Transcript Recent Developments in Patent Infringement Damages

Recent Developments in Patent
Infringement Damages
February 10, 2012
Presented by Charles S. Barquist
Morrison & Foerster LLP
Los Angeles, California
Issues

Courts are trying to address the perception that damages awards
are out of control and baseless through:
 Stricter application of the Entire Market Value Rule and requiring
apportionment where appropriate
 Requiring evidence supporting both the structure and the amount of the
award sought
 Eliminating the 25 Percent Rule of Thumb
© AIPLA 2012
Verdicts
i4i v. Microsoft verdict
Mirror Worlds v. Apple verdict
Background
Statutory Provision: 35 USC § 284
 “Upon finding for the claimant the court shall award the claimant
damages adequate to compensate for the infringement but in no
event less than a reasonable royalty for the use made of the invention
by the infringer, together with interest and costs as fixed by the court.”
 “The court may receive expert testimony as an aid to the determination
of damages or of what royalty would be reasonable under the
circumstances.”
 Unchanged by AIA.
Lost Profits
 Lost profits typically are the largest measure of monetary damages, but
are more difficult to prove than reasonable royalty.
 Profits that the patentee would have made on the sales of its patented
products but for the infringement.
 Four-part test:




Demand for the patented product
Absence of acceptable non-infringing substitute
Manufacturing/marketing capacity
Amount of profit the patentee would have made
Reasonable Royalty
 If the patentee cannot prove that it is entitled to lost profits, the court or
jury will award reasonable royalties.
 Reasonable royalty damages are awarded in over 75% of cases finding
infringement.
 If the patentee can show an established royalty rate, for example prior
agreements of the same scope, the established royalty rate will apply.
 If there is no established royalty rate, the court/jury will determine the
royalty rate that the parties would have agreed to in a “hypothetical
negotiation” at the time infringement began.
 Courts look at fifteen factors in determining royalty rate arising from
hypothetical negotiation. Georgia-Pacific Corp. v. U.S. Plywood Corp.,
381 F. Supp. 1116 (S.D.N.Y. 1970).
Hypothetical Negotiation
Hypothetical Negotiation Analysis
 Determine:
 what a willing licensee in the place of the infringer reasonably would
have paid and
 what a willing licensor in the place of the patentee reasonably would
have accepted
 … had such a license been negotiated just before the infringement
began
 Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 (Fed. Cir. 1995)
Georgia Pacific Factors
•Royalties
• Nature of the invention
•Rates paid by licensee of
• Infringer’s extent of use of the
invention
comparable patents
•Nature and scope of license
•Licensor’s licensing policy
•Commercial relationship of parties
•Effect of patent on ability to sell
other products
•Duration of patent & license
•Established marketability of the
product made under patent
•Advantages over old modes/devices
• Portion of profit customary to allow for
use of invention
• Portion of profit that should be
credited to the invention (as
distinguished from non-patented
elements)
• Expert opinion testimony
• What would willing licensor agree to
accept / what would willing licensee
agree to pay at time infringement began
Lucent Technologies v. Gateway
580 F.3d 1301 (Fed. Cir. 2009)
 Leading recent Federal Circuit case
 Addressed 2 issues:
 Appropriate royalty structure and amount
 Application of Entire Market Value Rule
Lucent Technologies v. Gateway
580 F.3d 1301 (Fed. Cir. 2009)

Patent at issue: date-picker tool in Microsoft Outlook, Money and
Windows Mobile.

Legal error to apply Entire Market Value Rule

Damages must be apportioned to reflect value of the patent feature in
relation to other unpatented features
Lucent Technologies v. Gateway
 Lucent: sought reasonable royalties
 Initial expert theory: 1% on entire market value of sales of computers
loaded with the accused software
 Court precluded testimony from being presented to jury
 Expert’s trial testimony: 8% royalty on sales of accused software
products; resulted in essentially the same amount of total damages
sought earlier ($562m)
 Microsoft: argued damages should be limited to lump-sum royalty
of $6.5m
 Jury award of $358 million lump-sum award with no explanation of
calculation
Lucent Technologies v. Gateway
Structure and Amount of Damages
 Juries are free to adopt lump sum or running royalty so long as
decision is guided by the evidence
 There must be evidence supporting both the structure and the
amount of the award sought
 Jury’s damages calculation did not meet “substantial evidence”
standard; against clear weight of evidence
Lucent Technologies v. Gateway
Structure and Amount of Damages
 Need evidence that the parties would have agreed to a lump sum
structure and amount in the hypothetical negotiation
 Parties’ financial needs at time of hypothetical negotiation (patentee
need to raise cash quickly or accused infringer need to cap liability
tends to support lump sum structure)
 Risks to parties of lump sum structure (overpayment by accused
infringer if technology is not used for a long time; undervaluation by
patentee if technology is wildly successful)
 Parties’ policies and practices in licensing patents (to support both
structure and amount)
 Costs to implement a specific and effective design-around (acts as a
form of cap on lump sum)
Entire Market Value Rule
 "The entire market value rule allows a patentee to recover damages
based on the value of an entire apparatus containing several features,
when the feature patented constitutes the basis for customer demand.”
 Slimfold Manufacturing Co., inc. v. Kinkead Industries, Inc., 932 F.2d 1453
(Fed. Cir. 1991).
Lucent Technologies v. Gateway
Entire Market Value/Apportionment
 Georgia-Pacific Factor 2: Comparable licenses
 Must establish comparability in terms of the technology covered, the
importance of that technology to the covered products, and the royalty
structure
 Address relevance of licenses that cover broader technology or more
patents
 May need technical expert
 Must demonstrate how royalty structure and amounts sought relate to
structure and amounts in the alleged comparable licenses
 Lucent relied on dollars/unit royalty licenses, but did not show how a per
unit amount related to the requested 8 percent royalty rate
 Cannot cite to industry licensing programs unless patent-in-suit relates
directly to the technology licensed under those programs and analysis is
performed to support their use as a benchmark
Lucent Technologies v. Gateway
Entire Market Value/Apportionment
 Georgia-Pacific Factor 11: Use Made of Invention
 Damages award needs to correlate in some respect to the extent of
infringing use of the method
 Testimony from defendants’ sales and marketing personnel
regarding customer use
 Testimony from sampling of customers
 Market survey
 But damages are not limited to specific instances of infringement
proven with direct evidence
 Record devoid of any evidence of how often consumers used the
date-picker
Lucent Technologies v. Gateway
Entire Market Value/Apportionment
 Georgia-Pacific Factor 13: Portion of realizable profit that
should be credited to invention
 Need to elucidate how parties would have valued the patented
feature during the hypothetical negotiation
 Address whether infringing feature is essential or an insignificant
feature of product
 Inconceivable that insignificant feature constitutes substantial
portion of value of software
Cornell Univ. v. Hewlett-Packard Co.
609 F. Supp. 2d 270 (N.D.N.Y. 2009)
 Entire Market Value Rule applied more strictly
 Patent at issue: instruction-issuing system in a central
processing unit (CPU) used in HP computers.
 Court reduced $184m jury verdict to $53m
 Cornell tried to use Entire Market Value Rule to apply royalty rate
to HP’s revenue from sales of entire computers
 Court – royalty base must be associated with “lowest salable unit
with close relation to the claimed invention” – here, the CPU
IP Innovation LLC v. Red Hat Inc.
2010 WL 986620 (E.D. Tex. March 2010)
 Entire Market Value Rule applied more strictly
 Patent at issue: related to “sharing workloads among remotely
located computers.”
 IP Innovation claimed a reasonable royalty on all of defendants’
revenues from “subscriptions to the accused operating systems.”
 Court excluded damages theory – expert “fail[ed] to account for the
economic realities of this claimed component as part of a larger
system.”
ResQNet.com, Inc. v. LANSA, Inc.
594 F.3d 860 (Fed. Cir. Feb. 2010)
 Addresses which licenses are appropriate for consideration in
damages analysis
 Patents at issue: screen interface & related technology
 Damages: $506,305 for past infringement based on 12.5%
royalty; ongoing license at 12.5% royalty for future activity
 Federal Circuit: District court’s award relied on speculative and
unreliable evidence divorced from proof of economic harm linked
to the claimed invention
ResQNet.com, Inc. v. LANSA, Inc.
 Bundled licenses to products and services
 Did not embody claimed technology
 Rates nearly 8 times greater than 2 straight licenses
 Needed factual findings that accounted for technical and economic
differences between licenses & patent-in-suit
 Straight licenses arising from settlement of litigation were best evidence
 Different district court interpretations
 Tyco Healthcare Group v. E-Z-EM, Inc., 2010 US Dist. LEXIS 18253 (E.D.
Tex. March 2010): settlement licenses and negotiations are relevant
 Fenner Invs., Ltd. v. Hewlett-Packard Co., 2010 U.S. Dist. LEXIS 41514
(E.D. Tex. April 2010): precluded introduction testimony or exhibits related to
settlement licenses
 “[T]rial court must carefully tie proof of damages to the claimed invention’s
footprint in the marketplace.”
Demise of 25% Rule of Thumb
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011)
 25% Rule of Thumb: Assume in hypothetical negotiation that
licensee is willing to pay a royalty rate of 25% of its expected
operating profits for the infringing product
 Federal Circuit held that the 25% Rule is “a fundamentally flawed
tool for determining a baseline royalty rate in a hypothetical
negotiation.”
 “Evidence relying on the 25 percent rule of thumb is thus
inadmissible under Daubert and the Federal Rules of Evidence,
because it fails to tie a reasonable royalty base to the facts of the
case at issue.”
Conclusions
 Courts are willing to exclude unreliable damages methodologies
that are not tied to the facts of the case
 Plaintiffs carry burden of proving credible damages based on sound
economic and factual predicates
 Damages must be apportioned based on the contribution of the
patent to the product and the technology
Strategies for Parties
 Plaintiffs
 Have technical expert explain how licensed technology relates to patents
 Emphasize patented technology as key driving force in market success/customer
demand
 Consider pushing for inclusion of licenses resulting from settlements
 Defendants
 Present evidence that accused technology is a small or insignificant part of an
overall product, which alone does not drive market success
 Present evidence of smaller salable units with closer relation to the claimed
invention
 Present evidence that damages theory is not correlated with extent infringing
method is used by consumers
 Argue that dissimilar licenses should be excluded