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Versata Software, Inc. v. Sap America, Inc. , 717 F.3d 1255 ( 2013 )


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  •   United States Court of Appeals
    for the Federal Circuit
    ______________________
    VERSATA SOFTWARE, INC.
    (formerly known as Trilogy Software, Inc.),
    VERSATA DEVELOPMENT GROUP, INC.
    (formerly known as Trilogy Development Group,
    Inc.), AND VERSATA COMPUTER INDUSTRY
    SOLUTIONS, INC. (formerly known as Trilogy
    Computer Industry Solutions, Inc.),
    Plaintiffs-Cross Appellants,
    v.
    SAP AMERICA, INC. AND SAP AG,
    Defendants-Appellants.
    ______________________
    2012-1029, -1049
    ______________________
    Appeals from the United States District Court for
    the Eastern District of Texas in No. 07-CV-0153, Mag-
    istrate Judge Charles Everingham.
    ______________________
    Decided: May 1, 2013
    ______________________
    MIKE MCKOOL, McKool Smith, P.C., of Dallas, Texas,
    argued for plaintiffs-cross appellants. With him on the
    brief were DOUGLAS A. CAWLEY; SCOTT L. COLE and JOEL
    L. THOLLANDER, of Austin, Texas.
    2                         VERSATA SOFTWARE   v. SAP AMERICA
    J. MICHAEL JAKES, Finnegan, Henderson, Farabow,
    Garrett & Dunner, L.L.P., of Washington, DC, argued for
    defendants-appellants.     With him on the brief were
    MICHAEL A. MORIN, JOHN M. WILLIAMSON and JENNIFER
    K. ROBINSON. Of counsel on the brief were JAMES R.
    BATCHELDER and LAUREN N. ROBINSON, Robert & Gray
    L.L.P., of Palo Alto, California; DAVID J. BALL, JR., Paul,
    Weiss, Rifkind, Wharton & Garrison L.L.P, of Washing-
    ton, DC; KATHERINE K. LUTTON, Fish & Richardson, P.C.,
    of Redwood City, California; JOHN W. THORNBURGH,
    JUSTIN M. BARNES and CRAIG E. COUNTRYMAN, Fish &
    Richardson, P.C., of San Diego, California; KEVIN R.
    HAMEL, SAP America, Inc., of Newtown Square, Pennsyl-
    vania. Of counsel was KENNETH A. GALLO, Paul, Weiss,
    Rifkind, Wharton & Garrison L.L.P, of Washington, DC.
    ______________________
    Before RADER, Chief Judge, PROST and MOORE, Cir-
    cuit Judges.
    RADER, Chief Judge.
    After a jury verdict of infringement with an award of
    damages in favor of Versata Software, Inc., Versata
    Development Group, Inc., and Versata Computer Industry
    Solutions, Inc. (collectively “Versata”), SAP America, Inc.
    and SAP AG (collectively “SAP”) appeal. Ultimately, the
    trial court found no infringement of the 
    U.S. Patent No. 5,878,400
    . The jury found infringement of three claims of
    
    U.S. Patent No. 6,553,350
    . Subsequently, the trial court
    denied SAP’s motions for judgment as a matter of law
    (JMOL) or a new trial, awarded prejudgment interest,
    and entered a permanent injunction. Although affirming
    the jury’s infringement verdict and damages award, this
    court vacates as overbroad the permanent injunction and
    remands for the district court to enter an order that
    conforms to this opinion.
    VERSATA SOFTWARE   v. SAP AMERICA                        3
    I.
    This invention relates to “the field of computer-based
    pricing of products.” ’350 Patent, col. 1, l. 10. In the
    competitive commercial marketplace, sales representa-
    tives often strive to provide particularized pricing for
    customers in a timely fashion. Yet, precise product pric-
    ing depends on a variety of factors including type of
    product (e.g., a single product versus a bundle or custom-
    ized product); the size of the customer; the type of cus-
    tomer (e.g., a wholesaler versus a distributor); and the
    customer’s geographic location. 
    Id.
     at col. 1, ll. 45–52.
    In the early 1990s, a different pricing table stored
    each pricing factor. Applying these factors to a single
    transaction required accessing and applying large
    amounts of data stored in a large central database. 
    Id.
     at
    col. 1, ll. 25–26. Assuming each product is sold at a price
    particularized for each purchaser, a selling organization
    with ten thousand products and ten thousand purchasers
    would need pricing tables with one hundred million
    entries.
    In the prior art computerized pricing engines, each
    pricing factor usually required separate database queries.
    The numerous tables were stored on a mainframe com-
    puter, the customer order was entered into a central
    billing system, and the mainframe would perform the
    pricing calculation by separately accessing each applica-
    ble data set. 
    Id.
     at col. 2, ll. 21–27, 56–63. Thus, deter-
    mining a final price was highly inefficient.         Sifting
    through this data meant that customers would often wait
    several days to get an accurate price. 
    Id.
     at col. 1, ll. 29–
    36. The delay often caused lost sales. 
    Id.
    The claimed invention leverages hierarchical product
    and data structures to organize pricing information.
    Hierarchical pricing involves a “WHO” (the purchasing
    organization or customer) and a “WHAT” (the product).
    
    Id.
     at col. 3, ll. 24–27. The WHO is defined by “creating
    4                         VERSATA SOFTWARE   v. SAP AMERICA
    an organizational hierarchy of organizational groups”
    such as “Customer Type,” “Customer Size,” and “Geogra-
    phy.” 
    Id.
     at Fig. 4A; col. 3, ll. 25–32. One or more cus-
    tomers may be members of each organizational group,
    and each customer may be a member of more than one
    organizational group. 
    Id.
     Thus, when a customer is
    selected, the system identifies all the groups to which the
    customer belongs as well as all corresponding price ad-
    justments. Similar hierarchies are constructed for prod-
    ucts. This hierarchical pricing engine used less data than
    the prior art systems and offered dramatic improvements
    in performance.
    In 1995 and 1996, Versata both commercialized its hi-
    erarchical pricing engine and filed a patent application
    covering the invention. The commercial embodiment was
    a software called “Pricer,” and it received praise as a
    “breakthrough” that was “very innovative.” J.A. 1304.
    The ’400 Patent issued in 1999. The ’350 Patent, a con-
    tinuation of the application which led to the ’400 Patent,
    issued in 2003.
    The praise for Pricer was borne out in its sales. Be-
    tween 1995 and 1998, Pricer customers included many
    large companies—called “Tier 1” companies at trial—such
    as IBM, Lucent, Motorola, and Hewlett-Packard. Pricer
    Tier 1 customers generated an average of $5 million in
    revenue and $3 million in profit for Versata. Versata sold
    Pricer either as a package with other Versata software or
    as a bolt-on addition to enterprise systems offered by
    companies like SAP.
    SAP provides software solutions for thousands of
    companies, governments, and nonprofits around the
    globe. SAP’s Enterprise Resource Planning (“ERP”) and
    Customer Relationship Management (“CRM”) software
    runs most processes needed by these institutions, includ-
    ing financials, accounting, materials management, pro-
    curement, supply-chain planning, human resources, and
    VERSATA SOFTWARE   v. SAP AMERICA                       5
    pricing. While Versata’s patent application was pending,
    SAP designed and released a new version of its enterprise
    software that contained hierarchical pricing capability.
    Before SAP launched its new software, it stated the
    planned software would be like Versata’s Pricer. When
    SAP ultimately released its software in October 1998, it
    bundled the hierarchical pricing capability into its full
    enterprise software to discourage the use of bolt-on prod-
    ucts like Pricer. J.A. 8479.
    Following the announcement and launch of SAP’s new
    hierarchical pricing engine, Pricer sales faltered. Versa-
    ta’s win-rate on sales offerings of Pricer dropped from 35
    percent to 2 percent. While Versata retained many of its
    previously-won Pricer customers, Versata decided to
    discontinue heavy investment in marketing because SAP
    had destroyed its market. Versata maintained Pricer as a
    product offering, but made no new sales as SAP’s bundled
    software took hold.
    In 2007, Versata sued SAP for infringement of both
    the ’400 Patent and the ’350 Patent. With respect to the
    ’400 Patent, Versata asserted infringement of independ-
    ent claim 31 and dependent claims 35 and 36. Each claim
    requires “computer readable program code configured to
    cause a computer to” perform a set of claimed operations,
    including accessing customer and product hierarchies in
    order to determine a price. ’400 Patent, col. 23, ll. 10–52,
    62–67.
    With respect to the ’350 Patent, Versata asserted in-
    fringement of independent claim 29 and dependent claims
    26 and 28. Claims 26 and 28 require “computer instruc-
    tions to implement” the claimed operations. ’350 Patent,
    col. 21, ll. 61–62. Claim 29 requires “computer program
    instructions capable of” retrieving “pricing information”
    from both customer and product hierarchies. ’350 Patent,
    col. 22, ll. 21–35.
    6                         VERSATA SOFTWARE   v. SAP AMERICA
    This suit resulted in two jury trials. During the first
    trial, Versata’s expert presented evidence that SAP’s
    software used hierarchical pricing. One method he used
    was a demonstrative data setup. Using and configuring
    the inherent functions of SAP’s software, the expert
    performed hierarchical access on customer and product
    hierarchies.
    The jury found that SAP directly infringed the assert-
    ed claims of the ’400 and ’350 Patents, SAP induced and
    contributed to infringement of claim 29 of the ’350 Patent,
    and the asserted claims were not invalid. The jury
    awarded $138,641,000 in damages. SAP moved for judg-
    ment as a matter of law of noninfringement of both pa-
    tents and for a new trial on damages.
    For the ’400 Patent, the trial court reasoned that the
    claim language “configured to cause” required that the
    SAP products, “as made and sold, contain computer code
    or program instructions sufficient to perform the opera-
    tions recited in the claims without additional modification
    or configuration, or the addition of further program in-
    structions.” J.A. 155. It found that Versata’s infringe-
    ment case emphasized SAP’s product as configured by
    Versata’s expert, not how the software was made or sold.
    
    Id.
     Thus, the trial court granted JMOL of noninfringe-
    ment of the ’400 Patent. However, the trial court denied
    SAP’s JMOL of noninfringement of the ’350 Patent,
    finding that substantial evidence supported the jury’s
    determination. Lastly, the court granted a motion for
    new trial on damages based on a change in governing law.
    Before the second trial began, SAP attempted to elim-
    inate any basis for future infringement. Specifically, SAP
    modified its products with a software patch. The modifi-
    cation essentially prevented users from saving data into
    certain fields relating to hierarchical access.
    The second trial focused on damages. Because SAP’s
    software patch was designed to eliminate infringement in
    VERSATA SOFTWARE    v. SAP AMERICA                         7
    products after May 2010, the jury was required to deter-
    mine the effectiveness of the patch in avoiding infringe-
    ment as part of damages. The jury concluded that, even
    with the software patch, the accused products still in-
    fringed.
    The jury also evaluated two damages theories: lost
    profits and reasonable royalties. For lost profits, Versata
    focused on Pricer sales it lost to Tier 1 SAP customers.
    Versata claimed this consisted of 93 lost sales, and it put
    forward evidence regarding demand, the absence of
    noninfringing alternatives, and the capacity to sell Pricer
    in this market. Defendants did not put on evidence of a
    competing lost profits model and instead offered expert
    testimony critiquing Versata’s model. Versata’s evidence
    persuaded the jury which awarded $260 million in lost-
    profits damages.
    With respect to reasonable royalties, the district court
    precluded Versata from putting forward its damages
    model. SAP, however, put forward a reasonable royalty
    model which included comparable software called Khi-
    metrics. The jury heard evidence that Khimetrics had an
    average per customer royalty of $133,200. The jury
    awarded reasonable royalties of $85 million.
    Following the second trial, SAP again moved for
    JMOL, claiming Versata failed to prove it was entitled to
    lost profits and that the reasonable royalty verdict lacked
    evidentiary foundation. The trial court denied the motion
    and granted Versata’s motion for a permanent injunction.
    This cross-appeal followed. The court has jurisdiction
    under 
    28 U.S.C. § 1295
    (a).
    II.
    SAP’s appeal focuses on three issues: (1) whether the
    district court erred after the first trial in refusing to grant
    a JMOL of noninfringement of the ’350 Patent; (2) wheth-
    er the district court erred after the second trial in refusing
    8                         VERSATA SOFTWARE   v. SAP AMERICA
    to overturn the lost profits and reasonable royalties
    award; and (3), whether the district court erred by grant-
    ing an overbroad permanent injunction. Versata, on the
    other hand, claims the district court erred by granting
    JMOL of noninfringement of the ’400 Patent and by
    excluding the reasonable-royalty testimony of Versata’s
    expert.
    The infringement and damages issues raised by both
    sides concern motions for JMOL, and are reviewed under
    regional circuit law. Muniauction, Inc. v. Thomson Corp.,
    
    532 F.3d 1318
    , 1323 (Fed. Cir. 2008). The Fifth Circuit
    applies an “especially deferential” standard of review
    “with respect to the jury verdict.” Brown v. Bryan Cnty.,
    
    219 F.3d 450
    , 456 (5th Cir. 2000). The jury may only be
    reversed if there is no substantial evidence supporting the
    verdict. Thus, a JMOL may only be granted when, “view-
    ing the evidence in the light most favorable to the verdict,
    the evidence points so strongly and overwhelmingly in
    favor of one party that the court believes that reasonable
    jurors could not arrive at any contrary conclusion.”
    Dresser-Rand Co. v. Virtual Automation, Inc., 
    361 F.3d 831
    , 838 (5th Cir. 2004); Brown, 
    219 F.3d at 456
    . The
    evidentiary and injunction rulings are reviewed for abuse
    of discretion. See Innogenetics, N.V. v. Abbott Labs., 
    512 F.3d 1363
    , 1379 (Fed. Cir. 2008) (addressing permanent
    injunctions); Vargas v. Lee, 
    317 F.3d 498
    , 500 (5th Cir.
    2003) (addressing Daubert challenges).
    III.
    SAP claims the trial court’s failure to grant a JMOL of
    noninfringement of the ’350 Patent was two-fold error.
    First, it argues that its software cannot infringe because
    the software is not capable of performing customer and
    product hierarchies without added computer instructions.
    Second, it claims the software does not use “denormalized
    numbers” in its pricing tables.
    VERSATA SOFTWARE   v. SAP AMERICA                       9
    Based on the parties’ stipulated construction, claims
    26 and 28 require “computer instructions causing a com-
    puter to implement” the claimed operations. J.A. 10006.
    Claim 29 requires “computer instructions capable of”
    performing those same operations. ’350 Patent, col. 22, l.
    21. Portions of the record clearly support the jury’s
    conclusion that SAP’s accused products infringe the
    asserted claims without modification or additional com-
    puter instructions.
    Versata’s expert explained SAP’s source code to the
    jury. He testified that SAP’s programmers left notes in
    source code explaining how the code works, and he
    showed these notes to the jury. These notes or comments
    explained “the implementation of customer hierarchies”
    as well as how to display product hierarchies. J.A. 1445;
    1450. Other comments stated that hierarchical access
    was the default for condition records. Condition records
    are how the software stores data relating to customers or
    products. The jury also saw SAP documents explaining
    that the accused hierarchical access feature was designed
    “[e]specially for hierarchical data such as that represent-
    ing a product hierarchy or a customer hierarchy.” J.A.
    2100.     Versata’s expert concluded that the code was
    written by SAP engineers “so that it could perform the
    [claimed] functions . . . . [The] writing of that code means
    that the code has been configured to implement these
    particular functions or to be able to cause the computer to
    do these things.” J.A. 1504.
    The most telling evidence was the expert’s demonstra-
    tive data setup. The expert used the inherent functionali-
    ty of SAP’s software to conduct hierarchical pricing based
    on customer and product hierarchies. Specifically, the
    expert used the SAP interface to set up four pricing
    elements: a pricing calculation function; a pricing proce-
    dure; a condition table; and an access sequence. The
    expert testified that this data setup did not require any
    modification to SAP’s source code, and that SAP’s accused
    10                        VERSATA SOFTWARE   v. SAP AMERICA
    products all included the code to accomplish his demon-
    stration. In essence, the expert confirmed his theories
    that the accused software was capable of performing the
    claimed functionality by making the software perform the
    function without modifying the software.
    SAP does not dispute that its software, as set up by
    Versata’s expert, performed the claimed functionality.
    Instead, it claims that Versata did not prove that SAP’s
    software, as shipped to the customer, infringed the ’350
    Patent. It argues that the claim language “computer
    instructions capable of” and “computer instructions caus-
    ing a computer to implement” are not directed to source
    code. Rather, the language requires that the software, as
    shipped, contain computer instructions to perform the
    claimed functionality. In its view, the expert’s data setup
    added new computer instructions to SAP’s software,
    thereby changing and modifying a noninfringing product
    into an infringing product.
    SAP misinterprets the claim language. The only
    claim construction affecting these terms was the stipulat-
    ed construction of “computer instructions to implement”
    which the parties agreed means “computer instructions
    causing a computer to implement.” It does not appear that
    SAP requested any claim construction of the term “com-
    puter instructions,” much less a construction that limits
    the phrase to exclude source code or require that the
    patented function be “existing as shipped” in the comput-
    er instructions. SAP cannot now collaterally attack the
    claim construction it has agreed to. Function Media
    L.L.C. v. Google Inc., 
    708 F.3d 1310
    , 1321–22 (Fed. Cir.
    2013) (noting a party may not object to a claim construc-
    tion it proposed or agreed to); Lazare Kaplan Int’l, Inc. v.
    Photoscribe Techs., Inc., 
    628 F.3d 1359
    , 1376 (Fed. Cir.
    2010) (“As we have repeatedly explained, litigants waive
    their right to present new claim construction disputes if
    they are raised for the first time after trial.”) (internal
    quotation omitted).
    VERSATA SOFTWARE   v. SAP AMERICA                      11
    Whether “computer instructions” can include source
    code thus becomes a pure factual issue. Versata’s expert
    testified that the source code is a computer instruction.
    He then presented evidence that the code, without modifi-
    cation, was designed to provide the claimed functionality.
    SAP cross-examined the expert, but the jury ultimately
    chose to credit the expert’s testimony and documentary
    evidence. SAP has not met the high standard needed to
    disregard the jury’s fact-finding function on this issue.
    See Bagby Elevator Co. v. Schindler Elevator Corp., 
    609 F.3d 768
    , 773 (5th Cir. 2010) (giving great deference to
    the jury’s findings and verdict); Agrizap, Inc. v. Wood-
    stream Corp., 
    520 F.3d 1337
    , 1342–43 (Fed. Cir. 2008)
    (stating that this court owes the jury great deference in
    its role as the factfinder).
    SAP also misinterprets the expert’s data setup. As
    this court has previously explained, when “a user must
    activate the functions programmed into a piece of soft-
    ware by selecting those options, the user is only activating
    the means that are already present in the underlying
    software.” Finjan, Inc. v. Secure Computing Corp., 
    626 F.3d 1197
    , 1205 (Fed. Cir. 2010); (quoting Fantasy Sports
    Props. v. Sportsline.com, Inc., 
    287 F.3d 1108
    , 1118 (Fed.
    Cir. 2002). While “a device does not infringe simply
    because it is possible to alter it in a way that would
    satisfy all the limitations of a patent claim,” High Tech
    Med. Instrumentation v. New Image Indus., Inc., 
    49 F.3d 1551
    , 1555 (Fed. Cir. 1995), an accused product “may be
    found to infringe if it is reasonably capable of satisfying
    the claim limitation,” Finjan, 
    626 F.3d at 1204
     (quoting
    Hilgraeve Corp. v. Symentec Corp., 
    265 F.3d 1336
    , 1343
    (Fed. Cir. 2001)).
    Versata’s expert did not alter or modify SAP’s code in
    order to achieve the claimed functionality. Rather, he
    followed SAP’s own directions on how to implement
    pricing functionality in its software and activated func-
    tions already present in the software: data structures,
    12                         VERSATA SOFTWARE   v. SAP AMERICA
    access sequences, pricing procedures, and condition types.
    SAP’s own expert admitted that each alleged alteration
    was part of the software’s capability, that it was not
    unusual for customers to perform the same actions, and
    that it was “expected that SAP’s customers who use the
    pricing functionality” will use it with a similar data setup.
    J.A. 2509. Furthermore, he testified that SAP expects its
    customers to set up access sequences, specific pricing
    procedures, and specific condition types. This record
    clearly supports the jury’s finding of infringement of the
    ’350 Patent. The trial court correctly refused JMOL on
    this ground.
    SAP’s second argument regarding infringement
    relates to denormalized numbers. The term “denormal-
    ized numbers” is not in the asserted claims. However, the
    trial court construed the term “pricing adjustment” as
    meaning “a denormalized number that may affect the
    determined price.” J.A. 263. The parties stipulated that
    “denormalized number” means: “a number, used as a
    price adjustment, that does not have fixed units and may
    assume a different meaning and different units depending
    on the pricing operation that is being performed.” The
    application of the number occurs during “run time,” i.e.,
    while the software is calculating the price and not during
    data entry.
    SAP argues the record does not show that the accused
    software used denormalized numbers during run-time.
    Instead, Versata showed that a user can (1) first enter a
    number and the later select a meaning for that number or
    (2) edit numbers after they have been entered but before
    run-time. These theories all relate to data entry—not
    software interpretation of the denormalized numbers
    during run-time.
    Again, sufficient evidence supports the jury’s verdict.
    Versata’s expert testified that SAP’s software contains
    numbers without “fixed units.” The numbers can assume
    VERSATA SOFTWARE   v. SAP AMERICA                      13
    a different meaning depending on which pricing operation
    is being performed by the software.
    The expert also compared SAP’s software to the prior
    art which did not use denormalized numbers. The prior
    art used fixed units in the pricing tables, for example 10
    dollars or 10 percent, so the computer “already knows,
    without looking at any other information, that that’s
    going to be dollars . . . [or] a percent.” J.A. 1414. SAP’s
    new software on the other hand did not use fixed numbers
    and “the computer can’t know [the units or] what the
    operation is without looking at” other information. J.A.
    1427–29. The computer considers the other necessary
    information during run time. Lastly, SAP’s expert admit-
    ted on cross-examination that both the association be-
    tween units and numbers, and the application of those
    numbers, occurs during run-time.
    This court carefully considered the remainder of
    SAP’s arguments on infringement and finds no reversible
    error. Sufficient evidence supports the jury’s verdict of
    infringement of the ’350 Patent, and the trial court cor-
    rectly denied SAP’s motion for JMOL of noninfringement
    of the ’350 Patent.
    IV.
    SAP also challenges the jury’s award of lost profits.
    Lost-profits damages are appropriate whenever there is a
    “reasonable probability that, ‘but for’ the infringement,
    [the patentee] would have made the sales that were made
    by the infringer.” Rite-Hite Corp. v. Kelley Co., 
    56 F.3d 1538
    , 1545 (Fed. Cir. 1995) (en banc). A showing under
    the four-factor Panduit test establishes the required
    causation. Rite-Hite, 
    56 F.3d at 1545
    . These factors
    include: “(1) demand for the patented product, (2) absence
    of acceptable noninfringing alternatives, (3) [capacity] to
    exploit the demand, and (4) the amount of profit [the
    patentee] would have made.” Panduit Corp v. Stahlin
    Bros. Fibre Works, Inc., 
    575 F.2d 1152
    , 1156 (6th Cir.
    14                        VERSATA SOFTWARE   v. SAP AMERICA
    1978). Causation of lost profits “is a classical jury ques-
    tion.” Brooktree Corp. v. Advanced Micro Devices, Inc.,
    
    977 F.2d 1555
    , 1578 (Fed. Cir. 1992).
    According to SAP, the jury’s lost profits award should
    be set aside for four reasons. The first two reasons relate
    to the methodology used by Versata’s expert. SAP avers
    that Versata’s “but for” model is “inconsistent with sound
    economic principles,” and thus “[the expert’s] opinion
    should have been excluded from evidence.” Appellant’s
    Br. 46. Similarly, SAP claims Versata’s expert did not
    adhere to the Panduit framework because he used multi-
    ple markets thereby rendering his analysis “legally defec-
    tive.” 
    Id. at 50
    .
    The court rejects these two arguments as improperly
    raised. Under the guise of sufficiency of the evidence,
    SAP questions the admissibility of Versata’s expert testi-
    mony and whether his damages model is properly tied to
    the facts of the case. Such questions should be resolved
    under the framework of the Federal Rules of Evidence
    and through a challenge under Daubert v. Merrell Dow
    Pharm., Inc., 
    509 U.S. 579
     (1993). See ePlus, Inc. v.
    Lawson Software, Inc., 
    700 F.3d 509
    , 515, 522–23 (2012)
    (affirming a trial court’s decision to exclude expert testi-
    mony under Daubert because it was analytically flawed
    and unreliable); Uniloc USA, Inc. v. Microsoft Corp., 
    632 F.3d 1292
    , 1314–16 (Fed. Cir. 2011) (noting that to carry
    its burden under Federal Rule of Evidence 702, the pa-
    tentee must sufficiently “tie the expert testimony on
    damages to the facts of the case”).
    SAP’s briefs and statements at oral argument confirm
    that its arguments should have been resolved under the
    framework of Daubert and the Federal Rules of Evidence.
    In its briefs, SAP argues that the expert’s testimony
    should have been excluded from evidence, the jury “should
    have never heard any lost profits theory,” that “the dis-
    trict court should not have permitted Versata’s expert to
    VERSATA SOFTWARE   v. SAP AMERICA                      15
    present his lost profits theory,” and that his analysis is
    “legally defective.” Appellant’s Br. 46–47, 50. At oral
    argument, SAP’s counsel stated that the expert’s testimo-
    ny “should not have been admitted,” and that “it should
    have been excluded.” Oral Argument at 14:00–15:00,
    Versata Software v. SAP America, (Fed. Cir. 2013) (No.
    2012-1029,     -1049),   available   at   http://www.cafc.
    uscourts.gov/oral-argument-recordings/search/audio.html.
    Whether evidence is inadmissible is a question clearly
    within the scope of the rules of evidence and Daubert.
    However, SAP has not appealed a Daubert ruling. In-
    stead, it argues that the jury could have not had sufficient
    evidence to award lost profits because the expert’s testi-
    mony was fatally flawed and should not have been admit-
    ted. This is the improper context for deciding questions
    that, by SAP’s own admissions, boil down to the admissi-
    bility of evidence.
    SAP’s other challenges to the lost profits award clear-
    ly relate to the sufficiency of evidence under Panduit and
    are thus properly before the court. SAP claims there is no
    evidence to show demand for the patented product (Pan-
    duit factor 1). Specifically, SAP argues that Versata could
    not present evidence of demand during the damages
    period (which started in 2003) because Versata did not
    sell Pricer to anyone, even non-SAP customers, after
    2001.
    Patentees may prove lost profits through presenting a
    hypothetical, “but for” world where infringement has been
    “factored out of the economic picture.” Grain Processing
    Corp. v. Am. Maize-Prods. Co., 
    185 F.3d 1341
    , 1350 (Fed.
    Cir. 1999). While the hypothetical, but-for-world must be
    supported with sound economic proof, “[t]his court has
    affirmed lost profit awards based on a wide variety of
    reconstruction theories.” Crystal Semiconductor Corp. v.
    TriTech Microelectronics Int’l, Inc., 
    246 F.3d 1336
    ,
    1355 (Fed. Cir. 2001). Here, the record supports the jury’s
    16                        VERSATA SOFTWARE   v. SAP AMERICA
    finding of demand for the patented functionality in a “but
    for” world.
    Versata showed there was demand for hierarchical
    pricing before SAP entered the market. Between 1995
    and 1998, Versata made at least 61 sales of Pricer. At
    least 21 sales were “Pricer-isolated,” meaning Pricer was
    the only product purchased from Versata. Versata’s
    average win rate before SAP entered the market was 35
    percent. Even SAP’s expert admitted there was demand
    for Pricer during this period. This evidence of demand is
    especially probative since it is a picture of a world in
    which Versata enjoyed market exclusivity similar to that
    which it would have had in a hypothetical world absent
    SAP’s infringement.
    When SAP entered the market by bundling hierar-
    chical pricing into its enterprise software, the market for
    Pricer disappeared. Versata made no sales of Pricer
    during the damages period of 2003 to 2011. However,
    Versata showed that demand for the patented functionali-
    ty remained. In 2007, SAP internal documents stated
    there was “customer need[]” for hierarchical access, and
    “having that capability is key” to SAP’s business. J.A.
    3480. During litigation, Versata sent written discovery
    questions to several SAP customers. Forty customers
    responded, and many use both customer and product
    hierarchies.
    SAP argues Versata cannot show demand because it
    made no sales of Pricer during the damages period.
    Usually, “the patentee needs to have been selling some
    item, the profits of which have been lost due to infringing
    sales.” Poly-America, L.P. v. GSE Lining Tech., Inc., 
    383 F.3d 1303
    , 1311 (Fed. Cir. 2004). However, the act of
    “selling” an item does not necessarily mean the item must
    be “sold.” Here, Versata was selling Pricer during the
    damages period. Versata need not have actually sold
    Pricer during the damages period to show demand for the
    VERSATA SOFTWARE   v. SAP AMERICA                      17
    patented functionality, particularly given the economic
    reality that SAP had eroded the market for Pricer
    through bundling hierarchical access into its own soft-
    ware.
    The Panduit factors do not require showing demand
    for a particular embodiment of the patented functionality,
    here Versata’s Pricer software. See Presidio Components,
    Inc. v. Am. Technical Ceramics Corp., 
    702 F.3d 1351
    , 1360
    (Fed. Cir. 2012). Nor does it require any allocation of
    consumer demand among the various limitations recited
    in a patent claim. DePuy Spine Inc. v. Medtronic Sofamor
    Danek, Inc., 
    567 F.3d 1314
    , 1330 (Fed. Cir. 2009). In
    other words, the Panduit factors place no qualitative
    requirement on the level of demand necessary to show lost
    profits. Versata showed demand for its product before
    SAP entered the market, and it showed continued de-
    mand for the patented feature during the damages period.
    SAP had the ability to cross-examine and rebut this
    evidence. SAP’s expert even prepared an alternative lost
    profit model but SAP chose not to present this evidence to
    the jury. The court finds sufficient evidence of demand in
    this record and declines to disturb the jury’s determina-
    tion.
    SAP also argues Versata did not prove the quantum of
    its lost profits with reasonable probability (Panduit factor
    4). Specifically, it argues Versata’s but-for world makes
    assumptions about demand and price elasticity that are
    inconsistent with the real world, and that Versata did not
    account for market forces other than infringement that
    might have caused its alleged losses.
    Versata’s expert calculated lost profits using the fol-
    lowing method. First, he identified a pool of potential
    customers: Tier 1 customers who had purchased SAP’s
    software. The record showed that Tier 1 customers were
    “larger companies” and “more likely to benefit from Pric-
    er’s unique value propositions.” J.A. 44. In the Tier 1
    18                        VERSATA SOFTWARE   v. SAP AMERICA
    market, SAP made 480 sales of infringing products during
    the damages period of 2003 to 2011. Versata’s expert
    then removed from this pool the 45 SAP customers who
    had previously licensed Pricer, and thus were not lost to
    SAP. The initial pool was therefore 435 customers.
    Next, the expert determined how many of those 435
    customers Versata would have won but for SAP’s in-
    fringement. The expert used Versata’s historic win-rate
    of 35 percent as a starting point, meaning Versata usually
    converted about a third of customers it targeted for Pricer
    into actual clients. The expert applied this percentage to
    the pool of customers and concluded that Versata would
    have been able to sell Pricer to 152 of the 435 SAP cus-
    tomers.
    Had the expert stopped at this point, SAP’s challenge
    might have more weight. A direct application of Versata’s
    historic win-rate would not necessarily reflect the differ-
    ences in economic conditions between 1996 and 2003. It
    also assumes Versata would have immediately resumed
    selling Pricer at the 1996–98 rates.
    However, Versata’s expert did account for some mar-
    ket pressures. He recognized that Versata would not
    likely resume making sales in 2003 at the same pace it
    had achieved in 1998. He concluded that Versata “could
    have ramped up and made these additional sales begin-
    ning in roughly, April 2003 at the same pace at which it
    ramped up and made actual sales when it had an exclu-
    sive beginning in 1996.” J.A. 3725. The expert then
    further discounted the pool of lost customers and conclud-
    ed Versata lost 93 sales to SAP during the 8-year damag-
    es period. This is an average 21 percent win-rate over the
    whole damages period.
    Next, the expert calculated the value of each lost sale.
    To isolate Pricer’s value in relation to Versata’s other
    software offerings, the expert differentiated between
    “Pricer-isolated sales” and general sales of Pricer. Pricer-
    VERSATA SOFTWARE   v. SAP AMERICA                        19
    isolated sales were those where Versata only sold Pricer,
    and they provide evidence of the value attributable to
    Pricer alone. The expert concluded that the base value of
    each lost sale was approximately $1.8 million. He then
    accounted for the additional revenue streams that would
    follow on a sale through maintenance and consulting
    agreements. The final conclusion was that Versata would
    have made approximately $3 million in profit per sale lost
    to SAP. Multiplying the pool of lost sales by the amount
    lost per sale would have resulted in an award of $285
    million. The jury awarded $260 million.
    SAP’s protestations that the award does not reflect
    market or economic variables are belied by the record.
    As noted above, the expert discounted the win rate to
    account for time Versata would need to ramp-up its sales.
    The expert also discounted his sales value calculations to
    account for the costs associated with making those sales.
    He accounted for “the direct costs of making those sales,
    plus costs associated with research and development
    efforts, plus costs associated with . . . selling, general and
    administrative expenses.” J.A. 3726. He also accounted
    for price elasticity when calculating the number of lost
    sales. The expert testified that if he had used a lower
    price (or even a declining price scale) when valuing the
    lost sales, the lower price would have been offset by
    additional lost sales: a lower price results in greater
    demand.
    As the trial court noted, “the final number . . . was not
    the product of speculation, but was based on sound eco-
    nomic proof confirmed by the historical record.” J.A. 46.
    As such, Versata made a prima facie showing of lost
    profits and the burden shifted to SAP to prove that a
    different rate would have been more reasonable. Rite-
    Hite, 
    56 F.3d at 1545
    . SAP did not make such a showing.
    Therefore, this court affirms the jury’s award of lost
    profits.
    20                         VERSATA SOFTWARE    v. SAP AMERICA
    V.
    In addition to lost profits, the jury awarded $85
    million in royalties. A reasonable royalty is the statutory
    floor for damages in an infringement case. See 
    35 U.S.C. § 284
    . Because the district court precluded Versata’s
    expert from presenting a reasonable royalty analysis, the
    only evidence for a royalty award came from SAP’s expert.
    A reasonable royalty may be calculated using one of
    two baselines: “an established royalty, if there is one, or if
    not, upon the supposed result of hypothetical negotiations
    between the plaintiff and defendant.” Transocean Off-
    shore Deepwater Drilling, Inc. v. Maersk Drilling USA,
    Inc., 
    699 F.3d 1340
    , 1357 (Fed. Cir. 2012) (quoting Rite–
    Hite, 
    56 F.3d at 1554
    ). “The hypothetical negotiation
    seeks to determine the terms of the license agreement the
    parties would have reached had they negotiated at arm’s
    length when infringement began.” 
    Id.
    SAP’s expert conducted a full hypothetical negotiation
    analysis using the factors in Georgia-Pacific Corp. v. U.S.
    Plywood Corp., 
    318 F. Supp. 1116
     (S.D.N.Y. 1970). The
    expert stated that a software called Khimetrics was
    comparable to Pricer for the purposes of valuing the
    hypothetical license. The expert noted that 12 customers
    had agreed to pay SAP for this add-on functionality. He
    concluded that the reasonable royalty rate should be
    around $2 million in a lump sum payment.
    On cross-examination, SAP’s expert confirmed that
    Khimetrics was a proper comparable bolt-on product, that
    SAP had sold Khimetrics to 12 customers, and that the
    average sales price per customer for Khimetrics was
    $333,000. He also stated that an appropriate royalty rate
    would have been 40 percent of the $333,000 per customer,
    yielding a royalty of $133,200 per customer. The expert
    also agreed that, after subtracting the number of lost
    sales covered under the lost profits award, SAP had made
    roughly 1300 infringing sales. The expert then stated
    VERSATA SOFTWARE   v. SAP AMERICA                         21
    that if his proposed per customer royalty rate was applied
    to every infringing sale, the damages should be $170
    million. Versata’s counsel confirmed this calculation with
    the following question:
    Q. So, if the jury believed that your per-customer
    royalty rate [of $133,200] should be applied to
    every infringing sale instead of just twelve [sales],
    then the number is not $2 million but $170 mil-
    lion.
    A. That would be the correct math.
    J.A. 4227.
    In spite of this testimony from its own expert, SAP
    now questions the royalty award. It claims the $2 million
    royalty estimate “already compensated Versata for the
    full scope of infringement,” and thus it was improper to
    extrapolate a per customer royalty from the royalty
    estimate. Appellant’s Br. 58. SAP also claims the award
    violates the entire market value rule. Neither argument
    has merit.
    SAP’s expert did not equivocate when he stated that
    the revenue generated by his proffered comparable license
    was $333,000 per Khimetrics customer. The expert did
    not dispute that he proposed a 40 percent royalty. He did
    not contradict or question the number of SAP’s infringing
    sales. Thus, SAP’s assertion that the expert intended his
    calculation to be a lump sum covering all of SAP’s infring-
    ing sales is belied by his own testimony.
    Furthermore, the award cannot violate the entire
    market value rule. The entire market value rule is a
    narrow exception to the general rule that royalties are
    awarded based on the smallest salable patent-practicing
    unit. LaserDynamics, Inc. v. Quanta Computer, Inc., 
    694 F.3d 51
    , 67 (Fed. Cir. 2012). “A patentee may assess
    damages based on the entire market value of the accused
    product only where the patented feature creates the basis
    22                        VERSATA SOFTWARE   v. SAP AMERICA
    for customer demand or substantially creates the value of
    the component parts.” SynQor, Inc. v. Artesyn Technolo-
    gies, Inc., --- F.3d ----, 
    2013 WL 950743
    , *13 (Fed. Cir.
    2013) (quoting Uniloc USA, Inc. v. Microsoft Corp., 
    632 F.3d 1292
    , 1318 (Fed. Cir. 2011))..
    Here, the expert did not apply his 40 percent royalty
    rate to the entire value of SAP’s infringing products. The
    royalty rate was applied to the value of Khimetrics’ sales.
    Rather, the expert merely accounted for all infringing
    sales. Thus, the entire market value exception was never
    triggered, and Versata was not required to show that
    demand for hierarchical pricing drove demand for SAP’s
    product as whole. See LaserDynamics, Inc., 94 F.3d at 67.
    The trial court, in denying SAP’s motion for JMOL,
    correctly noted that SAP “cannot legitimately challenge
    the comparability of its own comparable.” J.A. 51. The
    jury used common sense and merely applied SAP’s pro-
    posed royalty to a larger number of infringing sales than
    SAP desired. See Huffman v. Union Pac. R.R., 
    675 F.3d 412
    , 421 (5th Cir. 2012) (noting the jury is free to “draw
    inference on the basis of common sense, common under-
    standing and fair beliefs, grounded on evidence consisting
    of direct statement by witnesses or proof of circumstances
    from which inferences can fairly be drawn”) (internal
    quotations omitted). While the jury awarded less than
    the $170 million calculated by SAP’s expert, the jury is
    not bound to accept the maximum proffered award and
    may choose an intermediate rate. Powell v. Home Depot
    U.S.A., Inc., 
    663 F.3d 1221
    , 1241 (Fed. Cir. 2011). The
    question is whether the award is not “so outrageously
    high . . . as to be unsupportable as an estimation of a
    reasonable royalty,” Rite-Hite, 
    56 F.3d at 1554
    , and is
    “within the range encompassed by the record as a whole,”
    Powell, 
    663 F.3d at 1241
     (quoting Unisplay, S.A. v. Am.
    Elec. Sign Co., 
    69 F.3d 512
    , 519 (Fed. Cir. 1995)). This
    court concludes that award satisfies these standards and
    is supported by substantial evidence.
    VERSATA SOFTWARE   v. SAP AMERICA                      23
    VI.
    Following the resolution of post-trial motions, the
    trial court entered a permanent injunction. SAP argues
    the injunction is overbroad because it prohibits SAP from
    offering maintenance and additional seats for SAP’s
    current customers. “Additional seats” refers to increasing
    the number of users covered under a specific license. SAP
    does not challenge the portion of the injunction that
    prohibits it from offering the accused functionality in new
    sales of its software.
    The injunction uses two key terms: the “Infringing
    Products” and “the Enjoined Capability.” J.A. 4–5. The
    enjoined capability is the capability to execute a pricing
    procedure using hierarchical access of customer and
    product data. As repeatedly noted in the briefs and in the
    record, the enjoined capability represents only a fraction
    of the features contained in the infringing products.
    SAP’s bundling is one of the reasons cited by Versata for
    the destruction of Pricer’s market.
    Yet, the injunction states that SAP “shall not (a)
    charge to or accept payment of software maintenance
    from that customer with respect to any of the Infringing
    Products in the United States; or (b) license or sell any
    new ‘seats’ or otherwise charge to or accept license reve-
    nue from that customer in connection with any of the
    Infringing Products in the United States.” J.A. 5 (empha-
    sis added). While this court does not agree entirely with
    SAP’s arguments against the injunction, it appears the
    trial court erred by placing emphasis on SAP’s product as
    a whole. SAP should be able to provide maintenance or
    additional seats for prior customers of its infringing
    products, so long as the maintenance or the additional
    seat does not involve, or allow access to, the enjoined
    capability. Therefore, this court vacates the above lan-
    guage from the permanent injunction and remands for the
    24                       VERSATA SOFTWARE   v. SAP AMERICA
    trial court to modify its order in accordance with this
    opinion.
    VII.
    This court has considered the remainder of SAP’s ar-
    guments and finds no reversible error. Additionally, by
    Versata’s own admission, there is no need to address any
    of the issues raised in its cross-appeal. See Cross-
    Appellant Br. 69–70. Based on the reasons above, this
    court affirms the jury’s infringement decision and concom-
    itant damages awards. However, the court vacates part of
    the trial court’s permanent injunction and remands for
    further proceedings consistent with this opinion.
    AFFIRMED-IN-PART, VACATED-AND-REMANDED-
    IN-PART
    Costs to Versata.
    

Document Info

Docket Number: 2012-1029, 2012-1049

Citation Numbers: 717 F.3d 1255, 106 U.S.P.Q. 2d (BNA) 1649, 2013 U.S. App. LEXIS 8838, 2013 WL 1810957

Judges: Rader, Prost, Moore

Filed Date: 5/1/2013

Precedential Status: Precedential

Modified Date: 11/5/2024

Authorities (21)

rite-hite-corporation-acme-dock-specialists-inc-allied-equipment-corp , 56 F.3d 1538 ( 1995 )

Daubert v. Merrell Dow Pharmaceuticals, Inc. , 113 S. Ct. 2786 ( 1993 )

Vargas v. Lee , 317 F.3d 498 ( 2003 )

fantasy-sports-properties-inc-v-sportslinecom-inc-and-yahoo-inc , 287 F.3d 1108 ( 2002 )

jill-brown-plaintiff-appellee-cross-appellant-v-bryan-county-ok-bryan , 219 F.3d 450 ( 2000 )

dresser-rand-company-plaintiff-appellee-cross-appellant-v-virtual , 361 F.3d 831 ( 2004 )

Innogenetics, N v. v. Abbott Laboratories , 512 F.3d 1363 ( 2008 )

Agrizap, Inc. v. Woodstream Corp. , 520 F.3d 1337 ( 2008 )

High Tech Medical Instrumentation, Inc. v. New Image ... , 49 F.3d 1551 ( 1995 )

Grain Processing Corporation v. American Maize-Products ... , 185 F.3d 1341 ( 1999 )

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc. , 575 F.2d 1152 ( 1978 )

Poly-America, L.P. v. Gse Lining Technology, Inc. , 383 F.3d 1303 ( 2004 )

Muniauction, Inc. v. Thomson Corp. , 532 F.3d 1318 ( 2008 )

Unisplay, S.A. v. American Electronic Sign Co., Inc., and ... , 69 F.3d 512 ( 1995 )

Uniloc USA, Inc. v. Microsoft Corp. , 632 F.3d 1292 ( 2011 )

DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc. , 567 F.3d 1314 ( 2009 )

crystal-semiconductor-corporation-v-tritech-microelectronics , 246 F.3d 1336 ( 2001 )

Huffman v. Union Pacific Railroad , 675 F.3d 412 ( 2012 )

Finjan, Inc. v. Secure Computing Corp. , 626 F.3d 1197 ( 2010 )

Georgia-Pacific Corp. v. United States Plywood Corp. , 318 F. Supp. 1116 ( 1970 )

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