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Invotex® Group is pleased to share insights about current trends and issues of interest to litigators and counsel, particularly those with which we have recent experience. We hope you find this information informative, and we welcome your feedback.

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In this Issue

1. Patent
   The Case for a Post-Verdict Ongoing Royalty Award
2. Commercial
   A Tale of Two Experts; One Court’s Opinion on the Experts’ Resource Choices
3. Valuation
   Guidelines for Valuing Partial Interests
4. Accounting Malpractice
   Does Restatement of a Company’s Financials Trigger a Securities Class Action Suit?
5. Case in Brief
   Jury Accepts Damages Testimony to the Dollar; Awards More Than $6.5 Million in Damages

Patent

The Case for a Post-Verdict Ongoing Royalty Award

The question of the appropriate royalty to compensate for continued infringement in the absence of a permanent injunction is the hottest topic in patent infringement damages today. After the Supreme Court’s decision in MercExchange v. EBay that reversed the Federal Circuit’s general rule favoring the imposition of permanent injunctions in patent infringement cases, the courts have begun their development of approaches to answer this question.

When Michele Riley, a managing director with Invotex, testified at trial in May 2009 in the Eastern District of Texas regarding an appropriate reasonable royalty in Creative Internet Advertising Corporation v. Yahoo!, Inc., the jury agreed with her opinions regarding a 20% royalty rate and awarded this royalty rate in its damages award. Subsequent to trial, Yahoo! removed the infringing feature from the version of Yahoo! Messenger currently available for user download. However, older versions of the program, which were installed on the computers of some 20 million users, still possessed the capability to infringe the patent-in-suit. Because of this fact, the Court asked the parties to brief the issue of an ongoing royalty, noting that the Federal Circuit has found that the parties’ legal relationship has changed after a finding of infringement, and, therefore, the appropriate reasonable royalty may change as well.

Ultimately, the court was persuaded by CAIC’s argument that Yahoo! had made a conscious business decision not to disable the infringing feature and take the product outside of the scope of the invention claimed by the patent-in-suit, despite having the capability to do so. Therefore, as long as the older version of Yahoo! Messenger remains accessible to users, Yahoo! would owe CAIC an ongoing royalty for its use of the patent-in-suit.

Ms. Riley submitted an expert report regarding an ongoing royalty appropriate to compensate CAIC because of Yahoo!’s continued infringement. The report opined that a 23% royalty rate would be appropriate and the Court accepted her opinion, stating,

“The jury accepted Ms. Riley’s pre-verdict application of the Georgia-Pacific factors and the Court similarly accepts her opinion that a 23% royalty rate is reasonable and appropriate in light of the change in the relationship between the parties post-verdict. Ms. Riley’s opinion is consistent with the modified Georgia-Pacific approach endorsed by this district, and Ms. Riley specifically considers Yahoo!’s decision not to design around, or otherwise stop infringing.”

The opinion is cited as Creative Internet Advertising Corporation v. Yahoo!, Inc., No. 6:07cv354-JDL, 2009 WL 4730622 (E.D. Tex. Dec 9, 2009).

For more information, contact Michele Riley.

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Commercial

A Tale of Two Experts; One Court’s Opinion on the Experts’ Resource Choices

An independent expert, armed with the proper research and database tools, can positively impact the outcome of litigation on his client’s behalf. In a decision dated January 5, 2010, a Superior Court judge describes how the resources each side’s expert chose as well as one expert’s opinions aided in the determination of reasonable value of an employee’s services.

The case involved a debtor’s employer, Montgomery Baker’s, Inc. (MBI), and its failure to satisfy a judgment in favor of Paley, Rothman, Goldstein, Rosenberg & Cooper, Chartered (Paley Rothman) against Benson Fischer, who was co-owner and employee of MBI. According to court documents, Mr. Fischer “actively managed most aspects of the business affairs,” however, he did not draw a salary. Fischer Brewing Co. v. Flax, No. 97-678 B, slip op. at 8 (D.C. Super. Ct. Jan. 5, 2010), citing Schlossberg v. Fischer, 411 B.R. 247, 255 (Bankr. D. Md. 2009). The Court determined that garnishments of the reasonable value of the services could be used to satisfy Paley Rothman’s claim and considered the testimony of each side’s expert to determine the amount of that reasonable value. 

Expert testimony was heard on behalf of both sides. The Court determined MBI’s expert’s testimony to be “minimally credentialed” in part because the expert “relied significantly on her double interviews with each of the Fischers, both of which had a strong economic reason to downplay [Benson] Fischer’s importance to MBI.” Fischer Brewing Co. v. Flax at 22,  19. Additionally, the Court criticized MBI’s expert for being “selective in her use” of sources and inferred that MBI’s expert omitted data in an effort to support “conclusion-driven opinions.” Id. at 21, 38.

While “[MBI’s expert’s] conclusion driven opinions [were] not acceptable,” the Court determined Paley Rothman’s expert, Invotex Managing Director Joseph S. Estabrook, to be “both qualified and credible notwithstanding MBI’s efforts to impeach him.” Id. at 38, 39. Mr. Estabrook relied upon Economic Research Institute (ERI) and its database, the Executive Compensation Assessor. ERI is the “standard in the industry” – a fact that MBI’s expert admitted despite her failure to utilize it. Id. at 23, FN 19. In addition, Mr. Estabrook’s opinions took into consideration four factors: (1) the size and complexity of MBI’s business; (2) Fischer’s qualifications as president; (3) the nature, scope and extent of Fischer’s services for MBI; and (4) the prevailing compensation for the comparable positions at similar companies. Fischer Brewing Co. v. Flax at 22, citing Estabrook Test. Traverse Hr’g Tr. 21:17-22:4, July 27, 2009. The Court applauded this “comprehensive presentation” that customized salary amounts for different revenue options.Fischer Brewing Co. v. Flax at 39. The Court agreed with Mr. Estabrook’s conclusions on various key issues related to the value of Mr. Fischer’s services including designating Mr. Fischer as president of MBI. Id. at 26. As a result, the Court “determined to proceed only upon Mr. Estabrook’s opinions” and drew its conclusions based on his calculation of the reasonable value of Mr. Fischer’s services. Id. at 39.

Additional case details are available in the published opinion of Senior Judge Leonard Braman, dated January 5, 2010.

For more information, contact Joe Estabrook.

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Valuation

Guidelines for Valuing Partial Interests

The American Society of Appraisers (ASA) recently released updated Business Valuation Standards that now include guidelines for valuing partial interests, Procedural Guideline: (PG-2), Valuation of Partial Ownership Interests. Significantly, PG-2 instructs appraisers to analyze factors such as holding period, interim benefits, and the difficulty and cost of marketing the subject interest in arriving at a value conclusion.

The development of PG-2 reinforces the need for valuation experts to communicate with attorneys and clients in the earliest stages of an engagement to define, clearly and concisely, the size and nature of an interest being valued.

Partial or fractional interests are those interests of a business entity or asset comprising less than 100% ownership. Noting that the value of a fractional interest can differ vastly from the value of the underlying asset or entity, PG-2 offers guidance for determining the elements of control and marketability inherent in partial interests and the effects both factors have on an asset’s value, as summarized below:

• Rights and restrictions set forth by organizational and governing documents of the subject interest which may have a significant impact on the marketability and liquidity of the asset;
• Federal or statutory governance which may impact the rights of the interest holder;
• Limitations on the partial owner’s access to and availability of information useful in evaluating the performance of the asset;
• The availability of a marketplace for which potential investors of partial interests similar to the asset being valued exist;
• The holding period of the subject interest being valued;
• The interim cash flow (dividends) or other economic benefit of the partial interest, if any;
• The required rate of return for the partial interest, noting that partial interests may have very different risk attributes in comparison to the underlying asset or entity in its entirety;
• Tax implications, which may be very different for an owner of a partial interest in comparison to the entity in its entirety; and
• The entity’s policies for redeeming interests, as evidenced by any prior transactions of the subject entity.

Above are just some of the factors to consider when valuing partial interests. It is important to note that these factors and PG-2 in general provide non-binding guidelines developed solely to assist valuation professionals in determining value. They were not designed to provide a “cook-book” method of valuing partial interests. Valuation professionals are responsible for completing all levels of due diligence and for considering all approaches and methodologies appropriate in determining an asset’s value.

A number of Invotex valuation professionals are accredited by the American Society of Appraisers and adhere to ASA’s Business Valuation Standards. A copy of the full version of PG-2 – Valuation of Partial Ownership Interests can be downloaded directly from Invotex’s website.

For more information, contact Bill Bavis or Joe Estabrook.

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Accounting Malpractice

Does Restatement of a Company’s Financials Trigger a Securities Class Action Suit?

There is a long held belief that the restatement of a public company’s financials will necessarily lead to the filing of a Class Action* suit. However, with the waves of exposure of financial fraud, the credit crisis, and the meltdowns on Wall Street since the Enron collapse, this belief may no longer be valid.  Restatements have become increasingly common and may not hold the stigma they once did.

Since 2001, public companies have issued restatements of their financial statements on average 927 times per year. There was a noticeable drop in restatement activity in 2008 with only 778 financial restatements issued as compared to 1,111 in 2007. This trend of a decreasing number of restatements continued in 2009 (see Chart 1).

Over this same time period, the number of Class Action suits filed per year has averaged 188 (see Chart 1). Therefore, a Class Action suit resulted, on average, from only 20% of the financial restatements.

The trend in lawsuit targets has also shifted. Since 2005, the auditor has been a named defendant in the Class Action suit in only 3% of the cases on average. However, in 2009, there was an increase of initial complaints naming the auditor as target to 7% (see Chart 2).

Since 2005, allegations of Generally Accepted Accounting Principles (GAAP) violations have been identified in the Class Action in an average of 43% of the suits. However, in 2009, the filings alleging GAAP violations decreased to 34% of the Class Actions (see Chart 2).

The trend in public company financial restatements appears to continue downward after a peak in 2006 (see Chart 1). Interestingly, the number of Class Action suits filed was the lowest in 2006 (see Chart 2). The trend in Class Action suits filed appears more consistent, averaging 188 per year from 2001 thorough 2009, and does not trend in parallel with financial restatements.

*The Class Actions referred to in this article are defined as Federal Securities Fraud Class Actions.

Sources: Cornerstone Research, Securities Class Action Filings 2009: A Year in Review; The Stanford Law School Securities Class Action Clearinghouse; Audit Analytics, 2008 Financial Restatements, And An Eight Year Comparison. Please note the unique filer’s restatement number for 2009 is an estimate which may be revised.

For more information, contact Lyn Brown.

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Case in Brief

Jury Accepts Damages Testimony to the Dollar; Awards More Than $6.5 Million in Damages

In the fuel filter and priming pump patent infringement suit brought against Champion Laboratories, Inc. and Wix Filtration Corp. by Parker Hannifin and Parker Intangibles, LLC, Invotex damages expert Michele M. Riley, CPA, testified on behalf of plaintiff Parker that the amount of total damages adequate to compensate for the claimed infringement was approximately $6.5 million. On Friday, December 11, 2009, the jury decided that the patent asserted against the defendant was valid and infringed and adopted Ms. Riley’s lost profits analysis to the dollar, awarding damages in excess of $6.5 million.

The cases, Parker Hannifin corp. et al. v. Wix Filtration Corp. and Parker Hannifin Corp. et al. v. Champion Laboratories, Inc., were filed in the U. S. District Court for the Northern District of Ohio.

For more information, contact Michele Riley.

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