HIGHLY CONFIDENTIAL — ATTORNEYS' EYES ONLY
EXPERT REPORT OF DR. LAWRENCE KEATING, PH.D., ON THE SUBJECT OF DAMAGES
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS MARSHALL DIVISION
EXPERT REPORT OF DR. LAWRENCE KEATING, PH.D. ON THE SUBJECT OF DAMAGES
DRAFT — Due June 15, 2025
Prepared on Behalf of: Plaintiff Optiwave Semiconductor Corp.
Prepared by: Dr. Lawrence Keating, Ph.D. Managing Director Meridian Economic Consulting Group, LLC 233 South Wacker Drive, Suite 4400 Chicago, IL 60606 Telephone: (312) 555-4800
Email: lkeating@meridianeconomic.com
Counsel of Record: Calderwood & Harkness LLP Alan Ngo, Responsible Partner Marcus Delgado, Billing Partner Wendy Schultz, Lead Associate Omar Siddiqui, Working Associate 350 South Grand Avenue, 48th Floor Los Angeles, CA 90071 Telephone: (213) 555-7200
Local Counsel: Whitmore & Callahan LLP James "Jim" Callahan 110 North College Avenue, Suite 800 Tyler, TX 75702 Telephone: (903) 555-3100
CONFIDENTIALITY DESIGNATION: This report is designated HIGHLY CONFIDENTIAL — ATTORNEYS' EYES ONLY and contains information designated under the Stipulated Protective Order entered in this action pursuant to the three-tier confidentiality framework (Confidential / Highly Confidential — Attorneys' Eyes Only / Highly Confidential — Source Code). This report and its contents shall be treated in accordance with the terms and conditions of the Stipulated Protective Order (D.E. 22) and shall not be disclosed to any person or entity except as expressly permitted thereunder.
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I. INTRODUCTION AND QUALIFICATIONS
A. Purpose and Scope of Report
1. I, Dr. Lawrence Keating, have been retained by Calderwood & Harkness LLP on behalf of Plaintiff Optiwave Semiconductor Corp. ("OWS" or "Optiwave") to provide expert opinions on economic damages arising from the infringement by Defendant Lumicore Technologies, Inc. ("Lumicore") of four United States patents: U.S. Patent No. 10,234,847 (the "'847 Patent"), U.S. Patent No. 10,891,193 (the "'193 Patent"), U.S. Patent No. 9,678,562 (the "'562 Patent"), and U.S. Patent No. 11,402,015 (the "'015 Patent") (collectively, the "Asserted Patents").
2. I have been asked to analyze and quantify the economic damages sustained by OWS as a result of Lumicore's infringement of the Asserted Patents and to present my opinions regarding the appropriate measure of damages in this case. In conducting my analysis, I have considered the full range of evidence available in this litigation, including the parties' financial data, licensing histories, market information, deposition testimony, expert reports, and other materials as described more fully below.
3. This report presents three damages theories, each grounded in well-established principles of patent damages law and supported by detailed economic analysis:
Theory 1: Lost Profits. OWS is entitled to lost-profit damages under the framework established in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978). OWS and Lumicore are direct competitors in the silicon-photonics transceiver market, and OWS can demonstrate that "but for" Lumicore's infringement, OWS would have captured a substantial share of the sales made by Lumicore's accused products. My analysis of lost profits yields damages of approximately $128.9 million.
Theory 2: Reasonable Royalty. For the portion of Lumicore's accused-product sales that OWS would not have captured in the "but for" world, OWS is entitled to a reasonable royalty under the framework established in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). My analysis of all fifteen Georgia-Pacific factors, supported by comparable license agreements and industry benchmarking data, yields a royalty rate of 8.5% applied to the non-displaced sales base, resulting in reasonable royalty damages of approximately $37.5 million.
Theory 3: Enhanced Damages for Willful Infringement. OWS is entitled to enhanced damages 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). The evidence demonstrates that Lumicore knowingly and deliberately infringed the Asserted Patents after receiving actual notice, declined to take a license, and continued to launch new infringing products. My analysis recommends a selected enhancement of approximately $43.6 million (within the blended overall damages demand).
4. Taken together, the total compensatory damages amount to approximately $166.4 million (the sum of lost profits and reasonable royalty). With the recommended enhancement for willful infringement, the total damages demand is approximately $210.0 million. Under more aggressive enhancement scenarios, the total damages could be substantially higher, as detailed in Section VII below.
5. All of the opinions expressed in this report are stated to a reasonable degree of economic certainty.
6. This report addresses damages through the projected trial date of February 2, 2026. For calculation purposes, my damages model runs through the end of the fourth quarter of 2025 (Q4 2025). I reserve the right to update and supplement my calculations as additional data becomes available, including actual accused-product revenue data for FY 2024 and subsequent periods.
B. Qualifications of Dr. Lawrence Keating
7. I am currently Managing Director of Meridian Economic Consulting Group, LLC ("Meridian"), an economic consulting firm headquartered in Chicago, Illinois. Meridian provides economic analysis, valuation, and expert testimony services in complex commercial litigation, with a particular focus on intellectual property disputes.
8. I hold a Ph.D. in Economics from the University of Chicago, with a specialization in industrial organization and intellectual property valuation. I also hold a Master of Arts in Economics from the University of Chicago and a Bachelor of Science in Economics, summa cum laude, from the University of Michigan.
9. Over the course of more than twenty years, I have developed extensive expertise in the analysis and quantification of patent damages. My practice focuses on the valuation of intellectual property, the assessment of lost profits and reasonable royalties in patent infringement cases, and the economic analysis of technology markets. I have particular expertise in the semiconductor, photonics, telecommunications, and technology industries.
10. I have served as a damages expert in more than forty-five patent infringement cases in federal courts across the United States, including multiple cases in the Eastern District of Texas. I have submitted expert reports and provided deposition and trial testimony in matters involving a wide range of technologies and patent portfolios. A representative sample of my prior engagements includes cases in the semiconductor fabrication, optical networking, wireless communications, software, and medical device industries.
11. In addition to my consulting practice, I have published extensively in peer-reviewed academic journals on topics related to intellectual property economics, patent valuation methodology, and technology market analysis. I have served as a guest lecturer at the University of Chicago Booth School of Business, Northwestern Pritzker School of Law, and Georgetown University Law Center.
12. My current billing rate for expert services is $875 per hour. The estimated total engagement budget for my work in this matter is $950,000, which includes the preparation of this initial report, deposition preparation and testimony, rebuttal analysis, and trial preparation and testimony. My compensation is not contingent on the outcome of this litigation or on the substance of my opinions.
13. I was retained by Calderwood & Harkness LLP on behalf of OWS pursuant to a retention agreement dated August 5, 2024. My full curriculum vitae, including a complete list of publications, presentations, and prior testimony experience, is attached to this report as Exhibit 1.
C. Materials Considered
14. In forming my opinions, I have reviewed and considered a substantial body of documents, data, deposition testimony, expert reports, and other materials. The principal categories of materials I considered include, but are not limited to, the following:
(a) The four Asserted Patents ('847, '193, '562, and '015) and their respective prosecution histories before the United States Patent and Trademark Office;
(b) The complete file of Infringement Contentions served by OWS on September 16, 2024, including supporting claim charts mapping the claims of the Asserted Patents to the features and functionality of Lumicore's accused products;
(c) Reverse-engineering teardown reports prepared by Benchmark Semiconductor Analysis, LLC (Kevin Ng, Lead Engineer), including: the LumiLink 400G-ZR+ teardown report dated December 12, 2022; the LumiLink 800G-DR8 teardown report dated June 2023; and the LumiEdge 1600G-LR teardown report dated February 2024;
(d) The draft Expert Report of Dr. Caroline Ashford on the subject of infringement, upon which I have relied for opinions regarding infringement of the Asserted Patents by Lumicore's accused products, including both literal infringement and infringement under the doctrine of equivalents for certain claims;
(e) The draft Expert Report of Gregory Falk on the subject of industry background and market dynamics, upon which I have relied for opinions regarding the competitive landscape, market size and growth, and the relative positioning of OWS and Lumicore within the silicon-photonics transceiver market;
(f) OWS's financial records, including audited financial statements prepared by Gresham & Whitfield LLP for fiscal years 2021 through 2023. For FY 2023, OWS reported total revenue of $487.3 million and net income of $61.4 million;
(g) OWS's internal product-level financial data, including detailed cost and margin data for the OWS-400ZR, OWS-800XR, and OWS-1600DR product families. The gross margin on OWS's products competing directly with the accused products is 47.3%;
(h) Lumicore Technologies, Inc.'s Annual Report on Form 10-K for FY 2023, reporting estimated total revenue of $312.6 million, as well as segment disclosures and product-level financial data produced in discovery and designated Highly Confidential — Attorneys' Eyes Only;
(i) Lumicore product-level financial data, including gross margins by product line (ranging from 52.1% for the LumiLink 400G-ZR+ to 58.3% for the LumiEdge 1600G-LR), average selling prices, unit volumes, and customer-by-customer revenue breakdowns;
(j) Deposition transcripts of the following witnesses:
(i) Dr. Jian-Wei Huang, CTO of OWS (November 5, 2024); (ii) Dr. Sandra Michaud, CTO of Lumicore (November 19, 2024); (iii) Raymond Bautista, General Counsel of Lumicore (December 3, 2024); (iv) Angela Reeves, Managing Director of FairPoint Licensing Group, LLC (December 10, 2024); (v) Kevin Ng, Lead Engineer at Benchmark Semiconductor Analysis, LLC (January 7, 2025);
(k) Correspondence between FairPoint Licensing Group, LLC and Lumicore, including the initial licensing/notice letter dated January 15, 2023, notes from the in-person meeting on April 20, 2023 in Austin, Texas, and the supplemental licensing letter dated May 15, 2023;
(l) Comparable license agreements, as detailed in Section V.B of this report, including OWS's own licensing agreements with Terralink Semiconductor, NovaWave Corp., and Helix Integrated Photonics, as well as industry comparable agreements from third-party licensing transactions and litigation settlements in the silicon-photonics and semiconductor industries;
(m) Lumicore's Invalidity Contentions served October 14, 2024, which I reviewed for context only and upon which I do not rely;
(n) Lumicore's IPO prospectus filed with the Securities and Exchange Commission in connection with its initial public offering on the Nasdaq Stock Market in March 2022 at an offering price of $24 per share. At the time the Complaint was filed in this action (April 22, 2024), Lumicore's shares were trading at approximately $37 per share, with 91.8 million shares outstanding, yielding a market capitalization of approximately $3.4 billion;
(o) The Solara Optics, Inc. Asset Purchase Agreement dated June 15, 2018, pursuant to which OWS acquired a portfolio of twelve patents, including the '562 Patent, for a purchase price of $34.5 million;
(p) Industry publications, analyst reports, market research, and other publicly available data regarding the silicon-photonics transceiver market, hyperscale data-center build-out trends, and competitive dynamics among market participants;
(q) All other materials identified in the complete list of materials considered, attached as Exhibit 2.
15. I have also had discussions with counsel for OWS regarding factual and legal issues relevant to my analysis. These discussions have informed my understanding of the legal framework applicable to damages in patent infringement cases, but my economic opinions and conclusions are my own.
II. BACKGROUND AND FACTUAL OVERVIEW
A. The Parties
1. Optiwave Semiconductor Corp. (Plaintiff)
16. Optiwave Semiconductor Corp. ("OWS" or "Optiwave") is a Delaware corporation headquartered at 4810 Bayside Technology Parkway, Suite 300, Santa Clara, California 95054. OWS is a fabless semiconductor company specializing in the design and commercialization of silicon photonics chipsets for data-center interconnects, a rapidly growing segment of the semiconductor and optical networking industries.
17. OWS was founded in 2011 and has grown substantially over the past decade, currently employing approximately 1,250 people across its offices in Santa Clara, California; Austin, Texas; and Shenzhen, China. As a fabless company, OWS designs its integrated circuits in-house and outsources fabrication to leading semiconductor foundries, maintaining established relationships with foundry partners that provide scalable manufacturing capacity.
18. For the fiscal year ended December 31, 2023 ("FY 2023"), OWS reported total revenue of $487.3 million and net income of $61.4 million, as reflected in its audited financial statements prepared by Gresham & Whitfield LLP. OWS is the third-largest U.S. supplier of silicon-photonics transceiver modules for hyperscale data centers, a market that has experienced rapid and sustained growth driven by the expansion of cloud computing, artificial intelligence workloads, and high-performance data-center infrastructure.
19. OWS's key product families include the OWS-400ZR, OWS-800XR, and OWS-1600DR transceiver module families. These products are designed to meet the demanding performance, power, and density requirements of hyperscale data-center operators. OWS sells its transceiver modules to leading hyperscale operators, cloud service providers, original equipment manufacturers ("OEMs"), and telecommunications equipment vendors.
20. OWS maintains a substantial patent portfolio, consisting of 142 issued United States patents and 58 pending patent applications, covering a broad range of innovations in silicon photonics, optical transceiver design, waveguide multiplexing, thermal management, and related technologies. OWS actively manages and enforces its intellectual property portfolio through a combination of internal patent management, licensing through FairPoint Licensing Group, LLC, and, where necessary, litigation.
21. OWS is majority-owned by Ridgeline Capital Partners, LP, a private equity firm that acquired a 55% ownership stake in OWS in 2019 for approximately $780 million. Franklin Osei is the Managing Partner of Ridgeline Capital Partners. The remaining equity is held by OWS's management team, employees, and early-stage investors.
22. OWS's current executive leadership includes:
• Dr. Priya Ramaswamy, Chief Executive Officer
• Dr. Jian-Wei Huang, Chief Technology Officer
• Rebecca Tanaka, General Counsel
• Dr. Nikolai Petrov, Vice President of Engineering (Photonics)
• David Leitner, Chief Financial Officer
23. OWS maintains a $125 million revolving credit facility with Weston Fidelity Bank, N.A. as its primary commercial lender.
2. Lumicore Technologies, Inc. (Defendant)
24. Lumicore Technologies, Inc. ("Lumicore") is a Delaware corporation headquartered at 9200 Spectrum Boulevard, Building C, Austin, Texas 78759. Lumicore is a fast-growing entrant in the silicon-photonics transceiver market, targeting both hyperscale data-center and telecommunications customers.
25. Lumicore was founded in 2015 and has grown rapidly since its founding, currently employing approximately 870 people. For the fiscal year ended December 31, 2023, Lumicore reported total revenue of approximately $312.6 million in its Annual Report on Form 10-K. Lumicore's revenue has grown at a compound annual growth rate of approximately 45% over the past three fiscal years, driven primarily by its entry into the silicon-photonics transceiver market with products that compete directly with OWS's offerings.
26. Lumicore completed an initial public offering on the Nasdaq Stock Market in March 2022 at an offering price of $24 per share, generating gross proceeds of approximately $552 million. The IPO was managed by Silverstone Capital Markets LLC. At the time the Complaint in this action was filed on April 22, 2024, Lumicore's common stock was trading at approximately $37 per share, with 91.8 million shares outstanding, yielding a market capitalization of approximately $3.4 billion.
27. Lumicore's current executive leadership includes:
• Thomas "Tom" Kessler, Chief Executive Officer
• Dr. Sandra Michaud, Chief Technology Officer
• Raymond Bautista, General Counsel
• Dr. Eric Dalmqvist, Vice President of Product Development
• Janet Moreno, Chief Financial Officer
28. Lumicore's financial statements are audited by Brennan Kellogg & Associates LLP.
B. The Asserted Patents
29. OWS asserts four United States utility patents in this litigation. Each of the Asserted Patents covers fundamental aspects of high-performance silicon-photonics transceiver module technology. The Asserted Patents are summarized as follows:
30. U.S. Patent No. 10,234,847 (the "'847 Patent") is entitled "Multi-Channel Silicon Photonic Waveguide Multiplexer with Low Insertion Loss." The '847 Patent was filed on September 14, 2016, and issued on March 19, 2019. The '847 Patent was originally assigned to and is currently owned by OWS. The '847 Patent claims innovations in waveguide multiplexer architecture that enable multi-channel silicon photonic devices to achieve significantly lower insertion loss compared to prior-art designs, a critical performance parameter for high-bandwidth optical transceiver modules.
31. U.S. Patent No. 10,891,193 (the "'193 Patent") is entitled "High-Bandwidth coherent Optical Transceiver Integrated on Silicon Substrate." The '193 Patent was filed on April 7, 2017, and issued on January 12, 2021. The '193 Patent was originally assigned to and is currently owned by OWS. The '193 Patent claims innovations in the integration of coherent optical transceiver functions on a single silicon substrate, enabling higher bandwidth density and improved performance compared to discrete-component implementations. The '193 Patent shares Provisional Application No. 62/499,117 with the '015 Patent.
32. U.S. Patent No. 9,678,562 (the "'562 Patent") is entitled "Method for Thermal Management of Photonic Integrated Circuits Using Embedded Micro-Channel Heat Sinks." The '562 Patent was filed on November 22, 2014, and issued on June 13, 2017. The '562 Patent was originally assigned to Solara Optics, Inc. and was acquired by OWS pursuant to an Asset Purchase Agreement dated June 15, 2018, in which OWS acquired a portfolio of twelve patents, including the '562 Patent, from Solara Optics for a purchase price of $34.5 million. The '562 Patent claims methods for managing thermal dissipation in photonic integrated circuits through the use of embedded micro-channel heat sinks, a technology that enables photonic circuits to operate at higher power levels without performance degradation. The '562 Patent has a continuation relationship with the '847 Patent.
33. U.S. Patent No. 11,402,015 (the "'015 Patent") is entitled "Polarization-Diverse Grating Coupler for Silicon Photonic Transceivers." The '015 Patent was filed on August 30, 2019, and issued on August 2, 2022. The '015 Patent was originally assigned to and is currently owned by OWS. The '015 Patent claims innovations in the design of polarization-diverse grating couplers that enable more efficient optical coupling in silicon photonic transceivers, improving bandwidth and reducing signal loss. The '015 Patent shares Provisional Application No. 62/499,117 with the '193 Patent.
34. All four Asserted Patents are utility patents. All maintenance fees for the Asserted Patents are current, and no inter partes review petitions have been filed to date with respect to any of the Asserted Patents. The Asserted Patents were prosecuted by Cascade IP Advisors, LLC (Dr. Martin Chu, Lead Prosecution Attorney), 1550 Crystal Drive, Suite 600, Arlington, Virginia 22202.
C. The Accused Products and Revenue Data
35. OWS accuses three Lumicore product lines of infringing one or more of the Asserted Patents. The accused products and their associated revenue data are summarized below.
1. LumiLink 400G-ZR+
36. The LumiLink 400G-ZR+ is a 400-gigabit coherent optical transceiver module designed for data-center interconnect applications. Lumicore launched the LumiLink 400G-ZR+ in the third quarter of 2022 (Q3 2022). The LumiLink 400G-ZR+ is accused of infringing three of the four Asserted Patents: the '847 Patent, the '193 Patent, and the '562 Patent.
37. According to Lumicore's segment disclosures and financial data produced in discovery, the LumiLink 400G-ZR+ generated revenue of $94.8 million in FY 2023. The gross margin on the LumiLink 400G-ZR+ was 52.1%, based on Lumicore's product-level financial data produced in discovery and designated Highly Confidential — Attorneys' Eyes Only.
2. LumiLink 800G-DR8
38. The LumiLink 800G-DR8 is an 800-gigabit parallel optical transceiver module targeting short-reach data-center interconnect applications. Lumicore launched the LumiLink 800G-DR8 in the first quarter of 2023 (Q1 2023). The LumiLink 800G-DR8 is accused of infringing all four of the Asserted Patents: the '847 Patent, the '193 Patent, the '562 Patent, and the '015 Patent.
39. According to Lumicore's segment disclosures and financial data produced in discovery, the LumiLink 800G-DR8 generated revenue of $128.4 million in FY 2023. Detailed gross margin data for the LumiLink 800G-DR8 has been produced in discovery and designated Highly Confidential — Attorneys' Eyes Only.
3. LumiEdge 1600G-LR
40. The LumiEdge 1600G-LR is a next-generation 1600-gigabit long-reach transceiver module designed for campus and metro data-center interconnect applications. Lumicore launched the LumiEdge 1600G-LR in the fourth quarter of 2023 (Q4 2023). The LumiEdge 1600G-LR is accused of infringing two of the four Asserted Patents: the '193 Patent and the '015 Patent.
41. According to Lumicore's segment disclosures and financial data produced in discovery, the LumiEdge 1600G-LR generated revenue of $41.7 million in FY 2023. The gross margin on the LumiEdge 1600G-LR was 58.3%, based on Lumicore's product-level financial data produced in discovery and designated Highly Confidential — Attorneys' Eyes Only. The higher gross margin on this product reflects its premium positioning and the relatively early stage of its product lifecycle, during which pricing has not yet faced the competitive pressures typically experienced by more mature product lines.
4. Aggregate Revenue Calculations
42. Total accused-product revenue for FY 2023, across all three accused product lines, was $94.8 million + $128.4 million + $41.7 million = $264.9 million. This figure represents approximately 84.7% of Lumicore's total FY 2023 revenue of $312.6 million, demonstrating the centrality of the accused products to Lumicore's overall business.
43. Based on my preliminary analysis of Lumicore's quarterly segment disclosures and financial data produced in discovery, total accused-product revenue for the period from Q3 2022 (when the first accused product was launched) through Q1 2024 was approximately $378.2 million.
44. I have projected total accused-product revenue from Q3 2022 through Q4 2025, the end of the damages calculation period for this report, at approximately $714.6 million. This projection is based on historical growth trends observed in Lumicore's quarterly disclosures, Lumicore's publicly stated revenue guidance for FY 2024 and FY 2025, customer pipeline data produced in discovery, and industry analyst projections for the silicon-photonics transceiver market. The detailed quarterly breakdown of actual and projected accused-product revenue is presented in Exhibit 3.
D. Pre-Suit Notice and Licensing History
45. The chronology of events leading to this litigation is relevant to several aspects of my damages analysis, including the determination of the hypothetical negotiation date for the reasonable royalty analysis and the assessment of willful infringement for enhanced damages purposes. The key events are as follows:
46. October 2022: OWS's engineering team identified potential infringement of OWS's patents by the LumiLink 400G-ZR+ transceiver module. This identification occurred shortly after Lumicore's initial commercial shipments of the product in Q3 2022.
47. November 2022: OWS retained Benchmark Semiconductor Analysis, LLC, a leading independent semiconductor reverse-engineering firm, to perform a detailed teardown and analysis of the LumiLink 400G-ZR+ module. Kevin Ng, Lead Engineer at Benchmark, oversaw the teardown.
48. December 12, 2022: Benchmark delivered its teardown report on the LumiLink 400G-ZR+, confirming the use of accused waveguide multiplexer structures and embedded micro-channel heat-sink thermal management technology in the Lumicore product. This report provided the technical basis for OWS's initial infringement contentions and was relied upon by Dr. Caroline Ashford in her infringement analysis.
49. January 15, 2023: FairPoint Licensing Group, LLC (Angela Reeves, Managing Director), acting on behalf of OWS, sent a detailed licensing and notice letter to Lumicore's General Counsel, Raymond Bautista. The letter identified the '847 Patent, the '193 Patent, and the '562 Patent, described OWS's belief that the LumiLink 400G-ZR+ infringed those patents, and invited Lumicore to negotiate a license. This date—January 15, 2023—establishes the notice date for the willful infringement analysis discussed in Section VI of this report.
50. February 28, 2023: Lumicore, through its outside litigation counsel Hawthorne Vega & Cruz LLP (Kate Rourke), responded to FairPoint's January 15, 2023 letter. Lumicore disputed infringement of the identified patents and questioned the validity of certain claims.
51. April 20, 2023: An in-person licensing meeting was held in Austin, Texas. The meeting was attended by Angela Reeves (FairPoint Licensing Group, LLC), Rebecca Tanaka (OWS General Counsel), Raymond Bautista (Lumicore General Counsel), and Kate Rourke (Hawthorne Vega & Cruz LLP). According to Ms. Reeves's deposition testimony on December 10, 2024, the parties discussed the identified patents, OWS's infringement contentions, and potential licensing terms. Ms. Reeves testified that Lumicore showed "no interest in negotiating" a license during this meeting, and no resolution was reached.
52. May 15, 2023: FairPoint sent a supplemental licensing letter to Lumicore, adding the recently issued '015 Patent to the list of asserted patents and expanding the scope of accused products to include the LumiLink 800G-DR8, which Lumicore had launched in Q1 2023.
53. July 10, 2023: Lumicore formally declined to take a license. In its response letter, Lumicore stated that it had obtained "competent legal opinions" that its products do not infringe OWS's patents. However, Lumicore refused to produce these opinion-of-counsel letters, asserting attorney-client privilege. A Motion to Compel production of these opinion letters is currently pending before the Court at Docket Entry 38.
54. Q4 2023: Notwithstanding its knowledge of all four Asserted Patents and OWS's infringement contentions, Lumicore launched the LumiEdge 1600G-LR transceiver module. This product launch occurred after Lumicore had received detailed notice of all four Asserted Patents and OWS's contention that Lumicore's products infringed those patents. The launch of a new infringing product after full notice of the Asserted Patents is a significant factor in the willful infringement analysis.
55. March 18, 2024: OWS formally engaged Calderwood & Harkness LLP to pursue litigation against Lumicore.
56. April 22, 2024: OWS filed its Complaint in this action, Case No. 2:24-cv-00319-JRG, in the United States District Court for the Eastern District of Texas, marshall Division.
III. LEGAL FRAMEWORK FOR DAMAGES
57. In this section, I describe the legal principles governing damages in patent infringement cases. I am an economist, not an attorney, and I do not offer legal opinions. However, my understanding of the applicable legal framework, as informed by counsel, guides the economic analysis presented in this report. The legal standards described below provide the foundation for the three damages theories I have applied in this case.
A. Statutory Authority — 35 U.S.C. § 284
58. Section 284 of the Patent Act, 35 U.S.C. § 284, provides the statutory basis for patent damages. The statute provides, in pertinent part:
"Upon finding for the claimant 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."
59. The statute further provides that "[w]hen the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed." Id.
60. Under this statutory framework, courts have recognized two primary methodologies for calculating compensatory damages in patent infringement cases: (1) lost profits and (2) reasonable royalty. A patentee may recover lost profits on sales it would have made "but for" the infringement and a reasonable royalty on the remaining infringing sales. The reasonable royalty serves as the floor, or minimum, measure of damages — the statute mandates that the patentee receive "in no event less than a reasonable royalty."
61. As the Federal Circuit has explained, "[w]here the patentee can demonstrate that it would have made additional sales but for the infringement, lost profits may be awarded as damages. For sales the patentee would not have made, a reasonable royalty is the floor of damages." Rite-Hite Corp. v. Kelley, Inc., 56 F.3d 1538, 1545 (Fed. Cir. 1995) (en banc). In cases where the patentee is a direct competitor of the infringer and can satisfy the elements of a lost-profits analysis, lost profits are the preferred measure of damages for the diverted sales, as they more accurately reflect the economic harm suffered by the patentee.
B. Lost Profits — Panduit Corp. v. Stahlin Bros. Fibre Works
62. The most widely used framework for establishing entitlement to lost-profit damages in patent infringement cases is the four-factor test set forth by the Sixth Circuit in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978), as adopted and applied by the Federal Circuit. Under the Panduit test, a patentee is entitled to lost profits if it can demonstrate, by a preponderance of the evidence:
(1) Demand for the patented product;
(2) Absence of acceptable non-infringing substitutes in the market;
(3) The patentee's manufacturing and marketing capability to exploit the demand; and
(4) The amount of profit the patentee would have made absent the infringement.
63. All four Panduit factors must be established by a preponderance of evidence. The burden of proof lies with the patentee. However, the test is flexible and is not applied rigidly. As the Federal Circuit has recognized, the Panduit test is a "but for" inquiry — the fundamental question is what would have happened in the marketplace absent the infringement. See Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1349 (Fed. Cir. 1999).
64. Importantly, lost-profit damages need not account for 100% of the infringer's sales. Where the patentee can establish that it would have captured a portion of the infringer's sales in the "but for" world, lost profits are awarded on that portion. The remaining sales are then addressed through a reasonable royalty analysis. See Rite-Hite, 56 F.3d at 1548–49.
C. Reasonable Royalty — Georgia-Pacific Corp. v. U.S. Plywood Corp.
65. For infringing sales on which the patentee cannot demonstrate lost profits, the appropriate measure of damages is a reasonable royalty. The leading framework for determining a reasonable royalty is the hypothetical negotiation approach established in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
66. Under the Georgia-Pacific framework, the court determines the royalty that would have resulted from a hypothetical negotiation between a willing licensor (the patentee) and a willing licensee (the infringer) at the time infringement began. The negotiation is assumed to involve informed parties, acting rationally and in their respective economic self-interest, and with full knowledge that the patent is valid and infringed. The Georgia-Pacific decision identified fifteen factors that guide the determination of the reasonable royalty rate.
67. Critical to the reasonable royalty analysis are the concepts of the royalty base and the royalty rate. The royalty base is the revenue or other metric to which the royalty rate is applied. In general, the royalty base should reflect the value attributable to the patented technology, and the rate should be commensurate with that value.
68. Two related doctrines bear on the selection of the appropriate royalty base. The entire market value rule ("EMVR") permits the use of the entire product revenue as the royalty base where the patented feature drives the demand for the entire product. See Uniloc USA, Inc. v. Kestrel Partners LLC, 632 F.3d 1292, 1318 (Fed. Cir. 2011). Alternatively, the smallest salable patent-practicing unit ("SSPPU") may be used as the royalty base where the patented technology represents only a component of a larger product. As I explain in Section V.D below, the EMVR is properly applied in this case because the patented features drive customer demand for the transceiver modules, and the module itself constitutes the smallest salable patent-practicing unit.
D. Enhanced Damages for Willful Infringement — 35 U.S.C. § 284; Halo Electronics
69. Section 284 of the Patent Act authorizes district courts to "increase the damages up to three times the amount found or assessed." The Supreme Court addressed the standard for enhanced damages in Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93 (2016). In Halo, the Court held that the decision to enhance damages lies within the sound discretion of the district court, guided by the egregiousness of the infringer's conduct.
70. The Court explained that enhanced damages are "designed as a 'punitive' or 'vindictive' sanction for egregious infringement behavior" and that "[t]he sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or — indeed — characteristic of a pirate." Id. at 103–04.
71. In assessing whether enhanced damages are appropriate and, if so, in what amount, courts consider the factors articulated in Read International Sales Co., Inc. v. United States, 759 F.2d 1005 (Fed. Cir. 1985) (the "Read factors"). These factors include: (1) whether the infringer deliberately copied the patented invention; (2) whether the infringer, when it knew of the patent, investigated the scope of the patent and formed a good-faith belief that the patent was invalid or not infringed; (3) the infringer's behavior as a party to the litigation; (4) the infringer's size and financial condition; (5) the closeness of the case; (6) the duration of the infringer's misconduct; (7) remedial action by the infringer; (8) the infringer's motivation for harm; and (9) whether the infringer attempted to conceal its misconduct. Id. at 1012.
72. The existence of pre-suit notice and the infringer's continued infringement after receiving such notice are particularly relevant considerations in the willful infringement analysis. As I discuss in Section VI below, the evidence in this case demonstrates that Lumicore received actual notice of OWS's patent rights, declined to take a license, and continued to expand its product line with new infringing products after full knowledge of the Asserted Patents.
IV. THEORY 1: LOST PROFITS (PANDUIT ANALYSIS)
A. Overview
73. OWS claims that it lost sales of its OWS-400ZR and OWS-800XR transceiver modules directly to Lumicore's accused products as a result of Lumicore's infringement of the Asserted Patents. In the "but for" world — that is, a world in which Lumicore did not infringe OWS's patents — OWS would have captured a substantial share of the sales made by Lumicore's accused products. Those diverted sales, and the profits OWS would have earned on them, constitute lost-profit damages recoverable under 35 U.S.C. § 284.
74. As I demonstrate below, each of the four Panduit factors is satisfied in this case. OWS and Lumicore are direct competitors in the silicon-photonics transceiver market. OWS's products practice the Asserted Patents. There is strong and growing demand for the products at issue. Acceptable non-infringing substitutes were not available. OWS had the manufacturing and marketing capability to serve the incremental demand. And OWS's profit margins are well-documented and substantial.
75. Based on my analysis, OWS's lost-profit damages through the projected trial date, calculated through Q4 2025, amount to approximately $128.9 million.
B. Panduit Factor 1: Demand for the Patented Product
76. The first Panduit factor requires a showing of demand for the patented product. Here, the evidence overwhelmingly demonstrates strong and growing demand for silicon-photonics transceiver modules of the type that practice the Asserted Patents.
77. OWS's total FY 2023 revenue was $487.3 million, of which approximately $310 million is attributable to the OWS-400ZR, OWS-800XR, and OWS-1600DR transceiver module product families — the products that practice the Asserted Patents. This substantial revenue base demonstrates robust commercial demand for the patented technology.
78. The demand for silicon-photonics transceiver modules is driven by several powerful market forces, including the rapid expansion of hyperscale data-center capacity, the growing bandwidth requirements of cloud computing and artificial intelligence workloads, and the industry transition from traditional optical transceivers to silicon-photonics-based solutions. As Gregory Falk explains in his industry background expert report, the global silicon-photonics transceiver market has experienced compound annual growth rates exceeding 30% in recent years, with no signs of deceleration through the forecast period.
79. OWS's OWS-400ZR and OWS-800XR modules compete directly with Lumicore's LumiLink 400G-ZR+ and LumiLink 800G-DR8, respectively. These products target the same customer base, address the same performance specifications, and compete for the same design-in opportunities at hyperscale data-center operators. Customer testimony and sales data produced in discovery establish that OWS and Lumicore were regularly included in competitive evaluations and design-in opportunities at the same hyperscale customers. At least twelve of the top twenty hyperscale data-center operators have evaluated or qualified both OWS and Lumicore products for deployment in their networks.
80. The first Panduit factor is clearly satisfied.
C. Panduit Factor 2: Absence of Acceptable Non-Infringing Substitutes
81. The second Panduit factor requires a showing that acceptable non-infringing substitutes were not available in the market during the infringement period. This factor does not require the complete absence of any alternative product in the market; rather, it requires an analysis of whether alternatives existed that were both acceptable to consumers and non-infringing. See Grain Processing Corp., 185 F.3d at 1353.
82. I have analyzed the four potential non-infringing alternatives in the silicon-photonics transceiver market that Lumicore may point to as alternatives to its accused products. In each case, I have concluded that the potential alternative lacks key patented features and does not represent an acceptable non-infringing substitute for purposes of the Panduit analysis.
83. The Asserted Patents cover a combination of critical enabling technologies for high-performance silicon-photonics transceiver modules, including waveguide multiplexing with low insertion loss ('847 Patent), coherent optical transceiver integration on a silicon substrate ('193 Patent), embedded micro-channel thermal management ('562 Patent), and polarization-diverse grating coupling ('015 Patent). No commercially available product identified in the market offers the combination of performance, power efficiency, and cost covered by the four Asserted Patents without utilizing the claimed technologies.
84. The deposition testimony of Lumicore's own executives supports this conclusion. Dr. Sandra Michaud, Lumicore's CTO, testified in her deposition on November 19, 2024, that she could not identify specific non-infringing design alternatives for Lumicore's accused products. When asked whether Lumicore had identified any alternative waveguide multiplexer design that could achieve comparable insertion loss without infringing the '847 Patent, Dr. Michaud stated that she was not aware of such an alternative. Similarly, when asked about alternative thermal management approaches that could match the performance of the embedded micro-channel heat-sink technology claimed in the '562 Patent, Dr. Michaud acknowledged that conventional heat-sink approaches did not provide the same level of thermal performance.
85. Raymond Bautista, Lumicore's General Counsel, further corroborated the absence of ready non-infringing alternatives in his deposition on December 3, 2024. Mr. Bautista admitted that no formal design-around analysis was commissioned before the launch of the LumiEdge 1600G-LR module in Q4 2023. This admission is particularly significant because Lumicore launched the LumiEdge 1600G-LR after receiving notice of all four Asserted Patents and after declining to take a license from OWS. If acceptable non-infringing alternatives were readily available, one would expect Lumicore to have undertaken a design-around analysis before launching a new product into a market where it knew it faced infringement allegations.
86. Lumicore's own estimate that it would require 18 to 24 months to redesign its products if enjoined further confirms the absence of ready non-infringing alternatives. If alternatives were readily available, a redesign could be accomplished far more quickly. The extended timeline reflects the fundamental nature of the patented technologies and the difficulty of replicating the performance of the accused products without using the claimed inventions.
87. The competitive landscape further supports this conclusion. As described in Gregory Falk's industry report, the silicon-photonics transceiver market for hyperscale data-center applications is characterized by a limited number of competitors, effectively creating a two-to-three-supplier market structure in which OWS and Lumicore are the primary competitors for the product categories at issue. This concentrated market structure means that in the "but for" world, customers displaced from Lumicore's accused products would have turned primarily to OWS as the leading non-infringing alternative.
88. For all of these reasons, the second Panduit factor is satisfied.
D. Panduit Factor 3: Manufacturing and Marketing Capability
89. The third Panduit factor requires a showing that the patentee had the manufacturing and marketing capability to exploit the demand that the infringer captured. Here, the evidence demonstrates that OWS had ample capacity to serve the incremental demand that would have come to it in the "but for" world.
90. OWS is a fabless semiconductor company with established foundry partnerships that provide scalable manufacturing capacity. As a fabless company, OWS does not own or operate its own semiconductor fabrication facilities ("fabs"). Instead, OWS contracts with leading semiconductor foundries for wafer fabrication, packaging, and testing. This fabless model provides OWS with significant flexibility to scale its production up or down in response to changes in demand. OWS's existing foundry relationships could accommodate additional production volume sufficient to meet the demand displaced from Lumicore's accused products.
91. OWS's VP of Engineering (Photonics), Dr. Nikolai Petrov, has confirmed in internal documentation produced in discovery that OWS's foundry partners had unused capacity during the relevant period and that OWS could have increased its order volumes to meet incremental demand without encountering capacity constraints. The production capacity data reviewed in my analysis confirms that no manufacturing bottleneck would have prevented OWS from fulfilling the additional orders.
92. In addition to manufacturing capability, OWS has a mature global sales and marketing infrastructure. With approximately 1,250 employees, including dedicated sales teams covering all major hyperscale data-center customers, OWS has the distribution channels, customer relationships, and technical support capabilities necessary to serve the incremental demand. OWS already had existing relationships with many of the same hyperscale customers served by Lumicore, and in many cases was already engaged in competitive evaluations with Lumicore at those customers.
93. The third Panduit factor is satisfied.
E. Panduit Factor 4: Amount of Profit
94. The fourth Panduit factor requires the patentee to demonstrate the amount of profit it would have made on the sales diverted to the infringer. OWS's financial records, including audited financial statements prepared by Gresham & Whitfield LLP and internal product-level financial data produced in discovery, provide a reliable basis for calculating the profit OWS would have earned on incremental sales.
95. OWS's gross margin on its competing transceiver products (the OWS-400ZR and OWS-800XR families) is 47.3%, as confirmed by OWS's internal financial records and verified against Gresham & Whitfield's audited financials. This margin reflects the difference between the net revenue OWS receives for its transceiver modules and the variable costs (including foundry fabrication costs, packaging, testing, and freight) directly attributable to the production and sale of those modules.
96. In performing my lost-profits analysis, I have used an incremental margin approach. Because OWS's fixed costs — including research and development expenses, selling, general and administrative expenses, and facilities costs — are substantially covered by OWS's existing sales base, the incremental margin on additional sales would be at least equal to the average gross margin, and likely higher. The variable cost categories included in the gross margin calculation (foundry costs, packaging, testing, and freight) would scale proportionally with additional unit volume, but the fixed cost categories would not increase materially. Accordingly, the use of a 47.3% gross margin as the profit rate for the lost-profits calculation is conservative.
97. The fourth Panduit factor is satisfied.
F. Market-Share Displacement Calculation
98. Having established that all four Panduit factors are met, the next step is to determine what share of Lumicore's accused-product sales OWS would have captured in the "but for" world. Not all of Lumicore's sales would have gone to OWS absent infringement. Some customers may have had alternative suppliers, and some of Lumicore's sales were in market segments (such as telecom) where OWS has limited presence. The market-share displacement analysis accounts for these factors.
99. I have calculated the market-share displacement factor at 38.2%. This figure is based on a detailed analysis of:
(a) Customer overlap data showing that OWS and Lumicore compete head-to-head at 12 of the top 20 hyperscale data-center operators;
(b) Competitive win/loss records produced by both parties in discovery, documenting specific customer engagements where OWS and Lumicore competed for the same design-in opportunities;
(c) Design-in history data showing the extent to which OWS was positioned as the primary alternative to Lumicore's products at specific customer accounts;
(d) An analysis of the competitive dynamics between OWS and Lumicore in the "but for" world, taking into account factors such as OWS's product performance, pricing, customer relationships, and market reputation.
100. The 38.2% displacement factor is not 100% because certain Lumicore customers are not approved vendors for OWS and would not have turned to OWS in the "but for" world. Additionally, a portion of Lumicore's accused-product sales were in the telecommunications segment, where OWS has limited presence and would not have been a likely alternative supplier. The displacement factor accounts for these limitations.
101. The remaining 61.8% of Lumicore's accused-product sales — the sales that OWS would not have captured in the "but for" world — are addressed under the reasonable royalty theory in Section V of this report.
G. Lost Profits Calculation
102. Combining the elements described above, my lost-profits calculation is as follows:
103. The detailed quarterly calculation, showing accused-product revenue by product line by quarter, the displacement factor applied, and the margin applied, is set forth in Exhibit 4. The quarterly calculation reflects the actual revenue data available through Q1 2024 and projected revenue from Q2 2024 through Q4 2025, based on the methodology described in paragraph 44 above.
104. I have also performed a sensitivity analysis to test the robustness of this calculation under alternative assumptions. The sensitivity analysis varies the displacement factor from 35% to 42% and the margin from 45% to 50%, yielding a range of lost-profit damages from $114.6 million to $150.1 million. The detailed sensitivity analysis is presented in Exhibit 12.
105. Under every scenario in the sensitivity analysis, lost-profit damages exceed $114 million. This demonstrates the robustness and conservatism of the $128.9 million base-case estimate.
H. Price Erosion — Additional Lost Profits Component
106. In addition to lost sales volumes, OWS has experienced price erosion on its retained sales — that is, sales OWS continued to make, but at lower prices than it would have obtained absent Lumicore's infringement. Price erosion is a recognized component of lost-profit damages in patent infringement cases. See Crystal Semiconductor Corp. v. TriTech Microelectronics Int'l, Inc., 246 F.3d 1336, 1357 (Fed. Cir. 2001).
107. The average selling price ("ASP") of 400G-ZR transceiver modules declined approximately 18.7% from Q3 2022 to Q4 2023. While some price decline is expected in the normal course of the semiconductor product lifecycle, the magnitude and timing of this ASP decline are attributable in significant part to Lumicore's entry into the market with infringing products at aggressive price points. Lumicore's accused products competed directly with OWS's products at the same customer accounts, and Lumicore's pricing strategy placed downward pressure on the market-clearing price for the entire product category.
108. The price erosion component captures the additional profit OWS would have earned on its retained sales — the sales OWS continued to make — if market prices had not been depressed by Lumicore's infringing competition. I have quantified this price-erosion impact on OWS's own sales of OWS-400ZR and OWS-800XR modules during the infringement period. The detailed price-erosion analysis is presented in Exhibit 9.
109. I note that the price-erosion damages are presented as supplemental to the lost-unit-volume analysis. I have taken care to avoid double-counting between the lost-unit-volume component and the price-erosion component. The lost-unit-volume calculation uses OWS's actual margins (which already reflect the depressed pricing), and the price-erosion calculation is applied only to OWS's retained sales (not to the displaced sales already captured in the lost-unit-volume analysis). This methodology ensures that each dollar of harm is counted once and only once.
V. THEORY 2: REASONABLE ROYALTY (GEORGIA-PACIFIC ANALYSIS)
A. Overview and Applicability
110. A reasonable royalty is the appropriate measure of damages for the portion of Lumicore's accused-product sales where OWS cannot demonstrate that it would have captured the business in the "but for" world. As explained in Section IV.F above, my market-share displacement analysis indicates that OWS would have captured 38.2% of Lumicore's accused-product sales absent infringement. The remaining 61.8% of accused-product sales — the sales that would have gone to other competitors or would not have been made by OWS — are appropriately addressed through a reasonable royalty analysis.
111. The non-lost-profit sales base is calculated as follows:
Total projected accused-product revenue (Q3 2022 – Q4 2025): $714.6 million Less: Displaced revenue (captured by OWS in "but for" world): $272.98 million Non-lost-profit sales base: $441.6 million (approximate)
112. Applying the royalty rate of 8.5% that I derive from my Georgia-Pacific analysis below, the reasonable royalty damages amount to approximately $37.5 million ($441.6M × 8.5% = $37.5M).
B. Hypothetical Negotiation Framework
113. Under the Georgia-Pacific framework, the reasonable royalty is determined by reference to a hypothetical negotiation between the parties. The timing of this hypothetical negotiation is set at the point just before infringement began. In this case, the first accused product, the LumiLink 400G-ZR+, was launched in Q3 2022. Accordingly, I place the hypothetical negotiation date in Q2 2022, just prior to Lumicore's launch of the LumiLink 400G-ZR+.
114. The parties to the hypothetical negotiation are OWS, as the willing licensor and owner of the Asserted Patents, and Lumicore, as the willing licensee seeking to commercialize products that practice the patented technologies. Both parties are assumed to be rational economic actors, fully informed about all relevant facts (including the validity of the patents, the fact of infringement, the market for the products, and the competitive landscape), and acting in their respective economic self-interest. The negotiation assumes that the Asserted Patents are valid and infringed — these are the premises of the hypothetical negotiation as a matter of law.
115. In this hypothetical negotiation, OWS would seek to maximize the royalty rate to protect its competitive position and extract fair value for its patented innovations, while Lumicore would seek to minimize the royalty rate to preserve its anticipated profit margins on the accused products. The negotiated rate reflects the point at which both parties would prefer a license over their respective alternatives (for OWS, the alternative of litigation; for Lumicore, the alternative of not entering the market or designing around the patents).