American Intellectual Property Law Association
Patent Damages
Ranga Sourirajan
IP Practice in Japan Committee Pre-Meeting
Washington, DC
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October 23, 2013
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Patent Damages
• 28 U.S.C. 284
Upon finding for the claimant the court shall award []
damages adequate to compensate for the infringement, but in
no event less than a reasonable royalty . . . together with
interest and costs . . . [T]he court may increase the damages
up to three times . . .
• Damages
– Actual Damages: Lost Profits, Established Royalty
– Reasonable Royalty
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Actual Damages
• Lost Profits
– Difference between “but for” profits and “actual” profits
– Patentee must prove: (1) demand for patented product (2)
absence of noninfringing alternatives (3) patentee’s ability to
make and sell additional units; and (4) reasonable estimation
of patentee’s profit rate
– E.g. price erosion (impact on sales, lower actual prices)
• Established Royalty
– Royalty payment sufficiently prevalent and accepted
– Royalty rate must be: (1) paid prior to infringement (2) paid by
sufficient number of persons (3) uniform (4) not set under
threat of suit or settlement (5) covers comparable set of rights
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orFirm
uses
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Reasonable Royalty
• Methodologies
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Georgia-Pacific Hypothetical Negotiation
Analytical Approach
25% Rule
Nash Bargaining
Consumer Surveys/Conjoint Surveys
Cost Savings/Incremental Benefits and Cost of Non-Infringing
Alternatives
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Georgia-Pacific Hypothetical Negotiation
• Hypothetical negotiation between patentee and infringer
over use of invention at the time of first infringement
• Patent valid and infringed
• Link royalty rate to proper royalty base
• Damages expert uses “comparable” agreement related to
subject matter of patent-in-suit
• “baseline” royalty = “comparable” agreement rate
• Expert evaluates “baseline” royalty considering GeorgiaPacific factors to compute “final” rate
• Reasonable Royalty = “final” rate * total sales of infringing
product
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Georgia-Pacific Hypothetical Negotiation
• Lucent v. Gateway (Fed. Cir. 2009)
– $561M = 8% royalty; MSFT argued $6.5M lump-sum
– Lucent relied on 8 prior license agreements
– Technology of license agreements not similar to one litigated;
no evidence patented method was basis for consumer
demand
– “nothing wrong with using market value of entire product” so
long as royalty rate is proportional of base represented by
patented feature
• ResQNet v. Lansa (Fed. Cir. 2010)
– Can’t rely on non-comparable licenses to inflate royalty
Firm Logo agreement pertinent to reasonable royalty
– Settlement
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Analytical Approach
• Infringer’s own internal profit projections for infringing item
at time of first infringement
• Royalty rate = projected net profit % - industry net profit
• Reasonable royalty = royalty rate * infringer’s actual sales
• TWM Mfg. Co. v. Dura Corp., 789 F.2d 895 (Fed. Cir. 1986)
– reasonable royalty damages rate of 30%
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25% Rule
• “baseline” royalty = 25% of profit margin of infringing
product
• Expert evaluates “baseline” royalty considering GeorgiaPacific factors to compute “final” rate
• Reasonable Royalty = “final” rate * total sales of infringing
product
• Uniloc kills 25% Rule
• WhitServe, LLC v. Computer Packages, Inc. (Fed. Cir.
2012)
– Vacates 16-19% rate using 25% as starting point
– Expert failed to explain how Georgia-Pacific factors affected 25%
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25% Rule
• Uniloc v. Microsoft (Fed. Cir. 2011)
– Expert used internal MSFT document which placed “product
keys” value $10-$10,000
– Used $10, 25% rule of thumb  “baseline” royalty of
$2.50/license
– $565M = $2.50 * 226M sales  2.9% royalty on $19B gross
revenue; Jury awarded $388M
– DCT: grants new trial because product activation feature not
basis of consumer demand for MS Office and Windows and
hence, improper use of $19B EMV
– Fed. Cir.: “25% rule of thumb” is fundamentally flawed; can’t
consider
EMV for minor patent improvements even by
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asserting low enough royalty rate
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Nash Bargaining
• Parties split incremental profits of licensing evenly 50/50 if
neither licensor or licensee can monetize without license
• Not a 50/50 split if infringer has noninfringing alternatives or
patent owner can produce patented technology
• Reasonable estimate of disagreement profits, relative
bargaining power of parties
• Oracle v. Google (N.D. Cal. 2011)
– Expert suggested Google pay $1.4B - $6.1B based on Nash
Bargaining
– Judge Alsup rejects report; facts not tied to solution, no
evidence to show warranted assumptions
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• Suffolk Techs. LLC v. AOL Inc. (E.D. Va. 2013)
– 50/50 split of profits not adequately tied to facts
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Consumer Surveys
• Survey respondents evaluate several product profiles with
different bundles of attributes
• Compute quantitative values of individual product features
from statistical analysis of respondents’ choices
• i4i Ltd. P’shp v. Microsoft Corp. (Fed. Cir. 2010)
– 2% of MS Word purchasers used XML format feature
• IP Innovation v. Red Hat (E.D. Tex. 2010)
– Online user forum statements not related to patented technology
• Apple v. Motorola (N.D. Ill. 2012)
– Judge Posner: “Dummy! You haven’t estimated the [feature’s]
value”
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• TV Interactive Data Corp. v. Sony Corp. (N.D. Cal. 2013)
– Conjoint survey to apportion value of patented feature
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Incremental Benefits, Non-Infringing Alternatives’ Costs
• Expert testifies regarding costs of non-infringing
alternatives and benefits of patented feature
• Brandeis Univ. v. Keebler Co. (N.D. Ill. 2013)
– Judge Posner: Plaintiff’s expert can testify re difficulty in
implementation of non-infringing alternative and benefits of patented
invention
– Precludes def. expert’s testimony: not an expert on consumer
demand
• TQP Dev. LLC v. Merrill Lynch & Co., Inc. (E.D. Tex. 2012)
– Judge Bryson: Denies Motion to Exclude damages expert on noninfringing alternatives
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Royalty Base
• Entire Market Value (EMV)
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Invention is substantial basis of consumer demand for product
Royalty base = entire value of accused product
Lucent Techs., Inc. v. Gateway, Inc. (Fed. Cir. 2009)
AVM Tech., LLC v. Intel Corp. (D. Del. 2013)
• Live testimony to determine if Intel processor is SSU or dynamic logic circuit
• Smallest Saleable Unit (SSU) Value
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Apportion value of smallest saleable patent-practicing component
Royalty base = cumulative value of smallest saleable components
LaserDynamics, Inc. v. Quanta Computer, Inc. (Fed. Cir. 2012)
Tomita Tech. USA, LLC v. Nintendo Co. (S.D.N.Y. 2013)
• Grants remittitur on $30M damages to $15M; expert used EMV for 3DS
• Firm
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is SSU but patented tech used only in 2 features of gaming system
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NPE Deterrence
• Attorney Fees
– SCOTUS Cert. grant: Octane Fitness v. Icon Health Fitness and
Highmark v. Allcare Health Mgmt.
– Taurus IP, LLC v. DaimlerChrysler Corp. (Fed. Cir. 2013)
• State Attorney Generals
– Nebraska AG bar on law firm representing NPE
– Vermont, Minnesota AG actions against MPHJ Tech. Investments
LLC based on state consumer protection laws
• Civil Racketeer Influenced and Corrupt Organizations Act (RICO) claim
– FindTheBest.com, Inc. v. Lumen View Tech. LLC (S.D.N.Y. 2013)
• Pending Congressional Bills
• White House Office of Science & Tech. Policy (OSTP)
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• FTC Study
on Patent Assertion Entity (PAE)
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Conclusion
• Pendulum swinging against NPE
• Damages jurisprudence—evolving
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Thanks for your attention! Questions?
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