[00:00:00] Speaker 04: Final case for argument this morning is 24-1996, 4DD Holdings versus United States. [00:00:11] Speaker 04: You guys are good morning. [00:00:13] Speaker 04: Please proceed. [00:00:14] Speaker 00: Good morning. [00:00:14] Speaker 00: Thank you, Your Honor. [00:00:15] Speaker 00: May it please the court, Dan Geyser for 4DD. [00:00:18] Speaker 00: Contrary to the trial court's view, there was no need to conduct a hypothetical negotiation when the party's actual negotiation established a real-world value of 4DD software. [00:00:27] Speaker 00: On three separate occasions, the parties established a relevant pricing in a free and fair market, negotiating at arm's length and doing so against the backdrop of a planned worldwide deployment of cutting-edge software designed to solve a billion-dollar problem. [00:00:41] Speaker 03: Let's just assume we disagree with that argument. [00:00:44] Speaker 03: What's your backup argument for reversing or vacating the damages award? [00:00:50] Speaker 03: And what should we instruct the trial court to do if we think that, for instance, looking at the quick termination was improper? [00:01:00] Speaker 03: I'm concerned here. [00:01:03] Speaker 03: You can make that other argument to my colleagues, but I'm not buying that argument. [00:01:08] Speaker 03: There's no way. [00:01:09] Speaker 03: That would be a huge windfall to your company. [00:01:11] Speaker 03: It would not be consistent with the Fifth Amendment purpose of getting the value of your property. [00:01:17] Speaker 03: You're not going to convince me that you get actual license fees for every single multiple copy. [00:01:24] Speaker 03: What is, if we're going to send this back, what are the boundaries or what needs to be re-examined by the trial court? [00:01:34] Speaker 00: Sure. [00:01:35] Speaker 00: And I'm going to give the backup argument, but I do hope I get a chance to try to convince you of our primary argument. [00:01:42] Speaker 04: So don't worry. [00:01:43] Speaker 04: And we've got limited time. [00:01:44] Speaker 04: So go to the back. [00:01:45] Speaker 00: Well, the backup argument, the trial court committed multiple errors, both at a high level and also at a granular level. [00:01:51] Speaker 00: I think the easiest ones to understand are they first [00:01:53] Speaker 00: said that the parties would have negotiated for a developmental license instead of a production license. [00:01:58] Speaker 00: That's contrary to the actual government's preference at every single stage of this case. [00:02:03] Speaker 04: Can I just ask you about that? [00:02:04] Speaker 04: Was this a developmental license or a production license? [00:02:06] Speaker 04: Because I'm confused. [00:02:08] Speaker 04: Some of those charts talk about developmental license. [00:02:11] Speaker 04: Was this clearly a production license versus a dependent license? [00:02:15] Speaker 00: Your Honor, it absolutely was, and there's a very easy way to understand that. [00:02:19] Speaker 00: There is no development license in the real world. [00:02:21] Speaker 00: It's a product that 4DD would have had to create in order to sell it to the government. [00:02:25] Speaker 00: So it was contemplated at various stages of the negotiating process, but 4DD never had a development license. [00:02:33] Speaker 00: The government needed a production license to make sure that they could deploy the software right away. [00:02:38] Speaker 00: It's also essential for properly debugging the software and making sure it's operational. [00:02:42] Speaker 00: You can't have the software that doesn't do what it needs to do. [00:02:45] Speaker 00: If there are any bells and whistles that are turned off, they could deploy it and find out it doesn't work. [00:02:49] Speaker 02: To agree with you on that, we'd have to find clear error after the two-week bench trial on this point, would we not? [00:02:55] Speaker 02: You would, Your Honor, but these are clear legal areas. [00:02:58] Speaker 02: How would we find that clear? [00:02:59] Speaker 00: Well, they're legal and logical areas. [00:03:01] Speaker 00: I do want to make sure that this is clear. [00:03:03] Speaker 00: Some things are factual findings. [00:03:05] Speaker 00: Some things are more legal in nature. [00:03:07] Speaker 00: And so that would be a more of a general overview. [00:03:09] Speaker 02: How about development versus production license? [00:03:11] Speaker 02: That seems factual to me. [00:03:13] Speaker 00: This is one of the factual areas. [00:03:15] Speaker 00: But again, I think the easiest way to find it is that the parties at every relevant stage in the actual negotiations in the actual real world negotiated for a production license. [00:03:24] Speaker 00: But even if you set that aside, I'll give you an even... [00:03:29] Speaker 03: circumstances change so dramatically from the facts that underlay the actual negotiations, how can we assume that the government, if it would have known that its contractor was going to make these multiple orders of magnitude above what they thought they were going to do, copies, that it wouldn't have insisted on some development licenses and some production licenses? [00:03:55] Speaker 00: Well, Your Honor, I'm glad you brought that up because this is one of the legal errors instead of the factual errors. [00:03:59] Speaker 00: The hypothetical negotiation under this court's clear precedent has to take place from an ex ante perspective. [00:04:05] Speaker 00: So the question is, ex ante, what would the government have wanted to do? [00:04:08] Speaker 00: And the government wanted to do exactly what they ended up doing. [00:04:11] Speaker 00: When the contractor made these copies, it wasn't someone mindlessly sort of hitting a mouse button and replicating the software. [00:04:18] Speaker 00: This was by design. [00:04:19] Speaker 00: It was in order for the government to rapidly test and deploy the software. [00:04:23] Speaker 00: And the subcontractor did this, by the way, with the government's approval. [00:04:27] Speaker 00: And I think these are all findings directly in the court's own opinion. [00:04:31] Speaker 04: Does this bleed into this book of wisdom issue? [00:04:34] Speaker 04: It does, Your Honor. [00:04:38] Speaker 04: Assuming the court below went too far, is this a formulation of how we would use it, which is we allow reliance on post-infringement data only in limited circumstances, where post-infringement data can form the fact-finder about the party's negotiation procedures at the time of the hypothetical negotiation. [00:05:01] Speaker 04: That's allowed, right? [00:05:02] Speaker 04: You're not saying that's not allowed. [00:05:04] Speaker 04: You're just saying that you can't use it in a way that would contradict the expectation-based principles of the hypothetical negotiation. [00:05:14] Speaker 00: Well, I want to make sure I answer the question, so tell me if I'm not. [00:05:18] Speaker 00: But the way we look at it is the parties are supposed to be put back in the position that they occupied before the first act of infringement, which means in this case, and I think this shows some of the legal errors that the trial court made. [00:05:30] Speaker 00: that they presumed, according to the trial court, they presumed that this project would not work, that the government, in fact, would terminate 4DD, that, in fact, it would never enter to a full production and deployment. [00:05:42] Speaker 00: Those are all things that didn't. [00:05:44] Speaker 04: Well, I'm not sure. [00:05:44] Speaker 04: Did the court actually say the parties at the time would have known that? [00:05:48] Speaker 04: Or he just said, because it happened, we can consider it under the Book of Wisdom. [00:05:52] Speaker 00: He said, because it happened, then I'll take that into account in the hypothetical negotiation. [00:05:56] Speaker 00: But that's letting parties sort of spin the roulette wheel, see if it lands on red or black, and then decide how to bet. [00:06:01] Speaker 00: That's not the way the Book of Wisdom works. [00:06:03] Speaker 04: Okay, but it does have some applicability here, right? [00:06:07] Speaker 04: Even if you go back to the time in negotiation and people are looking at future expectations, which they're allowed to do if they're negotiating a long-term license that's humongous, right? [00:06:17] Speaker 04: So they can consider how certain their needs would be in the future. [00:06:22] Speaker 04: and things that might happen in the future that might dislodge the rate that they would agree to precisely at the time of the negotiation, right? [00:06:30] Speaker 00: Your Honor, but without knowing how those events would actually play out. [00:06:34] Speaker 00: So what the government could do is use that. [00:06:37] Speaker 04: I'm sorry to interrupt, but can the speculativeness of going forward inform the negotiation at the time? [00:06:44] Speaker 00: in the very way that it actually did in the real world here. [00:06:47] Speaker 00: I mean, the government was negotiating with 4DD knowing this project could work or not. [00:06:50] Speaker 00: This was a potential solution to a billion-dollar problem, which again is why I think, Judge Hughes, this is not a windfall. [00:06:56] Speaker 00: This is a critical component. [00:06:58] Speaker 04: But they didn't negotiate. [00:06:58] Speaker 04: The first license was, relatively speaking, for a minuscule number of cores and for a minuscule amount of money, relatively speaking. [00:07:06] Speaker 04: And so they weren't [00:07:07] Speaker 04: at that time deciding how should we spend the $5 billion over the next five or 10 years for thousands and thousands and hundreds of thousands of this. [00:07:16] Speaker 00: Fair enough, Your Honor. [00:07:17] Speaker 00: But the true up, at that point the government was negotiating against the backdrop of having committed massive infringement and having used the same software in the same fashion, knowing exactly how they were using it and whether it would work or not. [00:07:28] Speaker 00: And they still said that the fair market value of this software is the discounted rate that they did in the original contract. [00:07:35] Speaker 00: And to take you back to the list price, I think this is really important. [00:07:38] Speaker 00: The government itself certified 4DD's pricing, both at the retail and sort of the wholesale level. [00:07:43] Speaker 00: as fair and reasonable, commercially fair and reasonable in a free and fair market before any of this took place. [00:07:50] Speaker 00: I think part of the misperception here is that the government and my friend on the other side has done a nice job trying to paint 4DD sort of a small company and it seems a little unusual they come and have these sort of demands. [00:08:02] Speaker 00: 4DD beat out IBM, Oracle, SAP. [00:08:06] Speaker 00: If IBM came up to this court and said the government- For the small contract, for the short-term small contract. [00:08:11] Speaker 00: But they were negotiating, though, anticipating a worldwide deployment over a series of years to solve one of the key health- But the actual negotiation, you can't say because they entered into this particular contract, [00:08:23] Speaker 04: That necessarily means that the contract would have been the same or your client would have been involved for the kind of global contract that we're talking about going forward. [00:08:32] Speaker 00: Our client was selected to provide that key interoperability component for this exact program, for this billion dollar program. [00:08:39] Speaker 00: So again, the prices were certified by the government itself, ex ante, as fair and reasonable. [00:08:44] Speaker 00: So I do think that that should inform, if anything, at least the hypothetical negotiation. [00:08:48] Speaker 00: I don't think we should have a situation where the hypothetical negotiation says the parties would have done the opposite of what they actually did in the real world. [00:08:57] Speaker 00: I do want to give you the gist in case, though, because I'm happy to go back to our primary arguments. [00:09:02] Speaker 02: I actually think that is the right- Stay here a little bit longer, at least. [00:09:05] Speaker 02: Sure. [00:09:06] Speaker 02: Again, there were damages experts at the trial. [00:09:09] Speaker 02: You presented all of this to the district court, and the district court thought on the merits that here's how the hypothetical negotiation would go, and the government would have all the leverage, et cetera. [00:09:25] Speaker 02: It just seems like you're just trying to re-argue the facts again here. [00:09:29] Speaker 02: No, Your Honor. [00:09:30] Speaker 00: And again, it depends and I admit it's a little hard because we think that the trial court made multiple errors and some are legal, some are factual. [00:09:36] Speaker 00: Now, when the trial court said something like, the government would have exercised extreme leverage and forced 4DD's hand, then the question is, why didn't the government exercise that leverage in the actual negotiations? [00:09:47] Speaker 00: That should have driven down the price, but it didn't. [00:09:49] Speaker 00: They did negotiate with leverage, and that's why they got the price. [00:09:51] Speaker 00: If they did, they got a discount from the list price. [00:09:54] Speaker 00: Now, I do want to bring up a key factual point where I think the trial court is wrong, because this is an important difference to the outcome, and I think it's easy to kind of wrap our heads around. [00:10:03] Speaker 00: The trial court said that 4DD would have provided the same discount formula on the developmental license that it did on a production license. [00:10:12] Speaker 00: The record evidence shows that is flatly untrue. [00:10:14] Speaker 00: If you go to the pricing exercise at every single quote where 4DD had a production license and a developmental license, [00:10:21] Speaker 00: You can see as the quantities went up on a production license, the price went down. [00:10:25] Speaker 00: As the quantities went up on a development license, it was static. [00:10:30] Speaker 00: The development license price was 10% of the production license price. [00:10:34] Speaker 00: That was the discount. [00:10:35] Speaker 00: There is no evidence at all. [00:10:36] Speaker 00: Literally, there's nothing in the record that would support the government's expert's position that the trial court wrongly credited that somehow 4DD suddenly would have driven down a 90% deduction even lower than that. [00:10:50] Speaker 00: In fact, the record showed the opposite. [00:10:52] Speaker 02: One more. [00:10:53] Speaker 02: Georgia-Pacific factor 11 is the extent to which the infringer has made use of the invention. [00:11:00] Speaker 02: I think you agreed there should, well, if we think there should be a Georgia-Pacific analysis here, doesn't that mean at the hypothetical negotiation the parties would have some understanding that the government really wasn't in the end of the day going to use your copyrighted property? [00:11:19] Speaker 00: Your Honor, I think if you read Georgia-Pacific, it's requiring that here the court is inviting a square conflict with the Sixth Circuit and the Ninth Circuit. [00:11:26] Speaker 00: The copyright statute protects copying, not use. [00:11:30] Speaker 00: So it's the government's copying that infringes four duties rights and activates right to compensation. [00:11:35] Speaker 00: Now, I don't think you even need to get into the Georgia-Pacific factors, because again, that's trying to ask the question, what contract would the parties have negotiated had they negotiated before the first act of infringement? [00:11:46] Speaker 00: That's a very strange question to act when here the parties did negotiate a contract before the act of infringement. [00:11:52] Speaker 00: They had three separate data points, each negotiated in a fair market at arm's length, and there is no indication at any point that the government said, you know what, we may not use this, so let's drive down the price. [00:12:04] Speaker 04: Just for clarification, I mean, there's so many issues in this case, I may be mixing them up. [00:12:09] Speaker 04: But when you say a conflict between the Sixth and the, what other circuit? [00:12:13] Speaker 04: The Ninth Circuit. [00:12:13] Speaker 04: The Ninth Circuit. [00:12:15] Speaker 04: If we were to read our opinions in Gaylord, mainly Gaylord Three, I think, as not being limited to licenses between parties other than the ones here, [00:12:27] Speaker 04: Would that in and of itself create the conflict? [00:12:30] Speaker 04: Is that the conflict you're talking about? [00:12:31] Speaker 00: No, I was talking about they're actually they're multiple potential conflicts, unfortunately. [00:12:35] Speaker 00: But I think I was referring to the conflict saying if you don't credit compensation for unused copies. [00:12:41] Speaker 02: The Sixth Circuit said in a square... Address that argument in our latest bit management opinion and reject it. [00:12:46] Speaker 00: No, no, no. [00:12:47] Speaker 00: Actually, it came out exactly the opposite way. [00:12:48] Speaker 00: Bit management basically credited the six and nine circuits of use, but on the facts of that case, they had a license that governed use. [00:12:56] Speaker 00: It didn't govern copies. [00:12:58] Speaker 00: And so bit management actually contrasted that situation with what effectively is this situation. [00:13:03] Speaker 00: If you have a license that doesn't govern use, but instead governs copies, which is exactly what we have here, then bit management would have come out the opposite way. [00:13:11] Speaker 00: I see him in my rebuttal time. [00:13:14] Speaker 00: Thank you. [00:13:16] Speaker 00: Thank you. [00:13:16] Speaker 00: Thank you. [00:13:17] Speaker 00: All right, thank you. [00:13:25] Speaker 01: Good morning, Your Honors, and may it please the court. [00:13:28] Speaker 01: The court should affirm the Court of Federal Claims well-reasoned judgment that rejected 40D's multi-billion dollar established royalty theory. [00:13:39] Speaker 01: It was neither comparable to the infringement in this case, and it wasn't commercially established. [00:13:47] Speaker 01: With respect to the hypothetical negotiation, the Court of Federal Claims use of a hypothetical negotiation framework is supported by this court's precedent. [00:13:56] Speaker 03: So I'm going to invite you to do the same thing that I tried to invite your opposing counsel to do. [00:14:02] Speaker 03: I'm not sure he gave me his answers in. [00:14:06] Speaker 03: I'm not buying the argument that it has to be the actual license fee. [00:14:10] Speaker 03: And I think the hypothetical negotiation was correct. [00:14:13] Speaker 03: But I'm a little concerned about some of the facts that Judge Bruging, and he did, I mean, Judge Bruging, great. [00:14:21] Speaker 03: He did a thorough job on this case. [00:14:23] Speaker 03: I'm glad I wasn't the trial judge on this case. [00:14:25] Speaker 03: It was very, very difficult. [00:14:27] Speaker 03: But in particular, the use of the fact that this contract ended very early seems to me to be the kind of ex ante stuff you wouldn't normally put into a hypothetical negotiation. [00:14:38] Speaker 03: And if I find at least that was a error, what do you think this case would look like if we send it back for a remand? [00:14:46] Speaker 01: So Your Honor, we believe, we contend, that the court's use of the Book of Wisdom to determine the value of use is completely in accordance. [00:14:55] Speaker 03: No, I understand that. [00:14:55] Speaker 03: But I'm starting from the premise that certainly the Book of Wisdom is allowed, but the wisdom he allowed is perhaps too much wisdom. [00:15:05] Speaker 03: And particularly that one point, I really would struggle with the fact that you're allowed to consider that the parties would have known this was going to end really early. [00:15:15] Speaker 03: in the hypothetical negotiation. [00:15:17] Speaker 03: That seems to me to be too much and not included within the more narrow book of wisdom. [00:15:24] Speaker 03: So we have to reverse and say you can't consider that. [00:15:28] Speaker 03: How would the case play out from there? [00:15:31] Speaker 01: Well, can I take the first part first, which is we acknowledge that there is this philosophical debate as far as how far the book of wisdom can extend and whether it can shed light on what is already known to the parties or whether, as is stated in Fromson, it can [00:15:48] Speaker 01: completely come in and bring in new facts. [00:15:51] Speaker 01: Here, especially with respect to the short-term nature of this project, the court acknowledges that the entire DMICS project was always going to be a stopgap solution, something that would get DHA from [00:16:09] Speaker 01: basically the short term to the long term. [00:16:11] Speaker 01: So this Tetra Federator software, that was simply one small component of the entire short term project. [00:16:20] Speaker 04: So I think, and I don't know if Judge Hughes, this is his thought, I don't think we need to suggest that they couldn't look at what the duration, the scope, [00:16:32] Speaker 04: of going forward would be, was in the minds of the negotiators at the time. [00:16:39] Speaker 04: But at least I think that's different from what Judge Hughes pointed out in terms of what the court of federal claims did in this case. [00:16:47] Speaker 04: Just take this subsequent fact and put it onto the negotiation. [00:16:53] Speaker 01: Your Honor, I think this all plays into how the court ruled with respect to the value of use. [00:16:59] Speaker 01: And even if the court disagrees with how far the court of federal claims stretched to use the book of wisdom with respect to this one particular fact, the standard here is abuse of discretion. [00:17:16] Speaker 01: And this is simply one fact, and the court just needs to ask whether the court's decision was supported by other facts in the record. [00:17:27] Speaker 03: OK, I understand those arguments, and I'm happy to let you keep making them if you want to. [00:17:34] Speaker 03: They're in your brief. [00:17:36] Speaker 03: The whole point of my question is, presuming we disagree with you in this case is going back, this was messy. [00:17:42] Speaker 03: It's going to be messy. [00:17:44] Speaker 03: I don't want to overly frustrate Judge Bruggen by just saying try again. [00:17:47] Speaker 03: If we have to send it back, I'm not saying we're going to, but if we have to, what [00:17:53] Speaker 03: do you think would help correct at least what I think are some errors in the way he used the Book of Wisdom? [00:17:59] Speaker 01: Your Honor, I think if this was going to be sent back. [00:18:04] Speaker 03: I'm not asking you to concede. [00:18:06] Speaker 03: I'm just asking you to give us some advice to give Judge Brugink clear directions on what has to be done. [00:18:14] Speaker 03: Because I'm sure if we just say, err, try again, he's going to be really, really frustrated with us, and rightfully so. [00:18:23] Speaker 03: So I think if we send it back, we have to give him, here's what we find incorrect and some guidance on how to make sure that those errors aren't repeated. [00:18:35] Speaker 01: I acknowledge that, Your Honor, but the problem is that the court's precedent has been messy as well, too. [00:18:41] Speaker 03: You're not going to answer my question, right? [00:18:43] Speaker 03: I'm getting frustrated with you, too, and I understand you want to say we should just affirm. [00:18:49] Speaker 03: Start from the premise, we are not going to affirm. [00:18:52] Speaker 03: We are going to send this back. [00:18:53] Speaker 03: What is the government's fallback best position on what we tell the court to do when we send this back? [00:19:01] Speaker 01: are positioned, if you were to send it back, would be that the court should still reach the same conclusion with respect to the value of use. [00:19:10] Speaker 01: Because it was always known that this was going to be a stopgap solution. [00:19:17] Speaker 04: Is it your answer that there's other evidence in the record that perhaps the court of federal claims did not call out that would support not looking backwards, but what the reasonable expectations were at the time the license was engaged in? [00:19:32] Speaker 01: Yes, Your Honor. [00:19:35] Speaker 02: Can we see any of that evidence in its actual opinion, or do you concede that that's not what the court of federal claims relied on, at least in this opinion? [00:19:44] Speaker 01: Yes, you can see it in its opinion, Your Honors. [00:19:47] Speaker 01: On Appendix 19, that's where the court talks about how the DMICS program was going to be a stopgap solution to get to the dim sum program. [00:20:00] Speaker 01: That's in the facts section. [00:20:04] Speaker 01: On page A22, the court talks about how all the parties knew that a very serious development effort was necessary before this could even be put in production. [00:20:15] Speaker 01: This was all known to both parties before the hypothetical negotiation. [00:20:19] Speaker 04: But he didn't call back on these facts in his conclusion. [00:20:23] Speaker 01: Not expressly. [00:20:25] Speaker 01: No, you're wrong. [00:20:25] Speaker 04: Can I ask you another question that's kind of related to the Book of Wisdom, which is what the Court of Federal Claims. [00:20:32] Speaker 04: It's finding that the government would have negotiated for a development license. [00:20:39] Speaker 04: Can you explain the difference between production and development and how he reached the conclusion they would have only negotiated for a development license? [00:20:48] Speaker 04: I'm just confused about that issue. [00:20:49] Speaker 01: Sure, Your Honor. [00:20:50] Speaker 01: So the best source for learning about the difference between production licenses and development licenses is appendix page 20994. [00:21:00] Speaker 01: And what 4DD said in this particular email, and this email was sent. [00:21:05] Speaker 01: Well, this is the email, OK. [00:21:06] Speaker 01: Yes, this is the email that was sent during the context of the DMICS competition. [00:21:12] Speaker 01: So they were competing against other people for the government's business. [00:21:16] Speaker 01: What they say there is that development licenses enable the user to process or to do development on the software and to process development data, whereas a production license can do both development and production. [00:21:33] Speaker 01: So it's really, if you think about, for example. [00:21:36] Speaker 01: But this was a production license. [00:21:38] Speaker 01: What they had engaged in was a production license. [00:21:40] Speaker 01: That's what the license purchase was for in 2013. [00:21:43] Speaker 01: Not a development license. [00:21:45] Speaker 01: That's correct. [00:21:46] Speaker 01: That's correct. [00:21:46] Speaker 01: But the development licenses were quoted during the DMICS competition. [00:21:50] Speaker 01: We cite the different quotes. [00:21:53] Speaker 01: They were considered by the agency in the context of the DMICS competition. [00:21:58] Speaker 01: Development licenses were always something that was relevant. [00:22:01] Speaker 04: But what the government improperly copied here, and there's no dispute, was production copies of the software. [00:22:07] Speaker 01: Well, that's a distinction between licenses and actual software. [00:22:11] Speaker 01: If you think about Microsoft Word, Microsoft will sell you a student version of Word or a business version of Word. [00:22:17] Speaker 01: And it's the same software. [00:22:19] Speaker 01: It's just licensed under different licenses. [00:22:22] Speaker 04: But at the time of the hypothetical negotiation, were both parties under the impression that the Tetra would be used for purposes of fixing the government's inoperability problem? [00:22:33] Speaker 01: Yes, that's correct, Your Honor. [00:22:34] Speaker 01: And that's the distinction between an actual negotiation. [00:22:37] Speaker 04: And no one knew at the time of the hypothetical negotiation that the government would abandon using their software, right? [00:22:45] Speaker 01: That's correct, Your Honor. [00:22:48] Speaker 01: But that's the distinction between an actual negotiation and a hypothetical negotiation. [00:22:53] Speaker 04: But you're saying the hypothetical negotiation, the Court of Federal Claims said it would be exclusively developmental licenses. [00:23:00] Speaker 01: That's correct. [00:23:02] Speaker 01: And that's because that's all the agency ever used the software for. [00:23:06] Speaker 01: That's completely in line with the Gaylord case, where in Gaylord, what had happened is the Postal Service had [00:23:14] Speaker 01: created a lot of postage stamps, 87 million. [00:23:18] Speaker 01: And then it wasn't even known when the Postal Service retailed the stamps how those stamps would be used. [00:23:24] Speaker 01: Only after they were used by the end customer or retained [00:23:30] Speaker 01: was that the kind of use that this court said, look, you have to assign different royalties to it. [00:23:36] Speaker 01: And you have to award a royalty that best fits the value of use that becomes clear after the hypothetical negotiation. [00:23:45] Speaker 01: This is completely in line with what the court said in the Lucent case. [00:23:49] Speaker 01: In Lucent, the court said, yes, you can use the Book of Wisdom to see the extent of use. [00:23:57] Speaker 01: But that's only the first chapter in the Book of Wisdom. [00:24:00] Speaker 01: The next chapter, and this was discussed in Lucent, is you have to see [00:24:05] Speaker 01: how it was used, what kind of evidence or industry practices in the case of Lucent shed light on the value there. [00:24:15] Speaker 01: So what the trial court did here is completely in line with the Book of Wisdom use in Gaylord and with the Book of Wisdom use in Lucent. [00:24:25] Speaker 02: Where DD is arguing that there was clear error in the trial court's findings with respect to [00:24:33] Speaker 02: production versus development licenses and the discounts on the production licenses. [00:24:38] Speaker 02: Can you tell me why those were not clear factual errors? [00:24:41] Speaker 01: Yes, so with respect to the development versus production licenses, both licenses were quoted in the context of the DMICS competition. [00:24:51] Speaker 01: That's the email. [00:24:52] Speaker 01: That's the email, but there's also specific quotes there in the record as well too that say, [00:24:58] Speaker 01: Here's production cores, and here are development cores. [00:25:02] Speaker 01: So that was all part of what was offered to the government prior to the hypothetical negotiation. [00:25:08] Speaker 01: It certainly would have been in the minds of the negotiator. [00:25:11] Speaker 04: But the Court of Federal Claims said it was not a production license. [00:25:18] Speaker 04: It was exclusively a development license. [00:25:20] Speaker 01: That's correct. [00:25:21] Speaker 01: Because the program never entered production, Your Honor. [00:25:26] Speaker 01: The software was never used to process production data. [00:25:31] Speaker 01: The use by the agency was only for development purposes. [00:25:35] Speaker 02: And so with the hypothetical negotiation, the idea is the government would know that, I guess. [00:25:41] Speaker 02: I guess we're now bleeding into a book of wisdom, that they'd know they were never going to use it long enough to need a production license. [00:25:49] Speaker 02: That's at least the trial court's analysis. [00:25:50] Speaker 01: That's correct, Your Honor. [00:25:52] Speaker 01: And we would contend that that's completely consistent with Gate Ward management as well, too. [00:25:58] Speaker 01: Now, turning to the second part of your question of the additional discounts on top of the development licenses, the record is replete with qualitative statements that if the government [00:26:15] Speaker 01: made a big purchase, 4DD would make an incredible deal. [00:26:20] Speaker 01: Unprecedented discounts. [00:26:21] Speaker 01: And this is before the hypothetical negotiation, after the hypothetical negotiation. [00:26:27] Speaker 01: So it's these, sir. [00:26:28] Speaker 03: That's why they're not getting what they're asking for, which is the multiplying the actual rate across every copy. [00:26:35] Speaker 03: I mean, at least not for me. [00:26:37] Speaker 03: But I'm still a little confused about a lot of this stuff, including the production versus development, because it seems like [00:26:45] Speaker 03: In the actual agreement that was made, it was for production licenses. [00:26:50] Speaker 03: And so why would you necessarily assume in the hypothetical negotiation that [00:26:55] Speaker 01: Instead, it would have been all development licenses. [00:26:59] Speaker 01: That was within the court's discretion to arrive at that decision. [00:27:03] Speaker 01: And it arrived at that decision by looking at how the government had actually used the software, just like Gatewayward, just like fit management. [00:27:12] Speaker 01: But as far as why there is an additional discount with respect to the development license. [00:27:16] Speaker 03: Is it because, I'm sorry, we don't do a lot of copyright cases, obviously. [00:27:21] Speaker 03: And this one, particularly with the government overlay, is difficult. [00:27:24] Speaker 03: Is it because? [00:27:26] Speaker 03: The book of wisdom allows you to consider how generally stuff would have played out, even if you can't look at really specific things that wouldn't have known, and that if the government, if the parties at the time had been negotiating with the idea that the only use of these licenses were going to be for development, they would have priced them lower. [00:27:49] Speaker 03: That's right, Your Honor. [00:27:50] Speaker 03: And why are you allowed to attribute the knowledge that they were only factually used for development in a hypothetical negotiation? [00:27:58] Speaker 03: Why isn't that improper ex ante knowledge? [00:28:02] Speaker 01: It's proper because the end destination for the trial court and for this court is to arrive at reasonable compensation. [00:28:09] Speaker 01: And like you say, there could be a windfall unless you allow the trial court to take in this future knowledge [00:28:18] Speaker 01: and look at how the parties would have negotiated a license in light of this future knowledge at the time of the hypothetical negotiation. [00:28:26] Speaker 01: So there could be windfall. [00:28:27] Speaker 01: You could undercompensate the plaintiff. [00:28:31] Speaker 01: It's this additional information from the future that can be brought in. [00:28:35] Speaker 01: and helps inform the hypothetical negotiation. [00:28:38] Speaker 04: And I don't think you finished answering maybe a question to Judge Stark about the double counting argument on the discount and the volume discount. [00:28:48] Speaker 04: And I don't understand why you would apply anything more. [00:28:51] Speaker 04: There's a 90% discount, right? [00:28:53] Speaker 04: And then on top of that, there was another discount that the Court of Federal Claims applied? [00:28:58] Speaker 04: That's right. [00:28:59] Speaker 01: That's correct, Your Honor. [00:29:01] Speaker 01: I'm not understanding the basis for having gotten there. [00:29:05] Speaker 01: Sure. [00:29:05] Speaker 01: So the volume discount formula was a formula that 4DD advertised and told the competitor or told the government that it applied to its products for purchases. [00:29:19] Speaker 01: It did not [00:29:21] Speaker 01: specifically say, we apply this formula to development licenses. [00:29:27] Speaker 01: But if you look at this court's precedent, such as in the Smith-Kline diagnostics case, which we cite in our brief, what that says is in the context of trying to arrive at reasonable compensation, a court need not [00:29:42] Speaker 01: cite to or anchor its decision in a particular offer. [00:29:48] Speaker 01: Oftentimes, a party will come in and say, we want a royalty of 1%. [00:29:51] Speaker 01: The other party says 5%. [00:29:53] Speaker 01: The court will say, well, it's 2% or 3%. [00:29:56] Speaker 01: And here's why it's 2% or 3%. [00:29:58] Speaker 01: It's the same thing here. [00:29:59] Speaker 01: 4DD walked in the door and they said, if the government makes a large purchase, we will give you an unprecedented deal. [00:30:10] Speaker 01: The trial court is allowed to take that at face value and apply their standard formula to the development license price. [00:30:22] Speaker 04: Assuming we have some trepidation about not allowing for a hypothetical negotiation, do you agree that even in discussing [00:30:35] Speaker 04: thinking about the hypothetical negotiation, an important aspect of that would include the actual license agreements that existed in the parties that already engaged it? [00:30:45] Speaker 01: Yes. [00:30:46] Speaker 01: On page 22 of our brief, we say those are absolutely relevant. [00:30:50] Speaker 01: The issue is really whether they are controlling or not. [00:30:55] Speaker 01: Thank you. [00:30:56] Speaker 01: Thank you. [00:30:59] Speaker 04: OK, we're going to give you three minutes of rebuttal because we went over it with the other side. [00:31:03] Speaker 00: Thank you, Your Honor. [00:31:04] Speaker 00: I'll start out by pointing out the government is, in fact, embracing an ex post negotiations directly contrary to this court's law. [00:31:11] Speaker 00: If you don't accept our original argument, it will create a direct circuit split. [00:31:15] Speaker 00: There's not a single court I'm aware of that says you depart from an actual agreement the parties have reached in setting the price. [00:31:19] Speaker 00: But if we are going to remand for redoing the hypothetical negotiation, I think there are a few clear points. [00:31:26] Speaker 00: There are three specific things I would instruct the judge to do. [00:31:29] Speaker 00: The first is presume that it is in fact a production license. [00:31:32] Speaker 00: That's what the government insisted upon at every turn. [00:31:34] Speaker 00: And importantly, during the true-up, the government did not say after engaging in massive infringement in the development process that the license should be repriced at a development license rate. [00:31:44] Speaker 00: It agreed that the production license rate applies. [00:31:46] Speaker 00: So I think that's clear evidence. [00:31:48] Speaker 00: The hypothetical negotiation doesn't say the parties do the opposite of what they actually did. [00:31:52] Speaker 03: That doesn't answer the question, though, of whether the production license would have stayed at the same rate if it had been at the same volume that they actually copied it at. [00:32:03] Speaker 00: Fair enough, Your Honor. [00:32:04] Speaker 00: I think the list pricing certified as fairly reasonable does that. [00:32:07] Speaker 00: But I take your point. [00:32:08] Speaker 00: But I think at least the court should start assuming it's a production license instead of a discount license or a development license. [00:32:14] Speaker 00: If you do disagree and you think it should be a development license, I think clearly the discount formula cannot apply to that. [00:32:21] Speaker 00: My friend did not give any record evidence that shows that 4DD, even when contemplating development licenses at scale, applied the discount formula on top of that. [00:32:31] Speaker 00: That was a clear error. [00:32:32] Speaker 00: There's no record evidence to support that. [00:32:34] Speaker 00: The third is I would instruct the court to take it into consideration all unused copies. [00:32:39] Speaker 00: Again, unless the court wants to create a direct circuit split with the 6th Circuit and the 9th Circuit, the unused copies add value. [00:32:46] Speaker 00: It made it easier for the government to replicate the software. [00:32:49] Speaker 00: If you look at the wall data pinned in from the 9th Circuit, it's the exact same scenario here. [00:32:54] Speaker 00: There, the government, and it was a government entity, there was the LA Sheriff's Department. [00:32:58] Speaker 04: Just to be clear, on the circuit split, weren't those cases involving multiple license agreements that show that there was a market rate, which is what led those circuits to that conclusion? [00:33:12] Speaker 04: So that's a different analysis that we would necessarily have to apply in this context. [00:33:16] Speaker 00: No, Your Honor. [00:33:17] Speaker 00: And just to be very clear, the Sixth Circuit case said two things. [00:33:20] Speaker 00: They said first, unused copies count. [00:33:22] Speaker 00: Second, apply the market agreement between the parties. [00:33:25] Speaker 00: They had an actual license between the two parties. [00:33:28] Speaker 00: That license rate applied to both the used and unused copies indistinguishably. [00:33:32] Speaker 00: So it would be creating a direct circuit split if the court does not take into account the unused copies. [00:33:38] Speaker 00: There are also three more general instructions I would give to the trial court. [00:33:43] Speaker 00: The first is, again, you have to take this into account ex ante. [00:33:47] Speaker 00: You cannot assume the project would have ended early. [00:33:50] Speaker 00: And in fact, as we cited in our brief, there's evidence that the government's own agent said, even during the true-up, that the project had promised there was no reason to think the 4DD solution wasn't in fact the solution. [00:34:01] Speaker 00: This, by the way, was not a stopgap solution in the sense that this was in fact a billion dollar program over a period of multiple years. [00:34:09] Speaker 00: I'd also instruct the court, if I may just go over ever so slightly, not to use Rhapsody as an alternative. [00:34:16] Speaker 00: Again, this is counterfactual. [00:34:18] Speaker 00: Rhapsody existed during the competition to decide what software would work. [00:34:22] Speaker 00: It didn't have the critical interoperability function. [00:34:25] Speaker 00: The trial court on his own terms said, I don't need to decide whether Rhapsody can actually serve the purpose that the government hired 4DD to accomplish. [00:34:35] Speaker 00: I'm just going to assume there is some alternative somewhere that does something, so I'm going to credit that to drive down the price. [00:34:40] Speaker 00: That logically doesn't make any sense. [00:34:43] Speaker 00: And the final point I would say is, again, not to presume counterfactual presumptions. [00:34:47] Speaker 00: Things like preferring a development license when the government insisted on a production license at every turn. [00:34:52] Speaker 04: Thank you. [00:34:53] Speaker 04: Thank you, Your Honor. [00:34:56] Speaker 04: That concludes our proceeding.