Tuesday, November 17, 2015

Federal Circuit Restores $45 Million Lost Profits Award to Akamai

Suppose that a patented method comprises four steps A, B, C, and D; and that Party X carries out steps A, B, and C, and instructs Party Y to carry out step D.  In such cases, is anyone liable for patent infringement?  In 2012 in Akamai Technologies, Inc. v. Limelight Networks, Inc., the Federal Circuit held that Party X could be liable for inducing infringement, even if no one was liable for direct infringement because no one person was carrying out all of the steps.  In 2014 the U.S. Supreme Court reversed, holding that a defendant cannot be liable for indirect infringement of a patent under 35 U.S.C. section 271(b) absent someone being liable for direct infringement under section 271(a) (see here).  This past August an en banc panel of the Federal Circuit held, however, that Limelight (corresponding to Party X in my illustration above) could be liable for direct infringement of the method patent in suit (involving a method for "delivering electronic data using a 'content delivery network'"), based on its carrying out of some of the steps and its "direction or control" over consumers (Party Y) to carry out the remaining step.  Yesterday a panel of the court disposed of the remaining issues on appeal, including an affirmance of the jury's $45 million lost profits damages award, and remanded back to the district court (opinion by Judge Linn here).

The basis for challenging the award was that Akamai's expert did show a causal connection between the infringement and Akamai's loss of profits, due to the price disparity between the parties' products.  Specifically:
Limelight originally sold a different, non-infringing service than the one at issue in this case.  Limelight’s infringing service was released in April of 2005. Dr. Ugone testified that in 2005 Akamai had a market share of 79.8% and Limelight had a market share of 5% and in 2006 Akamai had a market share of 74.7% and Limelight had a market share of 10.7%. Dr. Ugone then calculated an adjusted market share for the years when Limelight’s infringing service was on the market and concluded that, assuming Limelight only sold its earlier software, Akamai’s market share would have been 81% in 2005 and 79.9% in 2006. Because he did not have sufficient data to determine the market share for 2007, he assumed it would be the same as the market share for 2006. For the sake of “conservatism,” Dr. Ugone reduced Akamai’s share by 3% and excluded the lowest earning 25% of Limelight’s customers who he categorized as particularly price sensitive consumers, who may be unlikely to purchase a higher-priced alternative without Limelight’s infringing products in the market. Subject to these assumptions and modifications, Dr. Ugone opined that Limelight’s infringing sales totaled approximately $87.5 million.
The lost profit analysis was complicated by the fact that Limelight sold its product for half the price of Akamai’s. This affected Dr. Ugone’s calculations in two ways. First, he assumed that in the but-for world where Limelight did not sell an infringing product, Akamai would sell its product to some of those customers for twice as much as Limelight had. Second, because of the difference in price between Akamai’s product and Limelight’s product, Dr. Ugone assumed that the demand for Akamai’s product would be 25% less than the demand for Limelight’s infringing products. Dr. Ugone explained that, in economics, how a change in price affects a change in demand is described as “elasticity.” The more elastic the demand, the more sensitive it is to change. A demand is described as “inelastic” if, when the price changes by a certain percentage, the demand changes by a smaller percentage. As Dr. Ugone explained, “if you change prices by 10 percent and quantity demanded changes by only 5 percent . . . that’s an example of something we call inelastic.”
Dr. Ugone opined that the demand for Akamai’s products was relatively inelastic (i.e. relatively price insensitive) and provided two justifications for calculating that 75% of Limelight’s sales would potentially have been made by Akamai. First, because Akamai’s costs were “revenue-generating costs,” customers would be more willing to expend money to buy Akamai’s product. Second, though there would be some “price sensitivity” such that some of Limelight’s customers would not purchase the higher-priced Akamai product, the demand was relatively inelastic – meaning the quantity demanded would not change as much as the price changed. The relative inelasticity of demand was supported by Akamai’s evidence that Akamai and Limelight were direct competitors, including statements by Limelight that 1) Akamai was its largest competitor; 2) “Limelight and Akamai are, from a scale and quality standpoint, head and shoulders above the rest of . . . Limelight’s competition”; 3) demand was driven by end-users not customers; and 4) Akamai maintained a dominant market share despite Limelight’s infringing service and lower price. Dr. Ugone conceded that in picking 75% he “had to make a judgment call based on the attributes and come to a conclusion what the adjustments would be” (pp. 18-20).
The court concludes that the evidence "sufficiently support[ed] the district court's decision to allow Dr. Ugone's adjusted lost-profits analysis," and rejects Limelight's argument that the price disparity "necessarily created a market segmentation in which Akamai was separate from Limelight" (p.20):
In conclusion, Dr. Ugone’s 25% adjustment for market elasticity was sufficiently grounded in economic principles for the district court to allow it. Though Limelight is correct that its customers expressed a clear preference for lower-priced products — as evidenced by their buying Limelight’s significantly cheaper product — and therefore would have been less likely to buy Akamai’s products than the average consumer, Dr. Ugone’s testimony took this consideration into account both in excluding the lowest 25% of Limelight’s customers from his lost profits analysis, and for discounting the potential award for price elasticity. Whether this discount was sufficient is not a legal challenge to the availability of lost profits, but as to the amount of lost profits, which Limelight failed to address in its panel briefing (p.21).
My initial reaction is that the court is probably right to reject the argument that the price disparity necessarily meant that none of Limelight's customers would have purchased the higher-priced product from Akamai, absent the infringement.  It seems conceivable to me that some of them might have, depending on the circumstances.  On the other hand, the evidence in support of the expert's 75% figure, as recounted by the court, doesn't strike me as being overwhelming, though perhaps there is more detail in the record to support it.

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