austin ■ boston ■ northern california ■ washington, d.c. damages analysis innovention toys,...

67
Damages Analysis Innovention Toys, LLC v. 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

Upload: julie-parks

Post on 29-Dec-2015

217 views

Category:

Documents


0 download

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

4

Documents Considered

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$

13

Damages – Lost Profits (example)

100 Buyers of Coffee

Patented Recipe

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$

20

Damages – Lost Profits

Innovention’s Lost Profits

21

Damages – Lost Profits

Buyers of Laser Games

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

67

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