Friday, July 22, 2011

Judge orders overhaul of Oracle's damages report but maintains Halloween trial date

Google got some good news -- but also some additional harsh criticism of its "brazen" attitude toward intellectual property rights -- at the end of an otherwise dreadful week in its defense against Oracle's lawsuit. Judge William Alsup issued an order (which I uploaded to Scribd) on Friday afternoon (Pacific Time) that "largely" grants Google's Daubert motion (a motion to exclude a damages report and the related testimony of its author before a jury). Oracle gets a second chance to present a report that the judge may consider acceptable.

While Oracle originally claimed damages of $2.6 billion, the judge dismissed large parts of the underlying theories. He outlined an alternative approach that uses $100 million as a starting point and possible adjustments, most of which would push the figure even further down, with little upside. However, that alternative approach isn't binding, and Oracle still has the chance to arrive at higher numbers, but based on more defensible theories. The "network effects" theory put forward by Oracle in a letter filed yesterday might also contribute to an upward adjustment from the proposed starting point.

[Update] In a subsequent decision, the court accepted Oracle's network effects theory in principle, stating that "it remains clear that Plaintiff may take into account at least some of Defendant's non-mobile, American-based businesses in formulating its damages assessment." However, "any non-mobile business that [Oracle] seeks to account for in its damage report must be supported by the evidence and not be purely speculative." [/Update]

Even though Oracle is likely to arrive at a fairly high damages amount in its damages report 2.0, I believe it's an uphill battle now for the primary Java rights holder to derive a multi-billion dollar amount out of this litigation just based on damages. Instead, the profitability of this for Oracle may now depend mostly on the question of whether or not the court grants an injunction, which is increasingly a possibility given what the judge said at a hearing on Thursday. With an injunction, Oracle would have the leverage to negotiate with Google a license deal that could result in a very high per-unit royalty.

It's possible that Oracle would not have filed its lawsuit in Northern California in the first place if it had foreseen that the judge would be so skeptical of its damages claims. While I'm sure Oracle's position was just a starting point and they never expected the full amount (which could even be tripled based on willful infringement), I suspect that damages were a key motivation for Oracle. In order to obtain an injunction-like decision, it would have made more sense for Oracle to file ITC complaints against Android device makers -- which Oracle might still do. But Oracle probably hoped that this would be another SAP case in terms of the damages award. And that's much less likely after the latest order.

Entire market value theory dismissed

Getting back to the judge's largely negative perspective on the original damages report, the most fundamental criticism he presented in his order is that "Dr. Cockburn’s focus on Java as a whole runs afoul of controlling law". Cockburn applied the entire market value theory, meaning that the asserted intellectual property rights (seven patents plus certain copyrights) were effectively treated as though they covered all of Android. The judge wants Oracle's damages report 2.0 to "apportion the total value between the specific infringing features versus the rest of Android". The order explains this:

"The fact that Java may be a critical component of Android does not justify application of the entire market value rule. Wheels are critical to an automobile, but no one would apportion all of the demand for a car to just the wheels."

The judge is right. The position he just took has been my view all along. On June 7, 2011 I already wrote the following in a blog post:

I understand that Oracle takes an Oracle-centric perspective on the world, and I could see some arguments, such as claiming that hundreds of thousands of Android apps run on a virtual machine that allegedly infringes Java-related intellectual property rights. Then there would be the argument that today's mobile platforms are all about ecosystems, and the Android ecosystem stands on allegedly thin ice that largely belongs to Oracle.

But still there's a greater scheme of things [...]

I support Google's position that "damages must be tied to 'the claimed invention's footprint in the market place.'" Should Oracle's expert indeed have denied or not properly applied that concept (for now we only know what Google claims he did), then he should amend his report accordingly.

This is the most fundamental (though by far not the only) respect in which the judge disagreed with Oracle.

Advertising revenue will be part of the consideration

The most fundamental disagreement between the judge's and Google's positions on damages theories is that Google wanted all advertising revenue (even if attributable to Android) to be excluded from the hypothetical royalty base, and the judge completely dismisses that idea. So did I: when I commented on Google's related position in early June, I said that I was 100% with Oracle and 0% with Google on this one. Again, the judge decided in a way that was quite expected.

Even though Google achieved a lot with its Daubert motion, it lost the strategic battle over the inclusion of Android-related advertising revenues. Perhaps even more importantly, Google faces the problem that the judge appears increasingly suspicious (if not already convinced) of Google having committed willful infringement because of a problematic attitude toward other companies' intellectual property rights.

Judge suspects Google of having preferred "to roll the dice on possible litigation rather than to pay a fair price"

In connection with the theories Google presented, the judge refers to one (even in a headline) as "Google's Soviet-style negotiation", defined as "What's mine is mine and what's yours is negotiable". In that context, the judge suspects the following attitude:

"Google may have simply been brazen, preferring to roll the dice on possible litigation rather than to pay a fair price."

That kind of statement reflects extremely unfavorably on Google. It's exactly the kind of basis on which the judge might consider an injunction a highly appropriate remedy, and a tripling of the base damages amount, too.

One of the most interesting passages in today's order quotes from an October 2005 email by Google's Android boss Andy Rubin:

"If Sun doesn't want to work with us, we have two options: 1) Abandon our work and adopt MSFT CLR VM and C# language - or - 2) Do Java anyway and defend our decision, perhaps making enemies along the way"

If a jury sees that statement (and if there is a trial, then the jury will see it for sure), Google has a very serious problem. And "very serious" may be an understatement. Moreover, a statement like that showing up in publicly accessible court documents now may cause significant concern among many of Google's Android partners (including, but not limited to, device makers).

Timeline: no stay for now

At the very end of the order, the timeline question comes up. The judge wants Oracle to present its revised damages report "35 days before the final pretrial conference" and says it's Oracle's problem if it "believes that it cannot craft a report until it figures out what patent claims (of the many currently asserted) it will actually assert at trial." Oracle should tell the court now if this requires a postponement of the trial date. The order then concludes with the following paragraph:

"With respect to a possible stay pending re-examination, the Court is yet unwilling to give up on the October trial date. This will be revisited in due course, and in any event at the final pretrial conference. A factor will be whether this case will be truly trial-ready."

The last term, "trial-ready", relates in no small part -- or even entirely -- to Oracle's willingness or unwillingness to narrow its claims and select only a few patent claims for a trial. So the judge doesn't go for a stay yet. He'd probably be happy to do so if Oracle said it needs more time. But otherwise he keeps all options open for the time being. He may still hope for a near-term settlement. If that's what the judge hopes for, he's probably going to be disappointed. I think Oracle will prefer a stay over a cheap settlement.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents.

Share with other professionals via LinkedIn: