“Upon finding for the [patent holder] the court shall award the [patent holder] 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[.]” 35 U.S.C. § 284. In the old days, proving reasonable royalty damages typically worked as follows: Your patent damages expert would find a “comparable” agreement that related (in some tangential way) to the subject matter of the patent-in-suit, and use that agreement to establish a “baseline” royalty rate (typically the “baseline” rate is whatever rate was in the “comparable” agreement). Or, the expert would determine how much profit the infringer made from selling the infringing product. The expert would then use 25% of the profit as the “baseline” rate (i.e., based on the assumption that 75% of the profit would stay with the infringer and the patent holder would be entitled to 25% of the profit).
The expert would then run through the 15 Georgia-Pacific damages factors, with each factor pushing the “baseline” rate either “higher” or “lower” (or having “no effect” on the rate). The expert would come up with a rate, which would then be multiplied by the defendant’s infringing product total sales to come up with a “reasonable royalty.” For example, your expert might find a “comparable” agreement that contained a 5% royalty rate. The expert would take the 5% rate, run through the 15 Georgia-Pacific, find that these factors “lower” the 5% baseline rate to 4%, then multiple 4% by the total amount of the defendant’s infringing products to establish a reasonable royalty.
This typical methodology has been turned on its head over the last couple of years by the Federal Circuit in three major decisions relating to damages.
Lucent. In Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), Lucent sought $561 million in damages from Microsoft, which represented an 8% royalty applied to Microsoft’s infringing sales. Microsoft argued that a lump-sum payment of $6.5 million would have been the correct amount in damages. The Federal Circuit held that Lucent had not proven its damages by substantial evidence. To begin with, “Lucent submitted no evidence upon which a jury could reasonably conclude that Microsoft and Lucent would have estimated, at the time of the negotiation, that the patented date-picker feature would have been so frequently used or valued as to command a lump-sum payment that amounts to approximately 8% of the sale price of Outlook.” Id. at 1327.
And, although Lucent relied on eight prior license agreements, the Federal Circuit found that none of these agreements supported the awarded damages, given that, among other things, Lucent presented “no analysis of those license agreements, other than, for example, noting the agreement was a cross-license of a large patent portfolio and the amount paid.” Id. at 1327-29. “The law does not require an expert to convey all his knowledge to the jury about each license agreement in evidence, but a lump-sum damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ballpark of the jury’s award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.” Id. at 1329.
The Federal Circuit also found that Lucent had not established that the entire market value rule applied: “The first flaw with any application of the entire market value rule in the present case is the lack of evidence demonstrating the patented method of the Day patent as the basis—or even a substantial basis—of the consumer demand for Outlook.” Id. at 1338.
Accordingly, a new trial on damages was necessary.
Lucent also had the following to say regarding the entire market value rule (which would later be expressly disowned by Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011)): “Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence). . . . 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.” Lucent, 580 F.3d at 1339.
ResQNet. In ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), the Federal Circuit noted that “the trial court must carefully tie proof of damages to the claimed invention’s footprint in the market place.” Id. at 869. The court rejected the plaintiff’s expert’s attempt to rely on non-comparable licenses to inflate his royalty calculation, given that the expert “made no effort to link certain licenses to the infringed patent.” Id. at 871. The court also “observe[d] as well that the most reliable license in this record arose out of litigation.” Id. at 872. In other words, according to the court, the best license in evidence was a litigation settlement agreement. See also In re MSTG, Inc., 675 F.3d 1337, 1348 (Fed. Cir. 2012) (“Our cases appropriately recognize that settlement agreements can be pertinent to the issue of reasonable royalties.”)
(The court did not mention Fed. R. Evid. 408(a)(1), which would seemingly prohibit litigation settlement agreements from being used to establish damages.)
The court remanded the case to the district court, and indicated that the district court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology. Id. at 872-73. “In sum, the district court erred by considering ResQNet’s re-bundling licenses [i.e., non-comparable licenses] to significantly adjust upward the reasonable royalty without any factual findings that accounted for the technological and economic differences between those licenses and the [patent-in-suit].” Id.
Uniloc. In Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), the plaintiff’s damages expert found an internal Microsoft document that placed a value on “product keys” of anywhere between $10 and $10,000. The expert took the lowest value, $10, and applied the “25% rule of thumb” to it, resulting in a baseline royalty rate of $2.50 per license. The expert then considered the Georgia-Pacific factors, but found that they did not change the baseline rate of $2.50. Applying $2.50 to 226 million sales of infringing products resulted in a $565 million royalty. The expert “checked” this figure by calculating the gross revenue of the infringing products ($19 billion) and determining that the royalty ($565 million) was 2.9%. The expert presented this information in a pie chart, and the jury ultimately ended up awarding the plaintiff $388 million.
Microsoft contested the use of the 25% rule, and the use of the entire market value rule “check” because the product activation feature was not the basis of the consumer demand for Microsoft’s Office and Windows products. The district court agreed with Microsoft and granted a new trial, “because the ‘$19 billion cat was never put back into the bag’ and the jury may have ‘used the $19 billion figure to ‘check’ its significant award of $388,000,000.’”
The Federal Circuit held as follows. First, “as a matter of Federal Circuit law [] the 25 percent rule of thumb 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.” Uniloc, 632 F.3d at 1315. Microsoft was accordingly entitled to a new trial on damages.
Second, the Federal Circuit agreed with Microsoft that the use of the $19 billion “check” was improper under the entire market value rule. “The Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate.” Id. at 1320. Because the plaintiff had not shown that the entire market value of the accused products was derived from the patented invention, the use of the $19 billion “check” was improper. Hence, the Federal Circuit ruled that the district court did not err in granting Microsoft a conditional new trial on damages in light of the plaintiff’s violation of the entire market value rule.
