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Expert Witnesses Should Analyze the Georgia-Pacific Factors, Not Merely Recite Them

August 20, 2012

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Last Month at the Federal Circuit - September 2012

Judges: Prost, Mayer (dissenting), O'Malley (author)

[Appealed from: D. Conn., Judge Covello]

In WhitServe, LLC v. Computer Packages, Inc., Nos. 11-1206, -1261 (Fed. Cir. Aug. 7, 2012), the Federal Circuit adjudicated several issues related to the assertion of four patents by WhitServe, LLC (“WhitServe”) against Computer Packages, Inc. (“CPi”). Specifically, the Court upheld the jury’s finding that CPi infringed the four WhitServe patents and, with one exception, affirmed the jury’s finding that most of those patents’ claims were not anticipated. The Court, however, vacated the jury’s damages award and remanded for a new trial on damages. Finally, with regard to the cross-appeal of WhitServe’s sole principal and employee, Wesley Whitmyer, Jr., the Court affirmed the district court’s denial of sanctions against CPi and fees in Mr. Whitmyer’s favor.

WhitServe owns U.S. Patent No. 6,981,007 (“the ’007 patent”) and “the ’468 family” of patents: U.S. Patent Nos. 5,895,468 (“the ’468 patent”); 6,182,078 (“the ’078 patent”); and 6,049,801 (“the ’801 patent”). The ’468 family is directed to automating the delivery of professional services over the Internet, while the ’007 patent is directed to technology for backing up client data. WhitServe alleged that CPi’s software programs, operated by a CPi customer such as a law firm to generate and send reminders to its clients of upcoming patent or trademark annuity or maintenance fee deadlines, infringed the WhitServe patents. CPi answered with affirmative defenses and a counterclaim against WhitServe and Mr. Whitmyer seeking a DJ of noninfringement, invalidity, and unenforceability.

The primary factual disputes at trial were whether CPi’s products operated in a manner such that they fell within the ’468 family claims’ definition of “automatic,” and whether the ’007 patent was anticipated by prior art. The jury found that CPi failed to prove that any claims of the four WhitServe patents were invalid; CPi’s systems infringed the patents; the infringement was willful; and WhitServe was entitled to $8,378,145 in damages. The district court denied CPi’s post-trial motions seeking JMOL and/or a new trial. The district court also denied, dismissed, or failed to address WhitServe’s post-trial motions for a permanent injunction, a compulsory license, enhanced damages, attorneys’ fees, prejudgment interest, prejudgment remedy, and post-trial accounting. The district court further denied Mr. Whitmyer’s motion seeking fees and sanctions against CPi for asserting the counterclaim against him. CPi appealed, and WhitServe and Mr. Whitmyer cross-appealed.

Applying Second Circuit law, the Court affirmed the denial of JMOL on noninfringement because substantial evidence supported the jury’s verdict of infringement. The Court rejected CPi’s argument that its products did not operate “automatically” in the context of the ’468 family’s claims. Claim 1, for example, recited “software executing on [a] computer for automatically querying [a] database by . . . values attributed to each client reminder date field to retrieve a client reminder.” Slip op. at 7. CPi did not dispute the district court’s interpretation of “automatic”—a process that, once initiated, is performed by a machine without the need for human intervention. Instead, CPi argued that its products require the manual entry of a due date range during the execution of the querying process. Thus, because human intervention is needed for its products to perform the querying process, CPi argued that they do not meet the definition of “automatic” as used in the ’468 family’s claims. The Court disagreed, finding substantial evidence that the “querying process [in CPi’s products] does not start until the user enter[s] a date range and starts the process.” Id. at 10 (second alteration in original) (citation omitted).

Specifically, the Court pointed to WhitServe’s expert’s testimony that a query requires “a date range, so that you know what you’re searching for,” as evidence the jury could rely on to reach its verdict of infringement. Id. at 11. Thus, the Court affirmed the district court’s denial of CPi’s motion for JMOL of noninfringement.

The Court next affirmed the district court’s denial of JMOL on anticipation on most of the claims of the ’007 patent, but reversed-in-part, holding that no reasonable juror could have found claim 10 not anticipated in light of the only prior art upon which CPi relied, U.S. Patent No. 5,903,881 (“the Schrader patent”). WhitServe asserted that the Schrader patent was missing three elements of the ’007 patent claims: “(1) a central computer for transmitting client data to a client computer (required by all claims 1-15); (2) Internet-based data (required by claims 1-9); and (3) data conversion (required by claims 7-9 and 12-15).” Id. at 16. The Court eliminated asserted differences (2) and (3) because claim 10 did not recite them, and rejected the asserted difference (1) because “Schrader clearly disclose[d] a central computer in the form of the financial institution’s computer.” Id. Because no other contrary evidence in the record existed upon which WhitServe could rely, the Court held that “no reasonable juror could have found that claim 10 was not anticipated by the Schrader Patent.” Id. at 17.

The Court, however, found that CPi failed to develop a detailed evidentiary record of how the other claims of the ’007 patent were anticipated. The Court found an opinion by CPi’s expert, “which failed to articulate how the Schrader Patent anticipated the other claims’ specific elements, to be a far cry from the ‘overwhelming amount of evidence’ needed to . . . overturn the jury’s verdict.” Id. at 19. Similarly, the Court found that CPi failed to develop a record sufficient to answer the factual inquiries underlying an obviousness determination. Thus, the Court held that substantial evidence supported the jury’s verdict of no invalidity as to the remaining claims of the ’007 patent.

As to the damages award, the Court found the jury’s verdict unsupportable under either the reasonable royalty or the lost profit theory of infringement compensation. The Court first reviewed whether the $8,378,145 damages award could represent a reasonable royalty stemming from a hypothetical negotiation. CPi’s expert stated that there were 1,036,877 accused infringing transactions. In a factual dispute over the average service fee CPi charged for each infringing transaction, the Court sided with WhitServe’s calculation of $41 over CPi’s $15.69. The $41 figure represented company-wide average gross revenue per transaction across both infringing and noninfringing transactions. The Court arrived at a royalty base of $42-43 million, which would be multiplied with a royalty rate to arrive at a reasonable royalty amount.

The Court, however, did not find support in the record for the 16-19% royalty rate that WhitServe’s expert advanced. The Court discounted the value of WhitServe’s expert’s testimony advancing a 31.8% royalty rate based on a proposed, but unaccepted, license. That would incentivize patentees to artificially inflate the royalty rate by making outrageous offers that would never be accepted. Further, WhitServe’s expert arrived at the 31.8% royalty rate by using CPi’s $15.69 average gross revenue per transaction as a baseline, when WhitServe itself had argued against it for calculating the royalty base in favor of the $41 figure, which would yield a much lower royalty rate.

WhitServe also cited two lump-sum royalties, both in the $2-3 million range, that it successfully negotiated with CPi’s competitors as evidence that a 19% royalty rate was reasonable. But WhitServe did not explain how the lump-sum payments could be converted to a royalty rate. Thus, the Court reasoned, “the lump-sum agreements [were] not substantial evidence in support of the jury’s verdict.” Id. at 31. Further, the jury’s verdict of $8.3 million was over three times the average of the lump-sum royalties; the Court explained that there is “little evidentiary basis under Georgia-Pacific Factor 2 for awarding roughly three to four times the average amount in the lump-sum agreements in evidence.” Id. (quoting Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1332 (Fed. Cir. 2009)).

Next, WhitServe argued that the Georgia-Pacific factors supported the 19% rate. But the Court found that WhitServe’s expert, Dr. Shapiro, made several errors in his analysis. First, he used the 25% rule of thumb that the Court discarded in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed. Cir. 2011), as a starting point. Second, he did not explain how that rate should be adjusted up or down in light of the Georgia-Pacific factors. “He did not explain how much each factor affected the rate, however, and he testified that almost all factors justified an increase in the applicable rate, a few were neutral in terms of their impact, and none justified a decreased rate.” Slip op. at 32 (footnote omitted). Thus, the Court concluded, “the royalty rate suggested by Dr. Shapiro does not support the verdict because his testimony is conclusory, speculative and, frankly, out of line with economic reality.” Id. at 35.

The Court also found the jury’s verdict unsupportable under a lost profit theory because there was no evidence in the record to quantify the competitive harm that WhitServe allegedly suffered. The Court observed that the jury’s damages award must be the result of sheer surmise and conjecture, “divorced from proof of economic harm linked to the claimed invention and . . . inconsistent with sound damages jurisprudence.” Id. at 37 (quoting, Inc. v. Lansa, Inc., 594 F.3d 860, 868 (Fed. Cir. 2010)). Thus, the Court vacated the damages award and remanded for a new jury trial on damages.

The Court then considered WhitServe’s cross-appeal of the district court’s denial of its post-trial motions for a permanent injunction, a compulsory license, enhanced damages, attorneys’ fees, prejudgment interest, prejudgment remedy, and post-trial accounting. In each instance, the Court found the district court’s analyses of WhitServe’s motions cursory and thus inadequate. Accordingly, the Court vacated and remanded these district court rulings. Finally, the Court addressed Mr. Whitmyer’s cross-appeal of the district court’s denial of his motion seeking fees and sanctions against CPi for asserting the counterclaim against him. Although the Court considered CPi’s claims against Mr. Whitmyer “questionable,” the Court did not consider them sufficient to make the case exceptional. Id. at 48. Thus, the Court affirmed the district court’s denial of Mr. Whitmyer’s motion.

Judge Mayer dissented. In his view, the ’468 family of patents could not be infringed because they are all invalid under 35 U.S.C. § 101, as “directed to the abstract idea that it is useful to provide people with reminders of approaching due dates and deadlines.” Mayer Dissent at 1. Judge Mayer considered it appropriate to take up the eligibility issue not specifically raised by the parties because there had been significant changes in the law governing patent eligibility of claimed subject matter since the district court’s decision.

Summary authored by Karthik Kumar, Ph.D., student associate at Finnegan.