On January 10, 2018, the Federal Circuit issued its opinion in Finjan v. Blue Coat Systems (available here). A jury found Blue Coat liable for infringement of four Finjan patents, and awarded approximately $39.5 million in reasonable royalty damages. The Federal Circuit found that Blue Coat was entitled to judgment as a matter of law of non-infringement as to one patent. With respect to the remaining three patents, the Federal Circuit affirmed the award of damages with respect to two patents (the ’731 and ’633 patents), and vacated the award with respect to the third patent (the ’844 patent) due to lack of proper apportionment and the fact that the $8-per-user royalty was not supported by substantial evidence.
’844 Patent. With respect to the ’844 patent, the Federal Circuit found that Finjan failed to apportion damages to the infringing functionality. The Court first provided an overview of the law:
When the accused technology does not make up the whole of the accused product, apportionment is required. [T]he ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more. In such cases, the patentee must give evidence tending to separate or apportion the [infringer]’s profits and the patentee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative. Finjan, as the present patent holder, had the burden of proving damages by a preponderance of the evidence.
(citations and quotations omitted).
Here, the infringing product (WebPulse) was a cloud-based system that associates URLs with over eighty different categories. Further, WebPulse was not sold by itself. DRTR (dynamic real-time rating engine) is the part of WebPulse that is responsible for analyzing URLs, and performs both infringing (relating to malware detection) and non-infringing functions.
At trial, Finjan attempted to tie the royalty base to the incremental value of the infringement by multiplying WebPulse’s total number of users by the percentage of web traffic that passes through DRTR. “DRTR processes roughly 4% of WebPulse’s total web requests, so Finjan established a royalty base by multiplying the 75 million worldwide WebPulse users by 4%. Although DRTR also performs the non-infringing functions described above, Finjan did not perform any further apportionment on the royalty base.”
Finjan argued that its “apportionment” of DRTR is adequate because DRTR constitutes the smallest, identifiable technical component tied to the footprint of the invention. The Federal Circuit rejected this argument:
[T]he fact that Finjan has established a royalty base based on the smallest, identifiable technical component does not insulate them from the essential requirement that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product. [I]f the smallest salable unit—or smallest identifiable technical component—contains non-infringing features, additional apportionment is still required.
(citations and quotations omitted).
Because malware detection was not the only valuable portion of WebPulse’s ability to identify and filter other categories of content, further apportionment was required:
Because DRTR is itself a multi-component software engine that includes non-infringing features, the percentage of web traffic handled by DRTR is not a proxy for the incremental value of the patented technology to WebPulse as a whole. Further apportionment was required to reflect the value of the patented technology compared to the value of the unpatented elements.
The Federal Circuit identified a second error with respect to the ’844 patent’s damages award. “To arrive at a lump sum reasonable royalty payment for infringement of the ’844 patent, Finjan simply multiplied the royalty base by an $8-per-user royalty rate. Blue Coat contends that there is no basis for the $8-per-user rate.” The Federal Circuit agreed:
We agree with Blue Coat that the $8-per-user royalty rate employed in Finjan’s analysis was unsupported by substantial evidence. There is no evidence that Finjan ever actually used or proposed an $8-per-user fee in any comparable license or negotiation. Rather, the $8-per-user fee is based on testimony from Finjan’s Vice President of IP Licensing, Ivan Chaperot, that the current “starting point” in licensing negotiations is an “8 to 16 percent royalty rate or something that is consistent with that . . . like $8 per user fee.” Mr. Chaperot further testified that the 8–16% figure was based on a 2008 verdict obtained by Finjan against Secure Computing. On this basis, Finjan’s counsel urged the jury to use an $8-per-user royalty rate for the hypothetical negotiation because “that’s what Finjan would have asked for at the time.”
While any reasonable royalty analysis necessarily involves an element of approximation and uncertainty, a trier of fact must have some factual basis for a determination of a reasonable royalty. Mr. Chaperot’s testimony that an $8-per-user fee is “consistent with” the 8–16% royalty rate established in Secure Computing is insufficient. There is no evidence to support Mr. Chaperot’s conclusory statement that an 8–16% royalty rate would correspond to an $8-per-user fee, and Finjan fails to adequately tie the facts of Secure Computing to the facts in this case. See LaserDynamics, 694 F.3d at 79 (“[A]lleging a loose or vague comparability between different technologies or licenses does not suffice.”).
Secure Computing did not involve the ’844 patent, and there is no evidence showing that the patents that were at issue are economically or technologically comparable. Finjan’s evidence on this point is limited to the fact that that the infringing products in Secure Computing were also in the computer security field and that Secure Computing was a competitor of Blue Coat in 2008. This surface similarity is far too general to be the basis for a reasonable royalty calculation. In any case, Mr. Chaperot’s testimony that an 8–16% royalty rate would be the current starting point in licensing negotiations says little about what the parties would have proposed or agreed to in a hypothetical arm’s length negotiation in 2008. And Finjan’s evidence of a $14–34 software user fee is not indicative of how much the parties would have paid to license a patent. See Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1317 (Fed. Cir. 2011) (“[T]here must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case.”). In short, the $8-per-user fee appears to have been plucked from thin air and, as such, cannot be the basis for a reasonable royalty calculation.
(citations and quotations omitted).
As such, the Federal Circuit remanded to the district court to determine whether Finjan had waived its right to establish reasonable-royalty damages under a new theory and whether to order a new trial on damages.
’731 and ’633 patents. With respect to these patents, Finjan’s expert apportioned the revenues comprising the royalty base between infringing and non-infringing functionality of Proxy SG. Blue Coat argued that the apportionment was insufficient. The Federal Circuit disagreed:
Finjan’s expert, Dr. Layne-Farrar, based her apportionment analysis for the ’731 and ’633 patents on an architectural diagram prepared by Blue Coat. The diagram is entitled “Secure Web Gateway: Functions” and shows twenty-four boxes representing different parts of the Secure Web Gateway system. Dr. Layne-Farrar assumed that each box represented one top level function and that each function was equally valuable. Thus, because one function infringed the ’633 patent, and three infringed the ’731 patent, she used a 1/24th apportionment for the ’633 patent and a 3/24th apportionment for the ’731 patent.
Blue Coat argues that there was no evidence to support Dr. Layne-Farrar’s assumption that each box represents a “function” and that each function should be treated as equally valuable. But at trial, Dr. Layne-Farrar testified that her assumption was based on Blue Coat’s own diagram, which is entitled “Secure Web Gateway: Functions”, as well as her discussions with Mr. Medovic, a Finjan technical expert who explained the use of architectural diagrams and identified certain components within the diagram that did and did not infringe. Dr. Layne-Farrar also testified that she relied on the deposition of a Blue Coat engineer, in which the engineer stated that the diagram in question represents the full scope of Secure Web Gateway functionality. Based on this evidence, Dr. Layne-Farrar based her analysis on the twenty-four “functions” identified in the Blue Coat diagram and considered each function equally valuable.
Blue Coat notes that Dr. Layne-Farrar’s conclusions conflict with testimony from Mr. Shoenfeld, Blue Coat’s Senior VP of Products, stating that each box in the diagram can “have many, many things behind [it] . . . so there’s no equal weighing of these [boxes] . . . .” But the existence of conflicting testimony does not mean the damages award is unsupported by substantial evidence. The jury was entitled to believe the patentee’s expert. The jury’s damages awards for infringement of the ’731 and ’633 patents were based on substantial evidence.
Notably, Blue Coat also argued that the damages award was flawed because the jury awarded damages in excess of the estimates offered by Finjan’s damages expert. Finjan’s damages expert gave a range of $2,979,805 to $3,973,073 for infringement of the ’731 patent and a range of $833,350 to $1,111,133 for infringement of the ’633 patent, but the jury awarded $6,000,000 for the ’731 patent and $1,666,700 for the ’633 patent. The Federal Circuit found that “the record contains evidence that the expert’s estimates were conservative and that the underlying evidence could support a higher award.”