In VIRNETX, INC. v. CISCO SYSTEMS, INC., Appeal No. 2013-1489, the Federal Circuit vacated a damages award for use of an improper royalty base.
VirnetX sued Apple for infringing patents relating to secure Internet connections and VPN technology. VirnetX won a jury trial verdict of $368 million against Apple based on its “FaceTime” and “VPN On Demand” features.
On appeal, the Federal Circuit vacated and remanded the damages award as founded on an improper royalty base. The Federal Circuit determined that the district court’s jury instructions misstated the law on reasonable royalties because the instructions mistakenly suggested that, when a smallest salable unit is used in the royalty base, there is no further constraint on the selection of the base. When the smallest salable unit is a multicomponent product containing several non-infringing features (for example, Apple’s iPhone), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. The Federal Circuit also pointed out that a damages theory based on a mathematical theorem (the Nash Bargaining Solution) suggesting a 50/50 split was an inappropriate “rule of thumb” as applied in this case.