Intellectual Property Law

The IP Blawg is pleased to welcome today's guest blogger, IP damages expert Alan Ratliff, with a summary of his article on developments in IP litigation damages.

Historically, patent litigation is recognized for yielding more frequent and sizeable damage awards when compared to other forms of IP litigation, although there have certainly been some large copyright, trade secret and breach of license damage awards as well).  In fact, in 2005, five of the twenty-five largest damage verdicts were IP cases and the two largest of those five (totaling damages of more than $600 million) were not patent infringement cases.

Based on prior year NLJ Top 100 reports, several $100+ million copyright, trade secret and breach of license damage awards and settlements have occurred since 2000 and, for the first time since accurate electronic case tracking has been available, there were more copyright litigations filed in federal court last year than any other type of IP litigation.  And, the trend continued into 2005 with copyright filings occurring at nearly double the rate of patent filings, and copyright filings representing the only category with increased filings compared to 2004.

At least in part, this trend is reasonably attributable to the growing use of the statutory damage provisions including, e.g., those under the DMCA that provide for not less than $200 in damages for each act of circumvention of a security measure.  While the damage amount is small, when multiplied by thousands of violations (which could easily occur in a single day on a large computer network), the damages can really add up.

That said winning damages, much less significant damages, in intellectual asset and IP (IA/IP) litigations is by no means a slam dunk.  The discussion that follows is a summary of a more complete article to which a link is provided hereafter.  The focus of this discussion is on damages in non-patent IA/IP litigation and, while not a comprehensive survey of cases, highlights some important recent cases and trends.

The 3 Letter Words Plaintiff?s Hate to Hear:  Fit & Gap

? Atlas Copco Tools, Inc. v. Air Power Tool & Hoist, Inc., 131 S.W.3d 203 (Tex.App.?Fort Worth 2004, pet. denied)

In this business tort action, the court awarded $700,000 in economic damages, trebled it based on a finding of willful or flagrant conduct (to $2.1 million), awarded attorney's fees in the amount of $123,761.56, and court costs in the amount of $9,160.60.  The court of appeals reversed the judgment because the damages methodology did not fit the facts of the case and there was a gap in the expense analysis.

? Fluorine On Call v. Fluorogas, 380 F.3d 849 (5th Cir. 2004)
The absence of ?fit? and the existence of a ?gap? in more dramatic proportions arose later in 2004 when the Fifth Circuit reversed a damage award of more than $120 million because the expert?s opinions on damages were considered speculative.  The court reversed the multi-million dollar award for lost asset damages because the record contained no evidence of the exclusive license's market value.  While the expert performed an analysis that was arguably similar to loss in value (plaintiff argues that he simply didn?t use those ?magic words?), the result of the expert?s analysis was characterized by the expert as a determination future lost profits which the court found to be speculative.
Limits on Flexibility in Proving Unjust Enrichment: Acquisition Prices Are Not a Reliable Basis for Determining Loss In Value Damages

? Alcatel USA , Inc. v. Cisco Sys., Inc., 239 F.Supp.2d 660 (E.D.Tex. 2002)

Alcatel alleged that Monterrey and Cisco systematically misappropriated and used cutting-edge Alcatel technology.  Cisco acquired Monterey for a little more than $500 million in 1999, and Alcatel sued Cisco for that amount.  The court entered summary judgment against Alcatel determining that the use of acquisition prices to determine loss in value was not reliable.

? Storage Tech. Corp. v. Cisco Sys. Inc., 395 F.3d 921 (8th Cir. 2005)

In a similar situation also involving Cisco, the Eighth Circuit found that, although restitution damages were available after Cisco Systems allegedly stole employees from rival (renamed) StorageTek, Cicso was unable to prove the $450 million in damages (based on the acquisition price paid by defendant for the accused business) claimed in its corporate raiding lawsuit.

Even the Jury?s Determination of a Reasonable Royalty Without Any Error in the Admission of Evidence or the Jury Charge Isn?t Safe?And Other Unresolved Patent Damages Issues

? Harris Corporation v. Ericsson Inc., No. 03-1625, -26 (Fed. Cir., August 5, 2005).

In one of the few significant patent damages decisions in 2005, a $61 million jury verdict was reduced to $17.5 million by the trial court and appellate court despite no finding that the jury considered improper evidence.

Concerning other unresolved issues in patent damages, while no 2005 cases raised these, they remain in play for future determinations by the Federal Circuit, including:

? Is design around or next best alternative a limit on the reasonable royalty? (Grain Processing & Lextron 2003)
? How do you compute the royalty on offered for sale/used/imported vs. sold? (Vulcan, Sci-Med)
? How useful are average royalty rates from the typically not-so-comparable third-party licenses obtained from public sources and databases for purposes of determining the reasonable royalty in a particular case? (Integra)
? When does the hypothetical negotiation occur, and as to what subject matter, where there are multiple patents and claims, including re-examinations, with different dates of first infringement (and, thus, hypothetical negotiation dates)? (Catalina Lighting)
? What is the royalty base, what collateral or convoyed sales are included, and how is this analysis affected by the entire market value rule? (Bose, Riles, Interactive Pics)
? How reliable are sales ?projections? and how can they be used in determining the reasonable royalty and lost profits? (Interactive Pics, Shockley)
? How can you get known but unquantifiable indirect sales into the royalty or lost profits base? (Mabuchi, Sci-Med)

But There is Some Good News for Plaintiffs: Higher Royalty Rates and Flexible Standards

? Higher Royalty Rates

In 2001, the Analysis Group performed a review of average royalty rates in 15 industries based on the licensing transactions contained in the RoyaltySource database.  The first study reflected an upward trend in average royalty rates (6%+) which had long hovered around 5% based on earlier studies performed by various consultants and reported by LES.  The 2005 update to this study reflects that average royalty rates continue to increase based on a review of 6,000 transactions over the last 19 years.  Average rates increased to 6.7% from 6.6% in 2004 and 6% in 2001.

While this study does not track rates awarded in litigation, anecdotal evidence and trends reflected by articles discussing litigation rates published during the first few years of the Analysis Group studies, reflect that rates awarded in litigation have followed the upward trend of real world royalty rates and that litigation rates are typically higher (frequently from 1-3%) than real world rates.

? University of Colorado v. American Cyanamid Company, 342 F.3d 1298 (Fed. Cir. 2003)

In this trade secret misappropriation case relating to confidential information of certain inventors used by a third-party patentee in obtaining a patent on a vitamin supplement, the district court found that the patentee was liable, awarding the inventors the incremental profits the patentee wrongfully made by obtaining the patent, but less than the total profits the patentee made by selling a product incorporating the invention.

? Andreas, et al. v. VW, et al., 210 F. Supp. 2d 1078 (N.D. Iowa 2002), affirmed in part and reversed in part, 336 F.3d 789 (8th Cir. 2003)

Continuing with the indirect profits theme, but focusing more on the level of required causal link or nexus, the Eighth Circuit reinstated a jury verdict for indirect damages based on defendant?s profits upon finding that the plaintiff had demonstrated a nexus between the infringement and the indirect profits. 

? Davis v. The Gap, Inc., 246 F.3d 152 (2nd Cir. 2001)

In yet a fourth case on the indirect damages theme, the Second Circuit disallowed indirect damages based on defendant?s profits but allowed a reasonable royalty instead.

? United States v. Slater, 348 F3d 666 (7th Cir. 2003)

In this criminal software piracy case the Seventh Circuit, long-known for its progressive approach to economic damages issues, offers insight into how to determine the value of infringement in connection with a product that is offered for sale at ?retail? but always ?sold? (under a license) commercially at a much lower price.

Conclusion

What these cases demonstrate is that plaintiffs can have (and are having) success in non-patent IA/IP litigation using copyright, trade secret, contract and other common law theories.  Recent trends reflect an increase in these types of litigations as opposed to patent litigation.  At the same time, many complex issues remain unresolved in the field of patent damages leading to uncertainty and, all-to-commonly, reversal.

Today's Guest Blogger:  Alan Ratliff, CPA-JD, Partner, The StoneTurn Group

Other Useful Links:

Fit, gap and other expert issues - http://www.daubertontheweb.com/

Top 100 Verdicts ? http://www.nlj.com

Royalty Rate Trends ? http://www.royaltysource.com, Licensing Economics Review