Much has been written about “patent reform” and the proposed role of the trial judges as “gate keepers” with respect to damages theories and evidence. Well, everyone can stop writing; the courts have already enacted this “reform.” (IP Innovation, LLC v. Red Hat, Inc. et al.)
IPI sued Red Hat, alleging that its Linux-based operating systems’ multiple virtual workspaces and workspace switching features infringe the patents-in-suit. IPI’s damages expert invoked the “entire market value rule,” including ALL of Red Hat’s revenues from sales of subscriptions to the accused operating systems in his proposed royalty base.
The Court – and this is in the Eastern District of Texas, where the spaces are wide open and the damages are sky high – rejected this proposed damages model for several reasons. First, it found that “the workspace switching feature represents only one of over a thousand components included in the accused products … [and] the workspace switching feature’s small role in the overall product is further confirmed when one considers the relative importance of certain other features such as security, interoperability, and virtualization.”
Then, it went on to hold that “this proffered evidence has no economic foundation,” in part because there was no evidence in the record that would suggest that users buy the accused system for the workspace switching feature.
Warming to his subject, the Court went on, “the record shows that some accused operating systems are sold to the public with a default setting that does not enable the workspace switching feature.” The expert (we use this term advisedly) “made no effort to even discern the percentage of users who would never enable or use the claimed feature … [and] never accounts for the record evidence that most users of the accused operating systems do not seem to use the workspace switching feature at all.” The Court went on, “[i]n sum, this stunning methodological oversight makes it very difficult for this court to give any credibility to [the “expert’s”] assertion that the claimed feature is the basis for customer demand.”
Having demolished the proffered royalty base, the Court turned to the proposed royalty rate. As an opening shot, the Court castigated the “expert” because “he arbitrarily picked a royalty rate that is much higher than the existing royalty rates for licenses to the patents-in-suit.”
As a “starting point” (expert-speak meaning “here is where the B-S begins”), the “expert” turned to two surveys of royalty rates conducted in 2004 – the case at bar was filed in 2007 and was being argued in 2010. “Instead of relying on these studies, [the “expert”] should have at least inaugurated his analysis with reference to the existing licenses to the patents-in-suit.”
Not surprisingly, the “expert” was precluded from testifying at trial or otherwise presenting his opinions on the issue of damages based on his current expert report. Two strikes and he’s out.
THE LESSONS TO BE LEARNED: (1) As we’ve repeatedly said before, “don’t get greedy”; and (2) retain an expert who will do the job right and give a reliable opinion.