Federal Circuit OK’s Award of 50% of Gross Margin

Astrazeneca v. Apotex (Fed. Cir. 2015)

Omeprazole (Prilosec) is a proton pump inhibitor (PPI) used to treat stomach acid issues.  In a prior portion of this case, the Federal Circuit affirmed that Apotex’s generic omeprazole infringed the AZ patents and that the patents were not invalid. After that 2007 decision, the company took the product off the market. The present appeal is simply about the damages that Apotex needs to pay based upon its infringement from 2003 – 2007.

A patentee is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. § 284.  Thus, the statute sets a ‘floor’ of a reaonable royalty but offers the option of proving further damages that would not be accounted-for in such a royalty calculation. This second category is ordinarily thought of as the patentee’s “lost profits” due to the infringement. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009).

Reasonable Royalty as 50% of gross margin: Here, the patentee asked for a reasonable royalty, which the district court set at 50% of Apotex’s $150 million gross margin (gross sales minus cost of goods) on the infringing sales.  On appeal, the Federal Circuit has affirmed.

District courts (and juries) are given substantial deference in awarding damages for patent infringement.  Factual conclusions (including the ultimate award) are reviewed only for clear error and the damage computation approach is reviewed for abuse of discretion.

Entire Market Value Rule for Pharma: The most interesting aspect of the case involved a discussion of the “entire market value rule.”

When thinking about damages, the focus should be on the incremental value of the patented invention.  When the patent covers only a small-portion of a multi-component product, the damage award should be based upon how the invention improves that small-portion unless the patentee proves that the patented feature “creates the basis for customer demand” in the whole product or “substantially creates the value of the component part.” quoting Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011).  One way around this is for a patentee to claim the product as a whole, then reciting both the novel features and conventional elements that make-up the rest of the product.  Here, that is exactly what AZ did – claiming a pill containing the (novel) drug covered with a (standard) enteric coating and subcoating. For the Federal Circuit, that claiming trick was sufficient to allow the patentee to focus on the entire market value of the pills rather than on the value of the novel drug component:

Astra’s formulation patents claim three key elements—the drug core, the enteric coating, and the subcoating. The combination of those elements constitutes the complete omeprazole product that is the subject of the claims. Thus, Astra’s patents cover the infringing product as a whole, not a single component of a multi-component product. There is no unpatented or non-infringing feature in the product.

The court did note that the relative proportion of novel-to-conventional parts should have an impact on the ultimate damage awaard:

When a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine 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. See Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1233 (Fed. Cir. 2014) (“[T]he patent holder should only be compensated for the approximate incremental benefit derived from his invention.”).

All of these thoughts and concerns regarding proportional valuation go back to the 1884 Supreme Court case of Garretson v. Clark, 111 U.S. 120 (1884). In that case, the court wrote that the patentee:

must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative, or he must show by equally reliable and satisfactory evidence that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature.

Thus, under Garretson, it should not really matter whether you calculate the reasonable royalty as a smaller percentage of the whole product or instead a larger percentage of the component.  However, there are two reasons why plaintiffs want to use the larger number.  First, there is a sense that a judge/jury is psychologically more likely to award a higher total amount when the pie appears larger.  Second is the reality that the whole product is sold at a point further down the supply chain where prices are higher as opposed to component supply where prices are generally much lower.

= = = =

See also

  • In re Omeprazole Patent Litig., 84 F. App’x 76 (Fed. Cir. 2003) (“Omeprazole I”);
  • In re Omeprazole Patent Litig., 483 F.3d 1364 (Fed. Cir. 2007) (“Omeprazole II”);
  • In re Omeprazole Patent Litig., 281 F. App’x 974 (Fed. Cir. 2008) (“Omeprazole III”); and
  • In re Omeprazole Patent Litig., 536 F.3d 1361 (Fed. Cir. 2008) (“Omeprazole IV”);
  • All relating to U.S. Patent Nos. 4,786,505 and 4,853,230.

33 thoughts on “Federal Circuit OK’s Award of 50% of Gross Margin

  1. 3

    It is also interesting that the CAFC reversed the post-expiration damages award without reconciling the entire market value calculation based on secondary products. Patent scope (infringement) is central to both, but from different perspectives (claims v. term).

    Perhaps Kimble will shed some light (or not) on royalties beyond the scope of a patent.

    1. 3.1

      Hmm, I don’t think that Kimble will do anything for damages and the amount of royalties one might get.

      Kimble is about contractual extension of the patent term.

      1. 3.1.1


        Your statement is the very thing that needs to be corrected.

        This is NOT a contractual extension of the patent term, but rather a separate extension of payment terms – separate and mutually agreed upon that has NO effect on patent term.

        After all, a contract of payment can be struck on anything – even things that have never fallen under the power of patent law.

  2. 2

    Funny, isn’t it? Why shouldn’t infringer cough up its entire I’ll-gotten gain?

    Infringement, like crime, pays.

    1. 2.2

      Crime in general doesn’t actually pay in the long run, but with a state run “reward system” for infringement, apparently theft of IP and innovation DOES pay.

      Then again this case is about medicine for which the “public” has a “need”. One could argue that infringers play an important role in a state mandated system for “redistribution of wealth” (notice the air-quotes).

      Perhaps this needs a little more thought as to who really is aiding whom and in the commission of “what”.

      1. 2.2.1

        Anon2, actually, the system that allows patents to read on the inventions of others is a system that turns a blind eye to functional claiming.


          The claimed invention of a patent reads on things and actions, “patents” do not “read on inventions”. Notwithstanding the fact that invention can be found in a thing or a set of actions, I have never head it said before that a claim reads on an invention by another.

          What is your point may I ask? Does it have anything to do with letting an infringer walk away with $75 million in profit?


            Ned is merely on his Quixote curse-ade against what Congress did in 1952.

            His post is off on all accounts, including your point here that someone who is an infringer still gets away with stealing $75 million dollars.

            What is the term for someone shamelessly stealing from a “grifter” and stuffing that money into their own pockets?


              What Congress intended in 1952 was to offer a reasonable royalty instead of equitable accounting, which was a disgorgement of the entire profit of the infringer. The reason why Congress opted to do this was because finding out how much profit the infringer made took a substantial amount of time, so that there was a delay in justice. In one example it took 20 years after the initial trial for the special master to demonstrate the amount the infringer made.

              The delay hurt patentees and infringers alike. The party that would benefit from delaying would purposely delay so to get a better settlement agreement.


                Thanks J,

                Your addition to the conversation is indeed welcome (although per DanH below, we this in the 1952 Act, or earlier?)

                That being said, my point too is still on target, as Ned indeed is on his Quixote “functional” trip once more, having never acknowledged and accepted the law of 1952 as written by Congress.

                But again – thanks for your value added post.


            Anon2, I have never head it said before that a claim reads on an invention by another.

            With all due respect, haven’t you at least read O’Reilly v. Morse?

            “Now, in this case, there is no description but one, of a process by which signs or letters may be printed at a distance. And yet he claims the exclusive right to any other mode and any other process, although not described by him, by which the end can be accomplished, if electro-magnetism is used as the motive power. That is to say — he claims a patent, for an effect produced by the use of electro-magnetism distinct from the process or machinery necessary to produce it. The words of the acts of Congress above quoted show that no patent can lawfully issue upon such a claim. For he claims what he has not described in the manner required by law. And a patent for such a claim is as strongly forbidden by the act of Congress, as if some other person had invented it before him.

            … The evil is the same if he claims more than he has invented, although no other person has invented it before him. He prevents others from attempting to improve upon the manner and process which he has described in his specification — and may deter the public from using it, even if discovered. He can lawfully claim only what he has invented and described, and if he claims more his patent is void.”

            Morse at 120-121.


              I still would not use the words “read on an invention”.

              In Morse, the claim purported to define the invention is not commensurate with what was invented and therefor reads on things and actions which fall outside of the scope of protection which is properly to be afforded to what was actually invented.

              Here the “incorrect” claim reads on things and actions which simply fall outside of the invention. I merely point out that the invention and the “contraption” are not the same thing. After all a contraption may embody a great many inventions. A claim to any one invention reading on the contraption does not technically “read on” any of the other inventions. Claims read on things and actions.


                I’m not necessarily talking about this specific case, Anon2, but about functional claiming. The functional claim may cover what one discloses, but it also covers and a lot more – it covers the improvements of others and independent inventions of others that accomplish the same overall result. This is known as functional claiming. And when one has a patent of such broad scope and just sits there waits and watches while industries develop, such a patent can be quite valuable. But the inventor’s contribution is in the specification, not in the claims.

                To some degree the same occurs when one includes structure and elements beyond the invention in the claim. This changes what infringes from something small to something large. But this is not so much a matter of infringement, but a matter of damages.

                If the courts determine the value of the contribution of the invention to what is claimed in every instance, patent practitioners will have an incentive to claim only the invention because adding and other elements simply reduces the scope of the claim and thereby reduces infringement.

                1. This is known as functional claiming.


                  Ned, your “version” is not what the law is.

                2. The problem, anon, is that you live in the world of Judge Rich an think that that is reality.

                3. As I so often have to correct you Ned, I live in the world in which Congess enacted the Act of 1952.

                  Your obsession with Rich is a detriment to your being able to accept the reality that happened way back then.

                  Wake up son.

    2. 2.3

      Why shouldn’t infringer cough up its entire I’ll-gotten gain?

      Because the statute hasn’t permitted recovery under that approach since 1946.

    1. 1.1


      You raise a very good point here that deliberate piracy should not be rewarded by retention of any profit. In fact, unless the award truly hurts, there will be no disincentive whatsoever to deliberate piracy.

      1. 1.1.1

        If you read the legislative history, though, reasonable royalties were deliberately added because equitable accounting took forever!

        Why not use enhanced damages to increase it (other than the Federal Circuit’s judicially created rule that enhanced damages are available only for willful infringement)? There is nothing in the statute that prohibits it…


          J, enhancing damages is discretionary. But I would say it is an abuse to leave a deliberate pirate with any profits. All should be extracted, and the pirate should pay costs and attorneys fees.

          And, I really do not want to hear anything about any subjective belief in non infringement or invalidity. If a pirate has a belief in non infringement or invalidity, that his own affair. He should not be able to evade requirements of the law because of his private beliefs. He should be required to file a DJ action at a minimum to clear his right to practice the invention.

          I have had it up to here with the coddling of infringers. If claims are unclear, if the PTO is issuing invalid patents, these things are causes for invalidity defenses. One should have no right to infringe, and infringement without regard to the legal rights of the patent owner must be punished and deterred.


            So, you are in favor of a system that allows people to challenge the validity of patents even before there is a threat of litigation?


              Squirrel, No.

              If one choose to infringe a patent, is sued, loses on its validity theory, then it should pay.

              But really, how does one deliberately pirate a patented invention if one does not copy a marked product, received notice of infringement, or is aware that others are being noticed and sued?


                Let’s ask the Snyder brothers (and see if they have been paying attention to the fact that even if they do invent something first, but fail to make it appropriately Prior Art, that they can be – as purposefully written in the law, like forever – infringers to someone else inventing the same thing, even at a later date).


                Because one does not always deliberately infringe a patented invention?

                Let’s see. It is not hard to imagine a scenario where a company started doing X, and afterwards becomes aware of a patent that could cover X (some arts are not indexable, afterall). The company believes that it can prove that the patent is invalid. What now? Do they waste their investment in X? Do they provoke the lawsuit? Do they sit on the evidence and hope? (I guess they could learn if others are being sued over the patent and provide assistance).

                1. The ordinary squirrel should know about both the ordinary carrot AND the ordinary stick that patent law has had, like forever (and direct infringement has no sense of “deliberateness”)

                2. The idea that PHOSITA should know the state of the art (e.g., all the relevant patents in the fields, and sufficiently adjacent fields) is a legal fiction. Some fields simply are not indexable.

                  In fields where independent invention is more common, it seems inequitable to punish those who can show that the patent holder does not, in fact, have a valid property interest in the supposed invention. (Just like in criminal law, sometimes the lawsuit is the punishment, even if the accused is eventually exonerated.)

                3. You see, Ordinary Squirrel, you are exhibiting a basic lack of understanding of patent law.

                  Throughout its history there has always been a stick aspect to beat upon those who may invent and not share. You can share by joining the patent game or you can share by suitably making your invention be known as proper Prior Art.

                  What you cannot do is what you appear to want to do here: merely invent but NOT share and then whine when someone else does invent and does share.

                  Your “it seems inequitable” is in fact NOT – and it is not by conscience design.

                  This is also a lesson that our friends the Snyder brothers just can’t seem to grasp, but it is a basic lesson that has been around forever.

                4. Squirrel, for the non intentional infringer, there is “no less than a reasonable royalty.”

    2. 1.2

      Meh. The non-infringement and invalidity arguments made were plausible.

      Actually, in my view, the invalidity argument was correct. But the court went the other way. I’ll deal. Would only others deal with KSR, Alice, etc.

      1. 1.2.1


        F that.

        In the best Jefferson tones: “All tyranny needs to gain a foothold is for people of good conscience to remain silent.”

        They will try again.

        link to youtube.com

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