Issue #21-2 | February 28, 2013

Does apportionment rule extend to trade secrets cases?

Case analysis: Versata Software, Inc. v. Internet Brands, Inc., 2012 U.S. Dist. LEXIS 145020 (Oct. 9, 2012)

Background: Both the plaintiff and defendant sold software to large automobile manufacturers that permitted customers to comparison shop for cars online. After the plaintiff lost its contract with Chrysler to the defendant, it sued for patent infringement related to the software technology. In response, the defendant countersued for theft of trade secrets and breach of contract, claiming it owned the critical comparison-enabling components of the software and calculating damages based on the plaintiff’s continuing contracts with Toyota.

Expert testimony: In assessing damages for a jury trial, the defendant’s expert reviewed various documents related to the plaintiff’s work for Toyota, including contracts and financial and business records related to income from the contracts and licenses for the software. He also looked at industry research that both parties had conducted, including market and consumer studies, and drew on his prior experience working with automobile manufacturers and service providers, including Toyota. (He noted one document “highlighted” the plaintiff’s need for the comparison component of the software.) An additional technical expert for the defendant testified how the plaintiff used the component in preparing its software products for Toyota.

Based on this review, the damages expert testified that the comparison functionality was the basis for Toyota’s purchase of the plaintiff’s software and that the defendant was entitled to all of the profits from related contracts, which amounted to $2 million. If the jury was not prepared to accept the proposition, he still believed that “not less than 50%” of those profits was attributable to the plaintiff’s theft. Notably, the plaintiff cross-examined the expert, but did not present its own expert to calculate damages for the alleged trade secret theft.

Trial court verdict: After the defendant vigorously contested the patent infringement claims on the basis of invalidity and anticipation, the jury returned entirely in the defendant’s favor of $2 million, and the plaintiff appealed.

Appeal: As a preliminary matter, the plaintiff argued that the defendant’s expert incorrectly applied all of its revenues from the Toyota contracts, in violation of the entire market value rule (EMVR). Borrowing the rule from federal patent law, which permits recovery of damages based on the entire value of the accused product if the patented feature drives consumer demand, the plaintiff claimed the expert’s evidence “was not up to the task.” That is, he never showed that the basis for Toyota’s interest in the plaintiff’s software was the trade secret component and failed to prove that all of the profits from the Toyota contract were attributable to the same. At a minimum, the plaintiff maintained the expert should have apportioned the amount of profits that were due directly from the stolen technology.

Importantly, the plaintiff did not cite any legal authority or case precedent for its argument to apply the EMVR to trade secret cases. “In any event,” the court said, “all that is at issue here is whether the evidence supports the jury’s finding that [the defendant’s] trade secret[s] were of sufficient importance to [the plaintiff’s] work on the Toyota project” for its award of all of the profits to be appropriate.

To determine this narrower issue, the court acknowledged generally the financial documents and market/industry surveys that the defendant’s expert relied on, noting in particular that the plaintiff was free to explore any of their shortcomings on cross-examination. Similarly, the plaintiff had “ample” opportunity to point out any flaws in the expert’s calculations as well as any alleged inconsistencies in his offering a lesser amount. Finally, the plaintiff could have had an expert offer an alternative measure of misappropriation damages, but chose not to. “At the end of the day, the jury apparently chose to believe” the testimony of the defendant’s expert, “which it was entitled to do,” the court said, and affirmed the $2 million award.

Read the text of the decision in BVLaw.

Final rules and guidance to implement first-inventor-to-file provision

The USPTO has published final rules and guidance in the Federal Register implementing the first-inventor-to-file provision. This provision becomes effective on March 16, 2013.

Publication of the first-inventor-to-file final rules and guidance concludes the agency’s rulemaking for provisions that become effective in March 2013. It likewise concludes the agency’s rulemaking for the America Invents Act.

Valuation analysts can help small business owners get a grip on their IP assets

Before small business owners can move to protect the intellectual property rights (IPRs) of a business, an IP audit must be conducted to help develop an understanding of the nature and value of the business IP.

“An IP audit is a systematic review of the IP owned, used, or acquired by a business.” The objectives to be reached in an IP audit are to:

  • Identify all the IP owned or used by the business. Checking on ownership rights can be burdensome. Has the IP been licensed? Who was the inventor, and are assignments in order?
  • Provide the information necessary to value these intangible business assets. This is what IPmetrics calls “triaging.” Each IP asset needs to be valued in terms of its strategic necessity to the business. Priorities can be set only after relative value is established.
  • Once identified and vetted in terms of ownership and valued, IP-related decisions can be made. Do we protect the IP? Do we abandon it? What enforcement steps are we willing to take?

A Department of Commerce website,, strongly recommends that small business owners employ skilled financial advisors to assist them in the process of auditing their IPRs because only through understanding the commercial value of the IP can prudent strategic and tactical decisions be made. The website offers an outline of what goes into an audit:

An IP audit should cover all the IP assets that are owned, licensed, or incorporated into a business’s products and services. For each of these assets, the audit should determine:

  • The IP the company owns, plus the IP not owned but licensed or otherwise used in the business;
  • Any licenses or written permissions required for IP not owned but used;
  • The type(s) of IP protection that may be available to protect each of the owned IP assets;
  • The markets where each owned IP asset needs protection and the types of protection (and costs) available in those markets;
  • The remaining useful life of each owned IP asset; and
  • The value of each owned IP asset to the company.

The value of an IP asset can be a function of:

  • The contribution the asset makes to the business;
  • The IP asset’s resale and license value;
  • The amount invested to develop it;
  • The amount the business would be willing to invest to protect or enforce against infringement; and
  • How much the company would have to pay to license similar IP.

Ian Cockburn, of the PIPERS patent law firm in the UK, developed a useful template for an IP audit, found here.

New directory identifies different IP business models

Raymond Millien compiled what he calls the “players” in the business of IP. Nineteen different business models are reflected in the companies listed in a 16-page directory of IP intermediaries in the US:

  1. Patent licensing and enforcement companies (PLECs);
  2. Privateers;
  3. Institutional IP aggregators/acquisition funds;
  4. IP/technology development companies;
  5. Licensing agents;
  6. Litigation finance/investment firms;
  7. IP brokers;
  8. IP-based M&A advisory firms;
  9. IP auction houses;
  10. Online IP/technology exchanges, clearinghouses, bulletin boards, and innovation portals;
  11. IP-backed lending firms;
  12. Royalty stream securitization firms;
  13. Analytics software and services firms;
  14. University technology transfer intermediaries;
  15. IP transaction exchanges and trading platforms/IP transaction best practices development communities;
  16. Defensive patent pools, funds, and alliances;
  17. Technology/IP spinout financing firms;
  18. Patent-based public stock index publishers; and
  19. IP insurance carriers.

To the extent valuation analysts need to understand the business models, the directory is worth review.

CPE programs target IP valuation issues

Valuing Brands, with Mike Pellegrino and Ira Mayer
A webinar on Thursday, March 21, 2013
10:00 a.m. to 11:40 a.m. PT, 1:00 p.m. to 2:40 p.m. ET

Damages in Patent Infringement Lawsuits, with Richard Bero and Robert Surrette
A webinar on Tuesday, May 7, 2013
10:00 a.m. to 11:40 a.m. PT, 1:00 p.m. to 2:40 p.m. ET

Valuation of Know-How, Patents, Proprietary Technology and IPR&D, with Mark Zyla
A webinar on Thursday, June 27, 2013
10:00 a.m. to 11:40 a.m. PT, 1:00 p.m. to 2:40 p.m.

Contact Us:

Business Valuation Resources, LLC
1000 SW Broadway
Suite 1200
Portland, OR 97205
(503) 291-7963

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