In a recent decision, Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d 1332 (Fed. Cir. 2018), the Court of Appeals for the Federal Circuit appears to have created a distinction in regard to expert testimony that, if it holds in future cases, could benefit patent owners. Specifically, it could be of benefit to those patent owners lucky enough to be litigating, or savvy enough to have drafted, patent claims that are written so as to cover an entire commercial product to which an incremental improvement has been made to a component, rather than written to cover merely that improved component.
Exmark addressed patent damages in the form of a “reasonable royalty.” In those (frequent) instances in which a patent owner cannot prove that infringement caused it to lose profits — such as where the patent owner is a “non-practicing entity” (NPE) that owns a patent but does not sell a patented product — the patent owner is still entitled by statute to no “less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. Section 284. The most common analytical framework for determining a reasonable royalty is a “hypothetical negotiation” that might have taken place if both parties had both been willing to license the technology at the time infringement began. Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324-25 (Fed. Cir. 2009). As evidence of a reasonable royalty, the parties usually introduce the testimony of experts with an accounting or economic background, who testify as to the license terms that, in their opinions, would have resulted from the hypothetical negotiation.
The damages experts commonly present competing views of the proper royalty rate to be applied to infringing sales. Some cases, though, like Exmark, involve the question of to what sales revenue should the rate be applied, i.e., what is the proper royalty base.
That question becomes acute when the patent covers only a component of the infringer’s multi-component, commercial product. In that situation, can the patent owner recover a royalty that is a percentage of sales of the entire multi-component product? The answer is usually no; “the entire market value rule” allows damages for infringement of a patented component to be awarded as a percentage of revenues of the entire product only “[i]f it can be shown that the patented feature drives the demand for [that] entire multi-component product.” LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012). In Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), for instance, the court held that the plaintiff was not entitled to damages based on a percentage of Microsoft’s entire sales of Office and Windows products; the infringement was of a patent that covered a feature, Product Activation, used to register new licensed users of Microsoft’s Word software programs, and Plaintiff had conceded that no customer would buy Office or Windows because of the relatively minor Product Activation feature. Id. at 1318-19.
The Federal Circuit has also rejected the argument that an exception can be made for a reasonable royalty calculated on the basis of sales of the entire product if one sets the royalty rate low enough. “The Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate.” Uniloc, 632 F.3d at 1320. That holding seems illogical at first glance, in that, for example, i) a five percent royalty on sales of a patented component whose sales equal 10% of sales of the entire product and ii) a half percent royalty on sales of the entire product are mathematically equal. Continuing the above example, if sales of the entire product were $200 million, then a royalty calculated the first way (on the component) results in $1 million in damages ($20,000,000 x 0.05 = $1,000,000), and so does a royalty calculated the second way (on the entire product) ($200,000,000 x 0.005 = $1,000,000).
The Federal Circuit, though, perceives a significant difference between the two methods of calculating damages, due to the prejudicial effect of presenting the overall sales figure to the jury where only a patented component is at issue. In Uniloc, the court ordered a new trial on damages because of references to Microsoft’s $19 billion in overall revenue from the Microsoft Office product. “The disclosure that a company has made . . . 19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.” Uniloc, 632 F.3d at 1320. The court specifically mentioned as concerns: i) Plaintiff’s cross-examination of Microsoft’s expert, which compared the paltriness of the expert’s proposed royalty to the $19 billion figure, and ii) Plaintiff’s expert using “a prepared pie chart” showing Plaintiff’s proposed royalty damages as a tiny “sliver” of the $19 billion pie. Id. at 1318, 1320-21.
Uniloc left open the question of to what extent, if any, its rule applies when the patent claim, despite the invention being directed to an improved component, is written to cover the infringing product as a whole, rather written to cover a single component of a multi-component product. Exmark involved the former type of patent: the patent claimed “[a] multiblade lawn mower,” although the innovation clearly involved only “improved flow control baffles” on the mower. 879 F.3d at 1338. “[T]he patent makes clear that the patented improvement relates to the mower’s flow control baffle,” with the remaining elements of the patent claim defining the overall product by merely “recit[ing] conventional features of a lawn mower,” such as “a mower deck, a side discharge opening, and a power [source].” Id. at 1348.
The court agreed with Defendant in general that value must be “apportioned” in the damages experts’ testimony between the improved feature and the conventional features of the product. “[T]he patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product,” so that the owner “is compensated [only] for the patented improvement . . . rather than the entire mower.” Id.
The Court, however, rejected Defendant’s argument that Plaintiff’s expert should have been required to separate the value of the improved baffle from the overall value of the product by using as a royalty base the value of the improved baffle feature, rather than the sales of the entire lawn mower product. Id. The Court held that it was permissible for Plaintiff’s expert to calculate reasonable royalty damages as a percentage of overall sales of the lawn mower, noting that “[u]sing the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claim is, in fact, directed to the lawn mower as a whole. . . . There is no unpatented or non-infringing feature of the product.” Id. Any apportionment of the value of the improvement should be done by setting the royalty rate, rather than by adjusting the royalty base. Id.
In other words, in the context of a patent directed to an improved feature (“improved flow control baffles”) yet claiming in the claims an entire product (“[a] multi-blade lawn mower” comprising various features, all but one of them conventional), it may be acceptable to let the jury know the overall sales of the entire product, and to compare the Defendant’s proposed royalty to those overall sales, and to prepare a pie chart showing Plaintiff’s claimed damages as a sliver of the overall revenue pie — all of which were the tactics found to be the basis for reversible error in Uniloc. This apparently different treatment arises from what could merely be a choice in drafting the claims; as the Defendant pointed out in Exmark, letting the patent owner use the entire value of the infringing mowers as the royalty base would be like allowing “a patentee claiming an improved windshield wiper [to] use the revenue from the entire car as the royalty base simply by drafting a claim . . . as ‘A car having improved windshield wiper blades'” that comprises the improved wiper blades and conventional features of an automobile. Defendant’s Brief, p. 61 (Case 16-2197, Doc. No. 15).
The caselaw in this area appears to be still evolving, so it is unclear whether Exmark was intended to announce a hard-and-fast rule. Also, it should be noted that, in Exmark, the court overturned the damages verdict on the basis that Plaintiff’s expert failed to justify her proposed royalty rate with sufficient evidence, which was not excused by “using an allegedly low royalty rate.” 879 F.3d at 1351. Ultimately, the court may move in the direction of a rule requiring “apportionment” between the value contributed by the invention and the overall sales, but leaving the specific nature of the apportionment to be determined on a case-by-case basis. Exmark nevertheless indicates that that determination could be influenced by how the patent claims at issue were drafted.