- Calculating Collateral Patent Damages: Lucent v. Gateway and the Entire Market Value Rule
- October 6, 2009
- Law Firm: Venable LLP - Washington Office
When a patent owner proves that someone has infringed his patent, he is entitled to compensation equal in amount to the injury. In particular, U.S. patent law permits the patent owner to recover a reasonable royalty for the infringing use or, in the alternative, an amount equal to the profits lost as a result of the infringement. A lost profits award is typically higher than a reasonable royalty award, but to receive lost profits, the patent owner must prove that his lost profits were the direct result of the infringing sales. If, for example, the infringer establishes that it did not need to sell infringing products, but could have just as easily sold an acceptable alternative, then there is uncertainty as to whether the infringer would have taken sales from the patent owner and caused any lost profits. The court would accordingly award a royalty but not lost profits.
Sometimes an infringer sells infringing and non-infringing components or products together. This situation arises when the infringer sells its customers a single product that includes both infringing and non-infringing components, and when the infringer sells its customers separate but related products, some infringing and some not. In either case a court can apply the Entire Market Value Rule (“EMVR”) to allow the patent owner to recover lost profits or a reasonable royalty based on both infringing and non-infringing sales. When infringing and non-infringing components are embodied in the same product, such as a computer or automobile, the EMVR permits recovery of damages on the entire product if the infringing component is the basis for customer demand for the product. Where the demand is not based on the infringing component, the EMVR does not apply, but the entire value of the product can nevertheless be used as the basis for a reasonably apportioned royalty. When separate infringing and non-infringing products are at issue, the EMVR can permit a lost profits award based on lost sales of both products, provided they combine to serve a unitary function. Application of the EMVR can greatly enhance damage awards.
Disputes over the application of the EMVR were recently illustrated in Lucent Technologies, Inc. v. Gateway, Inc., __ F.3d __ (Fed. Cir., Sept. 11, 2009), where the Federal Circuit vacated a $358 million jury award against co-defendant Microsoft. Lucent’s patent claimed a method for entering data into fields of a software form, and Lucent showed that Microsoft’s Outlook and other popular Microsoft products used the patented technology to enter data in the form of dates. Lucent did not prove lost sales due to Microsoft’s infringement, and accordingly requested damages in the nature of a reasonable royalty. After hearing evidence the jury awarded Lucent an 8% royalty on the entire market value of the Outlook software, not just the proportionate value of the infringing data-entry feature, despite the fact that the data-entry feature was only one of “hundreds, if not thousands” of features of the software.
The Federal Circuit rejected the $358 million award on grounds that Lucent had not provided sufficient evidence for the jury to conclude that the infringing feature was “the basis – or even a substantial basis – of the consumer demand for Outlook,” and found that Lucent thus failed to establish that the EMVR should be applied. But the Federal Circuit noted and expressly rejected the position of some commentators that the EMVR should have little role in reasonable royalty law. According to the Court, “[the commentators’] general propositions ignore the realities of patent licensing and the flexibility needed in transferring intellectual property rights. … [T]he present dispute illustrates the importance the entire market value may have in reasonable royalty cases.” The Federal Circuit remanded the case for a recalculation of damages, suggesting that a much smaller royalty award should result.
Lucent underscores the “demand” requirement for application of the EMVR – the rule doesn’t apply if the patent owner cannot prove that the sales in question resulted from demand for the patented feature. But where demand is not in question, the Federal Circuit has upheld the use of the EMVR to include non-infringing products in the royalty base. In Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371 (Fed. Cir. 2001), the Federal Circuit held that the infringer’s expected bundling of infringing and non-infringing products, as evidenced by its pre-infringement business plan, was sufficient to warrant damages based on infringing and non-infringing sales. The Federal Circuit termed the non-infringing sales “convoyed sales” because they directly resulted from the infringing sales. The infringer’s business plan anticipated sales of $4 million in patented and unpatented products in the first year, with annual increases at a 2.68% rate, and on that basis the jury awarded a 10% across-the-board royalty on infringing and non-infringing products. Similarly, the Federal Circuit did not consider it unreasonable for the patent owner’s expert to rely on the convoyed sales to support his recommendation for a 10% royalty, saying the expert “did not provide for an unfair double recovery by factoring the bundling and convoying sales into the royalty rate.”
The EMVR has also been used to award lost profits based on infringers’ sales of separate, non-infringing products. In order to benefit from the EMVR in the lost profits context, a patent owner must generally show that (a) there was a demand for the infringing product and he would have made profits had it not been for the infringement, and (b) the non-infringing product, though separate in form, created a functional unit with the infringing product. On this basis the Federal Circuit has applied the EMVR and upheld lost profits awards based partly on non-infringing sales. See, for example, Golden Blount, Inc. v. Robert H. Peterson Co., 483 F.3d 1354 (Fed. Cir. 2006) (infringer sold infringing ember burners and non-infringing burner assemblies), Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367 (Fed Cir. 2004) (infringer sold infringing dispensers and non-infringing syrup used in the dispensers), and Kalman v. Berlyn Corp., 914 F.2d 1473 (Fed. Cir. 1990) (infringer sold infringing filtering devices and non-infringing filter screens used with the devices). Contra, American Seating Co. v. USSC Group, Inc., 514 F.3d 1262 (Fed. Cir. 2008) (EMVR inapplicable to infringer’s sales of non-infringing passenger seats where patent owner failed to show functional relationship between seats and infringing wheelchair restraint system, and where customers purchased products together for convenience only).
The Federal Circuit affirmed in Lucent that the infringing component or product must drive customer demand in order for the Entire Market Value Rule to apply. The rule nevertheless continues as a viable and important tool for patent owners seeking full compensation for patent infringement.