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Jun 15

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Federal Circuit leaves large damage award stand

The Federal Circuit affirmed a $391 million damage award in Versata Software, Inc. v. SAPAmerica, Inc., No. 2012-1029, -1049 (Fed. Cir. May 1, 2013). In reviewing the damage portion of the ruling, one cannot help but wonder about the damages calculation strategy that the defendant employed.

The Federal Circuit summarized the parties and the infringement as follows:

“In 1995 and 1996, Versata both commercialized its hierarchical pricing engine and filed a patent application covering the invention. The commercial embodiment was a software called “Pricer,” and it received praise as a “breakthrough” that was “very innovative. … The praise for Pricer was borne out in its sales. Between 1995 and 1998, Pricer customers included many large companies—called “Tier 1” companies at trial—such as IBM, Lucent, Motorola, and Hewlett-Packard. Pricer Tier 1 customers generated an average of $5 million in revenue and $3 million in profit for Versata. Versata sold Pricer either as a package with other Versata software or as a bolt-on addition to enterprise systems offered by companies like SAP. …

Before SAP launched its new software, it stated the planned software would be like Versata’s Pricer. When SAP ultimately released its software in October 1998, it bundled the hierarchical pricing capability into its full enterprise software to discourage the use of bolt-on products like Pricer.

Following the announcement and launch of SAP’s new hierarchical pricing engine, Pricer sales faltered. Versata’s win-rate on sales offerings of Pricer dropped from 35 percent to 2 percent. While Versata retained many of its previously-won Pricer customers, Versata decided to discontinue heavy investment in marketing because SAP had destroyed its market. Versata maintained Pricer as a product offering, but made no new sales as SAP’s bundled software took hold.”

For background, the Federal Circuit nicely summarized relevant damage principles as follows:

“Lost-profits damages are appropriate whenever there is a “reasonable probability that, ‘but for’ the infringement [the patentee] would have made the sales that were made by the infringer. A showing under the four-factor Panduit test establishes the required causation. These factors include: “(1) demand for the patented product, (2) absence of acceptable noninfringing alternatives, (3) [capacity] to exploit the demand, and (4) the amount of profit [the patentee] would have made.” [Citations omitted]

The Federal Circuit’s damages analysis and related case facts are interesting for the following:

1. The defendant claimed that the first Panduit test had been failed because plaintiff had not made any sales. This argument was rejected. Although the Federal Circuit’s analysis was much more lengthy, the essence is that the defendant cannot complain about plaintiff’s failure to sell products, when such failure was largely caused by the infringement itself.

2. Defendant’s damage expert chose only to critique the plaintiff’s calculation, and did not offer a competing calculation. Defendants do this frequently, but I find this a dangerous strategy. The jury found liability, and accepted the only lost profits calculation that they had. The Federal Circuit analyzed the details of the plaintiff’s lost profits calculation, and also found it to be sufficiently reliable.

3. Because the lost profits calculation used a market share reduction approach (instead of seeking lost profits for all of defendant’s sales), the remaining sales earned a reasonable royalty. This “split damage” calculation approach is becoming more common. The Federal Circuit ratified this multiple damage calculation approach, which apparently was not challenged by the parties.

4. The reasonable royalty was determined largely by taking defendant’s fully-paid (lump-sum) $2 million license for a similar product. Plaintiff converted this license to a per-license royalty based on actual sale results. The per-license royalty was then applied to the infringing sales. This math should not have surprised defendant. The trial and appellate courts both found nothing wrong with this conversion process, and the royalty damages that flowed from it.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

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