Patent Watch: Versata Software, Inc. v. SAP Am., Inc.

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"[T]he Panduit factors place no qualitative requirement on the level of demand necessary to show lost profits."

On May 1, 2013, in Versata Software, Inc. v. SAP Am., Inc., the U.S. Court of Appeals for the Federal Circuit (Rader,* Prost, Moore) affirmed-in-part, vacated-in-part and remanded-in-part the district court's judgment that SAP did not infringe U.S. Patent No. 5,878,400, but infringed U.S. Patent No. 6,553,350, both of which related to computer-based product pricing, and the award of $260 million in lost-profits damages, $85 million in reasonable royalties, and the grant of a permanent injunction. The Federal Circuit stated:

Lost profits damages are appropriate whenever there is a "reasonable probability that, 'but for' the infringement, [the patentee] would have made the sales that were made by the infringer." A showing under the four-factor Panduit test establishes the required causation. These factors include: "(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." . . . SAP claims there is no evidence to show demand for the patented product (Panduit factor 1). Specifically, SAP argues that Versata could not present evidence of demand during the damages period (which started in 2003) because Versata did not sell Pricer to anyone, even non-SAP customers, after 2001. Patentees may prove lost profits through presenting a hypothetical, "but for" world where infringement has been "factored out of the economic picture." 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." Here, the record supports the jury's finding of demand for the patented functionality in a "but for" world. . . . SAP argues Versata cannot show demand because it made no sales of Pricer during the damages period. Usually, "the patentee needs to have been selling some item, the profits of which have been lost due to infringing sales." However, the act of "selling" an item does not necessarily mean the item must be "sold." Here, Versata was selling Pricer during the damages period. Versata need not have actually sold Pricer during the damages period to show demand for the patented functionality, particularly given the economic reality that SAP had eroded the market for Pricer through bundling hierarchical access into its own software.

The Panduit factors do not require showing demand for a particular embodiment of the patented functionality, here Versata's Pricer software. Nor does it require any allocation of consumer demand among the various limitations recited in a patent claim. In other words, the Panduit factors place no qualitative requirement on the level of demand necessary to show lost profits. Versata showed demand for its product before SAP entered the market, and it showed continued demand for the patented feature during the damages period. SAP had the ability to cross-examine and rebut this evidence. SAP's expert even prepared an alternative lost profit model but SAP chose not to present this evidence to the jury. The court finds sufficient evidence of demand in this record and declines to disturb the jury's determination. SAP also argues Versata did not prove the quantum of its lost profits with reasonable probability (Panduit factor 4). Specifically, it argues Versata's but-for world makes assumptions about demand and price elasticity that are inconsistent with the real world, and that Versata did not account for market forces other than infringement that might have caused its alleged losses. . . . SAP's protestations that the award does not reflect market or economic variables are belied by the record. As noted above, the expert discounted the win rate to account for time Versata would need to ramp-up its sales. The expert also discounted his sales value calculations to account for the costs associated with making those sales. He accounted for "the direct costs of making those sales, plus costs associated with research and development efforts, plus costs associated with . . . selling, general and administrative expenses." He also accounted for price elasticity when calculating the number of lost sales. The expert testified that if he had used a lower price (or even a declining price scale) when valuing the lost sales, the lower price would have been offset by additional lost sales: a lower price results in greater demand. . . . 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. SAP did not make such a showing. Therefore, this court affirms the jury's award of lost profits.

In addition to lost profits, the jury awarded $85 million in royalties. A reasonable royalty is the statutory floor for damages in an infringement case. Because the district court precluded Versata's expert from presenting a reasonable royalty analysis, the only evidence for a royalty award came from SAP's expert. A reasonable royalty may be calculated using one of two baselines: "an established royalty, if there is one, or if not, upon the supposed result of hypothetical negotiations between the plaintiff and defendant." "The hypothetical negotiation seeks to determine the terms of the license agreement the parties would have reached had they negotiated at arm's length when infringement began." [T]he award cannot violate the entire market value rule. The entire market value rule is a narrow exception to the general rule that royalties are awarded based on the smallest salable patent-practicing unit. "A patentee may assess damages based on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts." Here, the expert did not apply his 40 percent royalty rate to the entire value of SAP's infringing products. The royalty rate was applied to the value of Khimetrics' sales. Rather, the expert merely accounted for all infringing sales. Thus, the entire market value exception was never triggered, and Versata was not required to show that demand for hierarchical pricing drove demand for SAP'sproduct as whole. The trial court, in denying SAP's motion for JMOL, correctly noted that SAP "cannot legitimately challenge the comparability of its own comparable." The jury used common sense and merely applied SAP's pro¬posed royalty to a larger number of infringing sales than SAP desired. While the jury awarded less than the $170 million calculated by SAP's expert, the jury is not bound to accept the maximum proffered award and may choose an intermediate rate. The question is whether the award is not "so outrageously high . . . as to be unsupportable as an estimation of a reasonable royalty," and is "within the range encompassed by the record as a whole." This court concludes that award satisfies these standards and is supported by substantial evidence.

Following the resolution of post-trial motions, the trial court entered a permanent injunction. SAP argues the injunction is overbroad because it prohibits SAP from offering maintenance and additional seats for SAP's current customers. "Additional seats" refers to increasing the number of users covered under a specific license. SAP does not challenge the portion of the injunction that prohibits it from offering the accused functionality in new sales of its software. The injunction uses two key terms: the "Infringing Products" and "the Enjoined Capability." The enjoined capability is the capability to execute a pricing procedure using hierarchical access of customer and product data. [T]he enjoined capability represents only a fraction of the features contained in the infringing products. SAP's bundling is one of the reasons cited by Versata for the destruction of Pricer's market. Yet, the injunction states that SAP "shall not (a) charge to or accept payment of software maintenance from that customer with respect to any of the Infringing Products in the United States; or (b) license or sell any new 'seats' or otherwise charge to or accept license revenue from that customer in connection with any of the Infringing Products in the United States." While this court does not agree entirely with SAP's arguments against the injunction, it appears the trial court erred by placing emphasis on SAP's product as a whole. 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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