Reasonable Royalty Cannot Include Activities That Do Not Constitute Patent Infringement

The Federal Circuit vacated a $4 million damages award to Seoul Semiconductor Co. (“Seoul”), holding that the district court erred when it denied Enplas Display Device Corp.’s (“Enplas”) motion for judgment as a matter of law that the damages award was not supported by substantial evidence. See Enplas Display Device Corp. v. Seoul Semiconductor Co., No. 2016-2599, 2018  (Fed. Cir. Nov. 19, 2018) (Before Newman, Hughes, and Stoll, J.) (Opinion for the court, Stoll, J.) (Concurrence-in-part and Dissent-in-part, Newman, J.).

The patents at issue, USPN 6,473,554 (“the ‘554 patent”) and USPN 6,007,209 (“the ‘209 patent”), claimed methods for backlighting display panels, namely LED displays used in electronic devices like laptops and televisions. Enplas filed a declaratory judgment action against Seoul, seeking a declaration that the patents were invalid and not infringed. Seoul counterclaimed for infringement and sought damages.

At trial, the jury found that Enplas induced infringement of both patents. The jury awarded Seoul $4 million in damages, representing a one-time freedom-to-operate payment, for the ‘554 patent, and awarded $70,000 in damages for the ‘209 patent. Specifically, the award for the one-time freedom-to-operate payment was for “all [Enplas] products,” including products that had not been accused of infringement. The district court denied Enplas’s pre-trial motions to exclude the testimony of Seoul’s damages expert for including products that were not at issue, and also denied Enplas’s post-trial motions for judgment as a matter of law (“JMOL”) of anticipation, no inducement, and excessive damages. Enplas appealed the denial of its post-trial motions.

The Federal Circuit affirmed the district court’s denial of JMOL with respect to anticipation and inducement. With respect to Enplas’s JMOL of excessive damages, however, the Court reversed the district court’s denial.

Enplas argued that the jury’s $4 million damages award was excessive and not supported by substantial evidence. Namely, Enplas argued that the only evidence supporting the $4 million award was testimony from Seoul’s damages expert and that this testimony improperly included non-infringing devices when calculating royalties. The Federal Circuit agreed.

Prior to trial, Enplas filed a motion in limine seeking to exclude expert damages testimony concerning devices not at issue in the case. However, the district court denied the motion, holding that “[Seoul’s expert] may present evidence that under a lump-sum royalty negotiation, [Enplas] would seek to cover all of its potentially infringing products,” and that “[a]s long as [the] ultimate damages determination is adequately adjusted” to account only for the devices at issue in the case, the testimony was permitted.

The Federal Circuit interpreted the district court’s decision as limiting Seoul’s expert to a damages theory based on infringing and “potentially infringing” products, but not non-accused products. At trial, Seoul’s expert opined that a hypothetical lump sum royalty for the patents, when limited to the accused devices, would have been $500,000 for the ‘554 patent at $70,000 for the ‘209 patent. However, Seoul’s expert went on to testify that Enplas and Seoul would not have limited the license to the accused products if there were a risk of Enplas infringing the patents by manufacturing other similar products. The expert then concluded that a freedom-to-operate license would have been a more practical solution to the parties’ licensing discussion and that Enplas would have agreed to pay $2 to $4 million for a freedom-to-operate license, depending on the “volume of sales of potentially infringing products beyond the ones in this case.”

After the jury awarded damages of $4 million for the ‘554 patent and $70,000 for the ‘209 patent, Enplas moved for JMOL on excessive damages. In denying JMOL, the district court held that the expert’s testimony about a lump sum freedom-to-operate license complied with its earlier ruling that Seoul could present evidence regarding Enplas’s potentially infringing products in a hypothetical lump-sum negotiation. However, the Federal Circuit overturned the damages award with respect to the ‘554 patent, because a reasonable royalty “cannot include activities that do not constitute patent infringement, as patent damages are limited to those ‘adequate to compensate for infringement.’” See AstraZeneca v. Apotex Corp., 782 F.3d 1324, 1343 (Fed. Cir. 2015). Because Seoul’s damages expert opined that a freedom-to-operate license would have been $2-$4 million by considering a royalty base comprising sales of non-accused devices, the testimony could not support the jury’s damages award for the ‘554 patent, and the court vacated and remanded the award for further proceedings. However, the Court did not disturb the award for the ‘209 patent.

Judge Newman’s Concurrence-in-part and Dissent-in-part.

Judge Newman concurred in the Court’s decision with respect to validity and inducement but dissented from the Court’s reversal of the damages verdict. Judge Newman found that the district court correctly denied JMOL on the damages verdict. She noted that Enplas did not challenge Seoul’s expert testimony at trial, nor did they appeal the district court’s Daubert ruling or motion in limine ruling related to Seoul’s expert testimony. Judge Newman also argued that the Court misapplied AstraZeneca; she found that the case did not exclude a patentee from presenting evidence that “a potential infringer would reasonably include all potentially infringing products in a paid-up license, in order to avoid the uncertainty of possible infringement and future litigation.” Therefore, Judge Newman found that the Court conducted an improper de novo hypothetical negotiation on appeal in determining that the damages award was erroneous and that this hypothetical that was removed from what the parties would have done in reality.

Take Away

A reasonable royalty award cannot include royalties obtained from activities that do not constitute patent infringement, as patent damages are limited to those adequate to compensate for infringement.