On the first of this month, Judge Phyllis Hamilton of the U.S. District Court for Northern California declared the use of the hypothetical license theory to be invalid in Oracle v SAP. She granted a motion by SAP to eliminate the $1.3 billion award for lost licensing fees and instead offered Oracle the option of accepting a remittitur of $272 million in lost profits or returning to trial to determine lost profits.
The main point at issue in the order was the use of the hypothetical license theory which Oracle used to estimate lost licensing fees between $881 million and $2.69 billion.
In the SAP Annual Report, the company stated they “believed both before and during the trial and continue to believe that the hypothetical license theory is not an appropriate basis for calculating the damages.” Instead, they wrote, those damages should have been determined by lost profits and infringer’s profits.
The debate in this case surrounds the lack of hard evidence. When SAP originally objected to this calculation method, they claimed it was invalid because Oracle never would have licensed the software to a competitor and, in fact, never has licensed the software to anyone. With no benchmark, SAP said, Oracle had no way of calculating a hypothetical licensing fee.
In 1977, the Ninth Circuit endorsed the use of a hypothetical license fee when it stated that “in situations where the infringer could have bargained with the copyright owner to purchase the right to use the work, actual damages are what a willing buyer would have been reasonably required to pay a willing seller for the plaintiff’s work.” Since Oracle would not have been a willing seller and TomorrowNow (the company bought out by SAP that was at issue on the case) could not have afforded a high license fee, the hypothetical damages would need to be based on the realities of the market.
At the time, Judge Hamilton allowed the damages calculation to progress to trial on the condition that Oracle present evidence to support their calculations. Now, nearly a year after the original trial, Judge Hamilton has determined that this evidence was never presented.
Oracle has until the end of September to accept the ruling or return to court. Based on what an Oracle spokeswoman told Reuters, we don’t expect Oracle to accept. “We believe the jury got it right and we intend to pursue the full measure of damages that we believe are owed to Oracle.”
Circuit Courts Set Precedent
In January of this year the Federal Circuit reversed a $388 million verdict based on the expert’s method for determining a reasonable royalty rate. In this damages case, the court concluded that the 25-percent rule was “fundamentally flawed” in its lack of a factual groundwork.
This and other cases suggest that any damages testimony based on speculation, gut feelings or conjecture will be disregarded by federal court. In what many think is an effort to stave off a repeat of Oracle v. SAP, the judge in Oracle v Google has appointed an independent expert to balance out the extreme calculations given by both parties.
In future cases, damages experts will need to be very explicit when detailing the facts that resulted in their expert opinion. To ensure the most accurate calculation, counsel needs to coordinate with damages experts every step of the way to provide all the necessary information.
Oracle v. SAP shows us once again that even if you win the case, the war is still uncertain.
Tell us: Do you think the hypothetical license theory was a valid method to calculate damages?