In a recent decision vacating a jury's US$358 million award for patent infringement, the Court of Appeals for the Federal Circuit sent a message to district courts—and to litigants—that it will no longer tolerate awards based on insufficient, irrelevant or unexplained evidence. The court laid blame for the erroneous award at the feet of both the district court, for failing to "scrutinize the evidence carefully," and the parties, observing that the "damages evidence of record was neither very powerful, nor presented very well by either party." The decision, which arguably requires more of an evidentiary showing from patent plaintiffs, follows recent, well-publicized discussions in Congress concerning patent law reform, particularly in the area of damages.

In Lucent Tech., Inc. v. Gateway, Inc., --- F.3d ---, Nos. 2008-1485, 2008-1487, 2008-1495, 2009 WL 2902044 (Fed. Cir. Sept. 11, 2009), Lucent sued Microsoft for infringement of a patent for a method of entering information on a computer screen without the use of a keyboard. Lucent alleged that the patent was infringed by Microsoft's "date-picker" tool—a graphical calendar that allows users to select dates, rather than enter them by keyboard—available in its Outlook application and other products. Microsoft argued that the patent was invalid for anticipation or obviousness and that, in any case, its date-picker tool did not infringe. Finding the patent valid and infringed, the jury awarded almost US$358 million in damages, amounting to roughly 8 percent of the value of 110 million units of software sold. Following trial, Microsoft moved to set aside the findings of invalidity and infringement, as well as the damages award. When its motions were denied by the District Court for the Southern District of California, Microsoft appealed to the Federal Circuit.

Applicable law requires that the successful patent owner be awarded damages adequate to compensate for the infringement, but in no event less than a reasonable royalty. 35 U.S.C. § 284. In Lucent, the plaintiff advanced only a reasonable royalty theory. In analyzing the jury's award of a lump sum (as opposed to a "running" or "per-unit") royalty of almost US$358 million (now swollen to over US$511 million with interest), the Federal Circuit applied the well-established framework from Georgia-Pacific Corp. v. US Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

Georgia-Pacific provides a set of 15 factors that help determine a reasonable royalty that willing negotiators would have agreed to at the time of first infringement. Focusing on Georgia-Pacific factor two, "the rates paid by the licensee for the use of other patents comparable to the patent in suit," the court admonished Lucent for the "shortcomings" in its evidence of license agreements offered in support of the award. Of the eight license agreements put into evidence, only four were for lump sum royalties. Of those four, insufficient evidence was presented to allow the court to deduce the subject matter of the agreements, or to answer important questions, such as how an agreement covering a large portfolio of patents could shed light on the value of a license agreement for a single patent. The court was equally critical of the four running royalty license agreements offered by Lucent in support of the award. The court noted that while running royalty agreements can, as a matter of law, be used to support awards for lump sum royalties, because of certain fundamental differences between running and lump sum royalty agreements and the negotiation of such agreements, litigants wishing to do so must explain how a running royalty agreement informs the calculation of a lump sum damages award. This requirement will likely apply to any future damages argument that seeks to rely on an allegedly comparable license agreement with an economic structure that differs from the structure of the proposed award. In particular, a litigant must explain: (a) the types of products covered by the agreement, (b) how valuable or essential the licensed patent rights are and (c) the relationship between the patented technology and the product sold in the agreement as compared to the product/service at issue in the litigation. Criticizing Lucent for the "evidentiary lacunae" created by failing to explain the relevance of the four running royalty agreements it offered into evidence, the Court of Appeals found that Georgia-Pacific factor two weighed strongly against upholding the jury's award.

Weighing other Georgia-Pacific factors, and focusing on its conclusion that the infringing date-picker was one "tiny feature" among "hundreds, if not thousands" of other features of an "enormously complex" software program, the Court of Appeals found it "inconceivable" to conclude that a substantial amount of the value of Outlook was a result of the date-picker.

The Court of Appeals also addressed the viability and applicability of the so-called "entire market value" rule, which states that, where a patented feature is the sole reason that consumers buy a product, the royalty can be based on the value of the entire product rather than on merely the value of the feature. Again citing a lack of evidence that the patented method was the basis of consumer demand for Outlook, the court ultimately reached the "unmistakable conclusion" that the date-picker was not the reason consumers purchased Outlook, and, therefore, that the entire market value rule was inapplicable. The court did, however, explain that there is nothing "inherently wrong" with using the value of the entire product as a base for determining a reasonable royalty, so long as an appropriately tailored royalty rate is used. Lucent's expert failed to properly construct his proposed royalty rate in light of the royalty base he sought to apply it to.

Patent litigants would be wise to heed the lessons of Lucent. Evidence offered during the damages portion of a trial will be scrutinized, so due time must be given to gathering that evidence and preparing its presentation for trial. Litigants who neglect their damages case to focus solely on liability should not be surprised by unfavorable awards or a failure to sustain a damages claim. In general, regardless of the applicability of the entire market value rule, parties will need to address the relative value of the patented technology to the product or service accused of infringement. This apportionment must be reasonable and supported by the evidence. In addition, for purposes of a Georgia-Pacific analysis, only licenses for patents that are reasonably similar in terms of content and value to the patent at issue may be accepted as "substantial evidence" capable of supporting a reasonable royalty damages award. Parties will no longer be able to bring allegedly comparable agreements under analysis without first making these initial evidentiary showings.

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