The U.S. Court of Appeals for the Federal Circuit recently reversed the reasonable royalty determination because the royalty rate was based on licenses unrelated to or that did not specifically mention the patents at issue., Inc. v. Lansa, Inc., Case Nos. 08-1365, -1366, 09-1030 (Fed. Cir., Feb. 5, 2010) (Per Curium) ( Newman, J., dissenting).

After a trial on ResQNet’s claim against Lansa for patent infringement, the district court found that Lansa infringed the patent and awarded ResQNet damages of over $500,000 for past infringement based on a hypothetical royalty of 12.5 percent and imposed a license at a royalty of 12.5 percent for future activity. The district court reached its decision after hearing testimony from ResQNet’s expert on how he determined a reasonable royalty rate of 12.5 percent, why he relied upon seven ResQNet licenses, how the seven ResQNet licenses relate to the patents and technology at issue, as well as analysis of the Georgia-Pacific factors. The district court additionally issued Rule 11 sanctions against ResQNet and its attorneys for litigating other related patents that were eventually found not to be infringed. ResQNet appealed.

On appeal, the Federal Circuit agreed that Lansa infringed the patent, but citing to its recent Lucent Techs v. Gateway decision, held that the district court’s reliance on five re-branding or re-bundling licenses (hereinafter, the re-bundling licenses), was “problematical”. The five licenses were for software products and source code, training, maintenance, marketing and upgrades to other software companies in exchange for ongoing revenue-based royalties far exceeding 20percent, (the specific numbers are under protective order). The Federal Circuit explained that the district court’s reliance on the re-bundling licenses was improper because these licenses did not specifically mention the patents in suit or evidence a “discernible link to the claimed technology.” The Federal Circuit noted that the district court “made no effort to link [these licenses] to the infringed patent” and moreover the expert’s opinion that the licensed products are “based on the technology described in the patents in suit” does not provide sufficient grounds to consider the re-bundling licenses in a reasonable royalty determination because such statement does not equate to a determination that ResQNet’s products are coextensive with the claimed invention or provide the necessary link between the re-bundling licenses and the patents in issue. Not to beat a dead horse, the Federal Circuit went on to note that the “re-bundling licenses simply have no place in this case” and that the “inescapable conclusion is that the [ResQNet’s damages] expert used unrelated licenses on marketing and other services—licenses that had a rate nearly eight times greater than the straight license on the claimed technology in some cases—to push the royalty up into the double figures.”

In reversing and remanding the reasonable royalty calculation, the Court cautioned that “the most reliable licenses in this record arose out of litigation” and continued that since a reasonable royalty arises out of a hypothetical negotiation that “occurs before litigation” the district court should be careful about evidence (such as a settlement agreement) that might “skew the results of the hypothetical negotiation.”

Ultimately the Federal Circuit determined that the only licenses that can be considered in determining a reasonable royalty for purpose of patent infringement damages are those that specifically name the patent(s) in suit or show a discernible link to the claimed technology.

The Federal Circuit also reversed the district court’s issuance of sanction (under Rule 11) against ResQNet and its attorneys. In reaching its conclusion, the Federal Circuit noted the “abuse of discretion” standard of review but nevertheless reversed, determing that ResQNet initially represented in pre-discovery correspondence between counsel that that it “did not appear” that Lansa’s product did not infringe two of the products and that it would dismiss these claims unless it discovers evidence to the contrary; ResQNet dismissed its claim for patent infringement with respect to one of its patent two years before Lansa moved for Rule 11 sanctions; and a motion for summary judgment of non-infringement with respect to the other patent was denied by the district court. Under the circumstances, the Federal Circuit determined that there was no act of bad faith sufficient to warrant Rule 11 sanctions against ResQNet.

In Judge Newman’s view, the majority’s dismissal of the testimony of ResQNet’s economic expert, who was subject to examination and cross-examination, is improper; “… the district court provided a full and reasoned analysis of the evidence. No flow in this reasoning has been assigned [by the panel majority] who, instead, create a new rule whereby no licenses involving the patented technology [but that include additional subject matter] can be considered …”

Practice Note: Prior licenses may only be considered in connection with a reasonable royalty determination where the patents in suit are the subject of the license or where licenses go to essentially the same subject matter as the patents found to be infringed.