Free Trial Brief - District Court of Colorado - Colorado

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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.

OPENING TRIAL BRIEF OF PLAINTIFF NATIONAL OILWELL VARCO, L.P.
Robert M. Bowick Matthews, Lawson, & Bowick PLLC 2000 Bering Suite 700 Houston, Texas 77057 . Phone: (713) 355-4200 Fax: (713) 355-9689 Jane Michaels Holland & Hart LLP 555 Seventeenth Street, Suite 3200 Post Office Box 8749 Denver, Colorado 80201-8749 Phone: (303) 295-8000 Fax: (303) 295- 8261 John W. Raley , III Cooper & Scully, P.C. 700 Louisiana Street, Suite 3850 Houston, TX 77002 Phone: (713) 236-6801 Fax: (713) 236-6880

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TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................................................................... iv I. II. INTRODUCTION.................................................................................................................1 STATEMENT OF FACTS....................................................................................................1 A. B. C. D. E. F. G. H. I. J. K. III. Summary of Facts .......................................................................................................1 Bobbie Bowden Invents And Patents An Automatic Driller. .....................................4 The Patented Invention Optimizes Drilling Across Multiple Parameters, Including Pump Pressure. ...........................................................................................5 Ownership Of The Patent Passed From Bowden, To Wildcat, To Varco. .................6 The Wildcat Driller Has Been A Commercial Success. .............................................8 The Owners Of The `142 Patent Have Enforced Their Rights Aggressively.............8 Pason Developed The AutoDriller To Squeeze Wildcat Out Of The Market. ...........9 Pason Ignored Its Patent Counsel's Repeated Warnings That The AutoDriller Might Infringe The `142 Patent.............................................................11 Pason Ignored Wildcat's Repeated Warnings That The AutoDriller Infringes The `142 Patent. ........................................................................................................13 Pason Ignored The PTO's Determination That The `142 Patent Is Valid. ...............13 Pason Earns Significant Revenues From Rentals Of The AutoDriller. ....................14

PASON'S INFRINGEMENT .............................................................................................14 A. B. Overview...................................................................................................................14 Each Limitation Of Claims 1, 11, And 14 Of The `142 Patent Is Present In Or Performed By Pason's Infringing Device............................................................17 1. 2. 3. Claim 1 ..............................................................................................................18 Claim 11 ............................................................................................................19 Claim 14 ............................................................................................................20

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IV. V.

PASON'S INVALIDITY DEFENSE .................................................................................22 DAMAGES .........................................................................................................................23 A. Varco Is Entitled To Recover Its Lost Profits...........................................................24 1. Varco's Evidence Satisfies The Panduit Test. ..................................................24 a. b. c. d. 2. B. The increasing rentals of both AutoDrillers and Wildcat Drillers show customer demand for products based on the `142 Patent. ................25 In this two-supplier market, there are no acceptable non-infringing substitutes...................................................................................................27 Varco possessed the manufacturing and marketing capability to exploit the demand.....................................................................................28 The only damages expert in this case has calculated Varco's lost profits with reasonable precision. ..............................................................29

The Two-Supplier Market Test Reinforces Varco's Entitlement To Lost Profits. ...............................................................................................................30

Alternatively, Varco Should Be Awarded A Reasonable Royalty. ..........................31 1. 2. 3. Commercial Relationship Between Varco And Pason......................................32 Profitability, Commercial Success, And Popularity Of The Wildcat Driller ................................................................................................................33 Utility And Advantages Of The `142 Patent Over Old Modes; Nature Of The Patented Invention, Character Of The Wildcat Driller, And Benefits From Use Of The Invention ................................................................34 Varco's Policy And Marketing Program...........................................................35 Duration Of The Patent And Term Of The License ..........................................36 Nature And Scope Of The License....................................................................37 Portion Of The Realizable Profit That Should Be Credited To The Invention............................................................................................................38 Opinions Of Qualified Experts..........................................................................38

4. 5. 6. 7. 8.

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9.

Extent To Which Pason Has Used The Invention, And Evidence Of The Value Of That Use.............................................................................................39

10. Royalties Received By The Inventor For Use Of The `142 Patent ...................39 11. Royalty That Varco And Pason Would Have Agreed Upon In 2003 ...............40 C. VI. Because Pason's Infringement Was Willful, Varco Is Entitled To Enhanced Damages....................................................................................................................43

CONCLUSION ...................................................................................................................45

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TABLE OF AUTHORITIES
FEDERAL CASES Bandag, Inc. v. Gerrard Tire Co., 704 F.2d 1578 (Fed. Cir. 1983)............................................................................................8 Bell Commc'ns Research, Inc. v. Vitalink Commc'ns Corp., 55 F.3d 615 (Fed. Cir. 1995)..............................................................................................17 Bio-Rad Labs., Inc. v. Nicolet Instr. Corp., 739 F.2d 604 (Fed. Cir. 1984)..............................................................................................5 Broadcast Innovation, L.L.C. v. Charter Commc'ns., Inc., 2006 WL 1897165 (D. Colo. 2006) ...................................................................................23 Catalina Lighting, Inc. v. Lamps Plus, Inc., 295 F.3d 1277 (Fed. Cir. 2002)..........................................................................................20 Custom Accessories, Inc. v. Jeffery-Allan Indus., Inc., 807 F.2d 955 (Fed. Cir. 1986)............................................................................................23 Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448 (Fed. Cir. 1998)..........................................................................................17 Del Mar Avionics, Inc. v. Quinton Instrument Co., 836 F.2d 1320 (Fed. Cir. 1987)......................................................................................8, 12 Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd., 122 S.Ct. 1831 (2002)........................................................................................................16 Finnigan Corp. v. Int'l Trade Comm., 180 F.3d 1354 (Fed. Cir. 1999)..........................................................................................22 Fonar Corp. v. Gen. Elec. Co., 107 F.3d 1543 (Fed. Cir. 1997)............................................................................................5 Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970)........................................................................... passim Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605 (1950)...........................................................................................................16

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Gyromat Corp. v. Champion Spark Plug Co., 735 F.2d 549 (Fed. Cir. 1984)......................................................................................2, 3, 4 In re Hayes Microcomputer Products, Inc., 982 F.2d 1527 (Fed. Cir. 1992)............................................................................................1 Jurgens v. CBK, Ltd., 80 F.3d 1566 (Fed. Cir. 1996)..............................................................................................1 Kaufman Co. v. Lantech, Inc., 926 F.2d 1136 (Fed. Cir. 1991)................................................................................2, 4, 7, 8 Kegel Co. v. AMF Bowling, Inc., 127 F.3d 1420 (Fed. Cir. 1997)..........................................................................................16 KLA-Tencor Corp. v. Nanometrics, Inc., 2006 WL 708661 (N.D. Cal. Mar. 16, 2006).....................................................................23 Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d 649 (Fed. Cir. 1985)..............................................................................................7 Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056 (Fed. Cir. 1983)........................................................................................7, 8 Lampi Corp. v. Am. Power Prods., Inc., 2004 WL 1656547 (N.D. Ill. July 22, 2004)......................................................................13 Lindemann Maschinefabrik v. Am. Hoist & Derrick Co., 895 F.2d 1403 (Fed. Cir. 1990)............................................................................................8 In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 831 F. Supp. 1354 (N.D. Ill. 1993), aff'd, 71 F.3d 1573 (Fed. Cir. 1995)...........................4 Markman v. Westview Instr., Inc., 52 F.3d 967 (Fed. Cir. 1995)..........................................................................................5, 22 Mickowski v. Visi-Trak Corp., 36 F. Supp. 2d 171 (S.D.N.Y. 1999)....................................................................................9 Micro Chem., Inc. v. Lextron, Inc., 318 F.3d 1119 (Fed. Cir. 2003)........................................................................................2, 8 Minco, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109 (Fed. Cir. 1996)..................................................................................9, 11, 19 v

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Panduit Corp. v. Stahlin Brothers Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978) .....................................................................................1, 4, 5 Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11 (Fed. Cir.1984)...............................................................................................17 Promega Corp. v. Lifecodes Corp., 1999 U.S. Dist. LEXIS 21094 (D. Utah Oct. 27, 1999) ..................................10, 11, 13, 14 Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir. 1995) ................................................................................... passim Roche Prods., Inc. v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984)......................................................................................17, 18 Ryco, Inc. v. Ag-Bag Corporation, 857 F.2d 1418 (Fed. Cir. 1988)............................................................................................1 Santa Fe-Pomeroy, Inc. v. P&Z Co., 1980 U.S. Dist. LEXIS 16986 (N.D. Cal. Sept. 2, 1980) ..................................................13 In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007)..........................................................................................20 SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161 (Fed. Cir. 1991)......................................................................................2, 12 State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573 (Fed. Cir. 1989)............................................................................................4 Stryker Corp. v. Intermedics Orthopedics, Inc., 96 F.3d 1409 (Fed. Cir. 1996)..............................................................................................1 TWM Mfg. Co. v. Dura Corp., 789 F.2d 895 (Fed. Cir. 1986)................................................................................18, 19, 20 Trans-World Mfg. Corp. v. Al Nyman & Sons, 750 F.2d 1552 (Fed. Cir. 1984)..........................................................................................17 Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17 (1997).............................................................................................................16

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DOCKETED CASES Bobbie J. Bowden v. Dick's Oilfield Instruments Sales & Serv., Inc., No. SA-98-CA1174-FB .............................................................................................................................12 Bobbie J. Bowden v. Martin Decker-Totco, Inc., No. SA-99-CA-0607 ........................................12 Bobbie J. Bowden v. Tech Power Controls Co., Nos. SA-99-CA-1336OG H-00-0271 ...............12 Varco L.P. v. IDM Equip. Co., No. H-05-0767 (S.D. Tex.) ..........................................................12 FEDERAL STATUTES 35 U.S.C. § 282..............................................................................................................................22 35 U.S.C. § 271............................................................................................................16, 17, 18, 20 35 U.S.C. § 284..........................................................................................................................8, 23

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I.

INTRODUCTION

This case centers on Defendant Pason System USA Corp.'s infringement of a patent for owned by Plaintiff National Oilwell Varco. The patent is for an automated drilling system used in the oil and gas industry. After nearly five years of litigation, including an appeal to the Federal Circuit, the case is now set for trial beginning October 27, 2008. Plaintiff submits this Opening Trial Brief in conjunction with its Trial Brief on Claim Construction. II. A. SUMMARY OF FACTS STATEMENT OF FACTS

In the early 1990s, Bobbie Bowden invented and patented an automated drilling system that represented a major innovation in oil and gas drilling. None of the automatic drillers available at the time provided accurate, useful information to operators and drilling contractors who wanted to drill wells that deviated from vertical to horizontal or diagonal (i.e., "directional" wells). When surface topography or underground geology demanded horizontal or other directional drilling, many drilling contractors controlled drilling operations manually ­ a stressful, imprecise process that often resulted in broken equipment and slower-than-optimal drilling. Bowden's invention ­ patented in the United States as Patent 5,474,142 ("the `142 Patent") ­ changed everything. A device called the Wildcat Driller is one embodiment of the patented invention. After a drilling contractor connects a Wildcat Driller to its rig, the system automatically controls the rate at which drill pipe ­ also known as "drill string" ­ is released into a well, based on measurements of multiple drilling parameters. While other automatic drillers controlled drilling based on a measurement of the weight pressing on the drill bit ("weight-on-

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bit"), the Wildcat Driller controls drilling based on measurements of multiple inputs, including the pressure of drilling fluid being pumped into a well ("pump pressure"). This is vital for directional drilling, because measurements of weight-on-bit are often inaccurate when a drilling contractor deviates a vertical well to proceed horizontally or diagonally. Using pump pressure to control the release of drill string was an important advance in directional drilling. Because the Wildcat Driller automatically controls the release of drill string based on measurements of multiple inputs, including pump pressure, drilling contractors can automatically control directional drilling with greater precision by basing the release of drill string on accurate data. Drilling contractors clamored for the Wildcat Driller, and rentals of the driller skyrocketed following its introduction. Indeed, the Wildcat Driller created an entirely new market that had not existed before: the market for high-performance multi-parameter automated drilling systems that could be used for both directional and vertical drilling. After an initial fouryear period in which Bowden relied on two established oilfield equipment companies to distribute the Wildcat Driller, a small start-up company called Wildcat Services ("Wildcat") ­ Plaintiff's predecessor ­ began distributing the Wildcat Driller in 1999. Defendant Pason Systems USA Corp. and its Canadian parent company, Pason Systems Corp. (together, "Pason") ­ one of the largest drilling instrument equipment providers in the world ­ sensed an opportunity to take over the market that Bowden and Wildcat had created. Pason's field personnel observed the Wildcat Driller's operation on drilling rigs, and Pason developed a plan to leverage its dominant instrumentation and drilling recorder presence on drilling rigs in the United States and Canada to become a major provider of multi-parameter automatic drilling systems. Although it was well aware of the `142 Patent, Pason did not seek a

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license from Wildcat to use the patented technology. Instead, despite its concerns about infringing the `142 Patent, Pason began marketing its own multi-parameter automatic driller, which it called the AutoDriller. The AutoDriller is the infringing device at the heart of this lawsuit. The Canadian parent company, Pason Systems Corp., manufactures the automatic driller. The United States subsidiary, Defendant Pason Systems USA Corp., imports the automatic driller into the United States. Pason's field personnel studied the Wildcat Driller, and Pason built the AutoDriller device so that its functionality is comparable to that of the Wildcat Driller. Pason priced the AutoDriller at the same level as the Wildcat Driller and marketed the AutoDriller to Wildcat's customers. Despite repeated requests from its Canadian patent counsel, Terry Leier, for nearly four years Pason did not provide the information necessary for him to determine whether the AutoDriller infringed any patents. When Pason finally did provide that information, Pason's patent counsel informed Pason within just a few hours that the AutoDriller infringed the `142 Patent. Ignoring repeated warnings from the same lawyer, Pason never hired a United States patent attorney to determine whether the AutoDriller infringed the `142 Patent. Pason did, however, continue with the extremely lucrative business of renting AutoDrillers to drilling contractors even after its patent counsel's repeated warnings and after receiving the opinion from Leier that Pason's AutoDriller infringed Claim 14 of the `142 Patent. These rentals allowed Pason to earn approximately $17.6 million from AutoDriller rentals in the United States from

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late 2003 through June 2008.1 B. BOBBIE BOWDEN INVENTS AND PATENTS AN AUTOMATIC DRILLER.

The son of an oilfield driller, Bobbie Bowden developed an automatic drilling system after more than 25 years of tinkering with drilling equipment. Bowden grew up in the oilfield town of Hobbs, New Mexico. Bowden's father developed and patented a drilling system that automatically controlled the release of drill string based on a measurement of weight-on-bit. At age 14, Bowden began working for his father. Still too young to work on an actual drilling rig, Bowden assembled his father's automatic drillers with parts from a local bicycle shop. After serving in the Navy, Bowden returned home to run his father's automatic driller business from 1968 through 1971. Bowden continued working in the automatic driller industry in the 1970s and early 1980s, focusing on both selling and repairing automatic drillers and drilling instrument equipment. In 1986, Bowden founded a new company, which he named Wildcat Specialty. In the mid-1980's drilling operators became more interested in directional drilling. Bowden recognized that the increasing popularity of directional drilling would be likely to create demand for automatic drillers responsive to multiple parameters, including pump pressure, because traditional automatic drillers (responsive only to weight-on-bit) did not provide sufficiently accurate feedback to optimize drilling performance in a directional well. In January 1992, Bowden developed a prototype, which he tested on three directional wells. Bowden filed a

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This figure ­ along with the damages calculations outlined in this brief ­ are based on financial information received from the parties through the first six months of 2008. These damages calculations will be revised prior to trial to reflect updated financial information received for the third quarter of 2008, through September 30, 2008. 4

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patent application for the invention on April 19, 1993. The PTO issued the `142 Patent to Bowden on December 12, 1995. C. THE PATENTED INVENTION OPTIMIZES DRILLING ACROSS MULTIPLE PARAMETERS, INCLUDING PUMP PRESSURE.

The `142 Patent describes a drilling system that automatically controls the operations of an oil and gas drilling rig in response to one or more factors. These factors include both pump pressure and weight-on-bit. Based on these factors, the drilling system automatically controls the release of additional drill string into the well bore. Controlling the release of the drill string is important for a number of reasons. If the drilling rig releases the drill string into the well too quickly, the excess pressure on the bit may cause it to break. Drilling contractors then must remove thousands of feet of drill pipe in order to replace the bit. This is both expensive and time-consuming: operators or drilling contractors must pay for a new drill bit and continue to pay for drilling equipment rentals and salaries of the drilling crew, even though the drilling contractor is making no new progress on the well. If, on the other hand, the drilling rig releases the drill string into the well too slowly, the lack of sufficient pressure on the drill bit causes drilling to proceed more slowly than it otherwise would. This is also expensive for the drilling contractor, because it increases the amount of time the contractor must pay for drilling equipment rentals and salaries for the crews to drill a well to the desired depth. Drilling contractors had historically attempted to control the release of drill string into a well manually. This is nerve-wracking work, as a driller's error in adjusting a control lever can result in a broken drill bit and hours ­ if not days ­ of lost drilling time. It is also imprecise work, as a driller is forced to continually monitor the gauges on the rig floor and adjust the 5

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release of a drill string manually for several hours at a time. When the release of drill string is set by hand, it is difficult to ensure that the drill string is released at the proper rate to optimize drilling performance. Instead of controlling the release of the drill string manually, a drilling contractor can use a traditional automatic driller when drilling a vertical well. A number of different automatic drillers control the release of the drill string based on a single input, weight-on-bit. These automatic drillers release additional drill string if the weight-on-bit is too low. While the weight-on-bit automatic drillers may be useful for vertical drilling, they are not as effective for directional drilling.2 This is because the weight-on-bit measurement is not accurate in a diagonal or horizontal well. The `142 Patent solves the problems associated with directional drilling by allowing drilling contractors to disregard inaccurate weight-on-bit data and control the release of the drill string based on the best-available data, including pump pressure. This technology revolutionized the directional drilling industry. D. OWNERSHIP OF THE PATENT PASSED FROM BOWDEN, TO WILDCAT, TO VARCO.

In 1995, Wildcat Specialty (Bowden's company) licensed the distribution rights for the Wildcat Driller to Drilex Services, Inc.. In 1997, Baker Hughes, Inc. purchased Drilex Services, Directional drilling allows drilling contractors to access petroleum reserves as efficiently as possible by controlling the layers of rock through which they drill, thereby opening new producing horizons and minimizing the chances of a well blowout. Directional drilling also allows drilling contractors to access reserves where the surface topography would not permit placement of a rig, by drilling from an offset position. Finally, directional drilling allows drilling contractors to drill in a more environmentally sustainable manner, because it reduces the number of wells that a contractor must drill and the portions of the earth's surface that are disturbed during the drilling. 6
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along with the distribution rights for the Wildcat Driller. At that time, Wayne Prejean was the director of the Drilex products division at Baker Hughes. An experienced directional driller himself, Prejean recognized the significance of the innovative technology embodied in the Wildcat Driller. In early 1999, Bowden's distribution agreement with Drilex/Baker Hughes expired. With Baker Hughes' blessing, Prejean left Baker Hughes, formed Wildcat Services ("Wildcat"), and obtained the distribution rights for the Wildcat Driller. Under the terms of Bowden's distribution agreement with Drilex, Drilex paid Bowden 50% of the revenue from each rental of a Wildcat Driller. After purchasing Drilex, Baker Hughes continued to pay Bowden 50% of the revenue from each Wildcat Driller rental. Recognizing the financial challenges Prejean faced in starting a new company, Bowden opted to decrease the payment he would receive under the distribution agreement with Prejean's new company from 50% to 40%. All together, these licensing agreements remained in effect for nearly six years. In 2001, Wildcat (Prejean's company) purchased Wildcat Specialty (Bowden's company), and acquired the `142 Patent outright. Faced with the prospect of Pason's continued poaching of its customers and ongoing litigation with Pason over Pason's infringement of the `142 Patent, Wildcat sold its assets ­ including the `142 Patent ­ to Varco, L.P. ("Varco") in June 2004.3 For the sake of clarity, Plaintiff will refer to itself as Varco, except when making specific references to Wildcat.

After National Oilwell purchased Varco in 2006, Varco began to operate under the name National Oilwell Varco, L.P. 7

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E.

THE WILDCAT DRILLER HAS BEEN A COMMERCIAL SUCCESS.

As discussed more fully in Part IV.B.2 below, the Wildcat Driller has been a dramatic commercial success. Prior to the introduction of the Wildcat Driller, drilling contractors primarily controlled directional drilling manually, and settled for less-than-optimal drilling performance. The success of the Wildcat Driller broadened drilling contractors' horizons, helping them realize that directional drilling ­ and vertical drilling using motors placed deep within the well ("down-hole") ­ could be done more efficiently and precisely than they previously could have imagined. The Wildcat Driller created an entirely new market segment: the market for multi-parameter automated drilling systems that used multiple inputs, including pump pressure, to optimize many different types of drilling, including directional drilling. F. THE OWNERS OF THE `142 PATENT HAVE ENFORCED THEIR RIGHTS AGGRESSIVELY.

Bowden, Wildcat, and Varco have moved aggressively to enforce their rights under the `142 Patent. Each of the actions that they have brought against infringing defendants has been quickly resolved, with the defendant in each case ceasing all infringing activities. Bowden sued Dick's Oilfield Instruments Sales and Services after Dick's manufactured a single infringing device. In April 1999, Dick's entered into a consent judgment with Bowden. In connection with the judgment, Dick's disassembled the infringing device, agreed never to manufacture another infringing device, and paid Bowden damages. Bowden sued Tech Power Controls after Tech Power Controls manufactured six infringing devices. Although these devices were computer-based, Tech Power Controls quickly recognized that the `142 Patent applied to such devices and entered into an Agreed Judgment with Bowden in September 2001. As part of the judgment, Tech Power Controls agreed never to

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manufacture another infringing device, and paid Bowden $4,000 in damages for each of its infringing devices. Varco sued IDM after IDM manufactured two infringing machines. IDM's machines, like Tech Power Controls' devices, were computer-based. Like Tech Power Controls, IDM recognized the breadth of the `142 Patent. IDM settled with Varco, agreeing never to infringe the `142 Patent again, and paying $10,000 in damages for each infringing device it had sold. Bowden also sued MD-Totco for infringing the `142 Patent. As part of a settlement with Bowden in September of 1999, MD Totco obtained a license from Varco to use the `142 Patent. Bowden opted to provide this license to MD Totco because MD Totco would be manufacturing a product that did not compete directly with the Wildcat Driller. The Wildcat Driller is an add-on piece of equipment that drilling contractors rent by the day to use on their rigs. MD Totco would be manufacturing complete sets of rig instrumentation and control equipment using computer software and computer controls that incorporated the technology described in the `142 Patent. It would then sell the complete rig control system to drilling contractors. Thus, MD Totco would not be manufacturing an add-on product that would compete directly with rentals of the Wildcat Driller. In addition to agreeing to obtain a license, MD Totco agreed to pay Bowden $50,000 for having manufactured seven infringing units, and to pay a $6,000 royalty for every unit sold in the future. G. PASON DEVELOPED THE AUTODRILLER TO SQUEEZE WILDCAT OUT OF THE MARKET.

Based in Canada, Pason Systems Corporation is one of the largest drilling instrument companies in the world. It is well-established on rigs throughout North America. Its Electronic Drilling Recorder ("EDR") ­ a piece of drilling rig equipment for capturing and displaying 9

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drilling data ­ boasts a 90% market share in Canada, and a 30% market share in the United States. Pason Systems Corporation operates in the United States through its wholly-owned subsidiary Pason Systems USA Corp. In the late 1990s and early 2000s, when Pason began developing and marketing the AutoDriller, Pason dwarfed Wildcat ­ a small, privately-owned company focused solely on renting multi-parameter automatic drillers. Pason's AutoDriller was specifically intended to compete with the Wildcat Driller. In connection with its development of the AutoDriller, Pason received reports from field technicians who had seen Wildcat Drillers on customers' rigs. Recognizing that the Wildcat Driller was the only multi-parameter drilling system that allowed drilling companies to optimize drilling based on both pump pressure and weight-on-bit, Pason built a drilling system that copied these same features. The price Pason first set for renting an AutoDriller was exactly the same as the price Wildcat earlier had set for renting a Wildcat Driller. The price Pason set for renting an AutoDriller was not driven by Pason's cost to produce and market the device: Pason's profit margin on AutoDriller rentals is at least 79%. Rather, Pason set its price to compete directly with the Wildcat Driller. When Varco later increased the rental price for the Wildcat Driller, Pason increased the rental price for the AutoDriller by approximately the same amount. Pason began marketing the AutoDriller to Wildcat's existing customers. All of Pason's first ten AutoDriller renters were Wildcat customers. During Pason's first three years of renting AutoDrillers, 86% of its rentals were to Wildcat customers.

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H.

PASON IGNORED ITS PATENT COUNSEL'S REPEATED WARNINGS THAT THE AUTODRILLER MIGHT INFRINGE THE `142 PATENT.

While developing the AutoDriller, Pason sought the opinion of Canadian patent attorney Terry Leier about whether the AutoDriller infringed any patents. On February 8, 2000, Leier provided an opinion to Pason. Leier began the opinion by advising Pason that he was "address[ing] the matter of infringement from a Canadian perspective." Trial Ex. 29, at 1. Leier continued: "As we are a Canadian law firm, the US patents are reviewed in general terms only[.]" Id. Later in the opinion, Leier warned that to determine whether the AutoDriller infringed Claim 14 of the `142 Patent, he needed additional information. See id. at 10 ("[T]he disclosure I have is not sufficiently detailed . . . . Clarification of what measurements and transformations of those measurements that Pason proposes to carry out is needed for further consideration in relation to this claim."). Despite Leier's advice and request, Pason did not hire a United States law firm to address the matter of infringement from a United States perspective, and did not send Leier the additional information he requested. On October 7, 2002, Leier wrote to Pason again. Leier again advised Pason to obtain an opinion from a United States law firm, making clear that only with such an opinion would Pason be protected against a claim that it willfully infringed the `142 Patent: Within the United States, it will be necessary to engage a U.S. attorney to carry out steps in relation to any litigation or advice that may arise in that jurisdiction. . . . Certainly a preliminary step that can be taken is to ask for an infringement opinion from a U.S. law firm and, perhaps a validity opinion in view of the prior art that was located during the course of the Canadian search. . . . An advantage to obtaining an infringement/validity opinion from a U.S. law firm is that such an opinion can be relied on to provide Pason with a defence [sic] against a claim for treble damages for patent infringement in the U.S.

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Trial Ex. 56, at 1, 2. Based on Leier's letter, Pason appeared to be contemplating trying to overwhelm Bowden and Wildcat in litigation, rather than respecting the `142 Patent. See id. at 2 ("[I]f you wish to prepare for litigation in the U.S., I suggest that counsel be retrained [sic] in either Houston, Austin, or San Antonio. I have prepared a list of lawyers that can be contacted should you wish to proceed with preparations for litigation in the U.S."). In any event, after receiving Leier's October 7, 2002 letter, Pason still did not attempt to obtain an infringement opinion from a United States lawyer. On October 29, 2002, Leier wrote to Pason a third time, again advising Pason of the importance of retaining United States counsel to address whether the AutoDriller infringed the `142 Patent: [P]lease note that . . . this opinion is limited to the Canadian patent and the law in Canada. While the principles of patent law are generally similar between Canada and the US, there are differences in what is prior art and in the requirements for patentability . . . . Moreover, these differences have changed over the years with changing laws. Furthermore, the principles of construction applied to US patent claims by US courts is not identical to the principles used in Canada. Trial Ex. 58, at 9. Leier also reminded Pason that ­ nearly three years after he first requested the information ­ Pason still had not provided him enough information to determine whether Pason infringed Claim 14 of the `142 patent. Id. Pason finally provided additional information to Leier about the operation of the AutoDriller on May 14, 2004, more than four years after Leier requested the information. That same day, Leier informed Pason, Pason's expert, and Pason's counsel by email that the AutoDriller infringed Claim 14 of the `142 Patent. Trial Ex. 155. In two separate places,

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Leier's email states that the "Pason system operates within the parameters of claim 14" at least some of the time. Id. Curiously, the next day Leier sent a follow-up email to all the recipients of his May 14 email, plus one of Pason's trial attorneys who was not included on the original email. Ex. 156. In the May 15, 2004 email, Leier did not retract his own analysis of Claim 14, but vaguely advised Pason's expert that the expert would "have to decide what the claim scope is to him and put that in [his] report." Id. I. PASON IGNORED WILDCAT'S REPEATED WARNINGS THAT THE AUTODRILLER INFRINGES THE `142 PATENT.

On January 14, 2003, Wildcat provided notice to Pason that the AutoDriller might infringe the `142 Patent and its Canadian counterpart, Canadian Patent No. 2,094,313. Trial Ex. 62. On August 11, 2003, Wildcat provided a follow-up notice to Pason, stating that, based on press releases and other materials, the AutoDriller Pason was developing infringed the `142 Patent. This letter made clear that Wildcat was "firm in [its] conviction of protecting [its] goodwill, reputation, and rights," and specifically invited a response from Pason. Trial Ex. 92. Despite these repeated warnings, Pason did not cease manufacturing and marketing the AutoDriller. It did not attempt to seek a license from Varco. Instead, Pason continued to infringe. J. PASON IGNORED THE PTO'S DETERMINATION THAT THE `142 PATENT IS VALID.

On January 23, 2004, Pason requested an ex parte re-examination of the `142 Patent in the United States Patent and Trademark Office ("PTO"), contending that the `142 Patent was not valid in view of a prior patent issued to Justin Varney. On July 4, 2006, the PTO confirmed the

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patentability of the `142 Patent, rejecting Pason's invalidity arguments. Despite the PTO's confirmation that the `142 Patent is valid, Pason has continued to manufacture and market AutoDrillers. K. PASON EARNS SIGNIFICANT REVENUES FROM RENTALS OF THE AUTODRILLER.

Since late 2003, when it began renting the AutoDriller, Pason has rented the AutoDriller to its customers for 182,453 days.4 Pason has earned revenues of $17.6 million on these rentals. Pason's AutoDriller rental days and revenues have grown each year it has offered the product. III. A. OVERVIEW PASON'S INFRINGEMENT

The `142 Patent contains 14 claims, three of which ­ Claims 1, 11, and 14 ­ are at issue in this suit. Trial Ex. 1. Claim 1 is an apparatus claim for an automatic drilling system using drilling fluid pressure as a control parameter to regulate the release of the drill string: An automatic drilling system for automatically regulating the release of the drill string of a drilling rig during the drilling of a borehole comprising: a drilling fluid pressure sensor; a drilling fluid pressure regulator coupled to said drilling fluid pressure sensor, said drilling fluid pressure regulator measuring changes in drilling fluid pressure and outputting a signal representing those changes; a relay coupled to said drilling fluid pressure regulator, said relay responsive to the output signal of said drilling fluid pressure

These figures ­ along with the calculations of Varco's damages outlined in this brief ­ are based on financial information received from the parties through the first six months of 2008. Varco's damages calculations will be revised prior to trial to reflect updated financial information received for the third quarter of 2008, through September 30, 2008. 14

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regulator to supply a drill string control signal at an output thereof, and a drill strong controller coupled to said relay wherein 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. Id. Claim 11 is a method claim for automatically regulating the release of drill string based on drilling fluid pressure: A method for automatically regulating the release of the drill string of a drilling rig drill, comprising the steps of measuring drilling fluid pressure; producing a signal in response to changes in drilling fluid pressure, said signal representing the changes in drilling fluid pressure, relaying said signal to a drill string controller; and controlling said drill string controller 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. Id. And Claim 14 is a method claim for automatically regulating the release of drill string based on drilling fluid pressure and weight-on-bit: A method for automatically regulating the release of the drill string of a drilling rig drill, composing the steps of: measuring drilling fluid pressure and bit weight;

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producing a first signal in response to changes in drilling fluid pressure, said first signal representing the changes in drilling fluid pressure; producing a second signal in response to changes in bit weight, said second signal representing the changes in bit weight; selecting any one of said first signal, said second signal, and both said first and second signals to control the release of said drill string; and relaying said selected signal or signals to a drill string controller which regulates the release of said drill string in response to said selected signal or signals. Id. To prove that Pason infringes the `142 Patent, Varco need only prove that each element of one of the above claims is found in the Pason AutoDriller. Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 29 (1997). Varco may prove infringement either literally or under the doctrine of equivalents. Kegel Co. v. AMF Bowling, Inc., 127 F.3d 1420 (Fed. Cir. 1997); see also Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605, 608 (1950) (doctrine of equivalents applies if accused device or method "performs substantially the same function in substantially the same way to obtain the same result"); Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd., 122 S.Ct. 1831, 1837 (2002) ("The language in the patent claims may not capture every nuance of the invention or describe with complete precision the range of its novelty. If patents were always interpreted by their literal terms, their value would be greatly diminished. Unimportant and insubstantial substitutes for certain elements could defeat the patent, and its value to inventors could be destroyed by simple acts of copying . . . . The scope of a patent is not limited to its literal terms but instead embraces all equivalents to the claims described."). Pason infringed the `142 Patent both directly and indirectly. Compare 35

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U.S.C. § 271(a), with 35 U.S.C. § 271(b) & (c). After the court determines the scope and meaning of the claims of the `142 Patent ­ which are addressed in Varco's Trial Brief on Claim Construction, submitted herewith ­ the jury can compare those claims against the AutoDriller system. See Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454 (Fed. Cir. 1998) (en banc). B. EACH LIMITATION OF CLAIMS 1, 11, AND 14 OF THE `142 PATENT IS PRESENT IN OR PERFORMED BY PASON'S INFRINGING DEVICE.

Pason directly infringed the `142 Patent because it made, used, offered for sale, sold, or imported devices that contain or perform each and every element (or their equivalents) of Claims 1, 11, and 14 of the `142 Patent. 35 U.S.C. § 271(a); see also Roche Prods., Inc. v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984) (only one of the activities enumerated under § 271(a) is required for infringement). Pason indirectly infringed the `142 Patent because it contributed to or induced direct infringement by others by renting its AutoDriller system for use in practicing the method of Claims 11 and 14 of the `142 Patent. 35 U.S.C. § 271(b) & (c). The prohibitions in 35 U.S.C. § 271 must be interpreted in their broadest sense. See, e.g., Trans-World Mfg. Corp. v. Al Nyman & Sons, 750 F.2d 1552 (Fed. Cir. 1984) (although the defendant did not make or sell an infringing product, but merely furnished infringing display racks to its customers, free of charge, for their use, the defendant "used" an infringing product, and therefore infringed). Moreover, as long as an accused product contains or performs each and every element (or their equivalents) of a claim at least some of the time, the accused product infringes. See, e.g., Bell Commc'ns Research, Inc. v. Vitalink Commc'ns Corp., 55 F.3d 615, 622-23 (Fed. Cir. 1995) ("[A]n accused product that sometimes, but not always, embodies a claimed method nonetheless infringes[.]"); Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 20 (Fed. Cir.1984) ("[I]mperfect practice of an invention does not avoid 17

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infringement[.]"); Roche Prods., Inc. v. Bolar Pharmaceutical Co., 733 F.2d 858, 861 (Fed. Cir. 1984) (stating that 35 U.S.C. § 271(a) "prohibits, on its face, any and all uses of a patented invention"). Attached for the Court's convenience is a chart showing the elements of the `142 Patent and Pason's infringement of each element. See Exhibit 1. As described more fully below, Pason infringes each element of Claims 1, 11, and 14 of the `142 Patent. 1. Claim 1

The AutoDriller system contains each element of Claim 1 of the `142 Patent. Pason has stipulated that the AutoDriller system is an automatic drilling system for automatically regulating the release of the drill string of a drilling rig during the drilling of a borehole. Pason also has stipulated that the AutoDriller system contains a drilling fluid pressure sensor. The AutoDriller system includes a computer processor that operates as a drilling fluid pressure regulator ­ a device that is capable of detecting and responding to electrical, mechanical, hydraulic, or pneumatic signals. The computer processor is connected to the drilling fluid pressure sensor and ascertains measurements of changes over time in drilling fluid pressure. The computer processor also compares these measurements to a set reference point and produces and transmits a signal that is related to the changes in drilling fluid pressure. The AutoDriller system includes a stepper motor driver that communicates, conveys, or imparts an electrical signal to control the movement of the stepper motor. This stepper motor driver, which is a relay, acts in response to the signal produced or delivered by the drilling fluid pressure regulator, and supplies a signal used to control the rate of release of the drill string.

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Finally, the AutoDriller system includes a stepper motor that is connected to the stepper motor driver/relay and that is used to control the rate of release of the drill string so that a decrease in drilling fluid pressure results in the relay supplying a drill string control signal that operates the stepper motor/drill string controller to effect an increase in the rate of release of the drill string, and an increase in drilling fluid pressure results in the stepper motor driver/relay supplying a drill string control signal that operates the stepper motor/drill string controller to effect a decrease in the rate of release of the drill string. 2. Claim 11

The AutoDriller system performs each element of Claim 11. Pason has stipulated that the AutoDriller system performs a method for automatically regulating the release of the drill string of a drilling rig drill. Pason also has stipulated that the AutoDriller system measures drilling fluid pressure. The AutoDriller system includes a computer processor with an algorithm that performs the step of producing a signal in response to the measurement of changes in drilling fluid pressure. This measurement is taken over time, and is compared to a set reference point. The signal relates to changes in drilling fluid pressure taken over time. The AutoDriller system includes a stepper motor driver, which conveys or transmits the signal produced by the computer processor to the stepper motor, which in turn controls the rate of release of the drill string. Finally, the AutoDriller system directs the release or lowering of the drill string by the stepper motor to increase the rate of release of the drill string when the signal corresponds to a decrease in drilling fluid pressure, and to decrease the rate of release of the drill string when the signal represents an increase in drilling fluid pressure.

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Throughout this litigation, the parties' primary dispute regarding Claim 11 has centered on whether the AutoDriller system relays a signal from a regulator to a drill string controller. Notably, Pason now has conceded that the AutoDriller system does perform this relaying step. Pason's claim charts identifying disputed claim terms concede that the term "relaying" should be construed to mean "passing along." Doc. 159, at 6. Pason's technical expert witness, J. Ford Brett, has conceded on multiple occasions that if "relaying" is given such a definition, Pason infringes Claims 11 and 14. Brett Dep. (June 1, 2004) 24:13-16 ("A: If you say ­ if you're talking about relay in terms of the broad definition, Pason infringes, so I don't know what else you want me to say about that.") (emphasis added); id. 25:10-19 ("Q: But it's your opinion that claim 11 is infringed by Pason's AutoDriller device with that interpretation [communicate or transmit] of relaying? A: With that interpretation of relaying, which is the word there, then Pason infringes, that's true. Q: How about claim 14? A: Same thing. Q: That claim 14 infringes with that same definition of relay? A: Right. Same thing.") (emphasis added); Brett Report (May 31, 2004), at 14 ("If `Relaying' is interpreted in the general `convey' sense, then the Pason AutoDriller does indeed fall within the scope of these claims. As mentioned above, the general `convey' sense Claims 11 and 14, are quite broad.") (emphasis added). 3. Claim 14

The AutoDriller system performs each element of Claim 14. Pason's own patent counsel, Terry Leier, concluded as much when Pason ­ after four years of prodding ­ provided enough information for him to evaluate whether the AutoDriller infringed the Canadian counterpart of the `142 Patent: Consequently, the technical explanation appears to be that Pason system operates within the parameters of claim 14 at least some of 20

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the time. Unless there is a basis to invalidate the claim, the operation of Pason system appears to fall within the scope of the claim. Therefore, if there is a Markman/construction hearing that affirms the claim, there does not seem to me to be any other defense issues. Trial Ex. 155 (emphasis added). Similarly, Pason's technical expert has conceded in no uncertain terms that Pason infringes Claim 14 when the limitations in that claim are construed as Pason now contends they should be. Doc. No. 44, Preliminary Injunction Hearing Transcript I (July 7, 2004) 124:1-4 ("Ms. Laff: If there was a broader construction of Claim 14, where `relaying' meant communicate, is it possible that [Pason's] autodriller would then infringe Claim 14? Mr. Brett: I don't even ­ I don't say possible, I say probable."); see also Brett Dep. (June 1, 2004) 25:10-19; Brett Report (May 31, 2004), at 14. Pason has stipulated that the AutoDriller system performs a method for automatically regulating the release of the drill string of a drilling rig. Pason also has stipulated that the AutoDriller measures drilling fluid pressure. The AutoDriller system determines the sensed weight of the drill string placed upon the drill bit. The AutoDriller system includes a computer processor with an algorithm for producing a first signal in response to measurement of changes in drilling fluid pressure, which are taken over time and are compared to a set reference point. The first signal corresponds to changes in drilling fluid pressure. The AutoDriller system's computer processor and algorithm produce a second signal in response to changes in bit weight, measured over time and compared to a set reference point. The second signal corresponds to changes in bit weight.

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The AutoDriller system's computer processor and algorithm select one or both of the signals to direct the release of the drill string. The AutoDriller system includes a stepper motor driver that conveys or transmits the chosen signal(s) to a stepper motor, which controls the rate of release of the drill string and that adjusts the rate of the lowering of the drill string in response to the selected signal(s). * * *

Thus, the AutoDriller infringes each and every element of Claims 1, 11, and 14 of the `142 Patent. IV. PASON'S INVALIDITY DEFENSE

Pason appears poised to assert the defense that the `142 Patent is invalid. The precise nature of Pason's defense has been a moving target, however. Varco will respond to Pason's invalidity defense, after Pason clarifies the nature of that defense, in its Response Trial Brief. No matter what type of invalidity defense Pason asserts, it will bear a heavy burden. Pason must prove invalidity with clear and convincing evidence. See Finnigan Corp. v. Int'l Trade Comm., 180 F.3d 1354 (Fed. Cir. 1999). The `142 Patent is presumed valid. 35 U.S.C. § 282. The presumption of validity flows from the fact that patent applications are reviewed in detail by experts at the PTO: Patent applications, unlike contracts, are reviewed by patent examiners, quasi-judicial officials trained in the law and presumed to "have some expertise in interpreting the [prior art] references and to be familiar from their work with the level of skill in the art and whose duty it is to issue only valid patents." Markman v. Westview Instr., Inc., 52 F.3d 967, 986 (Fed. Cir. 1995).

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In this case, the patent has been reviewed by experts at the PTO, not just in connection with Bowden's application for a patent, but also in connection with Pason's re-examination request. In connection with the re-examination request, the PTO confirmed the validity of all claims in the `142 Patent. This is particularly notable, because the PTO affirms all the claims of less than a quarter of the patents that are re-examined.5 When, as here, the PTO upholds the validity of a re-examined patent, it is strong evidence that a district court must consider in assessing whether the party asserting invalidity has met its burden of clear and convincing evidence. See Custom Accessories, Inc. v. Jeffery-Allan Indus., Inc., 807 F.2d 955, 961 (Fed. Cir. 1986); Broadcast Innovation, 2006 WL 1897165 at *2. Pason's argument that this twiceapproved patent is somehow invalid is simply not persuasive. V. DAMAGES

As a result of its deliberate, ongoing infringement of the `142 Patent, Pason has gained more than $17.6 million in revenues from rentals of AutoDrillers in the United States. Because it offers the AutoDriller as an add-on to other products rented or sold to its customers, Pason has pocketed extremely high profits from those rentals. Under 35 U.S.C. § 284, Varco is entitled to recover "damages adequate to compensate for the infringement." Because Varco and Pason are the only two suppliers of multi-parameter automatic drilling systems, Pason's rentals have had a significant impact on Varco. The only damages expert who will testify at trial has quantified Varco's losses and calculated the damages Ninety-one percent of requests for reexaminations are granted, and the PTO cancels all claims in approximately twelve percent of all reexaminations and changes some claims in approximately sixty-four percent. See KLA-Tencor Corp. v. Nanometrics, Inc., 2006 WL 708661 at *4 (N.D. Cal. Mar. 16, 2006); Broadcast Innovation, L.L.C. v. Charter Commc'ns., Inc., 2006 WL 1897165 at *8 n.8 (D. Colo. 2006). 23
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recoverable to compensate for Pason's infringement. His well-supported opinion is that Varco is entitled to lost profits of $11.5 million6 or, alternatively, payment of a reasonable royalty for Pason's five years of infringing rentals. A. VARCO IS ENTITLED TO RECOVER ITS LOST PROFITS.

Varco is entitled to recover its lost profits because it can show that, "but for" Pason's infringement, Varco would have rented its Wildcat Drillers to the customers who rented Pason's AutoDriller instead. See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1545 (Fed. Cir. 1995). A patent owner "need only show that there was a reasonable probability that the sales would have been made `but for' the infringement." Id. (emphasis added). When the patent owner establishes the reasonableness of this inference, it "has sustained the burden of proving entitlement to lost profits due to the infringing sales." Id. A patent owner need not negate every possibility that the purchaser might have purchased a product other than its own, absent the infringement. Id. 1. Varco's Evidence Satisfies The Panduit Test.

Panduit Corp. v. Stahlin Brothers Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978), establishes a four-part test for proving entitlement to lost profits damages. Rite-Hite, 56 F.3d at 1545. "A showing under Panduit permits a court to reasonably infer that the lost profits claimed were in fact caused by the infringing sales, thus establishing a . . . prima facie case with respect

6

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to `but for' causation." Id. To recover under the Panduit test, a patent owner needs to establish: (1) demand for the patented product, (2) absence of commercially acceptable, non-infringing substitutes, (3) the manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit the patent owner would have made. Panduit, 575 F.2d at 1156. Varco meets all four Panduit tests. a. The increasing rentals of both AutoDrillers and Wildcat Drillers show customer demand for products based on the `142 Patent.

Increasing rentals of the Wildcat Driller demonstrate the strong demand for products based on the `142 Patent. See Micro Chem., Inc. v. Lextron, Inc., 318 F.3d 1119, 1123-24 (Fed. Cir. 2003) (where "number of weigh machines in commercial use increased during the infringement period," and both patent owner and infringer made profits on placement of their machines, a reasonable jury could find demand for the patented features of the weigh machines); Kaufman Co. v. Lantech, Inc., 926 F.2d 1136, 1143 n.17 (Fed. Cir. 1991) (customers' purchases of machines incorporating patented invention, rather than more conventional machines, established demand for patented product). From 1999 through 2007, rental days for the Wildcat Driller increased from approximately 10,000 to more than 180,000. Varco's growth in rentals, despite Pason's dominant industry position, evidences strong customer demand for products based on the `142 Patent. Similarly, increasing rentals of the Pason AutoDriller also demonstrate demand for the patented product. See, e.g., SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161, 1165 n.3 (Fed. Cir. 1991) ("A substantial number of sales of the infringing slides . . . is compelling evidence of a demand for SKD's patented . . . slides."); Gyromat Corp. v. Champion Spark Plug Co., 735 F.2d 549, 552 (Fed. Cir. 1984) ("The substantial number of sales by 25

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Champion of infringing products containing the patented features itself is compelling evidence of the demand for the product."). When the infringer's product and the patent owner's product are similar, and are similarly priced, sales of the infringer's product establish that "there were buyers who wanted the product and were willing to pay" the patent owner's price. Gyromat, 735 F.2d at 552. The growth in Pason's AutoDriller rentals demonstrates strong demand for products based on the `142 Patent. During the last quarter of 2003, rentals of Pason's AutoDriller totaled 249 days. During the first and second quarters of 2008, such rentals totaled 20,748 and 23,553 days, respectively. Customer demand continues to grow: Pason's first- and second-quarter 2008 rentals were more than a 50% increase over their 2007 counterparts. This growth in rentals was not driven by any unique functionality of the AutoDriller, or by the AutoDriller's price relative to the Wildcat Driller. As demonstrated in Part II above, the AutoDriller and Wildcat Driller perform the same functions, and allow drilling contractors to maximize drilling efficiency across the same parameters. Pason appears to have pegged the AutoDriller's price to the price of the Wildcat Driller. In 2003, Pason began offering to rent the AutoDriller for $75 per day ­ the exact price at which Wildcat was offering to rent the Wildcat Driller. When Varco increased its rental prices, Pason did too. The Wildcat Driller and Pason AutoDriller remain comparably priced to this day. The explosion in demand for both the Wildcat Driller and the Pason AutoDriller indicates that customers value the features the two automatic drillers have in common -- in particular, the ability to control the rate of release of the drill string using multiple parameters, including drilling fluid pressure. These features are based on the `142 Patent.

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b.

In this two-supplier market, there are no acceptable non-infringing substitutes.

Pason has repeatedly acknowledged that Varco and Pason are the only companies that offer automatic drillers that are responsive to changes in both weight-on-bit and drilling fluid pressure. Pason's President, Jim Hill, testified under oath that Varco and Pason are the only two companies whose automatic drillers measure drilling fluid pressure as well as weight-on-bit. Id. Hill Dep. 25:10-21 (Sept. 20, 2006). The