GRANT STREET GROUP, INC., Pennsylvania corporation...., 2011 WL. 9332191...
`
`2011 WL 9382191 {W.D.Pa.) (Partial Expert Testimony)
`United States District Court, W.D. Pennsylvania.
`
`GRANT STREET GROUP, INC., Pennsylvania corporation, Plaintiff,
`V
`
`REALAUCI'ION.COM, LLC, a Florida limited liability company, Defendant.
`
`NO. 09-1407.
`
`November 2, 2011.
`
`(Partial Testimony of ]van T. Hufmann)
`
`Case Type: inleliectnal Property >> Patent
`Jurisdiction: W.D.Pa.
`
`Name of Expert: Ivan T. Hofmann, C.P.A.
`Area of Expertise: Accounting & Finance >> Accountant
`Area of Expertise: Accotuning & Finance >> Valuation/Appraisal (Non-Real Estate)
`Area of Expertise: Accounting & Finance >> Economics/Economist
`
`Representing: Plaintiff
`
`Appearances.
`
`On behalf of the Plaintiff:
`
`Patrick J. McElhinny, Esquire
`K&L Gates, LLP
`210 Sixth Avenue
`K&L Gates Center
`
`Pittsburgh. Pennsylvania 15222
`412.355.6334 patrick.meethinny@kIgates.com.
`
`On behalf of the Defendant:
`
`David S. Brafman, Esquire
`Akerman Senterfitt
`
`222 Lakevicw Avenue, Suite 400
`West Palm Beach, Florida 33401
`
`561.653.5000 david.braI1nan@al<enna11.com.
`
`DEPOSITION OF IVAN T. I-IOFMANN, a witness, called for exrunination by the Defendant, pursuant to the Federal Rules
`of Civil Procedure, by and before Cynthia P. Simonovitcli, a Court Reponer and Notaty Public in and for the Cemmonwealtli
`of Penns_v1vam'a, at the law offices of Leech Tislunan Fuscaldo S1. Lampl, 525 William Penn Place. 30111 Floor, Pittsburgh.
`Pennsyivania 15219, on Wednesday, November 2., 2011, commencing at 9:38 a.m.
`
`WITNESS
`
`Ivan T. Hofmann
`
`INDEX
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`SENJU EXHIBIT 2340
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`GRANT STREET GROUP, INC., Pennsylvania corpo:'atior:,..., 2011 WL 9382191...
`
`EXAMINATION PAGE
`
`Examination by Mr. Brafrnan
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`4
`
`Examination by Mr. McElhinny
`
`-
`
`DEPOSIITON EXHIBIT NO. MARKED FOR IDENTIFICATION
`
`232 (Report of Gleason & Associates, P.C., dated August 15, 2011)
`
`4
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`233 (Report of Gleason & Associates, P.C., dated September 30, 2011)
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`26
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`PROCEEDINGS
`
`(9:38 o'clock a.m.)
`
`IVAN T. HOFMANN, the deponent, having been first duiy sworn, was deposed and testified as follows:
`
`EXAMINATION
`
`BY MR. BRAFMAN:
`
`Q. Mr. Hofmann. what kind of company is Gleason & Associates?
`
`A. It's a specialized consulting firm. It's a certified public accounting firm that specializes in litigation support, intellectual
`property issues, and forensic accounting.
`
`Q. Are you one of the founders of Gleason & Associates‘?
`
`A. I am not.
`
`MR. BRAFMAN: I'll ask the court reporter to mark as Defendant's Exhibit 232 your expert repott dated August 15, 2011.
`
`(Defendant's Exhibit 232 was marked for identification.)
`
`BY MR. BRAFMAN:
`
`Q. Let's turn to your CV which is I believe in the back. The last tab. It's No. 2.
`
`You began working at Gleason & Associates in 2006?
`
`A. That's conect.
`
`Q. Since that time has your professional practice been devoted exclusively to litigation support?
`
`A. No.
`
`Q. What other things do you do?
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`GRANT STREET GROUP, FNC., Pennsylvania corporation,.... 2011 WL 9382191...
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`A. I work in consultation with companies in issues of valuation, intellectual property matters, licensing issues, evaluation. I
`also have done forensic accounting work, investigations outside the purview of litigation. I think those are the primary issues
`outside of litigation support.
`
`Q. Approximately what percentage of your practice in tenns of time devoted is litigation support?
`
`A. I believe it varies by year, but I would say on balance maybe half.
`
`Q. Before working at Gleason & Associates, did you provide expert consulting or testifying work in connection with litigation?
`
`A. No, not expert testifying. I had done some forensic and dispute services work, but my testifying primarily began when i
`was at Gleason & Associates.
`
`Q. Did you receive any particular training in coiuieclion with begiruijng to work in die litigation support area‘?
`
`[Note: Pages 6-81 missing in original documertt]
`
`Q. What is the royalty rate at those numbers‘?
`
`A. At - at current Realauction pricing, it's approximately maybe in the high 40 percent for tax liens and it's similar for deeds
`and foreclosures assuming that Reaiauction keeps it at the levels that it's at and doesn't raise prices.
`
`Q. In 2009 what was Realauction‘s operating profit or loss?
`
`A. When you say “operating profit”, what exactly do you mean‘?
`
`Q. How would you define it?
`
`A. Operating profit to me would be revenues minus SGSLA and I guess depreciation and aiiiortizritiori and any other direct
`setting costs. I guess that would be an SG&A.
`
`Q. Is that a different profit measure than what's reflected in Exhibit K?
`
`A. Exhibit K is overail net profit. I was distitiguislting between operating profit and net profit. There are certain expenses that
`are below operating profit in arriving at net profit.
`
`Q. Which one would you exclude‘?
`
`A. Typically interest, taxes, other income and expense. Those are the main ones that come to mind.
`
`Q. Under your reasonable royalty analysis, how much would Realauction have to pay Grant Street Group in 2009‘?
`
`A. Approximately 1.3 iniiliora dollars.
`
`Q. [REDACTED]
`
`A. [rosoacnsni
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`GRANT STREET GROUP, INC., Pennsylvania corporation,..., 2011 WL 9382191
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`Q. [REDACTED]
`
`A. [nsoacrs]
`
`Q. Under your reasonable royalty analysis, Reaiauction would have to pay in 2010 to Grant Street Group about 2.7 million
`dollars; correct?
`
`A. That's conect. Although I don't know that comparing bottom line not profit is the right comparison. Perhaps increinental
`profit or cash flow is more appropriate.
`
`Q. RealForoclose and Real’l'axLien as we've aiready discussed are the only revenue—generating products that Realauction had
`in 2009, 2010; correct?
`
`A. That's conecl.
`
`Q. To the extent that it pays Grant Street Group a royalty - well, strike that.
`
`lIRealauction is left without a profit on an incremental basis on those products, it has no income for which to offset its other
`costs; conect?
`
`A. Could you repeat that or read that back?
`
`Q. Why do you say that it would be more appropriate to compare the reasonable royalty costs against incremental profit than
`not profit?
`
`A. Because the way Fin hearing your question is you're suggesting either the inability to pay or, you know, the fact that there are
`losses or income that is not as big as the suggested royalty possesses some sort of problem or sortie reason that Realauctioa would
`not agree to this royalty. [REDACTED] Well, if I'm talking about a hypothetical negotiation before the Iitigation conunences,
`ltypothetically Realauction wouldn't have incurred the legal fees in defendiitg this litigation.
`
`So in looking at whercwitltal to pay and looking at, you know, the royalty negotiation, I think it's appropriate to look at
`incrernentat profit andlor cash llows, and those are just certain exarttples of why.
`
`Q. From Realattctioifs perspective. what makes a royalty rate of at least 40 percent reasonable?
`
`A. Well, I think I -I think I laid that out fairly clearly in my report in response to Ms. Rinke turning around and ~ and] guess
`agreeing with you that absent the license agreenient, they'll go out of business.
`
`It seems to me that there's a great deal of incentive to enter into a license agreement. And while a high 40 percent margin — or
`high 40 percent royalty rate would take that percentage of revenues, there's still snl’t‘1cient profit, especially prospectively, that
`it would make sense for Realauction to agree to the royalty rate.
`
`In addition to Realauction's ability to continue as a going concern. it would also allow Realauction's principals to continue to
`draw their salaries and benefits and I guess have a place to go to work every day if you wiii.
`
`So it seems to me that the significance of these -- the accused products to the revenues of Rcalauction, but Realattction has a
`situation where they have no other viable option titan to agree to a royalty from Grant Street Group or they go out of business.
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`GRANT STREET GROUP. tNC.. Pennsylvania corporation,..., 2011 WL 93821 91
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`And from Grant Street Group's perspective, the 48 percent that you're talking about is a rnuclt lower percentage of what they
`could expect to earn from a revenue and profitability perspective.
`
`So it's not even a terribly attractive royatty stream to Grant Street Group, you know, relative to what they could earn directly.
`
`Q. In your analysis did you apportion in any way the value added to Reaiauctioifs products from the patent features compared
`to unpatented features?
`
`A. As I addressed in my report, I analyzed and considered the applicability of the entire market value rule, which is you're
`basically considering what the -- another way of describing what you're describing is looking at the product with and without
`the patented feature.
`
`And the admission and acknowledgment by Ms. Rinke with which I agree is you don't have any accused producg you don't
`have any product without a license to the 063 patent. tells me that the accused products and the Grant Street Group products are
`- you know, are the entirety royalty base to which you would apply the royalty and that the value - the apportioning of value
`when you can't offer the product is inappropriate. You look at the entire market value.
`
`Q, You haven't done a patent claimed by patent claimed damage analysis, have you‘?
`
`A. Explain to me what you mean by that.
`
`Q. You haven't determined -~ I'lt put it another way. Your damage analysis is intended to apply whether all the claims being
`asserted by Grant Street Group are valid and infringed or whether only a single one of them is valid and infringed; correct?
`
`A. The analysis is, yes, based on the point that -- you know, with which Ms. Rinke agrees, that absent the license to the 063
`patent, you cannot offer the accused products.
`
`Q. For exalnple. should the jury find that Claim 1 is invalid and only one of the remaining claims is valid and infringed, in your
`opinion the same damages analysis applies; correct?
`
`A. E mean, i --1 would want to, you know, relook at the claims. You know. i've — I've not recently looked at them claim by
`claim in yourhypothetica! so -1 mean, I think as I said at the outset and it says in my report, that the report assumes the patent's
`valid and infringed.
`
`Q. If the jury were to find that Claim 1 were invalid and only Claim 2 were valid and infringed, you haven't done any kind
`of analysis that would cnabte anyone to apportion value to the features that were in Claim 1 compared to any features added
`by Claim 2, have you?
`
`A. Well, it would -1 mean, it would be attendant on, you know, the ability to offer the accused products absent infringement of the
`claims which are found to infringe. If there's an inability to offer the accused products. then these damage amounts would apply.
`And then I guess I think we touched base a little earlier on this whole concept of -- of design-around and that there would be
`damages that are articulated in here related to the remaining countdown clock, if that's tlcalt with in one or several of the claims.
`
`Q. Were you aware that there were claims in the parent patent, the 099 patent, that have been previously invalidated by the
`courts?
`
`A. I am aware of that.
`
`Q. Did that impact your analysis at all?
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`GRANT STREET GROUP, lNC., Pennsylvania eorporation...., 2011 WL. 9382191“.
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`A. Well, I mean, ultimately, no. I analyzed it and considered it, though.
`
`Q. Is it right that in your opinion, regardless of how many or how few features of the Realauction products zu-e covered by a
`valid and infringed claim, because Grant Street Group would have the ability to stop the sale of that product by withholding a
`license, your opinion is that it's entitled to its —- the reasonable royalty rate that you've come up with‘?
`
`A. Well, I think that that is the result and the appropriate application of a royalty analysis where, you know, I think - maybe
`an example would be a better way to get there.
`
`What you're suggesting is when there's a product, say Microsoft Word, that is for sale that can be sold without say a spell check
`function, you'd look at what the incrementai profits are of having a spell check function, that added functionally if the spell
`check was a patented feature. In this case you don't have -- that analogy doesn't apply as explained in any report and agreed to
`by Ms. Rinke, which is if I don't have a license to the 063 patent, I being Reaiauction, I can’: sell the accused products.
`
`So there's no incremental or additional profit attendant to attribute the 063 patent to when you wouldn't be able to sell the
`accused product without a license to the 063 patent.
`
`Q. What's your basis forconcluding that Reaiauction couidn't sell its RealForeclose or Real'I‘axLien product without a particular
`feature if that particular feature were found to be infringing’?
`
`A. Well, that's where I — as I explained and I think is articuiated, is that assuming the patent as it is is valid and inlfinged, my
`understanding is that they could not seil the accused product. And that seems to be soiuethi ng with which Ms. Rinke disagree
`or agrees.
`
`Q. I'm talking about your own analysis, not Ms. Rinke's, or your understanding of the analysis.
`
`A. I'm saying my affiniiative analysis and then it seems that she agrees with that.
`
`Additionally, slte raises the issue of the removal of the clock and, as I explained in any supplemental, that there's still maybe
`likely damages on the products which contain a countdown ctocic whichl understandl not been removed.
`
`So there is analysis of the removal or the potential non-appiicability of at least some of the claims.
`
`Q. Do you know other than the clock what features there are that are covered by the claims?
`
`A. I mean, I've read the patent. I've read the expert reports. But I don't have any teclutical opinion on any of the ciaims.
`
`Q. I want to make this clear. Your opinion that Realanction would not be able to setl the product without a particular feature
`should only that sub-feature be fon ad to be causing infringement is based on your assutnptiou that that's just not possible; rigltt‘?
`
`MR. MCELHINNY: Do you want to replay that for me.
`
`(Court reporter read back previous question.)
`
`MR. McELl-IINNY: Object to the form of the question; incomplete hypothetical.
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`GRANT STREET GROUP, INC., Pen nsytvania corporation..... 2011 WI. 9382191...
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`A. I mean, I think I explained both in my report and in the supplemental I don't know that I'd call it an assumption, but it's, you
`know, my understanding drawing on the appiication of the entire market value rule, the opinions of the technical experts, that
`the accused products are unavailable for sale without a license to the 063 patent.
`
`Q. What teclutical experts are you referring to?
`
`A. Just the review that I have of the - it was the claim charts and whatnot in the report of Dr. Kursh which shows his analysis
`of the infringing components of the Realauction product. And, as is typically the case in determining damages, you assume
`the validity and infringement of the patent.
`
`Q. In conjunction with l‘onnulating your opinions, you didn't, for example, ask Dr. Kursh whether it would be possible to remove
`particular features from the Realauction software, did you?
`
`A. I did not personally ask. I mean, I saw some of the arguments regarding design-around in the expert reports and I reviewed
`those.
`
`Q. That's the Single issue of tlte clock; right?
`
`A. I mean, I know that - again, I don't have any technical opinions on these issues or the tenus of art in the claim construction.
`But I know that there's been some disputes as well over the definition of financial instrutueuts and legal instruments and the
`design-around, but I'm assuming validity and iitfringetitcitt of the patent.
`
`Q. In your lost profits analysis for 2009, your opinion depends upon Grant Street being able to take over those customers in
`time to run the auctions which started as early as I think it was Aprii -— no, by June of 2009; correct?
`
`A. That's correct.
`
`Q. Is it your opinion that Realauctiorfs customers would have begun working with Grant Street Group before the issuance of
`the patents?
`
`A. As I -- as I mention in the report. Grant Street Group would have received or did receive a notice that the patent was going
`to issue in February 2009. At that point l've assumed at a minimum Grant Street Group would be mobilizing resources to plan
`for the conversion of those customers.
`
`As I articulate in the report, Realauctiotfs customers would have every incentive to work with Grant Street Group to effect the
`transition in 2009 given that their only other option would be to revert to public outcry auctions.
`
`So 1 think that there would be a mutual interest in converting to Grant Street Group as quickly as possible in 2009.
`
`Q. Have you looked at any evidence or data or do ue any analysis of how long it takes these government entities, the customers,
`to enter into an agreement for these products from start to finish?
`
`A. l—— I have analyzed that.
`
`Q. What have you found in your analysis?
`
`A. Well, in this case, you know -— and this is where I think there's been some confusion or conflation of issues by Realauction
`is what we're tatking about in 2009 is the conversion of existing Realauction customers to Grant Street Group customers.
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`GRANT STREET GROUP, INC., Pennsyivania cc.-rporation,..., 2011 WL 9382191
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`So you have sort of the discussion ofwhat it look to originate the contracts by Reaiauction is
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