Tuesday, June 04, 2013 6:16:52 AM
Pacer Update from SF CA. Courtesy of JonnyQwan Raging bull# 370067:
FOR THE NORTHERN DISTRICT OF CALIFORNIA
INTERWOVEN, INC.,
Plaintiff,
v.
VERTICAL COMPUTER SYSTEMS, INC.,
Defendant.
Case No. 3:10-cv-04645-RS
VERTICAL'S OPPOSITION TO INTERWOVEN'S MOTION TO EXCLUDE THE TESTIMONY OF JOSEPH GEMINI
DATE: JUNE 20, 2013 TIME: 1:30 P.M.
DEPT: COURTROOM 3 JUDGE: HON. RICHARD SEEBORG
Case3:10-cv-04645-RS Document177 Filed06/03/13 Page1 of 24
VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
TESTIMONY OF JOSEPH GEMINI− CASE NO. 3:10-CV-04645-RS
TABLE OF CONTENTS
Page
I. INTRODUCTION .............................................................................................................. 1
II. RELEVANT FACTS.......................................................................................................... 2
III. LEGAL STANDARD......................................................................................................... 4
IV. ARGUMENT...................................................................................................................... 6
A. Mr. Gemini's Testimony will Help the Jury ........................................................... 6
B. Mr. Gemini's Testimony Regarding Lost Profits is Admissible............................. 6
1. No Acceptable Non-Infringing Substitutes Exist ....................................... 8
2. Vertical has the Manufacturing and Marketing Capability to Meet the Demand for the Patented Product ............................................ 9
3. Mr. Gemini Applied a Proper Profit Rate................................................. 11
C. Mr. Gemini's Reasonable Royalty Analysis is Proper.......................................... 13
1. Mr. Gemini's Royalty Base was Proper Because the TeamSite Platform and LiveSite Products use the Patented Technology ................. 14
D. The Basix Agreement is the Most Relevant and Comparable License................. 16
V. CONCLUSION................................................................................................................. 19 Case3:10-cv-04645-RS Document177 Filed06/03/13 Page2 of 24
VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
TESTIMONY OF JOSEPH GEMINI− CASE NO. 3:10-CV-04645-RS
TABLE OF AUTHORITIES
Page(s)
CASES
ActiveVideo Networks v. Verizon Communications, 694 F.3d 1312 (Fed. Cir. 2012)................................................................................................17
Apple, Inc. v. Motorola, Inc., 2012 U.S. Dist. LEXIS 105387 (N.D. Ill. May 22, 2012) .......................................................11
AVM Techs., LLC v. Intel Corp., 2013 U.S. .................................................................................................................................18
Calouri v. One World Techs., Inc., US Dist. LEXIS 25508 (C.D. Cal. Feb. 27, 2012).............................................................16, 17
Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., 2012 U.S. Dist. LEXIS 159794 (W.D. Pa. Nov. 7, 2012) .......................................................17
Dataquill Ltd. v. High Tech Comp. Corp., 887 F.Supp 2d 999 (S.D. Cal. 2011)..................................................................................15, 16
Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).................................................................................................1, 5, 6, 8, 11
DSU Med. Corp. v. JMS Co., Ltd., 296 F. Supp. 2d 1140 (N.D. Cal. 2003) .................................................................................5, 6
Hebert v. Lisle Corp., 99 F.3d 1108 (Fed. Cir. 1996)..................................................................................................13
Honeywell International, Inc. v. Universal Avionics Systems Corp., 488 F. 3d 982 (Fed. Cir. 2007)...................................................................................................5
Illinois Tool Works, Inc. v. MOC Prods. Co., Inc., 2012 U.S. Dist. LEXIS 116471 (S.D. Cal. Aug. 17, 2012) .........................................11, 12, 13
IP Innovation LLC v. Red Hat, Inc., 705 F. Supp. 2d 687 (E.D. Tex. 2010).....................................................................................16
Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).................................................................................................................11
LaserDynamics, Inc. v. Quanta Comp., Inc., 694 F.3d 51 (Fed. Cir. 2012)........................................................................................14, 15, 18
Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009)..........................................................................................14, 15
Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387 (Fed. Cir. 2003)............................................................................5, 8, 11, 13, 14
Minks v. Polaris Indus., Inc., 546 F.3d 1364 (Fed. Cir. 2008)................................................................................................18
Oracle Am., Inc. v. Google, Inc., 2011 U.S. Dist. LEXIS 136172 ...........................................................................................9, 11
Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978) ...........................................................................................1, 7, 9
ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010)..................................................................................................18
Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538 (Fed. Cir. 1995)..............................................................................7, 9, 10, 16, 17
Siemens Med. Sols. USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d 1269 (Fed. Cir. 2011)..................................................................................................6
State Indus. Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573 (Fed. Cir. 1989)..................................................................................................9
Techsearch, LLC v. Intel Corp., 286 F.3d 1360 (Fed. Cir. 2002)..................................................................................................5
US Gypsum Co. v. LaFarge N.Am. Inc., 670 F. Supp. 2d 737 (N.D. Ill. 2009) ...................................................................................9, 11
Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268 (Fed. Cir. 1985)........................................................................................6, 11, 12
STATUTES
35 U.S.C. § 284..........................................................................................................................6, 13
I. INTRODUCTION
Interwoven seeks to preclude Mr. Joseph Gemini, Vertical's damage expert, from testifying as to Vertical's entitlement to lost profits or the proper reasonable royalty rate. However, Interwoven's Motion to Exclude the Testimony of Joseph Gemini does not apply the standards provided in Fed.R.Evid. 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and fails to provide any basis for exclusion.
Interwoven does not challenge Mr. Gemini's expertise or qualifications, nor does it challenge the propriety of his principles or methods. Indeed, Mr. Gemini is well-qualified to testify in this case; and he has applied time-tested and consistently accepted methods of proving lost profits and reasonable royalties under the Panduit test and Georgia-Pacific factors. Instead, Interwoven's brief is riddled with factual argument that does not address the reliability or admissibility of Mr. Gemini's analysis or methodology. This argument includes attacking the testimony of Vertical's party witness, Mr. Valdetaro, the Chief Technical Officer. Interwoven's proposition that a damages expert may not rely on the testimony or information gleaned from a party officer is without merit. A party officer would indeed be most knowledgeable about Vertical's products and marketing and manufacturing capabilities.
However, the role of the Court under Rule 702 and Daubert is not to judge the reliability or correctness of the facts upon which Mr. Gemini bases his testimony. This is a function of the trier of fact, after Interwoven has challenged those facts through rebuttal evidence and cross-examination. Thus, for the reasons set forth below, Vertical respectfully requests that the Court deny Interwoven's motion.
II. RELEVANT FACTS
Vertical retained Mr. Gemini to assist in its damages assessment. He is a Certified Public Accountant licensed in the State of Illinois for over 25 years. (Gemini Decl., Exhibit 7 ¶ 5)1. He has testified in over fifty cases on damages, including patent cases. Id. at ¶ 4. In calculating damages for Vertical, he considered various sources of information including the pleadings, the patents-in-suit, interrogatory responses, financial data, deposition transcripts, and publicly available information. (Id. at ¶ 9; see also the attachments to Gemini Decl.). In addition, Mr. Gemini had numerous discussions with Luiz Valdetaro, the Chief Technical Officer of Vertical. (Gemini Decl., Exhibit 7 ¶ 9). Mr. Gemini prepared two reports on damages, his initial report, which Vertical served on December 12, 2012, and a supplemental report, served on March 30, 2013. Vertical has consolidated the reports verbatim into Mr. Gemini's Declaration, Exhibit 7. (Gemini Decl., Exhibit 7 ¶¶ 1-58 and ¶¶ 59-75, respectively). In his Declaration, Mr. Gemini delves into a thorough analysis of Vertical's entitlement to lost profits and reasonable royalties based on the facts in evidence.
Regarding lost profits, Mr. Gemini considered the demand and unique functionality of the patented products at issue in this case, TeamSite and SiteFlash. Id. at ¶¶ 29-36. He determined, based on discussions with Mr. Valdetaro, that the parties are the only competitors that provide such functionality. (Gemini Decl., Exhibit 7 ¶ 39; Valdetaro Decl., Exhibit 6 ¶¶ 8, 11). Mr. Gemini also based his analysis on the assumption that Vertical had the capacity to meet demand
1 For efficiency, Vertical has cited to Exhibits 1-25 corresponding to Vertical Computer Systems, Inc.’s Opposition to Interwoven Inc.’s Motion for Summary Judgment, all of which are attached to the Declaration of Vasilios D. Dossas in Support of Vertical's Opposition to Interwoven's Motion for Summary Judgment filed concurrently herewith. In addition, Vertical cites to the Declaration of Joseph Gemini, Vertical’s damages expert. The Declaration fully incorporates Mr. Gemini’s December 12, 2012 Expert Report and March 30, 2013 Supplemental Expert Report for ease of reference.
for the patented product. (Gemini Decl., Exhibit 7 ¶ 39). Again, he based this assumption on discussions with Mr. Valdetaro. (Valdetaro Decl., Exhibit 6 ¶ 12). For example, Mr. Valdetaro has stated that Vertical has the capacity to sell and service the SiteFlash product. Id. at ¶ 12. This would merely require hiring more staff as Vertical acquires more customers. Id. The fact that Vertical has not sold SiteFlash for some time does not change the competitive landscape nor Vertical's abilities. Vertical provides its other products to many large corporations and non-profit entities without a problem. Id.
Interwoven trumpets the fact that Vertical has not sold its SiteFlash system since 2004, arguing that this shows the unavailability of lost profits. On the contrary, this fact is powerful circumstantial evidence in favor of lost profits, in that it demonstrates the lack of acceptable non-infringing alternatives. It supports the conclusion that Vertical could not make any sales after 2004 because that is when Interwoven entered the market with the infringing TeamSite product. It supports a conclusion that the market in which Interwoven and Vertical compete is essentially a two-supplier market – Vertical and the infringers.
Microsoft Corp.'s SharePoint product is not a potential non-infringing substitute. Vertical sued Microsoft Corp. for infringement of its SharePoint products. The parties settled that litigation with Microsoft receiving a license under the patents-in-suit. (Gemini Decl., Exhibit 7, ¶ 39). But, as Mr. Valdetaro points out in his Declaration, Sharepoint does not have the functionality and does not compete with the parties' products. (Valdetaro Decl., Exhibit 6, ¶ 8; Gemini Decl., Exhibit 7, ¶39; see also Sengupta Dep., Exhibit 10 at 134:1-19).
Regarding reasonable royalties, Mr. Gemini has devoted most of his analysis to the widely accepted Georgia-Pacific factors. One important element of Vertical's proof is an agreement dated September 8, 2004 between Vertical and a company called Basix1. (Exhibit 24). This Agreement, despite Interwoven's protestations, is an arms-length transaction that Case3:10-cv-04645-RS Document177 Filed06/03/13 Page7 of 24
occurred at approximately the same time that Interwoven's infringement began, the date of the so called hypothetical negotiation. (Valdetaro Decl., Exhibit 6, ¶ 14).
The licensed products under the Basix 1 Agreement are "forums and calendar applications of SiteFlash," the Vertical product covered by the patents-in-suit. And, the royalty rate is 10%. Id. at ¶ 44. What happened later does not diminish these facts. The parties negotiated the license fully expecting that Basix1 would obtain funding and that it would introduce the Enterprise Knowledge Gateway (EKG) product that it intended to market. Id.
Interwoven asserts that Mr. Gemini has not made any attempt to apportion the damages to that part of the TeamSite and LiveSite products that uses the patented technology. But, the whole of these products uses the patented technology; and Interwoven uses the patented features to sell the TeamSite product and related components. Thus, contrary to Interwoven's assertions, Mr. Gemini has identified the smallest salable patent practicing unit. Copies of the Autonomy website show just that. Vertical has attached those as Exhibit 25; and the Declaration of Mr. Valdetaro identifies the language on this Exhibit which promotes the patented features. (Valdetaro Decl., Exhibit 6, ¶ 10). If anything, Vertical is entitled to application of the entire market value rule to obtain damages for convoyed sales associated with the TeamSite product.
Therefore, Interwoven's arguments regarding the sufficiency of the facts simply lack merit.
III. LEGAL STANDARD
Rule 702 of the Federal Rules of Evidence governs the admissibility of expert testimony in this case. It provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and Case3:10-cv-04645-RS Document177
methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Fed. R. Evid. 702.
Because the admission of expert testimony is a procedural matter, the law of the Ninth Circuit Court of Appeals governs the admission of expert testimony in the present patent action. Techsearch, LLC v. Intel Corp., 286 F.3d 1360, 1376-77 (Fed. Cir. 2002); Honeywell International, Inc. v. Universal Avionics Systems Corp., 488 F. 3d 982, 994 (Fed. Cir. 2007). Under Rule 702 and Daubert, the trial court acts as a "gatekeeper" to determine "whether the reasoning or methodology underlying [an expert's] testimony is scientifically valid and whether that reasoning or methodology can properly be applied to the facts at issue." Daubert, 509 U.S. at 592-93. The Court's role under Rule 702 also includes determining whether the expert possesses some specialized knowledge such that his or her testimony will be helpful to the trier of fact and, if so, whether that knowledge arises from reliable methods applied in a reliable manner. Daubert, 509 U.S. at 590-91. This gatekeeper function is limited and is not intended to supplant the adversary system or the role of the jury. DSU Med. Corp. v. JMS Co., Ltd., 296 F. Supp. 2d 1140, 1147 (N.D. Cal. 2003) (citations omitted).
A Rule 702 Motion is not the appropriate vehicle to argue about the reliability of the facts in evidence. See Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387, 1392 (Fed. Cir. 2003). The Federal Circuit has affirmed that it is not the court's role to determine the accuracy of the fact's underlying an expert's testimony:
Defendants confuse the requirement for sufficient facts and data with the necessity for a reliable foundation in principles and method, and end up complaining that [the expert's] testimony was not based on '"reliable facts." The parties disputed many of the facts relevant in determining a reasonable royalty . . . . When, as here, the parties' experts rely on conflicting sets of facts, it is not the role of the trial court to evaluate the correctness of facts underlying one expert's testimony.
Id.
IV. ARGUMENT
A. Mr. Gemini's Testimony will Help the Jury
Interwoven fails to address the second prong of Daubert, namely whether the disputed testimony of the expert will be helpful to the jury. Mr. Gemini possesses specialized knowledge that will allow his testimony to aid the trier of fact. Daubert, 509 U.S. at 592-93. Mr. Gemini is a certified public accountant. He has a bachelor's degree from Western Illinois University with a major in accounting and a Masters of Business Administration from DePaul University with a major in finance. (Gemini Decl., Exhibit 7, ¶ 5). Over the years, Mr. Gemini has done auditing work, valuations of intellectual property, and consulting and expert work in the area of litigation damages. Id. He has testied as an expert numerous times over his career, including patent cases in federal courts in California. Id. He is well qualified to testify as a damages expert in this case and will offer testimony that will help the jury.
B. Mr. Gemini's Testimony Regarding Lost Profits is Admissible
Under 35 U.S.C. § 284, the Court "shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use of the invention by the infringer." Vertical need prove lost profits only to a reasonable probability; "t is well settled that proof of lost profits need not be absolute." Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268, 275 (Fed. Cir. 1985). To recover lost profits, Vertical must show that, "but for the infringement, [it] would have made additional profits." Siemens Med. Sols. USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d 1269, 1287 (Fed. Cir. 2011). However, in order to show lost profits, a patent holder need not negate every possibility of a purchaser deciding to buy a different product or foregoing the purchase altogether. DSU Med. Corp.., 296 F. Supp. 2d at 1148 (citing State Indus. Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577 (Fed. Cir. 1989)).
Case3:10-cv-04645-RS Document177 Filed06/03/13 Page10 of 24
Interwoven improperly argues that Mr. Gemini does not establish "causation in fact" of lost profits. However, the Federal Circuit has held that "[c]ausation of lost profits 'is a classical jury question.'" Versata Software, Inc., 2013 U.S. App. LEXIS 8838, at *19 (Fed. Cir. May 1, 2013) (quoting Brooktree Corp. v. Advanced Micro Devices, Inc., 977 F.2d 1555, 1578 (Fed. Cir. 1992)). Under Rule 702, Vertical must only show that Mr. Gemini has used reliable methodologies in his calculation, and that he applied these calculations to the facts of the case. Fed.R.Evid. 702.
Interwoven also argues incorrectly that the lost profit analysis requires two separate showings: (1) a "threshold" showing that the patent holder would have made and sold the products "but for" the infringement, and (2) a showing that the Panduit factors are present. (Dkt. No. 168-3 at 6). However, Interwoven misinterprets the law governing the lost profits analysis. There is no threshold requirement that the patentee meet a threshold requirement of showing "but for" causation. Rather, the Panduit test serves as a useful, albeit non-exclusive, way for a patentee to make a "but for" showing, namely whether a patent owner would have made the sales but for the infringement. Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1545 (Fed. Cir. 1995) ("A showing under Panduit permits a court to reasonably infer that the lost profits claimed were in fact caused by the infringing sales, thus establishing a patentee's prima facie case with respect to 'but for' causation."). Thus, although Interwoven argues that Mr. Gemini failed to establish "but for" causation, Interwoven admits that Mr. Gemini has addressed the Panduit factors. (Dkt. No. 168-3 at 9). This is all that is required.
To prove "but for" causation, Vertical must establish (1) a demand for the patented product, (2) an absence of acceptable non-infringing substitutes, (3) the manufacturing and marketing capability to exploit the demand, and (4) the amount of profits it would have made. Rite-Hite Corp., 56 F.3d at 1546 (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575
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F.2d 1152 (6th Cir. 1978)). Interwoven does not dispute that there was a demand for the patented product. (It cannot – the sales it has made alone proves this factor.) Therefore, Vertical must only demonstrate that Mr. Gemini addressed each of the factors (2), (3), and (4) under reliable methodology, as required by Daubert.
1. No Acceptable Non-Infringing Substitutes Exist
Interwoven avers that Mr. Gemini failed to establish the absence of non-infringing substitutes. However, Interwoven's arguments improperly challenge Mr. Gemini's conclusions, not his methodology. Mr. Gemini analysis is based on the assumption that there are no acceptable, non-infringing substitutes that existed in the market:
I understand that Vertical believes most CMS (Content Management Systems) in the market, in on way or another, infringe the patents-in-suit. I understand from Vertical that the SharePoint 2007 product licensed under the patents-in-suit by Microsoft does not compete in the CMS market.
Interwoven chose to provide versions of its TeamSite product that included the infringing capabilities. Interwoven sales of its versions prior to 6.0 had been slowing, as indicated by the Interwoven 10-Ks. It would seem that the prior versions of TeamSite were not acceptable alternatives.
(Gemini Decl., Exhibit 7, ¶ 39). The basis of this assumption is provided in the text of Mr. Gemini's report and listed in Exhibit B to his report. (Id. at ¶¶ 9-10). Of course, Interwoven disagrees with Mr. Gemini's opinions regarding the absence of non-infringing substitutes; however, "it is not the role of the trial court to evaluate the correctness of facts underlying one expert's testimony." Micro Chem., 317 F.3d at 1392 (finding that the trial court properly found plaintiff's damages expert's testimony admissible even though it was based on plaintiff's version of the contested facts).
Contrary to Interwoven's assertion, Mr. Gemini need not prove the nonexistence of adequate, non-infringing substitute during the relevant time period because he is only testifying on damages. The type of technical knowledge and skill required to prove that no non-infringing alternatives exist is outside the range of Mr. Gemini's expertise. See Micro Chem., 317 F.3d at 1392 (affirming that damages expert's testimony was admissible even though he relied on the statements of others and did not undertake an independent investigation of the industry or personally review the parties' financial records.). Instead, Vertical will proffer evidence that no non-infringing substitutes existed, as it is so entitled. Oracle Am., Inc. v. Google, Inc., 2011 U.S. Dist. LEXIS 136172, at **7-8 (Nov. 28, 2011). Interwoven's objections to Mr. Gemini's testimony are more properly addressed at trial on cross-examination or by presenting evidence rebutting the facts upon which his analysis is based. See US Gypsum Co. v. LaFarge N.Am. Inc., 670 F. Supp. 2d 737, 742-43 (N.D. Ill. 2009).
Interwoven also argues that, even where there is a presence of acceptable non-infringing substitutes, Mr. Gemini could have satisfied the second Panduit factor by providing a market share analysis. However, because Mr. Gemini's testimony is based on the absence of non-infringing substitutes, a market share analysis is not required. State Indus., Inc., 883 F.2d at 1576-77.
2. Vertical has the Manufacturing and Marketing Capability to Meet the Demand for the Patented Product
Interwoven argues that there is no evidence that Vertical had the capacity to meet demand. Again, it applies an improper standard, arguing that Vertical must be selling products that practice the patents-in-suit. However, sitting en banc, the Federal Circuit has stated that "[w]hether a patentee sells its patented invention is not crucial in determining lost profits damages." Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1548 (Fed. Cir. 1995) (en banc). And, as the Federal Circuit recently provided, the patentee "need not have actually sold [a competing product] during the damages period to show demand for the patented functionality,"
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VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
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particularly where, as here, the infringer eroded the market for the patentee's product during the damages period. Versata, 2013 U.S. App. LEXIS 8838, at *24.
Versata is factually similar to the case at bar. There, the infringer challenged the jury's award of lost profits. Id. at *19. It argued that the patentee was not entitled to lost profits because the patentee had not made any sales of its patented software, "Pricer," during the damages period, which started in 2003. Id. at **23-24. During trial, the patentee showed that it had made 82 sales of Pricer between 1995 and 1998. Id. at *23. It made no sales after 2001, two years before the damages period began. Id. In the present case, the market for the patentee's product also disappeared when the Interwoven began selling the infringing software. Id. at *24. The Federal Circuit found the jury's award proper, finding the patentee need not have actually sold its product during the damages "particularly given the economic reality that [the defendant] had eroded the market for Pricer through bundling [the infringing invention] into its own software." Id. This is precisely the case here, and Mr. Gemini properly addressed this in his analysis.
Mr. Gemini provided that Vertical had the capacity to meet the demand. (Gemini Decl., Exhibit 7, at ¶ 39). He stated, in relevant part, that Vertical had the personnel to develop, train, test and market the SiteFlash product during 2002 to 2004. Id. Interwoven argues that the evidence does not support his conclusion because Vertical had at most six or seven people working on the development and maintenance of SiteFlash. (Dkt. No. 168-3 at 11). However, Vertical ignores Mr. Gemini's statements that Vertical also had 4 to 5 personal working in marketing, Vertical also used independent marketers, and that Vertical had the ability to employ Now Solutions employees to perform necessary services for the SiteFlash product sales. (Gemini Decl., Exhibit 7, ¶ 39). (Now Solutions is a subsidiary of Vertical.) Furthermore, Mr. Gemini has based his analysis on the understanding that the SiteFlash product is easier and less labor intensive to service and support than TeamSite, and, therefore, requires less personnel than those employed by Interwoven. Id. These conclusions are all based on the testimony of Mr. Valdetaro or the discussions with him. Interwoven's disagreement with these facts is not a basis to exclude Mr. Gemini's testimony. See Micro Chem., Inc., 317 F.3d at 1392; US Gypsum Co., 670 F. Supp. 2d at 742-43.
Interwoven cites Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152 (1999) and Apple, Inc. v. Motorola, Inc., 2012 U.S. Dist. LEXIS 105387 (N.D. Ill. May 22, 2012) to support its argument that an expert may not rely on testimony from a party source to support its conclusions. However, neither of these cases supports this proposition, and this argument is in direct contravention of the well-established law under Fed.R.Evid. 702 and Daubert. In Kumho, the Supreme Court affirmed the district court's exclusion of an expert based on his unreliable methodology, not the facts underlying this methodology. Kumho, 526 U.S. at 153-54. In Apple, the Court excluded both parties' experts' because, in addition to using flawed methodology, the experts did not apply the same approach that they "would have been required by the applicable professional standards to use to deal with an identical issue outside the litigation context." 2012 U.S. Dist. LEXIS 105387, at 18. Here, Mr. Gemini's method of obtaining information relating to Vertical's business operations and manufacturing capabilities comprised interviewing the individual with the most knowledge, Vertical's Chief Technology Officer. If Interwoven has any concerns about bias, "it should make its arguments on cross-examination [at trial]." Oracle Am., 2011 U.S. Dist. LEXIS 136172, at **9-10.
3. Mr. Gemini Applied a Proper Profit Rate
Mr. Gemini properly applied a 26% profit rate to calculate lost profits. "A patent owner can compute his lost profits directly, through his anticipated profit margin, or indirectly, through use of the infringer's profit margin." Illinois Tool Works, Inc. v. MOC Prods. Co., Inc., 2012
U.S. Dist. LEXIS 116471, at *28 (S.D. Cal. Aug. 17, 2012) (citations omitted). And indeed, lost profits need only be proven to a "reasonable probability." Yarway Corp., 775 F.2d at 275. "Although the exact amount of lost profits cannot be precisely fixed, fundamental principles of justice require us to throw the risk of any uncertainty upon the wrongdoer instead of upon the injured party." Id. at 276 (internal citations omitted). Contrary to Interwoven's arguments, Mr. Gemini determined this rate came not only from the best evidence of projected profits, the GIS business plan, but also from discussions with Mr. Valdetaro. (Gemini Decl., Exhibit 7, ¶ 39). Therefore, Interwoven's argument that the 26% rate is not tied to the facts of this case is simply incorrect. Mr. Gemini took this 26% rate from a business plan dated July 2004, which is just prior to the date Interwoven's infringement began. Id. In addition, as Mr. Gemini stated in his deposition, the GIS plan "provides an indication of the expected profitability for products that used the technology of the patents." (Gemini Dep., Exhibit 9 at p. 117:14-21.) In addition, Mr. Valdetaro discussed with Mr. Gemini further relevant information regarding SiteFlash, including development costs and sales and services costs. (Gemini Decl., Exhibit 7, ¶ 39).
Interwoven's argument that the forecasted profit rates did not materialize actually supports Vertical's entitlement to lost profits. Mr. Gemini based his analysis on the assumption that, had Interwoven not infringed Vertical's patents, Vertical could have expected profits at the rate of 26%. If Vertical had experienced profits in the projected amount, as Interwoven argues it should, Vertical could not have collected damages for lost profits due to Interwoven's infringement at all. Thus, the absence of sales/profits by Vertical supports the conclusion that Interwoven's infringement drove it out of the market.
Interwoven again tries to discredit the testimony of Mr. Valdetaro, Vertical's Chief Technology Officer. As explained above, a Rule 702 motion is not the proper vehicle for resolving the disputed facts; rather, Interwoven's argument goes to the weight of the evidence,
not its admissibility. In fact, Interwoven's cited case law supports this proposition. In Illinois Tool Works, Inc., the damages expert based his lost profits damages calculation on the assumption that the plaintiff would have captured 50% of the defendant’s sales of the accused products. 2012 U.S. Dist. LEXIS 116471, at **21-22. The basis for this assumption was an estimate provided by the plaintiff''s Director of Technology. Id. The court found the expert's lost profits testimony admissible, if based on the underlying factual assumption that the plaintiff held 50% of the market share. Id. at 22 (citing Micro Chem., Inc., 317 F.3d at 1392) (holding that defendant's concerns with regard to the expert's testimony go to the weight and not its admissibility).
Like Illinois Tool Works, Mr. Gemini makes assumptions based on Vertical's evidence. Unsurprisingly, Interwoven disagrees with these facts. However, Interwoven's disagreement with Mr. Gemini's conclusions does not support precluding Mr. Gemini's testimony. Accordingly Mr. Gemini bases his lost profit analysis on sound principles and methodology, and thus is admissible.
C. Mr. Gemini's Reasonable Royalty Analysis is Proper
Mr. Gemini's report includes a calculation of a reasonable royalty, which is the minimum basis for damages guaranteed to a patentee under 35 U.S.C. § 284. Mr. Gemini's reasonable royalty analysis follows a well-accepted methodology for determining a reasonable royalty, namely applying the Georgia Pacific factors to the facts of this case in a hypothetical negotiation at the time infringement began.
The Federal Circuit has held that "[t]he amount of damages based on a reasonable royalty is an issue of fact." Micro Chem., Inc. v. Lextron, Inc., 317 F.3d at 1394. "The correct measure of damages is a highly case specific and fact-specific analysis." Hebert v. Lisle Corp., 99 F.3d 1108, 1119 (Fed. Cir. 1996). The Federal Circuit has also stated that a reasonable royalty may be measured as a percentage of a variety of different numbers. See, e.g., Fromson, 853 F.2d 1568, 1578 (Fed. Cir. 1988) ("The royalty may, for example, be measured as a percentage of Western's gross or net profit dollars, or as a set amount per infringing plate sold, or as a percentage of the gross or net price received for each infringing plate"). "The hypothetical negotiation tries, as best as possible, to recreate the ex ante licensing negotiations scenario and to describe the resulting agreement. In other words, if infringement had not occurred, willing parties would have executed a license agreement specifying a certain royalty payment scheme." Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). The hypothetical negotiation "necessarily involves an element of approximation and uncertainty." Id. at 1326.
The Federal Circuit has consistently approved of an experts use of a hypothetical negotiation utilizing the Georgia Pacific factors to estimate a reasonably royalty. See, e.g., Micro Chem., Inc., 317 F.3d at 1393. Mr. Gemini has addressed each of these factors in his report. Like its arguments concerning Mr. Gemini's lost profit analysis, Interwoven again challenges Mr. Gemini's conclusions. However, these conclusions do not undermine Mr. Gemini's well-reasoned methodology and relate to the weight or Mr. Gemini's testimony, not its admissibility. Interwoven may challenge his conclusions at trial and present contrary evidence through its own experts. Ultimately, Interwoven's arguments rest on a fundamental misunderstanding of the analysis performed by Mr. Gemini.
1. Mr. Gemini's Royalty Base was Proper Because the TeamSite Platform and LiveSite Products use the Patented Technology
Interwoven argues that Mr. Gemini uses an improper royalty base under LaserDynamics, Inc. v. Quanta Comp., Inc., 694 F.3d 51, 67-68 (Fed. Cir. 2012), because Mr. Gemini has not identified the smallest salable patent practicing unit and has thus failed to apportion the damages to that part of the TeamSite and LiveSite products that use the patented technology. However,
the entire market value rule does not apply in this scenario and, even if it does, the patented technology drives the demand for the Teamsite and LiveSite products.
As stated above, the Federal Circuit has stated that the reasonable royalty may be measured as a percentage of any variety of different numbers, including the gross or net price from each infringing product. See Fromson, 853 F.2d at 1578-1579. The entire market value rule is a "narrow exception to the general rule that royalties are awarded based on the smallest salable patent-practicing unit." Versita 2013 U.S. App. LEXIS 8838, at *31-32 (citing LaserDynamics, Inc., 94 F.3d at 67). It applies if an infringer sells a patented product, but the patent only relates to a part of the product sold. Id. If this is the case, a patent owner can only claim damages on the entire market value of the product sold, if "the patent-related feature is the basis for customer demand.'" Lucent Techs., Inc., 580 F.3d at 1336 (citing Rite-Hite, 56 F.3d at 1549).
Here, Mr. Gemini did not apply the entire market value theory. The whole of Interwoven's Teamsite and LiveSite products use the patented technology, and Mr. Gemini has cited advertising materials that support this conclusion. (Valdetaro Decl., Exhibit 6 ¶ 10; Gemini Decl., Exhibit 7, ¶¶ 33, 53, 62-64). Thus, contrary to Interwoven's arguments, Mr. Gemini has identified the "smallest salable practicing unit." Therefore, Mr. Gemini need not have apportioned damages.
However, even though Mr. Gemini has not applied the entire market value theory in his calculations, he has assumed that the patented technology drives the demand for TeamSite and LiveSite. (Gemini Decl., Exhibit 7, ¶¶ 32-33, 53). This assumption is supported by the facts and data in this case. (Valdetaro Decl., Exhibit 7, ¶ 10).
As Interwoven duly noted in its motion, Mr. Gemini's testimony was similarly challenged in Dataquill Ltd. v. High Tech Comp. Corp., 887 F.Supp 2d 999, 1027-28 (S.D. Cal. 2011). Case3:10-cv-04645-RS Document177 Filed06/03/13
There, the defendant argued that the entire market value rule was not sufficiently addressed in Mr. Gemini's report because Mr. Gemini did not tie the patented feature to the basis for customer demand. Id. The court found that Mr. Gemini cited articles showing that the patented feature was important to the defendant's ability to compete in the market, and this was sufficient evidence from which a jury could find that the entire market value rule had been satisfied. Id. Therefore, the court declined to exclude his testimony using the total revenue of the accused products as the royalty base. Id. Here, Mr. Gemini has done just that. As provided above, he has based his testimony on the importance of the patented features to customer demand for the accused products.
Interwoven also cites IP Innovation LLC v. Red Hat, Inc., 705 F. Supp. 2d 687 (E.D. Tex. 2010) to attack Mr. Gemini's analysis. Judge Rader, Chief Judge of the Federal Circuit and sitting by designation as the presiding judge, preliminarily excluded opinions that applied the entire market rule because he found the supporting evidence to be insufficient. Id. at 689-90. However, the court invited additional evidence and a revised report. Id. at 691. Eventually, Mr. Gemini did testify at trial, so Interwoven's citation does little to discredit Mr. Gemini's report.
For these reasons, Mr. Gemini's use of the total revenue from TeamSite and LiveSite sales is proper and admissible.
D. The Basix Agreement is the Most Relevant and Comparable License
"Comparable license agreements are those that are 'clearly linked to the economic demand for the claimed technology'" and that "provide relevant information about the value of the license to the patent-in-suit." Calouri v. One World Techs., Inc., US Dist. LEXIS 25508, at *11 (C.D. Cal. Feb. 27, 2012). The Basix Agreement is clearly comparable because, as Mr. Gemini provided in his report, it involved a license to technology that practices the patents-in-suit. (Gemini Decl., Exhibit 7, ¶¶ 44-48). In addition, the Basix Agreement is dated September 8, 2004, around the time Interwoven's infringement began. Rite-Hite, 56 F.3d at 1554 ("The hypothetical negotiation requires the court to envision the terms of a licensing agreement reached as the result of a supposed meeting between the patentee and the infringer at the time infringement began.") Mr. Gemini has also provided a number of factors he used in comparing the Basix Agreement to the hypothetical negotiation between Vertical and Interwoven. (Id. at 17-18). Given this factual foundation, Mr. Gemini determined that the Basix Agreement is the most relevant license available.
Interwoven's argument that Mr. Gemini's testimony should be precluded because the Basix Agreement is not comparable, while unsurprising, directly contravenes Federal Circuit precedent. The degree of comparability between an existing license and a hypothetical license is an issue to be measured through cross-examination, not by preclusion. ActiveVideo Networks v. Verizon Communications, 694 F.3d 1312, 1333 (Fed. Cir. 2012). Similar to the present case, in ActiveVideo the defendant challenged plaintiff's expert's reliance on two agreements as royalty benchmarks, including one agreement that did not involve the patents-in-suit or any of the technologies at issue in the case. Id. The ActiveVideo court rejected defendant's 702 challenges, finding that the degree of comparability of these agreements was a factual issue "best addressed by cross examination and not by exclusion." Id.; see also Calouri, 2012 U.S. Dist. LEXIS 25508, at *12.
Similarly, Interwoven may challenge the comparability of the Basix Agreements on cross-examination. Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., 2012 U.S. Dist. LEXIS 159794, at *12 (W.D. Pa. Nov. 7, 2012) ("[D]ifferences in features between the Intel Agreement and the hypothetical license [including the fact that it pertained to only one of the patents-in-suit] are 'more appropriately addressed by way of cross-examination than through exclusion.'); Calouri, 2012 U.S. Dist. LEXIS 25508, at *14 ("[T]he Court is unpersuaded that Heath's reliance Case3:10-cv-04645-RS Document177 Filed06/03/13
on the Bosch Agreement is not reliable simply because it includes licensing rights to two patents not at issue in this case.").
The majority of Interwoven's cited case law addresses damages awarded after a jury or bench trial and are therefore inapposite. See, e.g., LaserDyamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012); ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010); Minks v. Polaris Indus., Inc., 546 F.3d 1364 (Fed. Cir. 2008). The other cases are similarly inapplicable. In AVM Technologies, for example, the court declined to preclude the expert's opinion without hearing live testimony. AVM Techs., LLC v. Intel Corp., 2013 U.S. Dist. LEXIS 1163, at *10 (D. Del. Jan. 4, 2013). Additionally, in both AVM Techs. and DataQuill, the expert reports contained no explanation or analysis as to how the licenses at issue were comparable and relevant to the reasonable royalty analysis. AVM Techs., 2013 U.S. Dist. LEXIS 1165, at *9-10; DataQuill 2012 U.S. Dist. LEXIS 53164, at *14.
Here, Mr. Gemini has explained his factual bases for using the Basix Agreement as part of his analysis:
Q. Why do you choose to use [the Basix] agreement as part of your analyses?
A. Because it's a license that I considered as of the time the hypothetical negotiation related to the SiteFlash product.
Q. How is it related to the SiteFlash product?
A. My understanding is that what was being licensed to Basix related to the SiteFlash product, used the technology of SiteFlash in it is my understanding.
(Gemini Dep., Exhibit 9 at p. 119:15-25; see also Gemini Decl., Exhibit 7, ¶¶ 44-50.) Because the Basix Agreement that Mr. Gemini relied upon in his report is sufficiently comparable to the license that the parties would have negotiated in a hypothetical negotiation, his reliance on it is proper. While Interwoven may argue otherwise in its cross-examination of Mr. Gemini, its arguments are insufficient to preclude Mr. Gemini's entire testimony.
CONCLUSION
For the reasons stated above, Vertical respectfully requests that the Court deny Interwoven's motion.
Respectfully submitted,
/s/ Vasilios D. Dossas
VASILIOS D. DOSSAS (Pro Hac Vice) dossas@nshn.com NIRO, HALLER &NIRO 181 West Madison, Suite 4600 Chicago, IL 60602-4515 Telephone: (312) 236-0733 Facsimile: (312) 236-3137 MARK V. ISOLA (SBN 154614) misola@rehonroberts.com REHON &ROBERTS, APC 830 The Alameda San Jose, CA 95126 Telephone: (408) 494-0900 Facsimile: (408) 494-0909 Attorneys for Vertical Computer Systems, Inc.
FOR THE NORTHERN DISTRICT OF CALIFORNIA
INTERWOVEN, INC.,
Plaintiff,
v.
VERTICAL COMPUTER SYSTEMS, INC.,
Defendant.
Case No. 3:10-cv-04645-RS
VERTICAL'S OPPOSITION TO INTERWOVEN'S MOTION TO EXCLUDE THE TESTIMONY OF JOSEPH GEMINI
DATE: JUNE 20, 2013 TIME: 1:30 P.M.
DEPT: COURTROOM 3 JUDGE: HON. RICHARD SEEBORG
Case3:10-cv-04645-RS Document177 Filed06/03/13 Page1 of 24
VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
TESTIMONY OF JOSEPH GEMINI− CASE NO. 3:10-CV-04645-RS
TABLE OF CONTENTS
Page
I. INTRODUCTION .............................................................................................................. 1
II. RELEVANT FACTS.......................................................................................................... 2
III. LEGAL STANDARD......................................................................................................... 4
IV. ARGUMENT...................................................................................................................... 6
A. Mr. Gemini's Testimony will Help the Jury ........................................................... 6
B. Mr. Gemini's Testimony Regarding Lost Profits is Admissible............................. 6
1. No Acceptable Non-Infringing Substitutes Exist ....................................... 8
2. Vertical has the Manufacturing and Marketing Capability to Meet the Demand for the Patented Product ............................................ 9
3. Mr. Gemini Applied a Proper Profit Rate................................................. 11
C. Mr. Gemini's Reasonable Royalty Analysis is Proper.......................................... 13
1. Mr. Gemini's Royalty Base was Proper Because the TeamSite Platform and LiveSite Products use the Patented Technology ................. 14
D. The Basix Agreement is the Most Relevant and Comparable License................. 16
V. CONCLUSION................................................................................................................. 19 Case3:10-cv-04645-RS Document177 Filed06/03/13 Page2 of 24
VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
TESTIMONY OF JOSEPH GEMINI− CASE NO. 3:10-CV-04645-RS
TABLE OF AUTHORITIES
Page(s)
CASES
ActiveVideo Networks v. Verizon Communications, 694 F.3d 1312 (Fed. Cir. 2012)................................................................................................17
Apple, Inc. v. Motorola, Inc., 2012 U.S. Dist. LEXIS 105387 (N.D. Ill. May 22, 2012) .......................................................11
AVM Techs., LLC v. Intel Corp., 2013 U.S. .................................................................................................................................18
Calouri v. One World Techs., Inc., US Dist. LEXIS 25508 (C.D. Cal. Feb. 27, 2012).............................................................16, 17
Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., 2012 U.S. Dist. LEXIS 159794 (W.D. Pa. Nov. 7, 2012) .......................................................17
Dataquill Ltd. v. High Tech Comp. Corp., 887 F.Supp 2d 999 (S.D. Cal. 2011)..................................................................................15, 16
Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).................................................................................................1, 5, 6, 8, 11
DSU Med. Corp. v. JMS Co., Ltd., 296 F. Supp. 2d 1140 (N.D. Cal. 2003) .................................................................................5, 6
Hebert v. Lisle Corp., 99 F.3d 1108 (Fed. Cir. 1996)..................................................................................................13
Honeywell International, Inc. v. Universal Avionics Systems Corp., 488 F. 3d 982 (Fed. Cir. 2007)...................................................................................................5
Illinois Tool Works, Inc. v. MOC Prods. Co., Inc., 2012 U.S. Dist. LEXIS 116471 (S.D. Cal. Aug. 17, 2012) .........................................11, 12, 13
IP Innovation LLC v. Red Hat, Inc., 705 F. Supp. 2d 687 (E.D. Tex. 2010).....................................................................................16
Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).................................................................................................................11
LaserDynamics, Inc. v. Quanta Comp., Inc., 694 F.3d 51 (Fed. Cir. 2012)........................................................................................14, 15, 18
Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009)..........................................................................................14, 15
Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387 (Fed. Cir. 2003)............................................................................5, 8, 11, 13, 14
Minks v. Polaris Indus., Inc., 546 F.3d 1364 (Fed. Cir. 2008)................................................................................................18
Oracle Am., Inc. v. Google, Inc., 2011 U.S. Dist. LEXIS 136172 ...........................................................................................9, 11
Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978) ...........................................................................................1, 7, 9
ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010)..................................................................................................18
Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538 (Fed. Cir. 1995)..............................................................................7, 9, 10, 16, 17
Siemens Med. Sols. USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d 1269 (Fed. Cir. 2011)..................................................................................................6
State Indus. Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573 (Fed. Cir. 1989)..................................................................................................9
Techsearch, LLC v. Intel Corp., 286 F.3d 1360 (Fed. Cir. 2002)..................................................................................................5
US Gypsum Co. v. LaFarge N.Am. Inc., 670 F. Supp. 2d 737 (N.D. Ill. 2009) ...................................................................................9, 11
Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268 (Fed. Cir. 1985)........................................................................................6, 11, 12
STATUTES
35 U.S.C. § 284..........................................................................................................................6, 13
I. INTRODUCTION
Interwoven seeks to preclude Mr. Joseph Gemini, Vertical's damage expert, from testifying as to Vertical's entitlement to lost profits or the proper reasonable royalty rate. However, Interwoven's Motion to Exclude the Testimony of Joseph Gemini does not apply the standards provided in Fed.R.Evid. 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and fails to provide any basis for exclusion.
Interwoven does not challenge Mr. Gemini's expertise or qualifications, nor does it challenge the propriety of his principles or methods. Indeed, Mr. Gemini is well-qualified to testify in this case; and he has applied time-tested and consistently accepted methods of proving lost profits and reasonable royalties under the Panduit test and Georgia-Pacific factors. Instead, Interwoven's brief is riddled with factual argument that does not address the reliability or admissibility of Mr. Gemini's analysis or methodology. This argument includes attacking the testimony of Vertical's party witness, Mr. Valdetaro, the Chief Technical Officer. Interwoven's proposition that a damages expert may not rely on the testimony or information gleaned from a party officer is without merit. A party officer would indeed be most knowledgeable about Vertical's products and marketing and manufacturing capabilities.
However, the role of the Court under Rule 702 and Daubert is not to judge the reliability or correctness of the facts upon which Mr. Gemini bases his testimony. This is a function of the trier of fact, after Interwoven has challenged those facts through rebuttal evidence and cross-examination. Thus, for the reasons set forth below, Vertical respectfully requests that the Court deny Interwoven's motion.
II. RELEVANT FACTS
Vertical retained Mr. Gemini to assist in its damages assessment. He is a Certified Public Accountant licensed in the State of Illinois for over 25 years. (Gemini Decl., Exhibit 7 ¶ 5)1. He has testified in over fifty cases on damages, including patent cases. Id. at ¶ 4. In calculating damages for Vertical, he considered various sources of information including the pleadings, the patents-in-suit, interrogatory responses, financial data, deposition transcripts, and publicly available information. (Id. at ¶ 9; see also the attachments to Gemini Decl.). In addition, Mr. Gemini had numerous discussions with Luiz Valdetaro, the Chief Technical Officer of Vertical. (Gemini Decl., Exhibit 7 ¶ 9). Mr. Gemini prepared two reports on damages, his initial report, which Vertical served on December 12, 2012, and a supplemental report, served on March 30, 2013. Vertical has consolidated the reports verbatim into Mr. Gemini's Declaration, Exhibit 7. (Gemini Decl., Exhibit 7 ¶¶ 1-58 and ¶¶ 59-75, respectively). In his Declaration, Mr. Gemini delves into a thorough analysis of Vertical's entitlement to lost profits and reasonable royalties based on the facts in evidence.
Regarding lost profits, Mr. Gemini considered the demand and unique functionality of the patented products at issue in this case, TeamSite and SiteFlash. Id. at ¶¶ 29-36. He determined, based on discussions with Mr. Valdetaro, that the parties are the only competitors that provide such functionality. (Gemini Decl., Exhibit 7 ¶ 39; Valdetaro Decl., Exhibit 6 ¶¶ 8, 11). Mr. Gemini also based his analysis on the assumption that Vertical had the capacity to meet demand
1 For efficiency, Vertical has cited to Exhibits 1-25 corresponding to Vertical Computer Systems, Inc.’s Opposition to Interwoven Inc.’s Motion for Summary Judgment, all of which are attached to the Declaration of Vasilios D. Dossas in Support of Vertical's Opposition to Interwoven's Motion for Summary Judgment filed concurrently herewith. In addition, Vertical cites to the Declaration of Joseph Gemini, Vertical’s damages expert. The Declaration fully incorporates Mr. Gemini’s December 12, 2012 Expert Report and March 30, 2013 Supplemental Expert Report for ease of reference.
for the patented product. (Gemini Decl., Exhibit 7 ¶ 39). Again, he based this assumption on discussions with Mr. Valdetaro. (Valdetaro Decl., Exhibit 6 ¶ 12). For example, Mr. Valdetaro has stated that Vertical has the capacity to sell and service the SiteFlash product. Id. at ¶ 12. This would merely require hiring more staff as Vertical acquires more customers. Id. The fact that Vertical has not sold SiteFlash for some time does not change the competitive landscape nor Vertical's abilities. Vertical provides its other products to many large corporations and non-profit entities without a problem. Id.
Interwoven trumpets the fact that Vertical has not sold its SiteFlash system since 2004, arguing that this shows the unavailability of lost profits. On the contrary, this fact is powerful circumstantial evidence in favor of lost profits, in that it demonstrates the lack of acceptable non-infringing alternatives. It supports the conclusion that Vertical could not make any sales after 2004 because that is when Interwoven entered the market with the infringing TeamSite product. It supports a conclusion that the market in which Interwoven and Vertical compete is essentially a two-supplier market – Vertical and the infringers.
Microsoft Corp.'s SharePoint product is not a potential non-infringing substitute. Vertical sued Microsoft Corp. for infringement of its SharePoint products. The parties settled that litigation with Microsoft receiving a license under the patents-in-suit. (Gemini Decl., Exhibit 7, ¶ 39). But, as Mr. Valdetaro points out in his Declaration, Sharepoint does not have the functionality and does not compete with the parties' products. (Valdetaro Decl., Exhibit 6, ¶ 8; Gemini Decl., Exhibit 7, ¶39; see also Sengupta Dep., Exhibit 10 at 134:1-19).
Regarding reasonable royalties, Mr. Gemini has devoted most of his analysis to the widely accepted Georgia-Pacific factors. One important element of Vertical's proof is an agreement dated September 8, 2004 between Vertical and a company called Basix1. (Exhibit 24). This Agreement, despite Interwoven's protestations, is an arms-length transaction that Case3:10-cv-04645-RS Document177 Filed06/03/13 Page7 of 24
occurred at approximately the same time that Interwoven's infringement began, the date of the so called hypothetical negotiation. (Valdetaro Decl., Exhibit 6, ¶ 14).
The licensed products under the Basix 1 Agreement are "forums and calendar applications of SiteFlash," the Vertical product covered by the patents-in-suit. And, the royalty rate is 10%. Id. at ¶ 44. What happened later does not diminish these facts. The parties negotiated the license fully expecting that Basix1 would obtain funding and that it would introduce the Enterprise Knowledge Gateway (EKG) product that it intended to market. Id.
Interwoven asserts that Mr. Gemini has not made any attempt to apportion the damages to that part of the TeamSite and LiveSite products that uses the patented technology. But, the whole of these products uses the patented technology; and Interwoven uses the patented features to sell the TeamSite product and related components. Thus, contrary to Interwoven's assertions, Mr. Gemini has identified the smallest salable patent practicing unit. Copies of the Autonomy website show just that. Vertical has attached those as Exhibit 25; and the Declaration of Mr. Valdetaro identifies the language on this Exhibit which promotes the patented features. (Valdetaro Decl., Exhibit 6, ¶ 10). If anything, Vertical is entitled to application of the entire market value rule to obtain damages for convoyed sales associated with the TeamSite product.
Therefore, Interwoven's arguments regarding the sufficiency of the facts simply lack merit.
III. LEGAL STANDARD
Rule 702 of the Federal Rules of Evidence governs the admissibility of expert testimony in this case. It provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and Case3:10-cv-04645-RS Document177
methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Fed. R. Evid. 702.
Because the admission of expert testimony is a procedural matter, the law of the Ninth Circuit Court of Appeals governs the admission of expert testimony in the present patent action. Techsearch, LLC v. Intel Corp., 286 F.3d 1360, 1376-77 (Fed. Cir. 2002); Honeywell International, Inc. v. Universal Avionics Systems Corp., 488 F. 3d 982, 994 (Fed. Cir. 2007). Under Rule 702 and Daubert, the trial court acts as a "gatekeeper" to determine "whether the reasoning or methodology underlying [an expert's] testimony is scientifically valid and whether that reasoning or methodology can properly be applied to the facts at issue." Daubert, 509 U.S. at 592-93. The Court's role under Rule 702 also includes determining whether the expert possesses some specialized knowledge such that his or her testimony will be helpful to the trier of fact and, if so, whether that knowledge arises from reliable methods applied in a reliable manner. Daubert, 509 U.S. at 590-91. This gatekeeper function is limited and is not intended to supplant the adversary system or the role of the jury. DSU Med. Corp. v. JMS Co., Ltd., 296 F. Supp. 2d 1140, 1147 (N.D. Cal. 2003) (citations omitted).
A Rule 702 Motion is not the appropriate vehicle to argue about the reliability of the facts in evidence. See Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387, 1392 (Fed. Cir. 2003). The Federal Circuit has affirmed that it is not the court's role to determine the accuracy of the fact's underlying an expert's testimony:
Defendants confuse the requirement for sufficient facts and data with the necessity for a reliable foundation in principles and method, and end up complaining that [the expert's] testimony was not based on '"reliable facts." The parties disputed many of the facts relevant in determining a reasonable royalty . . . . When, as here, the parties' experts rely on conflicting sets of facts, it is not the role of the trial court to evaluate the correctness of facts underlying one expert's testimony.
Id.
IV. ARGUMENT
A. Mr. Gemini's Testimony will Help the Jury
Interwoven fails to address the second prong of Daubert, namely whether the disputed testimony of the expert will be helpful to the jury. Mr. Gemini possesses specialized knowledge that will allow his testimony to aid the trier of fact. Daubert, 509 U.S. at 592-93. Mr. Gemini is a certified public accountant. He has a bachelor's degree from Western Illinois University with a major in accounting and a Masters of Business Administration from DePaul University with a major in finance. (Gemini Decl., Exhibit 7, ¶ 5). Over the years, Mr. Gemini has done auditing work, valuations of intellectual property, and consulting and expert work in the area of litigation damages. Id. He has testied as an expert numerous times over his career, including patent cases in federal courts in California. Id. He is well qualified to testify as a damages expert in this case and will offer testimony that will help the jury.
B. Mr. Gemini's Testimony Regarding Lost Profits is Admissible
Under 35 U.S.C. § 284, the Court "shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use of the invention by the infringer." Vertical need prove lost profits only to a reasonable probability; "t is well settled that proof of lost profits need not be absolute." Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268, 275 (Fed. Cir. 1985). To recover lost profits, Vertical must show that, "but for the infringement, [it] would have made additional profits." Siemens Med. Sols. USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d 1269, 1287 (Fed. Cir. 2011). However, in order to show lost profits, a patent holder need not negate every possibility of a purchaser deciding to buy a different product or foregoing the purchase altogether. DSU Med. Corp.., 296 F. Supp. 2d at 1148 (citing State Indus. Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577 (Fed. Cir. 1989)).
Case3:10-cv-04645-RS Document177 Filed06/03/13 Page10 of 24
Interwoven improperly argues that Mr. Gemini does not establish "causation in fact" of lost profits. However, the Federal Circuit has held that "[c]ausation of lost profits 'is a classical jury question.'" Versata Software, Inc., 2013 U.S. App. LEXIS 8838, at *19 (Fed. Cir. May 1, 2013) (quoting Brooktree Corp. v. Advanced Micro Devices, Inc., 977 F.2d 1555, 1578 (Fed. Cir. 1992)). Under Rule 702, Vertical must only show that Mr. Gemini has used reliable methodologies in his calculation, and that he applied these calculations to the facts of the case. Fed.R.Evid. 702.
Interwoven also argues incorrectly that the lost profit analysis requires two separate showings: (1) a "threshold" showing that the patent holder would have made and sold the products "but for" the infringement, and (2) a showing that the Panduit factors are present. (Dkt. No. 168-3 at 6). However, Interwoven misinterprets the law governing the lost profits analysis. There is no threshold requirement that the patentee meet a threshold requirement of showing "but for" causation. Rather, the Panduit test serves as a useful, albeit non-exclusive, way for a patentee to make a "but for" showing, namely whether a patent owner would have made the sales but for the infringement. Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1545 (Fed. Cir. 1995) ("A showing under Panduit permits a court to reasonably infer that the lost profits claimed were in fact caused by the infringing sales, thus establishing a patentee's prima facie case with respect to 'but for' causation."). Thus, although Interwoven argues that Mr. Gemini failed to establish "but for" causation, Interwoven admits that Mr. Gemini has addressed the Panduit factors. (Dkt. No. 168-3 at 9). This is all that is required.
To prove "but for" causation, Vertical must establish (1) a demand for the patented product, (2) an absence of acceptable non-infringing substitutes, (3) the manufacturing and marketing capability to exploit the demand, and (4) the amount of profits it would have made. Rite-Hite Corp., 56 F.3d at 1546 (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575
Case3:10-cv-04645-RS Document177 Filed06/03/13 Page11 of 24
F.2d 1152 (6th Cir. 1978)). Interwoven does not dispute that there was a demand for the patented product. (It cannot – the sales it has made alone proves this factor.) Therefore, Vertical must only demonstrate that Mr. Gemini addressed each of the factors (2), (3), and (4) under reliable methodology, as required by Daubert.
1. No Acceptable Non-Infringing Substitutes Exist
Interwoven avers that Mr. Gemini failed to establish the absence of non-infringing substitutes. However, Interwoven's arguments improperly challenge Mr. Gemini's conclusions, not his methodology. Mr. Gemini analysis is based on the assumption that there are no acceptable, non-infringing substitutes that existed in the market:
I understand that Vertical believes most CMS (Content Management Systems) in the market, in on way or another, infringe the patents-in-suit. I understand from Vertical that the SharePoint 2007 product licensed under the patents-in-suit by Microsoft does not compete in the CMS market.
Interwoven chose to provide versions of its TeamSite product that included the infringing capabilities. Interwoven sales of its versions prior to 6.0 had been slowing, as indicated by the Interwoven 10-Ks. It would seem that the prior versions of TeamSite were not acceptable alternatives.
(Gemini Decl., Exhibit 7, ¶ 39). The basis of this assumption is provided in the text of Mr. Gemini's report and listed in Exhibit B to his report. (Id. at ¶¶ 9-10). Of course, Interwoven disagrees with Mr. Gemini's opinions regarding the absence of non-infringing substitutes; however, "it is not the role of the trial court to evaluate the correctness of facts underlying one expert's testimony." Micro Chem., 317 F.3d at 1392 (finding that the trial court properly found plaintiff's damages expert's testimony admissible even though it was based on plaintiff's version of the contested facts).
Contrary to Interwoven's assertion, Mr. Gemini need not prove the nonexistence of adequate, non-infringing substitute during the relevant time period because he is only testifying on damages. The type of technical knowledge and skill required to prove that no non-infringing alternatives exist is outside the range of Mr. Gemini's expertise. See Micro Chem., 317 F.3d at 1392 (affirming that damages expert's testimony was admissible even though he relied on the statements of others and did not undertake an independent investigation of the industry or personally review the parties' financial records.). Instead, Vertical will proffer evidence that no non-infringing substitutes existed, as it is so entitled. Oracle Am., Inc. v. Google, Inc., 2011 U.S. Dist. LEXIS 136172, at **7-8 (Nov. 28, 2011). Interwoven's objections to Mr. Gemini's testimony are more properly addressed at trial on cross-examination or by presenting evidence rebutting the facts upon which his analysis is based. See US Gypsum Co. v. LaFarge N.Am. Inc., 670 F. Supp. 2d 737, 742-43 (N.D. Ill. 2009).
Interwoven also argues that, even where there is a presence of acceptable non-infringing substitutes, Mr. Gemini could have satisfied the second Panduit factor by providing a market share analysis. However, because Mr. Gemini's testimony is based on the absence of non-infringing substitutes, a market share analysis is not required. State Indus., Inc., 883 F.2d at 1576-77.
2. Vertical has the Manufacturing and Marketing Capability to Meet the Demand for the Patented Product
Interwoven argues that there is no evidence that Vertical had the capacity to meet demand. Again, it applies an improper standard, arguing that Vertical must be selling products that practice the patents-in-suit. However, sitting en banc, the Federal Circuit has stated that "[w]hether a patentee sells its patented invention is not crucial in determining lost profits damages." Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1548 (Fed. Cir. 1995) (en banc). And, as the Federal Circuit recently provided, the patentee "need not have actually sold [a competing product] during the damages period to show demand for the patented functionality,"
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VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
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particularly where, as here, the infringer eroded the market for the patentee's product during the damages period. Versata, 2013 U.S. App. LEXIS 8838, at *24.
Versata is factually similar to the case at bar. There, the infringer challenged the jury's award of lost profits. Id. at *19. It argued that the patentee was not entitled to lost profits because the patentee had not made any sales of its patented software, "Pricer," during the damages period, which started in 2003. Id. at **23-24. During trial, the patentee showed that it had made 82 sales of Pricer between 1995 and 1998. Id. at *23. It made no sales after 2001, two years before the damages period began. Id. In the present case, the market for the patentee's product also disappeared when the Interwoven began selling the infringing software. Id. at *24. The Federal Circuit found the jury's award proper, finding the patentee need not have actually sold its product during the damages "particularly given the economic reality that [the defendant] had eroded the market for Pricer through bundling [the infringing invention] into its own software." Id. This is precisely the case here, and Mr. Gemini properly addressed this in his analysis.
Mr. Gemini provided that Vertical had the capacity to meet the demand. (Gemini Decl., Exhibit 7, at ¶ 39). He stated, in relevant part, that Vertical had the personnel to develop, train, test and market the SiteFlash product during 2002 to 2004. Id. Interwoven argues that the evidence does not support his conclusion because Vertical had at most six or seven people working on the development and maintenance of SiteFlash. (Dkt. No. 168-3 at 11). However, Vertical ignores Mr. Gemini's statements that Vertical also had 4 to 5 personal working in marketing, Vertical also used independent marketers, and that Vertical had the ability to employ Now Solutions employees to perform necessary services for the SiteFlash product sales. (Gemini Decl., Exhibit 7, ¶ 39). (Now Solutions is a subsidiary of Vertical.) Furthermore, Mr. Gemini has based his analysis on the understanding that the SiteFlash product is easier and less labor intensive to service and support than TeamSite, and, therefore, requires less personnel than those employed by Interwoven. Id. These conclusions are all based on the testimony of Mr. Valdetaro or the discussions with him. Interwoven's disagreement with these facts is not a basis to exclude Mr. Gemini's testimony. See Micro Chem., Inc., 317 F.3d at 1392; US Gypsum Co., 670 F. Supp. 2d at 742-43.
Interwoven cites Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152 (1999) and Apple, Inc. v. Motorola, Inc., 2012 U.S. Dist. LEXIS 105387 (N.D. Ill. May 22, 2012) to support its argument that an expert may not rely on testimony from a party source to support its conclusions. However, neither of these cases supports this proposition, and this argument is in direct contravention of the well-established law under Fed.R.Evid. 702 and Daubert. In Kumho, the Supreme Court affirmed the district court's exclusion of an expert based on his unreliable methodology, not the facts underlying this methodology. Kumho, 526 U.S. at 153-54. In Apple, the Court excluded both parties' experts' because, in addition to using flawed methodology, the experts did not apply the same approach that they "would have been required by the applicable professional standards to use to deal with an identical issue outside the litigation context." 2012 U.S. Dist. LEXIS 105387, at 18. Here, Mr. Gemini's method of obtaining information relating to Vertical's business operations and manufacturing capabilities comprised interviewing the individual with the most knowledge, Vertical's Chief Technology Officer. If Interwoven has any concerns about bias, "it should make its arguments on cross-examination [at trial]." Oracle Am., 2011 U.S. Dist. LEXIS 136172, at **9-10.
3. Mr. Gemini Applied a Proper Profit Rate
Mr. Gemini properly applied a 26% profit rate to calculate lost profits. "A patent owner can compute his lost profits directly, through his anticipated profit margin, or indirectly, through use of the infringer's profit margin." Illinois Tool Works, Inc. v. MOC Prods. Co., Inc., 2012
U.S. Dist. LEXIS 116471, at *28 (S.D. Cal. Aug. 17, 2012) (citations omitted). And indeed, lost profits need only be proven to a "reasonable probability." Yarway Corp., 775 F.2d at 275. "Although the exact amount of lost profits cannot be precisely fixed, fundamental principles of justice require us to throw the risk of any uncertainty upon the wrongdoer instead of upon the injured party." Id. at 276 (internal citations omitted). Contrary to Interwoven's arguments, Mr. Gemini determined this rate came not only from the best evidence of projected profits, the GIS business plan, but also from discussions with Mr. Valdetaro. (Gemini Decl., Exhibit 7, ¶ 39). Therefore, Interwoven's argument that the 26% rate is not tied to the facts of this case is simply incorrect. Mr. Gemini took this 26% rate from a business plan dated July 2004, which is just prior to the date Interwoven's infringement began. Id. In addition, as Mr. Gemini stated in his deposition, the GIS plan "provides an indication of the expected profitability for products that used the technology of the patents." (Gemini Dep., Exhibit 9 at p. 117:14-21.) In addition, Mr. Valdetaro discussed with Mr. Gemini further relevant information regarding SiteFlash, including development costs and sales and services costs. (Gemini Decl., Exhibit 7, ¶ 39).
Interwoven's argument that the forecasted profit rates did not materialize actually supports Vertical's entitlement to lost profits. Mr. Gemini based his analysis on the assumption that, had Interwoven not infringed Vertical's patents, Vertical could have expected profits at the rate of 26%. If Vertical had experienced profits in the projected amount, as Interwoven argues it should, Vertical could not have collected damages for lost profits due to Interwoven's infringement at all. Thus, the absence of sales/profits by Vertical supports the conclusion that Interwoven's infringement drove it out of the market.
Interwoven again tries to discredit the testimony of Mr. Valdetaro, Vertical's Chief Technology Officer. As explained above, a Rule 702 motion is not the proper vehicle for resolving the disputed facts; rather, Interwoven's argument goes to the weight of the evidence,
not its admissibility. In fact, Interwoven's cited case law supports this proposition. In Illinois Tool Works, Inc., the damages expert based his lost profits damages calculation on the assumption that the plaintiff would have captured 50% of the defendant’s sales of the accused products. 2012 U.S. Dist. LEXIS 116471, at **21-22. The basis for this assumption was an estimate provided by the plaintiff''s Director of Technology. Id. The court found the expert's lost profits testimony admissible, if based on the underlying factual assumption that the plaintiff held 50% of the market share. Id. at 22 (citing Micro Chem., Inc., 317 F.3d at 1392) (holding that defendant's concerns with regard to the expert's testimony go to the weight and not its admissibility).
Like Illinois Tool Works, Mr. Gemini makes assumptions based on Vertical's evidence. Unsurprisingly, Interwoven disagrees with these facts. However, Interwoven's disagreement with Mr. Gemini's conclusions does not support precluding Mr. Gemini's testimony. Accordingly Mr. Gemini bases his lost profit analysis on sound principles and methodology, and thus is admissible.
C. Mr. Gemini's Reasonable Royalty Analysis is Proper
Mr. Gemini's report includes a calculation of a reasonable royalty, which is the minimum basis for damages guaranteed to a patentee under 35 U.S.C. § 284. Mr. Gemini's reasonable royalty analysis follows a well-accepted methodology for determining a reasonable royalty, namely applying the Georgia Pacific factors to the facts of this case in a hypothetical negotiation at the time infringement began.
The Federal Circuit has held that "[t]he amount of damages based on a reasonable royalty is an issue of fact." Micro Chem., Inc. v. Lextron, Inc., 317 F.3d at 1394. "The correct measure of damages is a highly case specific and fact-specific analysis." Hebert v. Lisle Corp., 99 F.3d 1108, 1119 (Fed. Cir. 1996). The Federal Circuit has also stated that a reasonable royalty may be measured as a percentage of a variety of different numbers. See, e.g., Fromson, 853 F.2d 1568, 1578 (Fed. Cir. 1988) ("The royalty may, for example, be measured as a percentage of Western's gross or net profit dollars, or as a set amount per infringing plate sold, or as a percentage of the gross or net price received for each infringing plate"). "The hypothetical negotiation tries, as best as possible, to recreate the ex ante licensing negotiations scenario and to describe the resulting agreement. In other words, if infringement had not occurred, willing parties would have executed a license agreement specifying a certain royalty payment scheme." Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). The hypothetical negotiation "necessarily involves an element of approximation and uncertainty." Id. at 1326.
The Federal Circuit has consistently approved of an experts use of a hypothetical negotiation utilizing the Georgia Pacific factors to estimate a reasonably royalty. See, e.g., Micro Chem., Inc., 317 F.3d at 1393. Mr. Gemini has addressed each of these factors in his report. Like its arguments concerning Mr. Gemini's lost profit analysis, Interwoven again challenges Mr. Gemini's conclusions. However, these conclusions do not undermine Mr. Gemini's well-reasoned methodology and relate to the weight or Mr. Gemini's testimony, not its admissibility. Interwoven may challenge his conclusions at trial and present contrary evidence through its own experts. Ultimately, Interwoven's arguments rest on a fundamental misunderstanding of the analysis performed by Mr. Gemini.
1. Mr. Gemini's Royalty Base was Proper Because the TeamSite Platform and LiveSite Products use the Patented Technology
Interwoven argues that Mr. Gemini uses an improper royalty base under LaserDynamics, Inc. v. Quanta Comp., Inc., 694 F.3d 51, 67-68 (Fed. Cir. 2012), because Mr. Gemini has not identified the smallest salable patent practicing unit and has thus failed to apportion the damages to that part of the TeamSite and LiveSite products that use the patented technology. However,
the entire market value rule does not apply in this scenario and, even if it does, the patented technology drives the demand for the Teamsite and LiveSite products.
As stated above, the Federal Circuit has stated that the reasonable royalty may be measured as a percentage of any variety of different numbers, including the gross or net price from each infringing product. See Fromson, 853 F.2d at 1578-1579. The entire market value rule is a "narrow exception to the general rule that royalties are awarded based on the smallest salable patent-practicing unit." Versita 2013 U.S. App. LEXIS 8838, at *31-32 (citing LaserDynamics, Inc., 94 F.3d at 67). It applies if an infringer sells a patented product, but the patent only relates to a part of the product sold. Id. If this is the case, a patent owner can only claim damages on the entire market value of the product sold, if "the patent-related feature is the basis for customer demand.'" Lucent Techs., Inc., 580 F.3d at 1336 (citing Rite-Hite, 56 F.3d at 1549).
Here, Mr. Gemini did not apply the entire market value theory. The whole of Interwoven's Teamsite and LiveSite products use the patented technology, and Mr. Gemini has cited advertising materials that support this conclusion. (Valdetaro Decl., Exhibit 6 ¶ 10; Gemini Decl., Exhibit 7, ¶¶ 33, 53, 62-64). Thus, contrary to Interwoven's arguments, Mr. Gemini has identified the "smallest salable practicing unit." Therefore, Mr. Gemini need not have apportioned damages.
However, even though Mr. Gemini has not applied the entire market value theory in his calculations, he has assumed that the patented technology drives the demand for TeamSite and LiveSite. (Gemini Decl., Exhibit 7, ¶¶ 32-33, 53). This assumption is supported by the facts and data in this case. (Valdetaro Decl., Exhibit 7, ¶ 10).
As Interwoven duly noted in its motion, Mr. Gemini's testimony was similarly challenged in Dataquill Ltd. v. High Tech Comp. Corp., 887 F.Supp 2d 999, 1027-28 (S.D. Cal. 2011). Case3:10-cv-04645-RS Document177 Filed06/03/13
There, the defendant argued that the entire market value rule was not sufficiently addressed in Mr. Gemini's report because Mr. Gemini did not tie the patented feature to the basis for customer demand. Id. The court found that Mr. Gemini cited articles showing that the patented feature was important to the defendant's ability to compete in the market, and this was sufficient evidence from which a jury could find that the entire market value rule had been satisfied. Id. Therefore, the court declined to exclude his testimony using the total revenue of the accused products as the royalty base. Id. Here, Mr. Gemini has done just that. As provided above, he has based his testimony on the importance of the patented features to customer demand for the accused products.
Interwoven also cites IP Innovation LLC v. Red Hat, Inc., 705 F. Supp. 2d 687 (E.D. Tex. 2010) to attack Mr. Gemini's analysis. Judge Rader, Chief Judge of the Federal Circuit and sitting by designation as the presiding judge, preliminarily excluded opinions that applied the entire market rule because he found the supporting evidence to be insufficient. Id. at 689-90. However, the court invited additional evidence and a revised report. Id. at 691. Eventually, Mr. Gemini did testify at trial, so Interwoven's citation does little to discredit Mr. Gemini's report.
For these reasons, Mr. Gemini's use of the total revenue from TeamSite and LiveSite sales is proper and admissible.
D. The Basix Agreement is the Most Relevant and Comparable License
"Comparable license agreements are those that are 'clearly linked to the economic demand for the claimed technology'" and that "provide relevant information about the value of the license to the patent-in-suit." Calouri v. One World Techs., Inc., US Dist. LEXIS 25508, at *11 (C.D. Cal. Feb. 27, 2012). The Basix Agreement is clearly comparable because, as Mr. Gemini provided in his report, it involved a license to technology that practices the patents-in-suit. (Gemini Decl., Exhibit 7, ¶¶ 44-48). In addition, the Basix Agreement is dated September 8, 2004, around the time Interwoven's infringement began. Rite-Hite, 56 F.3d at 1554 ("The hypothetical negotiation requires the court to envision the terms of a licensing agreement reached as the result of a supposed meeting between the patentee and the infringer at the time infringement began.") Mr. Gemini has also provided a number of factors he used in comparing the Basix Agreement to the hypothetical negotiation between Vertical and Interwoven. (Id. at 17-18). Given this factual foundation, Mr. Gemini determined that the Basix Agreement is the most relevant license available.
Interwoven's argument that Mr. Gemini's testimony should be precluded because the Basix Agreement is not comparable, while unsurprising, directly contravenes Federal Circuit precedent. The degree of comparability between an existing license and a hypothetical license is an issue to be measured through cross-examination, not by preclusion. ActiveVideo Networks v. Verizon Communications, 694 F.3d 1312, 1333 (Fed. Cir. 2012). Similar to the present case, in ActiveVideo the defendant challenged plaintiff's expert's reliance on two agreements as royalty benchmarks, including one agreement that did not involve the patents-in-suit or any of the technologies at issue in the case. Id. The ActiveVideo court rejected defendant's 702 challenges, finding that the degree of comparability of these agreements was a factual issue "best addressed by cross examination and not by exclusion." Id.; see also Calouri, 2012 U.S. Dist. LEXIS 25508, at *12.
Similarly, Interwoven may challenge the comparability of the Basix Agreements on cross-examination. Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., 2012 U.S. Dist. LEXIS 159794, at *12 (W.D. Pa. Nov. 7, 2012) ("[D]ifferences in features between the Intel Agreement and the hypothetical license [including the fact that it pertained to only one of the patents-in-suit] are 'more appropriately addressed by way of cross-examination than through exclusion.'); Calouri, 2012 U.S. Dist. LEXIS 25508, at *14 ("[T]he Court is unpersuaded that Heath's reliance Case3:10-cv-04645-RS Document177 Filed06/03/13
on the Bosch Agreement is not reliable simply because it includes licensing rights to two patents not at issue in this case.").
The majority of Interwoven's cited case law addresses damages awarded after a jury or bench trial and are therefore inapposite. See, e.g., LaserDyamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012); ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010); Minks v. Polaris Indus., Inc., 546 F.3d 1364 (Fed. Cir. 2008). The other cases are similarly inapplicable. In AVM Technologies, for example, the court declined to preclude the expert's opinion without hearing live testimony. AVM Techs., LLC v. Intel Corp., 2013 U.S. Dist. LEXIS 1163, at *10 (D. Del. Jan. 4, 2013). Additionally, in both AVM Techs. and DataQuill, the expert reports contained no explanation or analysis as to how the licenses at issue were comparable and relevant to the reasonable royalty analysis. AVM Techs., 2013 U.S. Dist. LEXIS 1165, at *9-10; DataQuill 2012 U.S. Dist. LEXIS 53164, at *14.
Here, Mr. Gemini has explained his factual bases for using the Basix Agreement as part of his analysis:
Q. Why do you choose to use [the Basix] agreement as part of your analyses?
A. Because it's a license that I considered as of the time the hypothetical negotiation related to the SiteFlash product.
Q. How is it related to the SiteFlash product?
A. My understanding is that what was being licensed to Basix related to the SiteFlash product, used the technology of SiteFlash in it is my understanding.
(Gemini Dep., Exhibit 9 at p. 119:15-25; see also Gemini Decl., Exhibit 7, ¶¶ 44-50.) Because the Basix Agreement that Mr. Gemini relied upon in his report is sufficiently comparable to the license that the parties would have negotiated in a hypothetical negotiation, his reliance on it is proper. While Interwoven may argue otherwise in its cross-examination of Mr. Gemini, its arguments are insufficient to preclude Mr. Gemini's entire testimony.
CONCLUSION
For the reasons stated above, Vertical respectfully requests that the Court deny Interwoven's motion.
Respectfully submitted,
/s/ Vasilios D. Dossas
VASILIOS D. DOSSAS (Pro Hac Vice) dossas@nshn.com NIRO, HALLER &NIRO 181 West Madison, Suite 4600 Chicago, IL 60602-4515 Telephone: (312) 236-0733 Facsimile: (312) 236-3137 MARK V. ISOLA (SBN 154614) misola@rehonroberts.com REHON &ROBERTS, APC 830 The Alameda San Jose, CA 95126 Telephone: (408) 494-0900 Facsimile: (408) 494-0909 Attorneys for Vertical Computer Systems, Inc.
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