In Solutran, Inc. v. U.S. Bancorp and Elavon, Inc., Case No. 13-cv-02637 (SRN/BRT) (D. Minn. Dec. 11, 2018), Judge Susan Richard Nelson ruled on post-trial motions including a JMOL motion by defendant U.S. Bank relating to reasonable royalty and lost profits damages. The jury had awarded a hybrid damages verdict of $1.29M in lost profits and $1.98M in reasonable royalty, for a total award of $3.27M. The court denied the JMOL motion. The court also granted Solutran’s motion for an injunction and for post-2017 damages as well as post-judgment interest in full and pre-judgment interest in part.
The patent at issue related to an electronic check processing system. More specifically, the system allegedly provided advancements over paper check processing and other available electronic processing systems.
The main issue was apportionment. U.S. Bank argued there were four problems with Solutran’s reasonable royalty case, including three as to apportionment: (1) that Solutran’s expert, Mr. Green, had failed to apportion out portions of the U.S. Bank system that were allegedly not covered by the claims; (2) that Mr. Green failed to apportion out the value of the conventional elements of the claims; and (3) Mr. Green improperly used revenue and profit from a non-infringing product as the basis for his computation even though that product, as U.S. Bank argued, “has nothing to do with [Solutran’s] patent.” Slip op. at 37. The court rejected each argument.
First, U.S. Bank contended that its system did things other than electronically processing check transactions covered by the patent, including garnering revenues from “verification” and “guarantee.” Id. at 38. Solutran countered by contending that verification and guarantee services are “pass-through costs” and hence do not effect net profit. The court found for Solutran on this point, because Mr. Green “primarily relied on his reading of U.S. Bank’s net profit numbers …, which arguably did not include the V&G ‘pass through’ revenue.” Id. at 39. The court also reasoned that the jury may have considered testimony that U.S. Bank’s V&G services were only used by a small number of clients, and did not drive interest in the infringing services. The court distinguished the Federal Circuit’s apportionment decisions in Blue Coat and VirnetX, reasoning that in those cases the patented software was a “relatively minor” compared to the overall “much larger” computer product sold to customers, which was not the case here. Id. at 40. Having found that the record evidence supported that V&G add-ons did not drive demand for the U.S. Bank check processing system, and even if they did they did not affect net profits, the court found little risk of improper compensation.
Second, the court rejected U.S. Bank’s argument that Solutran failed to apportion out the “conventional elements” in the claims. The court called this “intra-patent” apportionment, id. at 41, and found substantial evidence to support the conclusion that the patent was a “novel combination” like the patent in the Federal Circuit’s AstraZeneca opinion, id. at 43. Noted the court, even though there was some evidence that only one step of the claim was novel, and that the step did not substantially create the value of the entire product (i.e., did not satisfy the EMVR), other testimony supported the conclusion that the patented method made is possible for Solutran to commercialize its patented system “for a segment of the retail market that had previously relied on more expensive and less desirable methods for processing checks.” Id.
Third, the court concluded that Mr. Green’s reliance on revenue-per-transaction numbers was not legally erroneous. The court found Mr. Green’s failure to break down the revenue by specific transaction type, so as to clearly eliminate any non-infringing services, his reasoning on this point was not impermissible speculation, and the jury heard cross-examination and contrary evidence on this issue, and nevertheless found for Solutran. Furthermore, the court relied on older Federal Circuit precedent (Rite-Hite from 1995 and Golight from 2004) for the proposition that Mr. Green’s overstatement of U.S. Bank’s anticipated profits-per-transaction was not fatal error because “’what an infringer would prefer to pay is not the test for damages’” and a “damages award can be reasonable even it is ‘not based on the infringer’s profits.’” Id. at 47 (quoting Rite-Hite).
Finally, as to the substance of the reasonable royalty claim, the court noted there were other “important facts” that might have led the jury to the award Solutran requested, such as the fact that Solutran and U.S. Bank were direct competitors, that Solutran had never licensed its patent, and that Solutran’s profit margins were on an upward trajectory. Id. at 50.
The court upheld the jury’s verdict awarding Solutran lost profits on 26% of the infringing transactions, which was a substantial reduction of the 80% that Mr. Green had testified should be awarded. Solutran had contended that it and U.S. Bank competed for the patented sales in a two-supplier market, and that other non-infringing check processing systems were outside this market. The court reasoned that, even if Solutran’s evidence fell short of such proof, that substantial evidence supported an absence of acceptable non-infringing alternatives that resulted in Solutran losing about ¼ of U.S. Bank’s sales. Id. at 56.
The court credited several categories of evidence: (1) testimony from Mr. Green and a fact witness that alternative technologies lacked the advantages of the patent, including evidence that large retailers would have preferred the patented process to non-infringing alternatives that were even more costly; (2) evidence that a vast majority of clients for the patented technology consistently used the patented method for a decade or more; (3) evidence that the cost of switching to the patented method at the outset of infringement would have been much less costly than non-infringing services; (4) evidence that U.S. Bank and Solutran were direct competitors for a small class of large national retailers with particular needs; (5) testimony that Solutran’s sales team would have persuaded a portion of U.S. Bank’s large clients to switch to Solutran’s service as opposed to non-infringing services; and (6) evidence that only two or three merchants every purchased non-infringing alternative services offered by U.S. Bank, despite the bank offering these services when selling them the infringing service. Id. at 56-59.
Finally, U.S. Bank argued that the 26% verdict on lost profits was unsupported by evidence and “nothing more than a compromise down from [Solutran’s] improper two-supplier market theory.” Id. at 59. The court, however, found evidence to support the verdict in that one of U.S. Bank’s witnesses testified that 74% of the infringing transactions resulted from sales to particular customers and that other evidence at trial indicated that those customers would not have turned to Solutran’s patented product. Thus, the jury would not have been unreasonable to find that Solutran would have realized a 26% capture rate from U.S. Bank’s customers. Id. at 60.
The court found that the irreparable harm factor favored Solutran even though the jury apparently rejected Solutran’s two-supplier market theory and only awarded lost profits on 26% of sales. The court pointed out that the parties were direct competitors in the market and that Solutran was harmed by being forced to compete against a product that incorporated its patented invention. Id. at 63.
As to balance of hardships, the court cited U.S. Bank’s much larger size and access to non-infringing services “ma[de] it clear that the balance of hardships weighs against [U.S. Bank].” Id. at 66.
Finally, the court found unpersuasive the “transitional pains” that U.S. Bank’s ten remaining customers for the infringing technology would experience from an injunction. “The (temporary) logistical inconveniences … do not outweigh the public policy favoring the protection of patents” especially given the large size of U.S. Bank’s customers and the fact that fewer people are paying with checks. Id. at 67.
The dispute here was mainly on the rate, with Solutran petitioning for the 10% Minnesota statutory rate, and U.S. Bank advocating the much lower 1-year T-Bill rate (without compounding). Id. at 71. The parties also disputed the time period of the interest.
As to time period, the court found that prejudgment should run from the date of first infringement to the date of the judgment. Id. at 72 (citing several Federal Circuit cases).
The court then rejected both parties’ proposed rates, because “neither party’s proposed prejudgment interest rate accords with the patent statute’s goal of compensating the patent holder for ‘the foregone use of money between the time of infringement and the date of judgment.’” Id. (quoting General Motors v. Devex, 461 U.S. at 655-56). “On the one hand, Solutran has provided no evidence that it forewent investments that would have yielded 10% returns, or that it borrowed money at a similar rate.” Id. “On the other hand, U.S. Bank’s proposed 1-year Treasury Bill rate would significantly undercompensate Solutran, as those rates hovered around zero until very recently.” Id. at 73. The court selected, instead, the prime borrowing rate, which sat between 3.25% and 4.50% during the relevant time frame. Id.
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