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Damage expert testifies on the royalty rate

By Robin Y. Richardson Marshall News Messenger
Aug. 5, 2010 at 2:04 a.m.

A damage expert, hired by Bright Response to perform a damages analysis in the Bright Response v. Google and Yahoo patent infringement trial, took the stand Wednesday.

"I'm supposed to be assessing what's reasonable. There are two important things I have to do," Dr. Stephen L. Becker, the damages expert witness, explained to jurors of how he assesses what a reasonable royalty would be. "I have to assume that the patent is valid and I have to assume that the patent is infringed and that both the defendants, Google and Yahoo, understand that."

Bright Response, a local company based at 207 C. North Washington Ave., is suing the Internet search engine giants for infringing its '947 patent, which covers an invention on automatic message interpretation and routing system.

Becker, who was hired by the plaintiff at a rate of $450 an hour for the case, boasts more than 25 years of experience in economic and financial analysis. Throughout his career, he's been hired as an expert for both plaintiffs and defendants in patent infringement cases more than 20 times and has provided testimony in cases more than a dozen times.

In this case, he concluded if infringement is found that Google should pay a reasonable royalty rate of 0.25 percent to 0.5 percent of the royalty base, which is $25.78 billion in total revenue generated from Google's U.S. AdWords system, starting with the first day of alleged infringement in July 2004 to March 2010.

That would mean Google would pay a reasonable royalty of $64.2 million to $128.4 million if the jury finds that the company infringed the claims in the patent.

"$64.2 million dollars is the quarter percent and the $128.4 million is the half percent," Dr. Becker explained. ".25 percent is a quarter of a penny for every dollar and .5 percent is a half of a penny for every dollar."

For Yahoo, he determined the company should also pay a reasonable royalty rate of 0.25 percent to 0.5 percent of the royalty base, which will be $5.58 billion in total revenue generated from Yahoo's Sponsored Search product.

This means Yahoo would pay $13.7 million to $27.4 million in damages if the jury finds infringement.

"It's a lot smaller than Google's," Dr. Becker said, noting the beginning of his analysis with Yahoo starts with the first alleged infringement date, April 2004.

To arrive at his conclusions, Becker said one of the things he relied on was the expert opinion of Dr. Thomas "Tom" Rhyne, hired by Bright Response as a technical expert.

"First, I'm relying on Dr. Rhyne's opinion that the Smart Ad Selection System is the product he sees infringing. Google switched over to it in July 2004," he said, noting the Smart Ad Selection System serves the ads for Google's Adwords system.

"Again, I looked for Dr. Rhyne for (a) technical opinion and when he first saw infringement with Yahoo products," Dr. Becker added.

He and his staff at Austin-based Applied Economics Consulting also reviewed hundreds of documents during his analysis.

Such documents included SEC filings, articles and research. He also relied on financial data and internal documents produced by parties in the case, depositions of witnesses and license agreements of both the plaintiffs and the defendants.

When determining whether they would've agreed to pay a running royalty or a lump sum payment in a hypothetical negotiation, Dr. Becker said he determined it will be a running royalty.

He also considered the popularity of the products as a relevant factor to determine his analysis.

"In this case, this AdWords product is very popular," he said of Google's product.

He noted that one of the things he found interesting in Google's product is that incremental changes made to the service increased revenue significantly.

"Just changing the size of the letters, that increased the revenue by 4 percent," he said.

A new default font face increased revenue by 2 percent and the tweak to the blue bar spacing increased revenue by 1 percent.

"This shows small changes, tweaks, can have an (impact) on profitability," he said.

The trial resumes 8:30 a.m., today, in the U.S. District Court for the Eastern District of Texas, Marshall Division, with Judge Charles Everingham presiding.



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