Patent damages law is one of the most complex areas in patent law and it is constantly evolving. Attorneys and courts often confuse the principles and get the law wrong. Further, even without the backdrop of constantly evolving and complex damages law, proving damages at trial is one of the hardest aspects of patent litigation. And properly apportioning damages can be one of the most difficult aspects of damages law to get right.
The Federal Circuit’s two recent decisions in Exmark Man. Co. v. Briggs & Stratton Power Prods. Grp., No. 2016-2197, __ F.3d __ (Fed. Cir. Jan. 12, 2018) and Finjan, Inc. v. Blue Coat Sys., Inc., No. 2016-2520, __ F.3d __ (Fed. Cir. Jan. 10, 2018) shed light on calculating damages for multi-component products. Together, these cases show that the royalty rate must be apportioned based on the incremental value the novel elements add to conventional elements of a claim, while the royalty base must be apportioned based on the incremental value the patented features add to the accused product.
Patent Damages, the Entire Market Value Rule, and Apportionment
35 U.S.C. § 284 entitles a patent owner to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty” on an infringing product. 35 U.S.C. § 284 thus provides two avenues to prove damages—lost profits as a result of infringement or a reasonable royalty. This is basic patent law. But it is not always clear how this works in litigation. Lost profits are hard to prove at trial and often require direct competitor relationships in a two-party market. This leaves reasonable royalty as the more common avenue for proving damages. Reasonable royalties are often calculated by multiplying the cost of an infringing product (the royalty base) by a percentage approximating the value of a license to the patented technology (the royalty rate).
Enter the entire market value rule (EMVR). In cases where a single feature within a multi-feature device is patented, the cost of the entire device cannot serve as the royalty base unless the patented feature serves as the basis for customer demand for the entire multi-feature device. LaserDynamics, Inc. v. Quanta Compuer, Inc., 694 F.3d 51, 68-69 (Fed. Cir. 2012); Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1549 (Fed. Cir. 1995)(“We have held that the entire market value rule permits recovery of damages based on the value of a patentee’s entire apparatus containing several features when the patent-related feature is the ‘basis for customer demand.’”). Proving one feature drives customer demand for a multi-feature device is often impossible, even if true.
Where a patent owner cannot meet the requirements of the EMVR, the Federal Circuit requires that the base for a reasonable royalty be limited to the smallest saleable patent practicing unit (“SSPPU”). LaserDynamics, 694 F.3d at 67-68. For example, in the context of a laptop using a disc drive with a patented feature that allows the laptop to determine if a disc is inserted into the drive, the disc drive—not the laptop—is the SSPPU for the reasonable royalty analysis. LaserDynamics, 694 F.3d at 68. Where a laptop might sell for a thousand dollars, the disc drive itself may only sell for tens of dollars, dramatically lowering the royalty base.
Using the SSPU instead of the entire product as the royalty base prevents the patent owner from collecting a royalty on the infringing product’s unpatented features. CSIRO v. Cisco Systems, Inc., 809 F.3d 1295, 1302 (Fed. Cir. 2015). It also reduces the likelihood that a larger royalty base (i.e., on the entire product instead of just the smallest salable patent-practicing unit) would bias the jury towards a larger damages award. Id.
But the SSPU is not the end of the royalty base inquiry. VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308, 1327-28 (Fed. Cir. 2014). In multi-feature SSPPUs, where only one feature is patented, the royalty base must be apportioned down from the cost of the SSPPU to reflect the value of the SSPPU that is attributable to the patented feature. Id.
Apportionment requires a jury to “separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features.” Garretson v. Clark, 111 U.S. 120, 121, 4 S.Ct. 291, 28 L.Ed. 371 (1884) (quotation marks omitted). Under apportionment, patent damages “must reflect the value attributable to the infringing features of the product, and no more.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). This prevents the patent owner from unfairly collecting a royalty on the value of an infringing product’s unpatented features.
For example, where a patent covers operating system software running on a multi-feature smartphone, although the smartphone may be the SSPPU, the royalty base must be apportioned down to exclude the other unpatented features, such as the touchscreen, cameras, processor, and microphones. VirnetX, 767 F.3d at 1328-29.
To Apportion the Base or Not? The Answer May Be In the Scope of the Claims
The Federal Circuit’s decisions in Exmark and Finjan reach opposite results on whether the royalty base needs to be apportioned beyond the SSPU. The difference appears to be in how the Federal Circuit viewed the scope of the claims compared to the SSPU.
In Exmark, the Federal Circuit found that apportioning the royalty base was not required. Exmark involved a suit against Briggs & Stratton for infringing a patent to lawn mowers that use a novel baffle design to channel air and grass clippings to enhance the mowers’ cutting ability. In presenting its damages case to the jury, Exmark used the entire sales price of the accused mowers as the royalty base. After trial, the jury awarded Exmark $24M in damages.
On appeal, Briggs & Stratton argued the district court erred in allowing Exmark to use the sales price of the entire lawn mower as the royalty base because Exmark had to apportion the value of the novel baffle from the rest of the mower. The Federal Circuit disagreed, holding that apportionment did not apply to the royalty base because the claim recited the entire lawn mower:
Using the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claim is, in fact, directed to the lawn mower as a whole. The preamble of claim 1 recites a “multiblade lawn mower.” It is not the baffle that infringes the claim, but rather the entire accused mower. Thus, claim 1 covers the infringing product as a whole, not a single component of a multi-component product. There is no unpatented or non-infringing feature of the product.
Exmark, slip op. at 23 (emphasis added). In other words, the Federal Circuit found apportionment didn’t apply to the royalty base in Exmark because Exmark was not trying to include the value of unpatented features in the royalty base. The key distinction here is that patented features does not mean novel features; instead patented features include both the conventional features recited by the claims as well as the novel ones.
In Finjan, the Federal Circuit reached the opposite conclusion and remanded the case for failure to properly apportion the royalty base. Finjan, slip op. at 18-19. Finjan’s patent relates to virus detection software and creating a security profile for web addresses. Id. at 18. Finjan accused Blue Coat’s DRTR or “dynamic real-time rating engine” of infringing its patent. Id. The DRTR was itself part of a larger software product called WebPulse that helps companies set internet policies for their employees by categorizing different websites as containing different kinds of content. Id.
Finjan attempted to apportion the royalty base to DRTR by multiplying the total number of users of WebPulse by the percentage of web traffic that passed through DRTR. . Id. at 19. But Finjan did not try to apportion the royalty base further beyond DRTR. Id.
The Federal Circuit found that, even though DRTR was the SSPU, Finjan failed to properly apportion the damages base:
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.
Id. at 20 (emphasis added). Here, unlike Exmark, the Federal Circuit found that further apportionment was required because the royalty base included unpatented features.
These two decisions highlight that it is the patented versus unpatented features that matter in apportioning the royalty base, not necessarily the novel features versus the conventional ones covered by the claims.
Don’t Forget the Royalty Rate Calculation
The Federal Circuit remanded both Exmark and Finjan for failure to properly calculate the royalty rate. In Exmark, the Federal Circuit stated that the proper way to account for the value of the novel features in the claims was to apportion the royalty rate. Exmark, slip op. at 24-28. The Federal Circuit found that, even though Exmark attempted to apportion the royalty rate to account for the incremental value that the novel baffle added to the mower using the Georgia-Pacific factors, its expert failed to properly tie her analysis to her adjustments to the royalty rate. Id.
In Finjan, the Federal Circuit also remanded because Finjan’s royalty rate analysis was not supported by substantial evidence. Finjan, slip op. at 20-22. Finjan argued at trial that the proper royalty rate was $8 per user, based on the testimony of Finjan’s Vice President of IP Licensing about the rate received in a previous lawsuit and based on evidence of a $14-34 software user fee. Id. The Federal Circuit found this evidence insufficient to support Finjan’s royalty rate in part because Finjan failed to show the facts of the previous case were analogous to the facts of the current suit, and because the amount of a software user fee was not indicative of how much the parties would have paid to just license the patent.
Exmark shows that the royalty rate is where to apportion the novel features from the conventional features covered by the claims. And both decisions highlight that any royalty rate analysis must tie the facts of the case to any adjustments to the royalty rate. Id. at 22.
The difference between the Exmark and Finjan cases’ treatment of apportionment lies in the Federal Circuit’s view of the scope of the claims compared to the accused products. Where a claim covers an entire product, apportionment is required in the royalty rate to account for the value the novel features add to the conventional features covered by a claim. Where a claim covers only a portion of a multi-component product, apportionment is required in the royalty base to account for the patented and unpatented features in the SSPU as well as in the royalty rate. And in any case, the royalty rate calculation must tie the facts of the case to the royalty rate determination.