When a jury returns its verdict, everyone involved, from the lawyers to the clients to the Court, has invested so many hours in the case that judges are loathe to disturb a jury verdict in any respect. It is therefore uncommon for a judge to uphold a jury’s findings on liability issues (which in patent cases with damage awards includes infringement and validity determinations in favor of a patentee) while rejecting the jury’s treatment of the damages issues. When it happens, though, it is noteworthy, if only as an example of a judge exercising the court’s gatekeeper function with respect to damages. This function is equally important in two respects: (1) determining what damages evidence the jury gets to consider; and (2) determining whether the jury properly considered that evidence. A recent decision out of the Southern District of New York, authored by Judge Jed Rakoff (whose rejection of SEC settlements with large banks was the subject of media interest in recent years) provides an interesting example of judicial intervention into the wavy seas stirred up by the application of current patent damages law in an actual trial setting.
On August 14, 2013, Judge Rakoff issued a comprehensive Memorandum Order (Dkt. No. 166) in the patent case styled Tomita Technologies USA, et. al (“Tomita”) v. Nintendo Co., Ltd., et. al (“Nintendo”) (S.D.N.Y. 11 Civ. 4256), disposing of cross-motions filed by the parties post-trial. The case had been tried to a jury earlier this year, with the jury finding in the patentee Tomita’s favor on liability and awarding $30.2 million in damages on March 13, 2013. That same day, the Court found that Nintendo’s infringement was not willful. Judgment in Tomita’s favor was entered the next day. (Mem. Order at 1.) Following entry of judgment, the parties filed post-trial motions with Nintendo seeking judgment as a matter of law or a new trial on liability, and remittitur or a new trial on damages in the alternative. Tomita’s motion sought to alter or amend the judgment “with respect to a number of issues related to its damages award and ongoing royalty payments.” (Mem. Order at 2.) In his Memorandum Order, Judge Rakoff addressed the issues raised by those motions, and decided to deny the majority of them, including all of Nintendo’s liability arguments. Importantly, however, Judge Rakoff did exercise his discretion and decided that the damages awarded to Tomita by the jury were “intrinsically excessive” and granted Nintendo’s motion for remittitur or a new damages trial. In rejecting the jury’s $30.2 million award, the Court fashioned a new set of choices for Tomita to consider: either accept a $15.1 million verdict or undertake a new trial limited to damages.” (Mem. Order at 19.) Tomita’s election was due on August 23, 2013. (Id. at 23)
While Nintendo surely welcomed the reduction of the award by half, the reduced award of $15.1 million was still much higher than the $2 million or so that Nintendo’s damages expert put forth at trial as a reasonable royalty amount. And while Tomita was surely disappointed at the haircut Judge Rakoff gave to the jury’s damages award, it was no doubt pleased that Judge Rakoff accepted its arguments regarding the use of Nintendo’s revenues from the sale of the 3DS handheld console as the royalty base. Some background: According to the Mem. Order, “the ‘664 patent is a patent relating to stereoscopic (or 3D) imaging technology” and “Tomita claims that Nintendo uses the ‘664 patent’s technology in the 3DS’s two outer cameras.” (Mem. Order at 2.) “The 3DS’s other applications, including its 3D display” and its core functionality as a handheld gaming device were not implicated by Tomita’s assertion of the ‘664 patent. (Id. at 2-3.) These facts were critical to the Court’s analysis of the jury’s damages award, as there very well may have been a different result for the parties had the infringing functionality been more central to the demand for the devices whose sales revenues constituted the royalty base.
At its core, the damages dispute centered on whether Tomita’s expert improperly used the “entire market value” (“EMV”) rule by using Nintendo’s 3DS revenues “as the royalty base for calculating the reasonable royalty owed to Tomita.” (Mem. Order at 16.) In ruling for Tomita on the question, Judge Rakoff agreed that the 3DS console reflected the “smallest salable patent-practicing unit” based on a number of considerations. (Id. at 17.) Because the revenues of the 3DS itself were properly considered as the royalty base, Tomita’s expert did not actually rely on the EMV rule, and therefore “[it] can provide no basis to reject the jury’s damages award.” (Id.) But while Tomita’s damages presentation at trial cleared that legal hurdle, the jury’s award amounting “to a royalty rate of just under 3 percent of the sales price of the 3DS” was “excessive” according to Judge Rakoff because: 1) Nintendo does not derive a profit from the sale of the 3DS console itself but rather from the sales of games and 2) the patented technology “was used only in two features…and thus was in some sense ancillary to the core functionality of the 3DS as a gaming system.” (Id. at 18-19.) Buttressing the Court’s findings was the evidence that: 1) many of the profit-generating 3DS games did not use the patented technology, and 2) “consumer reception for the patent-related features was mixed.” (Id.) Accordingly, Judge Rakoff found that the jury’s award “must have involved…excessive speculation” and represented an amount well higher than Nintendo ever would have agreed to in a hypothetical negotiation. (Id.)
In recent years, the Federal Circuit has given clear directives to District Court judges to take their “gatekeeper” roles seriously with regard to patent damages; and this case illustrates a well-regarded District Court judge exercising his authority in that regard. For litigants and their counsel, this case is also a testament to the value of persistence – for Tomita, persistence in putting forward a damages argument against stiff opposition, and for Nintendo, persistence in seeking judicial intervention even after an unfavorable jury verdict. With patent damages law remaining unsettled, both litigants and their counsel will need a measure of persistence to achieve the results they are seeking. A major objective of both sides in any patent case where damages is an issue is to utilize every opportunity to bring damages issues to the court’s attention, and to respectfully insist on obtaining reasoned rulings on those issues. Earlier is better, but as this decision illustrates, persistence can pay off even at a late hour in the case.
Finally, what of Judge Rakoff’s deadline that Tomita elect by August 23, between a new trial or acceptance of the remittitur figure of $15.1 million in damages? Tomita did not even wait until the Court’s deadline. Instead, on August 21st they filed a “Plaintiff’s Notice of Acceptance of Damages Award” rather than risk a new jury trial on damages. While Tomita’s decision to avoid that risk is unsurprising, it would have been interesting to see how Judge Rakoff would have dealt with a “new” jury award if it came in higher than his remittitur amount but lower than the original jury award. Of course, what would be interesting to outside observers is not something Tomita or Nintendo are concerned with. Their future is likely to include settlement discussions and a Federal Circuit appeal. For clients and their counsel in patent litigation, though, situations like this one are important to keep in mind as examples of a jury’s verdict not being the end of the case. Judges have the authority and duty to intervene to re-calculate patent damages when a jury’s verdict is based on speculation and an improper weighing of the evidence presented at trial. An unsuccessful defendant has the opportunity post-trial to convince the trial judge to reduce the verdict, and both parties must keep in mind the general importance of knowing when to quit when one is ahead – or as here, taking the sure money over another round in the damages game.