The Federal Circuit is continuing its close scrutiny of reasonable royalty damage awards and is encouraging district courts to do the same. In February 2010, the Federal Circuit in ResQNet.com, Inc. v. Lansa, 594 F.3d 860 (Fed. Cir. 2010), vacated a district court's award of reasonable royalty damages because the lower court failed to account for differences between the patented technology and the technology covered by licenses offered in evidence. The opinion suggests that parties need to be meticulous in presenting evidence supporting their reasonable royalty argument if they want to prevail.
ResQNet.com follows the Federal Circuit's decision last September in Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), where the court suggested it would be tightening the reins on reasonable royalty awards. In that case, the Federal Circuit vacated a $358 million damage award because, in its view, the plaintiff failed to present sufficient evidence showing that the licenses used as a basis for the reasonable royalty calculation were comparable to the license that would have been negotiated for the patent in suit. Many observers were surprised by the degree to which the Federal Circuit analyzed the terms of the eight licenses at issue and the expert testimony regarding those licenses.
The patents at issue in ResQNet.com covered processes for downloading screen information from a mainframe computer to a personal computer. In a bench trial, the district court ruled that the patent was valid and infringed, and awarded more than $500,000 in damages based on a 12.5 percent royalty.
On appeal, the Federal Circuit drew a direct link between this case and its decision in Lucent, stating that “[t]he majority of the licenses on which ResQNet relied in this case are problematic for the same reasons that doomed the damage award in Lucent.” Those reasons being that, in the panel majority's view, most of the licenses relied on by ResQNet's damages expert “had no relation to the claimed invention.”
ResQNet's expert relied on seven licenses to arrive at his reasonable royalty opinion. Only two of those licenses related to the patent in suit. Both of those licenses arose out of litigation; one contained a royalty of substantially less than 12.5 percent, and the other did not contain a running royalty rate. The remaining five licenses, on the other hand, contained rates of up to 25, 30, and 40 percent. Reviewing the trial record, the court said ResQNet's expert gave “unconvincing reasons” for considering these licenses and found “[t]he inescapable conclusion is that [ResQNet's expert] used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels.”
Unlike Lucent, the court's decision in ResQNet.com was not unanimous. Judge Newman dissented from the opinion, appearing to disagree with the majority's reading of the basic facts of the case. In particular, Judge Newman found that the five high-royalty licenses did include the patented technology and that the district court properly accounted for differences between the facts surrounding those licenses and the hypothetical negotiation relevant to the reasonable royalty analysis. Judge Newman would have deferred to the district court's evaluation of the facts and affirmed its decision.
Regardless of which judges were reading the facts correctly, the point of both Lucent and ResQNet.com is that Federal Circuit panels are paying much closer attention to the factual bases for experts' reasonable royalty opinions. In the past, parties may have been content to rely on whatever licenses were most favorable for them, regardless of how dissimilar they were to the patent in suit, and assume that hand-waving by a qualified economic expert would be enough to cure any evidentiary shortcomings. Lucent and ResQNet.com show that this is no longer a reasonable tactic.
Whenever possible, parties must rely on licenses for the patent in suit. If a license is ambiguous or plainly covers a different patent, the party must be thorough in setting forth the reasons why it believes the license is relevant to the hypothetical negotiation. In Lucent, for example, the court criticized the plaintiff's expert for providing no explanation of the subject matter or patents covered by several of the licenses.
In addition, parties should be careful not to short-change other evidence that is relevant to the reasonable royalty calculation. The experts in both Lucent and ResQNet.com used the 15-factor Georgia-Pacific test that is virtually standard in reasonable royalty calculations. Only two of the Georgia-Pacific factors relate to licenses for the patents at issue or other technology. Yet those two factors are usually the primary focus of damages experts' analyses. For example, in ResQNet.com, the court said the expert “considered a few of the other Georgia-Pacific factors, but dismissed them because ‘[f]or the most part, the other factors have no real impact here.'” And in Lucent, the court emphasized that the Georgia-Pacific factors are a “useful … framework” for assessing reasonable royalty damages and suggested that the outcome might have been different had there been more persuasive evidence under the other factors.
Essentially, Lucent and ResQNet.com can be read as directives that parties must be more thorough in presenting their reasonable royalty cases. The court in Lucent admonished that “a damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ballpark of the jury's award.” Parties need to do a better job of developing and explaining all of the evidence relevant to their royalty arguments if they want to prevail.