1. Austin ■ Boston ■ Northern California ■ Washington, D.C. Damages Analysis Innovention Toys, LLC v. MGA Entertainment, Inc. and Wal-Mart Stores, Inc. and Toys “R” Us, Inc. Case No. 07-6510 Steven B. Boyles, CPA/CFF/ABV, CVA, ASA

2. 2 Expert Qualifications Employment Partner, Hemming Morse, LLP Education Bachelor of Science in Accounting (University of South Florida) Credentials CPA, ABV, CVA, ASA Experience 15 years in public accounting 10 years in forensic accounting Employment Partner, Hemming Morse, LLP Education Bachelor of Science in Accounting (University of South Florida) Credentials CPA, ABV, CVA, ASA Experience 15 years in public accounting 10 years in forensic accounting

3. 3 Assignment Evaluate the damages suffered by Innovention related to the Defendants’ infringement of the ‘242 Patent

4. 4 Documents Considered

5. 5 Summary of Opinions

6. 6 Discussion Overview  Legal Framework for Patent Damages  Two Damages Periods  Damages Analysis  Lost Profits  Reasonable Royalty

7. 7 Legal Framework  Infringement Damages: Damages adequate to compensate for the infringement, but in no event less than a reasonable royalty. 35 U.S.C. § 284  Provisional Rights Damages: A reasonable royalty. 35 U.S.C. §154(d)(A)(i)

8. 8 Discussion Overview  Legal Framework for Patent Damages  Two Damages Periods  Damages Analysis  Lost Profits  Reasonable Royalty

9. 9 Two Damages Periods Provisional Rights Infringement Reasonable Royalty Lost Profits 10/18/06 Notice Letter (Ex 157) 9/4/07 Patent issues (Ex 1) Jan. 2010 End

10. 10 Discussion Overview  Legal Framework for Patent Damages  Two Damages Periods  Damages Analysis  Lost Profits  Reasonable Royalty

11. 11 Damages – Lost Profits (example) Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978) Demand ? Demand ? No Alternatives ? No Alternatives ? Capacity ? Capacity ? Profits Quantified ? Profits Quantified ? Lost Profits Lost Profits Reasonable Royalty Reasonable Royalty No Yes 1 2 3 4 Panduit 4 Factor Analysis

12. 12 Damages – Lost Profits (example) $3 Revenue $2 Costs Profit per Cup $1

13. 13 Damages – Lost Profits (example) 100 Buyers of Coffee Patented Recipe

14. 14 Damages – Lost Profits (example) Selling Coffee to only 40 Buyers Patented Recipe Infringing Recipe Selling Coffee to 60 Buyers Lost Sales = 60

15. 15 Damages – Lost Profits (example) Demand? Panduit Factor 1 - The existence of demand for the patented product; Assessment: The Demand Factor is satisfied as… 1)Coffee represents the patented invention, 2)Infringer using the infringing recipe, 3) 100 customers purchased the patented coffee (40 from patent owner + 60 from infringer).

16. 16 Damages – Lost Profits (example) Demand? No Alternatives? No Alternatives? Yes Panduit Factor 2 – There are no acceptable noninfringing alternatives; Assessment: The No Alternatives Factor is satisfied as… 1)It is deemed to be a “two-supplier” market.

17. 17 Damages – Lost Profits (example) Demand? No Alternatives? No Alternatives? Capacity? Yes Panduit Factor 3 – The patent owner has the capacity to meet demand through manufacturing and marketing capabilities; Assessment: The Capacity Factor is satisfied as… 1)The patent owner has the ability to make 100 cups of coffee, 2)The patent owner has the capability to market to those who want the product, 3)The patent owner has sufficient access to capital to expand.

18. 18 Damages – Lost Profits (example) Demand? No Alternatives? No Alternatives? Capacity? Quantifiable Profits? Quantifiable Profits? Lost Profits Yes Panduit Factor 4 – The patent owner is able to quantify the amount of profit it would have made. Assessment: The Quantifiable Profits Factor is satisfied as… 1)The patent owner has established that it’s profit per cup sold is $1.00, 2)The number of infringing units is known.

19. 19 Damages – Lost Profits (example) Calculation of Lost Profits:

20. 20 Damages – Lost Profits Innovention’s Lost Profits

21. 21 Damages – Lost Profits Buyers of Laser Games

22. 22 Damages – Lost Profits Innovention sold 83,860 Khet games during the Infringement Period. MGA sold 152,082 Laser Battle game units during the Infringement Period Total of 235,912 Game Buyers

23. 23 Damages – Lost Profits Calculation of Profits per Game (Khet):

24. 24 Damages – Lost Profits Calculation of Lost Profits (Khet):

25. 25 Damages – Lost Profits Demand? Panduit Factor 1 - The existence of demand for the patented product; Assessment: 1)Khet and Laser Battle represent the patented invention, 2)Defendants were selling Laser Battle which embodied the patented invention, 3)235,912 Khet and Laser Battle games were purchased. Factor 1 Satisfied

26. 26 Damages – Lost Profits Demand? No Alternatives? No Alternatives? Yes Panduit Factor 2 – There are no acceptable noninfringing substitutes; Assessment: 1)I am not aware of any acceptable, noninfringing substitutes, 2)Ami Shapiro (senior product designer for MGA) derives the same conclusion, 3)Two-Supplier Market. Factor 2 Satisfied

27. 27 Damages – Lost Profits Demand? No Alternatives? No Alternatives? Capacity? Yes Panduit Factor 3 – The patent owner has the ability to meet demand through manufacturing and marketing capabilities; Assessment: 1)Innovention had the ability to make additional units, 2)Innovention had the capability to market to those who wanted the product, 3)Innovention had sufficient access to capital to expand. Factor 3 Satisfied

28. 28 Damages – Lost Profits Demand? No Alternatives? No Alternatives? Capacity? Quantifiable Profits? Quantifiable Profits? Lost Profits Yes Panduit Factor 4 – The patent owner is able to quantify the amount of profit it would have made. Assessment: 1)Innovention’s profit per Khet game was $10.38, 2)The number of infringing Laser Battle sales was 152,052. Factor 4 Satisfied

29. 29 Damages – Lost Profits Quantification of Lost Profits (Khet): (as previously discussed)

30. 30 Damages – Lost Profits Convoyed Sales Damages can be recovered for lost sales of products not covered by the patent but that are often sold with, or as add-ons to, the patented product. Eye of Horus Beamsplitter Tower of Kadesh

31. 31 Damages – Lost Profits Eye of Horus Beamsplitter

32. 32 Damages – Lost Profits Eye of Horus Beamsplitter

33. 33 Damages – Lost Profits Eye of Horus Beamsplitter

34. 34 Damages – Lost Profits Tower of Kadesh

35. 35 Damages – Lost Profits Summary

36. 36 Damages – Lost Profits Damage Timeline $1,874,277 Provisional Rights Infringement Reasonable Royalty Lost Profits

37. 37 Discussion Overview  Legal Framework for Patent Damages  Two Damages Periods  Damages Analysis  Lost Profits  Reasonable Royalty

38. 38 Damages – Reasonable Royalty Damage Timeline Provisional Rights Infringement Reasonable Royalty Lost Profits How Determined?

39. 39 Damages – Reasonable Royalty Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp 1116 (SDNY 1970)

40. 40 Damages – Reasonable Royalty The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. Impact: Neutral Factor 1:

41. 41 Damages – Reasonable Royalty The rates paid by the licensee for the use of other patents comparable to the patent in suit. Impact: Starting Point for MGA Factor 2:

42. 42 Damages – Reasonable Royalty The nature and scope of the license, as exclusive or non- exclusive; or as restricted or nonrestricted in terms of territory or with respect to whom the manufactured product may be sold. Impact: Downward Factor 3:

43. 43 Damages – Reasonable Royalty The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. Impact: Neutral Factor 4:

44. 44 Damages – Reasonable Royalty The commercial relationship between the licensor and licensee, such as whether they are competitors in the same territory in the same lines of business or whether they are inventor and promoter. Impact: Upward Factor 5:

45. 45 Damages – Reasonable Royalty The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non- patented item; and the extent of such derivative or convoyed sales. Impact: Upward Factor 6:

46. 46 Damages – Reasonable Royalty The duration of the patent and the term of the license. Impact: Upward Factor 7:

47. 47 Damages – Reasonable Royalty The established profitability of the product made under the patent, its commercial success, and its current popularity. Impact: Upward Factor 8:

48. 48 Damages – Reasonable Royalty (9) The utility and advantages of the patent property over the old modes or devices, if any, which had been used for working out similar results. (10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. Impact: Upward Factor 9 & 10:

49. 49 Damages – Reasonable Royalty The extent to which the infringer has made use of the invention, and any evidence probative of the value of that use. Impact: Upward Factor 11:

50. 50 Damages – Reasonable Royalty The portion of the profit or of the selling price that may be customary in the particular business or in comparable business to allow for the use of the invention or analogous inventions. Impact: Neutral Factor 12:

51. 51 Damages – Reasonable Royalty The portion of the realizable profit that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer. Impact: Upward Factor 13:

52. 52 Damages – Reasonable Royalty The opinion testimony of qualified experts. Impact: Neutral Factor 14:

53. 53 Damages – Reasonable Royalty 7 Upward Impacting Factors 1 Downward Impacting Factor

54. 54 Damages – Reasonable Royalty A hypothetical negotiation between a willing licensee and a willing licensor just prior to the time infringement began. The parties to the negotiation would have assumed that the patent-at-issue was valid and would be infringed by the prospective licensee unless it obtained a license. Factor 15:

55. 55 Damages – Reasonable Royalty $0.85 5% Royalty $9.58 56% Royalty $9.81 58% Royalty $0.00 $7.04 41% Royalty $3.06 18% Royalty MGA Perspective Innovention Perspective Hypothetical Negotiation $11.65 69% Royalty

56. 56 Damages – Reasonable Royalty $9.58 Total Profit Hypothetical Negotiation MGA Profit Innovention Profit $3.06 $6.52

57. 57 Damages – Reasonable Royalty A royalty of $3.06 (18%) amounts to:

58. 58 Damages – Reasonable Royalty

59. 59 Damages – Reasonable Royalty Damage Timeline Provisional Rights Infringement Reasonable Royalty Lost Profits $429,372

60. 60 Damages – Combined Damage Timeline Provisional Rights Infringement Reasonable Royalty Lost Profits $429,372 $1,874,277 $2,303,649

61. 61 Damages – Reasonable Royalty

62. 62 Damages – Pure Reasonable Royalty Damage Timeline Provisional Rights Infringement Reasonable Royalty $845,897 * * Included because 35 U.S.C. §284 requires “no less than a reasonable royalty”

63. 63 MGA’s Total Revenue From Laser Battle Infringement $4,461,403 MGA’s Approach Rewards Infringement

64. 64 MGA’s Incremental Profits From Laser Battle $2,751,471 135,158 units (provisional rights period) +152,052 units (infringement period) = 287,210 units total ×$9.58 profit per unit =$2,751,471 Profit MGA’s Approach Rewards Infringement

65. 65 MGA’s Approach Rewards Infringement MGA $2,319,594 MGA keeps $2,319,594 profit from its infringement Innovention receives $431,877 for its ’242 patent $431,877 MGA’s Net Profits From Infringement Innovention

66. 66 MGA keeps $2,319,594 profit from its infringement Innovention receives $431,877 for its ’242 patent MGA’s Net Profits From Infringement MGA’s Approach Rewards Infringement

67. 67 Summary of Opinions