In the last few years, developments in U.S. patent damages law have emerged that may have an upward effect on the magnitude of reasonable royalty awards. This article addresses two developments that have begun to take hold in the U.S. district courts after significant precedential rulings from the U.S. Court of Appeals for the Federal Circuit:
- Reasonable royalty damages may incorporate the value of foreign economic activity caused by domestic direct infringement under 35 U.S.C. § 271(a), based on Brumfield v. IBG LLC, 97 F.4th 976 (Fed. Cir. 2024); and
- Reasonable royalty damages for a component supplier may incorporate the value of the invention in markets for downstream products, like finished consumer goods, based on Cal. Inst. of Tech. v. Broadcom Ltd., 25 F.4th 976 (Fed. Cir. 2022).
Each of these concepts, standing alone, can increase the magnitude of a damages award. In combination, they may have a multiplicative effect in certain cases.
These damages concepts arise from the fundamental framework of the hypothetical negotiation approach to reasonable royalty damages. See Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120-22 (S.D.N.Y. 1970). In short, the hypothetical negotiation addresses two questions:
- How much more money did the accused infringer make—or could it have made—by using the invention instead of an alternative?
- How would the parties have agreed to divide that incremental value in an arms-length negotiation?
After over 50 years of development in the law about the hypothetical negotiation, the Federal Circuit neatly encapsulated the hypothetical negotiation along the lines above in March 2024, in Brumfield: "Many authorities address issues concerning the hypothetical negotiation, which, operating under certain assumptions, at its core is a process for identifying the incremental value of the claimed technology over non-infringing alternatives and determining how that gain would be shared." 97 F.4th at 876.
The Brumfield and Caltech decisions address, in different ways, how to answer the first question—determining the incremental value of the invention to the accused infringer—and potentially expand the reach of how to calculate that value by looking to foreign economic activity and downstream product markets. Caltech also raises issues about the second question—how the parties would divide incremental value—and, in particular, what a patent owner may not be willing to give up when granting a hypothetical license to a component supplier.
Brumfield: Damages Based on Foreign Economic Activity Caused by Domestic Direct Infringement
In Brumfield, the Federal Circuit held that reasonable royalty damages under Section 284 for U.S. direct infringement under Section 271(a) may incorporate the value of foreign economic activity caused by that infringement. If the infringer commits its acts of infringement in the United States—such as making or using a patented invention—and those acts lead to the infringer enjoying increased value abroad, reasonable royalty damages may permissibly account for that additional value.
The Federal Circuit reached this conclusion by finding that the Supreme Court's decision in WesternGeco LLC v. ION Geophysical Corp., 585 U.S. 407 (2018), superseded the limits on the extraterritorial reach of U.S. patent damages set forth in prior Federal Circuit opinions. Brumfield, 97 F.4th at 878-80. We analyzed the same questions when WesternGeco issued in 2018 and reached the same conclusion as the Federal Circuit has now in Brumfield. A. Fahrenkrog et al., WesternGeco May Reshape Reasonable Royalty Damages, Law360 (July 13, 2018). Although WesternGeco addresses Section 271(f) infringement and lost profits damages, the fundamental principles underlying the opinion—that Section 271 confines infringement to domestic activity, and Section 284 merely provides a remedy for that domestic infringement—apply equally to Section 271(a) direct infringement and reasonable royalty damages. Brumfield, 97 F.4th at 871-76.
In short, the availability of reasonable royalty damages for foreign economic activity should have a net effect of increasing potential damages in some cases. How those potential damages will be calculated and judged by the courts, however, is far from defined at this point.
Brumfield articulated some initial conceptualizations of standards for proving reasonable royalty damages based on foreign economic activity, but it did not fully establish a legal or evidentiary framework. The Federal Circuit explained that "the hypothetical negotiation must turn on the amount the hypothetical infringer would agree to pay to be permitted to engage in the domestic acts constituting 'the infringement.'" Further, "the patentee must, at the least, show why that foreign conduct increases the value of the domestic infringement itself—because, e.g., the domestic infringement enables and is needed to enable otherwise-unavailable profits from conduct abroad—while respecting the apportionment limit that excludes values beyond that of practicing the patent." The Court clarified that "[t]his kind of causal connection . . . is a necessary beginning—we need not here say it is sufficient—for a foreign-conduct analysis in a reasonable-royalty case."
These open issues no doubt will be heavily debated in the district courts. To provide some guidance, the Federal Circuit also made several additional "observations," in dicta, about causation requirements. at 877-78. The Court suggested that the Supreme Court's WesternGeco opinion may require the patentee to establish that the domestic infringement proximately caused the foreign economic activity, and it set forth several formulations of what proximate cause could require in this context (such as "but for causation, plus more," "the absence of remoteness," or "reasonable, objective foreseeability").
It appears that the hypothetical negotiation framework itself adequately addresses these causation issues—it already requires evidence "for identifying the incremental value of the claimed technology over noninfringing alternatives.". at 876. That is, the hypothetical negotiation assesses what additional value is caused by the claimed inventions in the marketplace. However, the Federal Circuit's signal about the possibility of a "proximate cause" standard indicates that, when presented squarely with the issue, it will likely impose some such requirement on the patent owner's theory and evidence. Litigants in the district courts should prepare their cases accordingly.
The Federal Circuit also raised "[a]nother question" about how, if at all, "the long-recognized general avoidance of extraterritorial reach" could be considered "in applying the proximate-cause requirement . . . without contradicting the Supreme Court's ruling in WesternGeco?" The Court again declined to answer this question, and WesternGeco itself indicates that once infringement has occurred in the United States under Section 271, no additional extraterritoriality restriction applies to calculating damages under Section 284 for that domestic harm. WesternGeco, 585 U.S. 407, 414-16. But this signal too should inform how litigants prepare their cases in the trial courts—their theories and evidence should address this issue.
In Brumfield, despite raising these questions, the Federal Circuit did not actually need to address the scope and standards for damages from foreign conduct, because it found that the district court properly excluded the patent owner's damages expert's opinions on that issue. Brumfield, 97 F.4th at 878-80. The Court found that the patent owner and its expert did not sufficiently tie their damages theory to a domestic infringing act under Section 271(a). Therefore, they could not clear that threshold issue required by WesternGeco, and the Federal Circuit did not need to address any of its questions about proximate cause or extraterritoriality.
In sum, the Federal Circuit has confirmed that patent owners can pursue reasonable royalty damages based on foreign economic activity caused by direct infringement in the United States. This ruling has the potential to reshape damages theories for products and services with global markets. But the precise parameters of such damages' reach will take years to develop in precedent, and ultimately will turn on the facts of each case.
What should litigants do to maximize their chances of prevailing on these issues under the law today and as it evolves? As for all patent damages issues, the facts and evidence will drive results. Litigants should consider how U.S. infringing activity, such as the manufacture of accused products or use (including development and testing) of accused products or methods adds value, not only in the United States, but in product and services markets abroad. The Federal Circuit has signaled that it will focus on causation—and possibly impose a proximate cause requirement—and litigants should develop their evidence accordingly.
Caltech: Damages Based on Downstream Market Value of Infringing Components
In Caltech v. Broadcom (and Apple), the Federal Circuit held that an infringing component (like a Wi-Fi chip) and a finished device (like a smartphone) that also infringed by virtue of including that component should not, "in the absence of a compelling showing otherwise," bear different royalty rates in a reasonable royalty damages model. Caltech, 25 F.4th at 994. The jury had awarded a per-unit royalty of $0.26 against Broadcom for selling infringing Wi-Fi chips and a royalty of $1.40 against Apple for selling consumer products, like iPhones, that infringed because they contained the Broadcom Wi-Fi chips. Cal. Inst. of Tech. v. Broadcom Ltd., Defendant-Appellants' Brief, 2020 WL 8618020, at *2 (filed in Fed. Cir., Dec. 14, 2020) (identifying per-unit royalty rates). The Federal Circuit vacated that award, finding that "the mere fact that Broadcom and Apple are separate infringers alone does not support treating the same chips differently at different stages in the supply chain." Caltech, 25 F.4th at 993-94.
At first glance, the Caltech outcome might suggest that the downstream product seller should pay the same lower royalty as the upstream component supplier. But the Court's analysis does not reach that far. Instead, the Federal Circuit's holding requires only that, absent "a compelling showing," the upstream infringing component and downstream infringing product should bear the same royalty rate. The opinion does not address whether the patent owner must model its damages based on the economics of the component supplier or the finished product seller—the Court did not opine on whether Apple should have paid a lower $0.26 rate, Broadcom should have paid a higher $1.40 rate, or something else entirely.
After Caltech, patent owners should consider developing evidence and argue that a component supplier should pay a royalty rate that accounts for all value that the component contributes through the entire supply chain, through finished product markets. Why? This again comes from the fundamental framework of the hypothetical negotiation and what the patent owner would have considered before signing a license.
In a hypothetical negotiation with a component supplier, a patent owner would have to consider the scope of the rights they would give up by granting a license. Under U.S. patent exhaustion law, those rights would typically include not only the right to exclude the component supplier from practicing the claimed inventions, but also the right to exclude any downstream seller that incorporates the licensed components in its products. Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 635-38 (2008); TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1275-77 (Fed. Cir. 2009). The hypothetical licensee would receive value from both the freedom to practice the inventions itself and also the ability to pass that freedom to its customers.
The patent owner would generally not relinquish that full scope of rights without fair compensation. In a hypothetical negotiation—formulated in Brumfield as "a process for identifying the incremental value of the claimed technology over noninfringing alternatives and determining how that gain would be shared," 97 F.4th at 876—the parties likely would recognize that the "incremental value" included the market value of the invention in both the component and downstream product markets (including the accused infringer's customers' markets), and the patent owner, absent evidence to the contrary, would not "share" the downstream portion of that value for free.
As a result, after Caltech litigants, in cases involving component suppliers accused of infringement should consider (and are considering) the value of those components throughout the downstream supply chain when modeling reasonable royalty damages. Accused infringers may want to develop rebuttal evidence illustrating that the accused components do not add additional value in downstream products that would otherwise potentially increase the patent owner's reasonable royalty damages.
Focus on the Facts
Brumfield, by confirming that WesternGeco allows damages for foreign economic activity, increases the potential reasonable royalty damages available to patent owners. Caltech, by requiring (absent contrary evidence) the same royalty rates for different infringing devices in a supply chain, may have an upward effect on reasonable royalty damages for component suppliers. Where the manufacture, development, or sales of those components occur in the United States, Brumfield and Caltech together may have a multiplicative upward effect on potential damages. As these damages issues continue to evolve in the U.S. district courts and the Federal Circuit, litigants should focus their efforts on the facts and evidence specific to each case—how much more money did the accused infringer make (or could it have made) in foreign and downstream markets by using the invention in the United States instead of an alternative, and how would the parties have agreed to divide that additional value in a hypothetical negotiation?
Originally Published by IPWatchdog
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