Chip design company Dynetix Design Solutions Inc. was headed to trial this month in San Jose, Calif., in a big patent infringement case it brought against Synopsys Inc., a much larger rival in the electronic design automation field. Instead, after Synopsys' lawyers at Orrick, Herrington & Sutcliffe succeeded in knocking out a key damages expert, Dynetix has dropped its case without recovering a cent, hinging its hopes on an appeal.
"The court's pretrial rulings, including its rulings striking Dynetix's damages case and many of its infringement theories, punched gaping holes in Dynetix's case," Synopsys counsel Chris Ottenweller of Orrick said in an emailed statement. "Dynetix really had no option but to stipulate to a final judgment against it."
In an Aug. 29 motion, Dynetix stipulated to entry of judgment that Synopsys doesn't infringe its patents. After two weeks of haggling over the details of the stipulation, U.S. Magistrate Judge Paul Grewal of the Northern District of California entered a final judgment of noninfringement on Monday.
Dynetix holds patents relating to semiconductor design. In 2011, the two small law firms representing Dynetix—LiLaw Inc. and Banys P.C.—asserted those patents against Synopsys, a 8,000-person company. Dynetix retained an expert witness, who wrote in a May 2013 report that Synopsys should pay $117 million in damages.
In coming up with his $117 million damages estimate, Dynetix's expert wrote that "one reasonable starting point for a reasonable royalty rate is half of the gross margin of the infringing products." In other words, he started with the presumption that Dynetix should get royalties equal to 50 percent of Synopsys' profits from its infringing products. Applying the so-called Georgia-Pacific factors, the expert backed away from that starting point and eventually came up with a reasonable royalty of 14.25 percent.
Both Orrick and Grewal seemed pretty dumbfounded by that math. In his Aug. 22 decision disqualifying the expert, the magistrate judge pointed to Uniloc USA v. Microsoft, a 2011 decision from the U.S. Court of Appeals for the Federal Circuit that abolished a rule of thumb known as "the 25 percent rule." Under that rule, it was presumed that an infringer should pay a royalty rate equivalent to 25 percent of its expected profits for products that incorporate the patents at issue. Dynetix's 50 percent starting point is "even more arbitrary than the 25 percent starting place rejected by the Federal Circuit," Grewal wrote. "Every once in a great while, a Daubert challenge to a patent damages expert is justified. This case presents such an instance."
We have to tip our hat to professor Michael Risch of Villanova University School of Law, who spotted Grewal's damages ruling and took to Twitter to express his displeasure with Dynetix's approach.
"To go in saying let's start with 50 percent after Uniloc threw out 25 percent is really gutsy, to say the least," he told us in an interview. To make matters worse, Risch said, Dynetix's expert simply cited his own experience to justify the 50 percent starting point. "It's not unusual to shoot for the moon, but you try to have some evidence to back it up," he said.
One of Dynetix's lawyers, James Li, told us an interview that his client stipulated to dismissal because of several of Grewal's pretrial rulings, not just the one disqualifying the expert. "That wouldn't have prevented us from doing the trial," he said. "We'll certainly be appealing that decision though."
Li also said that a close reading of the Uniloc decision makes clear that the expert's methodology was sound.