Following the jury’s $70 million lump-sum royalty damages verdict from July, the district court judge slashes Lucent’s award to $26 million, finding several shortcomings in Lucent’s damages position that the jury had accepted. This case deals with Lucent’s Day patent, called the “date picker” patent since it allows users to schedule appointments by clicking on the Outlook calendar.
First, the judge found that Lucent failed to properly apportion the value of the Day patent. Lucent’s damages expert, Ray Sims, attempted to calculate the profits attributed to the Day patent by multiplying the total Outlook licenses by the percent of users who use the feature (43%) times the percent of users who would not buy Outlook without the feature (7%), arriving at 3%, which leads to 3.3 million license sales. Using the full value of Outlook of $67 and a 76% profitability, this translates to an “expected foregone profit” of $139 million. The judge had previously warned Lucent about using the full $67 value, since Lucent could not show that the Day patent was the basis for consumer demand. The court had stated that “use as a proxy for value does not appropriately account for all the other unpatented features” and that “Lucent has not shown that it is entitled to include in the royalty base all $67 of revenue generated…” The court then adjusts the $67 downward, but (interestingly) not based on an apportionment, but instead based on the documentary evidence supporting the number itself.
Because Outlook is typically sold within Office, and because Microsoft does not attribute Office revenues to each program (Word, Excel, Powerpoint, and Outlook), the “price” for Outlook was at issue. Lucent’s expert used $67 for the stand-alone value of Outlook, despite Microsoft’s average per-unit revenues from Office (that includes Outlook) amounting to only $98. After examining the evidence, the court “concludes that Lucent’s attribution of $31 collectively to Microsoft Word, PowerPoint, and Excel is not based on sound economic or factual predicates” and that Mr. Sims’ support did “not provide substantial evidence that Outlook is worth $67 within Office.” The court concludes that at most 25% ($24) could be allocated to Outlook, leading to total profits at issue of $53 million.
The court then applies the methodology by Mr. Sims, which he called a “business realities” approach that concluded that the parties would agree on a royalty mid-way between their bargaining positions (Microsoft wanted to pay $0 while Lucent wanted the full profit amount). The court explicitly accepts this conclusion that the parties would meet at one-half the total profits at issue. This leads the court to arrive at a royalty of $26 million (half the profit amount of $53 million). And for those paying attention to prior IP Value Blog posts, yes that should ring familiar – it is a form of the Nash equilibrium, just called something different.
It is curious that the court would go through a discussion of the need to further apportion the total price of Outlook (which it concluded was $24) but then not attempt to do so. Any ideas?
Lucent Technologies, Inc. v. Microsoft Corporation, 07-CV-2000H (S.D. CA, November 10, 2011, Order) (Huff)