Damages Reports with Loss Profits : Non-Infringing Alternatives and Reasonable Royalty
Damages Reports with Loss Profits require a set of guidelines to meet, specially the absence of Non-Infringing Alternatives. Non-Infringing Alternatives are important when determining damages and what is called, the Panduit Test. Damages experts usually have two choices when calculating damages in intellectual property cases:
- • Loss Profits,
- • Reasonable Royalty
There are numerous cases where loss profits are computed, and how in some cases even arriving to a reasonable royalty might be confusing and complicated.
Patent Damages theories including some landmark cases like Apple Inc vs Motorola Inc, Fed. Cir 2014 or other specially citing “Extent of use” approach, where a proportion of a technology affects the value of certain technology.
One of the theories used in many damages reports or when following a hypothetical negotiations, or what is called Georgia-Pacific factor for reasonable royalties.
Indeed, reaching a reasonable royalty is far more complicated than simply computing and writing damages reports with loss profits. However Loss Profits require a test that needs to include (see https://www.fr.com/wp-content/uploads/2016/12/FINAL_Patent_Damages_12_01.pdf) :
For lost profits, “not infringed” means the hypothetical world in which the infringer did not use the technology at all in competition with the patentee. See Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1350 (Fed. cir. 1999) (quot- ing Aro, 377 u.S. at 507).
I will use a sample case from the Federal Circuit to see how Loss Profits were used to compute damages.
In Dkct #280 of Case 2:16-cv-00586-JRG-RSP , the magistrate judge analyzed motions and filed and order stating that:
Stingray, which entered the United States in 2010, is Music Choice’s only significant competitor. Stingray has three products in the United States relevant to Music Choice’s claims: (1) the Music TV App, which consists of VOD music programming, which Music Choice accuses of infringing the ’025 and ’045 VOD Linking Patents; (2) the “OSE2” version of Stingray’s UbiquiCAST system, which provides images corresponding to the music playing, which Music Choice accuses of infringing the ’025 and ’045 VOD Linking Patents; and (3) the “OSE1” version of its UbiquiCAST system, which only provides generic images and which Music Choice does not accuse of infringement in this case. (Dkt. No. 214, at 2).
What this mean is that the defendant, Stingray, attempted to convince the court that they have product that did not infringe on plaintiff’s patents and hence, loss profits analyst made by the expert, Dr. Ugone’s was wrong ( their products were Non-Infringing Alternatives)
Lessson #1 – Panduit Test
A panduit test is cited by the judge as follows:
The four-factor Panduit test requires the patentee to show: (1) demand for the patented product; (2) an absence of acceptable, non-infringing alternatives or substitutes; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of profit that would have been made. Panduit, 575 F.2d at 1156
This test then requires that basically, there is no an acceptable, non-infringing substitute to the patents in dispute.
Upon analyzing, the pleadings filed by Greenberg and Decher Law, Stingray and Music Choice attorneys, the judge states that:
Stingray questions Dr. Ugone’s application of Panduit factor 2, which is “the absence of acceptable non-infringing alternatives or substitutes.” Panduit, 575 F.2d at 1156. Stingray states that Dr. Ugone’s conclusion that “OSE1 is not an acceptable non-infringing substitute because of the ‘importance of the features and benefits enabled by the Visual Complement Patent’” is flawed
And concludes that, Dr. Ugone’s analysis is hence correct, and the alternatives presented by Stingray are just not appropriate.
The Court concludes that Dr. Ugone’s analysis of lost profits under the Panduit test is sufficiently reliable with respect to Liberty. Stingray has not sufficiently shown that Dr. Ugone’s analysis here is so unreliable that exclusion is warranted. Instead, the arguments presented by Stingray are better suited for a jury.
And obviously, the Daubert challenge made to Dr. Ugone’s report failed, and the court simply denied it.
Lesson #2 : Non-Infringing Alternatives
There are numerous cases where Non-Infringing Alternatives or NIA is determined by simply finding out if:
By Non–infringing alternatives, we mean that the infringer, without infringing the subject patent, could have made the same product and achieved an equal number of sales using that alternative.
Gain Processing is a decision that brought a lot of light when to use a reasonable royalty and when to use loss profits.
Grain Processing has made it more difficult for patent holders to claim lost profits damages, it is less well understood how Grain Processing has affected the incentives of companies to risk litigation by using patented technology (without a license) rather than to avoid infringement by using an economically inferior non-infringing technology.
This indeed brings the questions what would be a difference by example between both:
In the same case, apparently in March 2011, Music Choice charge $0.12 per residential subscriber, however due to competition brough by Stingray, decried i to $0.0931 and its competitor, Stingray offered i at $0.03 per residential subscriber, which seems to be working at a loss. Loss Profits is a simple computation.
What Dr. Ugone identified is hat $15.69 M in loss profits where associated o Liberty and AT&T.
Although, this price erosion and loss profits from 2014-2018 could have been affecting other clients as well, it is unknown, as all the damages reports are confidential and cannot be seen.
A simple computation indicates that, $60M could have been the loss of revenues, as the cost, could have been flat at $0.03 per subscriber.
Then, if a NIA existed and it was not mere speculation (from https://www.stout.com/en/insights/article/presidio-atc-new-insights-regarding-noninfringing-alternatives/) :
When an alleged alternative is not on the market during the accounting period, a trial court may reasonably infer that it was not available as a noninfringing substitute at that time. The accused infringer then has the burden to overcome this inference by showing that the substitute was available during the accounting period. Mere speculation or conclusory assertions will not suffice to overcome the inference. After all, the infringer chose to produce the infringing, rather than noninfringing, product. Thus, the trial court must proceed with caution in assessing proof of the availability of substitutes not actually sold during the period of infringement. Acceptable substitutes that the infringer proves were available during the accounting period can preclude or limit lost profits; substitutes only theoretically possible will not.
Assuming then that, a non-infringing alternative exists, which is this case would have been my patents, or Cloud to Cable, as :
- • Cloud to cable enables a visual component with audio and video,
- • Cloud to cable can be used for VOD or SVOD
- • Cloud to Cable has been tested and besides being a patent is a software device with implementation.
Clearly, Cloud to Cable does and creates all what Music Choices states and claims Stingray is doing.
However, Stingray MUST provide to the court that a NIA exists and a license was possible without infringing on it. This can be achieved with a licensing deal, in my opinion, and all Dr. Ugone’s analysis would be then with problems.
Then assuming only AT&T and LIBERTY, or $15.6M in damages, could translate to $10% royalty or $4.5M or even at 1% or $450k total losses, which would be a significant decrease and impact from this litigation.
Lesson #3 : Greenberg and Traurig $9M hole
It doesn’t matter how large is your attorney’s firm or how much you paid, they may dump you.
I contacted Greenberg and Traurig and presented them with my non-infringement alternatives back in 2018. I spoke with a few gentlemen but then radio silence. I still do not understand how strategically was not to discuss anything with me, after seeing all these rulings by the jugde.
Greenberg and Trauring billed $9M to Stingray for a few years of litigation and dropped them, or were fired, it is not clear to me what happened but, what the new lawyers from Stingray are saying is that on Dkt #339:
After nearly five years of litigating this lawsuit for Stingray and after collecting more than $9,000,000 in legal fees, Greenberg now seeks to withdraw as Stingray’s counsel of record at the same time this Court is understandably eager to get this case tried. Because of the timing of Greenberg’s Motion to Withdraw, Stingray is placed in an untenable position.
Clearly, Stingray is still holding a hot potato and may go to trial, or accept settlement that appears not to be of their liking.
Greenberg’s withdrawal at this moment in time would materially prejudice Stingray’s ability to prepare for and participate at trial. Indeed, while it will not take several years or millions of dollars—as it has thus far—it will take considerable time for replacement counsel to acquaint themselves with the case in a manner sufficient to assist Stingray in mounting a robust defense.
Lessons learned are:
- • Stay on top of all potential solutions, and outcomes,
- • Get lawyers from other firms, to work with the main firm, more expensive but who can keep checks and bounds,
- • It is more inexpensive to simply take a license to a patented technology than infringing, I bet if Stingray Digital would I found some patents that were alternative would have spent less than the in a license.
- •Now, the case is a total mess, and who knows what the outcome will be