Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 1 of 31 PageID #: 50259
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
`
`C.A. No. 16-453 (RGA)
`
`))))))))
`
`ACCELERATION BAY LLC,
`
`Plaintiff,
`
`v.
`
`ACTIVISION BLIZZARD, INC.
`
`Defendant.
`
`PLAINTIFF ACCELERATION BAY LLC’S DAMAGES PROFFER
`
`Philip A. Rovner (#3215)
`Jonathan A. Choa (#5319)
`POTTER ANDERSON & CORROON LLP
`Hercules Plaza
`P.O. Box 951
`Wilmington, DE 19899
`(302) 984-6000
`provner@potteranderson.com
`jchoa@potteranderson.com
`
`Attorneys for Plaintiff
`ACCELERATION BAY LLC
`
`OF COUNSEL:
`
`Paul J. Andre
`Lisa Kobialka
`James Hannah
`Yuridia Caire
`KRAMER LEVIN NAFTALIS
` & FRANKEL LLP
`990 Marsh Road
`Menlo Park, CA 94025
`(650) 752-1700
`
`Aaron M. Frankel
`KRAMER LEVIN NAFTALIS
` & FRANKEL LLP
`1177 Avenue of the Americas
`New York, NY 10036
`(212) 715-9100
`
`Dated: February 15, 2019
`
`PUBLIC VERSION
`
`Public version dated: February 22, 2019
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 2 of 31 PageID #: 50260
`
`TABLE OF CONTENTS
`
`Page
`
`3.
`4.
`
`Introduction and Summary of Damages Case ...............................................................1
`Damages Claims ............................................................................................................1
`Parties to the Hypothetical Negotiation .........................................................................2
`Date of the Hypothetical Negotiation ............................................................................2
`Georgia-Pacific Analysis...............................................................................................3
`Description of Reasonable Royalty Methodologies ......................................................3
`Cost-saving Reasonable Royalty ...................................................................................4
`1.
`Cost Savings Royalty Base ...................................................................................7
`2.
`Royalty Rate Based on Boeing/Panthesis’ Negotiation for a License to
`Acceleration Bay’s Patents-in-Suit .......................................................................8
`Royalty Rate Based on Activision’s Cost of Capital ..........................................11
`Cost Savings Opinion Based on Activision’s Estimated Marginal
`Maintenance Costs ..............................................................................................12
`Royalty Rate Based on Activision’s Investment Rate of Return ........................13
`5.
`Revenue-based Reasonable Royalty ........................................................................... 15
`1.
`Royalty Rate....................................................................................................... 16
`2.
`Royalty Base ...................................................................................................... 16
`3.
`Apportionment ................................................................................................... 17
`User-based Reasonable Royalty ................................................................................. 21
`Additional Supporting Opinions and Testimony ........................................................ 22
`Dr. Valerdi’s Cost Savings Estimate .......................................................................... 22
`Benefits Analysis of Dr. Bims .................................................................................... 23
`Infringement Analysis of Drs. Medvidovic and Mitzenmacher ................................. 23
`Fact Witness Testimony .............................................................................................. 24
`Deposition Testimony ................................................................................................. 25
`Documentary Evidence ............................................................................................... 25
`Additional Damages Claims ....................................................................................... 26
`Conclusion .................................................................................................................. 27
`
`A.
`B.
`C.
`D.
`
`A.
`
`B.
`
`C.
`
`A.
`B.
`C.
`D.
`E.
`F.
`
`I.
`
`II.
`
`III.
`
`IV.
`V.
`
`i
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 3 of 31 PageID #: 50261
`
`TABLE OF AUTHORITIES
`
`
`
`Page(s)
`
`Cases
`
`Apple, Inc. v. Motorola, Inc.,
`757 F.3d 1286 (Fed. Cir. 2014)..................................................................................................1
`
`Aqua Shield v. Inter Pool Cover Team,
`774 F.3d 766 (Fed. Cir. 2014)................................................................................................5, 6
`
`Dowagiac Mfg. Co. v. Minn. Moline Plow Co.,
`235 U.S. 641 (1915) .................................................................................................................17
`
`Dow Chem. Co. v. Mee Indus., Inc.,
`341 F.3d 1370 (Fed. Cir. 2003)..................................................................................................1
`
`Ericsson, Inc. v. D-Link Sys., Inc.,
`773 F.3d 1201 (Fed. Cir. 2014)........................................................................................ passim
`
`Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp.,
`LLC, 879 F.3d 1332 (Fed. Cir. 2018) ................................................................................10, 11
`
`Fujifilm Corp. v. Benun,
`605 F.3d 1366 (Fed. Cir. 2010)..........................................................................................16, 17
`
`Garretson v. Clark,
`111 U.S. 120 (1884) .................................................................................................................17
`
`Georgia-Pacific Corp. v. United States Plywood Corp.,
`318 F. Supp. 1116 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir.
`1971), cert. denied, 404 U.S. 870 (1971) ...................................................................................3
`
`Hanson v. Alpine Valley Ski Area, Inc.,
`718 F.2d 1075 (Fed. Cir. 1983)..........................................................................................4, 5, 6
`
`Home Savings of America v. United States,
`399 F.3d 1341 (Fed. Cir. 2001)........................................................................................ passim
`
`Kumho Tire Co. v. Carmichael,
`526 U.S. 137 (1999) ...................................................................................................................7
`
`LaserDynamics, Inc. v. Quanta Computer, Inc.,
`694 F. 3d 51 (Fed. Cir. 2012).....................................................................................................2
`
`Lindemann Maschinenfabrik GmbH v. Am. Hoist & Derrick Co.,
`895 F.2d 1403 (Fed. Cir. 1990)..................................................................................................1
`
`ii
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 4 of 31 PageID #: 50262
`
`Lucent Techs., Inc. v. Gateway, Inc.,
`580 F.3d 1301 (Fed. Cir. 2009)............................................................................................6, 17
`
`Monsanto Co. v. McFarling,
`488 F.3d 973 (Fed. Cir. 2007)....................................................................................................4
`
`Powell v. Home Depot, U.S.A., Inc.,
`663 F.3d 1221 (Fed. Cir. 2011)..............................................................................................5, 6
`
`Prism Techs. LLC v. Sprint Spectrum L.P.,
`849 F.3d 1360 (Fed. Cir. 2017)..............................................................................................5, 6
`
`ResQNet.com, Inc. v. Lansa, Inc.,
`594 F.3d 860 (Fed. Cir. 2010)....................................................................................................6
`
`Slimfold Mfg. Co. v. Kinkead Indus., Inc.,
`932 F.2d 1453 (Fed. Cir. 1991)..................................................................................................6
`
`Summit 6 LLC v. Samsung Elecs. Co.,
`802 F.3d 1283 (Fed. Cir. 2015)................................................................................................20
`
`Uniloc USA, Inc. v. Microsoft Corp.,
`632 F.3d 1292 (Fed. Cir. 2011)............................................................................................6, 17
`
`Virnetx, Inc. v. Cisco Sys., Inc.,
`767 F.3d 1308 (Fed. Cir. 2014)..................................................................................8, 9, 10, 17
`
`Statutes
`
`35 U.S.C. § 284 ................................................................................................................1, 4, 17, 27
`
`35 U.S.C. § 285 ..............................................................................................................................27
`
`Other Authorities
`
`LEARNED HAND, HISTORICAL AND PRACTICAL CONSIDERATIONS REGARDING
`EXPERT TESTIMONY, 15 Harv. L. Rev. 40, 54 (1901) ................................................................7
`
`iii
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 5 of 31 PageID #: 50263
`
`Pursuant to the Court’s October 30, 2018 Case Management Order (D.I. 619),
`
`Acceleration Bay LLC (“Acceleration Bay”) submits this proffer of its damages case.
`
`I.
`
`Introduction and Summary of Damages Case
`
`Under 35 U.S.C. § 284, a finding of infringement “establishes the fact of damage because
`
`the patentee’s right to exclude has been violated.” Lindemann Maschinenfabrik GmbH v. Am.
`
`Hoist & Derrick Co., 895 F.2d 1403, 1406 (Fed. Cir. 1990). “The statute is unequivocal that the
`
`district court must award damages in an amount no less than a reasonable royalty” when
`
`infringement is found. Dow Chem. Co. v. Mee Indus., Inc., 341 F.3d 1370, 1381 (Fed. Cir.
`
`2003).
`
`A.
`
`Damages Claims
`
`
`
`As set forth below, Acceleration Bay will present a damages case based on expert
`
`opinion, the testimony of fact witnesses (live and by deposition), and documentary evidence
`
`including the documents and financial records of Defendant Activision Blizzard, Inc.
`
`(“Activision”).
`
`Consistent with Federal Circuit precedent, Acceleration Bay carefully tied its proof of
`
`damages to the claimed invention’s footprint in the marketplace and presents several methods for
`
`determining a reasonable royalty that the parties would have reached at the time of the
`
`hypothetical negotiation. Apple, Inc. v. Motorola, Inc., 757 F.3d 1286, 1315, 1319 (Fed. Cir.
`
`2014) (recognizing that estimating a reasonable royalty is not an exact science and that there may
`
`be more than one reliable method for estimating a reasonable royalty). These damages
`
`methodologies are discussed in more detail below.
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 6 of 31 PageID #: 50264
`
`B.
`
`Parties to the Hypothetical Negotiation
`
`The Court determined that the parties to the hypothetical negotiation are The Boeing
`
`Company (“Boeing”) as licensor and Defendant Activision as licensee. D.I. 521. Acceleration
`
`Bay’s damages claims are therefore based on a hypothetical negotiation between Boeing and
`
`Activision.
`
`C.
`
`Date of the Hypothetical Negotiation
`
`Acceleration Bay contends that the date of the hypothetical negotiation is the September
`
`2012 launch of the Mists of Pandaria version of World of Warcraft (“WoW”), the first of the
`
`games accused of infringement in this case (referred to as “Infringing Products”) to launch. See
`
`LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F. 3d 51, 75-76 (Fed. Cir. 2012) (explaining
`
`that the hypothetical negotiation is on the “date when the infringement began.”) (internal
`
`citations omitted). Activision began selling the Infringing Products as follows:
`o World of Warcraft – September 2012 (Mists of Pandaria); November 2014
`(Warlords of Draenor); August 2016 (Legion)
`o Destiny – September 2014
`o Call of Duty: Advanced Warfare – November 2014
`o Call of Duty: Black Ops III – November 2015
`Activision’s damages expert contends that the date of the hypothetical negotiation is
`
`slightly earlier, relying on the
`
`Mists of Pandaria. While the dates differ,
`
`Acceleration Bay’s damages expert, Russell Parr, found that small difference would not alter the
`
`outcome of the reasonable royalty analysis due to the impact of the book of wisdom and other
`
`factors that are not dependent on the specific date of the hypothetical negotiation. December 7,
`
`2
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 7 of 31 PageID #: 50265
`
`2018 Expert Report of Russell Parr (“Parr Report”) attached hereto as “Exhibit A” at ¶¶ 18, 50-
`
`52.1
`
`D.
`
`Georgia-Pacific Analysis
`
`Mr. Parr’s damages opinions are based on his consideration of the fifteen factors laid out
`
`in the seminal case Georgia-Pacific Corp. v. United States Plywood Corp., which is often
`
`referred to as the most common way to compute reasonable royalty damages based on a willing
`
`licensor and licensee scenario. 318 F. Supp. 1116 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d
`
`295 (2d Cir. 1971), cert. denied, 404 U.S. 870 (1971) (“Georgia-Pacific”).
`
`While Mr. Parr’s complete Georgia-Pacific analysis is set forth in paragraphs 61-147 of
`
`his report, a few representative examples are provided below of evidence that Mr. Parr included
`
`in his reasonable royalty analysis:
`
`•
`
`•
`
`•
`
`•
`
`the royalties received by the patentee for the licensing of the patents-in-suit (Georgia-
`Pacific Factor 1). Parr Report at ¶¶62-78.
`
`the rates paid by licensee for the use of other patents comparable to the patents-in-suit
`(Georgia-Pacific Factor 2). Id. at ¶¶79-109.
`
`the established profitability of the Infringing Products made under the patent; their
`commercial success; and their current popularity (Georgia-Pacific Factor 8). Id. at
`¶¶126-133.
`
`the nature of the patented inventions and utility over old modes and the benefits of the
`use of such inventions to Activision (Georgia-Pacific Factors 9 and 10). Id. at ¶¶134-
`136.
`
`• Factor 11 regarding the extent to which the infringer has made use of the invention;
`and any evidence probative of the value of that use. Id. at ¶¶ 137-141.
`
`II.
`
`Description of Reasonable Royalty Methodologies
`
`Mr. Parr sets forth the full basis for his reasonable royalty methodologies in his expert
`
`report, which is incorporated into this proffer in its entirety. The following is a summary of his
`
`1 Unless otherwise noted, all exhibits are attached to the Declaration of Yuridia Caire in Support
`of Acceleration Bay’s Damages Proffer.
`
`3
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 8 of 31 PageID #: 50266
`
`reasonable royalty opinions. In support of each of the reasonable royalty methods, Mr. Parr
`
`carefully analyzed the facts of the case, the parties’ bargaining positions, and the circumstances
`
`at the time of the hypothetical negotiation. Parr Report at ¶48; see also D.I. 521. As discussed
`
`in Section III, Mr. Parr’s analysis takes into account Acceleration Bay’s specific infringement
`
`allegations and considers the opinions of Acceleration Bay’s technical experts, Drs. Bims, Cole,
`
`Medvidovic, Mitzenmacher and Valerdi. Also as discussed in Section III, Mr. Parr considered
`
`and relied upon documentary evidence, financial records, and the deposition and anticipated trial
`
`testimony of the parties’ witnesses.
`
`A.
`
`Cost-saving Reasonable Royalty
`
`Acceleration Bay’s damages evidence is based on estimating costs that Activision
`
`avoided by infringing. At trial, Acceleration Bay will present evidence that a reasonable royalty
`
`would reflect Activision’s willingness, in a hypothetical negotiation, to pay an amount calculated
`
`by reference to the costs that Activision, in order to provide its customers the kind of service it
`
`wanted to offer them, would have incurred if it had chosen not to infringe—in this case, the costs
`
`of building a new non-infringing network instead of the infringing network it currently uses.
`
`As confirmed by the Federal Circuit, “[r]eliance upon estimated cost savings from use of
`
`the infringing product is a well settled method of determining a reasonable royalty.” Hanson v.
`
`Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1080–81 (Fed. Cir. 1983). When considering the
`
`amount of a use-based reasonable royalty “adequate to compensate for the infringement,” 35
`
`U.S.C. § 284, a jury may consider not only the benefit to the patentee in licensing the
`
`technology, but also the value of the benefit conferred to the infringer by use of the patented
`
`technology. Monsanto Co. v. McFarling, 488 F.3d 973, 980 (Fed. Cir. 2007) (“In determining
`
`the amount of a reasonable royalty, it was proper for the jury to consider not only the benefits of
`
`4
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 9 of 31 PageID #: 50267
`
`the licensing program to [the patentee], but also the benefits that [the patentee’s] technology
`
`conferred on [infringers].”).
`
`The Federal Circuit has repeatedly confirmed that reasonable royalties for patent
`
`infringement may be based on the cost savings to an infringer from its infringement, as
`
`Acceleration Bay seeks to do here. Under this methodology, the price for a hypothetical license
`
`is appropriately based on consideration of the “costs and availability of non-infringing
`
`alternatives” and the infringer’s “cost savings.” Aqua Shield v. Inter Pool Cover Team, 774
`
`F.3d 766, 771–72 (Fed. Cir. 2014) (remanding for redetermination of reasonable royalty,
`
`including consideration of the advantages of the patented product, and the ease and cost of
`
`designing around the claimed invention); see also, e.g., Hanson, 718 F.2d at 1080–81
`
`(“Reliance upon estimated cost savings from use of the infringing product is a well-settled
`
`method of determining a reasonable royalty.”); Powell v. Home Depot, U.S.A., Inc., 663 F.3d
`
`1221, 1240–41 (Fed. Cir. 2011) (approving a reasonable royalty damages award based on
`
`defendant’s cost-savings from infringement); Prism Techs. LLC v. Sprint Spectrum L.P., 849
`
`F.3d 1360, 1376–77 (Fed. Cir. 2017) (approving $30 million reasonable royalty damages award
`
`based on Defendant’s cost savings from infringement).
`
`In Prism Technologies, the Federal Circuit affirmed a $30 million reasonable royalty
`
`award that was based on the cost savings to Defendant Sprint from its infringement. 849 F.3d at
`
`1376. As here, those cost savings were determined by estimating the cost of the non-infringing
`
`alternative that the defendant was avoiding through infringement. Id. at 1375-77. (“Sprint would
`
`have chosen to build its own backhaul network in the absence of a license.”). Also, because the
`
`entire cost savings were attributable to and tied to the footprint of infringement (i.e., the
`
`5
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 10 of 31 PageID #: 50268
`
`defendant could either pay for the non-infringing alternative or infringe), the Federal Circuit
`
`approved the cost savings base without further apportionment. See id.
`
`Acceleration Bay’s cost-savings damages method is sufficiently tied to the “footprint” of
`
`the invention. The hypothetical-negotiation approach to calculating reasonable-royalty damages
`
`“attempts to ascertain the royalty upon which the parties would have agreed had they
`
`successfully negotiated an agreement just before infringement began.” Lucent Techs., Inc. v.
`
`Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). Although a patentee “must carefully tie
`
`proof of damages to the claimed invention’s footprint in the market place,” Uniloc USA, Inc. v.
`
`Microsoft Corp., 632 F.3d 1292, 1317 (Fed. Cir. 2011) (quoting ResQNet.com, Inc. v. Lansa,
`
`Inc., 594 F.3d 860, 869 (Fed. Cir. 2010)), that requirement for valuing the patented technology
`
`can be met if the patentee adequately shows that the defendant’s infringement allowed it to avoid
`
`taking a different, more costly course of action. A price for a hypothetical license may
`
`appropriately be based on consideration of the “costs and availability of non-infringing
`
`alternatives” and the potential infringer’s “cost savings.” Aqua Shield, 774 F.3d at 771–72; see
`
`also Hanson, 718 F.2d at 1080–81 (“Reliance upon estimated cost savings from use of the
`
`infringing product is a well-settled method of determining a reasonable royalty.”); Powell, 663
`
`F.3d at 1240–41; Slimfold Mfg. Co. v. Kinkead Indus., Inc., 932 F.2d 1453, 1458–59 (Fed. Cir.
`
`1991).
`
`Here, Mr. Parr estimated a reasonable royalty for Activision’s infringement based on Dr.
`
`Valerdi’s estimate of the cost savings to Activision from its infringement. Parr Report at ¶¶149-
`
`155; see also D.I. 633. This method evaluates Activision’s willingness, in a hypothetical
`
`negotiation, to pay an amount calculated from the costs that Activision would have incurred if it
`
`had chosen not to infringe, in order to provide the infringing functionality in the infringing
`
`6
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 11 of 31 PageID #: 50269
`
`products. In this case, those costs are the additional costs to Activision to build a new non-
`
`infringing network (as estimated by Dr. Valerdi) instead of the infringing networks it currently
`
`uses for the Infringing Products. Parr Report at ¶¶18, 149-155. The Court already rejected
`
`Activision’s Daubert challenge to the cost-savings opinions of Dr. Valerdi and to the opinions of
`
`Acceleration Bay’s infringement experts, Drs. Medvidovic and Mitzenmacher, upon whom Dr.
`
`Valerdi relies. D.I. 578 at 25-26, 30-31.
`
`1.
`
`Cost Savings Royalty Base
`
`Mr. Parr opined that, in the absence of a license, Activision would have attempted to
`
`design around the patented invention by building its own network that could handle the
`
`infringing multiplayer operations for the Infringing Products. Parr Report at ¶¶149-155. “Based
`
`on Dr. Mitzenmacher’s and Dr. Medvidovic’s considerable experience, it was determined that
`
`there are no known viable [non-infringing alternatives].” Id. at ¶149. As such, to the extent it is
`
`even possible, Activision would have to develop a new networking system to avoid
`
`infringement. Mr. Parr relied on Dr. Valerdi’s estimate of the costs to attempt to develop such a
`
`non-infringing alternative and the ongoing marginal maintenance costs for such a network. Id. at
`
`¶¶149-155.
`
`Mr. Parr’s reliance on Dr. Valerdi’s estimate is reasonable due to Dr. Valerdi’s decades
`
`of experience developing cost estimations applying the industry-accepted methodology. See
`
`Georgia-Pacific Factor 14; see also Parr Report at ¶146. Dr. Valerdi’s experience adequately
`
`qualified him to opine on the estimated cost savings to Activision from using the current
`
`infringing network instead of building a new, non-infringing alternative network. See Kumho
`
`Tire Co. v. Carmichael, 526 U.S. 137, 148–49, 156 (1999) (recognizing that expert testimony
`
`may be based on “specialized experience”) (quoting LEARNED HAND, HISTORICAL AND
`
`PRACTICAL CONSIDERATIONS REGARDING EXPERT TESTIMONY, 15 Harv. L. Rev. 40, 54 (1901)).
`
`7
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 12 of 31 PageID #: 50270
`
`These development costs and maintenance costs serve as the royalty bases for the cost-savings
`
`methods discussed below.
`
`Mr. Parr opined that the parties would have agreed to a royalty based on the development
`
`savings for the first non-infringing alternative that Activision would have needed, absent a
`
`license to the Patents-in-Suit, which was for World of Warcraft, the earliest of the accused
`
`games to go on sale. Parr Report at ¶¶150-156. Dr. Valerdi estimated the cost to build a non-
`
`infringing alternative network for World of Warcraft at approximately
`
`. Id. at ¶151.
`
`Mr. Parr assumes that the new, non-infringing network for World of Warcraft could also be
`
`used with Call of Duty and Destiny. Id. at ¶152. This is a very conservative assumption
`
`because the infringing network for World of Warcraft
`
`different from the networks for Call of Duty and Destiny
`
`is very
`
` So the actual
`
`cost of developing non-infringing alternatives for all of the Infringing Products would likely
`
`have been significantly higher than the estimate that Mr. Parr used.
`
`Dr. Valerdi relied on the analysis of Acceleration Bay’s infringement experts to limit his
`
`estimate to the costs attributable to developing a hypothetical non-infringing network. D.I. 480,
`
`Ex. 71 to Accel. Bay’s Opp. to MSJ & Daubert (“Valerdi Report”) at pages 2, 3, 12. Therefore,
`
`the cost-savings are directly tied and apportioned to the “footprint” of the invention (i.e., they are
`
`the savings realized from infringement). See Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308,
`
`1327 (Fed. Cir. 2014) (“a reasonable royalty analysis requires a court to … carefully tie proof of
`
`damages to the claimed invention’s footprint in the market place.”).
`
`2.
`
`Royalty Rate Based on Boeing/Panthesis’ Negotiation for a License to
`Acceleration Bay’s Patents-in-Suit
`
`The cost-savings based reasonable royalty is the portion of the cost-savings that Boeing
`
`and Activision would have agreed in 2012 should be paid to Boeing. After consideration of the
`
`8
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 13 of 31 PageID #: 50271
`
`appropriate royalty base to use, discussed above, Mr. Parr next determined the appropriate
`
`royalty rate to apply to the cost-savings royalty base. After reviewing the record and applying
`
`the Georgia-Pacific factors, Mr. Parr determined that the parties would have agreed to a royalty
`
`rate of
`
` This
`
` rate is based on the license to the Patents-In-Suit that Boeing
`
`negotiated with Panthesis (as discussed in the following sections, Mr. Parr came to
`
`approximately the same rate under three alternative analyses). Parr Report at ¶¶63-147, 156.
`
`
`
`Mr. Parr considered the negotiations and agreement that resulted from the arms-length
`
`negotiation between Boeing and Panthesis, wherein Boeing granted to Panthesis an exclusive
`
`license to sell products and services based on the patented technology. Id. at ¶¶63-71. Boeing
`
`and Panthesis agreed that in exchange for a license to the Patents-In-Suit from Boeing,
`
`Panthesis would give Boeing
`
`
`
` Id. Mr. Parr noted
`
`the similarities between the Boeing and Panthesis license and the hypothetical negotiation
`
`between Boeing and Activision, including that both were arms-length agreements for the
`
`Patents-in-Suit and involved a similar field of use. Specifically, “the Boeing/Panthesis license
`
`informs the hypothetical negotiation in this action because it is the result of an arms-length
`
`negotiation between Boeing (the licensor in the hypothetical negotiation) and Panthesis (like
`
`Activision in the hypothetical negotiation, a licensee looking to obtain rights to use the
`
`technology of the [Patents-in-Suit] in video game products).” Id. at ¶66.
`
`Mr. Parr considered and accounted for the differences between the Boeing/Panthesis
`
`license and the hypothetical negotiation between Boeing and Activision. Parr Report, ¶¶67-70.
`
`For example, Mr. Parr noted that (1) at the time of the Boeing/Panthesis license, the value of the
`
`technology was somewhat speculative and the validity of the Patents-in-Suit was unproven. In
`
`9
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 14 of 31 PageID #: 50272
`
`contrast, in the hypothetical negotiation between Boeing and Activision, the parties would know
`
`that Activision was infringing the Patents-in-Suit and that the Patents-in-Suit were valid,
`
`increasing the value of the hypothetical license (2) the Boeing/Panthesis license included
`
`additional considerations of an
`
`
`
`license was an
`
` and (3) the Boeing/Panthesis
`
` which is a broader license than the
`
`license it would grant to Activision (and its subdivisions) in the hypothetical negotiation but the
`
`narrower rights to Activision would be anticipated to be much higher in value to Activision than
`
`to Panthesis given the profitability of the games. Id. Mr. Parr also considered and discussed the
`
`other licenses and agreements in the record and explained why they were not comparable to the
`
`hypothetical negotiation between Boeing and Activision. Id. at ¶¶63-109.2
`
`Applying the
`
` royalty rate to Dr. Valerdi’s estimated
`
` in cost
`
`savings from Activision’s use of the infringing technology results in a reasonable royalty of
`
`approximately
`
` As noted above, this royalty base was already apportioned to the
`
`footprint of the invention because Dr. Valerdi estimated only the costs of developing the portion
`
`of the gaming network that infringed the Patents-in-Suit and would need to be replaced. Id. at
`
`¶¶149-156. The Federal Circuit has repeatedly confirmed, most recently in Exmark, that using
`
`either the royalty base or the royalty rate is an acceptable methodology to adequately and
`
`reliably apportion between the improved and conventional features of the accused product.
`
`2 Mr. Parr rejected the 2006 license between Boeing and Sony as a starting point for the
`hypothetical negotiation for multiple reasons, including that, at that time,
`
`
` Parr Report at ¶¶72-79. None of these factors are present in the hypothetical
`negotiation between Boeing and Activision. Id.
`
`
`
`
`
`
`
`10
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 15 of 31 PageID #: 50273
`
`Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d 1332, 1348 (Fed. Cir.
`
`2018).
`
`3.
`
`Royalty Rate Based on Activision’s Cost of Capital
`
`Mr. Parr provided other grounds to calculate a royalty rate based on Activision’s cost of
`
`capital that can be applied to Activision’s cost savings. Parr Report at ¶¶197-199. The Federal
`
`Circuit approved this methodology in Home Savings of America v. United States, 399 F.3d 1341
`
`(Fed. Cir. 2001). In Home Savings, the Federal Circuit affirmed an award for the full amount of
`
`replacement capital raised, which “calculated the damages as the difference between what it cost
`
`[the thrift] to raise that tangible capital and the benefit [to the thrift] derived from possessing that
`
`capital.” 399 F.3d at 1352. In affirming the award, the Federal Circuit noted that “the Court of
`
`Federal Claims properly noted that capital is not costless;  its cost is the required rate of return on
`
`various terms of financing.” Id. at 1354.
`
`Mr. Parr observed that, if Activision had to build a non-infringing network at a cost of
`
`over
`
` it would need to borrow capital to do so. Parr Report at ¶198. To determine
`
`Activision’s cost of borrowing that capital, Mr. Parr reviewed and analyzed previous bonds that
`
`Activision obtained for similar amounts of funding and the rates that Activision was willing to
`
`pay in exchange for that capital. Id. Mr. Parr found that, Activision had agreed to interest rates
`
`of
`
` and
`
` Id. Mr. Parr averaged those two rates to obtain an average
`
`cost of capital of
`
` Id. (citing Activision’s 2015 Annual Report). This rate represents
`
`a floor for the interest amount that Activision was willing to pay annually for additional capital
`
`to invest in its operations on the expectation that it would be profitable to do so. Id. Put another
`
`way, if Activision would pay
`
` interest to borrow the over
`
`needed to develop
`
`a non-infringing alternative, it would also pay the same amount to avoid the need to borrow the
`
`cost to develop a non-infringing alternative. This methodology is thus premised on the benefit to
`
`11
`
`

`

`Case 1:16-cv-00453-RGA Document 645 Filed 02/22/19 Page 16 of 31 PageID #: 50274
`
`Activision from avoiding the cost of borrowing the capital to replace the infringing technology.
`
`Id. This approach is very conservative because it only looks to interest paid on the cost to try to
`
`avoid infringement, but does not include in the calculation the actual cost of doing so.
`
`As a conservative measure, Mr. Parr calculated the interest savings for just a two-year
`
`window, rather than the full term of the bond, because Activision released the infringing games
`
`on a roughly two-year cycle. Parr Report at ¶198. Under this methodology, where Activision’s
`
`royalty is limited to the interest it would pay for two years to finance the non-infringing
`
`alternative, Mr. Parr opines that the parties would have agreed to a royalty of roughly
`
`
`
` Id. at ¶199.
`
`4.
`
`Cost Savings Opinion Based on Activision’s Estimated Marginal
`Maintenance Costs
`
`
`Mr. Parr opined that the parties would have also considered Activision’s savings from
`
`avoiding the ongoing increased maintenance and developme