PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT ATTORNEY-CLIENT PRIVILEGED
MEMORANDUM
NOT FOR DISTRIBUTION BEYOND IDENTIFIED RECIPIENTS
TO:
Dr. Lawrence Kessler Apex Claim Analytics LLC 150 North Michigan Avenue, Suite 2400 Chicago, IL 60601
FROM:
Christy Bauer and Omar Siddiqui Calderwood & Harkness LLP One Embarcadero Center, 34th Floor San Francisco, CA 94111
DATE:
November 18, 2022
RE:
Preliminary Damages Framework — Optiwave Semiconductor Corp. v. Lumos Photonics, Inc., Case No. 5:22-cv-03417-EJD (N.D. Cal.)
C&H MATTER NO.:
1014-00003
CLIENT:
Optiwave Semiconductor Corp.
COPIES:
Alan Ngo, Calderwood & Harkness LLP Marcus Delgado, Calderwood & Harkness LLP Sandra Ellison, Optiwave Semiconductor Corp., General Counsel Theodore "Ted" Marchetti, Optiwave Semiconductor Corp., Vice President of intellectual Property
Right-click to update Table of Contents
I. PURPOSE AND SCOPE OF THIS MEMORANDUM
This memorandum provides the preliminary damages framework for Dr. Lawrence Kessler's use in developing his expert report and opinions on patent damages in Optiwave Semiconductor Corp. v. Lumos Photonics, Inc., Case No. 5:22-cv-03417-EJD (N.D. Cal.). It is intended to serve as an orienting document that identifies and synthesizes the key facts, revenue data, patent portfolio context, market dynamics, and legal theories that will underpin the damages analysis in this matter. This memorandum does not constitute a final damages calculation; rather, it sets forth the analytical framework and preliminary estimates that Dr. Kessler will refine through his independent expert analysis, supported by additional discovery materials as they become available.
The primary damages theory that Calderwood & Harkness LLP ("C&H") intends to advance on behalf of Optiwave Semiconductor Corp. ("OWS" or "Optiwave") is a reasonable royalty under 35 U.S.C. § 284, using the well-established Georgia-Pacific factor framework set forth in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). The Georgia-Pacific analysis provides the most reliable and defensible methodology for establishing the damages owed by Lumos Photonics, Inc. ("Lumos") for its unauthorized use of four OWS patents covering critical silicon photonics subsystem technologies.
As a secondary matter, C&H may also explore a lost-profits theory under 35 U.S.C. § 284, subject to the analytical constraints of the Panduit four-factor test. However, the reasonable royalty theory is expected to be the dominant approach at trial due to certain challenges inherent in establishing lost profits in this competitive market context, as discussed in detail in Section VI below.
Additionally, this memorandum flags the potential for enhanced damages based on willful infringement under 35 U.S.C. § 284, as interpreted by the Supreme Court in Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93 (2016). Evidence of post-notice continued infringement by Lumos may support a willfulness finding and, consequently, an award of enhanced damages up to three times the compensatory damages amount. Dr. Kessler should be prepared to present multiple damages scenarios encompassing both the base royalty and enhanced royalty calculations.
We note that Dr. Kessler's engagement as an expert in this matter is governed by the Expert Retention Agreement dated October 2022 between Calderwood & Harkness LLP (on behalf of OWS) and Apex Claim Analytics LLC, which sets forth the scope of the engagement, compensation arrangements, confidentiality obligations, and related terms. All materials transmitted in connection with this engagement, including this memorandum and its enclosures, are subject to the confidentiality provisions of that agreement as well as the Stipulated Protective Order entered by the Court in September 2022.
II. CASE BACKGROUND AND PROCEDURAL POSTURE
A. The Parties
1. Plaintiff — Optiwave Semiconductor Corp. (OWS). Optiwave Semiconductor Corp. ("OWS" or "Optiwave") is a Delaware corporation headquartered at 2775 Augustine Drive, Suite 400, San Jose, California 95054. OWS is a fabless semiconductor design company specializing in the design and commercialization of silicon photonics integrated circuits for data center interconnects and telecommunications applications. Founded in 2014 by Dr. Priya Ramanathan and Dr. Kevin Fong, OWS has grown rapidly to become a recognized innovator in the silicon photonics space, with fiscal year 2022 revenue of approximately $187.4 million and approximately 620 employees as of the date of this memorandum.
OWS's key products include the OWS-400ZR and OWS-800LR coherent optical transceiver chipsets, as well as integrated silicon photonics engines designed for co-packaged optics applications in hyperscale data center environments. These products serve the growing demand for high-bandwidth, low-power optical interconnect solutions in cloud computing, artificial intelligence, and high-performance computing infrastructure. OWS's chipsets are fabricated by Pinnacle Semiconductor Foundry Co., Ltd., located in Hsinchu, Taiwan, using a 45nm silicon-on-insulator ("SOI") process that enables the integration of photonic and electronic components on a single silicon substrate.
OWS maintains a substantial and growing patent portfolio consisting of 87 issued U.S. utility patents and 14 pending patent applications. The portfolio is concentrated in several core technology areas, including waveguide coupling architectures, germanium-on-silicon photodetectors, modulator driver circuit architectures, and wavelength-division multiplexing structures for monolithic silicon photonics integration. The four patents asserted in this litigation — U.S. Patent Nos. 10,234,567; 10,891,234; 11,045,678; and 11,312,890 — represent key innovations within this portfolio and cover critical subsystem-level technologies that enable the performance characteristics of next-generation high-speed optical transceivers.
OWS is majority-owned (approximately 62%) by Vantage Point Capital Partners Fund IV, LP, a venture capital fund managed out of Menlo Park, California. Vantage Point Capital Partners Fund IV is a $2.1 billion fund with a 2018 vintage, managed by a team led by managing partner Douglas Fairbanks III. Vantage Point's total equity investment in OWS across the Series C and Series D preferred stock financing rounds amounts to approximately $74.5 million.
OWS's senior leadership team includes the following individuals relevant to this engagement:
• CEO: Dr. Priya Ramanathan (co-founder; Ph.D. in Electrical Engineering with a concentration in photonics, Stanford University)
• CTO: Dr. Kevin Fong (co-founder)
• General Counsel: Sandra Ellison
• VP of intellectual Property: Theodore "Ted" Marchetti
Prior to the initiation of this litigation, OWS engaged Clearpath IP Valuation Services, Inc. ("Clearpath"), a patent valuation consultancy based in Boston, Massachusetts, to perform an independent valuation of OWS's patent portfolio. The Clearpath analysis, led by principal analyst Jennifer Armitage, CFA, CLP, produced a portfolio-level valuation of approximately $215 million and attributed a collective value of approximately $42.8 million to the four asserted patents. The Clearpath report, which will be provided to Dr. Kessler under separate cover, may serve as a useful reference point in the damages analysis, although Dr. Kessler should independently assess the reliability of Clearpath's methodology and conclusions.
2. Defendant — Lumos Photonics, Inc. (Lumos). Lumos Photonics, Inc. ("Lumos") is a Delaware corporation headquartered at 9400 McNeil Drive, Building 7, Austin, Texas 78758. Unlike OWS, Lumos operates as an integrated device manufacturer ("IDM"), meaning it both designs and fabricates its own silicon photonics components. Lumos specializes in the design, fabrication, and sale of silicon photonics components and modules for hyperscale data center applications. Founded in 2016, Lumos has grown to become a significant competitor in the silicon photonics market, with fiscal year 2022 revenue of approximately $312.8 million and approximately 1,450 employees.
Lumos operates a semiconductor fabrication facility located at 3200 NE Shute Road, Hillsboro, Oregon 97124, and maintains a sales and engineering office at 4750 Great America Parkway, Suite 320, Santa Clara, California 95054. The Santa Clara office provides Lumos with a significant presence in the Northern District of California, which is relevant to the jurisdictional basis for this action and, more pertinently for present purposes, reflects Lumos's commercial activities within the forum.
Lumos has been publicly traded on the Nasdaq Stock Market under the ticker symbol "LMPH" since its initial public offering in 2021. As of the complaint filing date of June 3, 2022, Lumos's market capitalization was approximately $1.87 billion. The largest institutional shareholder of Lumos is Ridgeline Asset Management, LLC, based in Greenwich, Connecticut, which holds an approximately 9.2% equity stake in the company.
Lumos's senior leadership team includes the following individuals relevant to this matter:
• CEO: James "Jim" Harrelson
• CTO: Dr. Mei-Lin Chen
• General Counsel: Richard Talbot
• VP of Engineering (Photonics Division): Dr. Nikolai Petrov
As discussed in greater detail below, the two accused Lumos products — the LumosBridge™ 800G Optical Engine and the LumosEdge™ 400ZR+ Pluggable Transceiver — generated combined revenue of approximately $148.6 million in calendar year 2022, representing approximately 47.5% of Lumos's total fiscal year 2022 revenue. This level of revenue concentration in the accused products underscores the commercial significance of the patented technology to Lumos's business.
B. Procedural Summary
OWS filed its Complaint for Patent Infringement on June 3, 2022, in the United States District Court for the Northern District of California, San Jose Division. The case was assigned to the Honorable Edward J. Torvelis and docketed as Case No. 5:22-cv-03417-EJD. The Complaint asserts infringement of four U.S. patents: U.S. Patent Nos. 10,234,567 ("the '567 Patent"); 10,891,234 ("the '234 Patent"); 11,045,678 ("the '678 Patent"); and 11,312,890 ("the '890 Patent"). The Complaint seeks compensatory damages in an amount to be proven at trial (but believed to exceed $75 million), enhanced damages for willful infringement, pre-judgment and post-judgment interest, attorneys' fees, costs, and injunctive relief.
Lumos filed its Answer and Counterclaims on July 29, 2022. In its Answer, Lumos denied the allegations of infringement and asserted various affirmative defenses, including non-infringement, invalidity under 35 U.S.C. §§ 102, 103, and 112, and other defenses. Lumos also filed counterclaims seeking declaratory judgments of non-infringement and invalidity with respect to each of the four asserted patents.
The Markman hearing on claim construction has been scheduled for January 30, 2023. The outcome of claim construction will be significant for both the liability and damages analyses, as the scope of the asserted claims will directly affect the infringement theory and, consequently, the universe of accused products and features relevant to the damages calculation. Fact discovery is currently ongoing. Expert discovery deadlines have not yet been set as of the date of this memorandum, and will be established in a subsequent case management order.
OWS is represented in this matter by Calderwood & Harkness LLP, with the litigation team led by Christy Bauer and Omar Siddiqui. Lumos is represented by Brannick Howell & Stein LLP ("BHS"), with the lead partner being Victoria "Tori" Ashworth from the firm's San Francisco office. We have identified that Lumos has retained Compass Forensic Accounting LLP, a forensic accounting and economic consulting firm based in Dallas, Texas, to serve as its damages expert. Lumos's designated damages expert is Dr. Patricia Moreno, CPA, ABV, a principal at Compass Forensic Accounting. Dr. Kessler should anticipate that Dr. Moreno will prepare a rebuttal report challenging Dr. Kessler's damages methodology, royalty base, and royalty rate, and Dr. Kessler's analysis should be developed with the expectation of rigorous adversarial scrutiny.
III. THE PATENTS-IN-SUIT AND ACCUSED PRODUCTS
A. Asserted Patents — Summary
OWS asserts infringement of four U.S. utility patents, each of which covers a distinct but interconnected subsystem within high-speed silicon photonics optical transceiver technology. The four patents collectively address the principal functional elements of a silicon photonics transceiver chipset — waveguide coupling, photodetection, wavelength multiplexing, and modulator driving — and represent a significant portion of the technological value chain in silicon photonics transceiver design and manufacture. Each of the four asserted patents is assigned to OWS. A summary of each patent follows.
1. U.S. Patent No. 10,234,567 ("the '567 Patent")
The '567 Patent is titled "Integrated Waveguide Coupler with Tapered Mode Converter for Silicon Photonics Platforms." The application was filed on March 14, 2017, and the patent issued on March 19, 2019. The named inventors are Dr. Kevin Fong, Dr. Priya Ramanathan, and Hideo Tanaka. OWS asserts Claims 1, 4, 7, 12, and 15 of the '567 Patent. The core technology claimed in the '567 Patent is a tapered silicon waveguide that is adiabatically coupled to a silicon nitride waveguide layer, enabling low-loss optical mode conversion between waveguides of different materials and geometries on a single photonic integrated circuit. This coupling approach offers significant performance advantages over alternative coupling techniques, including lower insertion loss and improved broadband performance.
2. U.S. Patent No. 10,891,234 ("the '234 Patent")
The '234 Patent is titled "Germanium-on-Silicon Photodetector with Graded Buffer Layer for Enhanced Responsivity." The application was filed on September 8, 2017, and the patent issued on January 14, 2021. The named inventors are Dr. Kevin Fong and Dr. Amara Osei. OWS asserts Claims 1, 3, 5, 8, and 11 of the '234 Patent. The core technology claimed in the '234 Patent is a germanium photodetector structure in which the germanium active layer is grown on a silicon substrate using a buffer layer with a continuously varying (i.e., graded) germanium concentration. This graded buffer approach reduces threading dislocation density at the germanium-silicon interface, resulting in improved photodetector dark current characteristics and enhanced optical responsivity relative to devices fabricated with abrupt or step-graded buffer layers.
3. U.S. Patent No. 11,045,678 ("the '678 Patent")
The '678 Patent is titled "Multi-Channel Optical Transceiver with Integrated Wavelength-Division Multiplexing on Silicon." The application was filed on June 22, 2018, and the patent issued on June 29, 2021. The named inventors are Dr. Priya Ramanathan, Dr. Amara Osei, and Liwei Zhang. OWS asserts Claims 1, 2, 6, 9, and 14 of the '678 Patent. The core technology claimed in the '678 Patent is a wavelength-division multiplexing ("WDM") element that is monolithically formed on a single silicon die, enabling multiple optical channels to be multiplexed and demultiplexed on-chip without the need for external optical components or hybrid integration techniques. This monolithic integration reduces package complexity, improves optical alignment tolerances, and lowers manufacturing costs for multi-channel transceiver implementations.
4. U.S. Patent No. 11,312,890 ("the '890 Patent")
The '890 Patent is titled "Driver Circuit Architecture for High-Speed Silicon Photonic Mach-Zehnder Modulators." The application was filed on November 15, 2018, and the patent issued on April 26, 2022. The named inventors are Dr. Kevin Fong and Rajesh Iyer. OWS asserts Claims 1, 5, 8, and 13 of the '890 Patent. The core technology claimed in the '890 Patent is a pre-emphasis equalization stage that is co-integrated with the Mach-Zehnder modulator on a common substrate. By co-integrating the driver circuitry with the modulator, the patented architecture eliminates the parasitic inductance that arises from bond wire interconnections in conventional discrete driver configurations, enabling significantly higher modulation bandwidths that are critical for 400G and 800G data transmission rates.
All four patents are assigned to OWS, and all four remain in force with no maintenance fee issues or terminal disclaimers that would shorten their terms. Taken together, the four patents cover critical subsystems within high-speed optical transceivers — waveguide coupling, photodetection, wavelength multiplexing, and modulator driving — and represent a significant portion of the value chain in silicon photonics transceiver chipsets. The breadth and complementary nature of these patents is relevant to the damages analysis, as the patents collectively cover multiple independent functional elements within the accused products, each of which contributes to the overall performance and commercial value of those products.
B. Accused Products
OWS accuses two Lumos products of infringing the asserted patents:
1. LumosBridge™ 800G Optical Engine
The LumosBridge 800G Optical Engine is a co-packaged optics engine designed for use in hyperscale data center network switches. The LumosBridge integrates silicon photonics components with electronic driver and receiver circuitry in a single package, enabling 800 gigabits per second (800G) of optical bandwidth per engine. The LumosBridge was first shipped to customers in the first quarter of 2022 (Q1 2022). Based on publicly available product literature and discovery materials obtained to date, the unit price of the LumosBridge ranges from approximately $1,200 to $1,800 per unit, depending on configuration, volume, and customer-specific pricing terms. The LumosBridge has been adopted by several major hyperscale data center operators and represents a growing portion of Lumos's revenue.
2. LumosEdge™ 400ZR+ Pluggable Transceiver
The LumosEdge 400ZR+ Pluggable Transceiver is a QSFP-DD form factor pluggable optical transceiver module designed for metro networking and data center interconnect ("DCI") applications. The LumosEdge has been in production since the third quarter of 2021 (Q3 2021) and has established a significant market presence in the rapidly growing 400ZR/400ZR+ pluggable coherent optics segment. Based on available pricing data, the unit price of the LumosEdge ranges from approximately $600 to $900 per unit, depending on configuration and volume. The LumosEdge incorporates Lumos's internally fabricated silicon photonics chipset, which includes the waveguide coupling, photodetection, wavelength multiplexing, and modulator driving subsystems that are the subject of OWS's infringement allegations.
Both accused products incorporate silicon photonics chipsets that, under OWS's infringement theory, practice the inventions claimed in all four asserted patents. The detailed claim-by-claim infringement analysis is set forth in the four pre-suit infringement analysis memoranda prepared by C&H in April and May 2022, copies of which are enclosed with this memorandum.
C. Accused Product Revenue Data
Understanding the revenue generated by the accused products is fundamental to the damages analysis, as accused product revenue forms the basis of the proposed royalty base. Based on Lumos's publicly filed SEC reports (annual report on Form 10-K filed with the Securities and Exchange Commission by Lumos Photonics, Inc., Nasdaq ticker: LMPH) and responses to discovery requests obtained to date, the combined revenue attributable to the two accused products for calendar year 2022 is approximately $148.6 million.
This figure can be broken down by reference to the pre-suit and post-suit periods as follows:
• Combined accused product revenue for the pre-suit damages period (January 1, 2022 through June 2, 2022, i.e., Q1–Q2 2022): approximately $62.3 million.
• Combined accused product revenue for the post-suit damages period (June 3, 2022 through December 31, 2022): approximately $86.3 million (calculated as $148.6 million minus $62.3 million), with additional revenue continuing to accrue in calendar year 2023 and beyond through the anticipated trial date.
It is important to note that these revenue figures will require further refinement as additional discovery is obtained. In particular, product-level and configuration-level revenue breakdowns — which are necessary for a precise apportionment analysis — have not yet been fully produced by Lumos. These breakdowns are the subject of pending document requests contained in OWS's First Set of Requests for Production, which was served on November 21, 2022 and includes specific requests seeking revenue data segmented by product SKU, product configuration, customer, quarter, and geographic region.
For context, Lumos's overall fiscal year 2022 revenue was $312.8 million. The accused products therefore represent approximately 47.5% of Lumos's total revenue for that period. This revenue concentration is significant: it demonstrates the commercial importance of the accused products to Lumos's business and, by extension, the commercial value of the patented technologies incorporated into those products.
Additional revenue data predating calendar year 2022 — specifically, LumosEdge 400ZR+ revenue from Q3 2021 and Q4 2021, when the product first entered commercial production — will be required to establish the full pre-suit damages period. This data is the subject of pending discovery requests and has not yet been produced.
IV. PRIMARY DAMAGES THEORY: REASONABLE ROYALTY UNDER 35 U.S.C. § 284
A. Legal Framework
The primary damages theory in this case is a reasonable royalty under 35 U.S.C. § 284, which provides that "the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." The reasonable royalty serves as a statutory floor for patent damages, ensuring that a patent holder receives at least the royalty payment that the infringer would have agreed to pay in a hypothetical arm's-length negotiation at the time infringement began.
The reasonable royalty is determined by reference to a hypothetical negotiation between a willing licensor (here, OWS) and a willing licensee (here, Lumos) occurring at the time infringement began. This analytical framework assumes that both parties would have entered into a license agreement on mutually acceptable terms prior to the commencement of infringement, taking into account all of the facts and circumstances known or reasonably anticipated at the time of the hypothetical negotiation.
The date of the hypothetical negotiation is set as the date of first infringement. In this case, because the two accused products entered commercial production at different times, the hypothetical negotiation date differs for each product:
• For the LumosEdge 400ZR+ Pluggable Transceiver, the date of first infringement is Q3 2021, when commercial production and shipment began.
• For the LumosBridge 800G Optical Engine, the date of first infringement is Q1 2022, when the first commercial shipments were made to customers.
The principal analytical framework for determining the reasonable royalty rate is the 15-factor test established in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). The Georgia-Pacific factors provide a structured, comprehensive methodology for evaluating the considerations that a willing licensor and willing licensee would take into account in a hypothetical arm's-length negotiation. A detailed factor-by-factor analysis is provided in Section V below.
Key Federal Circuit precedent governing the reasonable royalty analysis includes:
• Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) — establishing the 15-factor analytical framework.
• Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009) — requiring that the reasonable royalty be tied to the economic value of the patented feature, not the entire product, where the patented feature is a small component of a larger product.
• Uniloc USA, Inc. v. Kestrel Partners LLC, 632 F.3d 1292 (Fed. Cir. 2011) — rejecting the "25% rule of thumb" as an admissible basis for determining a reasonable royalty rate and requiring that the royalty rate be grounded in the specific facts of the case.
• VirnetX, Inc. v. Sterling Reach Holdings, 767 F.3d 1308 (Fed. Cir. 2014) — reinforcing the apportionment requirement and the need to ensure that the royalty base reflects the value attributable to the patented features rather than unrelated product features.
Dr. Kessler should be thoroughly familiar with these authorities and should ensure that his damages methodology satisfies the analytical rigor required under current Federal Circuit law.
B. Proposed Royalty Base
The royalty base is the revenue figure to which the royalty rate is applied to calculate the compensatory damages amount. In this case, C&H proposes that the appropriate royalty base is the revenue attributable to the accused products — the LumosBridge 800G Optical Engine and the LumosEdge 400ZR+ Pluggable Transceiver.
As set forth above, the combined accused product revenue for calendar year 2022 is approximately $148.6 million, broken down as follows:
• Pre-suit damages period (Q1–Q2 2022): approximately $62.3 million
• Post-filing damages period (June 3, 2022 through December 31, 2022): approximately $86.3 million
• Additional pre-suit revenue (Q3–Q4 2021): to be determined through discovery (LumosEdge 400ZR+ production commenced Q3 2021)
• Post-2022 revenue: additional accused product revenue accruing in calendar year 2023 and beyond through the anticipated trial date must be projected based on Lumos's growth trajectory, product roadmap, market conditions, and publicly available financial data
The total royalty base for the full damages period — from the date of first infringement through trial — will exceed $148.6 million and will be refined as additional revenue data becomes available through discovery and as the trial date is established.
Apportionment Considerations. Under the Federal Circuit's holdings in VirnetX, Inc. v. Sterling Reach Holdings, 767 F.3d 1308 (Fed. Cir. 2014), and Commonwealth Scientific and Industrial Research Organisation v. Sterling Reach Holdings, 809 F.3d 1295 (Fed. Cir. 2015), the damages analysis must include a rigorous apportionment to ensure that the royalty base reflects the value attributable to the patented features, rather than the value of the entire product, where the patented feature represents only a component of a multi-component product.
In this case, the apportionment analysis requires careful consideration of the relationship between the patented subsystems and the accused products as a whole.
For the LumosBridge 800G Optical Engine, the patented features — the waveguide coupler ('567 Patent), the germanium photodetector with graded buffer ('234 Patent), the monolithic WDM element ('678 Patent), and the co-integrated driver circuit ('890 Patent) — are integral subsystems of the optical engine. These subsystems are not separable components that are independently sold or that exist in a separable sub-assembly within the optical engine; rather, they are monolithically integrated on the silicon photonics chipset that forms the functional core of the LumosBridge product. Strong arguments exist for treating the full optical engine as the smallest salable patent-practicing unit ("SSPPU"), given that the silicon photonics chipset incorporating the patented features is not separately sold by Lumos and does not exist as an independently marketed product. Alternatively, if the Court or Lumos's expert takes the position that further apportionment is required below the optical engine level, an apportionment factor can be applied to account for the value contributed by non-patented elements (e.g., the digital signal processor, firmware, packaging, thermal management, and fiber coupling mechanics).
For the LumosEdge 400ZR+ Pluggable Transceiver, a similar analysis applies. The transceiver module is a self-contained pluggable unit — conforming to the QSFP-DD form factor standard — that contains the silicon photonics chipset incorporating the patented subsystems. The transceiver module is sold as a single product unit, and the silicon photonics chipset is not separately available for purchase. Arguments therefore support treating the transceiver module as the SSPPU, with the potential for an apportionment factor to account for non-patented components within the module.
Dr. Kessler will need to analyze whether the entire accused product constitutes the SSPPU or whether further apportionment is required, and in either case, to support the selected royalty base with evidence demonstrating a nexus between the patented features and the revenue captured by the royalty base. This analysis should be developed in coordination with Dr. Harold Whitfield of Whitfield Technical Consulting Group, Inc. (530 Lytton Avenue, Suite 210, Palo Alto, California 94301), who is serving as OWS's designated technical expert in this matter. Dr. Whitfield's technical analysis of the role and value of each patented subsystem within the accused products will provide the evidentiary foundation for the apportionment analysis.
C. Proposed Royalty Rate
Based on a preliminary assessment of the Georgia-Pacific factors, comparable licensing activity in the semiconductor and photonics industries, and industry benchmarking data, C&H's preliminary estimated reasonable royalty rate is 7.5% of accused product revenue.
The basis for the 7.5% rate will be fully developed through the Georgia-Pacific factor analysis set forth in Section V below, supplemented by a comparable license analysis and industry benchmarking data. The 7.5% rate reflects the following preliminary considerations: (a) the breadth and significance of the four asserted patents, which collectively cover four critical subsystem-level innovations within the accused products; (b) the competitive relationship between OWS and Lumos, which would cause a willing licensor to demand a premium; (c) the strong commercial success of the accused products, which have generated $148.6 million in combined CY 2022 revenue; (d) the substantial remaining life of the patents (all four patents have at least 15 years of remaining patent term as of the hypothetical negotiation date); and (e) the technological advantages of the patented approaches over available alternatives.
At a 7.5% royalty rate applied to $148.6 million in CY 2022 accused product revenue, the base annual royalty for calendar year 2022 would be approximately $11.145 million.
The total damages claim as pled in the Complaint is "damages in an amount to be proven at trial but believed to exceed $75 million." The $75 million figure incorporates the following components:
(a) Pre-suit damages from Q3 2021 (commencement of LumosEdge commercial production) through June 2, 2022;
(b) Post-suit damages from June 3, 2022 through the anticipated trial date;
(c) Potential willfulness enhancement (up to three times the base damages amount under 35 U.S.C. § 284), applied to post-notice damages.
A more detailed calculation breakdown is as follows:
• Pre-suit period revenue (Q3 2021 through Q2 2022, estimated): Approximately $62.3 million has been identified for Q1–Q2 2022 alone. LumosEdge 400ZR+ revenue for Q3–Q4 2021 is to be determined through discovery, as the LumosEdge entered commercial production in Q3 2021. Total pre-suit revenue is therefore expected to exceed $62.3 million.
• Post-suit period revenue (June 3, 2022 through estimated trial date): The remainder of CY 2022 accused product revenue (approximately $86.3 million), plus projected CY 2023 accused product revenue based on Lumos's growth trajectory and market conditions. Given the strong growth trends in the 800G co-packaged optics and 400ZR+ pluggable transceiver markets, projected CY 2023 accused product revenue is expected to be substantially higher than CY 2022 levels.
• Base royalty on CY 2022 revenue alone: $148.6 million × 7.5% = approximately $11.145 million.
• Base royalty on the full damages period (pre-suit through trial), estimated: In the range of $15–25 million, depending on the pre-suit revenue figures obtained through discovery and the projected post-2022 revenue through the trial date.
• Enhanced damages for willfulness: Application of the willfulness multiplier (up to 3× under 35 U.S.C. § 284) to post-notice damages could add an additional $20–50+ million or more to the total damages figure, bringing the total claim into the range that exceeds $75 million as pled in the Complaint.
Dr. Kessler should develop his damages model to accommodate each of these components and should prepare to present multiple scenarios reflecting different assumptions about the royalty rate, the royalty base, and the willfulness enhancement factor.
D. Marking and Notice Considerations
Under 35 U.S.C. § 287(a), for patents covering articles of manufacture, damages for patent infringement are limited to the period after the infringer received actual notice of infringement, unless the patentee can demonstrate that it provided constructive notice through compliant patent marking of its own products practicing the asserted patents. The marking statute provides that "[i]n the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice."
Accordingly, OWS's marking practices with respect to its own products practicing the asserted patents must be thoroughly investigated and documented to determine the earliest date from which damages may be recovered. The following notice events are relevant:
• Cease-and-Desist Letter (March 15, 2022): OWS sent a cease-and-desist letter to Lumos on March 15, 2022, specifically identifying the '567 Patent and the '234 Patent and the LumosBridge and LumosEdge products as allegedly infringing. This letter establishes actual notice as of March 15, 2022 at the latest for the '567 and '234 Patents.
• Complaint (June 3, 2022): For the '678 and '890 Patents, which were not identified in the March 2022 cease-and-desist letter, actual notice was provided by the filing and service of the Complaint on June 3, 2022.
• Constructive Notice Through Patent Marking: Pre-notice damages (i.e., damages for the period before actual notice was provided) may still be recoverable if OWS can demonstrate compliant constructive notice through patent marking under § 287(a). This requires evidence that OWS consistently and correctly marked its own products practicing the asserted patents with the relevant patent numbers (or, in the case of virtual marking, with a URL linking to a webpage identifying the applicable patents). OWS's marking records and practices must be obtained and evaluated.
Dr. Kessler should coordinate with OWS — specifically with Ted Marchetti, VP of IP — to obtain OWS's marking records, including documentation of marking practices for the OWS-400ZR, OWS-800LR, and any other OWS products that practice the asserted patents. The marking analysis will directly affect the scope of the damages period and should be incorporated into Dr. Kessler's damages model.
V. GEORGIA-PACIFIC FACTOR ANALYSIS FRAMEWORK
A. Overview. The 15 Georgia-Pacific factors provide the principal analytical structure for determining the reasonable royalty rate in the hypothetical negotiation between OWS as willing licensor and Lumos as willing licensee. The factors are designed to capture the full range of considerations that would inform a rational economic bargain between the parties, including the value of the patented technology, the competitive dynamics of the market, the availability of alternatives, and the relative bargaining positions of the parties.
Below is a preliminary discussion of each factor as it applies to the facts of this case. This preliminary analysis is intended to orient Dr. Kessler to the key considerations under each factor and to identify areas where additional data and analysis are required. Dr. Kessler is expected to develop a full and independently reasoned analysis of each factor, supported by the factual record, financial data, technical evidence, and economic analysis appropriate to each factor.
B. Factor-by-Factor Preliminary Analysis
Factor 1: Existing Royalties for the Patent-in-Suit. Georgia-Pacific Factor 1 asks the court to consider the royalties received by the patentee for the licensing of the patent-in-suit, proving or tending to prove an established royalty.
OWS has not previously licensed any of the four asserted patents to third parties. The patents have been maintained exclusively as part of OWS's proprietary technology portfolio and have not been the subject of any arm's-length licensing transaction. As a result, no established royalty exists for the patents-in-suit.
However, it is important to determine whether OWS's broader patent portfolio — consisting of 87 issued U.S. utility patents and 14 pending applications — includes any other patents that have been subject to license agreements. If such agreements exist, they may provide indirect evidence of the licensing value of OWS's silicon photonics IP, particularly if the licensed patents cover related technologies within the same technical field. C&H is working with OWS to identify any such agreements, and any responsive documents will be provided to Dr. Kessler.
Lumos may argue that the absence of prior licenses for the asserted patents suggests that the patents lack independent licensing value or that OWS has not demonstrated a market willingness to pay for the claimed technology. Dr. Kessler should be prepared to respond to this argument by explaining that many technology companies — particularly those in competitive, high-growth markets — maintain their core patent portfolios as proprietary assets rather than licensing them to competitors, and that the absence of prior licenses does not diminish the technological or economic value of the patents.
Factor 2: Rates Paid by Licensee for Use of Comparable Patents. Factor 2 considers the rates paid by the licensee (Lumos) for the use of other patents comparable to the patents-in-suit.
Lumos, as a publicly traded IDM in the silicon photonics space, likely maintains a portfolio of inbound patent license agreements covering various aspects of its manufacturing processes and product designs. These agreements may provide evidence of the rates that Lumos has been willing to pay for access to third-party semiconductor and photonics IP. The identification and analysis of Lumos's existing inbound patent license agreements is a critical discovery objective, and OWS's pending document requests specifically seek production of all such agreements.
In addition to Lumos-specific license agreements, Dr. Kessler should survey comparable licenses in the broader silicon photonics, optical transceiver, and semiconductor IP licensing markets. Industry licensing rates for semiconductor IP in adjacent technology spaces — including radio frequency ("RF"), analog mixed-signal, and digital signal processing — may serve as useful benchmarks, provided that appropriate adjustments are made to account for differences in the technology field, the scope of the licensed rights, the volume of production, and other relevant variables. Published licensing surveys and databases maintained by organizations such as the Licensing Executives Society (LES) may also provide useful reference points.
Factor 3: Nature and Scope of the License. Factor 3 considers the nature and scope of the license — whether it is exclusive or non-exclusive, whether it is restricted in terms of territory or field of use, and the overall terms of the license grant.
In the hypothetical negotiation, the license would be structured as a non-exclusive license. OWS, as a fabless semiconductor design company, would retain the freedom to practice the patented inventions in its own products and to license the patents to other third parties. A non-exclusive license is the default assumption in the hypothetical negotiation framework, as it preserves the patentee's rights to exploit the patented technology through its own commercial activities and through additional licensing relationships.
The geographic scope of the hypothetical license would be limited to the United States, consistent with the territorial scope of the asserted U.S. patents. The product scope of the license would encompass the specific accused products — the LumosBridge 800G Optical Engine and the LumosEdge 400ZR+ Pluggable Transceiver — although the parties to a hypothetical negotiation might also consider a broader product scope (e.g., a portfolio license covering Lumos's full line of silicon photonics products) if such a structure would produce a more efficient licensing arrangement.
The running royalty structure (percentage of product revenue) assumed in this analysis is consistent with prevailing licensing practices in the semiconductor industry, where running royalties based on net sales are a common compensation mechanism for component-level IP licenses.
Factor 4: Licensor's Established Policy of Maintaining Patent Monopoly. Factor 4 considers the licensor's established policy and marketing program to maintain its patent monopoly by not licensing others to use the invention, or by granting licenses under special conditions designed to preserve the monopoly.
This factor weighs heavily in favor of a higher royalty rate. OWS has historically maintained its patent portfolio as a competitive advantage rather than pursuing a licensing business model. OWS competes directly with Lumos in the silicon photonics transceiver market for hyperscale data centers and telecommunications applications. OWS's decision to enforce its patents through litigation, rather than seeking a negotiated licensing arrangement with Lumos, reflects OWS's strong interest in preserving its competitive position and its reluctance to license core technology to a direct competitor absent a substantial royalty that would partially offset the competitive harm of enabling Lumos's use of the patented technology.
In a hypothetical negotiation, OWS would demand a premium royalty to compensate for the competitive disadvantage of licensing its proprietary technology to a rival. The premium would reflect the fact that licensing would enable Lumos to offer products with performance characteristics comparable to OWS's own products, potentially eroding OWS's market share and reducing OWS's pricing power. This competitive dynamic is directly relevant to the royalty rate analysis and supports a rate at the higher end of the reasonable range.
Factor 5: Commercial Relationship Between Licensor and Licensee. Factor 5 considers the commercial relationship between the licensor and the licensee, including whether they are competitors or whether the licensee operates in a different market.
OWS and Lumos are direct competitors in the silicon photonics market for hyperscale data center interconnects and telecommunications applications. Both companies design and sell silicon photonics-based optical transceiver products that target the same end customers — the major hyperscale cloud service providers and data center operators headquartered in the Northern District of California and elsewhere. Both companies compete for design wins with these customers, and the success of one company's products can directly displace demand for the other company's products.
OWS's FY 2022 revenue was $187.4 million; Lumos's FY 2022 revenue was $312.8 million. Lumos is therefore a larger competitor than OWS, with approximately 67% more revenue. This size differential may affect the hypothetical negotiation dynamic, as OWS would be particularly sensitive to the competitive threat posed by a larger, well-resourced rival that is leveraging OWS's patented technology to compete more effectively.
The directly competitive relationship between the parties supports a higher royalty rate, as the willing licensor (OWS) would require greater compensation to offset the competitive harm caused by licensing its core technology to a direct market rival.
Factor 6: Effect of Selling the Patented Specialty on Sales of Other Products. Factor 6 considers 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 its non-patented items, and the extent of such derivative or convoyed sales.
The patented technologies embodied in the accused products enable broader product sales and customer relationships for both parties. The optical engine and transceiver products are often part of larger system-level sales that include additional components, integration services, and ongoing support. For Lumos, sales of the LumosBridge 800G and LumosEdge 400ZR+ products may drive "convoyed" sales of related products and services — including extended warranty packages, firmware updates, optical interconnect cable assemblies, and design-in engineering support — that generate additional revenue beyond the unit sales price of the accused product itself.
Any derivative revenue attributable to the accused products should be analyzed by Dr. Kessler to determine whether it should be factored into the damages calculation, either as an addition to the royalty base or as a consideration supporting a higher royalty rate.
Similarly, OWS's own sales of competing products — the OWS-400ZR and OWS-800LR chipsets — may be accompanied by convoyed sales of design kits, development boards, and technical support services that contribute to OWS's overall revenue from customers that purchase its silicon photonics chipsets.
Factor 7: Duration of the Patent and Term of the License. Factor 7 considers the duration of the patent and the term of the license.
The four asserted patents have the following expiration dates, calculated as 20 years from their respective filing dates:
• '567 Patent: expires approximately March 14, 2037
• '234 Patent: expires approximately September 8, 2037
• '678 Patent: expires approximately June 22, 2038
• '890 Patent: expires approximately November 15, 2038
As of the hypothetical negotiation date (Q3 2021 for the LumosEdge; Q1 2022 for the LumosBridge), all four patents have substantial remaining patent life — in excess of 15 years in each case. This extended remaining term is significant because it means that a license to the patented technology would provide the licensee with a long-duration right to practice the inventions, during which the patented technology is expected to continue to be relevant and commercially valuable in the evolving silicon photonics market.
Longer remaining patent life generally supports a higher royalty rate in the hypothetical negotiation, as the licensee derives greater value from a license that provides protection against infringement claims for a longer period and during which the patented technology remains commercially relevant.
Factor 8: Established Profitability, Commercial Success, and Current Popularity of the Patented Invention. Factor 8 considers the established profitability of the product made under the patent, its commercial success, and its current popularity.
The accused products have achieved significant and rapidly growing commercial success. Combined CY 2022 revenue for the LumosBridge 800G and LumosEdge 400ZR+ products was approximately $148.6 million, representing approximately 47.5% of Lumos's total FY 2022 revenue of $312.8 million. This level of revenue demonstrates strong market demand for the accused products and suggests that the patented technologies incorporated into those products — which enable the performance characteristics that differentiate the accused products in the market — contribute meaningfully to their commercial appeal.
The LumosBridge 800G Optical Engine, in particular, has been adopted by hyperscale data center operators as part of their next-generation network architecture deployments. The LumosEdge 400ZR+ Pluggable Transceiver has been in production since Q3 2021 and has established a growing market presence in the metro networking and DCI application spaces, which are experiencing rapid demand growth driven by increasing data traffic, cloud computing workloads, and 5G network deployments.
Additionally, Lumos's market capitalization growth — from approximately $1.87 billion at the time of the complaint filing in June 2022 to approximately $2.24 billion by April 2023 — reflects the equity market's confidence in Lumos's product portfolio and growth trajectory. While market capitalization data post-dating the hypothetical negotiation is forward-looking and must be used with appropriate caution, it provides context for the commercial trajectory of the products at issue.
This factor supports a higher royalty rate, as the commercial success of the accused products demonstrates the market value of the technology — including the patented technology — embodied in those products.
Factor 9: Utility and Advantages of the Patent Property Over Alternatives. Factor 9 considers the utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
This factor requires a detailed technical analysis of the advantages of OWS's patented approaches over alternative technical implementations. Dr. Kessler should work closely with Dr. Whitfield to develop this analysis. A preliminary assessment of the key advantages follows:
• '567 Patent (Adiabatic Waveguide Coupling): The adiabatic tapered mode converter approach claimed in the '567 Patent provides significantly lower insertion loss compared to alternative coupling techniques such as grating couplers or butt-coupling. Lower insertion loss translates directly to improved signal integrity, higher optical link budgets, and reduced power consumption — all of which are critical performance parameters in high-speed optical transceiver applications.
• '234 Patent (Graded Buffer Germanium Photodetector): The continuously graded germanium buffer layer claimed in the '234 Patent reduces threading dislocation density at the germanium-silicon interface, resulting in lower dark current and improved photodetector responsivity compared to photodetectors fabricated with abrupt or step-graded buffer layers. These performance improvements directly affect the receiver sensitivity of the transceiver, enabling longer reach and higher data rate operation.
• '678 Patent (Monolithic WDM Integration): The monolithic formation of the WDM element on a single silicon die, as claimed in the '678 Patent, eliminates the need for separate external WDM components or hybrid integration approaches that require active optical alignment. This monolithic integration reduces package complexity, improves manufacturing yield, and lowers production costs for multi-channel transceiver implementations — advantages that are particularly significant in high-volume data center applications where cost and reliability are paramount.
• '890 Patent (Co-Integrated Driver Circuit): The co-integration of the pre-emphasis equalization driver circuit with the Mach-Zehnder modulator on a common substrate, as claimed in the '890 Patent, eliminates the parasitic inductance associated with bond wire interconnections in conventional discrete driver architectures. This enables significantly higher modulation bandwidth — a critical performance parameter for achieving 400G and 800G per-lane data rates — and reduces the overall package footprint.
The feasibility and cost of design-around alternatives must also be assessed. If viable non-infringing alternatives exist that provide comparable performance, the royalty rate may be moderated because the hypothetical licensee could credibly threaten to pursue those alternatives rather than accept a high royalty. Conversely, if the patented approaches are clearly superior to available alternatives — as the preliminary technical analysis suggests — and design-around options would impose significant performance penalties, development costs, or time-to-market delays, a higher royalty rate is warranted because the licensee has fewer options outside the hypothetical negotiation. Dr. Whitfield's technical expertise will be essential in quantifying these advantages and assessing design-around feasibility.
Factor 10: Nature of the Patented Invention. Factor 10 considers 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.
The four asserted patents cover specific but critical subsystem-level innovations within a complex multi-component product — the high-speed optical transceiver. Each patent addresses a distinct functional element within the transceiver's signal path: the '567 Patent addresses optical mode conversion at the waveguide coupling interface; the '234 Patent addresses optical-to-electrical signal conversion at the photodetection stage; the '678 Patent addresses wavelength multiplexing and demultiplexing; and the '890 Patent addresses the electrical-to-optical signal conversion at the modulation stage.
The character of these inventions as "enabling" technologies is significant. Each patented subsystem addresses a fundamental performance bottleneck in the design of next-generation high-speed optical transceivers. Without effective solutions to these bottleneck problems, the overall performance of the transceiver product is limited. The patented approaches provide solutions that enable the transceiver to achieve the performance levels — in terms of bandwidth, signal integrity, power consumption, and cost — required by hyperscale data center operators and telecommunications carriers. The "enabling" nature of the patented technology supports a meaningful royalty, as the technology directly contributes to the commercial viability and competitiveness of the accused products.
Factor 11: Extent of Infringer's Use of the Invention. Factor 11 considers the extent to which the infringer has made use of the invention, and any evidence probative of the value of that use.
Lumos's use of the patented technology is extensive. Under OWS's infringement theory, Lumos's accused products incorporate all four patented subsystems — the waveguide coupler, the germanium photodetector, the monolithic WDM element, and the co-integrated driver circuit. These subsystems are integral to the silicon photonics chipset at the core of both the LumosBridge 800G and LumosEdge 400ZR+ products. Lumos does not offer non-infringing versions of these products, and the infringing technology is present in every unit of the accused products sold.
The accused products represent approximately 47.5% of Lumos's total FY 2022 revenue ($148.6 million out of $312.8 million total). The depth and breadth of Lumos's reliance on the infringing technology — both in terms of unit volume and revenue concentration — supports a higher royalty rate, as it demonstrates the commercial significance of the patented technology to Lumos's business and the extent to which Lumos has benefited from its unauthorized use.
Factor 12: Customary Portion of Profit Attributable to the Invention in the Industry. Factor 12 considers the portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
To analyze this factor, Dr. Kessler will need to conduct an industry analysis of profit allocation practices in the silicon photonics and broader semiconductor IP licensing markets. Relevant considerations include:
• The customary share of revenue or profit allocated to silicon photonics IP versus other value contributors such as packaging, testing, firmware development, system integration, and customer support.
• Semiconductor industry licensing norms for component-level IP, including typical running royalty rates for licensed semiconductor technology in analogous product categories.
• Aggregate royalty burden analysis in the photonics and optical networking space — i.e., the total royalty burden that a product such as the LumosBridge or LumosEdge can reasonably bear given industry-standard profit margins and competitive pricing pressures.
Published industry surveys, analyst reports, and publicly available information regarding licensing arrangements in the semiconductor and photonics industries should be surveyed and incorporated into the analysis. Dr. Kessler's experience in semiconductor and technology IP damages will be valuable in calibrating this factor.
Factor 13: Portion of Profit Attributable to the Patented Invention vs. Non-Patented Elements. Factor 13 considers the portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
This factor is closely related to the apportionment analysis discussed in Section IV.B above and implicates the requirements of VirnetX and the SSPPU framework. The core question is: what portion of the accused product's profitability is attributable to the four patented subsystems versus non-patented elements of the product?
The non-patented elements of the accused products include, but are not limited to:
• Digital signal processor ("DSP") circuitry
• Fiber coupling mechanics and optical connector interfaces
• Firmware and embedded software
• Packaging technology (including thermal management solutions)
• Testing and quality assurance processes
• Manufacturing process innovations specific to Lumos's fabrication facility
• Brand value and customer relationships
To develop a rigorous apportionment analysis, Dr. Kessler will need access to Lumos's product-level profit margins and cost structures, which must be obtained through discovery. Dr. Kessler should work closely with Dr. Whitfield to develop the technical basis for the apportionment — i.e., to quantify the contribution of each patented subsystem to the overall performance and value of the accused products relative to the contributions of the non-patented elements. The technical apportionment analysis will be a critical element of Dr. Kessler's expert report and should be developed with sufficient rigor to withstand challenge on cross-examination and in a Daubert motion.
Factor 14: Opinion Testimony of Qualified Experts. Factor 14 considers the opinion testimony of qualified experts.
The expert testimony in this case will include:
• Dr. Lawrence Kessler (Apex Claim Analytics LLC): Dr. Kessler's own expert opinion on patent damages, including the reasonable royalty rate, the royalty base, and the total damages owed by Lumos.
• Dr. Harold Whitfield (Whitfield Technical Consulting Group, Inc.): Technical expert testimony regarding the technological contribution of each patented feature to the accused products, the advantages of the patented approaches over alternatives, design-around feasibility and costs, and the technical basis for apportionment.
• Dr. Patricia Moreno (Compass Forensic Accounting LLP): Anticipated rebuttal