Damages law, and testimony of financial experts, changed by Oracle v Google decisions

Oracle v Google is over for now, leaving its mark on BV, and damages law

Oracle America, Inc. v. Google Inc., No. C 10-03561 WHA (April 10, 2012)

After more than two weeks of trial and deliberations, the jury rendered a verdict of noninfringement on all counts in the epic Oracle v. Google litigation. More importantly, on May 29, the district court denied Oracle’s request for a judgment as a matter of law, finding “ample” evidence to support the jury’s decision and dismissal of claims. The next day, the judge also ruled that the Java application programming interfaces (APIs) were not subject to copyright.

“Software is algorithms, and that is mathematics, and it's wrong, totally wrong, to let math be patented. These patents should never have been issued,” concluded one blogger.

Appraisal experts were challenged five times. Whatever you think of this legal decision (and of course Oracle has promised to appeal the rulings), the case has also produced five Daubert opinions.  Key takeaways include:

• When applying the entire market value of any asserted technology, the expert “must in every case” apportion damages between the patented and unpatented features of the technology;
• Current patent law requires only a patent-by-patent apportionment, rather than claim-by-claim (as the court found in one of its prior orders);
• Consumer and market share surveys are not “inherently unreliable,” but may become so when the experts (as in this case) “artificially force” the participants or the data to a desired outcome; and
• Until they track larger datasets, current patent value studies do not inspire a high level of confidence in their predictive power.

This final case is the most interesting to financial experts, perhaps, because it involved Daubert challenges to the independent appraiser appointed by federal district Judge William Alsup. “Far from complicating the jury’s decision on damages,” the judge wrote, in his decision, “the testimony of a 706 expert would assist the jury by providing a neutral explanation and viewpoint,” particularly when “both sides have taken such extreme and unreasonable positions regarding damages.”

Google disagrees. Google succeeded twice in convincing the court to strike substantial portions of the expert’s opinion for failing to comply with the entire market value rule and for failing to apportion the damages between the patented and unpatented features of the technology at issue. In particular, in its first opinion, the court “strongly” advised that the calculation of any patent damages in this case should start with the “real world” negotiations between Sun Microsystems and Oracle (Oracle’s predecessor to the Java mobile technology). Adjustments could then account for several factors, including the validity of the asserted claims (as opposed to the asserted patents), as well as the traditional 15 factors set forth in the Georgia-Pacific framework.

In these most recent proceedings, Google challenged the court-appointed expert for assuming that, during the parties’ hypothetical negotiations, they would have equated the value of the intellectual property in suit (in-suit IP) with the entire Java portfolio of patents. Although the expert began with the parties’ 2006 negotiations, he did not move onto an apportionment analysis. Instead, the expert offered three “economic reasons” to support his conclusion that a 12% royalty rate was appropriate.

However, the court set these aside, and reiterated its prior orders in the case. That is, the hypothetical license “must be tailored to the amount and type of infringement that actually occurred” and that “the reasonable royalty must compensate for the infringing features, but not for the infringing ones.” In so holding, the court relied on recent Federal Circuit precedent, including ResQNet.com v. Lansa, Inc., 594 F.3d 860 (2010), which held that “at all times, the damages inquiry must concentrate on compensation for the economic harm caused by the infringement of the claimed invention.”

Accordingly, the court struck those portions of the expert’s report pertaining to his second and third explanations and denied the Daubert motion pertaining to his first without prejudice, thereby leaving the parties to argue the issue further.

And Oracle didn’t like the expert, either. Oracle also disputed the court-appointed expert’s calculation of copyright damages under Daubert. In his analysis, the expert relied on the same figures for Android-related expenses that Google’s expert used in his damages report. Google’s expert derived these expenses from an Android profit and loss statement that calculated traffic acquisition costs and operational costs, including those for sales, marketing, product management, and engineering.

Oracle challenged the experts’ reliance on the P&L statements and sought to preclude both the Google and the court-appointed expert from offering any testimony about Google’s Android-related expenses in calculating copyright damages, which would result in lowering such estimates by approximately $700 million. To support its claims, Oracle offered three reasons. First, the Google expert did not independently verify the P&L figures. Second, he relied on the hearsay of the Google analyst for their verification. Third, Google had not disclosed this analyst as a witness for trial.

In response, Google said that it had disclosed other witnesses who could lay the proper foundation for verifying the P&L expenses. It also cited case law from the Ninth Circuit, which permits deductions from overhead when the expenses were “of actual assistance in the production, distribution, or sale of the infringing product.”

Based on this precedent, the court denied Oracle’s first challenge to the experts’ use of the P&L statement without prejudice. As for Oracle’s second and third challenges, its proposed remedy—preventing any testimony based on the P&L statements—was too drastic and prejudicial. “Here, it is clear that Android’s gross revenue through 2011 was not entirely profit attributable to the allegedly infringed material,” the court said.

Up next: Google’s third attempt to disqualify Oracle’s damaged expert under Daubert. Stay tuned …