Patent reform is near the top of the legislative agenda, with the Senate having passed its version of patent reform legislation and the House of Representative about to vote on its version. Over the past several years, one of the concerns raised as part of proposed patent reform legislation is that the methodologies and factors used to determine damages for patent infringement may result in what some perceive as increasingly high – and unwarranted – damages awards. Although patent damages provisions are not included in legislation currently under consideration, the courts have rendered several significant decisions that limit the evidence that can be considered in determining damages. Those decisions focus the reasonable royalty analysis more closely on the specific features of the infringing products and processes that are covered by a patent in an effort to reduce speculation by the jury. The courts have likewise tied the availability of injunctive relief to the specific facts present in a case, and focused the amount of a compulsory royalty that may be awarded if an injunction is denied on the specific facts present in a case. Although these decisions focus the inquiry more sharply, that does not mean that substantial damages will not be awarded in any particular case. Nor does it mean that injunctive relief will not be awarded where appropriate.
Tying Damages Awards More Closely To The Patented Invention
Rejection Of The Rule Of Thumb.
For years, patent owners commonly relied on a rule of thumb that a reasonable royalty analysis should consider that an appropriate royalty should be 25% of an infringer’s anticipated profit. The Federal Circuit’s 2011 decision in Uniloc v. Microsoft held that the use of that “rule” is a legally inadequate methodology, and granted a new trial on damages after a jury had awarded $388 million in damages. The Federal Circuit rejected use of that “rule” because it fails to account for the unique relationship between the patent and the accused product, and fails to account for the unique relationship between the parties. Thus, the Federal Circuit concluded that the 25% rule of thumb “is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.”
Limitation Of Licenses As Evidence Of A Reasonable Royalty.
The Federal Circuit has rendered several decisions that limit what types of licenses may be relied on in determining a reasonable royalty. The Federal Circuit’s decisions reject licenses that arise out of circumstances that are different from the hypothetical negotiation upon which a reasonable royalty is based. For example, in Lucent v Gateway, the Federal Circuit rejected eight licenses as proof of a reasonable royalty. Some of those licenses were “radically different” from the hypothetical agreement in terms of different patents and subject matter, while the subject matter of the others was unclear, providing no basis to find they were sufficiently comparable to the hypothetical agreement. Similarly, in ResQNet v. Lansa, the Federal Circuit rejected reliance on “unrelated” licenses that had no relationship with the claimed invention – they neither covered the patent-in-suit nor had any link to the claimed invention. Without accounting for the technological and economic differences between those licenses and the patent-in-suit, a royalty based on those licenses was improper as speculative. And, in Wordtech Systems v. Integrated Network Solutions, the Federal Circuit rejected reliance on 13 licenses that had previously been granted by the patent owner for some or all of the patents-in-suit. Wordtech was requesting lump sum royalty damages, as opposed to a running royalty rate. Only two of its 13 licenses provided lump sum payments, and there was no basis for comparison of those lump sum licenses with the infringing sales from which damages could be determined. Thus, the Federal Circuit concluded that the jury’s verdict was improper because it was based on speculation and guesswork.
Limitation Of The Entire Market Value Rule.
The Federal Circuit has clarified the circumstances under which a patent owner can rely on the entire market value rule. For patents that are directed to a single feature that may be included in a much larger system, patent owners often ask juries to calculate royalty damages by applying a reasonable royalty rate to the entire system. For example, in the Lucent Technologies v. Gateway case, Lucent accused the date-picker feature in Microsoft Outlook of infringing Lucent’s patent. The jury awarded $357 million in royalties based on the cost of the entire Outlook program, but the Federal Circuit rejected that award because the date-picker feature was a minor aspect of Outlook, and the portion of the profit attributable to the date-picker was small. Moreover, there was no evidence that anyone bought Outlook because of the date-picker feature. Because the patent owner failed to prove that the patented feature was the basis for consumer demand for Outlook, the entire market value rule did not apply, and the Federal Circuit sent the case back to the district court for a new trial on damages to determine what royalty the parties would have negotiated for the infringing date-picker feature. The Federal Circuit has further held that it is improper to place numbers reflecting total sales revenue for an infringer’s entire product before the jury, using the entire market value rule only as a “check” on the reasonableness of the royalty for the patented feature, because of the potential to prejudice the jury with such large numbers.
Tying Availability Of Injunctive Relieve
More Closely To The Facts Of The Case
Prior to the Supreme Court’s 2006 decision in eBay v. MercExchange, a successful patent owner was almost certain to obtain an injunction based on a general rule that injunctions issue in patent cases absent exceptional circumstances. The Supreme Court rejected that rule and held that the requirements for obtaining an injunction in a patent case are no different from the requirements in other types of cases, which focus on the analysis of case specific facts under the traditional four-factor framework for awarding injunctive relief. Thus, the decision whether or not to grant injunctive relief depends on the facts and circumstances present in a particular case – not on a general rule.
Since the eBay decision, the ability of prevailing patent owners to obtain an injunction has become less certain. However, just because an injunction is not awarded in a case does not mean that an adjudicated infringer can continue to use the patented invention with impunity. Courts may award an ongoing royalty for patent infringement in lieu of an injunction. The compulsory royalty rate that applies to ongoing infringement is not necessarily the same as the reasonable royalty rate determined at trial because it must account for additional economic factors arising out of the imposition of an ongoing royalty. Indeed, the compulsory royalty may be substantially higher. For example, in the Paice v. Toyota case, the jury awarded a reasonable royalty of $25 per vehicle. The trial court concluded that an injunction should not issue and, after looking at changed factual and legal circumstances, concluded that, because Toyota was an adjudged infringer that chose to continue infringing Paice’s patent, the appropriate royalty was $98 per vehicle – nearly four times the reasonable royalty rate determined by the jury.
As always, injunctions remain far from toothless. An infringer may be forced to remove its product from the market and replace it with a redesigned product. The failure to comply with the terms of an injunction can result in dramatic sanctions, even if the infringer spends substantial effort attempting to redesign its product. For example, the Federal Circuit recently affirmed a sanction of nearly $90 million against EchoStar for violating the terms of an injunction awarded to TiVo by EchoStar’s redesigned product. It made no difference that EchoStar employed 15 engineers who spent 8000 hours over the course of a year redesigning EchoStar’s software.
Conclusion
In the absence of Congressional action, the courts have addressed issues relating the concern that patent infringement remedies may sometimes be too drastic by focusing such remedies on the specific facts present in cases in an effort to reduce speculation in awarding remedies.