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Beware of risky litigation

September 17, 2013

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Two recent patent infringement cases involve damages strategies that backfired. In the case of Versata Software, Inc. v. SAP America, Inc., Versata sued SAP America for alleged infringement of Versata’s patent on computer-based pricing software. After several years of healthy sales, new sales of Versata’s software virtually disappeared after SAP launched its competing product. The U.S. Court of Appeals for the Federal Circuit upheld the jury’s $391 million damages award, which included $260 million in lost profits and $85 million in reasonable royalties, plus prejudgment interest.

Versata court uses Panduit factors

In this case, the court rejected SAP’s arguments on liability as well as the sufficiency of damages evidence. Regarding lost profits damages, the court stated that such damages are appropriate whenever there’s a reasonable probability that, but for the infringement, the plaintiff would have made the defendant’s sales. A patent holder’s entitlement to lost profits, the court explained, is based on the Panduit factors:

1.    Demand for the patented product,

2.    Absence of acceptable noninfringing alternatives,

3.    Capacity to exploit the demand, and

4.    The amount of profit the patent holder would have made.

One of SAP’s challenges involved the first factor. It argued that Versata’s lack of sales during the damages period reflected an absence of demand for the patented product. But the court held that Versata’s strong history of preinfringement sales supported “the jury’s finding of demand for the patented functionality in a ‘but for’ world.”

SAP also challenged Versata’s calculation of the amount of profits it would have made absent infringement (factor 4). It argued that Versata had failed to account for market forces other than infringement that might have caused its losses. Versata’s expert computed lost profits by identifying a pool of potential customers and applying the company’s historical average win rate of 35%. In other words, the expert posited that, but for the infringement, Versata would have converted 35% of the pool into customers.

Had Versata’s expert stopped there, the court noted, SAP’s challenge may have succeeded. But Versata’s expert “did account for some market pressures,” discounting the average win rate to 21% to reflect changes in economic conditions between introduction of the product and the damages period. To arrive at lost profits, the expert estimated the value of each lost sale — $3 million (after deducting direct and indirect costs), including expected maintenance and consulting agreements — and multiplied that figure by the total number of lost sales.

The court found that Versata’s lost profits calculations were not speculative, but were “based on sound economic proof confirmed by the historical record.” The company made a prima facie showing of lost profits, shifting the burden to SAP to prove that a different calculation would have been more reasonable. SAP declined to offer such evidence, however, so the court upheld the jury’s award.

Unicom case singles out expert testimony

In the other patent infringement case, Unicom Monitoring, LLC v. Cencom, Inc., the plaintiff prevailed on liability. But the U.S. District Court for the District of New Jersey granted the defendant’s motion for summary judgment on damages because the plaintiff had failed to offer expert testimony in support of its reasonable royalty calculations.

According to the court, the only evidence in the record regarding the reasonable royalty rate was this statement in Unicom’s opposition brief: “Since Cencom and Unicom were in the same business, Unicom would only have licensed Cencom for a royalty rate in the vicinity of 30% of revenues collected from . . . customers . . . .”

The court noted that establishing reasonable royalty damages doesn’t necessarily require expert testimony. But in this case, witnesses that Unicom identified weren’t qualified to guide a factfinder through the hypothetical negotiation process on which reasonable royalty rates are based.

Don’t take chances

Defendants often are reluctant to present alternative damages calculations, either to keep costs down or because they fear the jury will interpret them as an acknowledgment of liability. As Versata demonstrates, however, simply criticizing the plaintiff’s calculations essentially creates an “all or nothing” position, which can be extremely risky. And, on the plaintiff’s side, Unicom shows how dangerous it can be to attempt to prove damages without expert assistance.

Both cases highlight the need to engage qualified valuators when heading into court.
For more information, please contact Matt Gutzwiller at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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