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To read comments to this article, go here
Oracle v. Google - Inquisitive Judge Invites Questionable Approach
Wednesday, December 28 2011 @ 11:00 AM EST

In an order issued yesterday (657 [PDF; Text]) Judge Alsup invited the parties to submit memoranda analyzing an alternative approach to the use of the Sun/Google 2006 negotiation. In so doing Judge Alsup is inviting an almost insoluble problem that can ensnare courts and juries when applying the Georgia-Pacific factors in determining damages. Don't expect Google to leap at this approach.

The problem is evidenced in the second numbered paragraph of the Judge's order:

2. The 2008–2011 value is today an arguable indicator of the value Google would have placed on that feature in 2006. True, it is not a precise value because it derives from data as yet unknown in 2006, but it might be a rough indicator of how vital that feature was expected to turn out so long as the marketplace events, as they eventually unfolded, were reasonably predictable in 2006. For example, if in 2011 we now know that feature X has proven to be extremely important to consumers, then the argument would be that the parties in 2006 could reasonably have expected that feature to turn out approximately this way. This expectation then, in turn, would have informed their 2006 negotiation. Again, so far, this line of reasoning has nothing to do with the $100 million offer.


The problem is two-fold. First, consumers are rarely aware of the features provided by the patent claims. Their purchasing decisions are more typically based on more immediate user experience with the product. That is not to say that a patented feature is not important if its absence would render the product useless or unsatisfactory, but absent such dominance, the patented feature is simply one of hundreds that may be embodied in the product, and it likely plays no role whatsoever in the consumer's buying decision.

Second, many factors contribute to the commercial success of a product, and too often courts fail to take these other factors into account. Some of those factors would include brand strength, product integration, marketing, availability of capital, etc.

At least Judge Alsup recognizes that the approach may not be kosher when he restates the question to be answered:

(a) Under appellate law, to what extent are hypothetical negotiators in 2006 allowed to peek into the future to see how events unfolded through 2011?
So where is the basis for this approach? Arguably it is Georgia-Pacific. Let's review a few of the relevant Georgia-Pacific factors and what that court had to say about a hypothetical negotiation. Two of the 15 factors are most relevant in this instance, No. 8 and No. 15:

8. The established profitability of the product made under the patent; its commercial success; and its current popularity.

...

15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee -- who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention -- would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.

Factor 15 sets the stage for the hypothetical negotiation by discussing what a willing licensor and willing licensee would arrive at for a royalty, i.e., the royalty would have to be acceptable to each. It must provide the licensor adequate compensation, but it would not burden the licensee by yielding an unreasonably low profit.

Factor 8 implies that, in determining a reasonable royalty, the parties can look at the actual results achieved by the licensee in the marketplace with the product covered by the licensed patent(s). What Factor 8 doesn't do is suggest a filtering of the various contributing factors that led to the actual commercial results.

It is important to keep in mind that these are only two of the factors, and no one of the 15 Georgia-Pacific factors is given greater weight than the remainder. The greater limitation is stated later in the case (Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 166 U.S.P.Q. (BNA) 235 (S.D.N.Y. 1970)) when the court discusses how the hypothetical negotiation would occur:

The rule is more a statement of approach than a tool of analysis. It requires consideration not only of the amount that a willing licensee would have paid for the patent license but also of the amount that a willing licensor would have accepted. What a willing licensor and a willing licensee would have agreed upon in a supposititious negotiation for a reasonable royalty would entail consideration of the specific factors previously mentioned, to the extent of their relevance. Where a willing licensor and a willing licensee are negotiating for a royalty, the hypothetical negotiations would not occur in a vacuum of pure logic. They would involve a market place confrontation of the parties, the outcome of which would depend upon such factors as their relative bargaining strength; the anticipated amount of profits that the prospective licensor reasonably thinks he would lose as a result of licensing the patent as compared to the anticipated royalty income; the anticipated amount of net profits that the prospective licensee reasonably thinks he will make; the commercial past performance of the invention in terms of public acceptance and profits; the market to be tapped; and any other economic factor that normally prudent businessmen would, under similar circumstances, take into consideration in negotiating the hypothetical license.
[Emphasis added]

In other words, the hypothetical negotiation is to be based on what the parties knew or what they projected at the time the negotiation would have occurred, not necessarily what happened later. Thus, a licensee's failure to achieve its profit target on the licensed product does not diminish the reasonable royalty a licensor would ask for at the time the infringement first commenced.

It strikes me that Judge Alsup is opening a can of worms here, but I would expect both parties to argue this alternative approach vigorously.

In other news of the day the judge also granted an extension of time to the court's damages expert, Dr. Kearl, to the last business date of January for filing his report. (658 [PDF;Text]) The significance of this extension is that it virtually precludes a trial date before early summer as this report would arrive too late to permit the trial to commence in January as Oracle requested. (See, [PDF; Text])

Finally, Oracle has submitted a letter (656 [PDF; Text]) seeking to supplement information previously provided with respect to its motion in limine No. 1. That motion pertains to "the exclusion of any evidence or argument regarding the pending, non-final reexaminations of six of the patents-in-suit." Clearly, there is some merit to this motion, as non-final actions by the USPTO are just that, non-final. However, this motion, if granted, would not preclude Google from introducing evidence from final actions, and that is, at present, most pertinent to the '520 patent where the claims were all allowed but where Oracle, in defending the claims in reexamination, provided a term definition that significantly limits the scope of the claims. (See, Update on the Reexaminations) More importantly, if the trial is, in fact, delayed until the June/July 2012 timeframe, most, if not all, of the reexaminations are likely to have reached a final action.


**********

Docket

656 - Filed and Effective: 12/27/2011
Letter
Document Text: Michael Jacob's letter to the Court in support of Oracle's Motion in Limine No. 1. (Attachments: # 1 Attachment)(Jacobs, Michael)

657 - Filed and Effective: 12/27/2011
ORDER
Document Text: ORDER REQUESTING FURTHER BRIEFING re 642 Order,. Signed by Judge Alsup on December 27, 2011. (whalc1S, COURT STAFF)

658 - Filed and Effective: 12/27/2011
ORDER
ORDER GRANTING DR. KEARL'S REQUEST FOR EXTENSION. Signed by Judge Alsup on December 27, 2011. (whalc1S, COURT STAFF)

659 - Filed and Effective: 12/27/2011
ORDER
Document Text: ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO SEAL re 542 Response ( Non Motion ), filed by Motorola Mobility, Inc., 533 Administrative Motion to File Under Seal Portion of Trial Brief filed by Google Inc., 556 Notice (Other) filed by Google Inc., 507 Joint Administrative Motion to File Under Seal filed by Oracle America, Inc., 540 Order,, 648 Declaration in Support, filed by Google Inc., 569 Notice (Other) filed by Oracle America, Inc., 537 Amended Administrative Motion to File Under Seal Portions of Oracle's Trial Brief filed by Oracle America, Inc., 532 Administrative Motion to File Under Seal Oracle's Trial Brief and Exhibits B, C, D and E to Declaration of Marc David Peters in Support of Oracle's Trial Brief filed by Oracle America, Inc.. Signed by Judge Alsup on December 27, 2011. (whalc1S, COURT STAFF)


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

Documents

656

December 27, 2011

The Honorable William H. Alsup
United States District Court, Northern District of California
450 Golden Gate Avenue
San Francisco, California 94102

Re: Oracle America, Inc. v. Google Inc., No. 3:10-CV-03561-WHA (N.D. Cal.)

Dear Judge Alsup:

As referenced during the oral argument on December 21, 2011, Oracle America wishes to bring to the Court’s attention an additional case relevant to Oracle’s Motion in Limine No. 1 to Exclude Evidence or Argument Regarding Patent Reexaminations (Dkt. 498).

In Realtime Data, LLC v. Packeteer, Inc., No. 6:08-cv-00144-LED-JDL (E.D. Tex. Dec. 30, 2009), the court granted plaintiff’s motion in limine to exclude a PTO office action preliminarily rejecting the claims of the patent-in-suit. Although the defendant argued that the office action was relevant to rebut a willfulness charge, the court excluded the evidence because “reexamination proceedings, even if relevant, are nevertheless highly prejudicial.” Id. at 3. The court also noted that “even if the jury is instructed to consider the Office Action for the limited purpose of assessing objective recklessness, there is a strong likelihood that the jury would be confused as to its relevance and use this evidence in considering the validity of the [patent-in-suit].” Id. at 4. This case was decided after In re Seagate, 497 F.3d 1360 (Fed. Cir. 2007).

Similarly, in Presidio Components Inc. v. American Technical Ceramics Corp., No. 08-CV- 335-IEG (NLS), 2009 U.S. Dist. LEXIS 106795 (S.D. Cal. Nov. 13, 2009), which is cited in Oracle’s Motion in Limine No. 1, the court excluded evidence of a grant of reexamination on both validity and willfulness because “even if the reexamination proceedings are somehow relevant on the issues of obviousness or willfulness, they are nevertheless unfairly prejudicial.” Id. at 5.

As stated in these cases, evidence of reexaminations, even if offered to rebut a claim of willfulness, is more prejudicial than probative. Although the PTO has issued final Office Actions rejecting the asserted claims of the ’720 and ’476 patents, those rejections are not binding until affirmed by the Board of Patent Appeals and

The Honorable William H. Alsup
December 27, 2011
Page Two

Interferences and by the Federal Circuit. To avoid juror confusion, argument and evidence relating to the reexaminations should be excluded.

Respectfully submitted,

/s/ Michael A. Jacobs

Michael A. Jacobs


657

FOR THE NORTHERN DISTRICT OF CALIFORNIA

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

No. C 10-03561 WHA

REQUEST FOR FURTHER
BRIEFING

By NOON ON JANUARY 5, 2012, both sides are invited to address the following in simultaneous memoranda each not to exceed ten pages (no declarations) with five-page simultaneous replies due at noon the following Monday (again, please, no declarations).

The July order stated that the Court was strongly of the view that the hypothetical negotiation should begin with the $100 million offer and make adjustments, but expressly stated that this was not the only possible format and other formats were not absolutely ruled out (Dkt. No. 230 at 14–15). This request concerns an alternate format, but it also involves legal issues in the matter already under consideration. In framing its ruling, the Court would prefer to be consistent with proper answers to the following.

In analyzing the parties’ submissions on reasonable royalty issues, the judge would like to have the benefit of counsel’s guidance on the extent to which the following approach would be proper under appellate law. Significantly, this approach would not place the burden on Oracle to allocate among the items in the $100 million offer by Sun in 2006. Here are the steps in the possible line of reasoning:

1. Through its econometric and conjoint statistical analyses, Oracle claims to be able to spread the 2011 value of Android across various features. This methodology, standing alone, has not been challenged by Google. These analyses allow Oracle to opine on a value for a particular feature (such as processing time) in the 2008–2011 marketplace and, in turn, opine on the value of that feature to Android (meaning to Google) in 2008–2011. This, of course, is a stand-alone value independent of the 2006 offer.

2. The 2008–2011 value is today an arguable indicator of the value Google would have placed on that feature in 2006. True, it is not a precise value because it derives from data as yet unknown in 2006, but it might be a rough indicator of how vital that feature was expected to turn out so long as the marketplace events, as they eventually unfolded, were reasonably predictable in 2006. For example, if in 2011 we now know that feature X has proven to be extremely important to consumers, then the argument would be that the parties in 2006 could reasonably have expected that feature to turn out approximately this way. This expectation then, in turn, would have informed their 2006 negotiation. Again, so far, this line of reasoning has nothing to do with the $100 million offer.

3. The value of a feature must be apportioned among all of the know-how inputs that enabled it. That a license to a particular patent claim in suit is now needed to practice a feature does not justify attributing the entire value of the feature to that patent claim, for other know-how may also be required to practice the feature, such as licenses from other competitors and Google’s own independent know-how contribution to developing that feature. Again, the fact that a license to practice an Oracle patent claim is essential to the feature does not justify appropriating the full market value of the feature to that claim. This is a question of apportionment but it differs from the issue of apportionment of the 2006 package.

2

4. Thus, in the 2006 hypothetical negotiation, both sides would be informed, the argument would go, as to the expected importance of a feature but would also be informed as to the relative contribution of the claimed invention in comparison to all other know-how needed to enable the particular feature. Only the expected percentage contribution of the claimed invention to the overall expected value would be on the negotiating table.

5. Finally, under this line of analysis, the relevance of the $100 million offer in 2006 would be defensive, meaning Google would be entitled to rebut by showing that Sun would not have extracted the vast sums now suggested by Dr. Cockburn because Sun was willing to license, not just the claimed inventions, but the entire package for $100 million. If Google wishes to argue further that only a small percentage of the $100 million should be attributed to the claimed inventions, then it would be Google’s burden to allocate the $100 million between the claimed inventions versus the rest of the 2006 package, subject to adjustments for fragmentation and so on.

Under this line of reasoning, to repeat, there would be no need for Oracle, in order to meet its initial burden, to allocate the $100 million among the thousands of items in the 2006 package (or even to address the 2006 offer). Oracle would, on the other hand, have to allocate the value of a feature as between the claimed invention and all other know-how contributing to that feature.

This order does not bless this format of analysis (please do not call it “the Court’s proposal”), but invites comment on it generally and particularly with respect to: (a) Under appellate law, to what extent are hypothetical negotiators in 2006 allowed to peek into the future to see how events unfolded through 2011? (b) Is it correct that the burden would be on Oracle to apportion the value of a feature as between the claimed invention versus all other know-how contributions to that feature? (c) Is it correct that although Google might raise the $100 million offer by way of defense, Oracle would have no duty in its case in chief, if it used the above approach to allocate the $100 million as between the claimed invention versus the many other thousands of items in the 2006 package?

The above line of reasoning, the Court realizes, is different from the suggested approach in the July 2011 order, which suggested approach was to start with the $100 million offer and

3

make adjustments. Harping on that point will be unhelpful. What will be helpful is to illuminate the above questions. Although the Court continues to believe that using the 2006 real-world $100 million offer as a starting point and making adjustments is the most persuasive and practical approach, it may not be the only viable approach.

IT IS SO ORDERED.

Dated: December 27, 2011.

/s/William Alsup
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

4


658

FOR THE NORTHERN DISTRICT OF CALIFORNIA

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

No. C 10-03561 WHA

ORDER GRANTING
DR. KEARL’S REQUEST
FOR EXTENSION

Dr. James Kearl’s request to extend the due date for his report until the last business day of January is granted. In fact, until the issue of Dr. Cockburn’s methodology is finally determined, Dr. Kearl should not release his own report.

IT IS SO ORDERED.

Dated: December 27, 2011.

/s/William Alsup
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE


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