Versata Software, Inc., et al. v. SAP America Inc, et al., Nos. 2012-1029, -1049 (Fed. Cir. May 1, 2013)
Affirming a damages award of $345 million, the Federal Circuit, in an opinion by Judge Rader, underscored the importance of preserving objections to expert testimony. Versata alleged SAP infringed its patents concerning computer-based product pricing. The technology enabled efficient factoring of variables such as product type and customer type, size, and geographic location, called ‘hierarchical pricing.’ Versata commercialized its invention in 1995 and applied for the first patent in 1996.
Versata enjoyed strong sales initially. In October 1998, SAP launched its hierarchical pricing product as part of its enterprise software, and the evidence showed that Versata’s sales plummeted, to the point that Versata stopped making significant marketing expenditures. In 2007, Versata sued SAP for infringement.
The case was tried twice. The first jury awarded $138 million in damages, and the trial court granted SAP a new trial on damages. Before the second trial, SAP adopted a software patch to avoid infringement, but the second jury found that the infringement was continuing, and awarded $345 million in damages, comprised of $260 million in lost profits and a $85 million royalty award. SAP appealed, inter alia, the denial of its JMOL motion on damages.
The lost profits issue invoked the four-factor Panduit test, which requires showing: (1) demand for the patented product, (2) absence of acceptable noninfringing alternatives, (3) capacity to exploit the demand, and (4) the amount of profit the patentee would have made. Panduit Corp v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978).
Under the guise of arguing insufficiency of the evidence, SAP argued that Versata’s “but for” model was inconsistent with sound economic principles so that the expert’s opinion should have been excluded from evidence, and that Versata’s expert did not adhere to the Panduit framework for lost profits because he used multiple markets thereby rendering his analysis “legally defective.”
The court rejected these arguments as improperly raised, opining that SAP was questioning the admissibility of Versata’s expert testimony and whether his damages model was properly tied to the facts of the case. Such questions, the court held, should be resolved under the framework of the Federal Rules of Evidence and through a challenge under Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), and SAP did not appeal the denial of a Daubert motion. The court held that a ‘sufficiency of evidence’ argument is the improper context for deciding questions of admissibility of expert testimony.
SAP raised other arguments about the sufficiency of the damages evidence that the court considered on the merits and rejected. SAP argued that Versata could not prove demand during the damages period, which began in 2003, because Versata stopped selling its product in 2001. The court held, however, that “[p]atentees may prove lost profits through presenting a hypothetical, ‘but for’ world where infringement has been ‘factored out of the economic picture’”, citing Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1350 (Fed. Cir. 1999). “While the hypothetical, but-for-world must be supported with sound economic proof, ‘[t]his court has affirmed lost profit awards based on a wide variety of reconstruction theories.’”
Because Versata proved demand for Versata’s product before SAP entered the market, including a 35% average win rate, the court found there was sufficient evidence of demand, noting that SAP’s expert admitted there was earlier demand for Versata’s product. Versata proved demand for the patented functionality during the infringement period from SAP’s documents and discovery of customers. While the patentee needs to be selling the item during the damages period, the court stated, that does not mean an item must have actually been sold, and Versata was engaged in ‘selling’ during the period. Also, the court held, the patentee does not need to prove demand for a particular embodiment of the patented functionality. “[T]he Panduit factors place no qualitative requirement on the level of demand necessary to show lost profits.” The court noted that SAP had the ability to cross-examine the damages expert and SAP’s expert had prepared an alternative lost profits analysis but SAP chose not to introduce it.
The court also rejected as contrary to the record SAP’s arguments that Versata did not prove the quantum of lost profits with reasonable probability, that Versata made assumptions about demand and price elasticity that are inconsistent with the real world, and that Versata did not account for other market forces that might have caused its alleged losses.
Versata’s expert looked at a pool of 480 large customers to whom SAP sold its product during the damages period, and then deducted the 45 who had previously licensed Versata’s product, leaving 435 potential customers. The expert then applied Versata’s 35% win rate as a starting point and adjusted for certain market pressures including an assumption that Versata would not have resumed sales at that high a rate. He ended up opining that Versata lost 93 sales. The expert concluded that the average sales price, including the initial sale and subsequent maintenance and consulting revenue, would average a bit more than $3 million per sale. The overall total was $285 million and the jury awarded $260 million.
The court found the expert adequately adjusted for market variables, costs, and price elasticity, and held that Versata made a prima facie showing of lost profits “and the burden shifted to SAP to prove that a different rate would have been more reasonable.”
Regarding the royalty award, the trial court had excluded the royalty calculation of Versata’s expert so Versata relied on the opinion of SAP’s expert, as modified on cross-examination. On direct, SAP’s expert testified to a hypothetical negotiation under Georgia Pacific, and opined that another software product offered by SAP, called Khimetrics, was comparable for damages purposes, that 12 customers had agreed to buy this add-on product, and that a lump-sum royalty of $2 million would be appropriate in this case.
On cross-examination, SAP’s expert testified the average price paid for Khimetrics was $333,000, and that a 40% royalty would be appropriate, resulting in a royalty per customer of $133,200. The expert agreed that, subtracting for sales covered in the lost profits analysis, SAP had made roughly 1300 infringing sales and that applying the Khimetrics royalty to the number of infringing sales (instead of the 12 buyers of Khimetrics) would result in damages of $170 million.
The court rejected SAP’s argument that this was an improper application of the entire market value rule, opining that the rule was never triggered because SAP’s expert did not base the royalty on all of SAP’s infringing sales but on the add-on that the expert deemed comparable to the patented technology. The jury, the court found, simply applied the royalty to a large number of infringing sales than SAP wanted, and the award was within the range encompassed by the record.
The court vacated as overbroad the trial court’s injunction that prohibited SAP from offering maintenance and support for any of the ‘infringing products.” SAP pointed out that the enjoined capability, defined as ‘the capability to execute a pricing procedure using hierarchical access of customer and product data’ represented only a fraction of the features contained in the infringing products. The court held that “SAP should be able to provide maintenance or additional seats for prior customers of its infringing products, so long as the maintenance or the additional seat does not involve, or allow access to, the enjoined capability.” The court directed the trial court to modify the injunction accordingly.