Q. All right. Now let's go to your opinions.
Before we get into the details, give the jury an
overview of what your opinions are?
A. Sure. I have a couple of opinions. First one
is is that Mr. Reed, in his presentation, has
significantly overstated VirnetX's claim damages.
The opinions I hold is that the parties,
if they had negotiated a license to the patents in
dispute here, would have negotiated a lump-sum payment
structure and the payment would have ranged between $9
million and $15 million for a license to the two patents
in dispute here.
Q. Mr. Reed did a Georgia-Pacific analysis to
determine the royalty payment that he testified about in
his testimony, and you were here for that?
Q. Essentially, did Mr. Reed describe the
framework of a Georgia-Pacific analysis properly?
A. Yes, he did. There's 15 Georgia-Pacific
factors, and I'm not going to dispute his presentation.
I think those are generally accepted factors.
Q. All right. So we won't go into details about
explaining those factors except as they relate in other
ways to your opinions. But did you do a Georgia-Pacific
Q. Now, Mr. Reed conducted what is known as a
hypothetical negotiation analysis; is that right?
Q. Did you also perform a hypothetical negotiation
A. Yes, I did.
Q. In doing that in the legal framework you are to
follow, are you required to make any assumptions?
A. I have and I have a slide on that, and you can
see a negotiating table here. And it's a hypothetical
negotiation because the parties did, in fact, not
negotiate a license in the past, but I am required to
make certain assumptions, which I have listed on the --
the right side of the chart there.
Some of the assumptions I am required to
make are that the patents are valid, enforceable and
infringed. And that the parties, both VirnetX and
Microsoft, would have a willingness to negotiate, that
VirnetX would be willing to give a license to the
patents we've been talking about and that Microsoft
would be willing to acquire a license.
But what's important is in this
hypothetical negotiation is that the parties go into the
negotiation as prudent business people. They go in
smart. They have knowledge as to the relevant economic
factors to help them determine the appropriate royalty
payment for the use of the patents, and they have
reasonable expectations as to future events.
And then finally, I think as the jury has
understood, nobody can kind of leave this room without
having reached an agreement, so they must reach an
But this is the general framework of the
Q. In a hypothetical negotiation, can one side
dictate to the other the outcome?
A. Well, the best way to think about it is we're
trying to determine a reasonable royalty payment, and so
what that means is one side can't dictate the outcome.
There has to be the inner play between the negotiations
to determine this reasonable payment.
Q. Now, in the context of a case like we have
here, you are required to do this hypothetical
negotiation framework because that's the legal method in
which you do it; is that right?
Q. But do the real world facts count?
A. Yes, the real world facts count. As I said,
these are business people going into the negotiations,
and so there would have been relevant financial
information and economic considerations at the time of
the hypothetical negotiation. So even though it's a
hypothetical negotiation, you're still using real world
information and real world economic considerations.
Q. And let's talk about the hypothetical
negotiation. Remind the ladies of the jury when it
would have taken place.
A. Well, it would have been in early 2003 or March
2003. That's the time of the alleged first
infringement, so that's the point when Microsoft would
have required a license to the patents-in-suit, so
that's when the negotiations would have taken place.
Q. Between which parties?
A. And at that time, SAIC owned the patents that
have been discussed here, so it'd be between SAIC and
Microsoft. So, hopefully, I'm not hitting this too
much. I don't know if that's disturbing to people.
Q. Could you tell us what would have been
discussed at the negotiation, what topics?
A. Well, what I'm really here to present is the
economic questions that would be answered at the
hypothetical negotiation, and I've kind of hinted at
But there's really two primary ones. The
first one is what's the payment structure for a license
to the patents-in-suit, and the second one is what's the
payment amount. So how much is going to be paid and
what are the -- what's the structure of those payments.
Those are two important economic questions to be
Q. And what types of payment structure are there?
A. Well, I've got a slide that shows two of them.
There's actually various combinations, but it's easiest
to think about these two. The first is called a
lump-sum payment structure, and a lump-sum payment
structure, as the slide says, is just sort of an upfront
paid-in-full royalty payment.
So the parties negotiate. They determine
the amount of the pavement as paid upfront and then you
have a license and a freedom to operate using the
patents that have been licensed, so it's one-time
The second type is called a running
royalty, and the easiest way to think about that is that
that's one that's -- could be based on volume. So if
the volumes go up, there's higher payments; if the
volumes go down, there's lower payments. So there can
either be a lump-sum upfront payment or there can be a
running royalty payment.
Q. Now in this case --
THE COURT: Excuse me, Dr. Ugone. You may
want to lean back a little bit or move that. You can
move that microphone out a little bit. It's sort of
bent around there. You're popping a little bit.
THE WITNESS: Okay.
Q. (By Mr. Sayles) Now, in this case you know Mr.
Reed is contending for a running royalty, right?
Q. And your opinion is that there would have been
an upfront paid-in-full royalty?
A. That's correct.
Q. And are there advantages and disadvantages to
A. Sure. Yes, there's -- depending on sort of the
facts and circumstances and -- and the economic
circumstances surrounding the businesses and the
license, that dictates which of these makes sense. So
yes, there are advantages and disadvantages to both.
Q. All right. Now let's talk about the
hypothetical negotiation. And could you tell the jury
what economic factors would have been important in a
hypothetical negotiation between SAIC on the one hand
and Microsoft on the other?
A. Well, I'm going to go through six topics of
discussion. I'm going to briefly touch on the thousands
of features and functionalities contained in the accused
software products; I'm going to talk about the usage of
the accused functionalities; I'm going to talk about
Microsoft's patent licensing practices; I'm going to
talk about SAIC's failure to commercialize the SAIC
And I think we've -- the jury has heard of
this. We're only going to talk about the SAIC licenses
with SafeNet and VirnetX, and I'm also going to talk
about certain value indicators that existed over time.
Now, some of these things you've already
heard of, but what I'm going to try to do is take these
and put them in the context of the hypothetical
negotiation so you can see how these would be used in
the negotiating process to determine a reasonable
Q. All right. Let's start with the first one.
Can you explain the economic significance
of the fact that there were thousands of features and
functionalities in the products that are accused here?
A. Well, this -- from just listening to trial
throughout the past week seems to be undisputed,
especially when you talk about Windows XP and Windows
Vista, that there's many, many basic, but important
features and functionalities in those operating systems.
And I think you've seen some of the
witnesses use a computer. Well, the operating system
helps the computer recognize the keyboard or the
operating system, allows the text and the graphics to be
displayed on a monitor. The operating system helps the
computer recognize a printer so you can print documents.
Those are all important features and some of the
thousands of features that are included in the operating
systems in XP and Vista that we've been talking about
up. And I think as we've also heard that there's many,
many hundreds, if not thousands, of APIs as well.
Q. And from an economic standpoint, what is the
significance of that?
A. Well, the significance of that is if you look
at the complexity of the product, that with XP and
Vista, for example, there's these thousands of
functionalities, and what the parties are negotiating
over are just some limited features or functionalities
within this much larger software product in a sense.
Q. The next economic consideration you mentioned
that you would discuss is the usage of these accused
functionalities. Would you explain that, please?
A. Yes. And this would be important to the
negotiators at the -- at the hypothetical negotiation.
And I have a slide on this one as well.
But when I'm talking about usage, what I'm
really looking at, first of all, is sort of the usage of
the accused functionalities relative to the usage of
just the XP and Vista operating systems in general. And
relatively speaking, obviously, these accused
functionalities are used in a much more limited sense
than the entire operating systems.
But in this example here, I just tried to
give a little bit of an idea of that, that over -- if
you look from 2003 to 2008, there were roughly 280
million copies of XP and Vista in the United States.
But at the same time people that had client access
licenses that allowed LCS and OCS to be used with XP and
Vista, so those were licenses that would allow, in a
sense, a combination of these software products, were
only about 15 million dollars -- 15 million copies. If
we roundly look at those numbers, 14.8 million.
The point is that's much less than the 280
million, and that would be important to the negotiators
at that negotiating table.
Q. Dr. Ugone, I'm going to point out above your
head here the right-hand corner where there's a DX
Are there exhibit references on the
graphics that you've prepared to explain your testimony?
Q. And so this data comes from information that
was available to you and Mr. Reed?
A. That's correct.
Q. Now Mr. Reed concluded that had Microsoft would
agree to pay royalties relating to the '135 patent for
each and every copy of Windows XP and Vista?
A. That's correct. So he's -- he is calculating
royalties on the big blue bar, even though it's -- it
would be the -- my understanding -- for the alleged
infringement, that there would have to be this
combination of -- for the '135 patent XP and Vista with
LCS and OCS.
Q. Do you agree with Mr. Reed's conclusion?
A. No, I do not.
Q. Why not?
A. Well, if you think about it, if you are a
business person at the negotiating table, while you're
negotiating a license to the '135 and the '180 patent,
you know that there's an awful lot of copies of XP and
Vista that are not going to be used in an alleged
infringing way, and so that's going to be an important
economic consideration at the hypothetical negotiation.
Q. For the '135 patent, if one must use LCS or OCS
with XP or Vista in order to use the functionality
that's accused, have you done the math to see what that
A. Well, you would -- if you do a division here,
you get about 5.3 percent.
Q. And what is it that Mr. Reed did in this
A. Well, he was applying a royalty rate to all the
copies of XP and Vista, the revenues associated with
Now, I have to be a little careful. He
did some adjustments. If you recall, I think he had
40 -- 44 to 48 billion dollars of sales. He adjusted
that down ultimately to 30 billion, but it's still a
substantial number of the XP and Vista copies.
Q. So let me see if I understand this correctly.
Is it your opinion that Mr. Reed thinks Microsoft would
have, at the table, agreed to pay a royalty on over 250
million copies of XP and Vista even though both parties
would know those copies wouldn't infringe the '135
A. Well, he -- yes, he essentially is -- is giving
Q. And do you agree with that analysis?
A. No, I do not.
Q. And from the standpoint of the hypothetical
negotiation, tell us briefly why not.
A. Well, again, think about what a -- what prudent
business people would do. And this is from an economic
perspective. And from an economic perspective, you'd be
looking at the limited usage of the features that the
license would be required to have Microsoft provide to
its customers, and those are much more limited than all
the copies of XP and Vista.
So a prudent business person would not
agree to paying royalties on all the copies of XP and
Vista even with some adjustments; and frankly, SAIC on
the other side of the negotiating table, if you think
about it, would have reasonable expectations as to the
royalty base as well. So they would be taking that into
account as well.
Q. I want to shift your attention now to the
claims of the '180 patent and the feature of PNRP Plus
Grouping. Regarding this usage idea, do you have a
A. Yes. And -- and we've heard some of this
testimony, that there are no applications using the
PeerNet APIs for Windows XP. We've heard testimony that
there was only one application, Windows Meeting Space,
that used the PeerNet APIs and -- in Windows Vista. And
if we get a little bit more technical about it, there
was some discussion about a PNRP Plus Grouping
functionality in a sense, but that was rarely, if ever,
used in conjunction with Windows Meeting Space.
So, again, the point is, like I was saying
before, but now we're looking at the PeerNet APIs that,
again, there's limited usage and the parties
realistically would not expect to have a huge royalty
base or payments on a huge royalty base when there's
much more limited usage of those functionalities.
Q. And the parties would know that at the
Q. Now let me shift your attention to the other
area, the third area that you said you would address and
that's patent licensing practices.
Could you describe what you did in this
A. Yes. So I looked at 20 Microsoft what's called
inbound patent license agreements. And I have to
explain that a little bit. But we're -- we're trying to
understand what are the licensing practices of the
parties at the hypothetical negotiation. So, in a
sense, you know, what are their positions going in and
how do they like to run their business with respect to
licenses to intellectual property.
And we can show a slide here. Perhaps.
There we go.
Q. First of all, before you go into that, tell us
what inbound means in this context.
A. Right. So we have Microsoft inbound patent
license agreements. And think about it as inbound
versus outbound. On the inbound ones, it's Microsoft
TLDR: Microsoft claimed a license wasn't worth $242M that VHC was asking. They thought it should be $15M based on the contributions of Office Live Communicator and 4 other smaller programs as a small piece of Windows XP and Vista.
Jury Verdict said otherwise with $106M and MSFT eventually settled for $200M. VHC went on to sign 5 other licenses under a similar structure using entire market value of products involved.