Federal Circuit Requiring More Rigorous Proof of Patent Damages
In a string of recent cases addressing reasonable royalty damages, the Federal Circuit has put patent litigators and district courts on notice that they “must carefully tie proof of damages to the claimed invention’s footprint in the marketplace.” ResQNet.com, Inc. v. Lansa, Inc., 2010 U.S. App. LEXIS 2453 at *19 (Fed. Cir. Feb. 5, 2010).
First, in Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), the Court sharply criticized evidence on damages and overturned an award of a lump sum royalty of $358 million.
Then, in ResQNet.com, decided last month, the Court overturned a district judge’s award of a 12.5% hypothetical royalty as speculative.
Just last week, Judge Rader, sitting in the district court for the Eastern District of Texas, applied Lucent and ResQNet and excluded the opinion of an expert witness for improperly relying on general royalty rates in the software industry rather than existing licenses to the patents-in-suit and improperly applying the “entire market value rule.” IP Innovation L.L.C. v. Red Hat, Inc., Case No. 2:07-cv-447 (E.D. Tex. March 2, 2010) (Rader, J.).
The one exception to this trend is the December, 2009 decision in i4i L.P. v. Microsoft Corp., 589 F.3d 1246 (Fed. Cir. 2009), in which the Court did not conduct the type of searching review of the evidence that characterizes Lucent and ResQNet. i4i, however, involved only the appeal of a motion to exclude an expert’s testimony because the defendant failed to make a pre-verdict motion for judgment as a matter of law (JMOL) challenging the sufficiency of the evidence of damages. A district court’s decision on a motion to exclude evidence is reviewed under a deferential abuse of discretion standard, and the Court expressly stated that it addressed only the reliability of the expert’s methodology, not his conclusions. The Court also stated that the result may have been different if the defendant had made a timely motion for JMOL and appeared to draw a distinction between the admissibility of an expert opinion and whether that opinion provided a sufficient basis for a damage award.
A full analysis of the opinions is beyond the scope of a blog post, but the cases contain several high-level lessons for patent litigators, including:
Other license agreements are comparable to the parties’ hypothetical license negotiation only if they have a logical connection to the claimed invention.
- A license agreement covering multiple patents to broad technologies is not comparable to a hypothetical negotiation involving one patent on a narrow method claim. (Lucent)
- Licenses to finished software products, source code and services such as training and maintenance with no discernible link to the claimed technology are suspect, especially when the rates for those licenses differ greatly from other licenses for the claimed technology. (ResQNet)
- Licenses offered by a party must have some “discernible link” to the claimed technology; otherwise “a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology in question.” (ResQNet)
- An expert cannot arbitrarily pick an average royalty rate for a broad industry without some evidence that such industry-wide data is in some way comparable to the patents-in-suit. (Red Hat)
Licenses that result from litigation may be considered as evidence of a reasonable royalty. (ResQNet)
- One district court recently cited ResQNet to hold that litigation-related licenses were admissible to show a reasonable royalty and that concerns about reliability of the licenses go to weight, not admissibility. DataTreasury Corp. v. Wells Fargo & Co., Civil Action No. 2:06-CV-72 (E.D. Tex. March 4, 2010) (Folsom, J.).
Parties must present particularized evidence and analysis of licenses they claim are comparable. (Lucent)
- Testimony about comparable licenses must go beyond superficial recitations of the royalty rates and amounts paid in the agreements.
- Parties should introduce evidence about the subject matter of the patents covered in comparable licenses, how valuable or essential those patent rights are and how the technology in those patents is similar or dissimilar to the claimed invention.
- When offering cross-licenses, licenses of multiple patents or other complex agreements, a party must explain the value of the patent rights being cross-licensed and how a license to multiple patents is probative of the hypothetical license at issue.
When an accused product includes features other than the claimed invention, parties should offer evidence of the importance of the claimed invention to the accused product.
- A glaring imbalance between infringing and non-infringing features must impact the analysis of how much profit can be attributed to the claimed invention. (Lucent)
- Conversely, evidence that the claimed invention is an important feature of an accused product will greatly bolster an expert’s reasonable royalty opinion. (i4i)
- Application of the entire market value rule requires an “accurate economic measurement” of the demand for the claimed invention and its contribution to the demand for the entire product asserted as the royalty base. (Red Hat)
Post-infringement evidence of usage of the claimed invention must be focused on the infringed claim and not include non-infringing features of the accused products.
- “The damages award ought to be correlated, in some respect, to the extent the infringing method is used by consumers.” (Lucent)
There are significant distinctions between lump sum and running royalty agreements. (Lucent)
- When arguing for a lump sum award, a party should offer evidence of the expected or estimated usage of an invention.
- While running royalty agreements may be relevant to a lump sum award, parties must offer some basis for comparison between a running royalty and a lump sum.
- Evidence of per-unit licenses should include an explanation of how a per unit rate corresponds to a percentage of the cost of the products covered under the license.
The plaintiff always bears the burden of proving a reasonable royalty.
- A court should not sustain a royalty award based on inapposite licenses simply because a defendant did not proffer a rebuttal expert. (ResQNet)
- A plaintiff cannot shift the burden to the defendant to produce sufficient evidence to determine the value of the claimed technology relative to other features of the accused products. (Red Hat).
