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.
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.
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.
14 Id.at 1312-1313.
15 WesternGeco, 791 F.3d at 1353 (internal quotations omitted).
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.
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