Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 1 of 9 PagelD #: 52414
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
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`ACCELERATION BAY LLC,
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`Plaintiff,
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`Vv.
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`C.A. No. 16-453 (RGA)
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`ACTIVISION BLIZZARD,INC.,
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`PUBLIC VERSION
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`Defendant.
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`PLAINTIFF ACCELERATION BAY’S DAMAGES PROFFER
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`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
`
`Attorneysfor Plaintiff
`ACCELERATION BAY LLC
`
`OF COUNSEL:
`
`Paul J. Andre
`Lisa Kobialka
`James Hannah
`Yuridia Caire
`KRAMERLEVIN NAFTALIS
`& FRANKEL LLP
`990 Marsh Road
`Menlo Park, CA 94025
`(650) 752-1700
`pandre@kramerlevin.com
`Ikobialka@kramerlevin.com
`jhannah@kramerlevin.com
`ycaire@kramerlevin.com
`
`Aaron M.Frankel
`KRAMERLEVIN NAFTALIS
`& FRANKEL LLP
`1177 Avenueof the Americas
`New York, NY 10036
`(212) 715-9100
`afrankel@kramerlevin.com
`
`Dated: October 18, 2019
`Public Version Dated: October 25, 2019
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 2 of 9 PagelD #: 52415
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`I.
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`NATURE AND STAGE OF PROCEEDINGS
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`Pursuant to the Court’s October 15, 2019 Order (D.I. 699), Acceleration Bay submits this
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`proffer of its damages case in view of the Court’s Memorandum Opinion on damages issues
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`(D.I. 692) and an explanation of it compliance with D.I. 619.
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`IL.
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`COMPLIANCE WITH CASE MANAGEMENT ORDER(D.I. 619)
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`Acceleration Bay will present a fact-based damages case with expert support that fully
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`complies with the Court’s orders in this case, which did not exclude presentation of the
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`underlying facts. These facts relating to apportionment of revenue are identified below, and
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`were disclosed in Acceleration Bay’s original damages proffer (D.I. 614), as well as its
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`supplemental expert report.! Specifically, for each apportionment methodology, Acceleration
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`Baydisclosed in its original damages profferall of the factual evidence and the expert opinionsit
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`will rely upon. Moreover,all of the expert opinions Acceleration Bay will rely on were
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`approved by the Court in its Memorandum Opinion on Damages(D.I. 692, the “Damages
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`Order”), unobjected to by Activision. Fortrial and as explained below, these facts will be
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`presented through fact witnesses and to the extent appropriate, in summary format by
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`Acceleration Bay’s expert.
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`Il.
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`APPORTIONMENT PROFFER
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`Acceleration Bay proffers the following apportionment methodologies:”
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`e
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`royalty based on application of a 12% royalty rate to the revenues for the
`accused products: the 12% royalty rate is derived from the comparable
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`' Activision submitted responsive expert reports and deposed Acceleration Bay’s damages
`expert on his supplemental report, as permitted by the Court’s Case Management Order. D.I.
`619 at 2.
`2 The Federal Circuit confirmed that it is acceptable to apportion the royalty base or the royalty
`rate to adequately and reliably apportion between the improved and conventional features of the
`accused product. Exmark Mfg. Co. v, Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d
`1332, 1348 (Fed. Cir. 2018).
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 3 of 9 PagelD #: 52416
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`Boeing/Panthesislicense that already reflected an apportionment to the footprint of
`the invention;
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`e
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`royalty based on two-years of maintenancefees: this is a cost-based
`methodology, with the royalty base apportioned to the footprint of the invention;?
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`A,
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`Apportioned 12% Royalty Rate Derived from Boeing/Panthesis License
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`Acceleration Bay will demonstrate that a 12% royalty rate applied to Activision’s
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`revenues from the accused products is a reasonable royalty for Activision’s infringement. This
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`12% rate is based on the comparable Boeing/Panthesis license for Panthesis’ use of the Patents-
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`In-Suit. D.I. 642-1, Ex. A (Parr Report) at §§63-147, 156. The Court already found that
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`Acceleration Bay sufficiently disclosed the Boeing/Panthesis license to rely onit to establish a
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`royalty rate. D.I. 692 at 13.
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`Factual Evidence: Acceleration Bay will present testimony from Drs. Fred Holt and
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`Virgil Bourassa, the inventors and founders of Panthesis, regarding the license that Boeing and
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`Panthesis negotiated for Panthesis’ use of the Patents-in-Suit in the videogamefield.
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`Acceleration Bay disclosed its intention to offer this evidence in its Damages Proffer. D.I. 641
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`at 24. The testimony of Dr. Holt and Mr. Bourassa will demonstrate that the Boeing/Panthesis
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`license is comparable to the license that Boeing would have negotiated with Activision in a
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`hypothetical reasonable royalty negotiation and that the 12% royalty rate that Boeing and
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`Panthesis agreed upon wasalready apportioned,i.e., that Boeing and Panthesis agreed that 12%
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`of the revenue generated by Panthesis from using the technology of the Patents-in-Suit was a
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`fair royalty to compensate Boeingforthe contributionsof the Patents-in-Suit to the video games
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`that Panthesis was developing.
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`3 The cost savings royalty based on maintenance fees is the subject of Acceleration Bay’s
`pending Motion for Reconsideration (D.I. 695), which will impact whetherit can be presented to
`the jury. Acceleration Bay presents it to preserve this apportionment approach while that Motion
`is pending.
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 4 of 9 PagelD #: 52417
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`Expert Opinion: Acceleration Bay will present the expert opinion of Mr. Parr to support
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`the royalty based on the application of the 12% rate. All of the opinions Mr.Parr will offer
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`were disclosed in his expert report and left undisturbed by the Court in its Damages Order:
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`the Georgia-Pacific hypothetical negotiation framework and howit applies to the
`Boeing/Panthesis license. D.I. 642-1, Ex. A (Parr Report) at [J 61-71;
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`how the negotiations and agreementthat 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 is comparable
`to the circumstances between Boeing and Activision becauseit involved parties
`similarly situated as Boeing and Activision, in an arms-length negotiation, for the
`same technology andin the samefield. Id. at {] 63-71.
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`at the time of the Boeing/Panthesis license, the value of the technology was
`somewhatspeculative and the validity of the Patents-in-Suit was unproven. In
`contrast, in the hypothetical negotiation between Boeing and Activision, the parties
`would know that Activision was infringing the Asserted Patents and that the
`Patents-in-Suit were valid, increasing the value of the hypotheticallicense. Jd. at
`q{ 67-70;
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`the Boeing/Panthesis license included additional considerations of an upfront
`paymentand stock that wouldnot occur in the hypothetical negotiation but would
`drive a higherroyalty rate Jd.;
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`the Boeing/Panthesis license was an exclusive license with the right to sublicense,
`whichis a broaderlicense than the license it would grant to Activision (and its
`subdivisions) in the hypothetical negotiation, but the narrowerrights to Activision
`would be anticipated to be much higher in value to Activision than to Panthesis
`given the profitability of the games. D.I. 642-1, Ex. A (Parr Report) at {{[ 68-70.
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`After reviewing the record and applying the Georgia-Pacific factors, Mr. Parr determined
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`that the parties would have agreed to a royalty rate of 12%. Jd. ate.g., | § 71, 142, 156, 204.
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`In view of the Damages Opinion, Mr. Parr will not address the specific issue of the
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`apportionmentof the rate. However, as noted above, Acceleration Bay will use the factual
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`testimony of Dr. Holt and Mr. Bourassato establish that the 12% royalty constitutes an already
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`apportioned rate, accounting for the value of the contributions of the patented technology to
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`Panthesis’ planned video games.
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 5 of 9 PagelD #: 52418
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`B.
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`Apportioned Reasonable Royalty Based on Ongoing MaintenanceFees
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`Acceleration Bay will offer evidence that Activision’s estimated maintenance fees for a
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`two-year period represent an already-apportioned reasonable royalty for Activision’s
`infringement. Acceleration Bay fully disclosed this claim in its Damages Proffer. D.I. 641
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`(Proffer at 12-13).
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`Mr. Parr looked at these estimated maintenance costs, which Activision would be willing
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`to pay to operate the accused World of Warcraft gamein the real world, as a proxy forthe
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`“floor of the amount Activision would payto realize the over $2.4 billion in profits for World of
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`Warcraft alone” in the hypothetical world of the reasonable royalty negotiation. D.I. 642-1, Ex.
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`A (Parr Report) at { 202. In other words, Activision would pay these estimated amounts to
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`continue to achieve the revenue stream from the game, so it would be willing to pay at least that
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`muchas a cost to unlock the same revenue stream in the hypothetical world where it obtains a
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`license.
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`While the Court excluded this damagestheory,it is one of the subjects of Acceleration
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`Bay’s pending Motion for Reconsideration (D.I. 695). As set forth in that Motion, Mr. Parr’s
`maintenance cost-based damagesopinion is distinct from the other excluded damages opinions
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`based on Dr. Valerdi’s developmentcalculations. D.I. 695; D.I. 642-1, Ex. A (Parr Report) at
`{{ 200-203. Separate from the cost to develop a non-infringing alternative, Dr. Valerdi
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`determined the cost of ongoing maintenance for the theoretical non-infringing alternative by
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`estimating the maintenancecosts for the accused systems (which Activision never provided
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`during discovery) based on the estimated lines of code and complexity of the actual World of
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`Warcraft game. D.I. 480, Ex. 71 (Valerdi Report) at pages 12-13. This opinionis not based on
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`“the cost of rearchitecting each of the Accused Productsin this case in order to develop a new
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`networking platform for each of the accused games,” but rather, estimating the cost to maintain
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 6 of 9 PagelD #: 52419
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`software with the actual characteristics of the accused products, andis, therefore, not subject to
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`the Court’s objections thereto. D.I. 692 at 5-6.
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`Should the Court reconsiderits decision to strike this portion of Mr. Parr’s report, as a
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`cost-savings based theory already tied to the infringing functionality, no further apportionment
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`would be required. As confirmed by the Federal Circuit, “[rJeliance upon estimated cost savings
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`from use of the infringing product is a well settled method of determining a reasonable royalty.”
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`Hansonv. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1080-81 (Fed. Cir. 1983); Prism Techs.
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`LLCy. Sprint Spectrum L.P., 849 F.3d 1360, 1376-77 (Fed. Cir. 2017) (approving $30 million
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`reasonable royalty damages award based on Defendant’s cost savings from infringement without
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`requiring further apportionment).
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`Cc,
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`Appropriate Revenue Base Apportioned to Smallest Saleable Patent
`Practicing Unit
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`In connection with the apportionment methodologies described above in Sections A and
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`B, Acceleration Bay will offer evidence regarding the appropriate identification of a royalty base
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`based on the revenues associated with the Infringing Products, which are the smallest saleable
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`patent practicing units. Activision does not charge separately for the use of its network, but
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`reaps manybenefits from its network, including the sales of the Accused Games,additional
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`monetary compensation for other activities made possible through the infringing network, such
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`as microtransactions, additional purchases, awards andpraise for the Accused Games, discussed
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`in more detail below. See, e.g. D.I. 642-1, Ex. A (Parr Report) at (119-123. Acceleration Bay’s
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`damages expert has apportioned the revenuesfor the Infringing Products and removed any sales
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`associated with the Sony platform, which is not accused. This base captures the extensive nature
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`of Activision’s infringement and the benefits its reaps from its infringement, no further
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 7 of 9 PagelD #: 52420
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`adjustmentto the revenue base is necessary which Acceleration Bay hasidentified by geographic
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`location.
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`IV.
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`PERTINENT EVIDENCE FOR CONSIDERATION OF THE ABOVE METHODS
`In addition to the above-described apportionment methodologies, Acceleration Bay will
`present factual and expert opinion evidence to assist thejury in determining the reasonable
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`royalty owed to Acceleration Bayas a result of Activision’s infringement. Acceleration Bay
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`fully disclosed this evidence and opinionsin its damages proffer and expert reports, which are
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`incorporated herein.
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`In summary, Acceleration Bay will offer the following expert opinionsrelevant to
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`damages:
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`e
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`Mr.Parr will discuss the Georgia-Pacific framework, analyze Activision’s financial
`documents, value the sales to Activision, including the profitability, apportion
`Activision’s revenues down to the relevant timeframe and the specific versions of
`the accused products at issue, and provide information on possible geographic
`adjustments, his reliance on the technical experts regarding the infringement,
`benefits and how, for World of Warcraft, the infringement comes from the
`networking ofthe servers, not the participants, such that World of Warcraft, like
`Destiny, is always infringing. D.I. 642-1, Ex. A (Parr Report)at e.g., (935, 56-58,
`89, 134-135, 146, 149-152.213-217.4
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`e_Dr. Bimswill provide technical opinions regarding the benefits of the patented
`technology to the Accused Products and the absence of viable non-infringing
`alternatives. See, e.g., D.I. 480, Ex. 67 (Bims Report) at e.g., 992, 3, 4, 14, 53-77;
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`Drs. Medvidovic and Mitzenmacherwill provide opinions regarding the benefits of
`the technology, locations ofthe infringement, extent of Activision’s infringement
`and the absenceofviable non-infringing alternatives, location of servers and
`development,testing of infringing technology. See, e.g., D.I. 455, Ex. 35, 40, 50;
`D.J. 454, Ex. 28; D.I. 480, Ex. 67 and 68; and
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`Dr. Cole will provide a technical tutorial on the technology at issue and howit is
`used,
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`4 Mr. Parr relied on the financial data provided for Call of Duty, Destiny and World of Warcraft
`from 2015 through the date which Activision provided financials for the specific infringing
`products. See, e.g, ATV1I0033750, AVTI0027360, ATV10034005-34006 and ATVI0034008.
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 8 of 9 PagelD #: 52421
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`The following is a summary of factual evidence Acceleration Bay will presentat trial on
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`damages, which wasalso disclosed in Acceleration Bay’s proffer at D.I. 641 at 22-26:
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`e__Activision’s financial records to establish relevant revenues from and usage ofthe
`Accused Products;
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`Qualitative statements regarding the importance ofthe infringing features of the
`Accused Products to their commercial success, such as Activision’s presentations
`and surveys and the deposition testimony of Activision’s designees and employees;
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`e_the testimony of John Garland, responsible for Acceleration Bay’s licensing efforts;
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`the testimony of Joe Ward, Acceleration Bay’s CEO, whois familiar with
`Acceleration Bay’s business dealings;
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`the testimony of Fred Hold and Virgil Boursassa, the inventors and founders of
`Panthesis, regarding how their inventions are improvements over the prior art and
`their negotiations of the 12% royalty rate for Panthesis with Boeing.
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`e_Activision’s witnesses, including its CEO, that Destiny is “always connected,” and
`Ms.Smith, Activision’s Corporate Designee on World of Warcraft that World of
`Warcraft is always a Massive Multiplayer Online Role-Playing Game
`(“MMORPG”).
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`V.
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`CONCLUSION
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`Asset forth above, Acceleration Bay is prepared to present a damages case based onfacts
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`and claims disclosed in its prior Damages Proffer and consistent with the Court’s Damages
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`Order.
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`Case 1:16-cv-00453-RGA Document 704 Filed 10/25/19 Page 9 of 9 PagelD #: 52422
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`POTTER ANDERSON & CORROON LLP
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`By: /s/ Philip A. Rovner
`Philip A. Rovner (#3215)
`Jonathan A. Choa (#5319)
`Hercules Plaza
`P.O. Box 951
`Wilmington, DE 19899
`(302) 984-6000
`provner@potteranderson.com
`jchoa@potteranderson.com
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`Attorneysfor Plaintiff
`Acceleration Bay LLC
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`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
`KRAMERLEVIN NAFTALIS
`& FRANKEL LLP
`1177 Avenue of the Americas
`New York, NY 10036
`(212) 715-9100
`
`Dated: October18, 2019
`Public Version Dated: October 25, 2019
`6448716
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