Architects’ and engineers’ plans that predate AWCPA are protected by the Copyright Act

Valuators of professional firms many times run into complicated rights with respect to intellectual property. One esoteric issue relates to architectural drawings that predate the Architectural Works Copyright Protection Act (read about the extent of protections offered by the AWCPA here). Ron Coleman, in his blog Likelihood of Confusion, brought a case to our attention that reinforces the fact that copyright protections existed for architectural plans, as a whole, prior to AWCPA, even though others could legally use those same plans to build replica structures.

Background. Architect Scholz independently created house plans and registered them with the Copyright Office. Later Scholz agreed to design houses for a homebuilder. When that agreement terminated, the homebuilder unilaterally posted Scholz’s plans on the Internet in the form of a promotion. Scholz sued the homebuilder for copyright infringement, and the homebuilder’s defense was that the plans predated the AWCPA.

Nothing earth-shattering here, but the focus was directly on architectural plans that predate AWCPA, something analysts will encounter. The 2nd Circuit Court of Appeals ruled on August 15, in Scholz Design, Inc. v. Sard Custom Homes, LLC (Docket No. 11-3298), that AWCPA added to the copyright protections already enjoyed by architects, namely that their plans cannot be copied, as plans, without infringing, under the Copyright Act. (AWCPA added the protection against building the replica structure represented in a plan.)

Valuators looking at engagements involving architecture and engineering firms will benefit from the perspective of Ian Rusk, ASA, and Michael O’Brien, ASA, who presented on the topic during the BVR webinar Valuing Architecture and Engineering Firms.

A retrospective on the pretrial Daubert hearings in Apple v. Samsung

Apple, Inc. v. Samsung Electronics, Co., 2012 U.S. Dist. LEXIS 90877 (June 30, 2012) offers a great deal of insight into how each side subjected the more than 16 financial experts to dueling Daubert motions.

News flash: Appraisers can’t ignore the law when doing damages calculation. 

In its challenge to the defendant’s primary damages evidence, Apple argued that his apportionment of the defendant’s profits, derived from infringement of its design patents, was inconsistent with the federal remedy set forth in the Patent Act (35 USC § 289) and previously discussed in BVR’s IP Value blog.

The law entitles the holder of a design patent to an infringer’s entire profits without the need to split damages between the patented design and the product bearing the design. Unfortunately for Samsung, its expert witness argued for the remedy consistent with the federal standard for damages in the infringement of utility patents, which require any reasonable royalties or lost profits to be apportioned between the patented and unpatented features of the product; see, e.g., Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011)(available at BVLaw). Without any basis in law, the court found its expert’s apportionment of patent design damages unreliable and prejudicial, and excluded them.

A second challenge to Samsung’s expert was to his apportionment of damages related to Apple’s trade dress claims, arguing that his use of a consumer survey was unreliable and his methodology was generally unsound. The court summarily dismissed the first point, finding the survey data was the kind experts in the same field typically rely on.

However, the court found that neither the defendant nor its expert had cited “any evidence supporting their assertion that [his] calculations are based on a generally accepted, peer-reviewed method.” By contrast, the plaintiff had raised “serious doubts” about the reliability of the expert’s calculations, which contained several obvious math errors. Without providing any more specifics, the court excluded his apportionment analysis with respect to the plaintiff’s trade dress claims.

As a third and final challenge against this same rebuttal expert, the plaintiff sought to exclude his assertion that “demand for the patented features” of a product is required under the first prong of the four-part Panduit test, which establishes eligibility for damages (Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)). However, Panduit’s first prong simply requires a showing of demand for the patented product; as a result, the expert’s opinion that Panduit also required evidence of demand for the patented features was, again, contrary to law, and the court also excluded this portion of his testimony.

For its part, Samsung cited five grounds for excluding various aspects of the damages calculations by the plaintiff’s expert, as follows:

• Lost profits. The defendant claimed the plaintiff’s expert should have used a separate price elasticity study to account for certain market factors that contributed to Apple’s profits, such as its higher prices and consumer loyalty platform. However, in markets in which the parties are direct competitors—as is the case here—the lost profits remedy for utility patents does not require such a study, the court held. Further, the plaintiff’s expert did isolate the demand for Apple’s particular intellectual property rights at issue in the suit. “And in any event,” the court found, in denying this aspect of the defendant’s motion, “evidence of demand for the patented product as a whole is relevant to the first Panduit factor under a lost profits analysis.”
  
  
• Reasonable royalty. The defendant claimed the expert’s reasonable royalty calculations, using the income approach, was improper for four reasons.
  1. Apportionment. The expert attributed the entire premium value of Apple’s iPhone and iPad products to the asserted IP without due apportionment, as required by the Uniloc standard, the defendant argued. But this objection went to the weight and not the admissibility of the evidence, the court said, which also found the expert’s income approach was essentially sound
  2. Cost. The expert’s cost approach improperly used the defendant Samsung’s total gross profits for the loss period, the defendant said, but this went to the weight of the evidence as well. “While determination of a reasonable royalty is not based on an infringer’s profits,” the court emphasized, “an infringer’s profits are a relevant consideration under at least three Georgia-Pacific factors.”
  3. Unwilling licensee. The defendant took issue with the expert’s assumption that Apple would have been reluctant in negotiations, when the hypothetical standard requires assuming a prudent and willing licensee. The court disagreed, finding precedent permits consideration of a patentee’s “actual unwillingness to license” within the hypothetical negotiation framework.
  4. Comparable license. In attempting to establish a floor for his calculations, the plaintiff’s expert relied on one particular license, which he conceded was “not a comparable license to any of the Apple intellectual property in suit.” As a result, his reliance violated the federal standard requiring sufficient comparability among licenses used as the basis for a reasonable royalty calculation. See, e.g, ResQNet.com Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010). Accordingly, it excluded the expert’s opinion related to this one license. In the age of ktMINE, it’s difficult to comprehend an expert’s not thoroughly exploring a larger base of comparables.
• Critique of costs. In the rebuttal portion of his report, Apple’s expert claimed the plaintiff was entitled to a disgorgement of all the defendant’s profits related to the infringement and that it was the defendant’s burden to reduce this amount by a proper accounting for costs. To the extent the expert sought to critique the accuracy of the defendant’s accounting, the court said, his opinion was permissible. However, to the extent he sought to “instruct the jury as to [the defendant’s] burden of proof for establishing costs,” his opinion was improper attorney argument and inadmissible.
  
  
• Prenotice damages. Since any damages would be limited to the time after the defendant received actual notice of infringement, the plaintiff’s expert must subtract any prenotice damages from his calculations, the defendant said. This issue turned on a finding of fact regarding when the defendant actually received notice, however, and was not a proper ground for excluding the expert’s evidence under the Daubert standard, the court explained, denying this portion of the motion.
  
  
• Irreparable harm. In stating an opinion on whether the plaintiff had suffered irreparable harm from the infringement, its expert had also overstepped his bounds. Since this evidence was not relevant to any issue at trial, the court struck these portions of his testimony.

Facebook releases an update on customer counts and makeup

Valuation analysts doing fair value work for business combinations know how difficult it is to qualify and quantify customer relationships as an identifiable intangible. IP Value Wire can’t help but watch what is happening to Facebook, a company whose value is clearly tied to its customer relationships. More data was released last week on the makeup of Facebook customers; imagine tackling this engagement:

1. Facebook now has one billion active monthly users;
2. Facebook now has 600 million mobile users; and
3. The median age of the Facebook user is now 22 years old, down from 26 years old in July 2010.

The strategies for and pitfalls inherent in Valuing Customer Relationships is the focus of a November 29 BVR webinar.

Probability of success in defending IP is a major input into the value calculus

Perspective is everything when it comes to reviewing the patent system. The same statistic can be viewed as evidence that the system needs fixing (worldwide) and that it is behaving just fine, depending upon the propensity of the viewer.

Here’s an example. Sir James Dyson, inventor and entrepreneur most famous for his unique vacuum cleaners, speaking at a conference on innovation in the U.K., believes the system is tilted dangerously in favor of infringers. It costs too much to defend a patent, and the likelihood of success is no more than 18%. “The 82% [that lose legal disputes] have gone to all the trouble and expense of developing the technology and then some company comes along and rides on their coattails. It’s grossly unfair.”

And then there is a parallel article in ars technica, decrying what has happened to the U.S. patent system after the introduction of the patent-specific court, the U.S. Court of Appeals for the Federal Circuit (CAFC), in 1982. The article borrows a statistical review of the share of patents found valid and infringed on appeal from Innovation and Its Discontents, comparing, in effect (because the contrast is so great), pre- and post-CAFC results. Prior to the introduction of the CAFC, patents were upheld slightly over 20% of the time, on average. After the introduction of the CAFC, that average number jumped to over 60%. This is precisely what Dyson would like to see … but according to Timothy Lee in ars technica, that change in the U.S. is evidence of a “rogue” court that has “wrecked” the U.S. patent system.

The likelihood of success in defending a patent is critically important to valuators. Risk associated with the 20% probability is overwhelming compared to the 60%, and in either case, the expense of patent defense is daunting. As IP Value Wire often reinforces, value is directly dependent upon the willingness and wherewithal of the patent holder to defend the IP.