Several recent opinions from the U.S. Court of Appeals for the Federal Circuit dramatically have changed the landscape for damages in patent infringement cases. The cases clarify permissible damages and provide more opportunities to challenge patent owners’ damages claims before trial.
• Calculating patent damages: In most cases a patent holder receives compensation for infringement of a valid patent through an award of money damages. It comes in the form of a reasonable royalty for the infringer’s use of the invention.
Courts typically determine this by multiplying the royalty base (the total number of allegedly infringing products multiplied by either the product’s overall price or the value of the patented feature of the product, depending on the facts of the case) by the royalty rate.
• Limiting the royalty base: In recent years, the Federal Circuit dramatically has limited patent holders’ ability to use the price of the overall product as part of a damages calculation. In what has become known as the "entire market value rule," the court has held that a damages model can be based only on the value of the overall product when the patent-related feature is the basis for customer demand for the accused product.
Thus, the Federal Circuit has held — most recently in Laserdynamics v. Quanta Computer (2012) — that unless the patent holder demonstrates this, courts should base royalties on sales of the "smallest salable patent-practicing unit," not the entire product. Applying this rule substantially impacts the royalty base, since it lowers it from the revenue of, for example, the sale of a computer to the sale of a part within the computer’s hard drive.
• Focus on the claimed invention:The Federal Circuit also has emphasized repeatedly that, because the damages inquiry must concentrate on compensation for the economic harm caused by infringement of the claimed invention, proof of damages must be tied carefully to the claimed invention’s "footprint in the market." It has cautioned trial courts that any evidence unrelated to the claimed invention does not support compensation for infringement.
Accordingly, in Laserdynamics the Federal Circuit specifically rejected admission of evidence of the revenue from sales of the overall product, because the revenue number was not correlated to the value of the patented feature alone and instead would serve simply to make the patentee’s proffered damages amount appear modest by comparison.
• Factual basis for the royalty rate: Courts often determine the royalty rate using a list of factors from Georgia-Pacific v. U.S. Plywood (1970). Here too, the Federal Circuit recently has emphasized that the analysis requires a factual basis tied to the facts of the case.
For example, in Uniloc v. Microsoft (2010), the damages expert based his damages opinion on a 25 percent rule of thumb: assuming that 25 percent of the profit from the sale of the product would go to the patent owner and the other 75 percent would remain with the infringing defendant. The Federal Circuit rejected application of this rule of thumb, instead emphasizing that the patentee must tie his royalty rate to the actual facts of the specific case, not a subjective rule.
• Admissibility of settlement licenses:The requirement that experts tie royalty rates to the facts of the case has increased the importance of another 2010 Federal Circuit opinion, ResQNet.com v. Lansa.
Before ResQNet, settlement agreements typically were inadmissible, since courts repeatedly had held that royalties paid to avoid litigation were not reliable and should be disregarded when determining a reasonable royalty. Similarly, the negotiations surrounding their execution typically were not discoverable, often due to courts’ expressed desire to promote the parties’ ability to negotiate settlements without fear that opposing parties would use them later in litigation.
Despite this longstanding disapproval of relying on settlement agreements to establish reasonable royalty damages, the Federal Circuit in ResQNet permitted such reliance under certain limited circumstances.
Trial courts now must engage in a case-by-case approach in virtually every case to determine whether specific license agreements resulted merely from a desire to avoid litigation or an evaluation of the underlying invention’s value.
The answer determines whether either side’s expert can use the royalty rate in the expert’s opinion. That, in turn, means that the parties often seek — and depending on the facts of the case may be able to obtain — draft license agreements and settlement communications to show the trial court whether the settlement agreements accurately reflect the inventions’ value.
Whether this change aids the search for the appropriate royalty rate is not clear. What is clear is that the damages analysis now is more expensive for all parties, and settlement negotiations have been hampered substantially.
The recent Federal Circuit opinions on patent damages will require more motion practice over the discoverability and admissibility of settlement licenses and related documents. Pretrial motions that seek to exclude expert opinions by the plaintiff’s damages expert now may be the most crucial proceeding in the case, since lawyers cannot reliably ascertain the case’s range of value until the court rules, often on the eve of trial.
The motions also reinforce the trial court’s authority and responsibility to ensure that damages opinions in patent infringement cases are adequately supported and tied to the specific facts of the case. While the settlement license issue is likely party-neutral, the increasingly stringent analysis of damages opinions likely will reduce the range of permissible damages in many cases.