The Federal Circuit’s recent Exmark v. Briggs-Stratton decision further confirms that there is no categorical rule about selecting a royalty base when litigating a reasonable royalty in order to apportion value to the patented invention, but that “apportionment can be addressed in a variety of ways … [s]o long as [the patent owner] adequately and reliably apportions between the improved and conventional features” of the accused product. Thus, in this case, the Federal Circuit ruled that the patent owner properly could use the entire lawn mower as the royalty base and was not limited to the innovative baffle component of the lawn mower as a royalty base. This case continues the clarification made in the Federal Circuit’s CSIRO decision involving standard essential patents that recognized that “adaptability [in determining patent damages] is necessary because different cases present different facts” and rejected as “untenable” the argument that every damages model must start with the smallest salable patent practicing unit (SSPPU) (see our Dec. 3, 2015 post).
A persistent dispute in the standard essential patent (SEP) community is whether a patent owner may license its SEPs based on the sales price of the end product or if the patent owner must license its SEPs based on the sales price of a component within that end product (e.g., the smallest salable patent practicing unit or SSPPU). The Federal Circuit’s Ericsson v. D-Link decision explained that the SSPPU theory was based on an evidentiary principle to avoid confusing jury’s in U.S. patent damages litigation (see our December 5, 2014 post). Yet some continued to claim that the SSPPU principle was a substantive rule of law required in all circumstances, including outside of litigation in private negotiations for SEP licenses. The Federal Circuit’s CSIRO decision later held it was “untenable” to argue that all damages methodologies must start with the SSPPU (see our December 3, 2015 post). Yet the debate somehow continued. The Federal Circuit’s Exmark decision here may finally settle and dispel arguments that the royalty base cannot be the end product, but must be the SSPPU. But we will see …
Exmark Manufacturing Company (“Exmark”) sued Briggs & Stratton Power Products Group LLC (“Briggs”) for infringing its patent directed to an improved flow control baffle for a lawn mower that efficiently guides glass clippings from under the lawn mower and out of a side chute. The asserted patent claim was directed to a “multiblade lawn mower” as a whole, comprising the innovative flow control baffle component along with other traditional lawn mower elements.
Importantly, these are not every day consumer lawn mowers, but high-end commercial-grade lawnmowers that can sometimes have retail prices over $10,000. The parties filings indicate that the accused infringing lawnmowers included the Snapper Pro S200X, Ferris Comfort Control DD, and mowers having Briggs’ iCD Cutting System and that the average selling price was about $5,000. (See Briggs & Stratton Opening Brief (Public) at Appx21 (district court Order identifying accused products); Exmark Responsive Brief (Public) at 4, 25 (retail cost often exceeds $10,000; royalty of approximately $250 per lawn mower using a 5% royalty); Briggs & Stratton Reply Brief (Public)).
The parties did not dispute that reasonable royalties must apportion the value of the invention from the value of the lawn mower as a whole, but they disagreed as to the royalty base–i.e., whether the royalty base could only be the innovative baffle component or if the royalty base could be the the entire lawn mower. The patent owner used the lawn mower sales price as the royalty base and adjusted the royalty rate as the means for apportioning value attributable to the invention. The district court rejected the accused infringer’s argument that the entire market value rule required using something less than the entire lawn mower as the royalty base, stating that “The claimed benefits of the invention–improved cutting performance, a reduction of blowout, a more uniform discharge, and a faster cut with less engine demand–all go right to the heart of the purpose and function of the accused product.” (See Briggs & Stratton Opening Brief at Appx113).
A jury awarded $24.2 million as reasonable royalty damages for Brigg’s infringement of the patent.
Federal Circuit Decision
On appeal, the adjudged infringer challenged the reasonable royalty damages award based on three grounds:
- Use of the entire end product (lawn mower) sales price as the royalty base, rather than the flow control baffle component.
- Use of a 5% royalty rate without adequate justification for that rate based on the facts of the case.
- Certain evidentiary rulings.
The Federal Circuit stated that the patent claim was directed to the entire lawn mower, but the claim included conventional lawn mower features (e.g., mower deck, side discharge opening) along with the patented improvement relating to the lawn mower’s flow control baffle. In such circumstances, “the patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product.” Doing so ensures that the patent owner “is compensated for the patented improvement (i.e., the improved flow control baffle) rather than the entire mower.”
The Federal Circuit rejected the adjudged infringer’s argument that such apportionment must be done by selecting the royalty base (i.e., use the flow control baffle price) rather than the royalty rate:
On appeal, [the adjudged infringer] Briggs argues that [the patent owner] Exmark’s expert should have apportioned or separated the value of the baffle from the other features of the mower through the royalty base rather than the royalty rate. We disagree. We have held that apportionment can be addressed in a variety of ways, 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. So long as [the patent owner] Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology. “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 Federal Circuit further found that using the entire end product price (the lawn mower sales price) was “particularly appropriate” because “the asserted claim is, in fact, directed to the law mower as a whole.” Thus, the claim covers “the infringing product as whole, not a single component of a multi-component product.” But where a claim covers the product as a whole having both conventional and unconventional elements, apportionment is required. That can be done using the royalty rate, not just the royalty base:
We hold that such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate.
The Federal Circuit further observed that using the entire lawn mower price as the royalty base “is consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing,” stating:
As we stated in Lucent Technologies, Inc. v. Gateway, Inc., “[t]he hypothetical negotiation tries, as best as possible, to recreate the ex ante licensing negotiation scenario and to describe the resulting agreement.” “[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.”
The Federal Circuit agreed with the adjudged infringer’s argument that the patent owner’s 5% royalty rate should not have been used because it was not sufficiently tied to the facts of the case. The Federal Circuit found that the patent owner’s expert discussed the Georgia-Pacific factors, but her royalty rate conclusion following that discussion gave “little explanation” why the parties “would have agreed to a 5% reasonable royalty rate on the sales of the accused lawn mowers as the value for the improved baffle.” Among other things, the damages expert:
- Did not tie relevant Georgia-Pacific factors to the 5% royalty
- Did not explain how she calculated a 5% royalty from the Georgia-Pacific factors
- Did not explain how her analysis of the benefits of the improved flow baffles led to a 5% royalty rate
- Did not explain how unpatented features of the lawn mower impacted her 5% royalty rate determination
The court thus vacated and remanded the damages determination for a new trial.
Damages Evidentiary Rulings
The Federal Circuit considered several evidentiary rulings by the district court concerning damages.
First, the Federal Circuit ruled that it was error to exclude prior art alternatives soley because the prior art was not commercialized:
We conclude that the district court abused its discretion by holding that prior art is relevant to damages only to the extent that the prior art was commercialized. … The fact that some prior art mowers were not commercialized does not make them immaterial to determining the extent to which the mower claimed in the [asserted] patent provides utility and advantages over the prior art.
Second, the Federal Circuit ruled that the district court reasonably limited prior art to side discharge mowers and excluded prior art mulching mowers:
The only asserted claim of the [asserted] patent requires a side-discharge mower. Therefore, it was reasonable and within the district court’s discretion to exclude prior art mowers that were not side-discharge mowers, commensurate with the scope of the asserted claim.
Third, the Federal Circuit agreed with the district court that evidence of the patent owners delay in bringing suit “is not relevant to damages.”