PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential attorney-client communication and attorney work product. It is intended solely for the use of the identified recipients. This memorandum contains the mental impressions, conclusions, opinions, and legal theories of counsel. It is not to be distributed, copied, or disclosed to any person or entity outside the Board of Directors of Optiwave Semiconductor Corp. and the individuals identified herein without the prior written consent of Calderwood & Harkness LLP. Any unauthorized disclosure may constitute a waiver of applicable privileges.
CALDERWOOD & HARKNESS LLP One Embarcadero Center, 34th Floor San Francisco, California 94111 Telephone: (415) 782-4000 Facsimile: (415) 782-4001
March 3, 2023
TO:
Board of Directors, Optiwave Semiconductor Corp.
Douglas Fairbanks III, Managing Partner, Vantage Point Capital Partners Fund IV, LP
Rebecca Torres, Operating Partner (Semiconductor Sector), Vantage Point Capital Partners Fund IV, LP
FROM:
Alan Ngo, Responsible Partner, intellectual Property Group, Calderwood & Harkness LLP
CC:
Marcus Delgado, Billing Partner, Calderwood & Harkness LLP
Sandra Ellison, General Counsel, Optiwave Semiconductor Corp.
Theodore "Ted" Marchetti, VP of intellectual Property, Optiwave Semiconductor Corp.
RE:
Request for Settlement Authority — Optiwave Semiconductor Corp. v. Lumos Photonics, Inc., Case No. 5:22-cv-03417-EJD (N.D. Cal.)
MATTER NO.: 1014-00003
PRIVILEGED AND CONFIDENTIAL — NOT FOR DISTRIBUTION OUTSIDE THE BOARD OF DIRECTORS AND IDENTIFIED RECIPIENTS
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I. EXECUTIVE SUMMARY
The purpose of this memorandum is to request formal settlement authority from the Board of Directors of Optiwave Semiconductor Corp. ("OWS" or the "Company") for the patent infringement action captioned Optiwave Semiconductor Corp. v. Lumos Photonics, Inc., Case No. 5:22-cv-03417-EJD, currently pending in the United States District Court for the Northern District of California, San Jose Division, before the Honorable Edward J. Torvelis (the "Action").
As the Board is aware, on February 17, 2023, Judge Torvelis issued his Markman Order construing all eleven disputed claim terms across the four patents-in-suit. The Order adopted claim constructions substantially aligned with Defendant Lumos Photonics, Inc.'s ("Lumos") proposals on eight of the eleven disputed terms, effectively gutting OWS's infringement theories on three of the four asserted patents and significantly weakening the remaining infringement theory on the fourth. The Court adopted OWS's proposed constructions on only two terms — neither of which was dispositive of infringement — and adopted a modified construction on one additional term.
Following issuance of the Markman Order, Calderwood & Harkness LLP ("C&H") conducted an internal post-Markman assessment, the results of which were circulated to the Board on February 21, 2023 (the "Post-Markman Impact Assessment Memorandum," attached hereto as Appendix A and incorporated by reference). That assessment concluded that OWS's infringement theories are untenable as to U.S. Patent Nos. 10,234,567 (the "'567 Patent"), 10,891,234 (the "'234 Patent"), and 11,045,678 (the "'678 Patent"), and are significantly weakened — with a probability of success well below ten percent — as to U.S. Patent No. 11,312,890 (the "'890 Patent"). This conclusion was presented to the Board at its February 24, 2023 meeting (Appendix B), at which the Board authorized C&H to initiate settlement discussions with Lumos's counsel.
Pursuant to that authorization, on March 6, 2023, I contacted Victoria "Tori" Ashworth, lead partner at Brannick Howell & Stein LLP, counsel for Lumos, to propose a structured settlement window. The parties agreed to a thirty-day settlement window commencing on or about March 6, 2023, and filed a stipulated motion to stay all discovery deadlines during that period. The stipulation was filed with the Court on March 10, 2023, and remains pending.
This memorandum now requests authority from the Board to settle the Action on terms ranging from a cross-license with a nominal royalty payment down to a walk-away settlement with mutual releases and no monetary payment in either direction. Specifically, C&H recommends the following settlement approach:
Primary Objective: Pursue a cross-license agreement under which Lumos would pay OWS a one-time nominal royalty of $500,000 in exchange for a mutual cross-license covering both parties' patent portfolios, together with a mutual covenant not to sue and dismissal of all claims and counterclaims with prejudice.
Acceptable Fallback: If the cross-license proposal is rejected by Lumos, accept a walk-away settlement providing for mutual general releases, $0 payment in either direction, each party bearing its own attorneys' fees and costs, no admission of infringement, validity, or invalidity, and dismissal of all claims and counterclaims with prejudice.
Floor: Under no circumstances should OWS make any payment to Lumos, or agree to terms that involve any admission of invalidity or that narrow the enforceability of OWS's patents against third parties.
The near-zero probability of meaningful recovery in the wake of the Markman Order makes continued litigation economically irrational. The expected value of the litigation is negative when risk-adjusted against the estimated $1.55–$2.15 million in additional costs required to proceed through trial, plus the material downside risks of adverse invalidity findings, potential fee-shifting, management distraction, and impairment to the Company's broader patent portfolio. By contrast, settlement — even on walk-away terms — eliminates these risks, preserves OWS's patents for enforcement against other potential infringers, and allows the Company to redeploy legal and management resources toward higher-value activities.
C&H respectfully requests the Board act on this request no later than March 10, 2023, to permit prompt engagement with Lumos's counsel within the agreed-upon settlement window.
II. PROCEDURAL BACKGROUND
A. Case Posture
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 OWS patents directed to silicon photonics technologies:
1. U.S. Patent No. 10,234,567 (the "'567 Patent"), entitled "Integrated Waveguide Coupler with Adiabatic Mode Transition," issued March 19, 2019;
2. U.S. Patent No. 10,891,234 (the "'234 Patent"), entitled "Germanium-on-Silicon Photodetector with Graded Buffer Architecture," issued January 12, 2021;
3. U.S. Patent No. 11,045,678 (the "'678 Patent"), entitled "Multi-Channel Optical Transceiver with Integrated Wavelength-Division Multiplexing on a Monolithic Silicon Platform," issued June 29, 2021; and
4. U.S. Patent No. 11,312,890 (the "'890 Patent"), entitled "High-Speed Driver Circuit Architecture for Mach-Zehnder Modulator with Co-Integrated Pre-Emphasis Equalization," issued April 26, 2022.
The accused products are Lumos's LumosBridge™ 800G Optical Engine and LumosEdge™ 400ZR+ Pluggable Transceiver, both of which are commercially significant products in Lumos's data center interconnect product line. These products were publicly launched at OFC 2022 in March 2022 and have generated substantial revenue for Lumos in the intervening period.
On July 29, 2022, Lumos filed its Answer and Counterclaims, denying infringement of all four patents and asserting counterclaims for declaratory judgment of non-infringement and invalidity under 35 U.S.C. Sections 102 (anticipation), 103 (obviousness), and 112 (indefiniteness and lack of written description). Lumos's counterclaims are aggressive and, if adjudicated, could result in findings that one or more of the asserted patents are invalid — a result that would impair the value of those patents not only in this Action but against all potential infringers.
The case proceeded through initial disclosures, patent local rules disclosures (infringement and invalidity contentions), and claim construction briefing on the following schedule:
• December 5, 2022: OWS filed its Opening Claim Construction Brief, proposing constructions for all eleven disputed terms.
• December 19, 2022: Lumos filed its Responsive Claim Construction Brief.
• January 9, 2023: OWS filed its Reply Brief.
• January 19, 2023: Lumos filed its Sur-Reply, by leave of Court.
• January 30, 2023: The Markman hearing was held. The hearing lasted approximately six and one-half hours, during which the Court heard argument from both sides on all eleven disputed terms and posed extensive questions to both parties' counsel and technical experts. The length and depth of the hearing was notable; Judge Torvelis is known for conducting thorough Markman proceedings.
• February 17, 2023: The Court issued its Markman Order (34 pages), construing all eleven disputed terms.
Following the Board's authorization on February 24, 2023, C&H initiated settlement discussions with Lumos's counsel at Brannick Howell & Stein LLP. On March 10, 2023, the parties jointly filed a stipulation to stay all outstanding discovery deadlines for a period of thirty days to facilitate settlement negotiations. As of the date of this memorandum, the Court has not yet ruled on the stipulation, though we anticipate it will be granted given the mutual nature of the request.
B. Pre-Suit Damages Claim
OWS's Complaint sought damages in excess of $75 million, based on a reasonable royalty theory of damages under 35 U.S.C. Section 284. The damages calculation, as set forth in OWS's initial disclosures and as developed by our damages expert Dr. Lawrence Kessler of Apex Claim Analytics LLC, was structured as follows:
• Accused Product Revenue (CY 2022): Approximately $148.6 million in combined revenue from the LumosBridge™ 800G Optical Engine and LumosEdge™ 400ZR+ Pluggable Transceiver, based on publicly available financial data and industry estimates.
• Pre-Suit Revenue (Q1–Q2 2022): Approximately $62.3 million in accused product revenue generated during the period from product launch through the filing of the Complaint, for which pre-suit damages under 35 U.S.C. Section 287 were claimed based on constructive notice via patent marking.
• Reasonable Royalty Rate: 7.5%, derived from a Georgia-Pacific analysis incorporating comparable licensing transactions in the silicon photonics industry, the relative value of the patented technology to the accused products, and the parties' hypothetical negotiation positions.
• Base Annual Royalty Calculation: $148.6 million × 7.5% = approximately $11.145 million per year.
• Willfulness Enhancement: The Complaint alleged willful infringement based on Lumos's actual knowledge of the OWS patents, seeking enhanced damages of up to treble the compensatory award under 35 U.S.C. Section 284, as interpreted in Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93 (2016).
Prior to the commencement of this litigation, OWS engaged Clearpath IP Valuation Services, Inc. (Jennifer Armitage, CFA, CLP, lead appraiser) to conduct a formal valuation of the four patents-in-suit and the broader OWS patent portfolio. The Clearpath valuation, completed in April 2022, assigned a collective value of $42.8 million to the four asserted patents and $215 million to OWS's broader portfolio of eighty-seven issued patents and fourteen pending applications. These valuations were based on an income approach incorporating expected licensing revenues, litigation outcomes, and the competitive significance of the claimed technologies in the silicon photonics market.
As discussed below, the Markman Order has materially impaired the valuation of the four asserted patents and may necessitate a reassessment of the broader portfolio valuation.
III. IMPACT OF THE MARKMAN ORDER
A. Summary of Constructions
On February 17, 2023, the Court issued its Markman Order construing all eleven claim terms that were in dispute between the parties. The full text of the Order is attached as Appendix D. A summary of the Court's dispositions is as follows:
The net effect of the Markman Order is that key claim limitations in all four asserted patents have been construed to exclude the specific design implementations employed in Lumos's accused products. The Court's reasoning was detailed, well-supported, and reflected a careful reading of the intrinsic evidence — including the patent specifications, prosecution histories, and the parties' claim construction briefing. As a practical matter, this means that the Court's constructions are unlikely to be viewed as clearly erroneous on appeal and will present formidable obstacles at every subsequent stage of the litigation.
B. Patent-by-Patent Impact Analysis
1. The '567 Patent (Integrated Waveguide Coupler)
The '567 Patent is directed to an integrated optical waveguide coupler that achieves low-loss mode transitions between different waveguide geometries through an adiabatic coupling mechanism. The patent claims a specific structural arrangement in which the coupling region transitions optical power from one waveguide mode to another gradually, avoiding the excitation of higher-order optical modes that would cause signal degradation.
The central dispute at claim construction concerned the term "adiabatically coupled," which appears in all asserted independent claims of the '567 Patent.
OWS's proposed construction: "coupled such that optical mode transitions occur without significant power loss."
Lumos's proposed construction: "coupled through a gradual, continuous taper that prevents excitation of higher-order modes throughout the entire transition region."
Court's construction: "coupled through a gradual, continuous taper designed and configured to prevent excitation of higher-order modes over the entire transition length."
The Court's construction tracks Lumos's proposal almost verbatim, with only minor syntactic variation. The critical distinction lies in the requirement of a "gradual, continuous taper" — language that OWS's broader proposed construction deliberately omitted in order to encompass Lumos's segmented taper design.
Impact on infringement theory: Lumos's LumosBridge™ 800G Optical Engine employs a segmented (non-continuous) taper design, in which the coupling region consists of multiple discrete coupling sections rather than a single gradual and continuous taper. Under the Court's construction, which expressly requires a "gradual, continuous taper," Lumos's segmented taper architecture falls outside the scope of the claims. This is a structural and categorical exclusion, not a close call.
Doctrine of Equivalents ("DOE"): An argument under the doctrine of equivalents — i.e., that Lumos's segmented taper performs substantially the same function, in substantially the same way, to achieve substantially the same result as the claimed "gradual, continuous taper" — is foreclosed by prosecution history estoppel. During prosecution of the '567 Patent, the limitation "adiabatically coupled" was added by amendment to overcome the Tanaka prior art (U.S. Patent No. 9,456,012), which disclosed a non-adiabatic, abrupt coupling transition. The applicant's remarks accompanying the amendment distinguished the prior art on the basis that the claimed invention employed a specifically gradual and continuous transition, as opposed to the discrete or abrupt transitions disclosed in Tanaka. Under the doctrine of prosecution history estoppel as articulated in Festo Corp. v. Fenmore & Co., 535 U.S. 722 (2002), the narrowing amendment gives rise to a presumption that the patentee surrendered all equivalents between the original claim scope and the amended claim scope. None of the three recognized exceptions to this presumption (tangential relation, unforeseeable equivalent, or other reason) applies here: segmented taper designs were well known in the art at the time of the amendment, making the equivalent both foreseeable and directly related to the surrendered subject matter.
Assessment: Infringement is untenable under both literal infringement and the doctrine of equivalents. There is no viable theory of infringement remaining for the '567 Patent.
2. The '234 Patent (Germanium-on-Silicon Photodetector)
The '234 Patent is directed to a germanium-on-silicon photodetector structure that employs a graded buffer layer between the silicon substrate and the germanium absorber layer to manage lattice mismatch and reduce threading dislocation density. The critical limitation at claim construction concerned the composition profile of the buffer layer.
The key disputed term was "graded buffer layer having a continuously varying germanium concentration," which appears in Claims 1, 7, and 12 of the '234 Patent.
OWS's proposed construction: "a buffer layer in which the germanium concentration changes across the thickness of the layer."
Lumos's proposed construction: "a buffer layer in which the germanium atomic fraction increases monotonically and without step changes from the silicon substrate interface to the absorber layer."
Court's construction: Adopted Lumos's proposed construction verbatim.
The Court's analysis focused on the intrinsic evidence, particularly the specification's use of the phrase "continuously varying" in conjunction with detailed descriptions of continuous composition grading profiles. While the specification does describe both "continuously graded" and "step-graded" buffer layers as potential embodiments of the invention, the claims themselves use only the "continuously varying" language. The Court concluded that the claims, as written, are limited to continuous grading and do not encompass step-graded configurations, notwithstanding the broader disclosure in the specification.
Impact on infringement theory: Lumos's germanium-on-silicon photodetector, as used in both the LumosBridge™ and LumosEdge™ products, employs a step-graded SiGe buffer architecture with four discrete composition steps (germanium atomic fractions of 0.25, 0.50, 0.75, and 1.0). This step-graded design is explicitly excluded by the Court's construction, which requires that the germanium concentration vary "without step changes." The distinction between continuous grading and step grading is a fundamental structural difference that is well understood in the semiconductor physics literature and is not amenable to characterization as a trivial variation.
Note on drafting vulnerability: As noted in the Post-Markman Impact Assessment Memorandum (Appendix A), the claims of the '234 Patent suffer from a drafting gap: the specification discloses both continuous and step-graded embodiments, but the claims were drafted to cover only the continuously varying configuration. This gap was exploited by Lumos at claim construction and represents precisely the type of prosecution quality issue that OWS's patent prosecution practice should address going forward. Had the claims included dependent claims directed to step-graded configurations, or had the independent claims used broader language (e.g., "graded buffer layer"), the outcome might have been different.
Assessment: Infringement is untenable. There is no viable DOE argument given the clear structural distinction between continuous grading and step grading, and given the intrinsic evidence limiting the claims to the continuous configuration.
3. The '678 Patent (Multi-Channel Optical Transceiver with Integrated WDM)
The '678 Patent is directed to a multi-channel optical transceiver architecture that integrates wavelength-division multiplexing (WDM) elements directly on a single silicon photonic integrated circuit (PIC). The patent claims a monolithic integration approach in which all optical and WDM components are fabricated within a single semiconductor processing sequence, eliminating the need for separately fabricated and attached optical components.
The key disputed term was "integrated wavelength-division multiplexing element monolithically formed on a single silicon die."
OWS's proposed construction: "a WDM element that is formed on a silicon die using semiconductor fabrication processes."
Lumos's proposed construction: "a WDM element fabricated entirely within the same front-end-of-line and back-end-of-line semiconductor processing sequence on a single silicon substrate without heterogeneous bonding or attachment of separately fabricated optical components."
Court's construction: "fabricated entirely within the same front-end-of-line and back-end-of-line semiconductor processing sequence on a single silicon substrate without heterogeneous bonding or attachment of separately fabricated optical components."
The Court's construction adopted Lumos's proposal in its entirety and explicitly requires that the claimed structure be fabricated without "heterogeneous bonding or attachment of separately fabricated optical components." This construction reflects the Court's reading of the prosecution history and the specification's emphasis on the advantages of a purely monolithic approach over hybrid or heterogeneous integration techniques.
Impact on infringement theory: Lumos's 800G platform employs micro-transfer-printed III-V gain elements (indium phosphide-based laser sources) that are bonded to the silicon PIC. This heterogeneous integration approach — in which separately fabricated III-V optical components are transferred and bonded onto the silicon substrate — is precisely the type of design that the Court's construction excludes. The presence of heterogeneous bonding of separately fabricated optical components is undisputed; it is a design choice that Lumos has publicly described in its technical publications and product literature.
Additional prosecution history estoppel: During prosecution of the '678 Patent, the term "monolithically formed" was added by claim amendment to distinguish prior art references that disclosed heterogeneous integration approaches. The applicant's remarks accompanying the amendment specifically stated that "the present invention is distinguished from heterogeneous integration approaches in which separately fabricated optical components are bonded or attached to the silicon substrate." This statement constitutes a clear and unmistakable disclaimer of heterogeneous integration designs, further foreclosing any DOE argument.
Assessment: Infringement is untenable under both literal infringement and the doctrine of equivalents.
4. The '890 Patent (Driver Circuit Architecture for MZM)
The '890 Patent is directed to a high-speed driver circuit architecture for a Mach-Zehnder modulator (MZM) in which a pre-emphasis equalization stage is co-integrated with the modulator on a common semiconductor substrate. The patent claims a design in which the driver and modulator share the same fabrication process and are electrically connected without the use of discrete interconnect technologies such as bond wires or interposers.
The key disputed term was "pre-emphasis equalization stage electrically co-integrated with the modulator on a common substrate."
OWS's proposed construction: "an equalization circuit that is integrated with the modulator on a shared substrate."
Lumos's proposed construction: "an equalization circuit fabricated in the same semiconductor process as the modulator, sharing the same doping profiles and process layers, and electrically connected without bond wires, interposers, or package-level routing."
Court's construction: Adopted Lumos's proposed construction in full.
Impact on infringement theory: Lumos's driver architecture employs a separate CMOS driver die that is flip-chip bonded to the silicon photonic modulator die via copper pillar micro-bumps. This design involves two separately fabricated semiconductor dies — one containing the CMOS driver circuit and one containing the silicon photonic modulator — that are joined at the package level using micro-bump interconnect technology. Under the Court's construction, which requires that the equalization circuit be "fabricated in the same semiconductor process as the modulator" and "electrically connected without bond wires, interposers, or package-level routing," Lumos's flip-chip bonded architecture falls outside the scope of the claims.
Remaining DOE arguments: Unlike the other three patents, the '890 Patent presents at least some theoretical basis for a doctrine of equivalents argument. One might argue that copper pillar micro-bumps perform substantially the same function as direct on-chip electrical connection (i.e., providing high-bandwidth, low-latency signal transmission between the driver and modulator), in substantially the same way (i.e., through a short-distance metallic interconnection), to achieve substantially the same result (i.e., co-optimized driver-modulator performance). However, this argument is extremely weak for several reasons:
(a) Prosecution history estoppel: the "co-integrated" limitation was added during prosecution specifically to distinguish prior art references that disclosed separately fabricated and bonded driver circuits. The prosecution history contains explicit statements by the applicant distinguishing "co-integrated" designs from "separately packaged" or "bonded" driver-modulator configurations.
(b) The structural difference between true monolithic co-integration (same semiconductor process, same die) and flip-chip bonding of separate dies is well understood in the art and represents a fundamental architectural distinction, not a trivial variation.
(c) Under the Vitronics all-elements rule, an equivalents argument must be applied on an element-by-element basis, and equating a copper pillar micro-bump (which is, by definition, "package-level routing") with direct on-chip interconnection (which is, by definition, not package-level routing) would effectively vitiate the "without bond wires, interposers, or package-level routing" limitation.
Assessment: Infringement is untenable under the literal infringement theory. Some theoretical DOE arguments remain but are assessed as extremely weak, with a probability of success well below ten percent. This is the only patent with even a marginal remaining argument, but it does not change the overall assessment that OWS's litigation position is untenable.
C. Overall Litigation Value Assessment
The Markman Order has fundamentally altered the economics of this litigation. The following table summarizes the impact:
Even under the most optimistic scenario — in which OWS's marginal DOE argument on the '890 Patent survives summary judgment and proceeds to trial — the damages base would be limited to a single patent's contribution to the value of the accused products. Dr. Kessler's preliminary apportionment analysis attributed approximately $15 million in annual royalties to the '890 Patent alone (on a standalone basis), a figure that itself would be subject to substantial reduction given the weakness of the infringement theory and the likelihood that a jury or court would discount the royalty rate for a single-patent case. The probability of achieving even this reduced recovery is estimated at less than five percent overall.
C&H considered and rejected the option of seeking an interlocutory appeal of the Markman Order under 28 U.S.C. Section 1292(b). Markman orders are not immediately appealable as of right; they are interlocutory orders reviewable only on appeal from a final judgment or, in extraordinary cases, on a discretionary interlocutory appeal certified by the district court. Judge Torvelis has historically been reluctant to certify interlocutory appeals on claim construction issues, and the Markman Order here is well-reasoned and supported by extensive intrinsic evidence. The likelihood of obtaining certification, followed by acceptance of the appeal by the Federal Circuit, followed by reversal of the constructions, is vanishingly small and would not justify the delay and expense involved.
IV. LITIGATION SPEND TO DATE
A. Calderwood & Harkness Fees and Costs
Through the current date, C&H has billed a total of $1,847,312 in legal fees for its work in the Action. This figure reflects the blended hourly rate arrangement negotiated between C&H and OWS at the outset of the engagement, which includes a ten percent volume discount on C&H's standard hourly rates. The effective hourly rates for the primary billing timekeepers on the matter are as follows:
In addition to legal fees, C&H has incurred and billed a total of $289,456 in costs and disbursements, including filing fees, court reporter fees, deposition transcripts, electronic discovery hosting and processing charges (administered through Ridgeline Systems), travel expenses for the Markman hearing, and related out-of-pocket expenses.
B. Expert Fees
OWS has engaged two testifying experts in connection with the Action:
Dr. Harold Whitfield (Whitfield Technical Consulting Group, Inc.) serves as OWS's technical expert for claim construction and infringement analysis. Dr. Whitfield provided a declaration in support of OWS's claim construction briefing, attended and assisted C&H's team at the Markman hearing, and was prepared to provide an infringement opinion at the expert discovery stage. Dr. Whitfield bills at a rate of $750 per hour.
Dr. Lawrence Kessler (Apex Claim Analytics LLC) was engaged as OWS's damages expert to provide a reasonable royalty opinion under the Georgia-Pacific framework. Dr. Kessler's engagement has been paused following the Markman Order, as the infringement theories on which his damages analysis depends are no longer viable. Dr. Kessler bills at a rate of $850 per hour.
Combined expert fees billed through the current date total $412,800.
C. Total Litigation Investment
The grand total of OWS's litigation expenditure in the Action through the current date is as follows:
This total represents approximately 60.7% of the Board-approved litigation budget of $4.2 million through trial, leaving a remaining budget capacity of approximately $1,650,432.
D. Retainer Status
At the outset of the engagement and on a quarterly basis thereafter, OWS has deposited retainer funds with C&H as follows:
• Q2 2022 (engagement): $100,000
• Q3 2022: $100,000
• Q4 2022: $100,000
• Q1 2023: $100,000
• Total retainer deposits: $400,000
Of these deposits, a net total of $337,512 has been applied against outstanding invoices. The current retainer balance held by C&H is $62,488. The balance of fees collected — $1,509,800 — has been invoiced and paid through OWS's standard monthly invoice process.
E. Sunk Cost Analysis
The $2,549,568 spent to date on the Action constitutes a sunk cost that OWS cannot recover regardless of the settlement path chosen. This amount has been expended in good faith pursuit of OWS's patent enforcement objectives, but the Markman Order has fundamentally altered the landscape, and no future course of action can recoup these expenditures.
Critically, OWS cannot recover its attorneys' fees in this Action under any realistic scenario. Fee-shifting under 35 U.S.C. Section 285 is available only in "exceptional cases," and a finding of exceptionality would not be available to a prevailing plaintiff whose own infringement theories have been substantially defeated at claim construction. To the contrary, the risk of fee-shifting runs in the opposite direction: Lumos could potentially seek fees under Section 285 if the Court were to conclude that OWS's continued prosecution of claims that are untenable under the Markman constructions renders this an exceptional case. This risk further supports the recommendation to settle promptly.
The economic question before the Board is therefore a forward-looking one: whether to invest an additional $1.55–$2.15 million in litigation costs with a near-zero probability of recovery, or to resolve the matter through settlement and redeploy those resources toward higher-return activities.
V. ESTIMATED COSTS OF CONTINUED LITIGATION
A. Remaining Phase Costs (If Case Proceeds Through Trial)
Should the Board determine not to authorize settlement and instead direct C&H to continue the prosecution of the Action through trial, the following cost estimates represent C&H's reasonable projections for the remaining phases of the litigation:
1. Completion of Fact discovery
Remaining fact discovery includes supplemental document production (particularly Lumos's updated financial data for accused product revenues), depositions of Lumos technical witnesses — including Dr. Mei-Lin Chen (VP of Engineering, Silicon Photonics), Dr. Nikolai Petrov (Senior Director, Product Development), and potentially two to three additional engineering and sales personnel — and the completion of third-party discovery. The estimated cost for this phase is $350,000–$450,000.
2. Expert discovery
Expert discovery would encompass the preparation and service of OWS's opening expert reports (Dr. Whitfield on infringement, Dr. Kessler on damages), the receipt and analysis of Lumos's responsive expert reports (anticipated from Dr. Raymond Ng, Lumos's technical expert, and Dr. Patricia Moreno of Compass Forensic Accounting LLP, Lumos's damages expert), the preparation and service of OWS's rebuttal expert reports, and the depositions of all testifying experts. The estimated cost for this phase is $400,000–$550,000.
3. Summary Judgment Briefing
Lumos is virtually certain to move for summary judgment of non-infringement on all four patents based on the Markman constructions. OWS would need to brief its opposition to this motion, and Lumos would reply. The estimated cost for summary judgment briefing — including the substantial factual and legal work required to attempt to preserve any remaining infringement theory — is $200,000–$300,000.
4. Pre-Trial and Trial Preparation
If any claims survive summary judgment (which C&H assesses as unlikely for three patents and possible but improbable for the '890 Patent), pre-trial preparation would include motions in limine, the preparation of the pre-trial order, jury instructions (or proposed findings of fact and conclusions of law for a bench trial), witness preparation, demonstrative exhibits, and related activities. The estimated cost is $350,000–$500,000.
5. Trial
The trial is currently projected as a five-to-seven-day patent bench trial before Judge Torvelis. Trial costs would include attorney time, witness coordination, demonstrative exhibit preparation, daily trial transcripts, and associated travel and logistics expenses. The estimated cost is $250,000–$350,000.
Total estimated remaining costs to proceed through trial: approximately $1,550,000–$2,150,000.
B. Risk of Adverse Outcomes
Beyond the direct financial costs of continued litigation, the Board should be aware of several material downside risks that would accompany a decision to proceed:
Summary Judgment Risk: Lumos will almost certainly move for summary judgment of non-infringement based on the Markman constructions. Based on C&H's assessment of the constructions, there is a high probability that summary judgment would be granted as to the '567 Patent, the '234 Patent, and the '678 Patent. Summary judgment on the '890 Patent is also possible, particularly given the prosecution history estoppel issues identified above. If summary judgment is granted on all four patents, OWS would receive no recovery and would bear the full cost of the summary judgment proceedings.
Trial Risk: Even if one or more infringement theories survive summary judgment — which C&H assesses as unlikely — the trial would proceed under claim constructions that effectively exclude Lumos's actual product designs. Presenting an infringement case to the Court under these circumstances would be an extraordinarily difficult undertaking, and the probability of a favorable verdict is minimal.
Invalidity Counterclaim Risk: Lumos's counterclaims for declaratory judgment of invalidity under 35 U.S.C. Sections 102, 103, and 112 remain pending. If the case proceeds to adjudication on these counterclaims, and the Court or a jury finds one or more of OWS's patents invalid, the consequences would extend far beyond this Action. An invalidity finding would render the affected patents unenforceable against all potential infringers, permanently impairing their value. This risk is particularly acute given that Lumos has assembled a substantial prior art case, including references that were not considered by the Patent Trial and Appeal Board during prosecution.
Fee-Shifting Risk: If OWS continues to prosecute infringement claims that are untenable under the Court's claim constructions, Lumos may argue that this renders the case "exceptional" under 35 U.S.C. Section 285, entitling Lumos to an award of its attorneys' fees. While C&H assesses this risk as moderate — courts are generally reluctant to impose fee-shifting based solely on an adverse Markman Order — the risk increases materially if OWS continues to litigate claims that have no reasonable basis for success. Lumos's fees in this Action are likely substantial, and a fee award could impose a significant additional financial burden on OWS.
Management Distraction: Continued litigation would require the ongoing involvement of OWS's senior technical personnel, including Ted Marchetti and members of his team, in discovery and trial preparation. This represents an opportunity cost that should be weighed against the near-zero expected return from the litigation.
Lender Notification Obligations: As discussed in Section VIII below, OWS's revolving credit facility with First Pacific Commerce Bank, N.A. requires notification of material litigation developments. A continued litigation posture, particularly one involving adverse summary judgment rulings or an invalidity finding, could trigger adverse consequences under the credit facility covenants.
VI. SETTLEMENT OPTIONS AND ANALYSIS
C&H has identified three primary options for the Board's consideration. Each option is analyzed below in terms of its proposed terms, advantages, disadvantages, and overall assessment.
A. Option 1: Cross-License with Nominal Royalty (Preferred)
Proposed Terms:
• Mutual cross-license covering OWS's entire eighty-seven-patent portfolio and Lumos's patent portfolio (currently comprising approximately fifty-three issued U.S. patents and twelve pending applications, based on publicly available USPTO records).
• Nominal one-time royalty payment from Lumos to OWS of $500,000.
• Mutual covenant not to sue covering all patents in both portfolios as of the date of the agreement and for a defined field-of-use (data center optical interconnect and related silicon photonics technologies).
• Mutual release of all claims and counterclaims in the Action.
• Dismissal of the Action with prejudice.
• No admission of infringement, validity, or invalidity by either party.
• Standard confidentiality provisions governing the terms of the settlement.
Advantages:
• Provides some financial return on OWS's litigation investment, even if nominal relative to the original damages claim.
• Secures freedom-to-operate for OWS's products against Lumos's patent portfolio, which is a strategically significant benefit. Lumos holds a number of patents in the silicon photonics space that may constrain OWS's next-generation product development — particularly in the areas of co-packaged optics and 1.6T transceivers — and a cross-license would eliminate this constraint.
• Salvages a degree of reputational benefit: a settlement structured as a mutual cross-license with a royalty payment from the defendant is perceived in the market and by competitors as a licensing outcome rather than a litigation defeat.
• Provides certainty and finality, eliminating all downside risks identified in Section V.B.
Disadvantages:
• Lumos has little incentive to agree to this structure in the current environment. Lumos's counsel is aware that the Markman Order has substantially gutted OWS's case, and Lumos may see no reason to pay any royalty — even a nominal one — to resolve claims that it believes will be dismissed on summary judgment.
• Lumos's negotiating position is substantially stronger than OWS's, and Victoria Ashworth is a sophisticated litigator who will negotiate from a position of strength.
• The proposed $500,000 royalty payment is a fraction of the pre-Markman damages claim and may be perceived as capitulation by some stakeholders.
Probability of Lumos Accepting: C&H estimates this probability at approximately 15–25%. Lumos may see value in a cross-license for its own freedom-to-operate purposes — OWS's broader patent portfolio includes patents not at issue in this Action that could be relevant to Lumos's products — and the certainty of resolution may be attractive. However, Lumos may also calculate that it can achieve a better outcome (i.e., a walk-away with no payment) simply by waiting and leveraging its superior litigation position.
B. Option 2: Walk-Away with Mutual Releases (Acceptable Fallback)
Proposed Terms:
• No payment in either direction ($0).
• Mutual general releases of all claims and counterclaims arising out of or related to the Action, including Lumos's invalidity counterclaims.
• No license granted by either party to the other.
• Each party bears its own attorneys' fees and costs.
• No admission of infringement, validity, or invalidity by either party.
• Dismissal of all claims and counterclaims in the Action with prejudice.
• Standard mutual non-disparagement provision.
• Standard confidentiality provision.
Advantages:
• Eliminates the risk of further litigation expenditure, preserving the remaining approximately $1,650,432 in the Board-approved litigation budget for reallocation to other priorities.
• Avoids the risk of adverse invalidity findings that could impair the value of OWS's patents beyond this litigation. The mutual release of Lumos's invalidity counterclaims is a critical element: if these counterclaims were adjudicated and the Court found one or more of the asserted patents invalid, the patents would be unenforceable against any party, not just Lumos.
• Avoids the risk of a fee award to Lumos under 35 U.S.C. Section 285.
• Allows immediate matter closure, freeing C&H's team, OWS's in-house legal team, and OWS's technical personnel from ongoing litigation obligations.
• Preserves the asserted patents for enforcement against other potential infringers. A dismissal with prejudice on mutual releases, without an adjudication of invalidity, does not affect the patents' enforceability against third parties. The Markman constructions issued in this case are specific to this litigation and would not formally bind another court in a different action, although defendants in future actions would likely cite them as persuasive authority.
Disadvantages:
• OWS recovers nothing on its $2,549,568 litigation investment.
• No cross-license is obtained against Lumos's patent portfolio, leaving OWS potentially exposed to Lumos patent assertions in the future.
• No deterrent signal is sent to other potential infringers. A walk-away settlement may be perceived as a signal that OWS's patents are weak or that OWS lacks the resources or resolve to enforce its intellectual property.
• Reputational concern: the market — including OWS's customers, competitors, and potential licensing partners — may perceive a walk-away as an acknowledgment that OWS's patents lack merit, even though the settlement terms would include no admission.
Net Analysis: Notwithstanding its disadvantages, the walk-away option is economically rational. The alternative — continued litigation through trial — has a risk-adjusted expected value that approaches zero (or is negative when litigation costs are factored in). The probability of any meaningful recovery is less than five percent, and even a successful outcome would yield dramatically reduced damages limited to a single patent. Against this near-zero expected return, OWS would invest an additional $1.55–$2.15 million in litigation costs while bearing the material downside risks of invalidity findings, fee-shifting, and management distraction.
It is also important to note that the mutual releases and dismissal with prejudice do not constitute an adjudication of invalidity. OWS's four asserted patents — and its broader eighty-seven-patent portfolio — remain valid and enforceable against third parties. The Markman constructions are case-specific and would not bind another court in a different infringement action. While it is true that future defendants may cite the constructions as persuasive authority, claim construction is inherently a case-by-case determination, and OWS's counsel in any future enforcement action would be free to argue for different constructions based on different accused products, different prior art, and different arguments.
C. Option 3: Continued Litigation Through Trial (Not Recommended)
Estimated Additional Spend: $1,550,000–$2,150,000, as detailed in Section V.A above.