In LaserDynamics v. Quanta Computer, the U.S. Court of Appeals for the Federal Circuit overturned an $8.5 million lump sum jury award and remanded the case for a new trial on damages. The Federal Circuit’s decision provides guidance regarding the correct framework for evaluating reasonable royalty damages in cases of patent infringement.
In an opinion that addresses the proper legal framework for evaluating reasonable royalty damages in the patent infringement context, the U.S. Court of Appeals for the Federal Circuit overturned a jury award of an $8.5 million lump sum and remanded the case for a new trial on damages. LaserDynamics v. Quanta Computer, Case No. 11-1440 (Fed. Cir. Aug. 30, 2012) (Reyna, Judge)
A significant element of the Federal Circuit’s opinion is its treatment of the “entire market value” rule, under which a patentee may be awarded damages as a percentage of revenues or profits from the “entire product,” even when the patented technology relates to a feature within that product. The LaserDynamics opinion reiterates that the entire market value rule is a narrow exception, not the general rule as to the royalty base for calculating an award of damages. The decision also provides guidance regarding the correct framework for setting the hypothetical date of negotiation for the Georgia-Pacific reasonable royalty analysis. Finally, the opinion limits the use of litigation settlement agreements as proof of a reasonable royalty.
LaserDynamics sued Quanta Computer, Inc., (QCI) for patent infringement, alleging that QCI actively induced infringement by assembling and selling laptop computers that contained LaserDynamics’ patented optical disc drive technology. In the damages portion of the first trial of this case, LaserDynamics applied the entire market value rule to use revenues from the sale of entire laptop computers as the base for its damages calculations, although the patented technology was directed to optical disc drives in the computers. After the jury found that QCI was liable for infringement and awarded LaserDynamics a $52 million dollar verdict, the district court granted QCI’s motion for new trial, finding that LaserDynamics improperly used the entire market value rule. The district court reasoned that LaserDynamics failed to sufficiently demonstrate that its patented technology drove consumer demand for laptop computers. At the second trial, LaserDynamics’ damages case relied heavily on its 2006 litigation settlement agreement with BenQ, which included a lump sum license for $6 million, and was based on an August 2006 date for the hypothetical date of negotiation. This time, the jury awarded $8.5 million in damages using a 2 percent running royalty. Both sides appealed.
Although it ultimately remanded the case for a new trial on damages, the Federal Circuit addressed numerous damages-related issues, including proper use of the entire market value rule, determination of the date of the hypothetical negotiation under a Georgia-Pacific analysis, and the use of litigation settlement agreements as evidence to support a reasonable royalty.
The Entire Market Value Rule
The Federal Circuit reiterated that the entire market value rule is a narrow exception, and that the general rule remains that royalties are not based on the value of the entire product, but are instead based on the “smallest salable patent-practicing unit.” The threshold requirement for seeking to apply the entire market value rule is substantial—in cases involving products with multiple components, “patentees may not calculate damages based on the sales of the entire product, as opposed to the smallest salable patentee-practicing unit, without showing the demand for the entire product is attributable to the patented feature.” The Federal Circuit explained that royalty damages must be reasonable in light of the technology at issue, and that it falls to the plaintiff to sufficiently demonstrate that it is entitled to the entire market value of a multi-component product. A royalty rate cannot be based on the entire market value for a product unless the patented features constitute the basis for consumer demand.
The Federal Circuit went on to explain why LaserDynamics was not entitled to use the entire market value rule in this instance. LaserDynamics had argued that a laptop was not a commercially viable product without an optical disc drive, but the Federal Circuit concluded that argument was not sufficient to justify use of the entire market value rule—“proof that consumers would not want a laptop without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers.” Instead, LaserDynamics’ burden was to show that “the presence of [optical disc drive] functionality is what motivates consumers to buy a laptop computer in the first place.”
The Hypothetical Negotiation Date
The Georgia-Pacific royalty damages calculation is based on what two willing parties would agree to pay for a license under a hypothetical negotiation generally set on “the date that the infringement began.” In LaserDynamics, the Federal Circuit addressed the framework for establishing the correct date of this hypothetical negotiation when claims of active inducement infringement are involved. In this context, the “hypothetical negotiation is deemed to take place on the date of the first direct infringement traceable to [the inducing party’s] first instance of inducement conduct” (emphasis added).
The district court reasoned that August 2006, the date of filing of the complaint and the date of notice of infringement to QCI, was the proper hypothetical negotiation date—since that was when QCI first met all of the elements of inducement infringement. On this issue the Federal Circuit found error, explaining that QCI’s first act of inducing conduct (which resulted in direct infringement) occurred in 2003 when it began selling the accused laptop computers in the United States. Therefore, the Federal Circuit instructed that on remand, the hypothetical negotiation analysis in the new trial should be based on a 2003 date.
The Federal Circuit also explained the importance of establishing the correct date for the hypothetical negotiation in this case. Because the correct date should have been 2003, not August 2006, the Federal Circuit reasoned that it was improper for LaserDynamics’ damages expert to disregard 28 earlier lump sum license agreements, all valued under $1 million total, on the basis that the economic landscape had changed in the intervening years.
Litigation Settlement Agreements and Evidentiary Proof Regarding a Reasonable Royalty
The Federal Circuit also addressed the use of litigation settlement agreements as evidence for establishing a reasonable royalty under a hypothetical negotiation. The Federal Circuit noted that the “propriety of using prior settlement agreements to prove the amount of a reasonable royalty is questionable.” The coercive environment of patent litigation is unsuitable to a Georgia-Pacific analysis that is premised on the assumption that a voluntary agreement is reached between a willing licensee and licensor.
The Federal Circuit determined that a 2006 litigation settlement agreement between LaserDynamics and BenQ could not be relied upon by LaserDynamics to establish a reasonable royalty. The BenQ agreement was executed shortly before a trial where BenQ was facing several legal and procedural disadvantages resulting from court sanctions. Further, the BenQ settlement was for a lump sum payment of $6 million, an amount six times larger than the 28 additional licenses in evidence. These other 28 agreements reflected negotiated licenses, and the Federal Circuit indicated that these were “far more reliable indicators of what willing parties would agree to in a hypothetical negotiation.”
Addressing the burden for relying on licenses to prove a reasonable royalty, the Court explained that a plaintiff cannot inflate a royalty amount with “conveniently selected licenses,” but must present a clear link between a license agreement and the claimed technology. The Federal Circuit stressed that “[a]ctual licenses to the patents-in-suit are probative not only for the proper amount of a reasonable royalty, but also of the proper form of the royalty structure.” Therefore, in this case it was improper for LaserDynamics’ expert to ignore the amount and form of the royalties in the 28 lump sum “actual licenses” and present a damages theory based on a running royalty rate of 6 percent. Such a royalty rate was deemed “untethered from the patented technology at issue and the many licenses thereto, and, as such, was arbitrary and speculative.”