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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 03-CV-02579-RPM NATIONAL OILWELL VARCO, L.P. Plaintiff, v. PASON SYSTEMS USA CORP., Defendant. ______________________________________________________________________________ DEFENDANT'S REBUTTAL TRIAL BRIEF

September 19, 2008

Attorneys for Defendant Pason Systems USA Corp.

IRELAND, STAPLETON, PRYOR & PASCOE, P.C. Timothy G. Atkinson, # 18477 Mark E. Haynes, # 12312 Kelley A. Bergelt, # 35168 Mark E. Lacis, # 37421 1675 Broadway, Suite 2600 Denver, Colorado 80202 Phone: 303-623-2700 Fax: 303-623-2062

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TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................................. i INTRODUCTION .......................................................................................................................... 1 ARGUMENT .................................................................................................................................. 1 I. Varco's Proposed Claim Construction Is All Over The Map.............................................. 1 A. B. C. There Is A Difference Between Regulating The Release Of The Drill String And Increasing Or Decreasing ................................................................................ 2 A Drilling Fluid Pressure Regulator Means Something More................................ 5 Than a Regulator. ..................................................................................................... 5 Exclusive and Certain Function Permeates the Teachings and Language Used in Claims 1, 11, and 14. .............................................................................................. 7 1. Signals Representing Changes Means Signals Representing Changes in the Specified Parameter, Not a Processed and Simultaneous Consideration of Multiple Variables. ................................... 7 Certain Results Must Occur. ....................................................................... 7

2. II. A. B. III. A. B. C. IV.

Pason Does Not Infringe Under A Narrow, Proper Claim Construction. ........................... 9 Varco's Construction Will Not Prove Infringement. .............................................. 9 Opinion of Counsel Is Not Relevant to Establish Infringement. .......................... 12 Expert Testimony Is Not Required To Rebut The Incorrect Factual Assumptions And Point Out The Unwarranted Speculation Of Varco's Expert. . 14 Varco's Lost Profit Claim is Speculative. ............................................................. 15 Fifty-One Percent in Not a Reasonable Royalty. .................................................. 17

Damages. ........................................................................................................................... 14

Pason's Conduct Cannot be Found Willful Under the Seagate Test................................. 20

CONCLUSION ............................................................................................................................. 23

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TABLE OF AUTHORITIES Cases Abbott Laboratories, Inc. v. Sandoz, Inc., 2007 WL 4287503 (N.D. Ill. Dec. 4, 2007) .............................................................................. 21 Conoco, Inc. v. Energy & Envtl. Int'l, L.C., 460 F.3d 1349 (Fed. Cir. 2006)................................................................................................. 12 Dawn Equip. Co. v. Ky. Farms, Inc., 140 F.3d 1009 (Fed. Cir. 1998)................................................................................................... 9 Dippin' Dots, Inc. v. Mosey, 476 F.3d 1337 (Fed. Cir. 2007)................................................................................................. 11 Dynacore Holdings Corp. v. U.S. Philips Corp., 363 F.3d 1263 (Fed. Cir. 2004)................................................................................................... 9 Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).................................................................................... 18, 19 Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605 (1950) .................................................................................................................... 9 In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007)......................................................................... 13, 20, 21, 22, 23 Innogenetics, N.V. v. Abbott Laboratories, 512 F.3d 1363 (Fed. Cir. 2008)................................................................................................. 21 Laitram Corp. v. Rexnord, Inc., 939 F.2d 1533 (Fed. Cir. 1991); ................................................................................................. 9 Liebel-Flarsheim Co. v. Medrad, Inc., 358 F.3d 898 (Fed. Cir. 2004)..................................................................................................... 5 Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359 (Fed. Cir. 2008)................................................................................................. 15 Minn. Mining & Mfg. Co. v. Chemque, Inc., 303 F.3d 1294 (Fed. Cir. 2002)................................................................................................... 9

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Panduit Corp. v. Stahlin Brothers Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978) .................................................................................................. 15 Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005)................................................................................................... 5 Pivonka v. Central Garden & Pet Co., 2008 WL 486049 (D. Colo. 2008) ............................................................................................ 23 Slimfold Mfg. Co. v. Kinkead Indus., Inc., 56 F.3d 1538 (Fed. Cir. 1991)................................................................................................... 16 Smithkline Diagnostics, Inc. v. Helena Laboratories Corp., 926 F.2d 1161 (Fed. Cir. 1991)........................................................................................... 15, 17 Thorn Emi North America, Inc. v. Micron Technology, Inc., 837 F. Supp. 616 (D. Del. 1993) ............................................................................................... 13 Trading Technologies Int'l, Inc. v. eSpeed, Inc., 2008 WL 63233 (N.D. Ill. Jan. 3, 2008) ................................................................................... 21 Verizon Services Corp. v. Vonage Holdings Corp., 503 F.3d 1295 (Fed. Cir. 2007)................................................................................................. 18 W.L. Gore & Associates, Inc. v. International Medical Prosthetics Research Associates, Inc., 1990 WL 180490 (D. Ariz. 1990) ............................................................................................. 19 Wang Laboratories, Inc. v Mitsubishi Electronics America, Inc., 860 F Supp 1448 (CD, Cal. 1993) ............................................................................................ 20 Warner-Jenkinson Co., Inc. v. Hilton Davis Chem. Co., 520 U.S. 17 (1997) ................................................................................................................ 9, 12 Water Technologies Corp. v. Calco, Ltd., 850 F.2d 660 (Fed. Cir. 1988)................................................................................................... 15 Statutes 35 U.S.C. § 271 (c) ......................................................................................................................... 9 35 U.S.C. § 271(a) .......................................................................................................................... 9 35 U.S.C. § 271(b) .......................................................................................................................... 9 35 U.S.C. § 284 ............................................................................................................................. 20

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Other Authorities http://www.inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp ........... 16 Rules Federal Rule of Evidence 403 ....................................................................................................... 13

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INTRODUCTION Patents are a bargain between the government and the public--in exchange for teaching the public in such a way that advances the progress of science and the useful arts, innovators receive a limited monopoly to practice their inventions. When patents wrongly issue, not to true innovators, but instead to those who seek to abuse the patent system and stifle competition, and without any advancement in the science and useful arts, the public suffers. That is what will happen in this case, if Varco is able to twist the clear and limited teachings of U.S. Patent No. 5,474,142 ("the '142 Patent") to the materially different technologies Pason uses. As the evidence will unfold at trial, the '142 Patent's claims are not infringed. Recognizing that the clear interpretation of the language of the claims necessitates such a conclusion, Varco endeavors to expand the claims of the '142 Patent beyond the ordinary meaning of the claims, and, moreover, beyond the limited teachings of the patent itself. In so doing, Varco has opened the '142 Patent to invalidity defenses including, inter alia, anticipation and obviousness in light of prior art, and a lack of enablement. It naturally follows, therefore, that Pason does not infringe, let alone willfully infringe, any of the claims of the '142 Patent. ARGUMENT I. Varco's Proposed Claim Construction Is All Over The Map. Understandably, both parties in this matter are urging a construction of the claims at issue that will influence the outcome in that party's favor, either on the infringement issue or in connection with invalidity arguments. That is what advocates do. Absent a definitive construction of the claims, both parties have prepared an array of alternative positions that will by necessity shift in emphasis as the Court renders its determination on the claim construction

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issues. In this instance, however, in more than thirty pages dedicated to the issue of claim construction (on top of 130 previously submitted on the Markman briefing), Varco offers a hodgepodge of inconsistent arguments, dropping words left and right, or adding limitations not present in the language of the claims. This approach is one of necessity. By leaving out "drilling fluid pressure" in front of the word "regulator," or qualifying words like "results," "effects," and "represents" into possibilities rather than mechanical certainties, Varco is skirting the fine line between the teaching and enablement of the '142 Patent, the scope of prior art, and the vastly different elements and methods Pason employs in its AutoDriller. In this rebuttal, Pason responds to those portions of the claim language Varco urges that will truly make a difference in the affirmative defenses and claims presented. A. There Is A Difference Between Regulating The Release Of The Drill String And Increasing Or Decreasing The Rate Of Release.

As Varco notes, all three claims at issue in this case -- Claims 1, 11 and 14 -- contain a consistent preamble, describing a device or method that regulates the release of the drill string in response to changes in one or more drilling parameters. See Varco Claim Construction Trial Brief, at pp. 4-6, 23. At that preliminary level, the '142 Patent and Pason's AutoDriller are the same, as are a number of pieces of prior art. The distinctions lie not in the preamble, but in the limitations expressed in the actual claim language of the '142 Patent. Varco submits that to one of ordinary skill in the art, "regulates" means "increasing" or "decreasing" the rate of release, and points to places in the '142 Patent's specification that teach such "increases" and "decreases." The terms are not, however, by virtue of the internal language of the claims and prosecution history, interchangeable.

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Claims 1 and 11, in the limitations, state precisely how the invention of the '142 Patent responds to changes in drilling fluid pressure by increasing or decreasing the rate of release of the drill string. That appears to be the only, or at least the determinative, reason the examiner found the '142 Patent valid over the Varney patent after re-examination. Varco argued: "The last element of Claim 11 of the '142 Patent requires that the drill string controller to increase or decrease the RATE of release of the drill string. ... On the other hand, the Varney Patent teaches that a power transformer 132 functions as a 'pushbutton switch which on successive actuations alternatively opens and closes a circuit.' ... The 'on'/'off'' nature of this type of this type of brake control system prevents any increases or decreases in the rate of release." Patent Owner's Statement, June 8, 2004, at pp. 10-11, Trial Ex. 3 (emphasis in original). The examiner found this distinction meaningful. In the only piece of reasoning to be found in his opinion, he stated: "Varney does not teach or suggest effecting an 'increase in the rate of release' and a 'decrease in the rate of release' as it pertains to independent claims 1, 9 and 11." Statement of Reasons for Patentability and/or Confirmation, August 31, 2005, at p. 2, Trial Ex. 3. 1

The examiner's credibility in assessing this technology is somewhat suspect. In the subsequent sentence, he stated: "Claims 2-8 and 12-15 are patentable due to their dependency on Claims 1, 9, and 11." Statement of Reasons for Patentability and/or Confirmation (emphasis added). From this Varco argues that "the PTO confirmed the validity of all claims in the '142 Patent." Opening Trial Brief of Plaintiff National Oilwell Varco, L.P., at p. 23. But Pason only requested reexamination of Claims 1 and 11, and only in light of U.S. Patent 3,223,183 ("Varney"). Request for Ex Parte Reexamination Transmittal Form, dated Jan. 26, 2004. Pason did not request reexamination of Claim 14, which is on its face an independent claim and which does not make any mention of the rate of release.

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As Pason noted in its initial trial brief, this distinction was also critical to resolving the opposition to Mr. Bowden's European patent (EP 0 694 114 B2, Trial Ex. 6). See Interlocutory Decision in Opposition Proceedings, dated Dec. 9, 2004, at p. 3, Trial Ex. C-8 ("[a]s controlling the 'rate of release' of a drill string represents a particular way of controlling [regulating] 'the release' of said drill string the effect of the amendment is to further limit the scope of the claim..." Id. (commenting upon the fact that in Europe Varco amended the language of what is Claim 14 in the '142 Patent to claim a direct causal effect on the rate of release in response to various parameters, rather than simply "regulating" it, as the '142 Patent reads to this day). To suggest that any examiner, or anyone of ordinary skill in the art, believed that "regulate" in the preambles or in the last step of Claim 14 holds the same meaning as "increasing" or "decreasing" the rate of release flies in the face of the internal structure of the claims of the '142 Patent and the prosecution history. Pason was not there when Mr. Bowden prosecuted his patent, and it does not pretend to know why he chose the broader, more general concept of regulating the release of the drill string in Claim 14, rather than the narrower limitation of increasing or decreasing the rate of release as in the earlier independent claims. The teachings in the '142 Patent might have supported the narrower phrase. Perhaps his thinking was to use Claim 14 to encompass technologies that functioned more as on-off switches rather than the continuous and proportionate scheme he taught. Why Varco wants to read that limitation now into Claim 14 as part of the construction exercise, however, is abundantly clear. It wants to distinguish itself from prior art, such as Dillon and Hobhouse, which taught regulation of the drill string or control in the form of an on/off switch or comparable mechanism.

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The Court cannot re-write claim language merely in an effort to preserve validity. See Phillips v. AWH Corp., 415 F.3d 1303, 1327 (Fed. Cir. 2005) (en banc) ("[W]e have limited the maxim [of construing a claim to preserve its validity] to cases in which 'the court concludes, after applying all the available tools of claim construction, that the claim is still ambiguous.'" (quoting Liebel-Flarsheim Co. v. Medrad, Inc., 358 F.3d 898, 911 (Fed. Cir. 2004)). Here, there is nothing ambiguous in the terms "regulates the release" or "increasing or decreasing the rate of release" to necessitate judicial redrafting of an issued patent. According to one having ordinary skill in the art, "regulates the release" means the exercising of control over the movement of the drill string, whereas the "rate of release" refers expressly to the speed of advancement of the drill string. Varco made that clear to two sets of examiners, and the Court should not alter the plain meaning of the terms in a belated attempt to preserve the validity of Claim 14. B. A Drilling Fluid Pressure Regulator Means Something More Than a Regulator.

This Court has already ruled that "the term drilling fluid pressure regulator must be understood in the context of the use of the measurement of the changes in drilling fluid pressure and producing a signal representing changes in drilling fluid pressure." Ruling on Claim Construction Issues (Doc. No. 166, at 3) (emphasis added). In its Trial Brief, Varco ignores this Court's ruling, discarding the words "drilling fluid pressure," and leaving the word "regulator" in isolation to mean "any device capable of detecting or responding to electrical, mechanical, hydraulic or pneumatic signal." Varco Claim Construction Trial Brief, at p. 7. That regulator then performs, as further claimed, to "measur[e] changes in drilling fluid pressure and output[ ] a signal representing those changes."

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As Pason noted in its opening trial brief, the phrase "drilling fluid pressure regulator," as opposed to merely a "regulator," is inextricably tied to the function of a regulator specific to the drilling fluid pressure parameter and attached to other dedicated regulators and relays in a series. Although Claim 9 is no longer at issue, it is instructive on this score, setting forth as separate elements the "drilling fluid pressure regulator," and "bit weight regulator." If Varco's current interpretation is adopted, it could have simply claimed the single element -- a "drilling fluid pressure regulator" or perhaps just a "regulator" -- on the theory that those skilled in the art would know it was "any device capable of detecting or responding to electrical, mechanical, hydraulic or pneumatic signal," that responds to changes drilling fluid pressure, and to changes in bit weight, and outputs a signal or signals representing those changes. But, there are two elements in Claim 9 for a reason. They are separate devices performing separate and specific functions. There is nothing in the '142 Patent specification that teaches one of ordinary skill in the art to develop or practice a generic "regulator" that simultaneously considers and processes data from multiple parameters. Contrary to what Varco appears to argue, Pason does not take issue with how a generic "regulator" is defined. Here, however, what Varco has claimed is not a "regulator," it is a "drilling fluid pressure regulator." The construction of that phrase must recognize the specific limitation embodied in the words used and the clear teachings they represent: The regulators [plural, not singular] receive their respective signals to measure changes in those signals and produce an output signal representative of any changes. Specifically, the drilling fluid pressure regulator measures changes in drilling fluid pressure and outputs a signal representing those changes. The bit weight regulator measures changes in bit weight and outputs a signal representing those changes. The drill string torque regulator measures changes in drill string torque and outputs a signal

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representing those changes. The drill string RPM regulator measures changes in drill string RPM and outputs a signal representing those changes. Summary of the Invention, '142 Patent, C.2, ll. 4-14 (emphasis added). C. Exclusive and Certain Function Permeates the Teachings and Language Used in Claims 1, 11, and 14.

In another effort to broaden the claims of the '142 Patent away from the teachings to things neither invented nor contemplated, Varco urges a softening of the words Mr. Bowden used to bring vastly different devices and methods within their scope. 1. Signals Representing Changes Means Signals Representing Changes in the Specified Parameter, Not a Processed and Simultaneous Consideration of Multiple Variables.
As to the "signals representing changes in drilling fluid pressure," the Summary of the

Invention, quoted above, is instructive as to how those signals represent only the changes in the specific parameter measured at any particular time. Similarly, a relay "responsive to the output signal" of the drilling fluid pressure regulator in Claim 1 means it is responsive to only that. Running that teaching through the claim language, the method for "producing a signal in response to changes in drilling fluid pressure" in Claim 11 requires that the signal can only be produced in response to the changes. Further, a first and second signal produced "in response to changes" in drilling fluid pressure and bit weight in Claim 14 must mean necessarily that these two signals are produced only in response to changes in their respective parameters -- the clear meaning of the claim terms precludes a signal that represents the processed analysis of multiple data points to be produced in response to the changes. 2. Certain Results Must Occur. And in Claims 1 and 11, at least, the effect of the changes in the specified parameter, and

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the signals that represent those changes, is certain. There is no may or maybe about it: Claim 1: a decrease in drilling fluid pressure results in said relay supplying a drill string control signal that operates said drill string controller to effect an increase in the rate of release of said drill string and an increase in drilling fluid pressure results in said relay supplying a drill string control signal that operates said drill string controller to effect a decrease in the rate of release of said drill string. Claim 11: to increase the rate of release of said drill string when said signal represents a decrease in drilling fluid pressure and to decrease the rate of release of said drill string when said signal represents an increase in drilling fluid pressure. '142 Patent; see also Interlocutory Decision in European Opposition Proceedings, December 9, 2004, at p. 5 ("It results therefore that all of the documents on file [prior art] ... disclose systems intervening whenever drilling parameters exceed given predetermined values. All of the claims [of the Bowden Patent] presently on file [following the amendment to Claim 14] relate at the contrary to controlling methods or devices which react directly to the increase or decrease of controlling parameters, without waiting for said control parameters to exceed predetermined values.") (emphasis added). In Pason's estimation, the claims related to signals, what causes them and when and where they go, and the certain effect they have on the speed of the drill string release, are clearly worded, unambiguous, and a direct result of the '142 Patent specification without any reference whatsoever to the preferred embodiment. See, e.g. '142 Patent, C.2, ll 27-32 ("[i]llustratively, when the relay connected to the drilling fluid pressure regulator receives a decrease in drilling fluid pressure signal, it supplies a drill string control signal that operates the drill string controller to effect an increase in the rate of release of the drill string.") Varco's efforts to extend those words to mean something more is not a reasonable construction of the claims, and brings Varco

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into a head-on collision with the prior art. II. Pason Does Not Infringe Under A Narrow, Proper Claim Construction. Whether under direct (35 U.S.C. § 271(a)), inducement (35 U.S.C. § 271(b)), or contributory (35 U.S.C. § 271 (c)) 2 theories, Varco will not prove beyond a preponderance of the evidence that the AutoDriller infringes the '142 Patent. A. Varco's Construction Will Not Prove Infringement.

In its Opening Trial Brief, Varco skips over any analysis of infringement and seemingly forgets that it is its burden to prove, beyond a preponderance of the evidence, that Pason's AutoDriller infringes Claims 1, 11, or 14 of the '142 Patent, literally or under the doctrine of equivalents. It is axiomatic that failure to meet even a single element within a claim precludes a literal infringement finding. See Laitram Corp. v. Rexnord, Inc., 939 F.2d 1533, 1535 (Fed. Cir. 1991); Warner-Jenkinson Co., Inc. v. Hilton Davis Chem. Co., 520 U.S. 17, 21 (1997) (citing Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605, 609 (1950); see also Dawn Equip. Co. v. Ky. Farms, Inc., 140 F.3d 1009, 1015 (Fed. Cir. 1998) (explaining that to prove infringement under the doctrine of equivalents, "the accused device must be shown to include an equivalent for each literally absent claim limitation"). Pason's AutoDriller receives inputs from an electronic drilling recorder (the "EDR"),

Although Varco claims infringement under sections 271(b) and 271(c) as well, it fails to articulate how Pason has either induced or contributed to the direct infringement of the '142 Patent by others. In order to prevail on an inducement claim, the patentee must still establish "first that there has been direct infringement, and second that the alleged infringer knowingly induced infringement and possessed specific intent to encourage another's infringement. " Minn. Mining & Mfg. Co. v. Chemque, Inc., 303 F.3d 1294, 1304-05 (Fed. Cir. 2002) (citation omitted); see also Dynacore Holdings Corp. v. U.S. Philips Corp., 363 F.3d 1263, 1272 (Fed. Cir. 2004) (Indirect infringement under section 271(c) requires, as a predicate, a finding that some party amongst the accused actors has committed the entire act of direct infringement).
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which monitors bit weight and drilling fluid pressure as well as other appreciable factors in oil well drilling. The AutoDriller then processes those measurements through a computer algorithm. At the end of the analysis, the AutoDriller outputs a single and separate command signal to a drill string controller that may or may not cause the brake movement to reflect changes in those parameters from an initial target. Rather, the signal that the AutoDriller relays is the product of adaptive computer logic, which is constantly changing the target and slope of the curves in consideration of multiple variables, and therefore the command signal produced. In order to establish direct infringement, Varco must establish that Pason's AutoDriller possesses a separate drilling fluid pressure regulator (Claim 1), or a corresponding method for measuring changes in drilling fluid pressure and outputting a signal representing only these changes (Claims 1 and 11). According to Claims 1 and 11, when controlling by pressure, Varco must establish that the AutoDriller will necessarily result in the cause and effect relationship called for by the language of the claim limitations. Claims 1 and 11 are not infringed because the AutoDriller, even when it is operating in pressure mode alone, does not simply measure changes in drilling fluid pressure. No amount of mental gymnastics could turn any component of the AutoDriller into a "drilling fluid pressure regulator" as claimed. Instead, it senses the absolute value of that and other parameters, 50 times per second. The EDR then outputs a packet of digital information, representing the multiple inputs, which is then fed into the AutoDriller's computer algorithm. After the algorithm processes its result, a control signal operates a brake to control the operation of a drilling rig. The processed signal always considers and represents several factors beyond a change in pressure in optimizing the operation of the brake. Direct infringement of Claims 1 and 11 in

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light of these substantial differences cannot be found without rejecting the holding of Dippin' Dots, Inc. v. Mosey, 476 F.3d 1337, 1343 (Fed. Cir. 2007) (stating that "beads" does not mean "beads plus" other things, the same way that a signal representing changes in drilling fluid pressure does not mean changes in drilling fluid pressure in combination with other parameters). Pason's AutoDriller does more than simply add steps to the methods or additional elements to the device claimed. It uses distinctly different steps and is comprised of additional and materially different elements. Furthermore, as might be expected, the result of Pason's method of processing inputs, generating signals, and transmitting those signals is different from the '142 Patent's Claims. Because Claims 1 and 11 of the '142 Patent call for a precise "cause and effect" relationship--an increase in pressure results in a decrease in rate of release and vice versa--there is no literal infringement by the AutoDriller. Although the Pason algorithm can, after processing, have a similar effect, that is never certain because of the other variables always involved. It should be noted that Varco has never articulated an analysis explaining how Claims 1 and 11 could be infringed under the doctrine of equivalents employing either the all-elements rule or the function/way/result test. Similarly, there is no literal infringement of Claim 14. The AutoDriller does not, and in fact cannot, automatically select and send signals representing both pressure and bit weight simultaneously to control the release of the drill string. Only one signal goes from the AutoDriller to the stepper motor (the device that controls the brake handle). And that signal from the algorithm is not "said first or said second signals" as the claim language requires. It is the processed result of multiple variables, not merely the change in a particular parameter.

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To the extent that Varco attempts to establish equivalence between the '142 Patent and the operation of the AutoDriller, the use of the doctrine of equivalents to establish infringement is further limited by the doctrine of prosecution history estoppel. Warner-Jenkinson, 520 U.S. at 30. In particular, "prosecution history estoppel limits the broad application of the doctrine of equivalents by barring an equivalents argument for subject matter relinquished when a patent claim is narrowed during prosecution." Conoco, Inc. v. Energy & Envtl. Int'l, L.C., 460 F.3d 1349, 1363 (Fed. Cir. 2006). The court has explained that "prosecution history estoppel can occur during prosecution in one of two ways, either (1) [when the applicant makes] a narrowing amendment to the claim ('amendment-based estoppel') or (2) [when the applicant surrenders] claim scope through argument to the patent examiner ('argument-based estoppel')." Id. During prosecution, Bowden argued and successfully overcame enablement rejections to the method for multiple parameter control according to Claim 14, by explaining the necessity for selecting one parameter as a primary control, and the remaining parameters as secondary controls. Amendment After Final Under 37 U.S.C. § 1.116. Pason's AutoDriller does not need any such primary/secondary control scheme when controlling with multiple parameters. Because this limitation is absent, argument-based estoppel mandates that Claim 14 is also not infringed under the doctrine of equivalents. B. Opinion of Counsel Is Not Relevant to Establish Infringement.

If it follows the pattern established in its opening brief and discovery, Varco will attempt to present evidence, taken out-of-context (an e-mail correspondence between counsel and an expert), in an effort to mislead the jury. However, advice of counsel is not relevant for purposes of establishing patent infringement. See, e.g., Thorn Emi North America, Inc. v. Micron

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Technology, Inc., 837 F. Supp. 616, 620-21 (D. Del. 1993) ("Typically, counsel's advice to a client on whether or not the client may be infringing a valid patent is not relevant to the claims in an action for patent infringement. Evidence of that advice would not tend to make the existence of any fact of consequence to the determination of the action more or less probable and would not, therefore, fall within the definition of relevant evidence under Federal Rule of Evidence 401."). Simply put, the Leier e-mail is not at all probative on the issue of infringement, and the Court should not allow Varco to use it for that purpose. The potential prejudicial effect from the misuse of the e-mail to bolster thin non-infringement evidence so outweighs the usefulness of the evidence that it justifies exclusion under Federal Rule of Evidence 403. As the court in Thorn goes on to say, however, "[w]hen an alleged infringer decides to respond to a claim of willful infringement by offering evidence that he or she reasonably and in good faith relied on advice of counsel in making, using or selling the allegedly infringing device, then the advice becomes relevant and admissible. Documents and testimony relating to that advice are relevant in that they are probative of the alleged infringer's intent." Id. Pason has stated the affirmative defense of advice of counsel; and if it presses forward with that defense, the full examination of Mr. Leier's work might be relevant under the standard stated above, but only then. But since this case began, there has been a significant clarification of the standard for proving willfulness and the role of the advice of counsel defense. When the Seagate Court abandoned the affirmative duty of due care, it also concluded that in defending against a claim for willful infringement, "there is no affirmative obligation to obtain opinion of counsel." In re Seagate Technology, LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007). Objective recklessness, the

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Seagate standard, is a much higher bar for the plaintiff to cross. Varco's failure to satisfy its prima facie showing on objective reenablements may avoid the need for Pason to make any reference to the advice of counsel. The Leier e-mail, at best, would go only to subjective issues that may never become necessary to present. At the least, the Court should prevent the use of the Leier e-mail unless and until Pason opens the door, at which time its probative value can be assessed. In any event, it has no relevance whatsoever to Varco's infringement claims. III. Damages. A. Expert Testimony Is Not Required To Rebut The Incorrect Factual Assumptions And Point Out The Unwarranted Speculation Of Varco's Expert.

Varco puts entirely too much weight on Pason's decision not to offer a separate expert witness to rebut Varco's method of calculating damages. Pason has repeatedly advised Varco that it does not take issue with the methods by which Mr. Hall, Varco's damages expert, has arrived at Varco's damages. His formulas and methodology are consistent with acceptable accounting principles and do not appear to reflect bias. Nevertheless, Pason does not believe that there is such a thing as an expert on what constitutes a reasonable royalty, nor does it believe that there is a need for an expert to calculate lost profits and testify to the appropriateness thereof. Pason has consistently taken significant issue with the incorrect factual assumptions and facts Mr. Hall uses to arrive at his conclusions. Mr. Hall uses factually irrelevant and misleading information to arrive at the percentage values for lost revenue, incremental variable costs, and lost profits. Most, if not all, of his calculations are based on assumptions that have no support. Furthermore, Mr. Hall also demonstrates a lack of understanding of the marketplace and its

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effect on the marketability of automatic drillers. Pason could have engaged a separate damages expert to proffer opinions based on actual facts. However, Pason remains convinced that if presented with accurate facts, Mr. Hall will arrive at a completely different conclusion than that which he was paid to provide for Varco. If he does not, the jury, following the Court's instructions, will. B. Varco's Lost Profit Claim is Speculative.

Varco fails to offer any evidence of "but for" causation between Pason's alleged infringement and Varco's lost sales, which would be the lynch-pin of a lost profits claim. See Water Technologies Corp. v. Calco, Ltd., 850 F.2d 660, 673 (Fed. Cir. 1988). Although Varco does not have to prove causation as a certainty, it is nevertheless required to show a reasonable probability that it would have made the sales involving Pason's product. Id. at 672. "Availability of lost profits is a question of law reviewed without deference." Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1365 (Fed. Cir. 2008) (internal citations omitted). Pason agrees that the four-part test set forth in Panduit is a permissible method for proving entitlement to lost profit damages. Panduit Corp. v. Stahlin Brothers Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978) . However, Varco is unable to satisfy the requirements of that test. A patentee is not entitled to lost profits if it fails to prove any one of the four factors of the Panduit test. Smithkline Diagnostics, Inc. v. Helena Laboratories Corp., 926 F.2d 1161, 1165 (Fed. Cir. 1991). Varco cannot tie increasing customer demand for the Pason's AutoDriller to a strong demand for the features of the '142 Patent. Panduit Corp., 575 F.2d at 1165. The evidence will show that the increasing market demand has been driven mainly by unrelated market factors:

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namely, the increasing global demand for oil. 3 United States rig count is up across the board, which has, on the sales figures produced, resulted in both Pason and the current commercial embodiment of the '142 Patent (the "Wildcat Driller") increasing the number of units and days under rental, a factor wholly unrelated by the ability of both devices to control by fluid pressure, or both fluid pressure and weight on bit (the alleged infringement). See Slimfold Mfg. Co. v. Kinkead Indus., Inc., 56 F.3d 1538, 1458 (Fed. Cir. 1991) ("[Patentee] failed to show that buyers of bi-fold metal doors specifically want a door having the advantages of the Ford patent."). Pason believes that the evidence will show instead that those features are seldom used and there can be no reasonable inference that they are central to a customer's decision. Not only does Varco ignore the obvious factors driving market demand, Varco asserts that the growth in rentals was not driven by any unique functionality of the AutoDriller, and assumes: (1) the AutoDriller performs the exact functions as the Wildcat Driller (which Pason disputes; it does more things, and in a different fashion than the Wildcat); (2) that existing and longtime customers of Pason would have used the Wildcat Driller (unlikely and unsubstantiated); and (3) that Pason's pricing bears any relationship to the pricing standards Varco implements. Indeed, where Pason and the Wildcat Driller might compete for a brand new customer, the need to couple Pason's AutoDriller with an EDR unit places the cost substantially above the standalone Wildcat Driller. Pason's witnesses will testify that they base their sales and marketing strategy upon the service Pason provides, and have a price advantage based upon that and the

In 1993, the average price of oil was $16.75 per barrel (adjusted to inflation, $23.62 per barrel). Today, the average price of oil for 2008 is $98 per barrel. In July 2008, oil prices peaked at over $147 per barrel. http://www.inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp.

3

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superior adaptability and therefore function of its non-infringing technology. Furthermore, Varco offers inconsistent and insufficient evidence that it possessed the manufacturing and marketing capability to exploit the demand satisfied by Pason's rentals, citing the surge in rental days both companies have experienced. Varco's Opening Trial Brief, at p. 33. As this Court is aware, the '142 Patent has been transferred multiple times, from Mr. Bowden to Wildcat to Varco and then to National Oilwell Varco. Each time, the resources and support for marketing efforts has increased. Any argument that Varco's marketing capabilities are the same as they were in 1995 is contrary to the evidence, and further ignores the fact that rental success, in Pason's view, is largely a product not of the technology but the superior capabilities and reputation of Pason's national service imprint. Varco's burden is to prove that it could easily double its capability to manufacture, market, distribute, maintain and successfully rent and service that number of Wildcat Drillers. See SmithKline Diagnostics, Inc., 926 F.2d at 1164 ("...the amount of a prevailing party's damages is a finding of fact on which the plaintiff bears the burden of proof by a preponderance of the evidence"). Varco's suggestion that the Wildcat was swapped out for Pason's AutoDriller is grossly misleading. For much of 2003 to 2006, Varco and Wildcat were separate entities. Most of the customers Pason obtained were already using Pason's EDR, and it was a natural transition for those customers to rent an add-on product to their already existing EDR rental, regardless of the fact that some part of Varco also sold them something. Where Varco comes up with the 86% profit earnings number on Varco's customers is beyond Pason's comprehension. Varco's Opening Trial Brief, at p. 29. C. Fifty-One Percent in Not a Reasonable Royalty.

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Perhaps recognizing its lack of sufficient evidence on the Panduit factors, Varco gravitates to the alternate theory of a reasonable royalty, setting it at a whopping fifty-one percent. At the outset of Varco's request for a reasonable royalty, Varco contends that the jury should evaluate the factors Varco and Pason would have considered in a hypothetical negotiation for a license. Varco's Opening Trial Brief, at p. 32, citing Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). Pason agrees that this is an appropriate consideration, and intends to demonstrate the facts it would have relied upon in that negotiation. Pason will establish that differential pressure control, the key to the alleged infringement of Claims 1, 11, and 14, based upon its frequency of use, is a minor part of the historical marketability of the AutoDriller. If the AutoDriller was found to be an infringing product, Pason could simply remove that control parameter, or set it up as a limit control similar to what is taught in Hobhouse, Dillon, and Varney, and market the AutoDriller without the drilling fluid pressure component as currently configured. Courts suggest that it is appropriate for infringers to request time to develop a "workaround" that would avoid continued infringement of the patent. See Verizon Services Corp. v. Vonage Holdings Corp., 503 F.3d 1295, 1311 (Fed. Cir. 2007). If Pason could simply eliminate or adjust the drilling pressure parameter to avoid infringement, why would Pason agree to pay an outrageous royalty? Varco relies on several of the factors set forth in Georgia-Pacific as instructive to the means by which to determine what constitutes a reasonable royalty. Georgia-Pacific Corp., 318 F. Supp. at 1120. These factors are merely instructive and in no way exclusive when

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determining a reasonable royalty rate, the ultimate question of which is as stated above. 4 See id. Even so, Varco ignores the Georgia Pacific factors that favor a lesser royalty and emphasizes those that it believes will bolster its claim for an inflated royalty request. For example, Varco fails to consider factor 12, which sets forth a formula classified as the "rule of thumb" under which a willing licensee would be willing to forego one-fourth to one-third of its profits to the patent holder. "As a general rule of thumb, a royalty of 25 percent of net profits is used in license negotiations." W.L. Gore & Associates, Inc. v. International Medical Prosthetics Research Associates, Inc., 1990 WL 180490 (D. Ariz. 1990). While Pason would never have agreed even to a 25% royalty on the AutoDriller, at least that formula for determining an acceptable royalty rate was derived on the basis that a willing licensor would be willing to forego a reasonable percentage of its profits for use of the patented invention, instead of randomly choosing a number that splits the profits in half. Likewise, as in the lost profits analysis, Varco overstates the utility and advantages of the '142 Patent's claimed technology over the old modes of drilling using only bit weight. Varco Opening Trial Brief, at p. 34; referring to Georgia Pacific, factor 4. But, as noted, the differential pressure function comprises a minor portion of the actual use of the AutoDriller, and an even lesser part of the way Pason competes for its customers. The evidence will show that the Pason AutoDriller is being marketed and/or rented based on its position within a suite of complimentary products supported by "best in class" services. The industry is one in which down-time is far more costly than the gains to be made by an incremental improvement in

To the extent Varco relies upon Canadian data and sales to support its application of the Georgia-Pacific factors, that information is irrelevant and should be inadmissible.

4

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technology, thus favoring the service model, and undermining the argument that Varco should receive an excessive royalty based on a device that regulates drilling fluid pressure. Varco further places excessive reliance on the royalties paid by Baker Hughes to Mr. Bowden for the right to distribute a few products alleged to infringe the '142 Patent. Varco's Opening Trial Brief, at p. 35. That example, and other small players that may have dropped out to wait for the outcome of this trial, are poor benchmarks for what is at stake in this case. None involved substantial organizations with complimentary products that already commanded significant market share, as Pason does, and there is no evidence that those players did not in fact infringe the '142 Patent, as Pason believes it does not. "It is a century-old rule that royalties paid to avoid litigation are not a reliable indicator of the value of a patent, and should therefore be disregarded when determining reasonable royalty rates. This is because royalties paid under threat of suit may reflect the licensee's desire to avoid the risk and expense of litigation." Wang Laboratories, Inc. v Mitsubishi Electronics America, Inc., 860 F. Supp. 1448, 1452 (C.D. Cal. 1993). IV. Pason's Conduct Cannot be Found Willful Under the Seagate Test. Under the 35 U.S.C. § 284, the Court is permitted -- not required -- to award elevated damages; this issue is only ripe if Varco proves by clear and convincing evidence that infringement was willful. In re Seagate, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc). In support of its charge of willfulness, rather than pointing to objective circumstances of intentional infringement, Varco alleges that that Pason ignored: (1) Terry Leier's request for more information to facilitate his rendering of an opinion on infringement; (2) Terry Leier's opinion of infringement of Claim 14; (3) Terry Leier's advice to obtain an opinion from U.S.

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counsel; and (4) the PTO decision after re-examination which confirmed the validity of the claims of the '142 Patent. Raising these arguments, Varco jumps headfirst into the subjective category, and presumes that Pason will elect, at trial, to rely upon the advice of counsel defense in the absence of Varco's ability to establish that Pason acted "despite an objectively high likelihood that its actions constituted infringement of a valid patent" and that the risk "was either known or so obvious that it should have been known." In re Seagate, 497 F.3d at 1371. If there is no

objectively high risk of infringing a valid patent (prong one), there is no reason to address whether the accused knew or should have known of the risk (prong two). Nonetheless, Varco's entire argument is exclusively directed to issues that relate to Pason's state of mind, knowledge, intentions, motives, or omissions which are irrelevant to the objective analysis. Id. Since Seagate, Courts have routinely dismissed or summarily ruled on claims of willful infringement when the patentee failed to meet the first prong of the Seagate test. See, e.g., Innogenetics, N.V. v. Abbott Laboratories, 512 F.3d 1363, 1381 (Fed. Cir. 2008) (affirming ruling of no willful infringement because the record did not show an objectively high likelihood of infringement); Trading Technologies Int'l, Inc. v. eSpeed, Inc., 2008 WL 63233, *2 (N.D. Ill. Jan. 3, 2008) (The second prong is not reached when "plaintiff has failed to meet Seagate's threshold requirement."); Abbott Laboratories, Inc. v. Sandoz, Inc., 2007 WL 4287503 (N.D. Ill. Dec. 4, 2007) (Dismissing a claim of willful patent infringement because the defendant established a reasonable basis for his belief that his actions were legitimate, thereby showing objective reasonableness and negating objective recklessness). Here, Varco faults Pason's decision to "ignore" Terry Leier's (1) requests for additional

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information; (2) his ultimate "opinion" on infringement; and (3) his advice to obtain an opinion from U.S. counsel. However, all of these allegations relate to Pason's state of mind, which is clearly not relevant to the objective inquiry. In re Seagate, 497 F.3d at 1371. Moreover, in overruling the previous "affirmative duty of due care" standard the Seagate Court "reemphasize[d] that there is no affirmative obligation to obtain opinion of counsel" to defend against a charge of willful infringement. Id. Because opinion of counsel is longer required to defend against an accusation of willful infringement, the fact that one was obtained should not be allowed to now prejudice Pason. Varco's reliance on the PTO's decision after re-examination is similarly misplaced. Reexam was only requested of Claims 1 and 11 and only in light of the Varney patent. Although the PTO confirmed the '142 Patent, the examiner's conclusion that "Claims 2-8 and 12-15 are patentable due to their dependency on claims 1, 9, and 11" demonstrates a gross misunderstanding of the '142 Patent--Claim 14 is an independent claim, not a dependent claim. Statement of Reasons for Patentability and/or Confirmation (emphasis added). Furthermore, the PTO's decision after re-exam does nothing to alter the fact that Pason remained armed with its reasonable arguments of non-infringement, invalidity and unenforceability of the '142 Patent, all of which it will assert at trial, and all of which conclusively establish Varco's inability to meet the objectively high risk first prong under Seagate. This Court recently granted partial summary judgment of no willfulness based on the new Seagate standard where the defendant had "advanced a colorable challenge to the validity of the plaintiffs' patents. Under these circumstances, the plaintiffs cannot meet their burden of proving by clear and convincing evidence that the defendants acted despite an objectively high likelihood

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that their actions constituted infringement of a valid patent." Pivonka v. Central Garden & Pet Co., 2008 WL 486049, *2 (D. Colo. 2008). The relevant objective facts are clear: Varco failed to demonstrate a reasonable probability of success on the merits at the preliminary injunction hearing. That failure demonstrates an inability to establish the objectively high likelihood of infringing a valid patent required under In re Seagate, 497 F.3d at 1374. Throughout the course of the litigation, Pason maintained colorable challenges to validity and enforceability, as well as its non-infringement defenses. Accordingly, Varco is unable to establish the first prong under Seagate and thus, the willfulness claim fails. 5 CONCLUSION According to a person of ordinary skill in the art, a plain reading of the relevant claims of the '142 Patent compels a finding of non-infringement. However, to the extent Varco convinces this Court to accept its construction of the claim terms, Claims 1, 11, and 14 are either anticipated or obvious in light of material prior art. In like manner, Varco's broad construction is* not enabled by the teachings of the specification, which justifies this Court in holding the '142 Patent invalid and unenforceable. Because it can articulate such defenses and because it succeeded at the preliminary injunction stage, Pason's conduct cannot rise to level of objective

5

It should be noted, that any suggestion by Varco that Pason "deliberately copied... patented features" of the '142 Patent is scurrilous and is wholly unsupported by the record. Pason's decision to develop an automatic driller which controlled using known and appreciable parameters for rotary oil well drilling does not in any way support the prejudicial allegations Varco has made. Despite its suggestion to the contrary, and despite his own misrepresentations to the PTO, Bobbie Bowden was not the first to use drilling fluid pressure to automate control of a drilling rig. Dillon and LeCompte both did that in the 1930s, Varney did it and Young suggested it in the 60s, Hobhouse did it again, in combination with bit weight in the 70s, and Brett and Warren did so and wrote about it in the 80s.

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recklessness to support a finding of willfulness.

DATED this 19th day of September, 2008. Respectfully submitted, /s/ Timothy G. Atkinson Timothy G. Atkinson Mark E. Haynes Kelley A. Bergelt Mark E. Lacis IRELAND, STAPLETON, PRYOR & PASCOE, P.C. 1675 Broadway, Suite 2600 Denver, Colorado 80202 E-mail: [email protected] Attorneys for Defendant Pason Systems USA Corp.

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CERTIFICATE OF SERVICE I hereby certify that on this 19th day of September, 2008, I caused the foregoing DEFENDANT'S REBUTTAL TRIAL BRIEF to be electronically filed with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following: [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] /s/ Timothy G. Atkinson Timothy G. Atkinson Mark E. Haynes Kelley A. Bergelt Mark E. Lacis IRELAND, STAPLETON, PRYOR & PASCOE, P.C. 1675 Broadway, Suite 2600 Denver, Colorado 80202 E-mail: [email protected] Attorneys for Defendant Pason Systems USA Corp.

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