The US Court of Appeals for the Federal Circuit's recent decision in Exmark Mfg. Co. v. Briggs & Stratton Power Products Group, LLC, __ F.3d __ , Appeal No. 2016-2197 (Fed. Cir. Jan. 12, 2018), has important implications for reasonable royalty calculations in patent infringement cases. The Federal Circuit signaled greater flexibility when apportioning damages, which may permit using the royalty rate, and not just the royalty base, to value a patented invention's contribution to a larger, multicomponent product. However, the Circuit also reaffirmed that a damages expert must “adequately tie the expert’s proposed reasonable royalty rate to the facts of the case.” Slip Op. at 24.
Exmark sued Briggs & Stratton for infringing its patent on a multiblade lawn mower having improved flow control baffles that more efficiently direct grass clippings toward a side discharge opening, and thereby improving the quality of the mowing operation. Slip Op. at 3-4, 22 (discussing U.S. Patent No. 5,987,863). The '863 patent claimed not just the improved baffles but a complete mower, including a mower deck, side discharge opening, power means and other conventional elements. Although broadly directed to a multiblade mower, the claimed improvement related only to the flow control baffle, and the parties agreed that damages had to be apportioned to distinguish between the patented improvement (the improved baffles) and the mower's conventional components. Id. at 21-22. The district court permitted Exmark's damages model at trial, which sought to apportion damages according to the royalty rate, to compensate Exmark for the value of the patented improvement. Briggs argued that it was error to apply the royalty rate to the entire mower, and that the royalty base had to be apportioned down to the patented improvement (baffles), not the whole mower. Id.
The Federal Circuit rejected Briggs' argument. "Apportionment can be addressed in a variety of ways," the Court held, "including by careful selection of the royalty base to reflect the value added by the patented feature [or] … by adjustment of the royalty rate so as to discount the value of a product's non-patented features; or by a combination thereof." Slip Op. at 22 (internal quotes omitted). Deriving the royalty base from sales of complete mowers was "particularly appropriate in this case," the Court found, because the patent claimed an entire "multiblade lawn mower," and not only "a single component thereof." Slip Op. at 23. Thus: "It is not the baffle that infringes the claim, but rather the entire accused mower." Id.
Using sales of the accused mowers as the royalty base was also "consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing." Slip Op. at 23-24, discussing Lucent Techns., Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009). "[S]ophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products' sales price," and thus "[t]here is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature." Slip Op. at 24, quoting Lucent Techns., 580 F.3d at 1339.
The Court concluded, "As long as Exmark [the patentee] adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as the royalty base and apportioning through the royalty rate is an acceptable methodology." Slip Op. at 22-23, applying Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014) ("The essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.").
The scope of the Court’s holding, and how it will be applied by district court judges, remains to be seen. In Exmark, the Court focused on how to account for the value of the patented invention when the patent “covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements.” Slip Op. at 23. Because the claim was not limited to a feature or component, there was “no unpatented or non-infringing feature of the product.” Id. Further, a settlement agreement in the case showed actual practice of using the entire mower for purposes of a reasonable royalty. The Court cited its prior decision in Astrazeneca as addressing “how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.” Id. (citing AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338 (Fed. Cir. 2015)). Specifically, certain Georgia-Pacific factors can be used to evaluate the inventive contribution when deciding a hypothetically negotiated royalty rate. Id. Other Federal Circuit decisions have raised questions concerning the interplay between a royalty rate analysis and apportionment. See, e.g., Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1319 (Fed. Cir. 2011) (noting that the "Supreme Court and this court's precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate.").
Ultimately, on the record presented, the Federal Circuit rejected Exmark’s expert opinion of a 5% royalty rate as "speculative," "conclusory" and "devoid of any analysis tying either the evidence or the specific Georgia-Pacific factors to the proposed 5% royalty rate." Slip Op. at 24, 27. Exmark's expert suggested a 5% royalty rate based on her understanding of the benefits of the claimed mowers; advantages arising from the use of the claimed baffles; the assumption that hypothetical negotiators would have recognized the importance of these advantages and the key role they played in Briggs' sales of its mowers; and a "superficial recitation of the Georgia-Pacific factors" and "conclusory remarks" about "Georgia-Pacific factors nine (utility and advantage of the claimed technology) and ten (the nature of the patented invention)." See id. at 25-26. "To sufficiently tie the advantages of the patented baffles to the royalty rate in this case, Exmark's expert was required to explain the extent to which they factored into the value of the lawn mower and her 5% royalty rate," rather than "pluck[ing] the 5% royalty rate out of nowhere." Id. at 26, 28.
The expert apparently had not sufficiently considered the degree to which the accused mowers' other features (e.g., durability, reliability, brand position, dealer support and warranty) and patents held by Exmark's competitors impacted the mowers' market value or profitability, the relative value of the patented baffles, or the royalty rate. Id. at 26-27. Without "sound economic reasoning" or "evidence itemizing the relative value of these other components," her conclusion that other components and patents did not affect the value of the accused mower was "nothing more than speculation" and inadmissible. See id. at 27. Conclusory opinions of this kind cannot be salvaged by "using an allegedly low royalty rate alone" because "the expert must still apportion damages and sufficiently tie the royalty rate to the facts of the case." See id. at 27-28. "Without a more detailed analysis, the jury is simply left to speculate or adopt the expert's unsupported conclusory opinion." Id. at 27.
The Federal Circuit found the district court also abused its discretion by limiting evidence of baffles in the prior art to commercial products, while excluding evidence of baffles used in prior non-commercial devices. Id. at 28-29. For these and other reasons, the Court concluded that the district court had erred by not excluding Exmark's expert opinions on damages and abused its discretion by not granting Briggs a new trial on damages. Id. at 28. Accordingly, the Court vacated the damages award and remanded for a new trial on damages. Id.
While Exmark invites a more flexible approach to apportionment, allowing, at least in some cases, a focus on the royalty rate to value the patented invention, the rate analysis itself must be properly supported. Indeed, Exmark serves as a cautionary reminder that any expert opinions on reasonable royalty damages must be closely tied to the facts of the case. Damages opinions that are purely speculative and unsupported by the facts of the case are likely to be found inadmissible. As a result, apportionment approaches will continue to be case-specific, variously focusing on the royalty base, the royalty rate, or a hybrid-model involving both elements.