On July 3, 2018, the Federal Circuit issued its opinion in Power Integrations v. Fairchild Semiconductor (available here). The jury had awarded approximately $140 million, finding that the entire market value rule applied in calculating damages. The Federal Circuit reversed, because “the entire market value rule cannot be used here to calculate damages.”
According to the Federal Circuit:
A patentee is only entitled to a reasonable royalty attributable to the infringing features. The patentee must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features. [W]e have required that royalties be apportioned between the infringing and noninfringing features of the product. As a substantive matter, it is the value of what was taken that measures a reasonable royalty under 35 U.S.C. § 284. And in the context of a utility patent, it is only the patented technology that is taken from the owner, so the value to be determined is only the value that the infringing features contribute to the value of an accused product. . . .
[W]here multicomponent products are accused of infringement, the royalty base should not be larger than the smallest salable unit embodying the patented invention. . . . Admission of evidence of the entire market value only serve[s] to make a patentee’s proffered damages amount appear modest by comparison, and to artificially inflate the jury’s damages calculation beyond that which is adequate to compensate for the infringement. Even when a damages theory relies on the smallest salable unit as the basis for calculating the royalty, the patentee must estimate what portion of that smallest salable unit is attributable to the patented technology when the smallest salable unit itself contains several non-infringing features.
(citations and quotations omitted).
In this case, Power Integration relied on the “demanding alternative to [the] general rule of apportionment, the entire market value rule”:
The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for consumer demand. The law requires patentees to apportion the royalty down to a reasonable estimate of the value of its claimed technology, unless it can establish that its patented technology drove demand for the entire product. [S]trict requirements limiting the entire market value exception ensure that a reasonable royalty does not overreach and encompass components not covered by the patent. . . .
If the product has other valuable features that also contribute to driving consumer demand—patented or unpatented—then the damages for patent infringement must be apportioned to reflect only the value of the patented feature. This is so whenever the claimed feature does not define the entirety of the commercial product. In some circumstances, for example, where the other features are simply generic and/or conventional and hence of little distinguishing character, it may be appropriate to use the entire value of the product because the patented feature accounts for almost all of the value of the product as a whole.
(citations and quotations omitted).
Power Integrations’ royalty rate was premised on the patent’s “frequency reduction feature as driving consumer demand for Fairchild’s controller chips.” Power Integrations provided evidence that the patented feature was essential to many customers (as it allowed the product to meet a federal government program). Further, some customers asked for the patented feature, products with the patented feature outsold other products, and technical marketing materials promoted the feature.
Nevertheless, “Both parties [] agreed that the accused products contained other valuable features as well. Power Integrations presented no evidence about the effect of those features on consumer demand or the extent to which those features were responsible for the products’ value.” In view of this, the Federal Circuit held that the entire market value rule could not be applied:
It is not enough to merely show that the [patented feature] is viewed as valuable, important, or even essential to the use of the [infringing product]. Moreover, proof that consumers . . . choose the [infringing product] having the [patented] functionality says nothing as to whether the presence of that functionality is what motivates customers to buy [an infringing product] in the first place. . . .
[T]he entire market value rule is appropriate only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts. The burden of proof in this respect is on the patent holder. . . .
Where the accused infringer presents evidence that its accused product has other valuable features beyond the patented feature, the patent holder must establish that these features are not relevant to consumer choice. A patentee may do this by showing that the patented feature alone motivates customers to purchase [the infringing product] in the first place. But when the product contains multiple valuable features, it is not enough to merely show that the patented feature is viewed as essential, that a product would not be commercially viable without the patented feature, or that consumers would not purchase the product without the patented feature. When the product contains other valuable features, the patentee must prove that those other features did not influence purchasing decisions.
(citations and quotations omitted).
Here, the power supply controllers had other valuable features, and there was no proof that these features did not affect consumer demand. “Without such proof, Power Integrations did not meet its burden to show that the patented feature was the sole driver of consumer demand, i.e., that it alone motivated consumers to buy the accused products.” Accordingly, Power Integrations could not invoke the entire market value rule, and the damages award was vacated and remanded for a new trial.