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`IN THE UNITED STATES DISTRICT COURT
`
`FOR THE NORTHERN DISTRICT OF CALIFORNIA
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`FINJAN, INC.,
`Plaintiff,
`
` v.
` JUNIPER NETWORK, INC.,
`Defendant.
` /
`
`No. C 17-05659 WHA
`
`ORDER ON DAUBERT MOTIONS
`
`
`INTRODUCTION
`In this patent infringement action, both parties move to exclude the opposing party’s
`damages expert reports on the eve of trial. For the reasons stated below, accused infringer’s
`motion to exclude is GRANTED and patent owner’s motion to exclude is GRANTED IN PART
`and DENIED IN PART.
`
`STATEMENT
`The background of this action related specifically to the expert reports at issue has been
`set forth in a prior order (Dkt. No. 189). In short, as part of the first round of motions for
`summary judgment, plaintiff Finjan, Inc., accused defendant Juniper Network, Inc.’s (1) SRX
`Gateways used in combination with Sky ATP, and (2) Sky ATP alone of infringing Claim 10
`of the United States Patent No. 8,677,494 (“the ’494 patent”) (Dkt. No. 98 at 1–2).
`Sky ATP is a cloud-based scanning system that inspects files with its “Malware
`Analysis Pipeline” to determine the threat level posed by the Downloadable. Juniper offers
`free licenses to use Sky ATP, as well as paid basic and premium licenses. SRX Gateways are
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`network appliances that receive incoming files and subsequently send “Downloadable” types
`to Sky ATP for inspection.
`When Sky ATP receives a file from an SRX device, it hashes the file and determines if
`the file has been previously analyzed. This process takes approximately one second. If it’s an
`unrecognized file, then it is sent through the Malware Analysis Pipeline, which includes the
`following processes: (1) a conventional antivirus engine (approximately five seconds); (2)
`static analysis (approximately 30 seconds); and (3) dynamic analysis (approximately six to
`seven minutes). Sky ATP determines the threat level “verdict” score once the analysis is
`complete, sends that score to the SRX device, and stores the score in DynamoDB or Simple
`Storage Services, which are storage solutions provided by Amazon Web Services (“AWS”).
`Claim 10 of the ’494 patent involves three basic steps: (1) receive a Downloadable; (2)
`scan the Downloadable to generate security profile data, which includes a list of suspicious
`computer operations that the Downloadable may attempt to perform; and (3) store the security
`profile data in a database.
`An order dated August 24 granted in part plaintiff Finjan, Inc.’s early motion for
`summary judgment on Claim 10 of the ’494 patent (Dkt. No. 189). Trial is set for December
`10 on the remaining Claim 10 issues. Both parties now seek to exclude each other’s damages
`expert reports. Specifically, Juniper moves to exclude Finjan’s expert report prepared by
`Kevin M. Arst (Dkt. No. 230) and Finjan moves to exclude Juniper’s expert report prepared by
`Dr. Keith Ugone, both regarding the reasonable royalty for use of Claim 10 (Dkt. No. 231).
`This order follows full briefing and oral argument.
`ANALYSIS
`
`1.
`
`LEGAL STANDARD.
`Expert Opinion Admissibility.
`A.
`Under the Federal Rules of Evidence 702, an expert witness may provide opinion
`testimony “if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the
`product of reliable principles and methods, and (3) the witness has applied the principles and
`methods reliably to the facts of the case.” District courts thus “are charged with a ‘gatekeeping
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`role,’ the objective of which is to ensure that expert testimony admitted into evidence is both
`reliable and relevant.” Sundance, Inc. v. DeMonte Fabricating Ltd., 550 F.3d 1356, 1360 (Fed.
`Cir. 2008).
`
`Reasonable Royalty.
`B.
`Upon a finding of infringement, a patent owner is entitled to “damages adequate to
`compensate for the infringement, but in no event less than a reasonable royalty for the use
`made of the invention by the infringer.” 35 U.S.C. § 284. “A ‘reasonable royalty’ derives
`from a hypothetical negotiation between the patentee and the infringer when the infringement
`began.” ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 868 (Fed. Cir. 2010). Assuming the
`asserted patent claims are valid and infringed, the hypothetical negotiation “tries, as best as
`possible, to recreate the ex ante licensing negotiation scenario and to describe the resulting
`agreement.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009). In
`determining a reasonable royalty calculation, experts often consider one or more of the fifteen
`factors set forth in Georgia–Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120
`(S.D.N.Y.1970). ResQNet.com, Inc., 594 F.3d at 869.
`2.
`PATENT OWNER’S EXPERT (KEVIN ARST).
`In determining the reasonable royalty amount at issue, Finjan’s damages expert Kevin
`Arst relies on a “cost-savings” approach as the starting point for a hypothetical negotiation.
`Expert Arst theorizes that Juniper’s infringement of Claim 10 “allowed it to avoid present
`value adjusted costs of at least” $60–$70 million during the damages period (Dkt. No. 228-7 at
`30; Supp. Exhs. 1.1, 1.2). After going through the Georgia-Pacific factors, Expert Arst argues
`that Juniper would have agreed to pay Finjan 100 percent of this alleged cost saving as a lump-
`sum reasonable royalty amount — meaning he says Juniper would have agreed to pay $60–$70
`million to obtain a license to use Claim 10 for fourteen months.
`Expert Arst asserts that Juniper could not have stored any verdict scores without
`infringing and that its best non-infringing alternative would have been to re-analyze files each
`time (id. at 31). In other words, every SRX-sent file would have had to go through the entire
`Malware Analysis Pipeline — including dynamic analysis — according to Expert Arst, thus
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`taking Sky ATP an additional six to seven minutes to complete analysis. Expert Arst then
`calculates the AWS costs Juniper allegedly saved by using the claimed invention based on a
`“U.S. Apportionment Factor” of the total worldwide volume sales of all SRX devices. He then
`applies that factor to Juniper’s total AWS costs to derive a “U.S. apportioned Sky ATP AWS
`costs” totaling $182,249 over the damages period.
`Expert Arst then multiplies that number by a “Cost Savings Factor” of 359 and 419,
`which he derives from the assertion that Juniper would have had to spend six to seven
`additional minutes dynamically analyzing each file and that “the number of servers that would
`be required to process a file for sandboxing would be 360–420 times greater (6–7 minutes * 60
`seconds) than what is required to serve the file from the database of results (1 second)” (ibid.).
`Expert Arst thus concludes that the purported $182,249 cost-saving amount would have been
`between 359 and 419 times higher in the non-infringing alternative, resulting in an alleged
`$60–$70 million AWS costs saved (ibid.).
`The parties contest a myriad of details in connection with Expert Arst’s testimony.
`This order does not address every point of contention. Instead, this order focuses on a
`fundamental flaw in Expert Arst’s report that renders his opinion unfit for the jury — namely,
`Finjan’s sleight of hand to inflate the revenue base.
`That Expert Arst would suggest that Juniper would have been willing to pay an eye-
`popping $60–$70 million as a royalty for the sake of $1.8 million in revenue is preposterous.
`This order therefore agrees with Juniper that Expert Arst’s testimony “defies basic laws of
`economics” such that its unreliability renders it inadmissible under FRE 702.
`Finjan disputes Juniper’s $1.8 million figure (which Juniper bases on revenues from
`Sky ATP and SRX sales to customers with a Sky ATP license (Dkt. No. 229-6, Exh. 7)),
`arguing that the sales of all accused products amount to approximately $142 million in sales. It
`inflates the royalty base by including all sales of the SRX devices sold — including those not
`configured with Sky ATP. Finjan hinges this contention on its newfound belief that all SRX
`devices infringe the system claim because they contain code for interfacing with Sky ATP.
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`Finjan’s untimely new infringement theory, however, is procedurally defective. In its
`motion for summary judgment, Finjan accused (1) SRX Gateways used in combination with
`Sky ATP, and (2) Sky ATP alone of infringing (Dkt. No. 98 at 1). Juniper argued in its
`opposition to the motion that Finjan failed to show infringement as to the SRX units not
`configured with Sky ATP (Dkt. No. 126 at 22; 125-5 ¶¶ 4–7). Finjan’s technical expert Dr.
`Eric Cole testified then that he was not asked to analyze SRX alone and that he did not analyze
`whether the SRX devices contained other elements of Claim 10 such as a “Downloadable
`scanner” or “database” (Dkt. No. 125-17 at 140:19–141:21). Dr. Cole further testified that
`“[i]t is SRX Gateways and the Sky ATP that infringe Claim 10. It’s not SRX Gateways by
`themselves” (id. at 140:15–17) (emphasis added).
`During the summary judgment stage, Finjan’s reply did not even try to rebut Juniper’s
`assertion that “Finjan d[id] not even attempt to argue that SRX devices deployed without Sky
`ATP” infringe Claim 10. Finjan may not now, in an effort to hyper-inflate its damages claim,
`belatedly raise new infringement theories that it failed to assert in its summary judgment
`motion (and, in fact, disclaimed). Finjan will thus be stuck with the $1.8 million base.1
`
`Finjan further contends that the revenue base does not capture the benefits Juniper
`gained from the alleged infringement. That is, according to Finjan, it does not fully reflect the
`advantages Juniper gained from moving into the security business with its investment in the
`Sky ATP technology, such as having the most up-to-date threat intelligence. While this might
`be true, Expert Arst simply asserts this notion in his report and does not attempt to quantify
`these benefits to Juniper outside the cost-savings context. Nor does Expert Arst attempt to
`show that the offer of free Sky ATP licenses drove any SRX unit sales. “[A] reasonable
`royalty analysis requires a court to hypothesize, not to speculate.” ResQNet.com, Inc. v. Lansa,
`
`1 Finjan readily acknowledges that Juniper argued during summary judgment briefing that Finjan had not proven
`infringement of SRX units where the customer did not configure the device with a Sky ATP license (Dkt. No. 238-4 at 11
`n.12). It, however, argues that the Court disregarded those positions when it granted-in-part Finjan’s motion. Not so. Rather,
`the Court adopted Finjan’s description of the accused products (“(1) Juniper’s SRX Gateways used in combination with Sky
`ATP; and (2) Sky ATP alone”), which did not include Finjan’s new infringement theory at that time, and left the
`determination of the extent of damages for trial.
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`Inc., 594 F.3d 860, 869 (Fed. Cir. 2010) (citing Fromson v. Western Litho Plate & Supply Co.,
`853 F.2d 1568, 1575 (Fed.Cir.1988)).
`Because it is infeasible that Juniper would have agreed to a reasonable royalty amount
`of $60–$70 million when compared to the $1.8 million revenue base at issue, this order
`therefore finds Expert Arst’s testimony unreliable. Juniper’s motion to exclude Expert Arst’s
`testimony is therefore GRANTED.
`3.
`ACCUSED INFRINGER’S EXPERT (DR. KEITH UGONE).
`Juniper’s damages expert Dr. Keith Ugone relies on various “value indicators” that he
`believes are relevant to the hypothetical negotiation and applies them to the Georgia-Pacific
`framework, summarizing as follows (Dkt. No. 229-6 ¶ 16):
`Based upon an assessment of the Georgia-Pacific factors . . . the relative
`negotiating positions of the parties, and the economic considerations
`discussed throughout my report, Finjan and Juniper in October 2015 would
`have negotiated a fully paid-up, freedom-to-operate, non-exclusive U.S.
`license to Claim 10 of the ’494 Patent, for the life of the ’494 Patent, for a
`lump-sum amount of no more than $100,000 should the trier of fact
`determine that the ’494 Patent is valid, enforceable, and infringed by Juniper.
`Finjan takes issue with certain value indicators used by Expert Ugone and puts forth the
`following four-pronged attack on his report: (1) alleged improper use of prior software and
`patent license agreements; (2) application of allegedly flawed royalty rates to Expert Ugone’s
`allegedly incorrect royalty base; (3) an alleged cap on damages based on Juniper’s total profits;
`and (4) allegedly unreliable opinion regarding Juniper’s non-infringing alternatives (Dkt. No.
`231 at 2).
`
`Prior Software and Patent License Agreements.
`A.
`Expert Ugone relies on three categories of licenses in his hypothetical negotiation: (1)
`Juniper’s software license agreement with third party Joe Security LLC (which handles the
`sandboxing technology in dynamic analysis); (2) Juniper’s patent license settlement
`agreements with Enhanced Security Research, LLC, Vigilos, Inc., and SoftVault Systems; and
`(3) Finjan’s prior licensing agreements (Dkt. No. 229-6 ¶¶ 114–120).
`“[C]omparisons of past patent licenses to the infringement must account for the
`‘technological and economic differences’ between them.” Wordtech Sys., Inc. v. Integrated
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`Network Solutions, Inc., 609 F.3d 1308, 1320 (Fed. Cir. 2010) (citation omitted). Finjan
`argues that Expert Ugone failed to consider the economic differences between the software and
`settlement license agreements at issue and the hypothetical license. It further contends that
`Expert Ugone cherry-picked Finjan’s prior licensing agreements such that his opinion should
`be excluded. This order addresses each contention in turn.
`(1)
`Joe Security Software License Agreement.
` Juniper entered a software license agreement with Joe Security to use its Joe Sandbox
`software program (which is used in the dynamic analyzer within Juniper’s Sky ATP) for about
`$160,000 per year. Expert Ugone opines that this licensee fee is a “reasonable check” on the
`hypothetical license amount (Dkt. No. 229-6 ¶¶ 120, 139). Finjan contends, however, that the
`hypothetical license would confer “fundamentally different” rights as compared to those under
`the Joe Security license, as the Joe Security license placed limitations on usage, had time
`constraints, and did not license any intellectual property rights (Dkt. Nos. 231 at 4, Exh. 2 at
`34–36; 229-10 at 1, 8). This order agrees.
`It is undisputed that the Joe Security software license relates to the technology utilized
`by the accused products themselves. And, Expert Ugone properly relies on Dr. Aviel D.
`Rubin’s (Juniper’s technical expert) opinion that the Joe Security software license is
`technologically comparable to the hypothetical license (see Dkt. No. 236-12 ¶ 94). See Apple
`Inc. v. Motorola, Inc., 757 F.3d 1286, 1321 (Fed. Cir. 2014), overruled on other grounds by
`Williamson v. Citrix Online, LLC, 792 F.3d 1339 (Fed. Cir. 2015) (“Consistent with Rule 703,
`patent damages experts often rely on technical expertise outside of their field.”).
`While Expert Ugone notes the general nature of the Joe Security license (e.g., length of
`license period, licensee fee), he fails, however, to explain how any of the economic differences
`Finjan notes between the software license agreement at issue and the hypothetical license (e.g.,
`usage limitations, non-patent rights) informed his analysis. Nor does Juniper argue otherwise
`in its reply.
`Expert Ugone’s lack of any account for economic comparability of the software license
`— even if used as a “reasonableness check” — therefore renders his use of it unreliable.
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`Accordingly, Finjan’s motion to exclude Expert Ugone’s testimony to the extent relied upon
`Juniper’s Joe Security license is GRANTED.
`(2)
`Juniper’s Prior Patent Agreements.
`Finjan argues that Expert Ugone failed to consider the differences in circumstances
`existing between Juniper’s three patent settlement agreements (with Enhanced Security
`Research, LLC, Vigilos Inc., and SoftVault Systems, Inc.) and the hypothetical negotiation.
`This order agrees.
`As an initial matter, “[d]espite the longstanding disapproval of relying on settlement
`agreements to establish reasonable royalty damages,” the United States Court of Appeals for
`the Federal Circuit has “permitted such reliance under certain limited circumstances.”
`LaserDynamics Inc. v. Quanta Computer, Inc., 694 F.3d 51, 77 (Fed. Cir. 2012).
`Here, Expert Ugone relies on Dr. Rubin’s testimony that these licenses at issue are
`technologically comparable (see, e.g., Dkt. No. 229-6 ¶ 117). Again, however, he did not
`account for the economic differences between Juniper’s settlement agreements and the
`hypothetical license (e.g., presumed validity and infringement). Expert Ugone thus failed to
`establish that these settlement agreements (again, even if just used as a reasonableness check)
`are economically comparable such that they may be relied on under these circumstances.
`Accordingly, Finjan’s motion to exclude Expert Ugone’s testimony to the extent relied upon
`Juniper’s settlement agreements at issue is GRANTED.
`(3)
`Finjan’s Patent Agreements.
`Expert Ugone found four of the nineteen Finjan patent agreements “most relevant” to
`the hypothetical negotiation. Finjan argues that Expert Ugone cherry-picked these four
`agreements (which all involve the ’494 patent and Juniper’s competitors), failed to show
`economic comparability between those licenses and the hypothetical license, and lacked
`foundation for his effective royalty rate opinions.
`Three of the agreements at issue were settlement agreements with Websense, Inc.,
`Sophos Ltd., and F5 Networks, Inc. The fourth agreement with Barracuda Networks, Inc.,
`involved no litigation (Dkt. No. 229-4 at 7). Contrary to Finjan’s contention, Expert Ugone
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`walks through certain similarities and differences between the four Finjan patent license
`agreements and the hypothetical license, such as the patents asserted and length of license
`period (Dkt. No. 229-6 ¶¶ 72–81).
`For example, with respect to Finjan’s agreement with F5, Expert Ugone explains as
`follows (id. ¶ 72):
`I understand that Finjan asserted four patents against F5 in 2016 including the
`’494 Patent. While the patents asserted in the Finjan – F5 litigation included
`the ’494 Patent, the Finjan – F5 litigation not only involved more patents than
`the hypothetical negotiation, it also included more asserted claims of the ’494
`Patent as compared to the Finjan and Juniper matter.
`
`
`
`Expert Ugone further explains generally in connection with Finjan’s agreements with
`Barracuda, F5, and Sophos (id. ¶ 82(c)):
`The aforementioned license agreements may have been influenced by the
`licensees’ desire to avoid the costs of litigation and hence, may not be based
`solely upon the licensing value of Finjan’s patent portfolio. Since 2012, 11 of
`17 outbound license agreements entered into by Finjan have been settlement
`agreements. (Table 7.) This is an indication that Finjan has leveraged the cost
`of litigation against potential licensees, further supporting that its licenses
`were impacted by the potential of significant litigation costs the licensees
`were seeking to avoid.
`Moreover, Finjan’s complaint that two of the agreements at issue were executed after
`the hypothetical negotiation date (the F5 and Sophos agreements) is unpersuasive, as “factual
`developments occurring after the date of the hypothetical negotiation can inform the damages
`calculation” and that “the availability of post-infringement evidence as probative in certain
`circumstances.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1333 (Fed. Cir. 2009).
`Expert Ugone, however, fails to specifically account for the settlement circumstances in
`connection with Finjan’s agreement with Websense. Though he notes certain differences
`between that agreement and the hypothetical license, such as the longer length of license
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`period and broader patent rights, he does not account for whether the validity and infringement
`of the ’494 patent had been litigated or assumed or the parties’ litigation history (e.g., two
`separate lawsuits in Delaware and California).
`Furthermore, although Expert Ugone notes that Finjan entered into the agreements with
`Sophos after a jury found Finjan’s patent (including the ’494 patent) valid and infringed and
`post-trial orders affirming the verdict, he ultimately chooses — without explanation — to rely
`
`trial in which the proposed royalty rate of 6 to 16 percent was present to the jury (Dkt. Nos.
`229-6 ¶¶ 66(b), 79; 362 at 825:8–9).
`Thus Expert Ugone’s use of the Websense and Sophos agreements are unreliable and
`shall therefore be excluded to the extent stated above. Finjan’s other complaints, however, go
`to factual disputes best left tested by cross examination. Accordingly, Finjan’s motion to
`exclude Expert Ugone’s testimony to the extent relied upon Finjan’s patent agreements at issue
`is GRANTED IN PART and DENIED IN PART.
`B.
`Royalty Base.
`Finjan’s protests as to Expert Ugone’s applied royalty base fail to persuade for many of
`the reasons stated above in connection with Juniper’s motion. To the extent that Finjan
`complains that Expert Ugone’s royalty base opinion is not “based on sufficient facts” and that
`he “failed to disclose how he determines which of the various SRX models with Sky ATP code
`to include in his royalty base,” Expert Ugone does in fact offer some explanation to that effect
`(Dkt. No. 229-6, Exh. 5 at 2, n.(e)). Again, Finjan’s other dissatisfactions with Expert Ugone’s
`royalty base opinion go to the weight not admissibility. Accordingly, Finjan’s motion to
`exclude Expert Ugone’s testimony to the extent relied upon the royalty base is DENIED.2
`
`2 The Court is in receipt of Juniper’s request to strike Paragraph 6 of Attorney Kasten’s declaration in support of
`Finjan’s reply brief to its motion to exclude and Finjan’s response thereto (Dkt. Nos. 250, 251). Because the paragraph does
`not change the outcome of this order, Juniper’s request is DENIED AS MOOT.
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`Total Profits.
`C.
`While “evidence of the infringer’s actual profits generally is admissible as probative of
`his anticipated profits,” Trans-World Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552,
`1568 (Fed. Cir. 1984), it may not be used as a royalty cap. Aqua Shield v. Inter Pool Cover
`Team, 774 F.3d 766, 772 (Fed. Cir. 2014).
`Here, Finjan fails to show that Expert Ugone used Juniper’s total profits associated
`with the sales of the accuse products as a royalty cap. Though Expert Ugone uses total profits
`as a “constraint” on the reasonable royalty amount and a general indicator of value, there is no
`evidence that he used total profits as a hard ceiling. Rather, he states that “Juniper, as a
`prudent licensee and business, would not be willing to pay a royalty greater than its total
`profits earned on sales of” the accused products, “unless those products were providing some
`additional value to Juniper’s business that was not reflected in the revenue and profits” (Dkt.
`Nos. 229-6 ¶ 140; 236-7 at 122:17–25) (emphasis added). Expert Ugone then further explains
`why he saw no evidence that the accused products provided any such additional value (Dkt.
`No. 229-6 ¶ 140). This qualifier shows that Expert Ugone does not treat total profits as a
`royalty cap. To the extent Finjan disagrees with Expert Ugone’s conclusion, those factual
`issues may be addressed during cross-examination. Accordingly, Finjan’s motion to exclude
`Expert Ugone’s testimony to the extent relied upon the total profits is DENIED.
`D.
`Non-Infringing Alternatives.
`Finjan’s contention that Expert Ugone impermissibly uses the cost of implementing
`non-infringing alternatives as a cap on damages is unpersuasive. There is no indication that
`Expert Ugone uses the non-infringing alternatives as such. Indeed, his lump-sum royalty
`damages of $100,000 is higher than Juniper’s purported cost of $24,000 to $34,000 for a non-
`infringing alternative (Dkt. No. 229-6 ¶¶ 147, 148(d)(iv)). Moreover, his use of non-infringing
`alternatives as a “constraint” is permissible. See Riles v. Shell Expl. & Prod. Co., 298 F.3d
`1302, 1312 (Fed. Cir. 2002) (citing Grain Processing Corp. v. Am. Maize-Prod. Co., 185 F.3d
`1341, 1347 (Fed. Cir. 1999)) (“The economic relationship between the patented method and
`non-infringing alternative methods, of necessity, would limit the hypothetical negotiation.”).
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`Case 3:17-cv-05659-WHA Document 645-3 Filed 01/07/21 Page 13 of 13
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`Finjan further complains that Expert Ugone did not investigate the technical
`information regarding the non-infringing alternatives separately from that given by Juniper’s
`technical expert Dr. Rubin and Juniper software engineer Yuly Tenorio. To repeat, “patent
`damages experts often rely on technical expertise outside of their field when evaluating design
`around options.” Apple, 757 F.3d at 1321. None of Finjan’s cited authority relate to patent
`damages. Any grievance Finjan might have with regard to Expert Ugone’s opinion on non-
`infringing alternatives go to the weight not admissibility and can thus be addressed during
`cross-examination.3
`Accordingly, Finjan’s motion to exclude Expert Ugone’s testimony to the extent relied
`upon the non-infringing alternatives is DENIED.
`CONCLUSION
`For the foregoing reasons, Juniper’s motion to exclude is GRANTED. Finjan’s motion
`to exclude is, to the extent stated above, GRANTED IN PART and DENIED IN PART.
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`IT IS SO ORDERED.
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`Dated: December 3, 2018.
`
`
`WILLIAM ALSUP
`UNITED STATES DISTRICT JUDGE
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`3 This order finds Juniper’s disclosure of non-infringing alternatives timely.
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