It would appear that Judge Alsup is having his doubts about Oracle's "entire market value" theory of damages. He has issued an order [PDF] directing counsel (presumably Oracle counsel) to
address whether the Oracle damages report was deficient for failing to cover “all of its
damages report” as required by paragraph 9 of the case management order (Dkt. No. 56) inasmuch as it omits any basis for its application of the
“entire market value” theory, saying that “others” will cover this important premise.
Does this mean the theory fails? No, but it does mean that Oracle has, to quote I Love Lucy character Ricky Ricardo, "some 'splainin' to do."
Paragraph 9 of the Case Management Order [PDF] reads:
Any party seeking monetary damages must serve all of its damages report SEVENTY CALENDAR DAYS before other non-damages opening reports are due. Within FOURTEEN CALENDAR DAYS of receipt of such damages reports, the opposing side must file any
Daubert or other motion directed at the methodology, reliability or other defect, said
motion to be heard on a normal 35-day track. The opposition report will be due FOURTEEN CALENDAR DAYS after the ruling on such motion with any reply due SEVEN CALENDAR DAYS thereafter. One purpose of this timing is to give the party seeking damages a brief window in which to cure (if possible) any flaws in the study.
Judge Alsup clearly believes the Oracle damages report provided by Prof. Iain Cockburn has failed to provide a basis for applying the "entire market value" theory of damages.
So what is the "entire market" theory of damages?
To understand the theory one first needs to understand how royalties work. A royalty is determined by two components, a base and a rate. The royalty base is the object of the royalty and may consist of income from the sale of a product or the number of units sold. The base normally needs to have some association with the asserted patent and provides a reasonable basis for valuing the patent. The royalty base is then the factor that represents the value of the patent as a proportion of that base. Rate is usually expressed as a percentage or as a fixed dollar amount, for example, 5% of gross income from the sale of widgets or, in the alternative, $0.05 per widget.
“The entire market value rule has typically been applied to include in the compensation base unpatented components of a device when the unpatented and patented components are physically part of the same machine.” Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1548 (Fed. Cir. 1995) (en banc). The rule only allows recovery from unpatented components in an apparatus if the patented feature forms the “basis for customer demand” for the entire apparatus. Id., at 1549 (Fed. Cir. 1995), quoting State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989).
[quoting from Changing Law of Patent Damages in the U.S., E. Robert Yoches, Finnegan Henderson]
At least theoretically, under the "entire market" approach there needs to be some nexus between the patented component and customer demand.
In recent years the entire market value approach has come under a great deal of scrutiny.
In Lucent Technologies Inc. v. Gateway Inc., 580 F.3d 1301 (Fed. Cir. 2009), the jury awarded $385 million in damages for infringement of a patent for picking a date from a pop-up calendar by Microsoft Corp.’s Outlook e-mail program. The jury based its award on revenues from the sales of Outlook. The Federal Circuit remanded for a new trial on damages, finding “the infringing use of Outlook’s date-picker feature is a minor aspect of a much larger software program and... the portion of the profit that can be credited to the infringing use of the date-picker tool is exceedingly small." Id. at 1333. The court also noted, “There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.” Id. at 1339.
In Uniloc USA v. Microsoft Corp., 2011 U.S. App. LEXIS 11 (Fed. Cir. Jan. 4, 2011) the Federal Circuit found the use of the EMV rule improper because the patentee failed to prove that the patented feature was the basis for customer demand. The use of Microsoft’s total revenues, even with a low royalty rate, tended to skew the jury’s appreciation of the value of a license, and was therefore improper. [Yoches]
In a case well known to many of us, IP Innovation, L.L.C. v. Red Hat, Inc., 705 F.Supp.2d 687, 689-90 (E.D.Tex.2010), Judge Rader of the Federal Circuit, sitting by designation in this district court proceeding, asserted the entire market value rule may only be invoked where the patented feature forms “the basis for customer demand” for the larger accused device. In the instant case “[t]he claimed invention is but one relatively small component of the accused operating systems."
The rule was also rejected in Phillip M. Adams & Assoc. LLC v. Winbond Electronics Corp., Case No. 1:05-CV-64 TS (D. Utah, Sept. 8, 2010) where the patents covered only a feature of the chips present in Sony's computers and the plaintiff was seeking to use the entire value of the computer as the base.
In contrast, the court in Mondis Technology Ltd. v. LG Electronics, Inc., et. al., Case No. 2-07-cv-00565 (E.D. Tex. June 14, 2011) recently allowed the use of the entire market rule because there was no satisfactory other means for determining the royalties. It is worth noting that in Mondis the patent holder had a substantial track record of licenses covering the subject patents that relied upon the entire market rule.
Clearly, each of these cases is fact specific, but with the Lucent holding of the Federal Circuit as controlling, district courts will, as here, proceed with caution when the plaintiff advances the entire market rule as the basis for damages.
Judge Alsup's order:
IN THE UNITED STATES DISTRICT COURT
ORACLE AMERICA, INC.,
FOR THE NORTHERN DISTRICT OF CALIFORNIA
No. C 10-03561 WHA
NOTICE RE QUESTION
FOR JULY 21 HEARING
At the hearing on July 21, counsel shall please address whether the Oracle damages report
was deficient for failing to cover “all of its damages report” as required by paragraph 9 of the case
management order (Dkt. No. 56) inasmuch as it omits any basis for its application of the “entire
market value” theory, saying that “others” will cover this important premise. Please do not file
more submissions but address this point orally. This is without prejudice to addressing other
IT IS SO ORDERED.
Dated: July 8, 2011.
UNITED STATES DISTRICT JUDGE
07/08/2011 - 207 - NOTICE RE
QUESTION FOR JULY 21 HEARING. Signed by Judge Alsup on July 8, 2011.
(whalc1, COURT STAFF) (Filed on 7/8/2011) (Entered: 07/08/2011)
07/08/2011 - 208
- MOTION for Leave to File Supplement Invalidity Contentions filed by
Google Inc.. (Attachments: # 1 Affidavit
Declaration of Mark Francis in support of Motion for Leave to Supplement
Invalidity Contentions, # 2 Proposed Order
Proposed Order Granting Google Inc's Motion for Leave to Supplement
Invalidity Contentions)(Sabnis, Cheryl) (Filed on 7/8/2011)