By Samuel L. Walling, William H. Manning, Jacob S. Zimmerman, Tony G. Beasley, and Aaron R. Fahrenkrog, Robins, Kaplan, Miller & Ciresi, Minneapolis.

I. Introduction.

The past two years have seen significant evolution in patent damages law. A line of cases beginning with Cornell University v. Hewlett-Packard Co., No. 5:01-cv-01974 (N.D.N.Y. March 30, 2009), and continuing through (most recently) Uniloc USA Inc. v. Microsoft Corp., 632 F.3d 1292, 98 USPQ2d 1203 (Fed. Cir. 2011) (81 PTCJ 275, 1/7/11), has heightened the scrutiny with which courts approach reasonable royalty damages as calculated by the appropriate royalty base (entire market value rule) and royalty rate (comparable licenses, apportionment, or 25 percent rule). The conventional wisdom is that the progression of case law has inured almost exclusively to the benefit of accused infringers, by making it more difficult for patent holders to obtain large damages verdicts. But these cases present opportunities for patent holders as well, by providing patent holders with a framework for constructing a more persuasive damages case.

Thus, the astute litigator can use the current state of damages law as both a shield against unreasonably high damages awards, and as a sword that can drive high-value patent damages recoveries.

II. Summary of Evolution in Patent Damages Law.

The most noticeable progression in patent damages law began at the district court level, where Judge Randall R. Rader, now chief judge of the U.S. Court of Appeals for the Federal Circuit, was sitting by designation. In this role, Rader was able to directly exercise the gatekeeping function that he has since urged district court judges to undertake more rigorously.

The Federal Circuit has amplified this message in a series of landmark decisions scrutinizing the sufficiency of damages evidence. Collectively, these decisions have reframed the patent damages analysis.

Cornell: Entire Market Value Rule

Sitting with the U.S. District Court for the Northern District of New York in March 2009, Rader granted judgment as a matter of law in Cornell v. Hewlett-Packard that the reasonable royalty damages awarded by the jury were incorrect. The jury had wrongly premised its award on a royalty base that consisted of the entire market value of defendant Hewlett-Packard’s “CPU bricks.” The accused feature, however, was contained entirely within the CPU which was itself within those bricks.

Under the entire market value rule, Rader held, a patentee can include the entire price of a product containing an infringing component in the royalty base only if that component was the basis for customer demand. Otherwise, the royalty base must be limited to the “smallest saleable unit.”

Lucent and ResQNet: Comparable Licenses

In September 2009, the Federal Circuit issued its watershed decision in Lucent Inc. v. Gateway Inc., 580 F.3d 1301, 92 USPQ2d 1555 (Fed. Cir. 2009) (78 PTCJ 583, 9/18/09), striking down a jury’s damages award of nearly $360 million and in doing so addressing several aspects of reasonable royalty damages.

The court of appeals focused most rigorously on the patentee’s reliance on four license agreements to support its royalty rate of eight percent for infringement of a patent that read on the “date-picker” function in Microsoft Outlook. These licenses, however, were “radically different” from the hypothetical license between Lucent and Gateway, in terms of both economic circumstances and technological subject matter.

The court criticized Lucent’s characterization of the licenses as covering “PC-related patents,” “as if personal computer kinship imparts enough comparability to support the damages award,” and held that it was the patentee’s burden to show that license agreements are “sufficiently comparable” to the circumstances of the case.

The Lucent court criticized the lack of evidence regarding several other Georgia-Pacific factors, including Factor No. 10, related to the benefits of the invention, Factor No. 11, related to the extent of use of the invention by the accused infringer, and Factor No. 13, related to the portion of profit that should be attributed to the invention as opposed to contributions made by the accused infringer.

The court’s remarks with respect to Factor No. 11 were particularly scathing: “[W]e observe that the evidence of record is conspicuously devoid of any data about how often consumers use the patented date-picker invention.”

The Federal Circuit levied similar criticisms in its February 2010 decision in ResQNet.com Inc. v. Lansa Inc., 594 F.3d 860, 93 USPQ2d 1553 (Fed. Cir. 2010) (79 PTCJ 422, 2/12/10), vacating a damages award of over $500 million in reasonable royalties. As it did in Lucent, the court faulted the patentee’s damages expert for using “licenses with no relationship to the claimed invention” to establish a baseline royalty rate of 12.5 percent.

IP Innovation: Exercise of Gatekeeping Function Under Daubert

Sitting by designation in the Eastern District of Texas in March 2010, Rader issued a decision in IP Innovation LLC v. Red Hat Inc., 705 F. Supp. 2d 687 (E.D. Tex, 2010), excluding the testimony of the patentee’s damages expert for failure to adhere to Daubert standards. In exercising his gatekeeping function, Rader criticized the patentee’s damages methodology on two fronts: (1) failure to establish that the patented feature (a workspace switching feature) was the basis for consumer demand for the accused products (copies of Linux, a computer operating system); and (2) failure to establish that relied-upon licenses were comparable in circumstances and technology.

As a result, Rader held that the damages expert’s report “improperly inflate[d] both the royalty base and the royalty rate by relying on irrelevant or unreliable evidence and by failing to account for the economic realities of this claimed component as part of a larger system.”

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