On Thu., Aug. 30, 2012, in LaserDynamics v. Quanta, No. 2011-1440, the Federal Circuit (Dyk, Clevenger and Reyna) clarified and limited applying the entire market value damages rule where the patent is directed to a component of a multi-component system – e.g., a patented method for determining the type of disc in an optical drive that is a component of a laptop computer. This is a significant case to review in determining evidence required to establish damages under the entire market value rule as well as other damages theory, including issues such as using prior licenses, litigation settlements and the proper date for the Georgia-Pacific hypothetical negotiation.
The Court stated that the entire market value rule is a “narrow exception” to the general rule that “royalties be based not on the entire product, but instead on the ‘smallest salable patent-practicing unit.’” The Court expressed concern that, “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.” Further, “disclosure to the jury of the overall product revenues ‘cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue’” and may “make a patentee’s proffered damages amount appear modest by comparison [and] artificially inflate the jury’s damages calculation.” This problem is not “avoided by the use of a very small royalty rate.”
Thus, the Court “reaffirm[ed] that in any case involving multi-component products, patentees may not calculate damages based on sales of the entire product, as opposed to the smallest salable patent-practicing unit, without showing that the demand for the entire product is attributable to the patent features.” The Court also clarified that the patented feature must create the demand for the entire product itself, and not just be a reason a consumer may choose one product over another similar product:
“[I]f given a choice between two otherwise equivalent laptop computers, only one of which practices [the claimed] optical disc discrimination, proof that consumers would choose the laptop computer having the disc discrimination functionality says nothing as to whether the presence of that functionality is what motivates consumers to buy a laptop computer in the first place. It is this latter and higher degree of proof that must exist to support an entire market value rule theory.”
The Court also ruled that, for induced infringement, the date for the Georgia Pacific hypothetical negotiation for assessing a reasonable royalty is the date that the underlying induced infringement started and not the later date on which the alleged inducer’s liability began based on its knowledge of the patent (when the patent suit was filed).
The Court provided incremental insight on limiting use of patent settlement agreements to assess damages, noting “the longstanding disapproval of relying on settlement agreements to establish reasonable royalty damages.” And the Court emphasized the importance of relying on license agreements that are related to the patented technology.