austin ■ boston ■ northern california ■ washington, d.c. damages analysis innovention toys,...
TRANSCRIPT
Damages Analysis
Innovention Toys, LLCv.
MGA Entertainment, Inc. and Wal-Mart Stores, Inc. and Toys “R” Us, Inc.
Case No. 07-6510
Steven B. Boyles, CPA/CFF/ABV, CVA, ASA
2
Expert Qualifications
EmploymentPartner, Hemming Morse, LLP
EducationBachelor of Science in Accounting
(University of South Florida)Credentials
CPA, ABV, CVA, ASAExperience
15 years in public accounting10 years in forensic accounting
3
Assignment
Evaluate the damages suffered by Innovention related to the Defendants’ infringement of the ‘242 Patent
5
Remedy Period Amount
Lost Profits (including Convoyed Sales) Infringement 1,874,277$
Reasonable Royalty Provisional Rights 429,372$
Total Damages 2,303,649$
Damage
Summary of Opinions
6
Discussion Overview
Legal Framework for Patent DamagesTwo Damages Periods
Damages AnalysisLost ProfitsReasonable Royalty
7
Legal Framework
Infringement Damages: Damages adequate to compensate for the infringement, but in no event less than a reasonable royalty.
35 U.S.C. § 284
Provisional Rights Damages: A reasonable royalty.
35 U.S.C. §154(d)(A)(i)
8
Discussion Overview
Legal Framework for Patent DamagesTwo Damages Periods
Damages AnalysisLost ProfitsReasonable Royalty
9
Two Damages Periods
Provisional Rights Infringement
Reasonable Royalty Lost Profits
10/18/06Notice Letter
(Ex 157)
9/4/07Patent issues
(Ex 1)
Jan. 2010End
10
Discussion Overview
Legal Framework for Patent DamagesTwo Damages Periods
Damages AnalysisLost ProfitsReasonable Royalty
11
Damages – Lost Profits (example)
Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)
Demand?
No Alternatives
?
Capacity?
ProfitsQuantified
?
Lost Profits
ReasonableRoyalty
No No NoNo
Yes Yes Yes Yes
1 2 3 4
Panduit 4 Factor Analysis
12
Damages – Lost Profits (example)
Revenue 3.00$
(-) Costs 2.00$ $3
Reve
nu
e
$2Costs
Profit per Cup
$1
(=) Profit 1.00$
14
Damages – Lost Profits (example)
Selling Coffee to only 40 Buyers
Patented Recipe Infringing Recipe
Selling Coffee to 60 Buyers
Lost Sales = 60
15
Damages – Lost Profits (example)
Demand?Panduit Factor 1 - The existence of demand for the patented product;
Assessment:The Demand Factor is satisfied as… 1) Coffee represents the patented
invention, 2) Infringer using the infringing
recipe,3) 100 customers purchased the patented coffee (40 from patent owner + 60 from infringer).
16
Damages – Lost Profits (example)
Demand?
NoAlternatives?
Yes
Panduit Factor 2 – There are no acceptable noninfringing alternatives;
Assessment:The No Alternatives Factor is satisfied as… 1) It is deemed to be a “two-
supplier” market.
17
Damages – Lost Profits (example)
Demand?
NoAlternatives?
Capacity?
Yes
Yes
Panduit Factor 3 – The patent owner has the capacity to meet demand through manufacturing and marketing capabilities;
Assessment:The Capacity Factor is satisfied as… 1) The patent owner has the ability
to make 100 cups of coffee,2) The patent owner has the
capability to market to those who want the product,
3) The patent owner has sufficient access to capital to expand.
18
Damages – Lost Profits (example)
Demand?
NoAlternatives?
Capacity?
QuantifiableProfits?
Lost Profits
Yes
Yes
Yes
Yes
Panduit Factor 4 – The patent owner is able to quantify the amount of profit it would have made.
Assessment:The Quantifiable Profits Factor is satisfied as… 1) The patent owner has established
that it’s profit per cup sold is $1.00,
2) The number of infringing units is known.
19
Damages – Lost Profits (example)
Calculation of Lost Profits:
Profit per Unit (i.e., per Cup) 1.00$
Lost Sales Units (i.e., per Cup) 60
Lost Profits 60.00$
22
Damages – Lost Profits
Innovention sold 83,860 Khet games during
the Infringement Period.
MGA sold 152,082 Laser Battle game
units during the Infringement Period
Total of 235,912 Game Buyers
23
Damages – Lost Profits
Revenue per Unit 21.20$
Less: Incremental Costs:Manufacturing Costs 9.50 Shipping and Receiving Costs 1.32
Total 10.82
Incremental Profit per Unit 10.38$
Calculation of Profits per Game (Khet):
24
Damages – Lost Profits
Lost Incremental Profit per Unit 10.38$
152,052
Lost Profits 1,578,300$
Laser Battle Game Units Sold During Infringement Period
Calculation of Lost Profits (Khet):
25
Damages – Lost Profits
Demand?Panduit Factor 1 - The existence of demand for the patented product;
Assessment:1) Khet and Laser Battle represent
the patented invention, 2) Defendants were selling Laser
Battle which embodied the patented invention,
3) 235,912 Khet and Laser Battle games were purchased. Factor 1
Satisfied
26
Damages – Lost Profits
Demand?
NoAlternatives?
Yes
Panduit Factor 2 – There are no acceptable noninfringing substitutes;
Assessment:1) I am not aware of any acceptable,
noninfringing substitutes,2) Ami Shapiro (senior product
designer for MGA) derives the same conclusion,
3) Two-Supplier Market.
Factor 2 Satisfied
27
Damages – Lost Profits
Demand?
NoAlternatives?
Capacity?
Yes
Yes
Panduit Factor 3 – The patent owner has the ability to meet demand through manufacturing and marketing capabilities;
Assessment:1) Innovention had the ability to
make additional units,2) Innovention had the capability to
market to those who wanted the product,
3) Innovention had sufficient access to capital to expand.
Factor 3 Satisfied
28
Damages – Lost Profits
Demand?
NoAlternatives?
Capacity?
QuantifiableProfits?
Lost Profits
Yes
Yes
Yes
Yes
Panduit Factor 4 – The patent owner is able to quantify the amount of profit it would have made.
Assessment:1) Innovention’s profit per Khet game
was $10.38,2) The number of infringing Laser
Battle sales was 152,052.
Factor 4 Satisfied
29
Damages – Lost Profits
Lost Incremental Profit per Unit 10.38$
152,052
Lost Profits 1,578,300$
Laser Battle Game Units Sold During Infringement Period
Quantification of Lost Profits (Khet):(as previously discussed)
30
Damages – Lost Profits
Convoyed SalesDamages can be recovered for lost sales of products not covered by the patent but that are often sold with, or as add-ons to, the patented product.
Eye of Horus Beamsplitter
Tower of Kadesh
31
Damages – Lost Profits
Eye of Horus Beamsplitter Units Sold
September 2007 through
December 2009
Eye of Horus Beamsplitter Units Sold 15,131
Khet Game Units Sold 70,039
4.6
Rounded 5.0
Game Units Sold for Every Eye of Horus Beamsplitter Unit Sold
32
Calculation of Lost Sales
152,052
Lost Sales of Eye of Horus Beamsplitter Units 5.0
30,410
Laser Battle Game Units Sold During Infringement Period
Damages – Lost Profits
Eye of Horus Beamsplitter
33
Calculation of Lost Profit
Revenue per Unit 5.42$
Less: Incremental Costs:Manufacturing Costs 0.60
Total 0.60
Incremental Profit per Unit 4.82$
Lost Sales 30,410
Lost Profits 146,576$
Damages – Lost Profits
Eye of Horus Beamsplitter
34
Lost Sales 20,162
Lost Profits 149,401$
Damages – Lost Profits
Calculation of Lost Profit
Revenue per Unit 12.41$
Less: Incremental Costs:Manufacturing Costs 5.00
Total 5.00
Incremental Profit per Unit 7.41$
Tower of Kadesh
35
Damages – Lost Profits Summary
Totals
Lost Profits on Infringed Board Game 1,578,300$
Lost Profits on Convoyed Sales:Eye of Horus Beamsplitter 146,576$ Tower of Kadesh 149,401$
Total Lost Profits 1,874,277$
36
Damages – Lost Profits
Damage Timeline
$1,874,277
Provisional Rights Infringement
Reasonable Royalty Lost Profits
37
Discussion Overview
Legal Framework for Patent DamagesTwo Damages Periods
Damages AnalysisLost ProfitsReasonable Royalty
38
Damages – Reasonable Royalty
Damage Timeline
Provisional Rights Infringement
Reasonable Royalty Lost Profits
How Determined?
39
Damages – Reasonable Royalty
Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp 1116 (SDNY 1970)
Georgia Pacific Factors
1. Patentee licenses
2. Licensee licenses
3. Nature of license
4. Licensor’s license policy
5. Competition
6. Convoyed sales
7. Duration of license
8. Profitability and success of products
9 & 10. Advantages and benefits of technology
11. Infringer’s use of invention
12. Customary profit sharing/ royalty
13. Apportionment
14. Opinions of experts
15. Hypothetical negotiation
40
Damages – Reasonable Royalty
The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
Impact: Neutral
Factor 1:
41
Damages – Reasonable Royalty
The rates paid by the licensee for the use of other patents comparable to the patent in suit.
Impact: Starting Point for MGA
Factor 2:
42
Damages – Reasonable Royalty
The nature and scope of the license, as exclusive or non-exclusive; or as restricted or nonrestricted in terms of territory or with respect to whom the manufactured product may be sold.
Impact: Downward
Factor 3:
43
Damages – Reasonable Royalty
The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
Impact: Neutral
Factor 4:
44
Damages – Reasonable Royalty
The commercial relationship between the licensor and licensee, such as whether they are competitors in the same territory in the same lines of business or whether they are inventor and promoter.
Impact: Upward
Factor 5:
45
Damages – Reasonable Royalty
The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented item; and the extent of such derivative or convoyed sales.
Impact: Upward
Factor 6:
46
Damages – Reasonable Royalty
The duration of the patent and the term of the license.
Impact: Upward
Factor 7:
47
Damages – Reasonable Royalty
The established profitability of the product made under the patent, its commercial success, and its current popularity.
Impact: Upward
Factor 8:
48
Damages – Reasonable Royalty
(9) The utility and advantages of the patent property over the old modes or devices, if any, which had been used for working out similar results.
(10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
Impact: Upward
Factor 9 & 10:
49
Damages – Reasonable Royalty
The extent to which the infringer has made use of the invention, and any evidence probative of the value of that use.
Impact: Upward
Factor 11:
50
Damages – Reasonable Royalty
The portion of the profit or of the selling price that may be customary in the particular business or in comparable business to allow for the use of the invention or analogous inventions.
Impact: Neutral
Factor 12:
51
Damages – Reasonable Royalty
The portion of the realizable profit that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
Impact: Upward
Factor 13:
52
Damages – Reasonable Royalty
The opinion testimony of qualified experts.
Impact: Neutral
Factor 14:
53
Damages – Reasonable Royalty
7 Upward Impacting Factors
1 Downward Impacting Factor
Georgia Pacific FactorsImpact on Royalty
1. Patentee licenses Neutral
2. Licensee licenses Starting Point
3. Nature of license Downward
4. Licensor’s license policy Neutral
5. Competition Upward
6. Convoyed sales Upward
7. Duration of license Upward
8. Profitability and success of products Upward
9 & 10. Advantages and benefits of technology Upward
11. Infringer’s use of invention Upward
12. Customary profit sharing/ royalty Neutral
13. Apportionment Upward
14. Opinions of experts Neutral
54
Damages – Reasonable Royalty
A hypothetical negotiation between a willing licensee and a willing licensor just prior to the time infringement began. The parties to the negotiation would have assumed that the patent-at-issue was valid and would be infringed by the prospective licensee unless it obtained a license.
Factor 15:
55
Damages – Reasonable Royalty
$0.855%
Royalty$9.5856%
Royalty
$9.8158%
Royalty
$0.00
$7.0441%
Royalty
$3.0618%
Royalty
MGA Perspective
Innovention Perspective
Hypothetical Negotiation
$11.6569%
Royalty
56
Damages – Reasonable Royalty
$9.58Total Profit
Hypothetical Negotiation
MGA Profit Innovention Profit
$3.06$6.52
57
Damages – Reasonable RoyaltyA royalty of $3.06 (18%) amounts to:
For Innovention For MGA74% reduction in estimated profits
38% Profit Margin
58
Damages – Reasonable Royalty
Provisional Rights Period
Royalty Base:
MGA Revenue from Laser Battle Sales 2,385,402$
Royalty Rate 18%
429,372$
59
Damages – Reasonable Royalty
Damage Timeline
Provisional Rights Infringement
Reasonable Royalty Lost Profits
$429,372
60
Damages – Combined
Damage Timeline
Provisional Rights Infringement
Reasonable Royalty Lost Profits
$429,372 $1,874,277
$2,303,649
61
Damages – Reasonable Royalty
Provisional Rights Period
Infringement Period Total
Royalty Base:
MGA Revenue from Laser Battle Sales 2,385,402$ 2,314,023$ 4,699,425$
Royalty Rate 18% 18% 18%
429,372$ 416,524$ 845,897$
62
Damages – Pure Reasonable Royalty
Damage Timeline
Provisional Rights Infringement
Reasonable Royalty
$845,897*
* Included because 35 U.S.C. §284 requires “no less than a reasonable royalty”
63
MGA’s Total Revenue From Laser Battle Infringement
$4,461,403
MGA’s Approach Rewards Infringement
64
MGA’s Incremental Profits From Laser Battle
$2,751,471
135,158 units (provisional rights period)+152,052 units (infringement period)= 287,210 units total
×$9.58 profit per unit =$2,751,471 Profit
MGA’s Approach Rewards Infringement
65
MGA’s Approach Rewards Infringement
MGA
$2,319,594
MGA keeps $2,319,594 profit from its infringement
Innovention receives $431,877 for its ’242 patent
$431,877
MGA’s Net Profits From Infringement
Innovention
66
MGA keeps $2,319,594 profit from its infringement
Innovention receives $431,877 for its ’242 patent
MGA’s Net Profits From InfringementProfit from Infringement
MGA
Innovention
MGA’s Approach Rewards Infringement