In patent infringement litigation, after a finding of liability (i.e., the asserted patent claims are valid and infringed), the judge or jury must determine the damages to be awarded to the patentee. Depending on the evidence presented, the patentee may recover its lost profits, or if there are none, then “in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. Section 284:
In most cases, a reasonable royalty is calculated by multiplying the infringing sales revenue (royalty base) times a royalty rate. The royalty rate, typically expressed as a percentage, must expresses the value of the patented feature to the infringer. In the world of technology, however, it is extremely rare that a patented article comprises the entire device sold – rather, devices include a multitude of patented and non-patented components. The general rule is that the royalty rate must apportion the value of the patented feature to the article, as a whole. However, in cases where the infringed patent “constitutes the basis for consumer demand,” damages may be recovered based upon the “entire market value” of the infringing product. This latter rule, which favors high plaintiffs’ verdicts, is invariably controversial when applied, and is the subject of the U.S. Court of Appeals for the Federal Circuit’s recent decision in Power Integrations, Inc. v. Fairchild Semiconductor International, Inc.
Federal Circuit Continues Trend Toward Limiting Use of “Entire Market Value” Rule When appropriately applied, the “entire market value” rule has the potential to produce substantial damages awards in patent infringement litigation. Juries applying the rule have retuned eight-figure and nine-figure awards. When challenged on appeal (and they are always challenged), these awards are viewed by the Federal Circuit with increasing skepticism, and it has vacated several jury awards for further proceedings to either (i) obtain more evidence in support of applying the rule, or (ii) recalculate damages on an apportionment basis.
The Federal Circuit recently reversed such an award in Power Integrations, Inc. v. Fairchild Semiconductor International, Inc., a long-running patent dispute between two electronics power supply manufacturers. Filed in 2009, the case went to trial in 2014; and, after suffering a $105 million damages award, Fairchild successfully moved for a new trial. When the retrial resulted in an award of approximately $140 million, Fairchild appealed once again, this time challenging the finding of infringement and the application of the “entire market value” rule. The finding of infringement was affirmed; however, the Federal Circuit found fault with the application of the “entire market value” rule.
The Federal Circuit found that Power Integrations failed to demonstrate that its patent, “alone motivated customers to buy” Fairchild’s infringing product. Among other relevant factors, the Court noted the trial judge’s observation that, “there is evidence in the record that other features are important and are highlighted by the respective parties . . . [and] there is no question that . . . there are other valuable features.” The Federal Circuit reiterated that the burden of proof was squarely on the patentee, and that based on Power Integrations’ failure to prove that these other factors did not impact consumer demand, the application of the “entire market value” rule was improper. The Court then remanded the case for another retrial on damages.
For patent holders, the Federal Circuit’s decision in Power Integrations, Inc. v. Fairchild Semiconductor International, Inc. underscores the importance of ensuring a robust evidentiary basis for a damages theory, particularly when applying the “entire market value” rule.