United States: U.S. Patent Damages

In the United States, patent owners can seek several different types of remedies when considering a patent infringement litigation. Some remedies, like injunctions or orders barring imports, are more prevalent in particular industries. Some, like pharmaceutical and biosimilar exclusivity, are industry-specific. Most patent owners suing for infringement in US courts seek monetary damages.

For most patent owners, the amount of recoverable damages for patent infringement is a primary driver when deciding when to bring, defend, or settle patent litigation. The potential damages from litigation also drives (offensive and defensive) licensing decisions and freedom-to-operate analyses (when balancing design-around costs). US patent law guarantees a prevailing patent owner at least "a reasonable royalty."1  However, determining the potential damages (both before and during litigation) can prove complex, particularly for the multi-component products common in today's global marketplace. is because courts seek to compensate patent owners for the value of the patented improvement, which is oft en less than the value of the overall product.2Difficulty arises when attempting to determine the value attributable to a subcomponent instead of the whole product, especially when there is no established market for just the infringing subcomponent.3To address this, courts require patent owners to apportion the value of the patented feature relative to the overall product to avoid overcompensating a patent owner for an invention that contributes only a portion of the overall value of a final product.

Parties often approach apportionment by defining a royalty base (a per-product lump-sum revenue or profit) and a royalty rate (a percentage rate). Together, these represent the royalty the infringer and the patent owner would have agreed to for use of the patented technology in a "hypothetical negotiation" before infringement began. The choice of a royalty base is often driven by identifying a product that has an established market value. The royalty rate is often driven by identifying market established rates (e.g., from other licenses) for comparable products. Both of which help provide a defensible benchmark or starting point for establishing the value of the patented technology. There is a clear motivation for patent owners to choose a large base and a high rate. But these numbers must be supported with sound economic analysis. Patent owners typically rely on expert testimony to explain their damages theory to the decision maker, which in most cases is a jury. As recent cases show, patent owners bear the risk that poor evidence and insufficient analysis will be excluded, jeopardising the recoverable damages for infringement.

Recent Court Decisions Show Apportionment Is Not as Easy as It Might Sound

Three recent Federal Circuit decisions show apportionment is not as easy as it might sound. Exmark Manufacturing Co. v Briggs & Stratton Power Products Group,4Finjan, Inc. v Blue-Coat Systems, Inc.,5and WesternGeco LLC v ION Geophysical Corp.6illustrate the difficulty of apportioning patent damages for multi-component products and reemphasize the principle that patent damages start with the claims, are often guided by the specification, and the evidence presented must adequately tie the damages to the infringing activity (and nothing more).

Exmark:  The overall product can define the royalty base

In Exmark, the court considered how to determine an appropriate royalty for an "improved flow control baffle" for a commercial lawn-mowing machine. "improved fl ow control baffle" was a relatively small part of a large mower that included several other patented and conventional components. The baffle, a curved metal wall in the cutting deck, directed grass clippings toward the side of the mower as it cut. Therere was no commercial market for the baffl e alone, i.e., it was not sold separately but was included as part of the mower. However, the patent's specification described the baffle as a novel improvement over past designs and explained that it improved the overall speed and cut of the mower. The patent's claims were directed to a mower that included the new baffle design combined with conventional features, like cutting blades, a mower deck, and drive means.

The patent owner's damages expert relied on the price of the entire mower – not just the value of the baffle – as the royalty base for calculating damages. The court found this approach acceptable in part because the specification and claims were directed to the overall mower that included the improved baffle. In reaching its decision, the court explained apportionment can properly be addressed through the royalty base, through the royalty rate, or a combination of both. While the court explained that a thorough and reliable assessment must be made, the focus of the analysis is to account for the importance and value of the patented feature, and patent owners have flexibility to that – there is no set formula. Thus, a patent owner can apportion the value of the product by "careful selection of the royalty base to reflect the value added by the patented feature," by "adjustment of the royalty rate so as to discount the value of a product's non-patented features;" or by "a combination thereof.'"7

In Exmark, the court noted that a patent's claims and specification can impact the proper royalty base. The claims in Exmark, for example, recited the entire mower, not just the improved baffle. And the court found that using the accused lawn mower sales as the royalty base was "particularly appropriate" because "the asserted claim is, in fact, directed to the lawn mower as a whole." The court also analyzed the patent specification, which pointed to overall performance benefits of the mower from using the inventive baffle. The court found that this evidence supported the expert's decision to use the mower as the royalty base.

Exmark illustrates the importance of careful claim-drafting strategy to damages calculations. The court specifically relied on the claims (directed to the mower) when agreeing that the price of the mower was a proper royalty base. And the fact that the mower included conventional components did not detract from this conclusion. If the claims were directed to a smaller component, e.g., just the baffle itself or the mower deck, the court may have found differently. Thus, when considering claims of varying scope, as is typical for considering potential infringement, patent applicants may also want to consider how claim scope may impact damages. For example, considering what product will be sold, and what the established or expected product markets will be, may prove beneficial when seeking damages; claims directed to an overall product may provide a large royalty base with an established market, whereas claims directed to an intermediate component or sub-assembly may provide a more straightforward apportionment.

Applicants may also want to consider how the patented invention affects the overall product and system. If it improves the functionality of the overall product, such as the baffle-improving operation of the overall mower in Exmark, it may be helpful to describe that relationship in the patent specification to provide a link between the advantages of the patented technology and the value of using it in the commercial product. Not only did the Exmark court look to the claims to support the patentee's use of the mower as the royalty base, but it also considered the specification and the explanation it had of improved mower performance. There are, of course, limits to this strategy, including budget constraints and filing efficiencies. And applicants should remain cautious of overemphasising objects of the invention, background art, or problems to be solved that can adversely impact claim interpretation and validity (primarily obviousness or inventive step).

The court also noted that the patentee's use of the accused lawn mower sales as the royalty base was consistent with a "hypothetical negotiation" between the parties. The court explained that sophisticated parties oft en base licence royalties on a commercial product's sales price. Thus, so long as the royalty rate is apportioned to account for the value added by the patented feature to the commercial product, there is nothing "inherently wrong" with using the price of the entire product as the royalty base.

The court did, however, find fault with the expert's testimony regarding the royalty rate. The expert proposed that the baffles were worth 5% of the mower's value but did not provide any factual reasons to support the proposed rate. The expert largely relied on the benefits of the new baffles and tied those benefits to the established factors8for determining a reasonable royalty. Despite her analysis, the expert never explained how she specifically arrived at the 5% royalty rate. The court found the expert merely recited the advantages of the baffles and concluded that they were worth 5% of the overall mower. The court characterized the overall analysis as "superficial" and "conclusory" and found it could not support the awarded damages."9In the court's view, the analysis "told the jury nothing more than that the patented technology was important and commercially successful."10Because the overall damages analysis was not supportable, the court excluded the expert's opinion.

While the Exmark court took issue with the specific analysis, it did make clear that apportionment may be addressed in a "variety of ways." This will likely benefit patent owners, providing flexibility in proving damages. But the specific base and rate must accurately capture the value of the patented invention and be supported with sound analysis. The combination works depends on what the record best supports, which oft en starts with the claims and specification.

Finjan: Even small royalty bases must be apportioned

In Finjan, the court considered a patent owner's attempts to apportion damages for an infringed software system and method claims. The case involved three patents. The first patent covered a "real-time rating engine", which was part of a larger software package sold by the accused infringer. The other patents covered functional gateways that were designed to block malicious software. In a mixed outcome, the court found the patent owner failed to properly apportion damages with respect to the first patent but sufficiently did so for the other two.

For the first patent, the court found fault with the apportionment of damages for the patented rating engine, even though the patentee used just a single subroutine as the royalty base instead of the overall software platform. The asserted claims at issue related to a software application that monitored content to identify potentially malicious code. The accused real-time rating engine did perform this function but also identified and rated the content in one of several different categories even if it did not include malicious code. Thus, while all of the infringing functionality occurred in the accused rating engine (identifying malicious code), it also performed non-infringing activity (identifying other categories). The patentee used the realtime rating engine as the royalty base without apportioning out the non-infringing activity, and the court took issue with that analysis. As the court explained, even though the real-time rating engine was the smallest component of the overall software platform that performs the infringing activity, further apportionment is needed because it still includes infringing and non-infringing aspects.11The court also took issue with the patentee's purported royalty rate (characterized as a user fee), characterising it as being "plucked from thin air."12While the expert claimed the value was tied to a royalty rate from another case (one of the established factors often considered for determining reasonable royalty rates), the court found no evidence showing it was economically or technologically related to the patents at issue.13For the other two patents, the court upheld the damages analysis in part because it apportioned between infringing and non-infringing activity.14

Finjan again illustrates the impact of the claims on damages analyses. Where a device or product has non-infringing uses, asserted method or software claims may require apportionment beyond the smallest saleable device. Drafting claims to cover potential uses, extensions, or configurations of the product, if possible, may help to alleviate issues (and potential pitfalls with further apportionment). Further, when contemplating litigation, the patent owner may want to assert a subset of claims that will best support its preferred damages theory.

WesternGeco: Factually supported analyses must produce reasonable results

In WesternGeco, the court found fault with a damages analysis because, although it was factually supported, it would have awarded the patentee four times the amount the accused infringer earned on the product. The patentee's analysis relied on a proposed royalty rate of 10% of revenue, which would have eliminated all profits by the accused infringer. The court held that this went beyond a feasible hypothetical negotiation, and that "[a]s a matter of law, no such risk can be taken in a hypothetical negotiation."15In reaching this result, the court reemphasized that courts are "tasked with the gatekeeping function of determining whether to allow an expert to testify."16This gatekeeping function serves to prevent experts from proposing a rate that would have resulted in "a financially catastrophic agreement [that] would have been totally unreasonable."17The court deemed the evidence likely to mislead the jury, leading to unsupportable verdicts.

WesternGeco illustrates some concerns about the possibility of jury confusion due to the selection of overly large damages bases or high royalty rates. Requests for large awards or discussion of the defendants' high profits may, in some cases, lead to enhanced judicial scrutiny. While large royalty bases and rates may be attractive to patentees, there is a risk (similar to licensing negotiations), that the recovery sought may be considered too high and thus unreasonable. Working with the damages expert to confirm that the royalty base and rate lead to a reasonable recovery may be more sustainable.

Patent damages can include sales outside the U.S.

WesternGeco is also noteworthy because of the US Supreme Court's subsequent decision – expanding the scope of lost profits to include, in some instances, sales of US manufactured products outside the US.18There is a presumption that US patent laws do not extend to activities abroad, requiring a specific framework to determine when foreign activities can overcome this presumption. This framework consists of two steps:

1. whether the presumption against extraterritoriality has been rebutted by a clear indication in the statute, and if not,

2. whether the case presents a domestic application of the law.

By statute, patent damages are typically limited to activities occurring within US borders – products made, sold, used, or imported in the US. The question before the Supreme Court was whether foreign sales of domestically manufactured components were a domestic application of the statute. According to the Supreme Court, it was the accused infringer's "domestic act of supplying the components" that infringed the patent owner's patent, warranting an accounting that includes sales that occurred outside of the US. The implications of the WesternGeco decision remain unclear. The Supreme Court emphasized the narrowness of its holding, but some commentators feel the analytical framework has the potential to affect other acts of international patent infringement. In view of the WesternGeco decision, courts evaluating other activities beyond US borders may extend damages. How far this expansion goes, if it occurs at all, remains to be seen.

Conclusion

Proper apportionment analyses require strong, factually driven analysis of the value of the patented technology. Many case-specific facts, such as the scope of the patent technology compared to the product sold, can influence the complexity of the analysis and the evidence required to support it. The cases above highlight the notion that patent damages start with the scope of the claims and are often tied to the explanation of the invention in the specification. The cases also show that damages are inexplicably tied to the technical details of the invention and the commercial product. For example, the Exmark court looked to the claims and specification when evaluating the adequacy of the royalty base. And the direct link to the overall mower in the claims and specification weighed heavily in the court's decision. In addition, the Finjan court reemphasized that apportionment is necessary, regardless of the product and royalty base, to discount non-infringing (or conventional) aspects. All of which influence patent drafting, prosecution, and ultimately enforcement.

Footnotes 

1 35 U.S.C. § 284.

2 See Exmark Manufacturing Co. v Briggs & Stratton Power Products Group, Finjan, Inc. v Blue-Coat Systems, Inc. 879 F.3d 1332, 1348 (Fed. Cir. 2018).

3 See id. at 1349.

4 879 F.3d 1332 (Fed. Cir. 2018). www.cafc.uscourts.gov/sites/default/fi es/opinions-orders/16-2197.Opinion.1-10-2018.1.PDF

5 879 F.3d 1299 (Fed. Cir. 2018). www.cafc.uscourts.gov/sites/default/files/opinions-orders/16-2520.Opinion.1-8-2018.1.PDF

6 791 F.3d 1340 (Fed. Cir. 2015). https://law.justia.com/cases/federal/appellate-courts/cafc/13-1527/13-1527-2015-07-02.html

7Exmark, 879 F.3d at 1348 (quoting Ericsson, Inc. v D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014)).

8 The factors most oft en used are those enumerated in Georgia-Pacifi c v US Plywood Corp., 318 F.Supp 1116 (S.D.N.Y. 1970) and include, among other things, utility and advantages of the patented invention, commercial success of the patented invention, licenses for comparable products.

9 Exmark, 879 F.3d at 1348 (quoting Whitserve, LLC v Comput. Packages, Inc., 694 F.3d 10, 31 (Fed. Cir. 2010)).

10 Id. at 1349.

11 Finjan, 879 F.3d at 1311.

12Id., at 1311-1312.

13 Id.

14 Id.at 1312-1313.

15 WesternGeco, 791 F.3d at 1353 (internal quotations omitted).

16 Id.

17 Id.

18 138 S. Ct. 2129 (2018). Th e exclusion of the "unreasonable" royalty that eliminated all of the accused infringer's profi ts was not on appeal to the Supreme Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
27 Jan 2019, Other, Washington, DC, United States

Finnegan is a sponsor of the Association of Corporate Patent Counsel Winter Meeting. Finnegan partner Erika Arner will join the panel discussion “PTAB Review & Litigation.”

27 Jan 2019, Other, Florida, United States

Finnegan is a sponsor of the Association of Corporate Patent Counsel Winter Meeting. Finnegan partner Erika Arner will join the panel discussion “PTAB Review & Litigation.

28 Jan 2019, Other, Washington, DC, United States

Finnegan is a Gold sponsor of IAM Magazine’s second annual Pharma & Biotech IP Summit. Finnegan partner Anthony Tridico will moderate the panel discussion “Overcoming the Barriers to Building a Successful IP Business Strategy.”

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions