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Contents
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Michael J. Young, 
Nathan E. DiNatale,
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Valuations Insights, February, 2010 Microsoft Attacks $200M Award for Faulty Expert Survey and Royalty Rate i4i Ltd. Partnership v. Microsoft Corp., 2009 WL 2449024 (E.D. Tex.) Aug. 11, 2009 Microsoft attempts (attempts being the operative word) to overturn a multi-million dollar jury verdict for patent infringement by alleging insufficient expert damages evidence and improper application of the entire market value rule. Survey admissible, not hearsay. In 2007, the plaintiff sued Microsoft for infringing its patented invention for preserving XML editing capabilities (a method for processing and storing computer meta-codes). Microsoft's use of certain WORD 2003 products and all WORD 2007 products was infringing according to the plaintiff, and after a seven-day trial, the jury agreed, awarding $200 million damages to the plaintiff. Microsoft appealed on several issues, including damages. In particular, it asserted that a consumer/computer usage survey conducted by the plaintiff's damages experts was unreliable hearsay; and that it furnished insufficient proof for determining reasonable royalty and other damages calculations. On the first point, the court noted that the experts "extensively explained” the survey at trial, and that the results as well as the questionnaire were admitted into evidence. However, the "true” evidence supporting the plaintiff's damages calculations was the opinion of the plaintiff's primary damages expert, as supported by the expert who created the survey and collected the data. Both experts relied on the survey results. The court held that, "Therefore, the admissibility of the survey itself is not governed by the hearsay exceptions, but rather, Federal Rule of Evidence 703,” which permits otherwise inadmissible data or facts if they are probative and similar experts typically rely on them. On issues of unreliability, the court found that Microsoft had vigorously cross-examined both the survey designer and the plaintiff's chief damages expert. Thus, the court found that "any remaining complaints that Microsoft had about the survey concerned its weight and not its admissibility.” Reasonable royalty reliability. Microsoft next tried to attack the plaintiff's primary damages expert for his development of a reasonable royalty rate, citing the following three reasons: 1) Bad benchmark—the expert used XMetal pricing as the baseline for determining a reasonable royalty rate, Microsoft offered no evidence that such a method was unreliable, the jury properly assessed the benchmark data, and its use was supported by the Georgia-Pacific factors; 2) Improper Rule of Thumb—Microsoft also attacked the expert's use of the "25% rule of thumb” (the assumption in patent infringement cases that an inventor will generally receive 25% of the profit from licensing a patented device), once again, the court found that the jury appropriately weighed all the evidence; and 3) Manipulation of market value. Finally, Microsoft argued that comparing the plaintiff's damages calculations to Microsoft's total operating profits from the accused WORD products was the expert's "back door” attempt to get the entire market value theory of royalties to the jury. But the expert compared his $200 million calculations against total operating profit only as a "reasonableness check,” the court observed. Microsoft never objected to this use at trial, and the plaintiff never argued an "entire market value” theory to the jury. Thus, the expert's testimony was properly admitted and the court affirmed the $200 million damages award based on the expert's reasonable royalty calculations. Also notable: The court awarded an additional $40 million in enhanced damages due to the degree of Microsoft's infringement and attorney misconduct at trial, which compared the plaintiff to a "bad bank" seeking bailout money during the recent economic crisis. Microsoft has already appealed. |
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