Just when you thought the “entire market value rule” (EMVR) was decapitated, its presence rears its head. In LaserDynamics, Inc. v. Quanta Computer, Inc.,1 the Federal Circuit Court of Appeals severely restricted the EMVR’s use. Many—prematurely, it now seems—pronounced the doctrine dead.
Cases applying LaserDynamics continue to affect royalty damages even when the EMVR seemingly does not apply. Awareness of this shifting legal terrain is crucial for patent litigators and their clients.
The LaserDynamics Case
Courts award reasonable royalty damages—the minimum amount of infringement damages “adequate to compensate for infringement”— “for the use made of the invention by the infringer.”2
When limited elements of multi-component products are accused of infringement, a royalty base using the sales price of the entire product carries a “considerable risk” that the patentee will be unfairly compensated for non-infringing components.3 Thus, royalties are generally based not on the entire product, but on the “smallest salable patent-practicing unit . . . with close relation to the claimed invention.”4
The EMVR has been a “narrow exception to the general rule.”5 Damages are recoverable under the EMVR only “if the patented apparatus was of such paramount importance that it substantially created the value of the component parts.”6 To apply the EMVR, “the patentee must prove that the patent-related feature is the basis for customer demand” for the entire product.7
The EMVR is grounded on a 19th century U.S. Supreme Court rule: “[T]he patentee . . . must in every case give evidence tending to separate or apportion the defendant’s profits and the paten- tee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative.”8
The EMVR effectively ensures that royalty damages are “reasonable” and “arose and evolved to limit the permissible scope of patentees’ damages theories.”9 To ensure the rule is properly applied, proof of damages must be carefully tied to the claimed invention’s footprint in the marketplace,10 and the damages theory must be based on “sound economic and factual predicates.”11
In LaserDynamics, the Federal Circuit roundly rejected the plaintiff’s attempt to use the EMVR in calculating damages, confirming the doctrine’s critical limitations:
- A patentee cannot avoid the need to prove that the patented feature drives demand for the entire productby using a very small royalty rate.12
- It is not enough to show that the patented feature is viewed as “valuable, important, or even essential” to use of the accused product.13
- It is not enough to show that a product without the patented feature is “commercially unviable,” because proof that customers want a product with the patented features “is not tantamount to proof that only one of those features alone drives the market . . . “14
- Consumer preference says nothing about whether the presence of that functionality “is what motivates consumers to buy a [product] in the first place.”15
- Consumer expectations that the patented feature will be present in a product are not evidence that “this feature alone motivates consumers to purchase [the product]” such that the EMVR applies.16
New Cases Applying LaserDynamics
Current cases attempting to apply LaserDynamics will provide guidance about how courts will treat the strict rules announced in that case:
- Discovery Unaffected – While LaserDynamics limits the admissibility of evidence that does not meet the EMVR, it does not limit the discoverability of such evidence.17
- Disputed Issues of Fact – Questions of fact regarding the extent to which the patented technology drove demand for the accused products were enough to overcome a motion for summary judgment in one case.18 A patentee skirted a Daubert motion in another case by (1) arguing that the accused product was the smallest saleable patent-practicing unit for the patented method, and (2) providing “some evidence” of the applicability of the EMVR. 19
In yet another case, the district court denied a motion to exclude an expert’s testimony because issues relating to application of the EMVR were “clearly disputed.”20 After the trial of that matter, however, the district court granted a motion for remittitur or a new trial because the patentee’s expert failed to present evidence that consumers were motivated to purchase the accused product because of the patented feature.21
Denying a Rule 50 post-trial motion based on the EMVR’s improper application, a court noted, (1) the patentee provided some evidence that its expert considered the smallest saleable infringing unit, and (2) the patented invention was closely related to the accused device.22 In addition, the accused infringer failed to provide a “credible alternative.”23
- “Per-Unit” Royalty Allowed – A “per-unit” royalty did not violate the EMVR because the patentee did not use the revenue or profits of an entire accused product in its royalty base.24 But calculating an implied royalty rate as a percentage of total accused product revenue based on the “per-unit” royalty violated the EMVR. This testimony was ultimately excluded.25
- Consumer Demand Is Fundamental – Evidence that demand for products without the patented feature “dropped precipitously” when products with the patented feature were introduced to the market was enough for one patentee to survive a Daubert challenge.26 Even though products with the patented feature cost more than those without the feature, the court said, “Value added, as measured by an increase in sales price, is not the only factor considered in a royalty calculation, however.”27 The court also said that the patentee had applied an agreed royalty rate to the entire product in an actual negotia- tion with another party.28
- Reliance on Comparable Licenses Is Irrelevant to EMVR – The EMVR is not satisfied simply because the patentee relied on comparable licenses in its damages analysis. That is a different legal inquiry.29
- EMVR Not Applied to Generic Pharmaceuticals – “[T]here is little reason to import these rules [the EMVR] for multi-component products like machines into the generic pharmaceutical context.”30 In any event, a disputed coating was considered a “crucial aspect” of the process embodied in the patent, and products without the coating were not considered commercially viable.31
- Experts May Get a Second Chance – A district court gave one expert an opportunity to revise his report to explain why he used the total revenue for an accused product containing the accused feature.32 Whether the expert concluded that the accused product was the smallest saleable patent-practicing unit or the EMVR applied, he had to provide a sound basis for his conclusion.33 Similarly, when a damages expert “made no sincere attempt” to tie the patentee’s damages to the smallest saleable patent-practicing unit and relied on an apportionment factor derived from a single survey, the court required the expert to amend his report before he could testify at trial.34
- “Smallest Saleable Patent-Practicing Unit” – Analysis of whether the accused product is the smallest saleable patent-practicing unit may present the most complex issues for litigants. First, the court must identify the smallest saleable patent-practicing unit. One court concluded that the accused product was the smallest saleable patent-practicing unit
First, the court must identify the smallest saleable patent-practicing unit. One court concluded that the accused product was the smallest saleable patent-practicing unit because the defendant neither bought nor sold the individual components of the system, the components could not practice the patent before assembly and program- ming, and the product was imported fully assembled. 35
Second, there is a question whether the value of the smallest saleable unit also requires apportionment. One district court held that, when the smallest saleable patent- practicing unit formed the basis for a damages analysis, no further apportionment was warranted, even though the accused product contained non-patented features.36 Any further apportionment would be “speculative and arbitrary.”37
But other courts have reached the opposite conclusion, stating that Cornell University v. Hewlett-Packard Co. does not say that no further apportionment is ever necessary once the smallest saleable unit is determined.38 For one court, failing to apportion the value of the patent, even in the smallest saleable unit, was a basis to exclude the expert’s testimony.39 In another case, a patentee argued that the accused microprocessors were the smallest saleable patent-practicing unit for the claimed dynamic logic circuit.40 Citing the risk of “Uniloc error” and noting the expert’s failure to provide a basis for his testimony about a royalty based on microprocessors, the court indicated that it was inclined to strike the testimony. The court withheld a final determination on the motion pending testimony from the expert before trial.41
Mindful of this uneven landscape, savvy litigants will in every case:
- Consider alternative damages models that are not dependent on the EMVR, including per-unit royalties or royalties based on cost savings arising from the infringement.
- Recognize that comparable licenses do not play into the EMVR analysis.
- Develop evidence and expert opinion either (1) factually supporting application of the EMVR based on the strict LaserDynamics rules, or (2) identifying and justifying the smallest saleable patent-practicing unit.
- Apportion the value of the patented technology when the smallest saleable patent- practicing unit contains unpatented features.
- Avoid the need for a “second chance” to submit expert testimony on the issue.
- Develop a full factual and analytical record at trial.