Dunn on Damages

the economic Damages report for litigators anD experts

robert l. Dunn

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Valuation Products & Services, LLCJames R. Hitchner, CPA/ABV/CFF, ASA

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Robert L. Dunn, J.D.

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Please enjoy the following article, reprinted from Dunn on Damages, with my compliments!

© Copyright 2011, Valuation Products and Services, LLC (VPS). All rights reserved. This article may not bereproduced in whole or in part without the express written permission of VPS.

Marcie D. Bour, CPA/ABV, CFE, BVAL, CFFA, CVAFlorida Business Valuation Group, Hollywood, FL

Brian P. Brinig, J.D., CPA/ABV, ASABrinig & Company, Inc., San Diego, CA

Michael A. Crain, CPA/ABV, ASA, CFA, CFEThe Financial Valuation Group, Ft. Lauderdale, FL

Darrell Dorrell, CPA/ABV, ASA, CVA, CMA, DABFAFinancial Forensics, Lake Oswego, OR

Robert L. Dunn, J.D.San Francisco, CA

Melinda M. Harper, CPA/ABV/CFF, CFEHarper Lutz Zuber Hofer & Assoc., LLC, Denver, CO

Everett P. Harry, CPAHarry • Torchiania LLP, San Francisco, CA

James R. Hitchner, CPA/ABV/CFF, ASAFinancial Valuation Advisors, Ventnor, NJ

Michael G. Kaplan, CPA, CVA, CFFAKaplan Forensics, Los Angeles, CA

Robert M. Lloyd, J.D.The University of Tennessee, Knoxville, TN

William H. G. Norman, J.D.Cooper, White & Cooper, San Francisco, CA

Vincent E. O’Brien, DBAOSKR, LLC, Emeryville, CA

Robert C. Schubert, J.D.Schubert Jonckheer & Kolbe LLP, San Francisco, CA

Ralph Q. Summerford, CPA/ABV/CFF, CFE, CIRAForensic/Strategic Solutions, Birmingham, AL

Kelly J. Todd, CPA/ABV/CFF, CFEForensic/Strategic Solutions, Birmingham, AL

Michael G. Ueltzen, CPA/CFF, CFEUeltzen & Co., Sacramento, CA

Michael J. Wagner, J.D.LitiNomics, Mountain View, CA

Richard M. Wise, FASA, MCBA, CVA, FCBV, CA •IFA, FCAWise Blackman, Quebec, Canada

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Although the information in this journal has been obtained from sources that VPS believes to be reliable, we do notguarantee its accuracy, and such information may be condensed or incomplete. This journal is intended for information purposes only, and it is not intended as financial, investment, legal, or consulting advice. Valuation Products and Services, LLC, (VPS) disclaims all responsibility for its content.

Check out this stellarPanel of Experts!

Douglas g. KiDDer • dkidder@oskr.com

Mr. Kidder specializes in business strategy with emphasis on the valuationand monetization of intellectual property. His primary expertise is in infor-mation and technology, but his clients span a range of industries. He has 20years of experience in intellectual property and strategy consulting, includingpositions at LECG, Booz, Allen & Hamilton, and Scient. In addition, he hasindustry experience including Vice President of Business Development forWalt Disney Imagineering and Vice President of Operations for Kenamea.

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Letter from the Editor by Robert L. Dunn........................................................ 1

Projecting Future Economic Damages through Business Valuation Methodology by Robert L. Dunn.............................. 1

Book of Wisdom— Is It Fact or Fiction? by Michael J . Wagner................... 6

Reasonable Royalties by the New Rulesby Douglas G. Kidder and Vincent E. O’Brien ........................................ 8

Major Decision Expected from Delaware Supreme Courtby Robert C. Schubert ................................................................................. 13

Time for States to Get on Board with New Expert Witness Rulesby Michael P. Alerding ............................................................................... 16

Deepening Insolvency: A Primerby Michael G. Ueltzen and John P. Barrett ............................................. 17

Courtroom Insight by William Moran ............................................................ 21

Panel of Experts................................................................................................... 23

Dunn on Damages issue 3 summer 2011 Page 8

Courts have significantly restricted whatis allowable for patent damages opinionsin the last two years. Starting with Lu-cent v. Gateway,1 the courts have increas-ingly insisted that damages opinions begrounded with evidence directly fromthe case. In particular, opinions relyingon industry averages, the Entire MarketValue Rule (“EMV”) and notably the25% Rule have been disallowed. Withthe courts removing two of these fa-vorites for damages experts, the questionbecomes: What analyses are acceptable?

There are three ways to determinea reasonable royalty: comparable li-censes, market value, and fundamentaleconomics (sometimes referred to as theanalytical method).2 Of these three, themarket value – i.e., the price at which thepatent itself has been bought or sold – isusually the most difficult to use in thecontext of a reasonable royalty becausethe circumstances surrounding the salemay be very different from the circum-stances surrounding a license. Also, liti-gations involving a patent that has beensold are few and far between.

Truly comparable licenses are thebest indicator of the result of a hypothet-ical license negotiation.3 I f a patent hasbeen licensed to similarly situated com-panies multiple times at a standard rate,the expert can use the factors delineatedin Georgia-Pacific to analyze the differ-ences between the existing licensees andthe hypothetical licensee to arrive at areasonable royalty rate. However,patents with such a history of licensingare not the norm; it is more common thata patent involved in litigation will nothave been licensed at all but the ownerand purported infringer will have takenor licensed other patents. The difficultythen, is what can be used as a comparable?

Recent cases have limited what isacceptable in both comparable licensesand fundamental economics approaches.The message from the courts has beenthat the expert needs to ensure thatwhatever methodology is being used di-rectly ties in with the facts of the case.The court seems increasingly skeptical ofanalyses that rely on broad-based sur-veys of royalty rates or apportionment ofthe infringer’s profits. The CAFC alsoruled that the 25% Rule is no longer anacceptable methodology, commentingthat it fails to tie in to the facts of thecase.4 The courts are also insisting thatany use of the EMV starts by demon-strating that the patented feature is thebasis for demand for the entire product.

Lucent v. Gateway was the ground-breaking case for limiting damages opin-ions. While the actual reason given foroverturning the lower court’s damagesdecision was relatively narrow (grantinga lump sum amount on the basis of arunning royalty opinion), the court wrotevoluminously on various practices itfound objectionable including a strongrejection of the way that the EMV wasused by the plaintiff’s damages expert.This opinion then set up the cascade thatfollowed: ResQNet v. Lansa,4 IP Innova-tion v. Redhat5 and Uniloc v. Microsoft.6 Inthe following sections we will discuss theeconomic implications of each.

Lucent v. Gateway & MicrosoftLucent sued Gateway and Microsoft forinfringement of the “Day patent” al-legedly covering the date picker functionused in Microsoft Outlook and otherprograms. In the jury trial Lucent’s ex-pert, Roger Smith, opined that a reason-able royalty would be 8 percent of the

sales price of the infringing software.The jury returned a damages award of$358 million as a lump sum amount.

On September 11, 2009 the CAFCissued a 63-page ruling remanding thecase for a new trial on damages. Whilethe remand was specifically focused onthe jury’s award of a lump sum amount,the opinion also offered lengthy dis-course on other problems in Mr. Smith’sanalysis. In particular, the ruling fo-cused on Mr. Smith’s use of comparablelicenses: (Emphasis added)

Lucent relies on eight varied licenseagreements which purportedly sup-port the jury’s lump-sum damagesaward. When we examine these li-cense agreements, along with the rel-evant testimony, we are left with twostrong conclusions. First, some of thelicense agreements are radically dif-ferent from the hypothetical agree-ment under consideration for theDay patent. Second, with the otheragreements, we are simply unable toascertain from the evidence presented thesubject matter of the agreements, and wetherefore cannot understand how thejury could have adequately evaluated theprobative value of those agreements.7

The opinion continues in this di-rection by pointing out that there has tobe a link between the technology in thecomparable licenses and the patentedtechnology in suit:

Lucent had the burden to prove thatthe licenses were sufficiently compa-rable to support the lump-sum dam-ages award. The law does notrequire an expert to convey all hisknowledge to the jury about each li-cense agreement in evidence, but a

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reasonaBle

royalties By

the neW rules

Douglas g. kiDDer

OSKR, LLC

Emeryville, CA

dkidder@oskr.com

Vincent e. o’Brien

DBa

OSKR, LLC

Emeryville, CA

vobrien@oskr.com

Dunn on Damages issue 3 summer 2011 Page 9

lump-sum damages award cannot standsolely on evidence which amounts to lit-tle more than a recitation of royaltynumbers, one of which is arguably in theballpark of the jury’s award, particularlywhen it is doubtful that the technologyof those license agreements is in any waysimilar to the technology being litigatedhere.8

The opinion is clear that the bur-den is on the plaintiff to select licensesthat are truly comparable to the patentedtechnology in suit. While all of the citedlicenses were generally computer-re-lated, this was not enough of a connec-tion for the court. This paragraph was awarning to all even though the lack of aconnection to the patent-in-suit wasn’tthe basis for the remand. The court alsoclearly stated that experts need to be verycareful about not cavalierly comparinglump-sum royalties to running royalties.The Lucent opinion starts a four-pagediscussion of the perils of mixing lumpsum and running-royalty agreements bystating, “Significant differences exist be-tween a running-royalty license and alump-sum license.”9

The court’s conclusion on the mat-ter is that it is not a trivial matter to con-vert a running royalty into a lump sum:

For a jury to use a running-royaltyagreement as a basis to award lump-sum damages, however, some basisfor comparison must exist in the ev-idence presented to the jury. In thepresent case, the jury had almost notestimony with which to recalculatein a meaningful way the value of anyof the running-royalty agreements toarrive at the lump-sum damagesaward.10

The opinion goes on to note thatthere are substantial differences in therisks born by each side in lump sum roy-alties as opposed to running royalties.11

This is generally in keeping with thetheme that the courts are insisting that acomparable be directly comparable.

The court also took exception tothe application of the EMV, commentingthat there was no evidence that thepatented feature was even a substantialbasis for demand for Outlook:

The first flaw with any applicationof the entire market value rule in the

present case is the lack of evidencedemonstrating the patented methodof the Day patent as the basis—oreven a substantial basis—of the con-sumer demand for Outlook...

Thus, Lucent did not satisfy its bur-den of proving the applicability ofthe entire market value rule.12

The opinion goes on to point outthat there is nothing inherently wrongwith the use of the EMV so long as theroyalty rate selected is appropriatelymatched to the royalty base:

Microsoft surely would have littlereason to complain about the sup-posed application of the entire mar-ket value rule had the jury applied aroyalty rate of 0.1% (instead of 8%)to the market price of the infringingprograms.13

But, as we’ll see in the Uniloc opin-ion later, the court frowned upon the useof a low royalty rate as justification forthe use of the EMV. The foundationaltest has to be a demonstration of a linkbetween the patented feature and thebasis for demand.

resQnet v. LansaResQNet sued Lansa over five patentsrelating to technology embedded in a ter-minal emulator program sold by Lansain the U.S. Plaintiff’s expert, Dr. David,opined that a reasonable royaltyamounted to 12.5 percent of the allegedlyinfringing sales made by Lansa for atotal of $506,305.

F ive months after Lucent theCAFC remanded ResQNet v. Lansa.The court continued with its theme of in-sisting that comparable licenses showsome relationship to the facts of the case:(Emphasis added)

Yet Dr. David used licenses with norelationship to the claimed inventionto drive the royalty rate up to unjus-tified double-digit levels. Dr. Davidbased his damages on sevenResQNet licenses, five of which had norelation to the claimed invention.14

This court finds two parts of thisanalysis particularly troubling: first,the extremely high rates in the re-bundling licenses compared with the

license on the claimed technology,and second, the unconvincing rea-sons that Dr. David gave for consid-ering these re-bundling licenses atall. … In sum, Dr. David offers little orno evidence of a link between the re-bundling licenses and the claimed inven-tion. Yet he relies on these licenses toinflate his royalty recommendation.15

The first Georgia-Pacific factor, whichDr. David found to be controllingand which the district court in turnadopted, must consider licenses thatare commensurate with what the de-fendant has appropriated. I f not, aprevailing plaintiff would be free toinflate the reasonable royalty analy-sis with conveniently selected li-censes without an economic or otherlink to the technology in question.

Further the court points out that li-cense agreements that are part of settle-ment agreements are evidence of thevalue of the patented technology.

The rates in the re-bundling licensesare not consistent at all with theother two licenses in the record.Those two “straight” licenses aroseout of litigation over the patents insuit.17

The last comment by the courtseems to recognize that the most directevidence of a reasonable royalty may belicenses that arise out of litigation. Carehas to be taken when considering a li-cense arising out of litigation as a com-parable as there can be a mix of termsthat are related to past legal claims andterms that are related to economic value.However, we note that all patent licensesare entered into either after litigation hasbeen started or with the implicit threat oflitigation. The only difference is the ex-tent of the shadow cast by the actual orthreatened litigation. A naked patent li-cense does not give the licensee anythingthey don’t already have – it is simply apayment – and thus the only reason totake a license is to either settle or avoidlitigation.

iP innovation v. red HatTwo months after ResQNet, CircuitJudge Rader, sitting in the Eastern Dis-Continued on next page

trict of Texas, excluded testimony fromthe plaintiff’s expert for methodologicalerrors. In this case the court criticizedPlaintiff’s damages expert, Mr. Gemini,for his use of the EMV and reliance onindustry averages in preference to exist-ing agreements.

In his opinion, Judge Rader citedthe Lucent decision in his rejection of Mr.Gemini’s damages estimate for its use ofthe EMV. In particular, the opinioncharacterizes Mr. Gemini’s failure todemonstrate that the patented featurewas the basis for demand as a “stunningmethodological oversight”:

Mr. Gemini’s methodology howeverdoes not show a sound economicconnection between the claimed in-vention and this broad profferedroyalty base. 18

Accordingly, the record cannot sup-port the unfounded conclusion thatthe often-unused feature drives de-mand for a royalty base of 100% ofthe operating systems as a whole. Insum, this stunning methodologicaloversight makes it very difficult forthis court to give any credibility toMr. Gemini’s assertion that theclaimed feature is the “basis for cus-tomer demand.” See Lucent Techs.,580 F.3d at 1336.19

The court also found fault with thelicenses Mr. Gemini relied on as compa-rable.

Another reason for excluding Mr.Gemini’s expert testimony is that hearbitrarily picked a royalty rate thatis much higher than the existing roy-alty rates for licenses to the patents-in-suit.20

Mr. Gemini offers no evidence thatthe alleged industry agreements arein any way comparable to thepatents-in-suit.21

Taken together these three casesseem to set a standard for comparable li-censes that is difficult to meet; indicatingthat the use of comparables will only beuseful if the expert can show a verystrong connection to the patent-in-suit.Absent such a strong connection, the ex-pert will be forced to rely on primaryeconomic analysis of the commercial ad-

vantage conveyed by the patented tech-nology. Oftentimes, the data necessaryfor such an analysis does not exist.

This, however, may be an over-re-action to these cases. As described in theopinions, the three damages experts ap-pear to have taken an aggressive posi-tion. I t is apparent that the court wasunimpressed. Also, the court may havebeen reacting to the size of the awardsrelative to the patent’s contribution to theproduct embodying the technology.22

The question, then, is: Has the courtgone too far and is it likely pull back inthe future?

These cases also raise anotherissue: the courts’ rulings could be read toimply that a plaintiff’s expert needs totake discovery from the parties that ne-gotiated any license that he considers asa comparable. In almost every case, thiswill involve third parties who are likelyto object. I t is not clear what the CAFCexpects a lower court will do in such cir-cumstances.

uniLoc v. MicrosoftHaving greatly restricted the use of com-parable licenses, the CAFC focused onanother and perhaps the largest contrib-utor to high plaintiff awards: the so-called 25% Rule. In early 2011 theCAFC followed its course of insistingthat the proposed damages be based onthe particular facts of the case and disal-lowed any use of the 25% Rule. Again, itwas Dr. Gemini who took the heat.

Uniloc sued Microsoft, alleging in-fringement of a patent covering a regis-tration system to deter copying ofsoftware. Uniloc’s expert, Dr. Gemini,opined that a reasonable royalty for theinfringing use amounted to 25% of theminimum “value” of the software lock-ing functionality. His methodology re-sulted in a damages estimate of $565million while the jury awarded $388 mil-lion. However, the court awarded a newtrial on damages precisely because of theinadmissibility of the 25% Rule. (Em-phasis added.)

The admissibility of the bare 25 per-cent rule has never been squarelypresented to this court. Neverthe-less, this court has passively toler-ated its use where its acceptabilityhas not been the focus of the case…23

This court now holds as a matter of Fed-

eral Circuit law that the 25 percent ruleof thumb is a fundamentally flawed toolfor determining a baseline royalty rate ina hypothetical negotiation. Evidence re-lying on the 25 percent rule of thumb isthus inadmissible under Daubert andthe Federal Rules of Evidence, becauseit fails to tie a reasonable royalty base tothe facts of the case at issue.24

Interestingly enough, while thecourt clearly enunciated the numerousproblems with the 25% Rule, the statedreason to throw it out is because it has noparticular relationship to the facts of thecase.

The meaning of these cases is clear:there must be a basis in fact to asso-ciate the royalty rates used in priorlicenses to the particular hypotheti-cal negotiation at issue in the case.The 25 percent rule of thumb as anabstract and largely theoretical con-struct fails to satisfy this fundamen-tal requirement.25

The court also made sure to lock and boltthe door against the 25% Rule ever com-ing up. I t can’t even be used as a “start-ing point”:

I t is of no moment that the 25 per-cent rule of thumb is offered merelyas a starting point to which the Geor-gia-Pacific factors are then applied tobring the rate up or down. Begin-ning from a fundamentally flawedpremise and adjusting it based on le-gitimate considerations specific tothe facts of the case nevertheless re-sults in a fundamentally flawed con-clusion.26

The Uniloc decision also rejectedthe use of the EMV without a properfoundation even as a “check” on the rea-sonableness of the proposed royaltyamount. Mr. Gemini proposed that hisroyalty amount, when divided by thetotal sales of infringing products,amounted to only a 2.9 percent royaltyrate.27 Uniloc’s attorneys then com-pounded the problem by “deriding” Mi-crosoft’s expert because his proposedroyalty rate only amounted to 0.0003 per-cent of the total revenues.28 The courtpointedly took exception to both of theseuses of the EMV:

Dunn on Damages issue 3 summer 2011 Page 10

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Dunn on Damages issue 3 summer 2011 Page 11

The Supreme Court and this court’sprecedents do not allow considera-tion of the entire market value of ac-cused products for minor patentimprovements simply by asserting alow enough royalty rate…

This case provides a good exampleof the danger of admitting consider-ation of the entire market value ofthe accused where the patented com-ponent does not create the basis forcustomer demand.29

Once again, the court’s unwaver-ing position is that the starting point forany use of the EMV is that the plaintiffdemonstrate that the patented feature isthe basis for customer demand. The Lu-cent, IP Innovation and Uniloc opinionsall reach back to the Rite-Hite decision30

in taking this stance. In our opinion, the truly toxic rea-

sonable royalty opinions of the past haverelied on a combination of the now-lim-ited practices of establishing a reasonableroyalty either through the use of the 25%Rule or inflated comparables and apply-ing that rate to the entire market value ofthe product.

The EMV, in and of itself, is notproblematic but it becomes problematicwhen a royalty rate is selected that doesnot reflect the value added by thepatented feature to the entire product.For example, in a situation in which thepatent-holder had repeatedly licensedthe patents for some rate that was basedon the entire market value of the product– even though the patented technologywas not the basis for demand for theproduct – the use of the actually-licensedrates applied to the entire market valueof the allegedly infringing productwould be appropriate. The problemarises when the rate and the base are notbeing drawn from the same sample.

We’ve now discussed the ways inwhich recent court cases have limited themethodologies used by damages experts.In the next section, we discuss the meth-ods that may be more acceptable whenthe patent(s) in suit have not been previ-ously licensed.

METHODS Of pROvING REASONABLE ROYALTY DAMAGESTechnologies embodied in patents havedifferent economic impacts in the mar-ketplace and, therefore, widely differingeconomic values. To arrive at a reason-able royalty, these impacts need to be un-derstood.

First, there are patented technolo-gies that define a new product or themethod of making such a product.These are more commonly found in thechemical, agricultural, medical, biotech-nology and pharmaceutical industries.In those circumstances, evidence as tothe economic value of the patent shouldbe available from the parties’ analyses ofthe market for the product. I f there is adirect mapping between the patentedtechnology and the product (e.g., apatented chemical compound) thenanalyses of the commercial value of theproduct relate directly to the commercialvalue of the patented technology. Fur-thermore, in these cases, it should be atrivial exercise to demonstrate that thepatented technology is the basis for de-mand.

A large number of patents, how-ever, are those that describe an incre-mental improvement to an existingproduct.31 Many patents in the personalcomputer industry fall into this category.Within this category, there are thosewhere the patented technology adds afeature that:• Increases revenues and/or profits• Adds an attractive but not necessary

feature• Maintains existing revenues and/or

profitsA reasonable royalty analysis of the firstof these, a technology that increases rev-enues and/or profits, might be amenableto the CAFC’s recent rulings providedevidence is available as to the actual orprojected increases. For example, theremay be a period of time where the al-leged infringer was selling the productwith and without the feature. The pricedifferential less the cost of adding thefeature would be an indication of the fea-ture’s value.32 In practice, this evidenceoften is unavailable, is suspect or isclouded by the simultaneous introduc-tion of other features.

I f such evidence exists, the ques-tion of how such incremental benefitshould be divided between the parties isrelevant. Ironically, this seems familiarto the now discredited 25% Rule. Someexperts have used the concept of NashEquilibrium from game theory to sug-gest that such a split would be 50/50,however, that is only appropriate if theparties are similarly situated. As earlycourt discussions of the 25% Rule aboutrisk shifting indicate, that is seldom thecase. Furthermore, an analysis of the al-leged infringer’s alternatives may renderany split of benefits moot.

A reasonable royalty analysis ofthe second member of this categorywould appear to be self-evident. I f it isindeed a nice but not necessary feature,any market-based royalty would besmall if not zero. The analysis herewould likely focus on how significant thefeature was in the marketplace andwhether there are alternatives that areequally attractive.

A reasonable royalty analysis ofthe last member of this category,patented features that maintain revenuesand/or profits, is now much more diffi-cult and its acceptance by the courtsmore uncertain. For example, a patentedtechnology that adds a popular featureto a personal computer may be adoptedby all manufacturers and, as a result, itmay not command a price premium. Alicense to that patent simply allows thecompetitors to keep on doing what theywere already doing. A significant num-ber of patent cases are in this category.Typically, the plaintiff’s expert in this sit-uation relied on other licensed technolo-gies in the product or in the industry oron the purported 25% Rule. The latter isprohibited and the former greatly re-stricted. To the extent that there areother licenses, the expert should makeevery effort to relate the features pro-vided by them to the patented featureand hope that the courts accept them.

In the past when the patented fea-ture maintained revenues or profits,plaintiffs applied the 25% Rule to the en-tire gross profits (or some variantthereof) of the product embodying thepatented technology. The argument wasthat without a license, the alleged in-

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Dunn on Damages issue 3 summer 2011 Page 12

fringer would have to stop selling theproduct altogether. This was wrong atthe time33 and, given the recent rulings,is likely to fail now. The CAFC’s recentopinions on the EMV have made it clearthat the question is what the patentedtechnology adds to the product and notjust the overall success of the product.

Finally, there are patents thatlower the cost of making, distributing orselling the product. This could apply toany of the products discussed above.While none of the current rulings ad-dress this situation, they suggest that areasonable royalty analysis should focuson the cost reduction. This could easilyarrive at the wrong answer. Absent anenforced exclusive license to one of thecompetitors, economic theory says thatin a competitive market all of the costsavings would be captured by con-sumers through lower prices. Allegedinfringers would benefit only by the in-creased sales due to lower prices. Also,such analysis would be inconsistent withobserved practice where improvementsthat lead to cost savings are captured (ifat all) in the purchase price of the equip-ment that yields the savings rather thanthrough a license.

In summary, the courts are nolonger willing to tolerate poorly doneanalyses that lead to large awards. Theuse of “Industry Averages” appears tobe out, any appeal to the Entire MarketValue Rule needs to start with a cleardemonstration that the patented featureis the basis for demand,34 and the 25%Rule is decidedly out. Going forward,damages experts are going to be forcedto analyze the true economic benefitswithout resorting to the easy, but ulti-mately misleading, analyses of the past.

1 U.S. CAFC, 2008-1485, -1487, -1495, September 11,2009.

2 Lucent, p. 33.3 “An established royalty is usually the best measure of a

‘reasonable’ royalty for a given use of an invention be-cause it removes the need to guess at the terms to whichparties would hypothetically agree.” Monsanto Co. v. Mc-

Farling, 488 F.3d 973, 978-79 (Fed. Cir. 2007)4 U.S. CAFC 2008-1365, -1366, 2009-1030, February 5,

2010.5 705 F.Supp.2d 687 (E.D.Tex. 2010)6 U.S. CAFC 2010-1035, - 1055, January 4, 2011.7 Lucent, p. 39.8 Lucent, p. 43.9 Lucent, p. 36.10 Lucent, p. 43.11 There are other significant differences such as the effect

on variable costs and competitiveness that the court didnot discuss. Thus, the court has plenty of reasons tomaintain this position.

12 Lucent, pp. 58-59.13 Lucent, p. 61.14 ResQNet, p. 15.15 ResQNet, pp. 16-17.16 ResQNet, pp. 18-19.17 ResQNet, p. 15.18 IP Innovation, p. 3.19 IP Innovation, p. 4.

20 IP Innovation, p. 4.

21 IP Innovation, p. 5.22 See, for example, Lucent v. Microsoft “When the evi-

dence is viewed in toto, the jury’s award of a lump-sumpayment of about $358 million does not rest on substan-tial evidence and is likewise against the clear weight ofthe evidence. The evidence does not sustain a findingthat, at the time of infringement, Microsoft and Lucentwould have agreed to a lump-sum royalty payment sub-sequently amounting to approximately 8% percent of Mi-crosoft’s revenues for the sale of Outlook (andnecessarily a larger percentage of Outlook’s profits).”

23 Uniloc, p. 39.24 Uniloc, p. 41.25 Uniloc, p. 45.26 Uniloc, p. 46.27 Uniloc, p. 47.28 Uniloc, p. 54.29 Uniloc, p. 51.

30 “if the patented apparatus was of such paramount impor-tance that it substantially created the value of the compo-nent parts.” Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d1538, 1549 (Fed. Cir. 1995).

31 In the recent patent reform activity before Congress, in-dustry positions split along the lines of those industrieswhere the patent is the product and those where it is anincremental improvement.

32 To date, the CAFC has not addressed the temporal na-ture of patented improvements. A patented feature maycommand a price premium but only for a limited time. Ifso, this would have to be taken into account in any incre-ment analysis.

33 See, e.g., Grain Processing Corp. v. American Maize

Products Co., 185 F.3d 1341 (Fed. Cir. 1999). “The com-petitor in the “but for” marketplace is hardly likely to sur-render its complete market share when faced with apatent, if it can compete in some other lawful manner.”

34 The CAFC emphasis on the basis for demand doesn’taddress the situation where the patented feature is oneof a few factors that drive the demand for the product.

Guest Columnist Douglas G. Kidder spe-cializes in business strategy with a particu-lar emphasis on the valuation andmonetization of intellectual property. Hisprimary expertise is in information andtechnology but his clients span a range ofindustries.

Mr. Kidder has 20 years of experi-ence in intellectual property and strategyconsulting including positions at LECG,Booz, Allen & Hamilton, and Scient. In ad-dition, he has four years of industry experi-ence including Vice President of Business

Development for Walt Disney Imagineeringand Vice President of Operations for Ke-namea. Mr. Kidder has a BA from AmherstCollege and an MSc from the University ofCalifornia at Berkeley. Mr. Kidder alsoowns and manages a business that makesrowing shells and outrigger canoes.