On December 3, 2015, the Federal Circuit vacated a $16 million
damages award and remanded for a new determination of a reasonable
royalty, agreeing with the district court's apportionment
analysis but finding legal error with respect to the court's
failure to account for the value due to the patent being essential
to a standard. See Commonwealth Scientific and Industrial
Research Organisation v. Cisco Systems, Inc., No. 2015-1066
(Fed. Cir. Dec. 3, 2015). The decision reviewed the findings of
fact and conclusions of law of the district court following a
four-day bench trial on damages after the parties stipulated to
infringement and validity. The Federal Circuit found that: (i) a
reasonable royalty analysis on a patent covering a component in a
multi-component product need not always begin with the smallest
salable patent-practicing unit; and (ii) the royalty analysis for a
patent essential to a standard must take into account the value
flowing from the adoption of the standard itself.
First, the Federal Circuit reiterated that reasonable royalty
awards for multi-component products must be based on apportionment
principles. Apportionment requires that damages awarded for patent
infringement reflect the value attributed to the patented features
and exclude any damages attributable to unpatented features. In
other words, apportionment is the incremental value the patented
invention adds to the end product. The decision provided guidance
regarding the justification for and importance of apportionment to
the proof of damages. It noted that apportionment, which dates back
to the United States Supreme Court's decision in Garretson
v. Clark, 111 U.S. 120 (1884), has even greater importance
today, given "the great financial incentive parties have to
exploit the inherent imprecision in patent valuation." In
patent suits involving multi-component products, apportionment
requires a patentee to separate the damages attributable to the
patented features in the accused product. Generally, this means
that royalties must be based on the "smallest salable
patent-practicing unit" rather than on the entire product,
unless the patented invention drives the entire demand for the end
product, in which case the patentee may attempt to rely on the
entire market value.
Here, the Federal Circuit held that the district court did not err
in using a damages model based on the parties' pre-suit
informal negotiations relating to a patent essential to the 802.11
WiFi standard. The parties' negotiations focused on a royalty
rate applied to the end product rather than the smallest salable
patent-practicing unit. The Federal Circuit explained that
"there may be more than one reliable method for estimating a
reasonable royalty" and "this adaptability is necessary
because different cases present different facts." The court
found no error with the district court's damages analysis based
on the parties' licensing negotiations because such
negotiations already built in apportionment principles. "Put
differently, the parties negotiated over the value of the asserted
patent, 'and no more.'" The court rejected the
argument that damages models for multi-component products always
must begin with the smallest salable patent-practicing unit, noting
that such an approach would be "untenable" because it
conflicts with established jurisprudence permitting royalty rate
determinations based on, among other things, comparable
licenses.
Second, the court made it clear that a reasonable royalty award for
standard-essential patents ("SEPs") "must not
include any value flowing to the patent from the standard's
adoption." The court explained that SEPs have unique
apportionment considerations that must take into account the value
of the patented invention alone and exclude any value that
"artificially accrues to the patent due to the standard's
adoption." Indeed, the court held that such analysis applies
to all SEPs—even those not encumbered with an obligation to
license based on reasonable and nondiscriminatory terms. The court
explained that "damages awards for SEPs must be premised on
methodologies that attempt to capture the asserted patent's
value resulting not from the value added by the standard's
widespread adoption, but only from the technology's
superiority." Because the district court did not account for
standardization in evaluating the Georgia-Pacific factors, the
Federal Circuit remanded the case for a new determination of a
reasonable royalty.
This decision will likely have broad implications for cases
involving multi-component products and standard-essential patents.
But perhaps most importantly, this decision emphasizes the Federal
Circuit's continued insistence that damages be closely tied to
the facts of the case and limited to the patented technology.
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