Attention financial and economic experts: You may not want to introduce your damages analysis with the words, “Setting aside what the law may require …” That’s how the court-appointed expert in the high-profile, protracted patent infringement litigation pitting Oracle against Google began his reasonable royalty analysis, adding that “there are good economic reasons” why the value of the Java patents in suit, as of the parties’ 2006 hypothetical negotiations, should be equal to the entire Java IP portfolio. First, if the parties had known that the disputed technology was the most relevant to the Android system, then they would have let it drive the negotiations. Second, even if the parties did not know what subset of the IP portfolio would be the most useful, Google would have acquired an option to use any subset. Third, if Google was interested in writing its own system but decided that it needed to be based on Java-like technology, then it would have licensed the entire portfolio as insurance against later litigation.

But this analysis ignored the court’s prior (and repeated) orders requiring the hypothetical license “to be tailored to the amount and type of infringement that actually occurred.” Moreover, “the reasonable royalty must compensate for the infringing features, but not for non-infringing ones.” Applying this legal standard, the expert’s second and third explanations for equating the value of the IP in suit to the entire Java portfolio “are inappropriate for the hypothetical scenario,” because he failed to consider that, at the end of the negotiations, Google would have gotten a license to the IP in suit and “nothing more,” the court said, with emphasis, granting Google’s Daubert motion to strike these references in the expert’s report. Although his first explanation appropriately assumed that Google would only get a license for the patents in suit, the expert framed his opinion as a conditional, thereby making it unclear whether the parties would have let the IP drive their negotiations. The court denied the Daubert motion pertaining to these sections without prejudice—leaving the door open for both parties to reassert the issue.

Read the complete digest of Oracle America, Inc. v. Google Inc., No. C 10-03561 WHA (N.D. Calif. April 10, 2012) in the next Business Valuation Update; the court’s opinion will be posted soon at BVLaw.