Lucent Technologies, Inc. v. Microsoft Corp., 2011 WL 2728317 (S.D. Calif.)(July 13, 2011)
After remand to the federal district court (S.D. Calif.), Microsoft (the successor to Gateway’s interests) challenged Lucent’s new damages expert under Daubert for failing to comply with the entire market value rule. On the day of the motions hearing, Jan. 4, 2011, the Federal Circuit issued its opinion in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (2011), which abolished the 25% “rule of thumb” in patent infringement cases. The Federal Circuit also clarified the market value rule, requiring the plaintiff to either justify application of the rule on the basis of consumer demand or, “in every case,” apportion its damages calculations between the patented and unpatented features of the accused product.
Under this new and tighter standard, the federal court postponed the Daubert hearing to receive further briefing from both sides. When the hearing resumed in June 2011, Lucent’s expert submitted an “apportionment analysis” that discounted the base revenue from Microsoft’s Outlook application by the percentage of consumers who, according to a market survey, used the patented calendar feature. Under this analysis, the expert calculated a royalty base that equated Microsoft’s total per-unit revenue from Outlook sales ($67) to the discounted percentage of sample users, resulting in $73.8 million in damages.
Despite his effort to apportion Outlook revenues to use of the patented technology, the expert failed to show that the plaintiff was “entitled to capture this entire market value as the base,” the court found. “At best, Lucent has introduced evidence [from the survey] that the patent technology is the basis for consumer demand for about 7% of users. . . . For a product that is feature-rich like Outlook, use as a proxy for value does not appropriately account for all the other unpatented features that consumers use,” even when they invoke the patented methods, the court said. Moreover, the plaintiff failed to “separate out from the royalty base the portion [of damages] that can be attributed” to the patented technology, the court held. “It is not enough that the infringing and non-infringing parts are sold together for mere business advantage.” The entire market value rule requires adequate proof not only that 1) the infringing components are a substantial basis for customer demand, but also 2) the individual infringing and non-infringing components must be sold as a functional unit, and 3) they must be analogous to a single functioning unit.
Rather than dismiss the damages calculations, the court sent the parties back a second time to re-submit evidence and arguments in compliance with this standard.
Business realities approach. Just one month later, Lucent’s expert presented three separate approaches to calculating damages, and Microsoft challenged the reliability and relevance of all three under Daubert, but the court accepted its business realities approach. This approach used a Georgia-Pacific framework but assumed that in a hypothetical negotiation, Microsoft would want a royalty as close to zero as possible and Lucent would want a rate as close to the full value of the patented technology, which the expert estimated at $138.7 million. After applying a variety of negotiating factors—including Lucent’s licensing policies, Microsoft’s competitors, and the risks related to the parties’ respective bargaining positions—the expert posited a range of $65 million to $75 million as the lump-sum value for the patented technology. The court permitted the expert to present this second approach, subject to further proof that it did not violate the entire market value rule and that its “factual predicates” were credible.
