Patent Infringement Remedies An Overview and Update 1

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1 Patent Infringement Remedies An Overview and Update 1 I. INTRODUCTION Whether you seek monetary damages, an injunction ordering the cessation of infringement, or a declaration that there is no infringement, a basic understanding and appreciation of patent remedies (both by patent holders and accused infringers) is essential. The following article provides a brief overview of available remedies in patent law and an update on trends in damages awards. II. OVERVIEW OF AVAILABLE PATENT REMEDIES A. Damages: no less than a reasonable royalty A successful plaintiff in a patent infringement suit is entitled to an award of damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. 35 U.S.C Essentially, the patentee is guaranteed to recover at least the royalties that it ought rightfully to have received had the infringer duly sought out a license for the accused products. Infringement damages are typically calculated from the earlier of (1) the time the patentee marked a product as patented (thereby giving constructive notice) or (2) the time the patentee notified the accused infringer of the infringement. Am. Med. Sys. Inc. v. Med. Eng g Corp., 6 F.3d 1523, 1537 (Fed. Cir. 1993); see also 35 U.S.C. 287 ( no damages shall be recovered by the patentee in any action for infringement except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice ). Past damages are recoverable for up to six years prior to filing the complaint; a royalty can cover both past damages and future damages, typically if an injunction is not entered and the infringing party continues to sell. 1. Reasonably Royalty The minimum award of reasonable damages is calculated based on the traditional 15- factor test set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). See Dow Chem. Co. v. Mee Indus., Inc., 341 F.3d 1370, 1382 (Fed. Cir. 2003) ( the district court should consider the so-called Georgia-Pacific factors in detail, and award such reasonable royalties as the record evidence will support ) (citation omitted). Applying the Georgia Pacific factors, the reasonable royalty analysis essentially constructs a hypothetical negotiation to determine what the accused infringer would have paid to the patent holder at the time of infringement. 318 F. Supp. at The hypothetical negotiation is presumed to occur 1 Kimberly Van Voorhis is a partner in the Palo Alto office of Morrison & Foerster, LLP. Dinah Ximena Ortiz is also an attorney in the Palo Alto office. Dawn Hall is a managing director in the New York office of FTI Consulting, Inc. pa

2 just prior to the first alleged infringement, and assumes the patent is valid and enforceable, the licensee is willing to take a license, the licensor is willing to grant a license, all relevant business facts are known by both parties, and the parties met and an agreement was reached. Lucent Techs. v. Gateway, Inc., 580 F 3.d 1301, (Fed. Cir. 2009). In analyzing a potential hypothetical negotiation, plaintiffs must not assume that defendants would be willing to take a risk on infringement that would result in a profit-eliminating royalty obligation for them. WesternGeco LLC v. Ion Geophysical Corp., No. 4:09-CV-1827, 2012 WL , at *2 (S.D. Tex. July 16, 2012) (holding that [a]s a matter of law, no such risk can be taken in a hypothetical negotiation in which the infringement is deemed known ). Further, to determine a royalty rate, the defendant can also rely on non-infringing alternatives as its basis. For example, in Carnegie Mellon University v. Marvell Technology Group, Ltd., No , 2012 WL (W.D.Pa. Aug. 24, 2012), the district court denied plaintiff s motion to exclude testimony from two experts regarding non-infringing alternatives. Id. at *1. The district court noted that, for reasonable royalties, the fact that there [is] a possibility that the defendant could have come up with [an alternative] was sufficient to justify the district court s reduction of the reasonable royalty. Id. at *4. Thus, notwithstanding the fact that the expert did not know if the defendant had ever tested or tried to incorporate any of the alternatives, the testimony was proper. Id. In addition to the amount of royalty, the royalty base, i.e., the products to which the royalty rate will be applied, must also be established. One way to establish the royalty is by applying the entire market value rule, which permits recovery of damages based on the value of an entire device, even if only one component is infringed, where the patented component is the basis for customer demand. The entire market value rule has been the subject of much discussion over the past few years as several large damages awards have resulted from application of the theory. As discussed in more detail in Section III.A, below, courts continue to keep a close watch on application of the entire market value rule, reducing several excessive damages awards that have relied on it. 2. Recovering Lost Profits for the Patentee Infringement damages may also include lost profits if the patentee can show that it would have actually made those additional profits but for the infringement. See Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1349 (Fed. Cir. 1999). To recover lost profits damages, the patentee must establish four things: 1) that demand exists for the patented product, 2) an absence of acceptable non-infringing substitutes, or, if there were, that the patent holder lost some sales as a result of the infringing activity (i.e., profits would rightfully have flowed to the patentee but for the infringement), 3) that the patentee would have had the manufacturing and marketing capability to exploit the demand, and 4) the amount of profit the patentee would have realized but for the infringement. Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978); see Micro Chem., Inc. v. Lextron, Inc., 318 F.3d 1119, 1124 (Fed. Cir. 2003) ( the Panduit test [for determining lost profits] is usually straightforward and dispositive ). Because the lost profits calculation assumes that the patentee actively markets a similar or related product, a patentee who does not sell a product will not typically recover lost profits. See, e.g., Rite-Hite Corp. v. Kelly Co., Inc., 56 F.3d 1538, 1548 (Fed. Cir.1995). If a patentee and the accused infringer are not the only competitors in a market, lost profits can be calculated based on a market share approach, which awards the patentee damages based on its pa

3 percentage share of the market. State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989) (affirming award of damages based on market share calculation). As mentioned above, absence of acceptable non-infringing substitute is one of the factors a patentee must consider in determining lost profits. In a recent case decision, the district court denied defendant s motion in limine to exclude the opinion of plaintiff s damages expert with respect to the alleged absence of acceptable non-infringing alternatives as a basis for lost profits. Metris U.S.A., Inc. v. Faro Technologies, Inc., No. 08-CV PBS, at *1 (D. Mass. July 10, 2012). The plaintiff s expert relied, among other things, on the contents of a technical expert's report. Id. An expert may express an opinion that is based on facts that the expert assumes, but does not know, to be true. Id. When experts rely on conflicting sets of facts, it is not the role of the trial court to evaluate the correctness of facts underlying one expert s testimony. Id. at *2. 3. Recovering Enhanced Damages for the Patentee Patentees may also recover enhanced damages (up to three times the amount) in exceptional cases, which may include an award of attorneys fees. 35 U.S.C Such cases ordinarily involve some material inappropriate behavior, such as willful infringement, fraud or inequitable conduct, or litigation misconduct. See, e.g., Cambridge Prods. Ltd. v. Penn Nutrients, Inc., 962 F.2d 1048, (Fed. Cir. 1992). Where the infringer s behavior is particularly egregious or in bad faith, the court may treble the award of compensatory damages. See Beatrice Foods Co. v. New England Printing and Lithographing Co., 923 F.2d 1576, 1579 (Fed. Cir. 1991); see also 35 U.S.C A request for enhanced damages due to willful infringement must normally be based on pre-litigation conduct, because the patentee may adequately remedy post-filing infringement by seeking a preliminary injunction. In re Seagate Tech. LLC, 497 F.3d 1360, 1374 (Fed. Cir. 2007). To prove willful infringement, a patentee must show by clear and convincing evidence that the accused infringer s conduct was both objectively and subjectively unreasonable. The objective inquiry looks to whether the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. 2 Id. at If the threshold objective standard is satisfied, the subjective inquiry requires the patentee to demonstrate that the objectively defined risk was either known or so obvious that it should have been known to the accused infringer. Id. In most circumstances, a claim for willful infringement that arises during litigation will not succeed where the patentee did not seek to enjoin the alleged infringer s post-filing behavior. Id. However, the rule is not an absolute bar. DataQuill Ltd. v. High Tech Computer Corp., No. 08-CV-543-IEG (BGS), 2011 WL , at *12 (S.D. Cal. Dec. 1, 2011). District courts have carved out limited exceptions to the Seagate rule, including: (1) where the plaintiff is neither practicing nor competes with the defendant and thus would likely not be able to get an injunction 2 Actual knowledge of a pending patent application is insufficient to support a willful infringement claim. Courts have regularly required that plaintiffs plead knowledge of actual patents, not patent applications, because [f]iling an application is no guarantee any patent will issue and a very substantial perventage of applications never result in patents. What the scope of claims ni patents that do issue will be is something totally unforeseeable. See, e.g., LML Holdings, Inc. v. Pacific Coast Distributing Inc., No. 11-CV YGR, 2012 WL , at *4 (N.D. Cal. May 30, 2012) (quoting State Industries, Inc. v. A.O. Smith Corp., 751 F.2d 1226, 1236 (Fed. Cir. 1985)). pa

4 and (2) where a patent survived reexamination without narrowed claims. Investment Technology Group, Inc. v. Liquidnet Holdings, Inc., 769 F. Supp. 2d 387, 412 (S.D.N.Y. 2010). B. Injunctions In some cases, money damages may not actually remedy the infringement. This is often true when a patentee s competitor infringes in a manner that directly competes with the patentee s own profitable business. When the patentee simply wants the infringement to cease so that the patentee may enjoy the monopoly rights to which it is entitled, only an injunction will do. A permanent injunction is a court order directing the infringer to cease or limit its infringing behavior. District courts are empowered to enjoin infringement, both before or during trial as a restraining order or a preliminary injunction, and after a full adjudication on the merits in the form of a permanent injunction. See 35 U.S.C. 283; see also Fed. R. Civ. P. 65. Injunction is an exercise of the court s equitable power, reviewable on appeal for abuse of discretion. Accumed LLC v. Stryker Corp., 483 F.3d 800, 811 (Fed. Cir. 2007). A patent holder may enforce an injunction by initiating contempt proceedings against the infringer. KSM Fastening Sys., Inc. v. H.A. Jones Co., 776 F.2d 1522 (Fed. Cir. 1985). The Supreme Court has held that the framework for determining whether to grant or deny a permanent injunction as relief in a patent action is essentially the same framework that applies to any request for injunction. ebay v. MercExchange, LLC, 547 U.S. 388, 391 (2006) (holding that merely showing validity and infringement are not enough to support a permanent injunction). 3 Before a court may enter injunctive relief, the patentee must demonstrate and the court must weigh each of the following: 1) that the patentee has suffered an irreparable injury; 2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; 3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and 4) that the public interest would not be disserved by the requested injunction. Id.; see also AstraZeneca LP v. Apotex Corp., 633 F.3d 1042, 1050 (Fed. Cir (citing Winter v. Natural Res. Def. Council Inc., 555 U.S. 7, 25 (2008)) (applying similar four-factor inquiry in determining whether to grant a preliminary injunction, including requiring demonstration that patentee will likely succeed on the merits). A recent decision from the Federal Circuit in Robert Bosch LLC v. Pylon Manufacturing Corp. confirmed that that there is no longer a presumption of irreparable harm following a finding of infringement. 659 F.3d 1142, 1149 (Fed. Cir. 2011). This clarified the Federal Circuit s holding in ebay v. MercExchange, which, according to the Federal Circuit, jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief. Id. The court clarified, however, that even though there was no longer a presumption, the fact of the patentee s right to exclude... should not be ignored either. Id. Thus, in this case, the presence of direct competitors, clear evidence of lost market share, and the infringer s inability to satisfy the judgment demonstrated that the patentee had suffered an irreparable harm. Id. at The Supreme Court in ebay overruled the general rule that a permanent injunction will be granted if the patentee prevails on infringement and validity. See Acumed, 483 F.3d at (recognizing rule overruled by ebay in favor of traditional four factor test for injunctions ). pa

5 Thus, to maximize the odds of winning injunctive relief, a patentee should consider steps that will strengthen its arguments that its harm is irreparable and that monetary damages are truly inadequate to compensate for the infringement. In particular, demonstrating that the patentee has a commercial stake, or that the infringer is a direct competitor, may encourage a finding of irreparable harm. See ebay, 547 U.S. at 393 (noting that the district court found lack of commercial activity in practicing the patents weighed against issuance of injunction). For example, in Versata Software Inc. v. SAP America, Inc., No. 2:07-CV-153-CE, 2011 WL (E.D. Tex. Sept. 9, 2011), the district court granted a permanent injunction in large part because the parties were engaged in ongoing competition. Id. at *2. In granting the permanent injunction, the court rejected the defendants argument that the parties were not engaged in ongoing competition, so an injunction was not warranted: Versata s diminished presence was not voluntary and by no means is an indication that Versata has ceased competing with SAP. Instead, it indicates that Versata has suffered and will continue to suffer irreparable harm if an injunction is not issued. Id. In contrast, demanding royalty payments or offering a license may significantly weaken the patentee s subsequent argument that monetary relief is inadequate. See id. at 393 (stating that plaintiff s willingness to license its patents was among factors considered by district court denying injunctive relief); Fractus, S.A. v. Samsung Electronics Co., Ltd., No. 6:09-CV-203, 2012 WL (E.D. Tex. June 28, 2012) (denying plaintiff s motion for a preliminary injunction because the parties are not direct competitors and the plaintiff had discontinued selling its product in favor of licensing its patent portfolio). If the patentee has previously licensed the invention (or offered to do so), that too, may weigh against a permanent injunction. III. DAMAGES AND THE FEDERAL CIRCUIT RECENT TRENDS While we find it useful to review the general remedies available to patent holders for context, the remainder of this article will focus primarily on damages, in particular recent trends in damages cases. Notably, the Federal Circuit continues its trend toward tighter, more controlled damages awards in patent cases, and many district courts are following suit. In particular, the Federal Circuit has focused on the application of certain theories that have, in some instances, lead to inflated damages awards, including the entire market value rule and the 25% rule. At the same time, the Federal Circuit has also made it possible for successful patentees to recover a postverdict royalty rate in lieu of an injunction, with the rate being, at times, significantly higher than the pre-verdict royalty rate. We explore each of these new trends in more detail, below. A. Entire Market Value Rule Since 2009, the Federal Circuit has vacated several damages awards or significantly reduced them as being unsupported by the evidence, signaling a continued trend away from large damages awards. To that end, the Federal Circuit has severely limited application of the entire market value rule, which allows a patentee to assess damages based on the entire market value of the accused product [if] the patented feature creates the basis for customer demand or substantially create[s] the value of the component parts. Uniloc USA Inc. v. Microsoft Corp., 632 F.3d 1292, 1318 (Fed. Cir. 2011) (citing Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009); Rite-Hite, 56 F.3d at ). The Federal Circuit has pa

6 approved use of the rule where the parties can reasonably show that consumer demand for the product is attributable to the patented feature at issue or if the accused product substantially creates the value of the whole article. Id. However, where the patented invention is a minor element of the overall product, the Federal Circuit has prohibited using the rule. Id. at 1320 (holding that courts do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate ). In Cornell University v. Hewlett-Packard Co., 609 F. Supp. 2d 279 (N.D.N.Y. 2009), Chief Judge Rader, sitting by designation in the Northern District of New York, addressed the entire value market rule. In Cornell, the jury had found Cornell s patent valid and infringed, and awarded $184 million to Cornell. Id. at 282. The jury calculated this award by using a $23- million royalty base and applying a 0.8% royalty rate. Id. However, the accused device was merely a component of a component within the processors used in Hewlett-Packard s servers and workstations. Id. at Following an evidentiary hearing, Cornell s expert was prohibited from providing testimony that relied on the entire market value of HP s servers as a royalty base because he did not offer credible and sufficient economic proof that the patented invention drove demand for Hewlett-Packard s entire server and workstation market. Id. at 284 (emphasis added). Despite that limitation, Cornell s second attempt at calculating damages used a royalty base that incorporated much more than the claimed invention without providing any additional evidence demonstrating entitlement to the entire market value of any Hewlett-Packard product. Id. Judge Rader next noted that the important point is not the way that Cornell derived this royalty base, but that it exceeded again this court s discretion and proceeded to attempt to show economic entitlement to damages based on technology beyond the scope of the claimed invention. Id. at Judge Rader ultimately reduced the jury s damages award from $184 million to $53 million. A second case, Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), also dealt with the application of the entire market value rule. In Lucent, Microsoft appealed a jury award for over $357 million after Microsoft was found to infringe a patent held by Lucent. Id. at Reviewing the district court s decision concerning the methodology for calculating damages for an abuse of discretion, Judges Michel, Newman, and Lourie vacated the district court s decision and remanded for a new trial on damages. Id. at 1310, The opinion noted that [t]here is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature. Id. at 1339 (emphasis added). The Lucent court found further that the testimony of Lucent s damages expert urged the jury to rely on speculation in calculating a damages award. 4 Id. at And, after analyzing the relevant Georgia-Pacific factors, the court decided that the jury s damages award [was] not 4 Lucent s damages expert explained to the jury his lump sum speculation theory when he explained that parties speculate as to what they expect the future to be like when negotiating a lump-sum payment for a patent license. Id. at The court ultimately found this testimony to be inappropriate, even though the expert may have intended the word speculate to mean estimate. Id. pa

7 supported by substantial evidence, but [was] based mainly on speculation or guesswork. Id. at Expert speculation or guesswork, even if admitted, can often lead to trouble on appeal. 5 More recently, the Federal Circuit has continued to demand that the patented feature drive the demand for the product as a whole before applying the entire market value rule in LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012). In this case, the Federal Circuit ordered a third damages trial, citing flaws in the second trial while agreeing with the lower court that plaintiff s expert improperly calculated damages in the first trial. Id. at *81. With regard to the entire market value rule, in the first trial, the district court ruled that the $52.1 million jury award was excessive because the expert based his damages theory on the entire market value rule. Id. at 66. The Federal Circuit affirmed, finding that the expert improperly invoked the entire market value rule in the first trial as he failed to present evidence showing that the patented invention (a disc discrimination method) drove demand for the defendant s laptop computers. Id. at 68. Moreover, he failed to conduct any market studies or consumer surveys to ascertain demand for the patented technology. Id. at 69. In the district courts, treatment of the entire market value rule has not been perfectly consistent. For example, at least one court has permitted use of the entire market value rule even where the plaintiff failed to demonstrate that the accused product was the basis for consumer demand. In Mondis Technology LTD v. LG Electronics, Inc., No. 2:07-CV-565-TJW, 2011 U.S. Dist. LEXIS (E.D. Tex. Jun. 14, 2011) the District Court for the Eastern District of Texas denied the defendants motion to exclude expert testimony based on the entire market value rule because it was economically justified, even though it acknowledged that the accused product was not the basis for consumer demand. While acknowledging that the Federal Circuit s standard for the entire market value rule is whether the accused product is the basis for consumer demand, the Mondis court focused on a line from Lucent, in which the Federal Circuit stated that even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price or number of units sold can be economically justified. Id. at *16. The Mondis court considered use of the entire market value rule justified in this case because several comparable licenses used the value of the entire product, and even some of the defendants experts had used the entire value as the basis for their analysis. The court declined to limit application of the entire market value rule only to situations where the accused product was the basis for consumer demand: If this rule were absolute, then it would put Plaintiff in a tough position because on one hand, the patented feature does not provide the basis for the customer demand, but on the other hand, the most reliable licenses are based on the entire value of the licensed products. Id. at *19. Notwithstanding a minority of cases like Mondis, district courts almost universally refuse to apply the entire market value rule where the accused product is only a minor element of the overall product, and where the plaintiff fails to demonstrate that the accused product is the primary basis for consumer demand, in line with the Federal Circuit rulings. First, in the Lucent case on remand from the Federal Circuit, the District Court for the Southern District of California granted the defendant s motion in limine to exclude a supplemental damages expert report that calculated a royalty based on the entire value of Microsoft Outlook. Lucent 5 See Wordtech Sys., Inc. v. Integrated Network Solutions, Inc., 609 F.3d 1308, (Fed. Cir. 2010) (where the Federal Circuit Court followed the trend it set in Lucent and Lansa and reversed the district court s damages award for being based on speculative and unsupported guesswork.) pa

8 Technologies, Inc. v. Microsoft Corp., No. 07-CV-2000 H(CAB), 2011 WL , at *7 (S.D. Cal. July 13, 2011). As the patent at issue was only one element of this program, the court ordered the plaintiff to apportion between the patented and unpatented features of the program if it wanted that evidence to be considered at trial. Id. The jury ultimately returned a verdict of a $70 million lump sum reasonable royalty. However, in a subsequent order, the court granted Microsoft s motion for judgment as a matter of law and reduced the jury s damages award even further to $26.3 million because Lucent had not properly apportioned the percentage of Microsoft s revenue on the Office suite that is attributable to Outlook. Lucent Technologies, Inc. v. Microsoft Corp., No. 07-CV-2000 H (CAB), 2011 WL , at *10 (S.D. Cal. Nov. 10, 2011). Lucent used a $67 per license figure, the revenue from sales of Outlook when sold as a stand-alone product, but the court disagreed: no reasonable jury could conclude that Outlook within Office is worth $67, leaving the value of Word, Excel, and PowerPoint combined to be only $31. Id. at *11. Instead, the court adopted $ % of the Office revenue as the proper per-unit revenue for Outlook when sold as part of the Office suite. Id. at * Other district courts have found similarly. For example, in Rolls-Royce PLC v. United Technologies Corp., No. 1:10cv457 (LMB/JFA), 2011 WL (E.D. Va. May 4, 2011), the District Court for the Eastern District of Virginia granted the defendant s motion in limine seeking to exclude evidence of lost profits based on the entire market value rule. Id. at *1. The patent at issue was a fan blade, one of thousands of components in a jet engine. Id. at *9. However, the plaintiffs proposed damages based on the sales of the entire engine, and did not provide any evidence showing that the fan blade was the basis for consumer demand for the engine. Id. at *6. Thus, the plaintiff could not use the entire market value rule in order to show damages. Id. at *7. See also Inventio AG v. Otis Elevator Co., No. 06 Civ. 5377(CM), 2011 U.S. Dist. LEXIS (S.D. N.Y. Jun. 22, 2011) (granting a motion in limine excluding evidence based on the full market value rule because the expert had not shown that the accused product (an elevator dispatch system) was the primary basis for consumer demand for the elevator itself). The trend has continued in In CareFusion303, Inc. v. Sigma International, No. 10- cv-0442 DMS (WMC), 2012 WL (S.D. Cal. Jan. 3, 2012), the defendant moved for summary judgment on plaintiff s use of the entire market value rule for calculation of lost profits. Id. at *1. Plaintiff argued that since the invention contributed to the overall safety of the product, and since overall safety drove customer demand for their product, it was proper to apply the rule. Id. at *2. However, the court found that the rule does not apply unless the technology is the basis for demand, which the invention was not. Id. at *3. In University of Pittsburgh v. Varian Medical Systems, Inc., No. 08-cv-1307, 2012 WL (W.D. Pa. Feb. 10, 2012), the district court denied defendant s motion in limine to exclude the value of one of its products (linear accelerators) from the royalty base, finding them to be a part of the patented apparatus and not just a mere accessory, rendering the entire market value rule inapplicable. Id. at *11. As the court noted, the entire market value rule only applies when unpatented products are combined with patented products, which was not the case. Id. at *8. Moreover, the court held that damages from a dependent claim can exceed the damages of an independent claim. Id. at *11. The Northern District of California reached a similar conclusion in Mformation Techs., Inc. v. Research in Motion Ltd., No. C JW, 2012 WL (N.D. Cal. March 29, 2012). In this case, the defendants moved to exclude the opinion of the plaintiff s damages expert, on the grounds that the opinion improperly inflated Mformation s damages. Id. at 2. The pa

9 court agreed that the expert s calculation of a royalty base was not sufficiently reliable. Id. at *4. The expert relied on the entire market value rule, because all of the defendants devices have the capability to infringe the Patent-in-Suit, but the court found that the rule was not warranted because the capability to infringe does not establish that customer demand was driven by this capability, as opposed to other features of the device. Id. (emphasis added). In order to avoid violating the entire market value rule, plaintiffs may want to consider carefully apportioning the value of the patented portion of the product at issue. For example, in Fractus, S.A. v. Samsung Electronics Co., Ltd., No. 6:09-CV-203, 2012 WL (E.D. Tex. June 28, 2012), Samsung argued that the court should grant judgment as a matter of law on damages, because the damages award was excessive. Id. at *21. In particular, Samsung contended that Fractus s damages theory violated the entire market value rule because Fractus s damages expert used the average price of Samsung s infringing phones as the royalty base. Id. at *24. The court disagreed. Id. At trial, the expert calculated the royalty rate by apportioning the value attributable to the patented invention a cell phone antenna to the overall value of the phone. Id. at *22. The court found that the expert had not violated the entire market value rule, because the expert presented substantial evidence to support his apportionment theory and because he used the apportioned value of the infringing antenna as his royalty base, as opposed to the average price of the phones overall. Id. at *24. In sum, although the majority of post-lucent and-uniloc decisions have found that the entire market value rule is applicable only where the patented element is the primary source of consumer demand for the overall product, the economically justified language from Mondis leaves open the possibility for a looser application of the entire market value rule. Nonetheless, the trend is toward eliminating application of the rule except where the facts of the case demonstrate that considering the entire value of the product is justified. B. Unrelated Licenses In addition to curbing application of the entire market value rule, the Federal Circuit has also pushed against the application of other theories for determining a reasonable royalty rate that are not closely tied to the specific facts of each case. In ResQnet.com, Inc., v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), for example, the district court awarded over $500,000 to ResQNet.com based on a hypothetical royalty of 12.5%. Id. at 863. To support this royalty rate, ResQNet s expert submitted evidence of existing licenses that ResQNet had with other entities and for other patents. Id. at 869. But these licenses were unrelated to any conceivable hypothetical license that would have transpired between ResQNet.com and the accused infringer, Lansa, for the patent at issue. Id. at 870. ResQNet s expert made no attempt to show that the licenses he used in his calculations embody or use the claimed technology or otherwise show demand for the infringed technology. Id. at 871. The Federal Circuit ultimately vacated the damages award and remanded for a new trial on damages, cautioning the trial court to not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology. Id. at On remand, the district court found that a 3% royalty was reasonable, after considering the two licenses that the Federal Circuit signaled were relevant and properly apportioning for the pa

10 value of the patented technology, resulting in an award of just over $160,000. ResQnet.com, Inc. v. Lansa, Inc., 828 F. Supp. 2d 688, 695 (2011). The Federal Circuit reaffirmed this ruling in ResQNet in LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012). In this case, LaserDynamics had over the years entered into a number of licenses for the technology at issue, including sixteen licenses entered into from 1998 to 2001, all of which were one time lump sum payments under one million dollars. Id. at 57. In 2006, LaserDynamics entered into a license agreement with BenQ Corporation, as part of a settlement agreement on the eve of trial, where BenQ had suffered a number of sanctions that left it at a disadvantage before trial, for a lump sum payment of $6 million dollars. Id. at 58. The district court allowed the BenQ license into evidence notwithstanding the unique circumstances of that license agreement and the notable difference in amount between that license and the sixteen licenses entered into outside of litigation. Id. at 78. The Federal Circuit, following ResQNet, found that this license was not sufficiently tied to the facts of the case particularly in light of the plethora of licenses that were more applicable. Id. The Federal Circuit also reversed the district court s decision to allow into evidence information on licensing programs from the late 1990s which had no connection to the technology at issue. Relying on this irrelevant evidence to the exclusion of the many licenses expressly for the [patent-in-suit] served no purpose other than to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology. Id. at 80 (quoting ResQNet, 594 F.3d at ). However, a recent district court case demonstrates that, under limited circumstances, unrelated licenses may still be admissible during trial. In Mformation Technologies, Inc. v. Research in Motion Ltd., No. C JW, 2012 WL (N.D. Cal. June 7, 2012), the court denied a motion in limine seeking to exclude non-comparable license agreements, as well as the related opinions of the defendant s damages expert. Id. at *3. The expert acknowledged that the patent holder had not entered into any license agreements covering just the patent-in-suit, but she explained how these agreements would be adjusted to cover only the patented technology. The plaintiff had relied on those license agreements as well. Notably, the Federal Circuit has established a different standard for discoverability of even loosely related licensing agreements, as opposed to the standard for admissibility in trial. In In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012), the Federal Circuit denied a petition for a writ of mandamus following the district court s decision to order the patent owner to produce documents related to license negotiations, in addition to the license agreements themselves, which the patent owner had already produced. Id. at The court declined to find a settlement privilege and found that Rule 408 of the Federal Rules of Evidence controls admissibility in trial, not discoverability. Id. at Moreover, the Federal Circuit found that the district court had not abused its discretion by ordering production of the negotiation documents because the patent owner s expert had himself relied on negotiation document: As a matter of fairness MSTG cannot at one and the same time have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations. Id. at District courts have held similarly. For example, in High Point Sarl v. Sprint Nextel Corp., No CM-DJM, 2012 WL (D. Kan. April 30, 2012), the court granted plaintiff s motion to compel production of license and settlement agreements regarding pa

11 technology not covered by the patents-in-suit but it denied the request to produce settlement negotiations. The court found the settlement agreements relevant under the second, twelfth, and fifteenth Georgia-Pacific factors, because the licenses are relevant to a reasonable royalty calculation. Id. at *7. The court distinguished ResQNet and its predecessor, Lucent: a different standard exists for discoverability of other comparable patent licenses and the ultimate admissibility and weight to be given to the licenses at trial. Id. at *8. However, the court denied the motion with regards to the settlement communications, because High Point had not demonstrated how those discussions were relevant. Id. at *10. C. The 25% Rule Another way in which the Federal Circuit is pushing towards damages values that are directly tied to the facts of the case is its wholesale rejection of the 25% rule of thumb. In Uniloc, the Federal Circuit rejected an application of the 25% rule where the damages expert had not tied the theory to the facts of the case. 632 F.3d at The 25% rule approximates the baseline royalty rate that the accused infringer would be willing to pay the patentee during a hypothetical negotiation. Id.. According to the rule, a royalty rate equivalent to 25 per cent of [the licensee s] expected profits for the product that incorporates the IP at issue serves as a starting point for the hypothetical negotiation analysis. Id. at Once that baseline is established, the Georgia-Pacific factors would be applied in order to adjust the rate up or down. Id. at In Uniloc, the Federal Circuit held that evidence based on the rule was inadmissible because it did not link the proposed base royalty rate to the specific facts of the case. Id. at Following the Daubert line of cases as well as its holdings in ResQNet, Lucent, and Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010), the court stated that in order to prove damages through the application of a general theory, the patentee must tie the expert s testimony to the facts of the case; otherwise the testimony must be excluded. Id. at As the court warned, if even unrelated licenses were not sufficiently tied to the facts of the case, there was even less reason to admit evidence based on a completely abstract theory that had no ties to the facts at all, even if the 25% rate was then adjusted per the Georgia-Pacific factors: Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion. Id. And in this case the damages expert had not done so the expert could not testify that the parties typically started their negotiations with a 25% royalty rate, that previous comparable licenses had a 25% royalty rate, or that the contribution of the product at issue warranted a 25% royalty rate. Id. at Therefore, there was no justification for the use of this general theory. Id. And, in Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10 (Fed. Cir. 2012), the Federal Circuit affirmed the finding of willful infringement, vacated the damages award and remanded for a new trial on damages. Moreover, the Federal Court reversed and remanded the decision for consideration to enter an injunction or a compulsory license. With regards to the reasonable royalty, the court upheld the royalty base but found multiple errors in the royalty rate. Per the court, the expert cannot have it both ways. He cannot use $41 to boost the royalty base and then use $15.69 to boost the royalty rate. No reasonable juror could have credited both pa

12 values. The 31.8% value is therefore based on pure conjecture and, like the 25% rule of thumb, is irrelevant. Id. at *30. Moreover, WhitServe cited to two lump-sum royalties to support its running royalty, but offered no explanation for how the lump-sum royalties would apply to the facts of the case. D. Injunctions and Post-Verdict Royalties Recently, some courts have imposed a prospective ongoing royalty that the infringer is required to pay the patentee in lieu of imposing an injunction. Courts have the authority to impose such a royalty pursuant to the patent statute, which permits district courts to grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable. 35 U.S.C The Federal Circuit in Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007) interpreted this provision to authorize ongoing royalties in lieu of an injunction. Id. at 1314; see also Boston Sci. Corp. v. Johnson & Johnson, No. C SI, 2008 U.S. Dist. LEXIS 98939, at *13-14 (N.D. Cal. Nov. 25, 2008) (patent statute authorizes an ongoing royalty); Mondis Technology Ltd. v. Chimei Innolux Corp., No. 2:11-cv-378-JRG, 2012 WL (E.D. Tex. April 30, 2012) (post-verdict royalties bind both the defendant and its successors and assigns). Ongoing royalties involve different considerations than pre-judgment royalties: Prior to judgment, liability for infringement, as well as the validity of the patent, is uncertain, and damages are determined in the context of that uncertainty. Once a judgment of validity and infringement has been entered, however, the calculus is markedly different because different economic factors are involved. Amado v. Microsoft Corp., 517 F.3d 1353, 1362 (Fed. Cir. 2008). Prior to imposing an ongoing royalty, district courts must permit the parties to negotiate an ongoing royalty rate themselves. Paice, 504 F.3d at If that fails, the Federal Circuit has provided some guidance for district courts on what factors they must consider when determining an ongoing royalty, including the change in parties bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability for example, the infringer s likelihood of success on appeal, the infringer s ability to immediately comply with the injunction, the parties reasonable expectations if the stay was entered by consent or stipulation. Id. The date of the hypothetical negotiation is not the date that infringement began, as it would be for royalty rates based on past infringement; rather, it is the date of the judgment. Boston Sci. Corp., 2008 U.S. Dist LEXIS 98939, at *16 ( it is consistent with Amado that the hypothetical negotiation for post-judgment royalties should occur on the date of the verdict, when the determination of liability altered the parties bargaining positions); DataTreasury Corp. v. Wells Fargo & Co., No. 2:06-CV-72 DF, at 15 (E.D. Tex. Aug. 1, 2011) (order). Following the rules set out in Paice and Amado, the Eastern District of Texas issued an ongoing royalty that was higher than the pre-judgment royalty rate in DataTreasury Corp. No. 2:06-CV-72 DF, at 32. The court noted that a post-judgment royalty rate can be significantly higher than the pre-judgment royalty, because post-verdict infringement is almost always willful. Id. at 13. The court also applied the date of final judgment as the date of the hypothetical negotiation, since supplemental damages compensated the plaintiff for the time between trial and final judgment. Id. at 15. Then, using the pre-verdict royalty rate as a starting point, the court considered the Georgia-Pacific factors to adjust that rate, noting that changed bargaining pa

13 positions, the fact that a significant portion of the profit is creditable to the patented elements of the product, and the significant benefit that users of the product have enjoyed all favored increasing the royalty rate. Id. at The Federal Circuit, following Paice and Amado, has continued encouraging district courts to fashion post-verdict royalties in cases of ongoing infringement. In Whitserve, LLC v. Computer Packages, Inc., 694 F.3d 10 (Fed. Cir. 2012), the Federal Circuit affirmed a finding of willful infringement, but reversed and remanded to enter an injunction or a compulsory license. Id. at 35. The district court had denied Whitserve s request for some relief from ongoing infringement, either in the form of a permanent injunction or an ongoing royalty, because WhitServe failed to establish irreparable harm from ongoing infringement. Id. But the Federal Circuit found that the district court had abused its discretion in denying relief. Id. The damages awarded to WhitServe, by definition, exclusively covered past harm, and no paid-up license or other form of relief for future infringement had been granted. Id. Thus, on remand, the district court was directed to address the propriety of prospective relief. Id. And, in Activevideo Networks, Inc. v. Verizon Communications, Inc., 694 F.3d 1312 (Fed. Cir. 2012), the Federal Circuit found that the district court should have entered an ongoing royalty instead of a permanent injunction. In this case, the district court entered a permanent injunction, stayed the injunction for six months, and granted a sunset royalty provision for that same amount of time. Id. at The Federal Circuit reversed on the permanent injunction, finding that the district court had erred regarding all four factors. Id. at However, the Federal Circuit did not find any errors with the district court s post-verdict royalty. Id. at Verizon argued that it should only have to pay $0.17 per each subscriber, the same licensing fee that Cablevision (Activevideo s customer) paid. Id. But the district court, and the Federal Circuit, both found that Activevideo had an improved bargaining position following the favorable result in the lawsuit, and thus a royalty of 40% of Verizon s profits or $2.74 per subscriber was warranted. Id. The Federal Circuit remanded, asking that the district court create an ongoing royalty following the same reasoning that it used to develop its sunset royalty. Id. at In fact, considering Activevideo s bargaining position was even stronger following a successful appeal regarding infringement and validity, the Federal Circuit noted that the district court should consider additional evidence of change in bargaining position. Id. District courts have continued to follow the Federal Circuit s lead, as the Northern District of California did in Fresenius USA, Inc. v. Baxter International, Inc., No. C PJH, 2012 WL (N.D. Cal. Mar. 8, 2012). Initially, the jury found all twenty asserted claims invalid. Id. at *2. The court granted a motion for JMOL regarding the invalidity findings, and at the second trial on damages, the jury awarded Baxter over $14 million in damages, consisting primarily of damages for sales of the infringing product and $91,000 for sales of disposable products related to the infringing machine. Id. Subsequently, the court entered a permanent injunction, as well as a nine-month stay with a post-verdict royalty structure of 10% of sales of the infringing product and 7% of the sales of disposable products. Id. at *3. On appeal, the Federal Circuit reversed the grant of JMOL as to most of the asserted claims, vacated the royalty award, and remanded for the district court to determine the proper royalty in light of the changed circumstances. Id. On remand, the court reduced the award from 10% to 3.4% on sales of the infringing product, and only 0.007% on sales of disposable products, as opposed to the 7% Baxter requested. Id. at *16. The court considered that a number of factors pa

14 reduced the royalty rate, principal amongst them that (1) the life of the only remaining patent was shorter than that of the two invalidated patents; (2) Baxter had withdrawn from the market, and therefore the parties were no longer direct competitors; and (3) that the licenses relied on by the defendant were not comparable to the hypothetical license. Id. at * IV. CONCLUSION The Federal Circuit has made it much more difficult to enjoy a large damages award by restricting the use of theories that cannot be tied concretely to the facts of the case. At the same time, the Federal Circuit has also clarified its position on post-verdict royalties to acknowledge that after final judgment, a successful plaintiff may be in an improved bargaining position and therefore able to demand a higher royalty rate. In either situation, courts are now keeping a close watch on the nexus between damages theories and the facts of the case. pa