Foresight Valuation Group

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Tag: Licensing

Centripetal Networks v. Cisco Systems

Posted on Modified on by Lynn Dudinsky

The 22-day bench trial in the District Court for the Eastern District of Virginia concluded last week with a verdict in favor of Centripetal Networks for $1.9 billion in past damages and a running royalty of 10% for three years followed by a 5% royalty for an additional three years. The Centripetal Networks, Inc. v. Cisco Systems, Inc. case involved the assertion of five patents that deal with complex computer networking security functions. Centripetal accused various Cisco network devices of infringing the asserted patents, including Cisco’s Switches, Routers, Digital Network Architecture, Cognitive Threat Analytics as well as other products. Of the five asserted patents, the Court found that each element of the asserted claims in four valid and infringed by one or more of Cisco’s products and that Centripetal had failed to meet its burden of proof on infringement of the asserted claims of the fifth patent.

An interesting aspect of this case was the use of a live video platform used by both parties to present their evidence and the selection, over objections by Cisco, of a platform other than Cisco’s. The reason for the need of a video platform was based on the technologies involved being “at the forefront in protecting intellectual property and confidential personal information” as well as their use in the national defense context. The court believe that it was in the public interest to move forward with the trial rather than waiting until an unknown time when courtrooms would be open for traditional civil trials. The use of this platform ended up being a success and at the end of the last day of trial, both parties “joined in congratulating the Court’s staff for their handling of the trial evidence by means of the video platform.”

Following the Court’s determination on validity and infringement, the issue of damages was discussed. As it related to past damages, Centripetal declined to present evidence of a causal relationship between suspected lost profits and Cisco’s sales of infringing technology and therefore the lost profit method of calculating past damages was not at issue in this case. Rather, the Court adopted the approach based on the reasonable royalty Centripetal would have received through arms-length bargaining. The determination of reasonable royalties can be based on the following methods: (1) the analytical method which focuses on the infringer’s projections of profit for the infringing product and (2) the hypothetical negotiation or the willing licensor-willing licensee approach. The Court stated that insufficient evidence was submitted for the first approach therefore the willing licensor-willing licensee approach as selected.

In accordance with the selected approach, the Court based its economic analysis on the factors laid out in Georgia-Pacific Corp. v. U.S. Plywood Corp. Factors one and two of Georgia-Pacific focus on the presence of existing license agreements for the patents-in-suit and the rates paid by licensees to license other patents comparable to the infringed patents. In this case, the Court had recently heard a case involving Centripetal and Keysight Technologies where an agreement was made related to a Confidential Binding Term Sheet. In this agreement, Centripetal licensed patents that the Court determined to be comparable for a $25 million upfront payment in addition to a 10% royalty on directly competing products and a 5% royalty on non-competing products. The Court determined that the 10% royalty on directly competing products provided “a comparable baseline license from which the Court can determine a reasonable royalty in this case.” Due to the fact that this agreement was the only comparable agreement, the Court was able to overcome the preference to exclude agreements that were obtained in the coercive environment of litigation as opposed to being the result of open negotiation.

The Court discussed the various other Georgia-Pacific factors and, while we will not elaborate on the specific discussion of each factor in this blog, it is important to note that the Court determined that the “weight of the factors as a whole strongly favors Centripetal.” This determination allows the Court to find that the Keysight royalty rate of 10% is a reasonable royalty rate to compensate Centripetal for Cisco’s past infringement. Another discussion (reserved for another blog) relates to the apportionment argument presented by both parties that led to the determination that the apportioned royalty base was $7,558,085,447.

Following the determination of the reasonable royalty rate and the apportioned royalty base, the Court was able to calculate the total past damages award of $755,808,545, before adjusting for enhanced damages. On the topic of enhanced damages, the Court noted that Centripetal and Cisco signed an NDA in 2016 as a result of meetings where Centripetal’s product offerings and the effectiveness of their solutions were demonstrated to Cisco. After additional meetings and further disclosures, Cisco released its “network of the future” products in June 2017, which incorporated Centripetal’s patented technology. The Court outlined enough evidence to support its belief that “this is an egregious case of willful misconduct beyond typical infringement” and determined that enhancing the damages by a factor or 2.5 was appropriate. Applying this factor increased the damages to $1,889,521,362. One of the reasons stated by the Court to use a factor of 2.5 instead of 3 was because Cisco prevailed as to one of the asserted patents, potentially saving the company over $375 million in additional damages.

The Court then turned its attention to future damages where it denied Centripetal’s request for injunctive relief and instead imposed an ongoing royalty obligation. Again, the Court used Georgia-Pacific to find that the Keysight license as a comparable license and selected a 10% royalty for the first three years and extended the three year term of Keysight to 6 years for Cisco with a 5% royalty set for the final three years. The Court also set minimum and maximum annual royalties of $167 million and $300 million, respectively, for the first three years and $83 million and $150 million for the final three years.

The final tally of damages related to this case resulted in Actual Damages of $755 million enhanced to $1.9 billion and Pre-judgement Interest of $13.7 million for a lump-sum award of $1,903239,287 “due on the judgment date.” Additionally, the future damages based on royalties over the next six years will range from $754 million to $1.3 billion. These combined damages awards rank among some of the highest patent damages awarded to date.  Cisco has already announced its plan to appeal this decision to the U.S. Federal Circuit Court of Appeals, and we will update this blog as new information emerges.

Romag v. Fossil: Resolving a Circuit Split on Willfulness and Profit Awards for Trademark Infringement

Posted on Modified on by Lynn Dudinsky

In the midst of the COVID pandemic, the Supreme Court resolved an issue that was split evenly between the circuit courts. The issue before the Court was whether the Lanham Act, which is the federal statute governing trademarks, required a plaintiff to prove that the defendant had willfully infringed their trademark before the plaintiff could recover the infringer’s profits. In a surprisingly unanimous decision, the Supreme Court in Romag v. Fossil held that a plaintiff in a trademark infringement suit is not required to show that a defendant willfully infringed the plaintiff’s trademark as a precondition to a profits award.

This dispute began when Fossil signed an agreement with Romag that allowed Fossil to use Romag’s magnetic snap fasteners in Fossil’s handbags and other products. During the initial years of the relationship, both parties were content with the arrangement but after some time, Romag discovered that the factories Fossil hired in China to make its products were using counterfeit Romag fasteners. Romag alleged that Fossil did little to prevent the factories from continuing this practice and when both parties were not able to resolve the issue internally, Romag initiated litigation. A trademark case followed with Romag accusing Fossil of infringing its trademark and falsely representing that the fasteners came from Romag. At trial, a jury agreed with Romag and found that Fossil acted in callous disregard of Romag’s rights but rejected Romag’s claim that Fossil had acted willfully and therefore denied Romag’s recovery of Fossil’s profits. This decision by the jury was based on the definition of the district court which relied upon precedent from the Second Circuit. The Second Circuit happened to be one of the six circuits that required proof of willful infringement as a precondition to a profits award. This case was then accepted by the Supreme Court to resolve the split.

The Supreme Court was careful to rely on the plain language of the Lanham Act in describing the unanimous holding. This is important because the plain language of the Lanham Act does require willfulness as a precondition to a profits award for a trademark dilution cause of action. However, Romag’s cause of action was not for dilution (conduct that lessens the association consumers have with a trademark), it was for the false and misleading use of their trademarks and the plain language of that section does not require proof of willfulness. Fossil, and half of the circuit courts, had read into this cause of action the willfulness requirement of a dilution cause of action. The Supreme Court rejected this inclusion of willfulness language where the Act had been silent, holding that courts must be more careful when reading into statutes words that are not there when Congress has included that language elsewhere in the same statutory provision. In making its decision, the Supreme Court refused to insert this language, and noted other examples within the Lanham Act where the statutes speak to mental states and how the mental state impacts the damages award (i.e., increasing damages for intentional acts and with specific knowledge, increasing the statutory cap on damages for certain willful violations and limiting the types of awards for innocent infringers). With these references in mind, the Supreme Court made it clear that, while the mental state of a trademark defendant is a “highly important consideration in determining whether an aware of profits is appropriate,” the use of willfulness as an “inflexible precondition to recovery” cannot be read into the statute as written. Based on this determination, the Supreme Court vacated the judgment of the court of appeals and remanded the case for further proceedings consistent with its opinion and left the door open for policymakers to insert this language into the Lanham Act should it determine that this requirement for willfulness would further the goals of the statute.

When a Stick Becomes a Carrot: How Toyota’s Royalty-Free Patent Move Impacts The Valuation of Its IP Portfolio

Posted on Modified on by Efrat Kasznik

Toyota has recently announced (April 2019) that it will grant royalty-free licenses on nearly 24,000 patents related to its hybrid electric vehicle (HEV) market. In the announcement, Toyota stated that its goals were to promote widespread adoption of electrified vehicles in an effort to help governments, automakers and society at large accomplish goals related to climate change. Toyota has further noted that it felt now is the time to cooperate with other companies, based on the high volume of inquires it received in connection with its vehicle electrification system from companies who recognize a need to popularize hybrid and other electrified vehicle technologies.

The Toyota announcement comes at the heels of a similar announcement made in January 2015, when Toyota announced at the CES conference that it is going to make its hydrogen fuel portfolio of 5,600 patents available on a royalty-free basis. Toyota’s new patent announcement raises a number of important questions related to the value of these patents and the end goal of Toyota’s move.  In this blog we examine the potential motivations for Toyota’s bold move, its implications on patent valuation and brand valuation, and how Toyota’s patent move is very different from what appears to be a similar move made by Tesla.

From Hybrid Vehicle Pioneer to Market Leader

The Toyota brand is synonymous with the hybrid vehicle. Since the launch of the Prius, with its unique love-it or hate-it design, Toyota has solidified its position as a leading auto company in the pursuit of reduced vehicle emissions. The company’s eco-friendly branding efforts have paid global dividends – in 2017, Toyota surpassed the 10 million cumulative global unit sale mark, with Prius models alone accounting for about 60% of these sales. Though they may be the category leader, however, the hybrid vehicle market is fairly negligible in the total global car market, which is pegged at nearly 79 million unit sales in 2018. With an estimated 4.2 million unit sales in 2018, the hybrid market represents just 5% of the total. With such a strong brand in a minuscule category, it is only natural for Toyota to seek to aid growth in the hybrid market.

With the move to allow royalty-free access to its hybrid vehicle patent portfolio, while selling parts and consulting services on the technology, it seems that Toyota is attempting to advance the hybrid market as a whole. A J.P. Morgan analyst report noted that electric vehicles (including battery EVs, plug-in hybrids, and traditional hybrids) represented just 1% of total global vehicle sales in 2015. The same report estimates that by 2030, this will rise to nearly 60%. It is fair to assume that Toyota will be a major supplier fulfilling this increased global demand.

When a Stick Becomes a Carrot

In an article we published in March 2019, Foresight predicted the return of “Carrot licensing” as one of the trends to watch in 2019.  The Toyota announcement could not have been a more timely validation of that trend.  “Carrot licensing” is a term used to reference licensing activity that is driven by technology transfer, as opposed to licensing driven by enforcement (also known as “Stick” licensing). This form of licensing is more closely associated with emerging technologies, where the licensor is interested in creating markets for new products using an idea protected either by trade secrets or by patents.  A Carrot licensing strategy also has economic advantages: it allows expansion into new regions without bearing the marketing, manufacturing and distribution cost associated with the complementary business assets needed to bring a new technology to market.  In Toyota’s case, the company decided to grant royalty-free license agreements as a way to boost market adoption, which will in turn drive additional revenues from components and technical support.

Given Toyota’s dominance in the hybrid vehicle market, one could easily argue that the time to cooperate has long passed, as major US manufacturers currently offer their own hybrid vehicles, or have announced plans to go all electric in the coming years. With this in mind, it is unlikely that Toyota is seeking to create partnerships with major US manufacturers to expand their hybrid lineups. Instead, this seems to be Toyota’s push to become a component supplier that also provides fee-based technical support to car makers in developed or developing countries that do not have the same access to electric or hybrid vehicle technology. Through component sales and technical support, Toyota can continue to profit from the innovations protected by these patents without having to build, export and market Toyota vehicles.  Since Toyota cannot possibly grow its market share much beyond it already is, it needs to expand the overall pie so others can produce hybrid vehicles, while paying Toyota for parts and knowledge.  It is actually a very smart strategy from an economic and market perspective.

Toyota’s Patent Valuation: Boost or Bust?

Toyota’s announcement raises a number of questions related to the value of the 24,000 patents that were just offered royalty-free to the market. If Toyota is granting royalty-free licenses on a significant portion of its patent portfolio, does this mean that these patents hold no value? According to Toyota’s announcement, an actual license with Toyota is still required to gain access to these patents. This approach is markedly different from that of Tesla which stated they would not initiate patent lawsuits against anyone who, in good faith, wanted to use their patents. Toyota is stating that “contracts for the grants may be issued by contacting Toyota and discussing specific licensing terms and conditions.” This sounds more like Microsoft’s approach to granting access to 10,000 patents to startups to defend against lawsuits, subject to the condition that the startup must qualify based on their preceding three-month Azure spending.

We do not yet know what terms and conditions will ultimately be included in the Toyota license agreements, but the language tends to indicate that one could expect to find a tie-in with Toyota’s services and/or Toyota’s components, which could generate significant revenues for Toyota. The company will most likely still continue to maintain and grow its patent portfolio, even though the patents are offered under royalty-free licenses. Assuming this is the case, Toyota is seeking an alternative route to monetization of their patented technology that extends beyond the market which it already dominates in vehicle sales.  If the patents help drive other types of revenues, then they still have significant value, which could potentially be even higher than the value calculated based on the royalty savings or royalty licensing potential to Toyota.  Patents can also bring strategic value that does not translate directly into a revenue stream.  Toyota holds the IP rights to the technology underlying its massive patent portfolio, and can use these IP rights in whatever way it sees fit.  From an economic and legal perspective, the Toyota Board has a fiduciary duty to its shareholders to utilize corporate assets (including intangible assets, such as patents) in ways that optimize shareholders’ return.  One should assume that careful consideration has been given before 24,000 patents are released royalty-free, as the Board could have left the status-quo as is and have done nothing with the patents; if these patents are indeed worthless, why do anything with them? Let alone offer them free of royalty to the market.

“Toyota Inside”? The Branding Implications for Toyota

Toyota’s gesture also differs from Tesla’s in other important ways. Tesla’s announcement was interpreted as a way to expand adoption of a relatively new market: all-electric vehicles. Tesla viewed its patent portfolio as a road block to the emergence of newcomers in the market.  Toyota, on the other hand, is in a much different position: it holds the lion’s share of the market for hybrid vehicles –  a market it helped create over 20 years ago with the introduction of the first Prius model in 1997. Since that time, Toyota has effectively utilized its portfolio to restrict competition and build its massive market share, and is now facing an inflection point where the market appears ready to abandon hybrid vehicles in favor of all- electric vehicles. It seems clear that Toyota believes major markets are turning away from hybrids, and it now must find a way to monetize its patent portfolio through a new business model. Time will tell whether this approach will suffer the same fate as Toyota’s fuel cell patent offering in 2015, or if the company is able to extend the economic life of these assets through service and component obligations in emerging vehicle markets.

It also seems that Toyota views itself as a key player in enabling this overall growth. The Prius brand has proven itself to be marketable and sustainable; however, no matter how strong the brand, the demand must exist in the market to realize its true value. Perhaps this is why Toyota is seeking to enable its competitors to more readily produce hybrid vehicles. With the competition now armed with the tools to produce competitive hybrids, new markets could begin to open up. Aside from market expansion in territories like the U.S., new demand in markets such as China and India, which each sold around 25 million and 4 million vehicles respectively in 2017, could mean massive revenue potential for Toyota.

Conclusion

Toyota has achieved a dominant market position in the hybrid vehicle market; a position which has awarded Prius a great competitive advantage. We see the move by Toyota to allow royalty-free access to its 24,000 patent portfolio not only as a move to grow the hybrid vehicle market, but also as a way to extract new revenues sources from its patented technology as well as enhance the value of its brand (Toyota is already boasting a brand value of over $53 billion according to brand ranking service, Interbrand). The company may have won the hybrid market battle against traditional competitors such as Ford and Honda, but now it must deal with competition from a new generation of companies that were born all-electric, namely Tesla. With this move, Toyota reminds us that they are the dominant force in hybrid technology and are eager to drive the industry towards an emissions-free future.

FIRRMA and its Impact on That Which it Seeks to Protect

Posted on Modified on by Lynn Dudinsky

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was signed into law by the current Administration on August 13, 2018, to protect US technological superiority and address national security risks associated with the ability of foreign parties to obtain equity interests in domestic businesses and influence decisions or obtain information related to critical US technologies. However, FIRRMA poses a threat to a wide range of innovative industries, including Biotech, Aerospace, and Nanotechnology, by adding increased governmental scrutiny that may restrict the funding needed by entrepreneurs seeking to build the next-gen technologies. Without the funding necessary to take the risks necessary to develop these next-gen technologies, FIRRMA may erode the technological superiority it seeks to protect. Moreover, the pace of innovation in other parts of the world may increase as corporations are free to accept the investments that US companies are denied because of FIRRMA.

FIRRMA is designed to reform and modernize the review process of the Committee on Foreign Investment in the United States (CFIUS) and gives CFIUS authority over technology transfers. FIRRMA modified and broadened the power of the president and CFIUS by expanding the scope of foreign investments in the US subject to national security review. CFIUS’ authority applies to the technology transfers of US businesses to foreign organizations as well as domestic organizations that are controlled by a non-US person. While FIRRMA will not be fully implemented until February 2020, the US Department of the Treasury issued temporary regulations in October 2018 through a pilot program to address what it considers to be critical American technology and intellectual property from potentially harmful foreign acquisitions.

The pilot program implements two sections of FIRRMA that did not take effect upon FIRRMA’s enactment. The first section expands the scope of transactions subject to review by CFIUS to include certain investments involving foreign persons and critical technologies. The second section makes effective FIRRMA’s mandatory declarations provision for all transactions that fall within the specified scope of the pilot program. The regulations state that the pilot program establishes mandatory declarations for certain transactions involving investments by foreign persons in certain US business that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies.” The language of the temporary regulations may be concerning to businesses seeking investment due to the broad language it contains and without these investments, there will be a negative impact on the types of R&D efforts that facilitate the creation of innovative technologies that generate intellectual property portfolios that can be licensed.

The regulations also state that the purpose of the pilot program is to assess and address ongoing risks to the national security of the US resulting from two urgent and compelling circumstances: (1) the ability and willingness of some foreign parties to obtain equity interests in US business in order to affect certain decisions regarding, or to obtain certain information relating to, critical technologies; and (2) the rapid pace of technological change in certain US industries. While the regulations state that the current Administration “supports protecting our national security from emerging risks while maintaining an open investment policy,” it is unclear how this Administration will utilize this program and how it may impact funding in the US and the downstream impact that this lack of funding may have on IP licensing. In the first quarter of 2018, net foreign direct investment into the US has declined from $146.5 billion in the first quarter of 2016 to $89.7 billion for the same quarter in 2017 to $51.3 billion for the first quarter of 2018.  While most of the decline is attributed to general economic factors, many believe that it also reflects fears of what the administration is going to do given their stance on China and the threat of trade wars and tariffs.

The expansion of CFIUS authority over investments through FIRRMA may lead to decreased interests from foreign individuals, business, and funds that, in part, created an environment for US businesses to secure the technological superiority this Act now seeks to protect. If that is the case, we may see significantly less investment in the industries covered by the pilot program which includes many industries at the forefront on IP licensing activity such as: Computer Storage, Semiconductor, Battery, Aerospace (Aircraft manufacturing, Space Vehicles and Propulsion), BioTech, Wireless Communication Equipment and Nanotechnology.

It is too soon to know the impact FIRRMA will have on US businesses that seek investment to fund the type of research and development necessary to maintain the pace of innovation that led to the US holding a strong position in technological advancement; however, given the current decline in funding, there is a real possibility that these new regulations that are being imposed on US innovation companies may further restrict the funding necessary to drive the US technological superiority that FIRRMA was created to protect.

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