If you follow the development of damages theories closely, Commonwealth Scientific v. Cisco is one you won’t want to skip. Particularly, because of the unexpected turn Judge Leonard Davis took with rejecting the theory Cisco’s expert presented which the court felt would ultimately lead to a significant undervaluing of the inventive idea embodied in the patent at issue. Cisco’s damages theory based royalties on the price of the portion of the infringing device (here, microchips) that practiced the inventive aspects of the patent-in-suit. The court found this methodology “illogical” and threw a bit of a wrench into damages theories for a variety of reasons.

Judge Davis found that while it was undisputed that the inventive aspects of the claims at issue were carried out in a particular layer of the wireless chip, the chip itself was not the invention. Judge Davis focused on:

  • The patent involved a combination of techniques to solve a wireless communication problem and not a physical device
  • The price of the physical component using these techniques does not include any charge for use of the patented ideas themselves (e.g. infringement)
  • Cost of physical materials does not capture the value of an idea carried out through use of those materials
  • Component cost alone undervalues the usefulness and value of the patented concept

The fact that patented ideas are physically embodied on the silicon within a chip or some other component does not then allow the price of the component (or a percentage thereof) to be a proxy for the value of the invention. Indeed, Judge Davis found that because the price of the wireless chip would not include a charge for the pervasive infringement of the plaintiff’s patent, it was “illogical to value the contributions of the ‘069 Patent based on wireless chip prices.” The Court went on to state that basing a royalty solely on the price of the component embodying the infringing technology “is like valuing a copyrighted book based only on the cost of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.”

The opinion calls into question the use of component “cost” as the sole underpinning of any damages theory. While a party may be successful in isolating the smallest saleable patent practicing unit for a larger product, actually calculating the value the invention contributes to the overall product and market for the component will involve far more analysis than merely a reference to the cost figure in the bill of materials. This converts a simple mathematic equation into a far more difficult search for “value.”