Federal Circuit Refines Patent Damages Analysis as to Apportionment and Standard-Essential Patents
On December 3, 2015, the Federal Circuit vacated a $16 million damages award and remanded for a new determination of a reasonable royalty, agreeing with the district court's apportionment analysis but finding legal error with respect to the court's failure to account for the value due to the patent being essential to a standard. See Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., No. 2015-1066 (Fed. Cir. Dec. 3, 2015). The decision reviewed the findings of fact and conclusions of law of the district court following a four-day bench trial on damages after the parties stipulated to infringement and validity. The Federal Circuit found that: (i) a reasonable royalty analysis on a patent covering a component in a multi-component product need not always begin with the smallest salable patent-practicing unit; and (ii) the royalty analysis for a patent essential to a standard must take into account the value flowing from the adoption of the standard itself.
First, the Federal Circuit reiterated that reasonable royalty awards for multi-component products must be based on apportionment principles. Apportionment requires that damages awarded for patent infringement reflect the value attributed to the patented features and exclude any damages attributable to unpatented features. In other words, apportionment is the incremental value the patented invention adds to the end product. The decision provided guidance regarding the justification for and importance of apportionment to the proof of damages. It noted that apportionment, which dates back to the United States Supreme Court's decision in Garretson v. Clark, 111 U.S. 120 (1884), has even greater importance today, given "the great financial incentive parties have to exploit the inherent imprecision in patent valuation." In patent suits involving multi-component products, apportionment requires a patentee to separate the damages attributable to the patented features in the accused product. Generally, this means that royalties must be based on the "smallest salable patent-practicing unit" rather than on the entire product, unless the patented invention drives the entire demand for the end product, in which case the patentee may attempt to rely on the entire market value.
Here, the Federal Circuit held that the district court did not err in using a damages model based on the parties' pre-suit informal negotiations relating to a patent essential to the 802.11 WiFi standard. The parties' negotiations focused on a royalty rate applied to the end product rather than the smallest salable patent-practicing unit. The Federal Circuit explained that "there may be more than one reliable method for estimating a reasonable royalty" and "this adaptability is necessary because different cases present different facts." The court found no error with the district court's damages analysis based on the parties' licensing negotiations because such negotiations already built in apportionment principles. "Put differently, the parties negotiated over the value of the asserted patent, 'and no more.'" The court rejected the argument that damages models for multi-component products always must begin with the smallest salable patent-practicing unit, noting that such an approach would be "untenable" because it conflicts with established jurisprudence permitting royalty rate determinations based on, among other things, comparable licenses.
Second, the court made it clear that a reasonable royalty award for standard-essential patents ("SEPs") "must not include any value flowing to the patent from the standard's adoption." The court explained that SEPs have unique apportionment considerations that must take into account the value of the patented invention alone and exclude any value that "artificially accrues to the patent due to the standard's adoption." Indeed, the court held that such analysis applies to all SEPs—even those not encumbered with an obligation to license based on reasonable and nondiscriminatory terms. The court explained that "damages awards for SEPs must be premised on methodologies that attempt to capture the asserted patent's value resulting not from the value added by the standard's widespread adoption, but only from the technology's superiority." Because the district court did not account for standardization in evaluating the Georgia-Pacific factors, the Federal Circuit remanded the case for a new determination of a reasonable royalty.
This decision will likely have broad implications for cases involving multi-component products and standard-essential patents. But perhaps most importantly, this decision emphasizes the Federal Circuit's continued insistence that damages be closely tied to the facts of the case and limited to the patented technology.
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