One of the more controversial provisions of the proposed patent-law reform concerns the mandatory apportionment analysis required in assessing reasonable royalty damages for patent infringement when the entire-market-value rule does not apply. Indeed, Chief Judge Michel of the Federal Circuit twice wrote to Congress in 2007 stating the view that a mandatory apportionment analysis was not needed and would overburden the courts.1 Not surprisingly, when presented with a case that addressed the alleged evils the proposed apportionment provision sought to address in reasonable royalty awards, the Federal Circuit, in an extensive analysis for the court penned by Judge Michel, attempted to demonstrate how and why the current law of patent damages adequately deals with determining reasonable royalty awards.

In Lucent Tech., Inc. v. Gateway, Inc., No. 2008-1485, -1487, -1495, 2009 WL 2902044 (Fed. Cir. Sept. 11, 2009), a jury found that three Microsoft products, including Outlook, infringed a patent based on a "date-picker function" present in these programs. The patentee asserted that a reasonable royalty for the date-picker feature was 8% of the sales revenue of the three software products, and therefore asked the jury to award $561.9 million dollars. Microsoft argued that a proper royalty would be a lump-sum payment of $6.5 million dollars. The jury awarded a lump-sum royalty of approximately $358 million. On appeal, the Federal Circuit vacated the damages award and remanded for a new trial on damages because the award lacked substantial evidence in the record, and in fact was against the "clear weight" of the record evidence. Id. at *29.

To support the award, the patentee introduced into evidence eight prior license agreements that allegedly showed that the jury's lump-sum royalty was reasonable. Assessing these agreements, the Federal Circuit instructed that the patentee "had the burden to prove that the licenses were sufficiently comparable [to the infringement scenario] to support the lump-sum damages award." Id. at *22. According to the Federal Circuit, the patentee failed to meet its burden.

As a first ground for finding insufficient proof to sustain the award, the Federal Circuit noted that the patentee failed to explain how several of the proffered license agreements concerned the same or similar technical subject matter as the patented technology. Id. The court found that the only thing these prior agreements had in common with the infringement was that the prior agreements used a lump-sum royalty of approximately the same magnitude as the jury's damage award. The court held this was insufficient since "a lump-sum damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ballpark of the jury's award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here." Id.

The court also found fault with the patentee relying on several agreements that used running royalties instead of a lump-sum royalty. The court refused to adopt a per se rule that evidence of a running royalty can never be probative of a lump-sum royalty. But it did hold that "[f]or a jury to use a running-royalty agreement as a basis to award lump-sum damages, however, some basis for comparison must exist in the evidence presented to the jury." Id. at *23. Examining the patentee's evidence, the court found there was no testimony that allowed the jury to "recalculate in a meaningful way the value of any of the running royalty agreements to arrive at the lump-sum damages award." Id. at *23. Hence, these agreements could not support the damages award.

Considering the economic dynamics of the prior license agreements, the court also found that agreements licensing an entire patent portfolio had little relevance to the hypothetical negotiation that only addressed the single patent found to be infringed. Id. at *24. Additionally, the court found that the absence of any evidence showing that the importance of the licensed technology to the licensee's products in the prior agreements was comparable to the importance of the infringing feature to Microsoft's Outlook product cast further doubt on the probative value of the prior license agreements to the reasonable royalty analysis. See id. at *24-*25.

Addressing the "apportionment" issue, the Federal Circuit noted that the "date-picker" feature in Outlook was "but a tiny part of a much larger software program." It instructed that "the glaring imbalance between infringing and non-infringing features must impact the analysis of how much profit can properly be attributed to the use of the date-picker compared to non-patented elements and other features of Outlook." Id. at *26. Further noting that the accused Outlook program had many non-infringing features, the court instructed that "[t]he damages award can't be supported by evidence that the infringers also used additional, non-infringing features. ... The damages award ought to be correlated, in some respect, to the extent the infringing method is used by consumers." Id. at *28.

The Federal Circuit also instructed that the parties should have considered the actual usage of the date-picker feature by the users of Outlook during the damages period in determining whether the magnitude of the lump-sum royalty was reasonable. Relying on the "book of wisdom"2 the Federal Circuit stated that "neither precedent nor economic logic requires us to ignore information about how often a patented invention has been used by infringers." Id. at *26. It found that "the evidence of record is conspicuously devoid of any data about how often consumers use the patented date-picker invention." Id. at *27. While noting that minimal circumstantial evidence that at least one customer likely used the date-picker feature sufficed to sustain the liability verdict on indirect infringement, see id. at *11-*12,3 that evidence was insufficient to support the lump-sum royalty award as it only provided speculation as to the actual use made of the date-picker feature. The patentee "had the burden to prove that the extent to which the infringing method has been used supports the lump-sum damages award," and failed to meet that burden. Id. at *28.

The Federal Circuit's guidance on the need to have evidence of actual usage of the infringing technology potentially could conflict with prior precedent that a patentee can rely on optimistic sales forecasts existing when infringement first began even if these forecasts are never achieved.4 The court noted in Lucent, that data of "evidence of usage after infringement started," "sales projections based on past sales, consumer surveys, focus group testing, and other sources" can be helpful in assessing whether a royalty is reasonable. Id. at *27. It further instructed that where such evidence "meets admissibility requirements, ought to be given its proper weight, as determined by the circumstances of each case." Id. But the court did not give any guidance as to what weight should apply to a sales projection existing when infringement first began where evidence of actual later sales shows that the forecast was not achieved.5

In view of its finding that the proffered license agreements did not support the lump-sum royalty awarded by the jury, that the infringing feature was just a small part of the overall software product, and the evidence of usage of the infringing feature was speculative, the Federal Circuit concluded the substantial evidence did not support the jury's damage award. It cautioned district courts that "on post-trial JMOL motions, district court judges must scrutinize the evidence carefully to ensure that the 'substantial evidence' standard is satisfied, while keeping in mind that a reasonable royalty analysis 'necessarily involves an element of approximation and uncertainty.'" Id. at *29. Hence, while Lucent does not appear to substantively alter the law of reasonable royalty damages, it does instruct the courts to exercise a greater watchful eye on whether evidence alleged to support a damages award truly supports the advocated position.

The Lucent court also addressed the applicability of the entire-market-value rule6 to reasonable royalty determinations. First, the court noted that in view of the patentee's failure to show that the "date-picker" feature drove the sales of Outlook, the entire-market-value rule could not apply. Id. at *30-*31. But the court also explained that even where the predicates for applying the entire-market-value rule are not met, parties may still base a reasonable royalty on the selling price of the overall product so long as the royalty rate is sufficiently small so that it reflects that the patented feature is just a small component of the overall product that is not driving the sales of the product. Thus, "the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the [royalty] rate is within an acceptable range (as determined by the evidence). ... Microsoft surely would have little reason to complain about the supposed application of the entire market value rule had the jury applied a royalty rate of 0.1% (instead of 8%) to the market price of the infringing programs." Id. at *32.7

The foregoing first appeared in the October 2009 issue of Patent Happenings available at www.PatentHappenings.com. Other case summaries from that issue include:

  • Federal Circuit expands the defensive use of claim preclusion arising from a prior judgment of noninfringement
  • Openness of "comprising" did not overcome restrictive scope required by claim's use of the term "each"
  • Registering an article in the Copyright Office did not make the article publicly available
  • Delaware Judge states that bifurcation of damages and willfulness from infringement should be the norm in patent cases
  • Funding university research did not convey an express or implied license to the resulting patented technology
  • University researcher's agreement to assign future inventions to university employer trumped by a later agreement researcher had with a commercial entity that provided for an automatic assignment
  • Two Federal Circuit cases limiting claim scope based on "Present Invention" language
  • Notice of patent pool covering an industry standard and a general charge that any product compliant with the standard infringed was not actual notice under § 287

About the Author

Robert A. Matthews, Jr. provides patent-law consulting services to corporate counsel and trial counsel. Specifically, he helps counsel analyze and brief the myriad of substantive and procedural legal issues arising in patent infringement litigations. Matthews authors the Annotated Patent Digest, an eight-volume patent treatise published by West and available on Westlaw, the Patent Jury Instruction Handbook, and the monthly newsletter Patent Happenings®. Matthews has assisted clients with patent matters before the U.S. Supreme Court (KSR and Bilski), the Federal Circuit, the ITC and numerous federal district courts. Further information on the patent-law consulting services Matthews offers, plus a collection of patent-litigation resources, can be found at www.MatthewsPatentLaw.com.

Footnotes

1. See Patent Happenings, June 2007 at p.5 (discussing Judge Michel's letters of May 3, 2007 and June 7, 2007).

2. See generally, Robert A. Matthews, Jr., Annotated Patent Digest § 30:87 Use of Hindsight and the "Book of Wisdom" in Reasonable Royalty Determinations [hereinafter APD].

3. See generally, APD § 10:37 Prerequisite Showing of Direct Infringement and § 10:40 Circumstantial Evidence of Direct Infringement.

4. See e.g., TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 899 (Fed. Cir. 1986) (ruling that the district court did not abuse its discretion in using an infringer's projected profit forecasts in determining a 30% reasonable royalty rate and not considering infringer's evidence that those forecasts were not realized); ; see also Radio Steel & Mfg. Co. v. MTD Prods., Inc., 788 F.2d 1554, 1557 (Fed. Cir. 1986) (upholding royalty rate of 10% even though it exceeded the infringer's actual profits).

5. Cf. Interactive Pictures Corporation v. Infinite Pictures, Inc., 274 F.3d 1371, 1384-85 (Fed. Cir. 2002) (finding that the failure to meet sales projection did not undermine their use in a reasonable royalty analysis where the projection was not shown to have been "grossly excessive or based only on speculation and guesswork").

6. See generally, APD § 30:58 Substantive Aspects of the Entire Market Value Rule.

7. But cf. Uniloc USA, Inc. v. Microsoft Corp., 2009 WL 3106555, *23 (D.R.I. Sept. 29, 2009) (for claims directed a software activation feature, patentee's trial counsel using a pie chart comparing the total sales revenue received by the accused infringer from its software sales to the requested royalty for infringement of the activation feature was improper since the entire-market-value rule did not apply, and the referral to total sales revenues could not be condone as merely being a "gut-check" on the reasonable royalty advocated by the patentee – "[U]se of a large pie stuffed with desirable features of Windows and Office to make a royalty slice for PA seem small and reasonable, combined with repeated references to the numbers under the guise of a 'gut-check', encourages exactly what the rule seeks to prevent-awarding damages far in excess of the contribution of the precise patented invention.").

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