A recent ruling by the US Court of Appeals for the Federal Circuit provides notes of caution to those preparing opinions to avoid the possibility of willful infringement. The decision also speaks to the potential value and consequences of statements in licence agreements.

In its 3 June ruling in Pavo Solutions v Kingston Technology Co the Federal Circuit addressed two unusual fact patterns relating to willful infringement and the calculation of a proper reasonable royalty rate.

Moving forward, patent holders and alleged infringers, alike, should recognize the strategic importance that explanatory statements made in license agreements may have in royalty rate calculations in litigation. Similarly, each party should understand that obvious errors in patent claim language may not necessarily be relied on at trial.

The appeal stemmed from a jury finding that Kingston willfully infringed Pavo’s US patent 6,926,544 directed to a flash memory apparatus. The jury awarded compensatory damages of $7.5 million that the judge enhanced by 50% for willful infringement. Among other issues, Kingston appealed the jury’s finding of willful infringement and the compensatory damages award.

Reasonable royalty

At trial, Pavo presented a reasonably royalty theory of damages. Its expert relied on a licence agreement between CATR and IPMedia with respect to the ’544 patent. Both parties’ experts agreed that the IPMedia licence was a comparable licence to the hypothetical negotiation used to determine a reasonable royalty. Importantly, the licence included a representation that $0.01 was equal to 25% of IPMedia’s profits from the sale of the covered product. Consequently, Pavo’s expert determined that a similar profit split of 25 to 75, used in the IPMedia licence, was an appropriate factor to consider in calculating a reasonable royalty.

Kingston argued that Pavo’s expert’s methodology was unsound because it relied on the 25% characterisation rather than the $0.01 that IPMedia actually received. However, the Federal Circuit found that the expert’s testimony was not unduly speculative because the 25% characterisation provided context for the royalty rate in the agreement.

In addition, Kingston argued that Pavo’s expert did not properly apportion the value between patented features and non-infringing features. Under US law, damages must be restricted to the incremental value added by the patented invention over the prior art and exclude any value contributed by non-infringing features. However, the Federal Circuit found that a sufficiently comparable licence, like the IPMedia licence, had “built-in apportionment” because it was reasonable to assume that the parties to the licence weighed the relative value of the invention. Consequently, the Federal Circuit also affirmed the jury’s damages award. While rare, this decision is not the first time that the Federal Circuit has found “built in apportionment”.

There are at least two important lessons to be learned from the discussion of the damages award:

  • First, for a patentee, when drafting licence agreements, characterising agreed-upon per-unit royalty terms as a significant percentage of profits may be beneficial in later litigation.
  • Conversely, defendants in a litigation should be careful in conceding that any licence is a comparable licence. In this case, the licence was likely technologically comparable, but both damages experts spent significant time evaluating its economic comparability. The defendant appears to have made a strategic decision to rely upon the very low per-unit royalty rate. Such strategic decisions carry risks and ramifications that must be carefully considered, particularly after this ruling.

Willful infringement

During the claim-construction phase of the case the district court found that the claim phrase “pivoting the case with respect to the flash memory main body” included a clerical error, and it judicially corrected the claim language to read “pivoting the cover with respect to the flash memory main body”.

Clerical errors in patent claims may be corrected not only by the USPTO but also by a district court judge. The district court determined that the error was evident from the face of the patent and that the correction was not subject to reasonable debate. The Federal Circuit found the district court’s reasoning persuasive and affirmed the correction.

Kingston argued that: “It could not have formed the requisite intent to support a willfulness finding because it did not infringe the claims as originally written and because it could not have anticipated that a court would later correct the claims.” The Federal Circuit rejected these arguments, explaining that: “Judicial correction does not re-make the claim; rather, it gives effect to its obvious meaning. An obvious minor clerical error, by definition, does not mask that meaning, so Kingston cannot hide behind the error to escape the jury’s verdict.”

Kingston also argued that the jury’s finding was inconsistent with the patent office’s refusal to make the claim correction during an inter partes review proceeding. However, this change was refused during the IPR because the oral hearing was imminent. The Federal Circuit also pointed out that the later IPR proceeding was irrelevant, because the “proper time to assess willfulness is at the time the infringer received notice … making the relevance of later developments … questionable at best”.

What then, should one take away from this part of Pavo?

Clerical errors in issued patent claims are not as unusual as one might expect. One should be extremely cautious when relying on possible clerical errors as a basis for non-infringement because reliance on a clear error in the claims may not provide protection against willful infringement. If a mistake in a competitor’s patent claim is too good to be true, be very careful when relying on that mistake as a defence.

Conversely, not every error is clear. A patent owner should carefully review the claims upon issuance and seek a certificate of correction promptly, if necessary.

Lessons for the wary

With respect to the royalty rate calculation, this ruling teaches the value of strategic planning. Patent holders can anticipate and bolster later litigation strategies by including explanatory statements in their licence agreements. At the same time, alleged infringers should be wary of such statements and carefully weigh the strategic value of the agreement against the potential impact of the explanatory statement before committing to a strategy relying upon the agreement. With respect to infringement and willful infringement, each party should understand that uncorrected obvious errors in patent claim language may be corrected during trial in some instances and plan their strategies accordingly.

Philippe Signore, managing partner of Oblon, contributed to this report.

Andrew OIlis, Frank West