Patent Infringement Damage Report

New Challenges for Patent Infringement Damages

Damages Report discusses some recent decisions that will introduce new challenges for patent infringement damages

In Uniloc USA, Inc. et al. v. Microsoft Corporation the Court of Appeals for the Federal Circuit killed the 25% Rule and unintended consequences are likely, see below.

In Paice LLC v. Toyota Motor Corp. an appeals court ruled that when an injunction is not grated, post-judgment royalty rate awards are not necessarily the same royalty rate that was determined for past infringement. A separate analysis for post-trial royalty rates is required, see page 3.

In Bard Peripheral Vascular, Inc. v. W. L. Gore Inc. it turns out that if you don’t optimize the implementation of your intellectual property you might just lose it. After winning its infringement case Bard was denied a permanent injunction because Gore made a better product using Bard’s patented. Even though Bard and Gore were competitors, Bard was denied an injunction, see page 4.

In ResQNet.com, Inc. v. Lansa, Inc., the only useful royalty rate evidence was ruled to involve licenses of the patent at issue that were negotiated as litigation settlements. Settlement agreements can know be relied on for royalty rate determination, see page 5.

The Entire Market Rule must still allow for application of an appropriate royalty rate to the total selling price of an infringing product. To require otherwise completely ignores the reality of licensing.

All US Patents Dropped in Value on January 4, 2011

The value of all US patents dropped on January 4, 2011. In a decision by the Court of Appeals for the Federal Circuit regarding Uniloc USA, Inc. et al. v. Microsoft Corporation the court rejected a long standing tool used in patent infringement damages calculations.

Disruption to the calculation of patent infringement damages is likely and infringement may actually be encouraged as it now becomes more difficult to establish infringement damages. The extent of the reduction is not yet known. However, the reduction in value is not going to be uniformly distributed. Patents owned by individual inventors, universities and research institutes will be hardest hit.

In Uniloc, the Court rejected a frequently used tool for determining damages for patent infringement called the “the 25% Rule of Thumb.” In Uniloc, Microsoft was found to infringe Uniloc’s patent covering a remote registration system that generated a remote licensee unique identification.

Expert testimony at trial, concerning patent damages, relied on the 25% Rule of Thumb to determine damages owed to Uniloc. Microsoft appealed and the Court rejected the use of the 25% Rule of Thumb. Not just for this particular case but for forever, even though the rule has been used in and out of court for decades as guidance for determining royalty rates. Not just for this particular case but for forever, even though the rule has been used in and out of court for decades as guidance for determining royalty rates.

Patent owners license the rights to use a patented invention often in exchange for royalties. Most often the royalty is based on a percentage rate (royalty rate) applied to the sales earned (royalty base) by using the patent. A starting point for negotiating royalty rates is to consider a split of the profits that are expected to be derived from using the patented invention.

The 25% Rule suggests that 25% of the profits earned from using the invention goes to the patent owner while the remaining 75% stay with the licensee. A profit split is generally based on the concept of relative contributions. Companies that are licensing the patented invention are thought to bring other assets (sometimes many) to the commercialization process. These can include manufacturing expertise, well established brand names and distribution networks. By retaining 75% of the profits, the licensing corporation is allowed to earn a return on its significant contribution. The remaining 25% provides compensation to the inventor.

By precluding reliance on the 25% Rule of Thumb, a likely unintended consequence of that ruling will be an increase in the frequency of unreasonable damages claims. The 25% Rule is often used as a starting point in a damages analysis or as a sanity check for a conclusion reached by other methods. Absent the guidance provided by the rule, damage claims may become unbridled. In addition the Federal Circuit decision will also likely increase the cost of litigation because parties will need to conduct additional damages discovery and analysis.

Blind application of the 25% Rule clearly can lead to errors. Many other factors must be considered and usually are thoroughly considered by most experts. When a licensed invention is central to the success of a product then the rule is a good starting point, such as when the patented invention is the active ingredient in a cancer therapy. But for example, if a design alternative can be inexpensively substituted without infringing the patent at issue an entirely different analysis is needed. Instances have existed where the 25% Rule has been improperly used and lead to extraordinary damage awards for incremental and minor improvements to a product. Apparently, the Court has become frustrated by these abuses of the 25% Rule and reacted.

Estimating a reasonable royalty rate at which to license technology, whether for infringement damages lawsuits or for real world license transactions can be accomplished by considering the rates at which similar transactions have occurred. But often, the uniqueness of a patented invention of interest does not allow for any comparisons. When a particular invention is considered keystone sometimes the 25% Rule is the primary and only indicator of a reasonable royalty rate. Unfortunately, while striking down the 25% Rule the Court did not offer any alternatives.

In general, for companies engaging in the market in which the patented invention is being used, other forms of damage calculations exist, such as lost profits. Even in these cases damages based on a royalty are needed for a portion of the damages that cannot qualify as lost profits. For inventors, universities and research institutes, their only source of compensation for the unauthorized use of their invention is to receive an award of the royalties.

By making the determination of a royalty rate more difficult, infringement may be encouraged and when it becomes more difficult and expensive to protect a property that property becomes less valuable. Patent values just dropped.

Post-verdict Royalty Rates

Paice LLC brought infringement action against Toyota Motor Corp., alleging infringement of its patents for a hybrid electric vehicle drive train.

Paice LLC was the vision of Dr. Alex Severinsky. During the oil crisis of 1979, Dr. Severinsky conceived of the idea for a hybrid gasoline/electric car that could help reduce America’s dependence on oil. In 1992 Paice filed a patent application covering the groundbreaking concepts for a hybrid vehicle. Paice was issued U.S. Patent No. 5,343,970 (the ‘970 patent) in 1994.

The ‘970 Patent is considered by many as a breakthrough in hybrid technology: Hybrid electric vehicles increase fuel economy and reduce harmful emissions by combining an electric motor with the vehicle’s internal combustion engine. The ‘970 patent describes a hybrid vehicle with a microprocessor that receives control inputs and uses that information to determine whether the internal combustion engine, the electric motor, or both should provide torque to the wheels. It also describes a system with a powerful electric motor that receives energy from a battery at high voltage and low current to increase dramatically the efficiency and performance of the system.

Toyota’s first commercial hybrid electric vehicle, the Prius I, was sold in Japan beginning in 1997 and in the United States beginning in 2000. In 2003, Toyota began marketing a newer-model, the Prius II. Other Toyota models accused of infringement by Paice included the Toyota Highlander and Lexus RX 400h.

Paice eventually sued Toyota for patent infringement. In the United States District Court for the Eastern District of Texas, Judge David Folsom, ultimately entered judgment based on a jury’s finding that one patent was infringed under doctrine of equivalents, and imposed an ongoing royalty that permitted manufacturing to continue practicing patented invention. The United State Court of Appeals for the Fifth Circuit, 504 F.3d 1293, affirmed as to infringement but reversed and remanded as to amount of the royalty for on-going use of the patented invention.

Since eBay, Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006), injunctive relief in patent cases has been available only if the equitable standards for granting an injunction have been met. This has meant that an injunction is not available for patentees that do not practice the invention. Consequently there is need for determination of a post-judgment royalty rate for a license.

Paice argued that the absence of an injunction would have an adverse effect on its ability to license the patented technology. The court rejected this argument and ruled that since Paice did not actually manufacture any goods, the court concluded that there was no threat that Paice would lose name recognition or market share without an injunction

After a jury verdict in Paice’s favor, Judge Folsom applied the same royalty rate for the post-judgment royalty that the jury had used for its damages award ($25 per hybrid vehicle). On appeal, the Federal Circuit reversed, holding that the district court committed error by imposing the same rate awarded by the jury, without any explanation. The Federal Circuit on remand stated “the court may take additional evidence necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.”

Simply using the jury award for past damages for ongoing royalties was not good enough. The Federal Court also suggested that the parties first be given an opportunity to negotiate for an ongoing royalty. If the parties cannot reach agreement for an ongoing royalty a separate hearing – or at least separate briefing – allows the court to consider the evidence unique to the ongoing royalty. Most courts have imposed an ongoing royalty if the parties fail to reach agreement, instead of permitting the patentee to file a new lawsuit.

The majority opinion in the Federal Circuit’s Paice decision did not establish a standard for determining the amount of the post-judgment royalty. Judge Rader’s concurrence with the Federal Cicuit’s Paicedecision, however, stated that “pre-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties’ legal relationship and other factors.”

It is unclear how the relationship between the parties is changed from a royalty rate perspective. During an infringement trial a patent damages expert is given the underlying assumption that the patents at issue are valid and infringed. As such, expert damages analysis already reflects that the accused is an infringer. After a trial, in which the patentee is successful, the assumption used at trial is unchanged and simply becomes a fact. However, other factors may have changed and deserve consideration. While the Federal Circuit has not provided any guidance on methods for determining a post-verdict royalty rate an obvious starting point is to reconsider the well-known fifteen hypothetical negotiation factors outlined in Georgia-Pacific Corp. v. United States Plywood Corporation.

Presumably, the hypothetical negotiation date for determining the post-verdict royalty rate is the date of the trial verdict. While all of the Georgia-Pacific factors should be reexamined relative to the new date, factor eight may have considerable importance. Factor eight states that consideration must be given to “The established profitability of the product made under the patent, its commercial success, and its current popularity” It is quite possible that going-forward profit expectations may be different from the actual past profits earned on which past damages have been determined. Post-verdict profit expectations could have a material impact on the post-verdict royalty rate.

Another factor addressed by the Georgia-Pacific factors involves exclusivity. A post-verdict license denies the patentee from ever being able to offer its patented invention to another party on an exclusive basis. Thus, the patentee is denied the presumably higher royalty rate associated with an exclusive license. Some form of compensation in some cases may be appropriate for this loss.

An appropriate ongoing royalty may be the same as the rate for past infringement, but a separate analysis is required to support the on-going rate.

Optimize Your Patented Technology or Lose It’s Exclusivity

It turns out that if you don’t optimize the implementation of your intellectual property you might just lose it. A recent decision in Arizona District Court regarding Bard Peripheral Vascular, Inc. v. W. L. Gore Inc. denied Bard a permanent injunction because Gore made a better product using Bard’s patented technology than Bard.

Bard’s vascular products cover a wide range of minimally invasive devices for the treatment of peripheral vascular disease and heart arrhythmias. These products include: percutaneous transluminal angioplasty (“PTA”) catheters, guide wires, introducers and accessories; peripheral vascular stents and stent grafts, vena cava filters and biopsy devices; electrophysiology products, including electrophysiology laboratory systems and diagnostic, therapeutic and temporary pacing electrode catheters; and fabrics, meshes and implantable vascular grafts.

W. L. Gore is a highly diversified company with operations in many diverse industries including medical products. Gore Medical provides vascular products such as Gore-Tex® Vascular Grafts, which have met the challenges of the most demanding vascular procedures for more than 30 years. Recognized for exceptional performance and quality, they have earned the endorsement of renowned surgeons worldwide.

Bard Peripheral Vascular sued Gore’s Medical Products Division for patent infringement. Bard argued that Gore sells two types of infringing products. The first group of products is those which Bard sells an alternative, nearly identical counterpart. These products are referred to as “Counterpart Products” where Bard and Gore directly compete in the marketplace. The Counterpart Products include Propaten grafts, Intering grafts, cardiovascular patches, and other variations of those grafts and patches. The second group of products is made up of items for which Bard does not currently offer an alternative in the marketplace and consequently Bard and Gore do not compete. These products are referred to as “Non-Counterpart Products.” The Non-Counterpart Products include Gore’s Viabhan stent-grafts, Excluder stent-grafts, Tag stent-grafts, Viatorr stent-grafts, Acuseal patches, as well as other products.

Bard asked the court to permanently enjoin Gore from making and selling the Counterpart Products, the Non-Counterpart Products, and from any further development of infringing products, including products for which it lacks or is presently seeking FDA approval. The court heard testimony from surgeons telling about the superiority of Gore’s implementation of Bard’s patented technology. As a result, the court decided not to enjoin Gore. Patient benefits were a driving force for not enjoining Gore.

Bard was awarded lost profits for the Counterpart Products made and sold by Gore and also received a royalty on sales of the Non-Counterpart Products. What now remains to be decided is how Gore will compensate Bard for future use of Bard’s no longer exclusive patent rights. The parties will likely reach some agreement on the future royalties Gore will pay Bard for Non-Counterpart Products. The difficult question will be how to compensation Bard for Gore’s future sales of Counterpart Products, where Bard will directly compete. Bard will lose future sales and future incremental profits. A typical royalty rate will not be sufficient to compensate Bard for future lost incremental profits on Counterpart Products. Apparently, a Plaintiff may win a patent infringement case but lose exclusive use of its own patented technology.

Litigation-based Licenses

As previously discussed the fifteen Georgia-Pacific factors are used as part of a hypothetical negotiation to determine the royalty that the parties would have agreed to prior to the onset of infringement. Factor 1, says the parties would have considered, “the royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty”.

The standard for establishing the existence of an established royalty is tough and, consequently, is seldom satisfied. To qualify as an “established royalty,” a royalty rate must meet the following standard:

(1) it must have been paid prior to the infringement at issue;

(2) it must have been “paid by a sufficient number of persons” as “to indicate the reasonableness of the rate”;

(3) it must have been uniform;

(4) the royalty rate must not have been set under the threat of a lawsuit or in settlement of a litigation; and

(5) it must apply to a comparable set of rights or uses as are at issue in the litigation under consideration.

A settlement agreement refers to a license for a patented invention where rights to use the patent are granted, usually during a patent infringement case as settlement of the case. However, all license agreements can be considered settlement agreements because the threat of litigation, if an agreement is not reached, is always lurking somewhere in the background. Settlement agreements can be limited to compensation for allegedly past infringement without granting any rights for future use of a patented invention. These agreements typically provide for a lump-sum payment to cure past infringement. Settlement agreements can also be entered into providing the licensee with future use of the patented invention and these agreements can include running royalty rates. When such licenses exist they can be a powerful indication of what the parties to the lawsuit might have agreed. However, in the past, settlement licenses for the patent being asserted have been excluded. This may have forever changed when ResQNet.com, Inc. sued Lansa, Inc. for infringement of United States Patent Nos. 5,530,961, 5,831,608, and 6,295,075.

1- Mobil Oil Corp. v. Amoco Chems. Corp., 915F.Supp. 1333, 1342 (D. Del. 1995).

2- Rude v. Westcott, 130 U.S. 152, 164–65 (1889); Mobil Oil, 915 F. Supp. at 1342.

ResQNet.com, Inc. develops and markets Graphical User Interface (GUI) connectivity products for Mainframe and AS/400 systems. The company focuses on extending the reach and functionality of host applications through Web-enablement, improved user interfaces, and integration of business information with the Internet, intranets and traditional Windows-based PCs.

Lansa, Inc. is a leading provider of application development, modernization and integration software. Lansa’s suite of cross-platform development tools lets organizations overcome the complexity inherent in creating and maintaining business applications. Lansa’s integrated tool set is also the technology foundation for a wide range of business solutions from Lansa and over 300 business partners.

In ResQNet.com, Inc. v. Lansa, Inc. a panel of the Federal Circuit seems to have opened the door on what constitutes acceptable royalty rate evidence when assessing damages for patent infringement. The panel’s majority said the district court erred by considering license agreements which re-bundled the technology covered by the patent because the agreements did not mention the patents themselves and included licenses for other materials. The Federal Circuit said the only competent evidence that the lower court had, to determine a reasonable royalty rate between the patent holder and infringer, were license agreements that had settled previous litigation related to the patents-in-suit. The result of this decision is that litigation-based licenses may be a new tool for determining patent infringement damages based on a reasonable royalty rate.

Certainly, settlement licenses will not always be fully comparable to the hypothetical negation being conducted for a particular litigation. Some may include the settlement of cross-claims brought by the other party to the settled case and the compensation terms may be a net amount, not fully reflective of the full value of a stand-alone patent. Some may provide only a lump-sum payment for past infringement leaving no clues about the royalty rate used for calculating the payment. However, there are instances where such licenses will be good proxies for setting a reasonable royalty rate and it looks like they might be to see the light of day at future trials.

Entire Market Rule

Many recent decisions have focused on the Entire Market Rule. There is general agreement that damages should be based on the economic advantage provided by the utility and advantage of a specific patented invention. This requires a financial analysis that considers the economic advantage of the sometimes many other intellectual properties contained in a product or service. Incremental and minor improvements, and their economic contribution, should be separated from the whole but once this is accomplished the damages attributed to the patented invention at issue should be reflected as a royalty rate for application to the total selling price of the entire product or service.

Licensors and licensees almost always desire that the royalty base be the total selling price of the product using the patented invention. For the licensee it makes accounting for royalty payments easier and does not require them to divulge details about manufacturing and selling costs, often considered to be proprietary information. For licensors, using the selling price of the product as the royalty base eliminates the potential for arguments about costs and profits associated with the internal accounting conducted by the licensee.

Using the net selling price of the licensed product is a universal practice and a proper royalty rate can accurately reflect the keystone or incremental improvement. Proper consideration of the Entire Market Rule should not require any manipulation of the traditional royalty base of total net sales. It should only require that the royalty rate capture the economic advantage specific to a patented invention, whether keystone or incremental.

By Russell L. Parr, CFA, ASA

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Archive for the ‘Patent Infringement Damages’ Category

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