might have been a reasonable design choice," but he opined that such database "wasn't required" by the CompuServe Mall and that the prior art did not "necessarily disclose a database." Trial Tr. 167 ll.12-16, ECF No. 397.

The agreed claim construction for "shopping cart database" was "a database of stored representations of collections of products," where "database means a collec- tion of logically related data stored together by one or more computerized files." Claim Construction Order 3,

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ECF No. 214. The use of personal holding files in the CompuServe Mall is easily within this definition. Mr. Tittel testified that the personal holding file in CompuServe Mall was "a shopping cart in a shopping cart database." Trial Tr. 56 ll.9-10, ECF No. 394. He explained that "[t]he personal holding file itself is a shop- ping cart. And because CompuServe supported multiple individuals shopping in the same store at the same time, a collection of such files would be maintained, and that would meet the Court's requirements for a shopping cart database." Id. 56 ll.11-16. In addition, Mr. Trevor testified that the personal holding files in the CompuServe Mall system stored products "specific to each customer" and constituted an "in-memory database." Trial Tr. 39 ll.7-10, ECF No. 396.

The Ellsworth & Ellsworth book describes the storage of customer product selections in the CompuServe personal holding files. Using CompuServe 376, ECF No. 247-10 ("When you find a product that you want to buy, press O for order. Your order will be stored in a personal holding file until you leave that merchant's store."). The book further describes that items placed in the personal holding file are not yet purchased, and are held until the buyer types the "checkout" command. Id. ("When you are finished shopping in that store, type checkout. An electronic order form appears.").

When Dr. Shamos was asked how a person of skill in the art would have implemented the CompuServe online shopping system other than through a database, he suggested that CompuServe could have used a "fulfillment house," which would "fill your order and send it to you without ever recording it in a database." Trial Tr. 168 ll.9-14, ECF No. 397. Whether that alternative was feasible, it is not stated to be what CompuServe did. The Ellsworth & Ellsworth book states that the buyer's prod-

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uct selections are "stored"--not sent "without ever recording it in a database." The "fulfillment house" alternative proposed by Dr. Shamos does not relate to a personal holding file, and appears to have no relation to either the prior art or the patents. Dr. Shamos conceded that a database would have been a "reasonable design choice" for the personal holding files, and his statements that the prior art did not "necessarily disclose a database" are not evidence of nonobviousness. "Because the patentee is required to define precisely what his invention is . . . it is unjust to the public, as well as an evasion of the law, to construe it in a manner different from the plain import of its terms." Phillips v. AWH Corp., 415 F.3d 1303, 1312 (Fed. Cir. 2005) (en banc) (citations omitted).

The district court's conclusion that a prima facie case of obviousness was not met is not explained by the court or by Soverain, and does not accord with the record. Dr. Shamos did not provide evidence to rebut Newegg's prima facie case that every claim element was embodied in the prior art.

Although the district court criticized Mr. Tittel's expert report on the question of obviousness, the trial record contains extensive testimony of the experts for both sides, discussing every claimed element of the patented subject matter and the prior art system. Their testimony was subjected to examination and cross-examination, before decision of the question of obviousness was removed from the jury. Also, precedent does not require "expert" opinions on matters of law. In Nutrition 21 v. United States, 930 F.2d 867, 871 n.2 (Fed. Cir. 1991) this court observed that "[a]n expert's opinion on the ultimate legal conclusion is neither required nor indeed `evidence' at all." Avia Group Int'l v. L.A. Gear Cal., Inc., 853 F.2d 1557, 1573 (Fed. Cir. 1988) ("an expert's opinion

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on the legal conclusion of obviousness is neither necessary nor controlling").

We conclude that the prior art CompuServe Mall system, by clear and convincing evidence, rendered obvious the "shopping cart" claims: claims 34 and 51 of the '314 patent and claim 17 of the '482 patent. These claims are invalid; the district court's contrary ruling is reversed.

B

The '492 patent the "hypertext statement" claims

The '492 patent is a division of the '314 patent, with the same specification and drawings. Soverain asserted infringement of claims 41 and 61 of the '492 patent, called the "hypertext statement" claims. These claims are directed to the aspect of the online shopping system set forth in the patents, in which the client computer receives transaction statements from the server computer, in response to a request from the client computer. The district court included these claims in its ruling of nonobviousness, although the specific subject matter and claims were not mentioned by the court. We thus determine this question of law de novo.

Claim 41 is shown below, with claim 15 from which it depends, and bracketed numbers added to each claim clause:

15. A hypertext statement system, comprising:

[1] a client computer for operation by a client user; and

[2] one or more server computers for operation by a server user;

[3] the client computer and the server computers being interconnected by a public packet switched computer network;

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[4] at least one of the server computers being programmed to record information pertaining to purchase transaction records in a database, and to transmit a statement document comprising the purchase transaction records to the client computer over the network;

[5] the client computer being programmed to display the statement document to receive a request from the client user to display transaction details corresponding to a portion of the statement document displayed by the client computer, and to cause a transaction detail hypertext link corresponding to the portion of the statement document to be activated;

[6] at least one of the server computers being programmed to respond to activation of the transaction detail hypertext link by transmitting the transaction details to the client computer over the network as a transaction detail document.

41. A hypertext statement system in accordance with claim 15, wherein

[7] the statement document is sent by at least one of the server computer to the client computer in response to a statement URL sent by the client computer to at least one of the server computers.

Newegg argued that claim 41 is rendered obvious by the CompuServe Mall system, for the commonplace sending of a statement of a transaction or receipt, in response to a URL inquiry by the purchaser (claim clause [7]), does not contribute nonobviousness to known systems of e-commerce over the network, (clause [6]). Mr. Tittel's testimony included an element by element comparison of these claims with the CompuServe Mall statement sys-

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tem. Trial Tr. 71-76, ECF No. 394. Mr. Tittel testified that in the CompuServe Mall, the client user operated a client computer (clause [1]), and a server user operated a server computer (clause [2]), and the computers were interconnected by a public network (clause [3]). Id. 72. The CompuServe server recorded and transmitted purchase information, and provided a "confirmation number" from which buyers could "get all the information about that transaction that you might ever need," (clause [4]). Id. 73 ll.10-22. The client user could request transaction information using the confirmation number (clause [5]), and receive access to such information from the CompuServe system (clause [6]), though not using URLs or hypertext (clause [7]). Id. 74 ll.4-5. Mr. Tittel explained that the CompuServe Mall did not employ hypertext or URLs because it pre-dated the Internet and did not use the tools of the World Wide Web, but "[a]nyone who could get access to the text in a transaction record would understand how to use html to present that information at a variety of levels of details." Id. 75 ll.13-18.

At the trial, both sides presented testimony concerning the statement URL (clause [7]). Dr. Shamos argued that the statement URL rendered these claims nonobvious because there was no way of obtaining transaction details online in the CompuServe Mall system. Trial Tr. 173 ll.3-20, ECF No. 397; Soverain Br. 46. Mr. Tittel testified that hypertext and URLs are basic functionalities of the World Wide Web, and that "[a]nyone who wanted to move shopping on the web would know they had to use URLs to tie things together to deliver information." Trial Tr. 71 ll.4-6, ECF No. 394.

Also in suit was claim 61 of the '492 patent, shown with claims 1 and 60 from which claim 61 depends:

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61. A hypertext statement system in accordance with claim 60, wherein the information on transactions by the user includes at least one of the following types of information: a date of transaction, an identification of the product, a payment amount, and a merchant identifier.

60. The method of claim 1, wherein at least one service request comprises a purchase request, the purchase request including an associated user identifier, the method further comprising:

accessing, upon receipt of the purchase request at the server system, user information associated with the user identifier sufficient to charge to an account associated with the user, the purchase price of the product identified by the purchase request;

charging the user for the product identified by the purchase request according to the user information; and

fulfilling the purchase request based on the user information.

1. A method of processing service requests from a client to a server system through a network, said method comprising the steps of

forwarding a service request from the client to the server system, wherein communications between the client and server system are according to hypertext transfer protocol;

returning a session identifier from the servicer system to the client, the client storing the session identifier for use in subsequent distinct requests to the server system; and

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appending the stored session identifier to each of the subsequent distinct requests from the client to the server system.

Newegg points out that the elements of a "statement URL" (claim 41) and general purchase information (claim 61) are "routine modifications that are a part of adapting [the Internet] to an existing system," and do not render the system nonobvious, citing Western Union, 626 F.3d at 1370, where the court held the claimed system of Internet-based money transfer to be obvious, for the prior art money transfers were simply implemented by a newer electronic method that had become commonplace. Reply Br. 4. See also Muniauction, 532 F.3d at 1326 ("modification of [bid calculation software] to incorporate web browser functionality represents a combination of two well known prior art elements to a person of ordinary skill in the art."). Although Soverain argues that the Com- puServe Mall did not disclose "most, if not all, of the elements recited in the hypertext statement claims," such as a "statement document," or a "transaction detail document," Soverain Br. 46, the record does not support that argument, but rather supports Newegg's argument that these aspects were performed in the CompuServe Mall system.

Mr. Tittel explained that in the CompuServe Mall, buyers could get all the information about a transaction from the confirmation number. Tr. 73 ll.10-22, ECF No. 394. Soverain argues that in CompuServe Mall it might be necessary to resort to the telephone or email to get the transaction information, but Newegg states that whatever distinction Soverain is drawing, it is not a limitation on the claims other than a commonplace Internet capability to facilitate on-line transactions. See Muniauction, 532 F.3d at 1327 (holding it obvious to "apply[ ] the use of the

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Internet to existing electronic processes at a time when doing so was commonplace.").

Open Market did not invent the Internet, or hypertext, or the URL. See Trial Tr. 196-97, ECF No. 397 (testimony of Soverain's expert Dr. Shamos). Newegg is correct that the use of hypertext to communicate a "statement document" or "transaction detail document" was a routine incorporation of Internet technology into existing processes. See Western Union, 626 F.3d at 1370- 71; Muniauction, 532 F.3d at 1327.

We conclude that Newegg presented clear and convincing evidence of obviousness of claims 41 and 61 of the '492 patent. The district court's ruling of nonobviousness is reversed.

C

The '639 patent the "session identifier" claims

The '639 patent is directed to "methods of processing service requests from a client to a server system through a network." '639 patent, col.3ll.6-7. The subject matter is summarized in the '639 Abstract as follows:

This invention relates to methods for controlling and monitoring access to network servers. In particular, the process described in the invention includes client-server sessions over the Internet. In this environment, when the user attempts to access an access-controlled file, the server subjects the request to a secondary server which determines whether the client has an authorization or valid account. Upon such verification, the user is provided with a session identification which allows the user to access to the requested file as well as any other files within the present protection domain.

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Claims 60 and 79 of the '639 patent were in suit, called the "session identifier" claims. The jury found that these claims are not infringed by the Newegg system. On Soverain's motion for JMOL as to claim 79, the district court reversed the verdict and ruled the claim infringed. Claim 60 was not included in Soverain's motion, and is not included on this appeal. Claim 79 follows, shown with claim 78 from which it depends:

79. The method of claim 78, further comprising, in the server system:

receiving an initial service request from the client;

creating, responsive to the initial service request, the session identifier; and

returning the session identifier to the client for storage by the client for use in subsequent requests to the server system.

78. A method of processing, in a server system, service requests from a client to the server system through a network, said method comprising the steps of:

receiving, from the client, a service request to which a session identifier stored at the client has been appended by the client, wherein communications between the client and server system are according to hypertext transfer protocol;

validating the session identifier appended to the service request; and servicing the service request if the appended session identifier is valid.

The parties stipulated that "session identifier" means "a text string that identifies a session," wherein a

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"session" is a "series of requests and responses to perform a complete task or set of tasks between a client and a server system." Claim Construction Order 3, ECF No. 214. Newegg again argues that the district court erred in its ruling of nonobviousness. The court did not discuss the prior art or explain its reasoning, other than to include this patent in the general statement that Newegg had not presented a prima facie case of nonobviousness, and to criticize the expert witness for omitting to provide his conclusions as to validity.

Newegg relies on U.S. Patent No. 5,560,008 to Johnson and U.S. Patent No. 5,724,424 to Gifford, stating that either Johnson alone, or Johnson in view of Gifford, renders obvious the claimed subject matter. Soverain responds that neither Johnson nor Gifford discloses a "session identifier." Soverain states that the "credential identifier" of Johnson cannot be a "session identifier" because it identifies a "user rather than a session," and therefore "can cover a portion of a single session or . . . multiple sessions." Soverain Br. 47. Newegg states, and Mr. Tittel explained at trial, that "the same mechanisms that are used to set up a network login [as in Johnson] apply to establishing a session [as in the '639 patent]." Newegg Br. 42-43; Trial Tr. 78 ll.17-18, ECF No. 394.

The "credential identifier" is described by Johnson as follows:

A message, called a request for service, is sent from the user client machine to the server remote machine anytime that service is needed on the remote machine. . . . The server builds a set of credentials that represent all of the interesting security facts about the remote user. This information includes the user id, the group id that the user is in, the group set of other group ids that the

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user has access to, an account id, the set of privileges of the user that allow the user to bypass the normal security restrictions on the system, etc. The server establishes all of the credentials for the user, and stores this information in a data structure called the credentials structure, and returns a small value (e.g. 64 bits) to the client machine where the user is running. This returned small value is referred to as the credentials identifier.

After the credentials identifier is returned to the user, all the user has to do is to present the credentials identifier to the server in every request requiring authentication that is made of that server. . . .

Johnson patent col.5l.47-col.6l.2. The credential identifier in Johnson is "a flexible authentication and authorization process," col.6ll.51-54, where the server decides "the length of time that the credential structure will be maintained," col.6, ll.51-54.

Mr. Tittel testified that the patents to Johnson and Gifford show all of the elements of claims 78 and 79. Trial Tr. 76-81, ECF No. 394. He testified that the "service requests" of the '639 claims appear in Johnson's "requests for service." Id. 79 ll.5-6. The '639 claims refer to "appending" the session identifier to a service request, and Johnson refers to "presenting" the credential identifi- er in "every request." Id. 81 ll.3-4.

Dr. Shamos testified that the '639 claims are distinguishable because the Johnson reference pre-dated the World Wide Web. However, Mr. Tittel pointed out that that the Gifford reference includes application of the Web to the same effect. Id. 80 ll.8-11. Gifford describes a "complete system for the purchasing of goods or infor-

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mation over a computer network," that is "based upon the hypertext conventions of the World Wide Web." Gifford patent, Abstract; col.4ll.61-63. Gifford specifically teach- es the use of hypertext strings in e-commerce transactions for payment authorization and security, a "transaction identifier" that is a hypertext string used to authenticate a transaction. Id. col.11ll.32-35. Soverain does not dispute that Gifford teaches "additional Internet functionality" not taught in Johnson. Soverain Br. 47.

On the agreed claim construction and the teachings of Johnson and Gifford, we discern no distinction between the session identifier claims and Johnson alone, or Johnson with Gifford. In KSR the Court explained:

When we apply the standards we have explained to the instant facts, claim 4 must be found obvious. . . . we see little difference between the teachings of Asano and Smith and the adjustable electronic pedal disclosed in claim 4 of the Engel- gau patent. A person having ordinary skill in the art could have combined Asano with a pedal position sensor in a fashion encompassed by claim 4, and would have seen the benefits of doing so.

550 U.S. at 422. We conclude that claim 79 of '639 patent is invalid on the ground of obviousness.

D

Secondary Considerations

Before reaching our conclusions regarding obviousness referred to above, we have also considered the matter of secondary considerations. Soverain argues that obviousness of all of the claims in suit is negated by the favorable market response that was achieved by Open Market's Transact product, which Soverain states received "widespread recognition in the general media," "an

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excellence award from the industry," and was "widely licensed." Soverain Br. 50-51. Newegg responds with evidence that the Transact system was abandoned by its developers and almost all of its original users. Newegg points out that licenses were taken to avoid the costs of litigation, and not to use the flawed Transact system embodied in its software. Newegg Br. 5-6.

The record does not establish a nexus between use of the Transact software and the patents. At trial, former Open Market employee and inventor Alexander Treese testified that Open Market had attempted to license its patents apart from the software, but without success. Trial Tr. 108 l.25-109 l.3, ECF No. 391 (testimony of Alexander Treese stating that patent licensing program went "Not very well."). The record shows that the software was abandoned by almost all of its initial licensees, Trial Tr. 23 ll.12-25, ECF No. 392 (testimony of Soverain's President Katherine Wolanyk), and is not used by those who bought litigation peace, compare id. 38 ll.12-15 (listing current licensees of Transact) with id. 47 ll.17-18 (listing companies that settled after being "contacted first with a lawsuit"). The assertions of commercial success as here presented do not support nonobviousness.

SUMMARY

The claims in suit of the '314 and '492 patents are invalid for obviousness over the CompuServe Mall system. The claims of the '639 patent are invalid for obviousness over Johnson in view of additional prior art, and the other evidence presented. The judgments of validity are reversed, and therefore the judgments of infringement and damages are vacated.

REVERSED IN PART, VACATED IN PART

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¹ Soverain Software LLC v. Newegg, Inc.., 836 F. Supp. 2d 462 (E.D. Tex. 2011) (herein "Op.").

² The parties agreed that the level of ordinary skill in the field of this invention is "a Bachelor of Science degree in computer engineering or computer science, or equivalent education, with two to three years of practical experience developing or operating software and systems that relate to commerce on the Internet." Plaintiff's Submission of Joint Proposed Charge of the Court 29-30, ECF No. 289-3; Defendant's Submission of Joint Proposed Charge of the Court 35, ECF No. 289-4.