Entire Market Value Rule–R.I.P.?
In an opinion that addresses the proper framework for evaluating reasonable royalty damages in the patent infringement context, the U.S. Court of Appeals for the Federal Circuit overturned a jury award of an $8.5 million lump sum and remanded the case for a new trial on damages. LaserDynamics v. Quanta Computer, Case No. 11-1440 (Fed. Cir., Aug. 30, 2012) (Reyna, J.).
LaserDynamics sued Quanta Computer, Inc. (QCI) for patent infringement, alleging that QCI actively induced infringement by selling laptop computers containing LaserDynamics’ patented optical disc drive technology. In the first trial, LaserDynamics used the entire market value rule to seek damages based on QCI’s revenues from the laptop computers, although its patented technology was directed to only one component, the optical disc drives. The jury awarded LaserDynamics a $52 million verdict, but the district court granted QCI’s motion for new trial, finding that LaserDynamics’ damages case improperly relied on the entire market value rule. At the second trial, LaserDynamics’ damages case relied heavily on its 2006 litigation settlement agreement with BenQ, which included a lump sum license for $6 million and was based on an August 2006 date for the hypothetical negotiation. This time, the jury awarded $8.5 million in damages. Both sides appealed.
On appeal, the Federal Circuit addressed numerous damages-related issues, including use of the entire market value rule, the date of the hypothetical negotiation under a Georgia-Pacific analysis and use of litigation settlement agreements as evidence to support a reasonable royalty.
The Entire Market Value Rule
The Federal Circuit reiterated that the entire market value rule is a narrow exception to the general damages rules. The threshold requirement for a plaintiff seeking to apply the entire market value rule is substantial—in cases involving products with multiple components, “patentees may not calculate damages based on the sales of the entire product, as opposed to the smallest salable patentee-practicing unit, without showing the demand for the entire product is attributable to the patented feature.”
In this case, the Federal Circuit concluded that LaserDynamics’ argument was not sufficient to justify use of the entire market value rule—“proof that consumers would not want a laptop without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers.” Instead, LaserDynamics’ burden was to show that “the presence of [optical disc drive] functionality is what motivates consumers to buy a laptop computer in the first place.”
The Hypothetical Negotiation Date
The Georgia-Pacific royalty damages calculation is based on what two willing parties would agree to pay for a license under a hypothetical negotiation generally set on “the date that the infringement began.” The district court reasoned that August 2006, the date of filing of the complaint and notice of infringement to QCI, was the proper hypothetical negotiation date—when QCI first met all the elements of inducement infringement.
The Federal Circuit, explaining that in the active inducement infringement context, the “hypothetical negotiation is deemed to take place on the date of the first direct infringement traceable to [the inducing party’s] first instance of inducement conduct” (emphasis added), reversed that ruling. Thus, the Court explained, the correct hypothetical negotiation date was 2003, given that QCI’s first act of inducing conduct (resulting in direct infringement) occurred that year, when it began selling the accused computers in the United States.
Litigation Settlement Agreements and Evidentiary Proof Regarding a Reasonable Royalty
The Federal Circuit also addressed the use of litigation settlement agreements as evidence for establishing a reasonable royalty, noting that the “propriety of using prior settlement agreements to prove the amount of a reasonable royalty is questionable.” The coercive environment of a patent litigation settlement is unsuitable to a Georgia-Pacific analysis that is premised on assuming a voluntary agreement between willing parties.
The Federal Circuit determined that a 2006 litigation settlement agreement with BenQ could not be relied upon by LaserDynamics. This agreement was executed shortly before a trial at which BenQ faced several strategic disadvantages resulting from court sanctions. Further, the BenQ settlement was for a lump sum payment of $6 million, six times larger than the 28 additional licenses in evidence. As the court explained, “[A]ctual licenses to the patents-in-suit are probative not only for the proper amount of a reasonable royalty, but also for the proper form of the royalty structure.” Therefore, in this case it was improper for LaserDynamics’ expert to ignore the amount and form of the royalties in the 28 lump sum “actual licenses.”