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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
PARTIAL SUMMARY JUDGMENT
Case No. 07-CV-1658 PJH (EDL)
Robert A. Mittelstaedt (SBN 060359)
Jason McDonell (SBN 115084)
Elaine Wallace (SBN 197882)
JONES DAY
555 California Street, 26th Floor
San Francisco, CA 94104
Telephone: (415) 626-3939
Facsimile: (415) 875-5700
ramittelstaedt@jonesday.com
jmcdonell@jonesday.com
ewallace@jonesday.com
Tharan Gregory Lanier (SBN 138784)
Jane L. Froyd (SBN 220776)
JONES DAY
1755 Embarcadero Road
Palo Alto, CA 94303
Telephone: (650) 739-3939
Facsimile: (650) 739-3900
tglanier@jonesday.com
jfroyd@jonesday.com
Scott W. Cowan (Admitted Pro Hac Vice)
Joshua L. Fuchs (Admitted Pro Hac Vice)
JONES DAY
717 Texas, Suite 3300
Houston, TX 77002
Telephone: (832) 239-3939
Facsimile: (832) 239-3600
swcowan@jonesday.com
jlfuchs@jonesday.com
Attorneys for Defendants
SAP AG, SAP AMERICA, INC., and
TOMORROWNOW, INC.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
ORACLE USA, INC., et al.,
Plaintiffs,
v.
SAP AG, et al.,
Defendants.
Case No. 07-CV-1658 PJH (EDL)
DEFENDANTS’ NOTICE OF MOTION
AND MOTION FOR PARTIAL
SUMMARY JUDGMENT REGARDING
PLAINTIFFS’ HYPOTHETICAL
LICENSE DAMAGES CLAIM
[UNREDACTED VERSION OF D.I. 431]
Date: October 28, 2009; Time: 9:00 a.m.
Courtroom: 3, 17th Floor
Judge: Hon. Phyllis J. Hamilton
Case4:07-cv-01658-PJH Document543 Filed11/05/09 Page1 of 24
Oracle Corporation et al v. SAP AG et al Doc. 543
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TABLE OF CONTENTS
Page
- i -
I. INTRODUCTION AND SUMMARY OF ARGUMENT ................................................. 1
II. UNDISPUTED FACTS ...................................................................................................... 2
A. SAP and Oracle Are Direct, Vigorous Competitors ............................................... 2
B. Plaintiffs Never Would Have Granted a Copyright License to Defendants
Covering the Allegedly Infringing Activities ......................................................... 3
C. The Parties Would Not Have Even Negotiated for a Copyright License
Covering the Allegedly Infringing Activities ......................................................... 4
III. ARGUMENT ...................................................................................................................... 6
A. Legal Standard for Partial Summary Judgment under Rule 56............................... 6
B. A “Hypothetical License” Is Not a Permitted Form of Damages for
Copyright Infringement When the Parties Never Would Have Agreed to a
License .................................................................................................................... 7
1. The Copyright Act Sets Specific Remedies ................................................ 7
2. Causation Principles Apply to Actual Damages and Infringer’s
Profits .......................................................................................................... 8
3. Actual Damages May Be Measured Using a “Hypothetical License”
Only If, but for Infringement, the Parties Would Have Agreed to a
License ........................................................................................................ 9
4. A “Hypothetical License” Is Different from a “Reasonable
Royalty.” ................................................................................................... 10
C. Plaintiffs Are Not Entitled to Actual Damages in the Form of a
Hypothetical License Because the Parties Never Would Have Agreed to
Such a License ...................................................................................................... 11
1. Oracle Executives’ Undisputed Testimony Establishes that
Plaintiffs Would Not Have Granted a License.......................................... 11
2. Direct Competition between the Parties and the Lack of Any
Equivalent Licenses Further Proves that Plaintiffs Would Not Have
Granted a License...................................................................................... 12
3. Even Had Plaintiffs Been Willing to Negotiate, the Parties’
Differing Bases for a License Establish that They Would Not Have
Reached an Agreement ............................................................................. 13
4. Case Law Supports a Finding that Plaintiffs Are Not Entitled to a
“Hypothetical License” Form of Actual Damages.................................... 14
D. Plaintiffs Are Not Entitled to a Hypothetical License Based on “Saved
Acquisition Costs” Because this Theory Is Inconsistent with the Copyright
Act and Ninth Circuit Precedent ........................................................................... 16
IV. CONCLUSION................................................................................................................. 20
Case4:07-cv-01658-PJH Document543 Filed11/05/09 Page2 of 24
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TABLE OF AUTHORITIES
Page(s)
- ii -
Cases
American Employers Group, Inc. v. Employment Dev. Dep’t,
154 Cal. App. 4th 836 (2007) .................................................................................................... 13
Anderson v. Liberty Lobby, Inc.,
477 U.S. 242 (1986)..................................................................................................................... 6
Baker v. Urban Outfitters, Inc.,
254 F. Supp. 2d 346 (S.D.N.Y. 2003)........................................................................................ 10
Banner Entm’t, Inc. v. Superior Court,
62 Cal. App. 4th 348 (1998) ...................................................................................................... 13
Big Seven Music Corp. v. Lennon,
554, F.2d 504 (2d Cir. 1977)........................................................................................................ 9
Business Trends Analysts, Inc. v. Freedonia Group, Inc.,
887 F.2d 399 (2d Cir. 1989)................................................................................................ passim
Celotex Corp. v. Catrett,
477 U.S. 317 (1986)................................................................................................................. 6, 7
Data Gen. Corp. v. Grumman Sys. Support Corp.,
36 F.3d 1147 (1st Cir. 1994) ........................................................................................................ 8
Deltak, Inc. v. Advanced Sys., Inc.,
767 F.2d 357 (7th Cir. 1985).......................................................................................... 17, 18, 19
Encyclopedia Brown Prods., Ltd. v. Home Box Office, Inc.,
25 F. Supp. 2d 395 (S.D.N.Y. 1998).......................................................................... 9, 10, 12, 19
Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc.,
772 F.2d 505 (9th Cir. 1985)............................................................................................... passim
Gasaway v. Northwestern Mut. Life Ins. Co.,
26 F.3d 957 (9th Cir. 1994).......................................................................................................... 6
Harper & Row v. Nation Enters.,
471 U.S. 539 (1985)............................................................................................................... 8, 19
House, Inc. v. Thomas Nelson, Inc.,
No. CV 85-4225-PAR, 1987 WL 30581 (C.D. Cal. Aug. 28, 1987)......................................... 19
Jarvis v. K2, Inc.,
486 F.3d 526 (9th Cir. 2007)............................................................................................... passim
Mackie v. Rieser,
296 F.3d 909 (9th Cir. 2002)............................................................................................... passim
McRoberts Software, Inc. v. Media 100, Inc.,
329 F.3d 557 (7th Cir. 2002).......................................................................................... 12, 14, 15
Minks v. Polaris Indus., Inc.,
546 F.3d 1364 (Fed. Cir. 2008).................................................................................................. 10
Multitherm Corp. v. Fuhr, Civ. A.
No. 89-6151, 1991 WL 146233 (E.D. Pa. July 24, 1991).......................................................... 19
Nissan Fire & Marine Ins. Co. v. Fritz Cos.,
210 F.3d 1099 (9th Cir. 2000)...................................................................................................... 6
Case4:07-cv-01658-PJH Document543 Filed11/05/09 Page3 of 24
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TABLE OF AUTHORITIES
(continued)
Page
- iii -
On Davis v. The Gap, Inc.,
246 F.3d 152 (2d Cir. 2001)................................................................................................ passim
Polar Bear Prods., Inc. v. Timex Corp.,
384 F.3d 700 (9th Cir. 2004)............................................................................................... passim
Quinn v. City of Detroit,
23 F. Supp. 2d 741 (E.D. Mich. 1998)....................................................................................... 19
Roeslin v. District of Columbia,
921 F. Supp. 793 (D.D.C. 1995) ................................................................................................ 20
Shapiro, Bernstein & Co. v. 4636 S. Vermont Ave., Inc.,
367 F.2d 236 (9th Cir. 1966)........................................................................................................ 8
Sid & Marty Krofft Television Prods., Inc. v. McDonald’s Corp.,
562 F.2d 1157 (9th Cir. 1977).................................................................................... 7, 17, 18, 19
Steven Greenberg Photography v. Matt Garrett’s of Brockton, Inc.,
816 F. Supp. 46 (D. Mass. 1992) ............................................................................................... 19
Thornton v. J Jargon Co.,
580 F. Supp. 2d 1261 (M.D. Fla. 2008) ..................................................................................... 19
Thoroughbred Software Int’l, Inc. v. Dice Corp.,
439 F. Supp. 2d 758 (E.D. Mich. 2006)..................................................................................... 19
Weddington Prods., Inc. v. Flick,
60 Cal. App. 4th 793 (1998) ...................................................................................................... 13
Statutes
17 U.S.C. § 101.............................................................................................................................. 18
17 U.S.C. § 105................................................................................................................................ 1
17 U.S.C. § 412.......................................................................................................................... 8, 18
17 U.S.C. § 504................................................................................................................ 7, 8, 11, 17
35 U.S.C. § 284.............................................................................................................................. 10
Federal Rule of Civil Procedure 56.............................................................................................. 1, 6
Other Authorities
Notes of Committee on Judiciary, H.R. No. 94-1476.................................................................... 18
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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
PARTIAL SUMMARY JUDGMENT
Case No. 07-CV-1658 PJH (EDL)
NOTICE OF MOTION
PLEASE TAKE NOTICE THAT on October 28, 2009, at 9:00 a.m., or as soon thereafter
as this matter may be heard by the above-entitled Court, located at 450 Golden Gate Avenue, San
Francisco, California, in Courtroom 3 before the Honorable Phyllis J. Hamilton, Defendants SAP
AG, SAP America, Inc. (together, “SAP”) and TomorrowNow, Inc. (“TN,” and with SAP,
“Defendants”) will bring their motion for partial summary judgment, pursuant to 17 U.S.C. § 105,
Federal Rule of Civil Procedure 56 and Civil Local Rules 7-2, 7-4, 7-5 and 56-1, against Plaintiffs
Oracle USA, Inc., Oracle International Corporation and Oracle EMEA Limited (“Plaintiffs” or
“Oracle”) seeking a ruling that Plaintiffs are not entitled to pursue actual damages in the form of a
hypothetical license. This motion is based on the Memorandum of Points and Authorities herein,
along with the Declaration of Tharan Gregory Lanier and exhibits attached thereto.
RELIEF REQUESTED
Defendants respectfully request that the Court grant partial summary judgment that
Plaintiffs are not entitled to pursue actual damages in the form of a hypothetical license.
MEMORANDUM OF POINTS AND AUTHORITIES
I. INTRODUCTION AND SUMMARY OF ARGUMENT
Plaintiffs’ central claim is copyright infringement, for which they seek damages under
three different theories. First, Plaintiffs allege that TN, which was never profitable under SAP’s
ownership, cost them at least $100 million in lost profits. Second, Plaintiffs allege that they are
entitled to disgorgement of at least $500 million in SAP’s profits somehow attributable to TN’s
activities. Third, Plaintiffs seek actual damages in the form of a hypothetical license. Plaintiffs
have not yet quantified this claim, but base it on a hypothetical negotiation between Oracle and
SAP, at a time immediately after the PeopleSoft and TN acquisitions, and estimate that it is in the
“billions.” See Declaration of Tharan Gregory Lanier in Support of Defendants’ Motion for
Summary Judgment (“Lanier Decl.”) ¶ 8, Ex. H (May 22, 2009 Plaintiffs’ Supplemental and
Amended Disclosures (“Supplemental Disclosures”)) at 46-47. Although each damages claim is
overstated, only the hypothetical license claim is the subject of this motion.
A hypothetical license is a form of actual damages that measures the harm to a plaintiff
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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
PARTIAL SUMMARY JUDGMENT
Case No. 07-CV-1658 PJH (EDL)
who, absent infringement, would have received a licensing fee from the defendant for use of the
plaintiff’s copyrighted work. In contrast to the “reasonable royalty” of patent law, this form of
damages is available in copyright cases only if a plaintiff proves that, but for the infringement, the
parties would have agreed to a license. In other words, as with all forms of compensatory
damages, Plaintiffs have the burden to prove causation. Where the undisputed facts demonstrate
that, but for infringement, the parties never would have agreed to a license for the copyrighted
material at issue, a hypothetical license is not available as a matter of law.
The undisputed evidence here shows that these parties never would have agreed to a
license covering the allegedly infringing activity, in any amount. Plaintiffs contend that such a
license would have been akin to giving away their alleged intellectual property. They have never
granted such a license to anyone, and would not have granted it to SAP. Oracle and SAP are
fierce competitors in applications software, the field in which TN provided maintenance service.
Oracle founder and CEO Larry Ellison testified that Oracle would not have granted SAP a license
because Oracle was not interested in handing over its multi-billion dollar share of the applications
market, acquired after great expense and effort, to its biggest competitor. Oracle’s executives
explained that even had they considered a license, they would have demanded billions, which Mr.
Ellison acknowledged would have been “prohibitively” expensive to SAP.
Plaintiffs cannot meet their burden of proving that, but for the alleged infringement, the
parties would have agreed to a license permitting the full range of conduct that Plaintiffs now
contend caused them significant harm. Plaintiffs cannot escape this causation requirement by
characterizing the hypothetical license as based on a “saved acquisition costs” theory because this
theory is inconsistent with the Copyright Act and Ninth Circuit precedent. Because there is no
genuine issue of material fact with respect to Plaintiffs’ hypothetical license claim, summary
judgment should be granted. Eliminating this impermissible claim now will promote efficient
case management and is essential to resolution of this case.
II. UNDISPUTED FACTS
A. SAP and Oracle Are Direct, Vigorous Competitors.
According to the complaint, when Oracle completed its 18-month PeopleSoft acquisition
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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
PARTIAL SUMMARY JUDGMENT
Case No. 07-CV-1658 PJH (EDL)
in January 2005, it “emerge[d] as the second-largest provider of business software applications in
the world and the first to rival SAP AG in market share, size, and geographic and product scope.”
D.I. 418 (¶ 62); see also Lanier Decl. ¶ 1, Ex. A (March 27, 2009 Safra Catz Deposition (“Catz
Depo.”)) at 158:13-159:6. Oracle’s PeopleSoft acquisition was directed at SAP. See D.I. 418
(¶ 74); see also Lanier Decl. ¶ 1, Ex. A (Catz Depo.) at 158:13-159:6. Mr. Ellison testified that
Oracle purchased PeopleSoft specifically to “expand our applications business,” Lanier Decl. ¶ 3,
Ex. C (May 5, 2009 Larry Ellison Deposition (“Ellison Depo.”)) at 58:6-10, and publicly declared
that, as a result of the acquisition, “we’re going to give SAP a good run for their money in this
business.” Id. ¶ 9, Ex. I (December 10, 2004 “This week in OpenWorld news” CNET News.com).
Oracle’s top executives, including Mr. Ellison and co-Presidents Charles Phillips and
Safra Catz, believe that Oracle’s main competitor in the applications market is SAP. See id. ¶¶
1-3, Ex. C (Ellison Depo.) at 114:16-24; Ex. B (April 17, 2009 Charles Phillips Deposition
(“Phillips Depo.”)) at 96:15-16; Ex. A (Catz Depo.) at 19:10-25 (Oracle does not “have any more
significant competitor than SAP”). Mr. Phillips has publicly described SAP as Oracle’s “enemy.”
Id. ¶ 2, Ex. B (Phillips Depo.) at 57:12-58:18.
SAP executives also acknowledge that Oracle is SAP’s “main competitor” in applications
software. Id. ¶¶ 5-6, Ex. E (September 25, 2008 Henning Kagermann Deposition (“Kagermann
Depo.”)) at 167:25-168:7; Ex. F (October 2, 2008 Leo Apotheker Deposition (“Apotheker
Depo.”)) at 58:10-23. As one response to Oracle’s over $10 billion PeopleSoft acquisition, SAP
purchased TN for $10 million. See D.I. 418 (¶ 75). At that time, TN was a small software service
company, based in Bryan, Texas, that provided maintenance and support for PeopleSoft software,
and later, J.D. Edwards and Siebel software. See D.I. 418 (¶¶ 67, 86). TN had just achieved its
first profitable year, with a net income of approximately $52,600. See Lanier Decl. ¶ 7, Ex. G.
B. Plaintiffs Never Would Have Granted a Copyright License to Defendants
Covering the Allegedly Infringing Activities.
In their recent Supplemental Disclosures, Plaintiffs described the hypothetical license they
are pursuing as one resulting from a negotiation between Oracle and SAP in January 2005,
following Oracle’s PeopleSoft acquisition and SAP’s TN acquisition. See id. ¶ 8, Ex. H
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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
PARTIAL SUMMARY JUDGMENT
Case No. 07-CV-1658 PJH (EDL)
(Supplemental Disclosures) at 47. In motion practice, Plaintiffs described the hypothetical license
as one “reached between ‘keen competitors’ like Oracle and SAP” that “would [have] allow[ed]
SAP’s service subsidiary to use Oracle applications and service support intellectual property to
aggressively compete against Oracle for applications customers and market share,” and that would
have had “nothing in common with any agreement Oracle has with any business Partner.” D.I.
253 at 14. According to Plaintiffs, this license would have had to cover any “attempt[] to convert
the customer to a competing software platform and . . . daily wholesale copying and cross-use of
Oracle’s application software and support materials.” D.I. 253 at 2; see also Lanier Decl. ¶¶ 1-2,
Ex. A (Catz Depo.) at 10:20-11:7, 20:6-25:18; Ex. B (Phillips Depo.) at 118:8-120:18. Mr.
Ellison testified that such a license would have required “basically hav[ing] all of our IP, to make
the IP equally accessible to their team and our team” and would have included “everything we’re
currently doing.” See Lanier Decl. ¶ 3, Ex. C (Ellison Depo.) at 74:5-75:24. Plaintiffs have never
granted such a license to anyone. See D.I. 256 (¶¶ 1, 3-4); D.I. 253 at 10.
In January 2005, had SAP or TN approached Oracle for a license to support TN’s
operations, Oracle would have said no. Mr. Ellison, who would have been ultimately responsible
for making such a licensing decision, testified that Oracle would not have even “entertained” an
offer from TN. Lanier Decl. ¶ 3, Ex. C (Ellison Depo.) at 74:5-11, 81:10-82:2. As Ms. Catz
explained, Oracle would have refused to grant a license to SAP or TN if “we thought it wasn’t a
good business plan for us,” among “many” other circumstances. See id. ¶ 1, Ex. A (Catz Depo.)
at 47:3-15. According to Mr. Ellison, granting such a license to SAP or TN would have been
tantamount to “saying good-bye to the applications business forever . . . we might as well say,
okay, we’re exiting this business.” Id. ¶ 3, Ex. C (Ellison Depo.) at 80:3-81:9; 83:18-84:6.
Having just spent over $10 billion, 18 months in litigation and $100 million in legal fees to
establish its foothold in the applications business, Oracle had no intention of exiting it. See id. ¶¶
1, 3, Ex. A (Catz Depo.) at 26:24-27:15, 158:13-159:23; Ex. C (Ellison Depo.) at 81:6-9.
C. The Parties Would Not Have Even Negotiated for a Copyright License
Covering the Allegedly Infringing Activities.
Hasso Plattner, SAP’s co-founder, confirmed that SAP would not have even considered
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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
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Case No. 07-CV-1658 PJH (EDL)
the type of license contemplated by Oracle executives. When asked at deposition to contemplate
a hypothetical negotiation, Mr. Plattner’s response made it clear that the parties never would have
made it to the negotiating table:
Q. . . . Let’s say that the two sides are just sitting down to try and negotiate
that license under those circumstances I just described. Would you [as
Oracle] then be taking into account how much you’ve paid?
MR. LANIER: Same objections.
THE WITNESS: Then I can do what I want.
MR. HOWARD: Q. And would you then --
A. And --
Q. Would you then take into account how much you’ve paid if you’re
Oracle for the PeopleSoft business?
A. Then we don’t have to sit together.
Id. ¶ 4, Ex. D (June 2, 2009 Hasso Plattner Deposition (“Plattner Depo.”)) at 68:10-22.
Mr. Plattner explained that even had the parties reached the negotiating table, he would
have expected the asking price for a hypothetical license to be “lower than the price” that the
licensor normally charges a customer for maintenance, “because somebody else is doing the job”
for the licensor and therefore “it’s an indirect charge.” Id. ¶ 4, Ex. D (Plattner Depo.) at 56:21-
58:2. He also stated that he would not have expected the asking price to be based on the amount
of “money that [the licensor] spent to develop the software in the first place.” Id. ¶ 4, Ex. D
(Plattner Depo.) at 57:23-58:2. He also would not have expected the asking price to have been
based on “the purchase price that Oracle [had] just paid to PeopleSoft in setting that license fee”
for the same reason that “the history of the development of cost [sic] at GM is not relevant to the
price GM can charge for a car now.” Id. ¶ 4, Ex. D (Plattner Depo.) at 65:19-66:21.
Oracle executives’ testimony underscores Plaintiffs’ fundamentally different approach to
the hypothetical negotiation. In answering questions concerning the basis for and value of a
hypothetical license, Mr. Phillips testified that the license would have had to have cost at least $3-
4 billion in light of the “impact on our business by granting a competitor intellectual property.”
Id. ¶ 2, Ex. B (Phillips Depo.) at 118:8-120:6. Ms. Catz testified that she would have required
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DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR
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SAP or TN to pay more than $12.6 billion to account for the PeopleSoft acquisition (and related
legal fees). See id. ¶ 1, Ex. A (Catz Depo.) at 46:7-47:15, 158:13-159:23. Mr. Ellison testified
that the price of such an expansive license would have had to have been at least $8 billion, to
cover 70% of the over $10 billion PeopleSoft customer base Mr. Ellison believes Oracle would
have lost to SAP as a result of the license, and as much as $30 billion to cover exiting the
applications business. See id. ¶ 3, Ex. C (Ellison Depo.) at 76:16-78:11, 80:3-81:9. He
acknowledged, however, that Defendants would have viewed this price as extremely, even
“prohibitively” expensive. Id. ¶ 3, Ex. C (Ellison Depo.) at 74:2-75:9.
III. ARGUMENT
A. Legal Standard for Partial Summary Judgment under Rule 56.
A defendant may move for summary judgment “on all or part of [a] claim,” including
damages. Fed. R. Civ. P. 56(b), 56(d)(1). Summary judgment is proper when the pleadings,
discovery and affidavits show that there is “no genuine issue as to any material fact and that the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). Material facts are those
that may affect the outcome of the case. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). An issue of fact is genuine only if there is sufficient evidence for a reasonable jury to
find for the nonmoving party. See id. The moving party bears the initial burden of identifying
those portions of the pleadings, discovery and affidavits that demonstrate the absence of a
genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Nissan
Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). On an issue for which
the opposing party will have the burden of proof at trial, the moving party may “either produce
evidence negating an essential element of the nonmoving party’s claim or defense or show that
the nonmoving party does not have enough evidence of an essential element to carry its ultimate
burden of persuasion at trial.” Nissan Fire & Marine, 210 F.3d at 1102.
Once the moving party meets its burden, the nonmoving party must “set out specific facts
showing [that there is] a genuine issue for trial.” Fed. R. Civ. P. 56(e)(2). Mere allegations or
denials do not defeat a moving party’s allegations. See id.; Gasaway v. Northwestern Mut. Life
Ins. Co., 26 F.3d 957, 959-60 (9th Cir. 1994). If the nonmoving party fails to produce enough
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Case No. 07-CV-1658 PJH (EDL)
evidence to show a genuine issue of material fact, “the moving party is entitled to judgment as a
matter of law.” Celotex, 477 U.S. at 322-23.
B. A “Hypothetical License” Is Not a Permitted Form of Damages for Copyright
Infringement When the Parties Never Would Have Agreed to a License.
A plaintiff may not pursue a “hypothetical license” as a form of actual damages for
copyright infringement when the undisputed evidence demonstrates that, but for infringement, the
parties never would have entered into a license for the copyrighted material at issue.
1. The Copyright Act Sets Specific Remedies.
The Copyright Act sets the exclusive remedies available for infringement: actual damages
and infringer’s profits, as well as alternative statutory damages. See 17 U.S.C. § 504(b)-(c).
Actual damages are generally calculated “by the loss in the fair market value of the copyright,”
which is determined by either “the profits lost due to the infringement” or “the value of the use of
the copyrighted work to the infringer.” Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 708
(9th Cir. 2004); see also Mackie v. Rieser, 296 F.3d 909, 917 (9th Cir. 2002); Frank Music Corp.
v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 512 (9th Cir. 1985). The Ninth Circuit has held
that, “in situations where the infringer could have bargained with the copyright owner to purchase
the right to use the work,” the “value of use” form of actual damages may be determined by using
a hypothetical license. Jarvis v. K2, Inc., 486 F.3d 526, 533 (9th Cir. 2007); see also Polar Bear,
384 F.3d at 709 (stating that “a hypothetical lost license fee” may be awarded, “provided the
amount is not based on undue speculation”) (citation omitted). The amount of the hypothetical
license—a separate consideration—is measured by “what a willing buyer would have been
reasonably required to pay to a willing seller for plaintiffs’ work.” Jarvis, 486 F.3d at 533
(quoting Sid & Marty Krofft Television Prods., Inc. v. McDonald’s Corp., 562 F.2d 1157, 1174
(9th Cir. 1977)); see also Mackie, 296 F.3d at 917; Frank Music, 772 F.2d at 512.
In addition to actual damages, a copyright owner is also entitled to recover “any profits of
the infringer that are attributable to the infringement and are not taken into account in computing
the actual damages.” 17 U.S.C. § 504(b). To establish the infringer’s profits, “the copyright
owner is required to present proof only of the infringer’s gross revenue, and the infringer is
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required to prove his or her deductible expenses and the elements of profit attributable to factors
other than the copyrighted work.” Id.
These two forms of damages have different justifications and serve different purposes.
Actual damages, analyzed from the copyright owner’s point of view, are awarded to compensate
for demonstrable harm caused by infringement. See 17 U.S.C. § 504(b); Polar Bear, 384 F.3d at
708; On Davis v. The Gap, Inc., 246 F.3d 152, 159 (2d Cir. 2001). Infringer’s profits are analyzed
from the infringer’s point of view. If the infringer has earned a profit, it must disgorge the profit
so that it does not benefit from its wrongdoing. See id. When proof of actual damages or
infringer’s profits is insufficient, a copyright owner may elect to receive statutory damages, see 17
U.S.C. § 504(c), subject to having met other statutory requirements. See 17 U.S.C. § 412(2).
2. Causation Principles Apply to Actual Damages and Infringer’s Profits.
General “tort principles of causation and damages” apply when analyzing compensatory
damages awards for copyright infringement. Polar Bear, 384 F.3d at 708; see also Harper &
Row v. Nation Enters., 471 U.S. 539, 567 (1985); Jarvis, 486 F.3d at 533-34; Mackie, 296 F.3d at
915; Frank Music, 772 F.2d at 514 n.8 (citing Shapiro, Bernstein & Co. v. 4636 S. Vermont Ave.,
Inc., 367 F.2d 236, 241 (9th Cir. 1966)). Under Section 504(b), “actual damages must be suffered
‘as a result of the infringement,’ and recoverable profits must be ‘attributable to the
infringement.’” Polar Bear, 384 F.3d at 708 (quoting 17 U.S.C. § 504(b)). The plain statutory
language makes clear that “a causal link between the infringement and the monetary remedy
sought is a predicate to recovery of both actual damages and profits.” Id. (emphasis added).
The plaintiff bears the burden of proving this necessary causal connection between the
infringement and any damages sustained. See id., 384 F.3d at 708 (“We take this opportunity to
reaffirm the principle that a plaintiff in a § 504(b) action must establish this causal connection”);
Jarvis, 486 F.3d at 533-34; Mackie, 296 F.3d at 914-15 (citing Data Gen. Corp. v. Grumman Sys.
Support Corp., 36 F.3d 1147, 1170 (1st Cir. 1994)); Frank Music, 772 F.2d at 514. Specifically,
the plaintiff must show that “the infringement was the cause-in-fact of its loss by showing with
reasonable probability that, but for the defendant’s infringement, the plaintiff would not have
suffered the loss.” Data Gen., 36 F.3d at 1171. Further, the plaintiff must “prove that the
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infringement was a proximate cause of its loss by demonstrating that the existence and amount of
the loss was a natural and probable consequence of the infringement.” Id. (citing Big Seven
Music Corp. v. Lennon, 554, F.2d 504, 509 (2d Cir. 1977)). Finally, courts allow both direct and
indirect evidence to establish loss, but must “reject a proffered measure of damages if it is too
speculative.” Mackie, 296 F.3d at 915 (quoting Frank Music, 772 F.2d at 513); see also Polar
Bear, 384 F.3d at 709-11 (stating that damages may not be “based on undue speculation”); Jarvis,
486 F.3d at 534 (stating that excessively speculative claims of damages are to be rejected).
3. Actual Damages May Be Measured Using a “Hypothetical License” Only
If, but for Infringement, the Parties Would Have Agreed to a License.
Because causation principles apply, analysis of actual damages—be it for lost profits or
for a hypothetical license—is a two step process. The first, critical step is the threshold causation
inquiry, whether the plaintiff would have made a sale (lost profits) or licensed use (hypothetical
license) of the copyrighted work absent the infringement. See Polar Bear, 384 F.3d at 711; Jarvis,
486 F.3d at 533; Business Trends Analysts, Inc. v. Freedonia Group, Inc., 887 F.2d 399, 405-06
(2d Cir. 1989); Encyclopedia Brown Prods., Ltd. v. Home Box Office, Inc., 25 F. Supp. 2d 395,
401 (S.D.N.Y. 1998). The second step, reached only if the plaintiff meets its burden on causation,
is to determine the amount of the lost sale or licensed use. See id. When analyzing a hypothetical
license, it is at this second step that a court applies the objective willing buyer/willing seller test
to determine the amount of a hypothetical license. See Jarvis, 486 F.3d at 533 (“[I]n situations
where the infringer could have bargained with the copyright owner to purchase the right to use
the work, actual damages are ‘what a willing buyer would have been reasonably required to pay a
willing seller’”) (citing Frank Music, 772 F.2d at 512). If a plaintiff does not meet its burden of
proving causation, a court does not reach this second step and no actual damages may be awarded,
since to do so would be unduly speculative. See id.; see also Mackie, 296 F.3d at 917 (calculating
value of hypothetical license using willing buyer/willing seller test where evidence showed that
parties would have entered into a license); Polar Bear, 384 F.3d at 710-11 (same).
Accordingly, a plaintiff is not entitled to actual damages in the form of a hypothetical
license absent a showing that, but for the infringement, the parties would have agreed to a license.
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See Polar Bear, 384 F.3d at 708; Frank Music, 772 F.2d at 514; Business Trends, 887 F.2d at
405-06. Courts consider several factors when analyzing causation, including whether: (1) the
parties are direct competitors, (2) they sell goods in the same market, (3) the parties have ever
entered into a similar license and (4) the plaintiff has ever granted a similar license. See Polar
Bear, 384 F.3d at 711; Business Trends, 887 F.2d at 405-06 (rejecting hypothetical license in case
where parties were direct competitors); On Davis, 246 F.3d at 161-62 (allowing hypothetical
license where parties were non-competitors who could have agreed on a license); Encyclopedia
Brown, 25 F. Supp. 2d at 401-02 (same); Baker v. Urban Outfitters, Inc., 254 F. Supp. 2d 346,
357-58 (S.D.N.Y. 2003) (same). Evidence of direct competition between the parties, by itself,
strongly supports the conclusion that a hypothetical license may not be a measure of actual
damages. See Business Trends, 887 F.2d at 405-06; Encyclopedia Brown, 25 F. Supp. 2d 395 at
401-02. Where the parties directly compete in the same market and there is no evidence that they
would have agreed to a hypothetical license for the allegedly infringed work, a court will not
permit an award of actual damages to be measured by a hypothetical license. See Jarvis, 486
F.3d at 533 (hypothetical license award available only where “the infringer could have bargained
with the copyright owner”); Business Trends, 887 F.2d at 405, 407.
4. A “Hypothetical License” Is Different from a “Reasonable Royalty.”
It is useful to contrast a hypothetical license under copyright law with a reasonable royalty
under patent law. Under patent law, damages must be “adequate to compensate for the
infringement, but in no event less than a reasonable royalty for the use of the invention by
infringer . . . .” 35 U.S.C. § 284 (emphasis added). Congress specifically set a “reasonable
royalty” as a necessary floor for patent damages; even if a plaintiff alleging patent infringement
cannot directly prove damages caused by the infringement, the trier of fact must hypothesize a
reasonable royalty negotiation and award at least that amount. See id.; Minks v. Polaris Indus.,
Inc., 546 F.3d 1364, 1372 (Fed. Cir. 2008) (“The hypothetical negotiation requires the court to
envision the terms of a licensing agreement reached as the result of a supposed meeting between
the patentee and the infringer at the time [the patent] infringement began.”) (emphasis added).
By contrast, copyright law does not recognize any royalty floor for recovery of
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compensatory damages; a plaintiff must first establish causation. See, e.g., Polar Bear, 384 F.3d
at 708-10 (remanding award where a portion of the amount was too speculative). If a plaintiff is
unable to prove any compensatory damages, it may elect statutory damages if it has complied
with the necessary registration requirements. See 17 U.S.C. § 504(c).
C. Plaintiffs Are Not Entitled to Actual Damages in the Form of a Hypothetical
License Because the Parties Never Would Have Agreed to Such a License.
Plaintiffs are not entitled to a “hypothetical license” as a form of actual damages because
the undisputed facts show that Oracle never would have been willing to negotiate with its arch-
rival SAP for the type of copyright license Plaintiffs have put at issue here. This is evidenced by
Oracle executives’ unequivocal testimony, the parties’ fierce competition and the lack of any
equivalent Oracle licenses. Further, even had Oracle been willing to negotiate such a license,
testimony from both sides makes it clear that an agreement never would have been reached
because neither side could have even agreed on the basis for negotiations, much less the
“prohibitively” expensive price Oracle executives would have demanded. Absent this causal link,
Plaintiffs are not entitled to a “hypothetical license” as a form of actual damages.
1. Oracle Executives’ Undisputed Testimony Establishes that Plaintiffs
Would Not Have Granted a License.
Oracle’s top executives testified under oath that Oracle would not have licensed its hard-
won software to Defendants. See Lanier Decl. ¶¶ 1, 3, Ex. A (Catz Depo.) at 46:7-47:13; Ex. C
(Ellison Depo.) at 80:3-82:2, 83:18-84:6. Mr. Ellison’s testimony alone is sufficient to establish
that the parties never would have entered into a license for the PeopleSoft, J.D. Edwards and
Siebel software at issue, and it is supported by ample testimony from Oracle’s co-Presidents. See
id., see also id. ¶ 2, Ex. B (Phillips Depo.) at 118:8-120:6.
In light of Plaintiffs’ view regarding the scope of the hypothetical license, the business
reasons behind Oracle executives’ refusal to license the software at issue are understandable.
According to Mr. Ellison, the license at issue here would have allowed SAP to “basically have all
of our IP”—the same IP that Oracle had just fought for almost two years for the right to purchase
and that was critical to Oracle’s expansion in the applications business dominated by SAP. Id. ¶
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3, Ex. C (Ellison Depo.) at 74:12-75:24 (emphasis added). Plaintiffs’ contemplated license would
have given Defendants free rein “to use Oracle applications and service support intellectual
property to aggressively compete against Oracle for applications customers and market share.”
D.I. 253 at 14. In short, granting Defendants such a license would have eviscerated the rationale
behind acquiring PeopleSoft in the first place; there is no dispute that Plaintiffs would not have
granted Defendants such a license.
2. Direct Competition between the Parties and the Lack of Any Equivalent
Licenses Further Proves that Plaintiffs Would Not Have Granted a License.
SAP and Oracle’s status as direct competitors further demonstrates that Oracle never
would have granted such a license to Defendants. The testimony from Mr. Ellison, Ms. Catz and
Mr. Phillips, and the allegations in Plaintiffs’ complaint, evidence the fierce competition between
Oracle and SAP. There is no question that each considers the other its largest and most
formidable competitor in the enterprise software market. See Lanier Decl. ¶¶ 1-3, 5-6, Ex. A
(Catz Depo.) at 19:10-25; Ex. B (Phillips Depo.) at 57:12-58:18, 96:15-16; Ex. C (Ellison Depo.)
at 114:16-24; Ex. E (Kagermann Depo.) at 167:25-168:7; Ex. F (Apotheker Depo.) at 58:10-23;
D.I. 418 (¶¶ 62, 74). The parties’ direct competition is a critical and undisputed fact which
demonstrates that a hypothetical license is not a proper measure of actual damages here. See
Business Trends, 887 F.2d at 405-06 (rejecting hypothetical license in case where parties were
direct competitors); Jarvis, 486 F.3d at 533 (stating that hypothetical license measure is available
only where “the infringer could have bargained with the copyright owner”).
Additionally, there is no evidence, such as comparable past licenses, to suggest that
Plaintiffs would have even negotiated, let alone granted, a license to Defendants. See McRoberts
Software, Inc. v. Media 100, Inc., 329 F.3d 557, 567 (7th Cir. 2002) (allowing hypothetical license
where parties were not direct competitors and had past copyright license for work at issue);
Encyclopedia Brown, 25 F. Supp. 2d at 401 (same). By its own admission, Oracle has never given
any entity a license to “copy Oracle’s application software and support materials in order to create
their own fixes, patches or updates for customers.” D.I. 256 (¶¶ 3-4). And the parties have no
history of negotiating similar licenses for the use of comparable enterprise software applications.
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That Oracle has never granted the type of copyright license it insists it would have required from
Defendants further demonstrates that Plaintiffs cannot carry their burden of proof.
3. Even Had Plaintiffs Been Willing to Negotiate, the Parties’ Differing Bases
for a License Establish that They Would Not Have Reached an Agreement.
Even assuming that Oracle and SAP would have been willing to negotiate a license, such
negotiations would not have resulted in a license. Based on both Oracle and SAP executive
testimony, it is clear that neither side would have agreed on a license because they would have
had vastly different views as to the basis of the negotiation. This disconnect demonstrates that
there never would have been the requisite “meeting of the minds.” See e.g., American Employers
Group, Inc. v. Employment Dev. Dep’t, 154 Cal. App. 4th 836, 846-47 (2007) (“[T]here is no
contract until there has been a meeting of the minds on all material points.”) (quoting Banner
Entm’t, Inc. v. Superior Court, 62 Cal. App. 4th 348, 358) (1998); Weddington Prods., Inc. v.
Flick, 60 Cal. App. 4th 793, 797 (1998) (“If no meeting of the minds has occurred on the material
terms of a contract, basic contract law provides that no contract formation has occurred.”).
Oracle would have viewed the negotiation essentially as one for PeopleSoft’s entire
customer base and for Oracle’s very future in the applications market. See Lanier Decl. ¶¶ 1-3,
Ex. A (Catz Depo.) at 158:13-159:23; Ex. B (Phillips Depo.) at 118:8-120:18; Ex. C (Ellison
Depo.) at 76:16-81:9. Accordingly, Oracle executives testified that the hypothetical license
would have cost from $3-4 billion up to $30 billion. See id. ¶¶ 1-3, Ex. A (Catz Depo.) at 158:13-
161:5; Ex. B (Phillips Depo.) at 118:8-120:18; Ex. C (Ellison Depo.) at 76:16-81:9.
In stark contrast, Mr. Plattner’s testimony evidences that SAP would have viewed the
negotiation as simply one for the right to service Oracle’s customers; indeed, SAP would have
expected to get a bargain because TN would have been “doing [Oracle’s] job” for it. See id. ¶ 4,
Ex. D (Plattner Depo.) at 56:21-58:2. Mr. Plattner further testified that SAP would not have
expected the license to have been based on the amount of “money that [the licensor] spent to
develop the software in the first place” or “the purchase price that Oracle had just paid to
PeopleSoft.” Id. ¶ 4, Ex. D (Plattner Depo.) at 57:23-58:2, 65:19-66:21.
With such a fundamental disagreement over the basis of the license, it is inconceivable
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that the parties could have overcome this disconnect and reached a meeting of the minds. No
evidence suggests otherwise. Rather, as Mr. Plattner pointed out, the parties would have realized
that they “don’t have to sit together.” Id. ¶ 4, Ex. D (Plattner Depo.) at 68:9-22. Mr. Ellison
acknowledged this as well, when he testified that neither SAP nor TN would have paid Oracle’s
“prohibitively” expensive price for a license to use Oracle’s software in connection with TN’s
business. Id. ¶ 3, Ex. C (Ellison Depo.) at 74:12-75:24, 81:10-82:2.
4. Case Law Supports a Finding that Plaintiffs Are Not Entitled to a
“Hypothetical License” Form of Actual Damages.
The undisputed evidence that SAP and Oracle were direct competitors in the same market
and never would have agreed to a license for the allegedly infringing activities proves that a
hypothetical license is not permitted here. Indeed, these factors distinguish this case from those
in which plaintiffs were permitted actual damages in the form of a hypothetical license. See
McRoberts, 329 F.3d at 567; On Davis, 246 F.3d at 163-64; Polar Bear, 384 F.3d at 710-11;
Jarvis, 486 F.3d at 534; Mackie, 296 F.3d at 917. This case is similar to Business Trends, in
which the court vacated a hypothetical license award as too “speculative” where the parties
directly competed in the same market. Business Trends, 887 F.2d at 405, 407.
In Business Trends, the parties directly competed in the publication of economic analyses
and forecasts, and both produced a robotics industry study. See id. at 401. Upon a finding that
the defendant infringed the plaintiff’s robotics study, the lower court awarded damages in the
form of a hypothetical license. See id. at 404. The Second Circuit reversed, holding that the
“proof in the instant case is inadequate to support such an award” because the parties were direct
competitors and there was no evidence that they had any inclination to agree to a license for the
allegedly infringing activities. Id. at 407. Like the parties in Business Trends, SAP and Oracle
fiercely compete in the same market, and there is no evidence to suggest that they would have
agreed to a license for the allegedly infringing activities. Indeed, there is direct testimony to the
contrary. As in Business Trends, Plaintiffs here have not adduced, and cannot adduce, any
evidence on which to ground a hypothetical license form of damages that would be anything but
“speculative and artificial” and, therefore, impermissible.
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This case is distinguishable from McRoberts, where a hypothetical license award was
affirmed based on evidence that the parties, which were not direct competitors, had previously
entered into similar agreements for the particular copyrighted material. 329 F.3d at 567. In
McRoberts, defendant Media 100, a manufacturer of video editing hardware, was a licensed
distributor of plaintiff MSI’s software, which only functioned on Macintosh computers. See id. at
561-62. Without MSI’s permission, Media 100 hired a third party to translate MSI’s software so
that it was compatible with Windows machines and then sold the translated MSI software. See id.
at 562. MSI sued Media 100 for copyright infringement and sought actual damages in the form
of the hypothetical license Media 100 would have paid to obtain a Windows-translated version of
the software. See id. at 563, 566-67. The Seventh Circuit found that, despite Media 100’s claim
that it never would have entered into a license for the translated software, there was “ample
evidence” on which to base a hypothetical license, including that MSI had “past agreements with
Media 100 to develop and modify previous versions” of the software. Id. at 567. In this case, by
contrast, the parties are direct competitors that have never previously agreed on a license for the
software at issue in this case. Further, unlike the McRoberts defendant, Defendants do not rely on
bare assertions that they would not have agreed to a hypothetical license; rather, the evidence,
which here principally comes from Oracle, is that neither Plaintiffs nor Defendants would have
agreed on a license covering the allegedly infringing activities.
Similarly, in Jarvis, Polar Bear, Mackie and On Davis, plaintiffs were permitted to
measure actual damages in the form of a hypothetical license where they introduced evidence that
they would have entered into a license with the defendants for the intellectual property at issue,
but for the infringement. In Jarvis, the Ninth Circuit affirmed a hypothetical license award for
infringement of the plaintiff’s copyrighted photographs where the plaintiff had licensed
photographs to the defendant in the past. See Jarvis, 486 F.3d at 528, 533-34. In so doing, the
court noted that a hypothetical license form of actual damages is appropriate where, as in that
case, “the infringer could have bargained with the copyright owner to purchase the right to use
the work.” Id. at 533 (emphasis added). Likewise, in Polar Bear, the Ninth Circuit upheld a
hypothetical license award where the parties previously had a license concerning the plaintiff’s
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copyrighted video, and the defendant had simply continued to use that video after the license had
expired. See Polar Bear, 384 F.3d at 704, 709. Similarly, in Mackie, the Ninth Circuit upheld a
hypothetical license award where the parties were not competitors and the plaintiff “had
previously given permission to others to use” the copyrighted work for the same use. Mackie,
296 F.3d at 913, 917. And in On Davis, the Second Circuit permitted the plaintiff to recover a
hypothetical license fee for the defendant’s unauthorized use of plaintiff’s copyrighted eyewear in
defendant’s advertising campaign where the parties were not competitors and there was evidence
that the plaintiff obtained a $50 royalty for use of the sunglasses in a different magazine feature.
See On Davis, 246 F.3d at 161-62 (distinguishing its facts from those in Business Trends, where
“the plaintiff and defendant were competitors in the publication of economic analyses and
forecasts—not a relationship where the defendant was a potential licensee of the plaintiff”).
In each of these cases, the evidence demonstrated that the parties were not direct
competitors and that they had entered into comparable agreements for the copyrighted material at
issue in the past or, at the very least, that the plaintiff willingly had licensed the copyrighted
material to others for a similar use. None of these circumstances is present here, where SAP and
Oracle are fierce competitors and there is no evidence that Oracle has licensed its applications
software to others (including SAP or TN) to provide third party maintenance. Moreover, in this
case, the very Oracle executives who would have made such a licensing decision testified, under
oath, that Oracle never would have granted such a license to Defendants.
For these reasons, Plaintiffs cannot carry their burden of proving that the parties would
have agreed to a hypothetical license for the allegedly infringing activities but for the alleged
infringement. Because there is no genuine issue of material fact regarding Plaintiffs’ hypothetical
license claim, the Court should grant Defendants’ motion for partial summary judgment.
D. Plaintiffs Are Not Entitled to a Hypothetical License Based on “Saved
Acquisition Costs” Because this Theory Is Inconsistent with the Copyright
Act and Ninth Circuit Precedent.
Plaintiffs’ executives’ testimony and Supplemental Disclosures suggest that Plaintiffs may
try to support their hypothetical license claim by relying on the “saved acquisition costs” theory
conceived by the Seventh Circuit in Deltak, Inc. v. Advanced Sys., Inc., 767 F.2d 357 (7th Cir.
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1985). The Court should not countenance that argument. Deltak’s “saved acquisition costs”
theory is inconsistent with the Copyright Act and Ninth Circuit precedent because it is not a
measure of actual damages or infringer’s profits, and it has been expressly rejected by many
courts. Ultimately, Deltak’s “saved acquisition costs” theory is an outlier—neither the Ninth
Circuit nor any other appellate court besides the Seventh Circuit has ever adopted this theory as a
measure of damages. Therefore, it cannot support Plaintiffs’ hypothetical license claim.
In Deltak, the Seventh Circuit permitted the plaintiff to recover the “value of use” of
marketing materials infringed by a direct competitor. 767 F.2d at 361. Rather than focusing on
the harm to the plaintiff, the court measured the “value of use” by the defendant’s “saved
acquisition costs”—that is, the amount the defendant saved by infringing rather than acquiring the
underlying copyrights. Id. at 361-63. The court claimed that “saved acquisition costs” were
“simply an application” of the Ninth Circuit’s “value of use” actual damages measured by what a
“‘willing buyer’” would have paid a “‘willing seller.’” Id. at 360-62 (quoting Krofft, 562 F.2d at
1174). In reality, the court went well beyond the Ninth Circuit’s “value of use” concept and
adopted a novel theory that allowed disgorgement of the defendant’s purported saved costs,
unconstrained by the requirement of causation between infringement and alleged harm. See id.
In so doing, the court permitted recovery where no other remedy, including statutory damages,
was available. Id. at 359-60.
Deltak’s mutation of “value of use” damages contravenes the plain text of the Copyright
Act, which sets specific remedies for infringement. Contrary to the Seventh Circuit’s suggestion,
“saved acquisition costs” cannot qualify as “actual damages suffered by” the plaintiff, 17 U.S.C.
§ 504(b), because they measure an alleged benefit to the infringer, not harm to the copyright
owner. Nor does this form of benefit to the infringer qualify as infringer’s profits. The Copyright
Act only allows recovery of infringer’s profits “that are attributable to the infringement,” 17
U.S.C. § 504(b), which refers not to any “gain in economic theory,” but rather to “a more
conventional view of profits” as “gross revenue less out-of-pocket costs.” Business Trends, 887
F.2d at 405-06; see also 17 U.S.C. § 504(b) (“In establishing the infringer’s profits, the copyright
owner is required to present proof only of the infringer’s gross revenue . . . .”). In short, “saved
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acquisition costs” are neither actual damages nor infringer’s profits under the Copyright Act.
Deltak’s “saved acquisition costs” measure is also inconsistent with Ninth Circuit law.
This Circuit allows a hypothetical license only as a measure of actual damages, not as a measure
of ill-gotten gain to the defendant. See, e.g., Polar Bear, 384 F.3d at 709; Krofft, 562 F.2d at
1174. In addition, and consistent with the Copyright Act, actual damages and infringer’s profits
in the Ninth Circuit require “but for” causation, see Polar Bear, 384 F.3d at 708, which Deltak
ignores by permitting damages even where the infringement resulted in no lost license.
The “saved acquisition costs” remedy is also at odds with Congressional intent. The
Deltak court applied this remedy because it was troubled by the seemingly inequitable prospect of
awarding no damages to the plaintiff, which could not prove actual damages or infringer’s profits
and had failed to satisfy the requirements for statutory damages. See Deltak, 767 F.2d at 361. As
a result, “saved acquisition costs” effectively served as a “floor” for copyright damages,
analogous to a reasonable royalty in patent law, where causation is simply assumed and the only
question concerns the amount of the award. This is an unauthorized departure from the exclusive
remedies permitted by the Copyright Act and contravenes Congressional intent. Previously,
under the 1909 Copyright Act, statutory damages were available in all actions, regardless of
registration requirements, and therefore acted as a floor for copyright damages. See Copyright
Act of 1909, formerly 17 U.S.C. § 101(b). However, under the 1976 Act, Congress deliberately
excluded the recovery of statutory damages for unregistered copyrights in order to induce, “in
some practical way,” copyright registration. 17 U.S.C. § 412, Notes of Committee on Judiciary,
H.R. No. 94-1476. It left open the possibility that a plaintiff who failed to meet the standards set
out for obtaining statutory damages may be foreclosed from seeking a remedy that was otherwise
available to it. See id. Thus, the Deltak court’s creation of an effective floor for recovery in
copyright, where such a floor was deliberately removed by Congress, constitutes an attempt to
legislate, which is improper even when done “to avoid the anomaly of affording plaintiffs a right
without a remedy.” Business Trends, 887 F.2d at 406 (quotation omitted).
No Ninth Circuit case has adopted Deltak’s flawed “saved acquisition costs” theory. In
fact, the Ninth Circuit has favorably cited the opinion of the district court, which declined to
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award damages because of the Deltak plaintiff’s inability to prove that the defendant’s infringing
activities caused it harm. See Polar Bear, 384 F.3d at 715. Only one district court in the Ninth
Circuit has ever cited the Seventh Circuit opinion, and it did so simply for the “value of use”
concept, for which it also cited the Ninth Circuit’s Krofft and Frank Music decisions. See Harper
House, Inc. v. Thomas Nelson, Inc., No. CV 85-4225-PAR, 1987 WL 30581 (C.D. Cal. Aug. 28,
1987), rev’d on other grounds by 889 F.2d 197 (1989). In that case, the court measured value of
use based on a hypothetical license, which it held focuses on “the harm to plaintiff” and is not “a
proxy for measuring a defendant’s ill-gotten profits.” Id. at *3 (citing Krofft, 562 F.2d at 1174).
Similarly, although other courts outside the Seventh Circuit have cited Deltak for the
proposition that “value of use” is an appropriate measure of actual damages, the vast majority of
courts have declined to adopt Deltak’s “saved acquisition cost” remedy. Some courts have
expressed doubts about the validity of the theory. See, e.g., Quinn v. City of Detroit, 23 F. Supp.
2d 741, 751 (E.D. Mich. 1998) (“[T]he rationale of Deltak has been criticized by other courts and
by Nimmer.”); Multitherm Corp. v. Fuhr, Civ. A. No. 89-6151, 1991 WL 146233, at *14 (E.D.
Pa. July 24, 1991) (“[I]t is not at all clear that the copyright statute allows for damages measured
in [Deltak’s] fashion.”). Other courts have expressly rejected Deltak’s attempt to cast “saved
acquisition costs” as a measure of actual damages or infringer’s profits. See, e.g., Business
Trends, 887 F.2d at 405-06 (declining to award “saved acquisition cost[s]” because “entirely
hypothetical sales” between competitors were “speculative and artificial”); Encyclopedia Brown
Prods., 25 F. Supp. 2d at 401-02; Thoroughbred Software Int’l, Inc. v. Dice Corp., 439 F. Supp.
2d 758, 771-72 (E.D. Mich. 2006), aff’d in part, rev’d in part, vacated in part, and remanded by
488 F.3d 352 (6th Cir. 2007). Most courts that cite Deltak for the traditional “value of use”
concept do not even discuss the “saved acquisition costs” theory. See, e.g., Thornton v. J Jargon
Co., 580 F. Supp. 2d 1261, 1276-78 (M.D. Fla. 2008); Steven Greenberg Photography v. Matt
Garrett’s of Brockton, Inc., 816 F. Supp. 46, 49 (D. Mass. 1992). The Second Circuit took this
approach in On Davis by holding that Business Trends’s rejection of Deltak “[did] not foreclose”
actual damages based on a hypothetical license theory. On Davis, 246 F.3d at 163.
Ultimately, Deltak’s “saved acquisition costs” language has been adopted by only one
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court outside of the Seventh Circuit, and that court adopted it as a measure of infringer’s profits
(not actual damages) where the parties were not competitors. See Roeslin v. District of Columbia,
921 F. Supp. 793, 796, 799 (D.D.C. 1995). “Saved acquisition costs” are an improper measure of
copyright damages, and this theory cannot save Plaintiffs’ illegitimate hypothetical license claim.
IV. CONCLUSION
Where, as here, the undisputed evidence demonstrates that the parties never would have
agreed to a copyright license for the allegedly infringed works, summary judgment should be
granted to preclude a plaintiff’s claim to damages in the form of a hypothetical license. Any
other result would allow a plaintiff to present speculative evidence—including its own unilateral,
speculative demands for billions of dollars—regarding the terms of an agreement that never could
have, or would have, occurred, in the hopes that a jury might find the story sympathetic enough to
agree. This is not a rational approach for measuring copyright damages, and it is not one
permitted by either the Copyright Act or prevailing case law. On the undisputed facts of record
here, a damages theory based on a hypothetical license, including one based on alleged “saved
acquisition costs,” is forbidden because it is inconsistent with the Copyright Act and Ninth Circuit
precedent. For all of these reasons, Defendants respectfully request that the Court grant partial
summary judgment that Plaintiffs are not entitled to damages in the form of a hypothetical license.
Dated: August 26, 2009
JONES DAY
By: /s/ Tharan Gregory Lanier
Tharan Gregory Lanier
Counsel for Defendants
SAP AG, SAP AMERICA, INC., and
TOMORROWNOW, INC.
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