Northern District of Texas Blog

Ever since Twombly, Iqbal, and the abrogation of Form 18, patent-infringement plaintiffs have generally been filing detailed complaints showing how the defendant purportedly infringes the plaintiff’s patents. Not the plaintiff in Disc Disease Solutions v. VGH Solutions. In that case (decision available here), the Federal Circuit held that the plaintiff’s complaint satisfied Iqbal/Twombly:

This case involves a simple technology. The asserted patents, which were attached to the complaint, consist of only four independent claims. The complaint specifically identified the three accused products—by name and by attaching photos of the product packaging as exhibits—and alleged that the accused products meet “each and every element of at least one claim of the ’113 [or ’509] Patent, either literally or equivalently.” These disclosures and allegations are enough to provide VGH Solutions fair notice of infringement of the asserted patents. The district court, therefore, erred in dismissing Disc Disease’s complaint for failure to state a claim.

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.”

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.

On January 12, 2018, the Federal Circuit issued its decision in Exmark Manufacturing v. Briggs & Stratton Power Products (available here). In the case, the jury awarded over $24 million in compensatory damages, which the district court doubled as enhanced damages for willful infringement. The Federal Circuit ruled that Exmark’s damages expert failed to provide an adequate explanation as to how she arrived at a 5% royalty rate for the patented feature relative to the other conventional features of the accused products. (The Federal Circuit also concluded that the district court abused its discretion by excluding from the willfulness trial evidence relating to patent validity based on the district court’s determination that Briggs’ invalidity defenses were objectively unreasonable—willfulness is to be determined by the jury regardless of whether Briggs’ defenses were objectively reasonable.) As such, the Federal Circuit vacated the jury’s finding of willfulness, the jury’s damages award, and the district court’s enhanced damages award.

The parties did not dispute that apportionment was required—even though the claim of the patent broadly claimed a “multiblade lawn mower,” the Federal Circuit noted that a “reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” In this case, the patent made clear that the patented improvement related to the mower’s flow control baffle—e.g., the remaining limitations of the claim recite conventional features of a lawn mower. In such circumstances, the patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product. Such apportionment “ensures that Exmark is compensated for the patented improvement (i.e., the improved flow control baffle) rather than the entire mower.”

The Federal Circuit held that this apportionment could be done through either the royalty base or the royalty rate: “We have held that apportionment can be addressed in a variety of ways, including by careful selection of the royalty base to reflect the value added by the patented feature [or] . . . by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof. So long as Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology.” This is because the “essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.”

Even where the patent “cover the infringing product as a whole,” where the “claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.” The Federal Circuit held that “such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate.” One possible way to do this is through “a proper analysis of the Georgia-Pacific factors.”

Further, Exmark’s “use of the accused lawn mower sales as the royalty base is consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing . . . . Sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price, and thus there is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.”

In this case, using the lawn mower’s sales price as a base was “consistent with the settlement agreement relied on by Exmark’s damages expert, which the parties agree provided an effective royalty of 3.64% of the sales of the accused mowers.”

Nevertheless, the Federal Circuit held that Exmark’s damages expert’s opinion was inadmissible as it failed to adequately tie the expert’s proposed reasonable royalty rate to the facts of this case:

Exmark’s expert concluded with little explanation that Exmark and Briggs would have agreed to a 5% reasonable royalty rate on the sales of the accused lawn mowers as the value for the improved baffle. Nowhere in her report, however, did she tie the relevant Georgia-Pacific factors to the 5% royalty rate or explain how she calculated a 5% royalty rate using these factors. . . . [S]uperficial recitation of the Georgia-Pacific factors, followed by conclusory remarks, [cannot] support the jury’s verdict. . . . To sufficiently tie the advantages of the patented baffles to the royalty rate in this case, Exmark’s expert was required to explain the extent to which they factored into the value of the lawn mower and her 5% royalty rate. . . .

The expert’s analysis under Georgia-Pacific factor thirteen—the portion of realized profits attributable to non-patented elements—was also troublesome. Exmark’s expert acknowledged that other elements of the mowers affect sales and profits of the mowers, including durability, reliability, brand position, dealer support, and warranty. But she failed to conduct any analysis indicating the degree to which these considerations impact the market value or profitability of the mower and therefore impacted her suggested 5% royalty rate.

Other patents covering the product may impact the damages analysis:

Equally problematic, the expert acknowledged that Briggs and its co-defendant, Schiller, have patents covering other components of the accused mowers. But she ignored those components, opining without support that they do not relate to the quality of cut, which she considered “paramount” to selling mowers. We are skeptical that other patented components of the mower bear no relation to the overall value of the accused mowers, which would influence the relative value of the patented baffle and thus the royalty rate. . . . Merely concluding that other components do not affect the value of the accused mower amounts to nothing more than speculation. To cure this deficiency, the jury could have received evidence itemizing the relative value of these other components to better guide the jury’s understanding of the value of the baffle in relation to the other components of the accused multi-component mower. Without a more detailed analysis, the jury is simply left to speculate or adopt the expert’s unsupported conclusory opinion.

The Court rejected Exergen’s other argument–i.e., using a low royalty rate alone cannot overcome the lack of apportionment nor does it sufficiently tie the royalty rate to the facts of the case:

[W]e cannot agree that using an allegedly low royalty rate alone supports the admissibility of the expert’s reasonable royalty opinion. Regardless of how low the royalty rate, the expert must still apportion damages and sufficiently tie the royalty rate to the facts of the case. . . . [W]e recognize that Exmark’s expert discussed quantitative market evidence in her opinion. As explained above, however, we are troubled by the expert’s analysis because, even assuming she properly considered this record evidence, she failed to explain how the evidence factored into the proposed royalty rate. She merely addressed the Georgia-Pacific factors in light of the facts and then plucked the 5% royalty rate out of nowhere. It is not enough for an expert to simply assert that a particular royalty rate is reasonable in light of the evidence without tying the proposed rate to that evidence.

On May 15, 2018, the Federal Circuit issued its decision in In re BigCommerce, Inc. (available here). In the case, BigCommerce sought a writ of mandamus, challenging the Eastern District of Texas’ orders denying a motion to dismiss and transfer the case for improper venue.

Diem LLC and Express Mobile, Inc. both filed patent-infringement suits against BigCommerce in the Eastern District of Texas. BigCommerce is incorporated in Texas, but has its headquarters in Austin, which is in the Western District of Texas, and has no place of business in the Eastern District. The Federal Circuit decided to address the question of whether venue was proper because “different courts ha[d] come to different conclusions about whether a corporation ‘resides’ under § 1400(b) in every judicial district within its state of incorporation when the state has more than one judicial district.”

The Federal Circuit concluded:

[A] domestic corporation incorporated in a state having multiple judicial districts “resides” for purposes of the patent-specific venue statute, 28 U.S.C. 1400(b), only in the single judicial district within that state where it maintains a principal place of business, or failing that, the judicial district in which its registered office is located[.]

Because Petitioner BigCommerce, Inc. does not “reside” in the Eastern District of Texas, its mandamus petitions were granted.