Rembrandt v. Facebook: District Court Excludes Damage Expert Where Expert Failed to Apportion Damages to Patented Features in Accused Product

Rembrandt Social Media, LP ("Rembrandt") filed a patent infringement action against Facebook alleging that Facebook infringed two of its patents, U.S. Patent No. 6,415,316 ("the '316 patent) and U.S. Patent No. 6,289,362 ("the '362 patent").In 2009, Facebook introduced two new features to its website called BigPipe and Audience Symbol. Rembrandt's expert admitted that the alleged infringement of the patents-in-suit is because of to the introduction of these two features in 2009. Rembrandt's expert also admitted that Facebook does not infringe without BigPipe and Audience Symbol features.

As explained by the district court, "BigPipe, introduced in Fall 2009, is a web page acceleration and optimization computer program developed by Facebook to increase the speed at which certain web pages are delivered from Facebook's servers to the user's web browser. BigPipe takes a web page and divides it into portions known as "pagelets" using a certain piece of computer code12 to specify each pagelet." In addition, "Audience Symbol, introduced in June 2009, is a small icon displayed next to stories on various webpages on Facebook's website. The symbol signifies the third-party users, or "audience," allowed to view a particular story. Rembrandt alleges that display of Audience Symbol violates both the '316 and '362 patents."

Facebook moved to exclude Rembrandt's damage expert with respect to the royalty rate and the royalty base. The district court explained that "Facebook attacks the royalty base on four grounds: (1) use of Facebook's entire revenue stream as the starting point for the royalty base violated the Entire Market Value Rule("EMVR"), which allows a patentee to recover "based on sales for an entire apparatus having several features, but only one patented feature" so long as the patentee shows the entire revenue stream is attributable to the infringing features;16 (2) the expert apportioned revenue based on features not causing the alleged infringement; (3) the surveys determining each feature's worth exclude important revenue-producing features; and (4) the "importance" of features is improperly equated to some percentage of Facebook's revenue. Furthermore, Facebook attacks the royalty rate on three grounds: (1) the upper bound was calculated using the same four features as the royalty base; (2) the lower bound was calculated using incomparable licenses; and (3) the final royalty rate was arbitrarily selected."

After citing the relevant Daubert concepts, the district court addressed the merits of Facebook's contentions. The district court first found that Facebook's attack on the royalty base as violating the EMVR missed the mark because "Rembrandt's expert did not use the entire value of Facebook as the royalty base. Mr. Malackowski began his calculation of the royalty base with Facebook's entire revenue, but he then performed two separate apportionments. The EMVR applies when an expert performs no apportionment, instead using the entire value of a product as the royalty base."

However, the district court found that Facebook's second attack on the expert report was fatal. "In calculating the royalty base and rate, Mr. Malackowski failed to apportion Facebook's revenue to BigPipe and Audience Symbol--the features actually causing the alleged infringement. In apportioning revenue based on Timeline, News Feed, Groups, and Photo/Video Sharing, Rembrandt's expert claims damages "far in excess of the contribution of the claimed invention to the market" and thus claims "more than the damages adequate to compensate for the infringement.' Cornell University, 609 F.Supp.2d at 283-84."

The district court also noted that Rembrandt claimed its expert calculated damages, as the Federal Circuit requires, down to the smallest salable patent-practicing unit, and thus apportioning any further is impractical and unnecessary. The district court also found that this argument was not persuasive. "Awarding Rembrandt damages based on the revenue stream attributable to Timeline, News Feed, Groups, and PhotoNideo Sharing would award Rembrandt much more than "the use made of the invention by the infringer." Oracle America, Inc. v. Google Inc., 798 F.Supp.2d 1111, 1115 (N.D. Cal. 2011). In order to determine the revenue actually attributable to Facebook's use of the invention, Mr. Malackowski needed to apportion further. Of course, the smallest salable infringing unit must be the starting point for the royalty base, but the Federal Circuit has not held "that no further apportionment is ever necessary once the smallest salable unit is determined." Synetix Design Solutions, Inc. v. Synopsys, Inc., 2013 WL 4538210 (N.D. Cal. 2013). The smallest salable unit must be closely tied to the patent to suffice, and further apportionment is required "even when the accused product is the smallest salable unit...if the smallest salable unit is still a multi-component product encompassing non-patent related features." Id. For example, in Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2004), the Federal Circuit held that the fact that one feature of a computer program called "Outlook" infringed did not mean that the sale of Outlook could thus become the royalty base. Even though the multi-component Outlook program was the smallest salable unit in that case, "the use of a saleable unit greater than the patented feature is going to introduce Uniloc [EMVR] error when the patented feature is a 'date picker' [in the Outlook program], whether the saleable unit is a computer loaded with 'Outlook' or simply 'Outlook.'" AVM Technologies, LLC v. Intel Corp, 2013 WL 126233 at *3 (D. Del. 2013) (discussing Lucent, 580 F.3d at 1301). Similarly, allowing Rembrandt's expert to use as the royalty base the entire value of Timeline, News Feed, Groups, and Photo/Video Sharing--all of which can be used independently without infringing--while not using the value of BigPipe and Audience Symbol--the features that actually cause the alleged infringement--would be a mistake of the same kind as allowing Rembrandt's expert to use the entire value of Facebook."

Thus, the district also concluded that the royalty base was inappropriate because "Mr. Malackowski's apportionment does not adequately represent what Facebook would have been willing to pay to license the patents at issue. As Rembrandt's own expert, Dr. Jennifer Golbeck, has admitted, without BigPipe and Audience Symbol, the four features used as the royalty base--Timeline, News Feed, PhotoNide° Sharing, and Groups--do not infringe. In fact, those four features existed before the introduction of BigPipe and Audience Symbol in 2009, and continue to exist without infringing on Facebook's mobile platform. If Facebook did not pay Rembrandt to license the patents, it could have continued to use those four features without infringing. Thus, the claim that Facebook would pay, in a hypothetical negotiation, the entire revenue stream attributable to Timeline, News Feed, PhotoNideo Sharing, and Groups runs contrary to what common sense indicates a reasonable licensor would pay for the patents at issue. Instead, Facebook would have paid the worth of the features actually causing the infringement--BigPipe and Audience Symbol."

The district court also concluded that the apportionment based on these four factors impacted the royalty rate. "Mr. Malackowski's improper apportionment based on those four features, furthermore, affects the calculation of a royalty rate. In calculating the royalty rate, Mr. Malackowski set the upper bound--that is, the most that Facebook would have been willing to pay for the license--by taking into account the results of the three market surveys above, stating that 21.99% represents the portion of Facebook's revenue attributable to the technologies at issue. Accordingly, because Mr. Malackowski uses the incorrect apportionment to determine not only the also the royalty rate, both portions of his reasonable royalty analysis are unreliable. Nor is the flaw in Mr. Malackowski's expert opinion merely a dispute of fact; the flaw is in the nature of the analysis. By failing to use the portion of the revenue stream attributable to the infringing features, the entirety of his damages analysis is unreliable."

Accordingly, the district court excluded Rembrandt's damage expert for trial.

Rembrandt Social Media, LP v. Facebook, Inc., Case No. 1:13-cv-158 (E.D. Va. Dec. 3, 2013)