Gordon-Darby Sys., Inc. v. Applus Techs., Inc., No. 10 C 1863, Slip Op. (N.D. Ill. Dec. 23, 2010) (Zagel, J.).
Judge Zagel granted plaintiff’s motion to dismiss its patent infringement claims regarding vehicle emissions testing with prejudice and to dismiss defendants’ noninfringement, invalidity and unenforceability claims without prejudice. After the parties engaged in some discovery, plaintiff determined that it no longer wanted to pursue its claims and gave defendants a covenant not to sue. Based upon that covenant, the parties agreed that all of their claims should be dismissed, except for defendants’ inequitable conduct claims. Defendants argued that those claims were related to its 35 U.S.C. Section § 285 claim to make the case exceptional and award defendants their attorney’s fees. Citing the Federal Circuit’s decision in Monsanto Co. v. Bayer Bioscience N.V., 514 F.3d 1229 (Fed. Cir. 2008), the Court held that, although the Federal Circuit had not squarely decided the issue, the precedent was clear that the covenant divested the Court of subject matter jurisdiction over the inequitable conduct declamatory judgment claim.
The Court, however, retained independent jurisdiction over defendants’ Section § 285 claim to make the case exceptional and award defendants their attorney’s fees. And the Court acknowledged that it could consider unenforceability as part of the exceptional case analysis, which could trigger a holding that the patents in suit were unenforceable due to inequitable conduct.

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The following is an article I wrote with my Holland & Knight colleague Ben Stern outlining the Federal Circuit’s Uniloc decision striking down the 25% rule for patent damages.
On January 4, 2011, the U.S. Court of Appeals for the Federal Circuit found that the so-called “25 percent rule of thumb” analysis long used by damages experts in patent cases to calculate a “reasonable royalty” is “fundamentally flawed.” Uniloc v. Microsoft (Fed. Cir. 2011). The Federal Circuit held that because the 25 percent rule merely applies a general theory that is untethered to the facts of a case, “[e]vidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence.” Slip op. at 41. The full decision can be found online.
Striking down the 25 percent rule has important implications for patent damages in both existing and future patent litigation. As a result, the Uniloc decision is critical for every company that faces any current or potential risk of patent litigation.
Background
The 25 percent rule of thumb has long been a “starting point” of a reasonable royalty analysis. The rule – which the Federal Circuit observed has “met its share of criticism” – is based on the idea that, in a hypothetical negotiation, a licensee generally agrees to pay the patentee a royalty rate equivalent to 25 percent of the licensees’ expected profits on products that incorporate the intellectual property at issue in the case.
In this case, the plaintiff, Uniloc, sued Microsoft, alleging that a certain feature of Microsoft’s Word XP, Word 2003 and Windows XP infringed Uniloc’s patent. The jury agreed and awarded Uniloc $388 million in damages (which was less than the approximately $564 million that Uniloc’s expert opined it was due, based upon the 25 percent rule). These damages represented a “reasonable royalty” that Uniloc and Microsoft would have hypothetically agreed upon at the time the infringement began. Following the jury verdict, the district court granted Microsoft’s motion for a judgment as a matter of law of noninfringement, thereby effectively nullifying the jury’s damage award.
The Appeal
On appeal, the Federal Circuit first observed that the “admissibility of the 25 percent rule has never been squarely presented to this court” but acknowledged that it has “passively tolerated” the rule’s use over the years. After first reviewing the standards for the admissibility of expert opinions, the Federal Circuit concluded that U.S. Supreme Court precedent requires experts to “justify the application of a general theory to the facts of the case.” Slip op. at 43. If an expert cannot do so, then the proffered theory is inadmissible. Id. Given that the 25 percent rule, according to the Federal Circuit, is based on generalized empirical evidence about licenses, the Court concluded that the rule is nothing more than “an abstract and theoretical construct that … does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry or party.” Slip op. at 45. Furthermore, it “is of no moment” that the 25 percent rule is merely a “starting point” for a reasonable royalty analysis; damages experts used the rule as a baseline and then applied other case-specific factors to adjust the rate up or down. According to the Court, “[b]eginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the case nevertheless results in a fundamentally flawed conclusion.” Slip op. at 46. Because Uniloc’s expert’s damages opinion (which was based on the 25 percent rule) was unrelated to the facts of the case, it was “arbitrary, unreliable, and irrelevant.” Slip op. at 47.
Thus, the Federal Circuit held that Microsoft is entitled to a new trial on damages. Because the Federal Circuit also reversed the district court’s post-trial finding of noninfringement, ordering a new trial on damages means that Uniloc may yet obtain a damage award in the case.
Implications of the Decision
The implications of the Uniloc decision on damages analysis for patent cases are tremendous. Because most patentees seek “reasonable royalties” (rather than lost profits, the other general mode of analysis), damages opinions, up until now, often began with the 25 percent rule of thumb and then “adjusted” the royalty rate up or down in light of the facts of the case.
Now that the 25 percent rule has been repudiated, the future promises to bring new and creative modes of analysis to arrive at a “reasonable royalty” in patent cases, which will likely result in new disputes about the admissibility of damages opinions.

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Chamberlain Group v. The Lear Corp., No. 05 C 3449, Slip Op. (N.D. Ill. Jul. 13, 2010) (St. Eve, J.).
Judge St. Eve granted in part plaintiff Chamberlain’s Fed. R. Civ. P. 26(c)(1) motion for a protective order in this patent case involving garage door opening systems. The Court denied a protective order as to defendant Lear’s request for Chamberlain’s financial information. While Chamberlain claimed the sales information was not relevant because Chamberlain did not seek lost profit damages, Chamberlain’s interrogatory response said it did seek lost profit damages. Additionally, the financial information was relevant as it was reasonably calculated to lead to admissible evidence related to Chamberlain’s commercial success and its lost profits.
The Court granted a protective order as to discovery related to Chamberlain’s new garage-door-opening algorithm. Chamberlain had not sold a product embodying the algorithm. So, it was irrelevant to a reasonable royalty calculation which looked to a hypothetical negotiation when infringement began. Furthermore, the algorithm was not relevant to an obviousness analysis. Finally, Chamberlain’s decision to produce more information related to the same algorithm did not make the algorithm relevant.
The Court also entered a protective order preventing further deposition of a Chamberlain employee. The employee had already been deposed twice – once for two hours and once for a full day. To the extent Lear wanted to depose the employee about the new algorithm, the Court had already determined it was irrelevant. And despite repeated warnings to stop, Lear had already repeatedly questioned the employee about the algorithm.

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Von Holdt v. A-1 Tool Corp., No. 04 C 4123, Slip Op. (N.D. Ill. May 17, 2010) (Manning, J.).
Judge Manning granted defendants (collectively “A-1 Tool”) summary judgment as to plaintiff’s (collectively “Plas-Tool”) patent claims based upon a lack of notice and as to the plaintiff’s Computer Fraud and Abuse Act (“CFAA”) claims, and chose not to exercise supplemental jurisdiction over the remaining state law claims. A-1 Tool sought summary judgment of a lack of pre-suit notice of the alleged patent infringement. The issue was dispositive because Plas-Tool’s patent expired before the suit was filed. So, pre-suit-notice – actual or constructive – was required in order for Plas-Tool to have any damages.
Plas-Tool’s general statements that they would sue A-1 Tool if it ever infringed Plas-Tool’s patents did not create actual notice. And the alleged patent knowledge of Plas-Tool’s former employee who joined A-1 Tool could not be imputed to A-1 Tool for purposes of actual notice. A-1 Tool’s burden was to make an evidentiary showing that could lead a reasonable person to find that Plas-Tool complied with the marking requirements by marking substantially all of Plas-Tool’s relevant product. Plas-Tool did not meet its burden of proof. Plas-Tool’s only evidence of marking compliance was testimony from Plas-Tool’s 30(b)(6) witness. The witness testified that Plas-Tool’s policy was to mark its products, but had no recollection of what specifically was marked. And the Court held that evidence of a company policy to mark without any other evidence of marking compliance was insufficient to overcome summary judgment. Beyond the 30(b)(6) testimony, Plas-Tool’s only marking evidence was having sent a customer two molds including patent markings. But when the molds were returned, one of them had the patent marking covered up, suggesting the product was made from the mold had not been marked. The Court, therefore, granted A-1 Tool summary judgment on Plas-Tool’s patent claims for lack of notice.
The Court also granted A-1 Tool summary judgment on Plas-Tool’s CFAA claim. Plas-Tool alleged that its former employee improperly accessed and damaged CAD files related to the patented products. But Plas-Tool was not able to identify any damage to the allegedly accessed files and the CFAA was not designed to deal with disgruntled former employees that took electronic files as they left. Also, Plas-Tool was unable to show the required $5,000 in damages within one year of the alleged damage. The loss Plas-Tool was able to show was not related to fixing damaged files, as required by the CFAA. Plas-Tool’s alleged damage was related to a forensic review that allegedly showed that the former employee tampered with the files.
Having granted summary judgment on the federal patent claim and the CFAA claim, the Court declined to exercise supplemental jurisdiction over Plas-Tool’s state law claims.

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Integrated Cards, L.L.C. v. McKillip Indus., Inc. d/b/a USA/Docufinish, No. 06 C 2071 (N.D. Ill. Nov. 19, 2009) (Kendall, J.).
Judge Kendall, following a bench trial, held that pre-suit damages were barred by laches, but that the claims were not barred by equitable estoppel, in this patent case involving integrated labels. Laches was presumed because plaintiff and its founder/predecessor entities were aware of defendant’s alleged infringement for more than six years before filing. And defendant was prejudiced by plaintiff’s delay because defendant purchased more than $1M in machines for producing the allegedly infringing integrated labels. Laches, therefore, barred pre-suit damages.
Equitable estoppel, however, did not apply and bar all damages because plaintiff never suggested to defendant that plaintiff would not sue. There was no evidence that plaintiff or its predecessors ever threatened litigation or otherwise misled defendant into believing it would not get sued. And when litigation has not been threatened, courts typically will not estop patentee’s suit. Plaintiff’s suit, therefore, was not equitably estopped.
* Click here for more on this case in the Blog’s archives.

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Gabbanelli Accordions & Imports, L.L.C. v. Italo-Am. Accordion Mfg. Co., No. 02 C 4048, Slip. Op. (N.D. Ill. Sept. 21, 2009) (Zagel, J.).
Judge Zagel entered judgment on behalf of plaintiffs in the amount of $151,200 in lost profits after the Seventh Circuit affirmed the Court’s judgment.* The Court also held defendants jointly and severally liable for $147,576.12 in plaintiff’s attorneys’ fees.
* Click here for more on this case in the Blog’s archives.

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American Taxi Dispatch, Inc. v. American Metro Tax & Limo Co., __ F. Supp.2d __, 2008 WL 4616855 (N.D. Ill. Oct. 20, 2008) (St. Eve, J.).
Judge St. Eve permanently enjoined defendants’ (collectively “Metro”) use of trademarks infringing plaintiff American Taxi’s American Taxi marks, and awarded American Taxi damages in the amount of Metro’s gross sales as well as attorney’s fees. American Taxi began using its marks in 1975. Metro incorporated and began using their American Metro Taxi marks in early 2007. American Taxi filed the instant suit for trademark infringement, Lanham Act unfair competition and related state law claims. Metro initially defended itself, but after repeatedly missing deadlines th Court entered a default judgment and allowed American Taxi to submit proofs, which led to this opinion.
Pursuant to Fed. R. Civ. P. 54(c), the award could not exceed in form or amount what was demanded in the pleadings. The Court held that the complaint justified a permanent injunction. American Taxi alleged that Metro’s infringing acts harmed American Taxi’s goodwill, and the Seventh Circuit has held that damage to goodwill can constitute irreparable harm. And American Taxi backed up its complaint with an affidavit detailing actual confusion between the marks. Furthermore, a tailored injunction would not put Metro out of business. In fact, Metro’s owner claimed that Metro had been dissolved. So, the balance of harms weighed in American Taxi’s favor. And finally, there is a public interest in knowing whom they conduct business with, which favored an injunction. The Court, therefore, permanently enjoined Metro and its affiliates, successors and assigns from using its marks or any others that were confusingly similar to the American Taxi marks.
The Court then awarded damages in the amount of Metro’s provable gross sales. The Court focused its analysis on the Seventh Circuit’s recent WMS Gaming, Inc. v. WPC Prods. Ltd. decision in which the Seventh Circuit held that plaintiff need only prove gross sales and then the burden shifts to defendant to prove its costs — click here to read the Blog’s post about that decision. As a result, where defendant is in default, plaintiff’s may be awarded defendant’s gross profits.
Finally, the Court held that the case was exceptional, warranting an award of attorney’s fees. But the Court limited the amount of fees because the request was “less than a model of clarity” and it was not clear from the submission which of the time entries were appropriate.

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Hyundai Construc. Equip. U.S.A., Inc. v. Chris Johnson Equip., Inc., No. 06 C 3238, Slip Op. (N.D. Ill. Oct 21, 2008) (Leinenweber, Sen. J.).
Judge Leinenweber, having previously granted plaintiff summary judgment of Lanham Act unfair competition and deceptive trade practices,* enjoined defendant’s continued sale of gray market goods and use of plaintiffs’ trademarks and awarded plaintiffs damages and costs. The Court awarded plaintiffs defendant’s profits from sales of gray market construction equipment (equipment made abroad for sale abroad that was imported to the United States without authority for resale), but the Court held that awarding plaintiffs a multiple of defendant’s actual damages would be inappropriately punitive. Additionally, the Court gave defendant an opportunity to prove its costs before entering a final damages amount.
The Court also entered a permanent injunction. The Court, however, denied plaintiffs’ request that defendant have to provide plaintiffs and the Court a report proving defendants’ compliance with the injunction. Such a requirement was unduly burdensome.
Finally, the Court awarded plaintiffs their costs, but held attorney’s fees were not appropriate because the case was not exceptional. Among other reasons the case was not exceptional, the Court noted evidence that defendants “apparent pains” to warn customers that defendants’ products lacked a warranty and came from overseas. And the Court held that no actual confusion had yet been proven.
* Click here for the prior decision in the Blog’s archives.

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Bobak Sausage Co. v. Bobak Orland Park, Inc., No. 06 C 4747, Slip Op. (N.D. Ill. Nov. 3, 2008) (Kennelly, J.).*
Judge Kennelly denied without prejudice plaintiff Bobak Sausage Co.’s (“Bobak”) motion to compel defendant’s interest in Bobak Fifty Third Street LLC (“Bobak 53”). Bobak makes and sells meat products and operates a related restaurant in Chicago. Bobak’s founder, Frank Bobak, transferred ownership of Bobak’s to his sons. In early 2006, Bobak’s reorganized, leaving two of the sons owning Bobak’s and a third, defendant, owning a grocery store that Bobak’s had been building. All of the brothers maintained as interest in Bobak 53. As part of the reorganization, Bobak’s granted two entities rights to use Bobak’s trademarks at retail locations for a six month period. After the six month period ended, Bobak’s filed suit against defendants (including the third son and the licensed retail locations) for, among other things, trademark infringement based upon the continued use of the Bobak’s marks. The parties settled that dispute based at least in part upon a stipulated permanent injunction, which the Court entered, setting various limits on what marks each defendant could use, requirements that the defendants remove and change their signage and requirements that defendants use disclaimers that they were not affiliated with Bobak’s. The Court later held certain defendants in contempt for violating the permanent injunction and entered a remedial fine of $150,000. When defendants failed to pay the fine, the Court added interest to it.
Because defendants continue not to pay the fine, Bobak moved the Court for an order compelling the transfer of defendant’s interest in Bobak 53 pursuant to Fed. R. Civ. P. 69(a) and 70. The Court, however, held that Rule 70 only allows for enforcement of money judgment in very narrow circumstances, circumstances that were not yet met in this case.
Rule 69(a) allows for a writ of execution in accord with the rules of the state where the court is located, Illinois in this case. Illinois law says that the debtor’s property delivered for repayment is to be sold by the sheriff at public auction. But because defendant’s interest in Bobak 53 is relatively non-liquid – plaintiffs, the other owners of Bobak 53, retain substantial sale over any sale or subsequent sale. The restrictions on ownership and sale of Bobak 53 make a public sale impractical. But the Court could order that any distributions be paid to plaintiff. The Court, therefore, denied plaintiff’s motion without prejudice. But the Court also ordered defendant to show cause why the Court should not appoint a receiver for defendant’s interest in Bobak 53 and enjoin the state court proceedings regarding Bobak 53.
* Click here for more on this case in the Blog’s archives.

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WMS Gaming Inc. v. WPC Gaming Prods. Ltd., No. 07-3585, Slip Op. (7th Cir. Sep. 8, 2008) (Wood, J.).*
Judge Wood delivered the Seventh Circuit’s opinion reversing and revealing Judge Manning’s damages award. Plaintiff-Appellant WMS Gaming (“WMS”) alleged that defendants (collectively “PartyGaming”) infringed its JACKPOT PARTY and SUPER JACKPOT PARTY marks. Defendants chose not to participate in the suit. The Northern District, therefore, entered a default judgment for WMS and a permanent injunction. WMS sought $287M in damages, an amount equal to PartyGaming’s reported U.S. revenues during the relevant period. The Court, however, held that WMS was entitled to damages, not an equitable accounting of all of defendants revenues and awarded approximately $900K per year, or $2.7M total. As an initial matter, the Seventh Circuit held that Fed. R. Civ. P. 54(c) requires that in the case of a default judgment the award cannot differ from or exceed the type and amount of requested damages. Because WMS’s complaint and its subsequent pleadings all requested both an equitable accounting and actual damages, either were an allowable damages award.
Having determined that an equitable accounting was an appropriate remedy, the Court explained that WMS was entitled to an award of PartyGaming’s revenues attributable to PartyGaming’s trademark infringement. Further, WMS’s burden was only to prove PartyGaming’s revenue. WMS did that by proving PartyGaming’s $287M of U.S. revenues during the relevant period. The burden then shifted to PartyGaming to prove which portions of its revenue were not attributable to its infringement. The Seventh Circuit, therefore, reversed and remanded to the Northern District.
* Click here for the opinion and click here for a podcast of the oral argument.

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