NDCA denies summary judgment and Daubert motions on lost profits and reasonable royalty; allows patentee's entire market value and comparable license theories

On July 18, 2013, Judge Seeborg of the Northern District of California issued an opinion in Interwoven, Inc. v. Vertical Computer Sys., Case No. CV 10-04645 RS (Doc. 191), in which the court denied Interwoven's motion for summary judgment concerning lost profits and reasonable royalties, and denied Interwoven's motion to exclude Vertical's damages expert, Joseph Gemini.

The first issue concerned Interwoven's motion for summary judgment concerning lost profits. Interwoven (the declaratory judgment plaintiff) argued that Vertical's lost profits theory was legally flawed because Mr. Gemini did not rely on proper evidence to support his conclusion that no acceptable noninfringing substitutes existed. The court disagreed, however, citing in particular Gemini's reliance on the CTO of Vertical, who provided information concerning the existence of substitutes. The court reasoned this was "not an 'end-run' around the expert witness requirements of Rule 26(a) ...." Slip op. at 16.

The court also addressed Vertical's two-supplier market theory for lost profits. The court observed that Vertical had advanced a theory that it was unable to make any sales following Interwoven's alleged infringement, and that this "supports the conclusion that [Vertical] was unable to compete with Interwoven's product in the relevant market." Id. The court decided this constituted a factual dispute precluding summary judgment.

Next, the court turned to Interwoven's motion for summary judgment concerning reasonable royalties, and once again denied it. The issue here centered on the smallest salable patent-practicing unit (SSU). Interwoven contended that the SSU was a component within the accused software product because this SSU component was sold as an add-on option to a version of the overall software product, and only later was it bundled into Interwoven's product. Vertical, in contrast, adopted a total revenue base theory for the entire software product, and not the add-on component. Vertical argued that the patented feature drove demand for the entire product.

The court refused to dismiss Vertical's theory. It found that Gemini's reliance on marketing materials and conversations with the same Vertical CTO was "relatively weak," but found it "sufficient to present a question of fact as to the extent of the use of those features. A jury must find whether the patented feature drove consumer demand such that application of the entire market value is appropriate." Slip op. at 18-19.

The court addressed Gemini's use of several allegedly comparable agreements. They were re-bundling and co-marketing arrangements between related parties that intended to work cooperatively with one another over a period of time, but according to the court no payment was ever made under the agreements. The court allowed use of these agreements because "there is no evidence that any license for the exact patents-in-suit was negotiated but not considered," distinguishing Laser Dynamics. The court noted that "Gemini based his conclusions on what he thought to be the best evidence available to him." Slip op. at 19. The court also indicated that the agreements were from the same time period and dealt with the patented technology. In addition, the court noted that Gemini had addressed how the hypothetical license would differ from the allegedly comparable agreements. The court concluded that using these agreements as the royalty rate starting point was not precluded as a matter of law.

Finally, the court relied on its analysis for summary judgment motions to deny the Daubert motion concerning Gemini's opinions.