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,"
Case3:10-cv-04645-RS Document177 Filed06/03/13 Page13 of 24
VERTICAL'S OPPOSITION TO INTERWOVEN'SMOTION TO EXCLUDE THE
TESTIMONY OF JOSEPH GEMINI− CASE NO. 3:10-CV-04645-RS - 10 -
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.
