February 24th, 2012

Proving Damages in Intellectual Property Litigation

Northern District of California Rejects Hypothetical License Finding and Cuts Down Largest Copyright Infringement Jury Verdict of $1.3 Billion

February 24, 2012 –  A recent high-profile case from Northern California highlights the difficulty of proving damages in IP cases based on a hypothetical license model.  On September 1, 2011, the Northern District of California entered a Judgment As a Matter of Law and reduced a $1.3 billion jury verdict for copyright infringement against SAP in Oracle USA, Inc., et al. v. SAP AG, et al., Case No. C07-1658PJH (N.D. Cal).  The jury verdict was the largest ever in a copyright infringement case.  The Court found that Oracle’s hypothetical license model for proving damages was too speculative because Oracle did not present any benchmark evidence to support a hypothetical license.  Instead, Oracle presented only witness testimony speculating on what Oracle would have charged for such a hypothetical license.  The Court entered a remittitur of $272 million based on the lost profit analysis done by Oracle’s expert.
Oracle accused SAP’s subsidiary, TomorrowNow, of stealing Oracle’s customer support software and using it to provide low cost maintenance to companies familiar with Oracle’s products.  Shortly before trial, SAP conceded liability on copyright infringement but continued to contest Oracle’s damages claims.
At trial, Oracle’s damages expert and executives testified that had SAP sought to license the stolen software, Oracle would have charged SAP between 1.66 and 3 billion dollars.  Another Oracle employee testified that because SAP and Oracle are competitors, such a license would be unique and unprecedented.  Oracle did not present any figures against which the hypothetical license fees could be benchmarked since it had never previously licensed the software and there were no comparable licenses from other sources.  Notwithstanding the lack of any comparable data, the jury returned a verdict of $1.3 billion based on the fair market value of a hypothetical license.  Following the verdict, SAP filed post-trial motions to reduce the jury award.
Relying on the Copyright Act provision allowing only actual damages “as a result of the infringement” plus recoverable profits “attributable to the infringement,” the Court held that to prove damages based on a hypothetical license model, Oracle needed to establish:
(1) but for the infringement, the parties would have agreed to license the copyrighted work; and (2) an objective, non-speculative license price through objective evidence of benchmark transactions.
Since Oracle did not present any actual data of prior or comparable licenses, the Court overturned the jury verdict as speculative and entered a remittitur of  $272 million based on the Oracle expert’s lost profits analysis.  Oracle could either accept the remittitur or proceed to a new trial.
On February 8, 2012, Oracle rejected the remittitur and demanded a new trial.
While the eventual verdict and the Court’s decision will likely be appealed, this decision highlights the difficulty of proving damages in IP cases, particularly where (1) there are no comparable licenses to benchmark against because Plaintiff never licenses the IP; and (2) the wrongdoer generates little or no profit.  As Oracle’s President Safra Catz testified in response to a question about SAP’s settlement offer:
“SAP paying us $40 million is a reward for their bad behavior. This is like taking someone’s $2,000 watch and hocking it for $20 and then offering us $20. … (It) undervalues the basis of our entire industry. It’s all about intellectual property.”
Philip J. Wang is an IP and commercial litigation partner in the San Francisco office of Lim, Ruger & Kim, LLP.  His practice also includes securities and derivative litigation, government enforcement actions, and antitrust litigation.  Trusted by Fortune 500 companies and entrepreneurs, the firm of Lim, Ruger & Kim, LLP (www.limruger.com) is a minority-owned law firm focused on complex commercial litigation, employment, and sophisticated real estate, finance, and corporate transactions.

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