Tag Archives: Damages

Patent Reform 2007: Apportionment of Damages

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Patent are business tools that can help ensure some monetary reward for innovative effort.  Although few patent are litigated through final decision, the threat of litigation casts an ever-present shadow on licensing negotiations and inter-corporate dealings.  Of course, any underlying threat is closely related to the size of potential damages and strength of a potential injunction.  In the past two-years, damages in particular have become more important as the Supreme Court's decision in EBay v. MercExchange lessens the likelihood of injunctive relief.

There has been little scholarly discussion of how ongoing money damages should be assessed when an injunction is denied.  I take the position that a denial of an injunction should not necessarily result in a compulsory license and that there are many times when continued infringement would be considered willful.

The Patent Reform Acts of 2007 (both House and Senate) propose changes to damage calculations that would require specific economic analysis to ensure that any reasonable royalty damage award captures "only [the] economic value properly attributable to the patent's specific contribution over the prior art."  These calculations would apparently apply to calculations of both past and future damages. CAFC Chief Judge Michel recently testified before Congress -- discussing some practical implementation of the damage modifications:

[T]he provision on apportioning damages would require courts to adjudicate the economic value of the entire prior art, the asserted patent claims, and also all other features of the accused product or process whether or not patented. This is a massive undertaking for which courts are ill-equipped. For one thing, generalist judges tack experience and expertise in making such extensive, complex economic valuations, as do lay jurors. For another, courts would be inundated with massive amounts of data, requiring extra weeks of trial in nearly every case. Resolving the meaning of this novel language could take years, as could the mandating of proper methods. The provision also invites an unseemly battle of "hired-gun" experts opining on the basis of indigestible quantities of economic data. Such an exercise might be successfully executed by an economic institution with massive resources and unlimited time, but hardly seems within the capability of already overburdened district courts. Appellate issue would also proliferate increasing complexity and delays on appeal, not to mention the risk of unsound decisions.

I am unaware of any convincing demonstration of the need for either provision, but even if the Committee ultimately concludes that they would represent an improvement over current patent policies embedded in Title 35 of the United States Code, their practicality seems to me very dubious. That is, the costs in delay and added attorneys fees for the parties and overburden for the courts would seem to outweigh any potential gains. Finally, even if the policy gains were viewed as significant, the courts as presently constituted simply cannot implement the provisions in a careful and timely manner, in my judgment.

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2007 Patent Reform: Proposed Amendments on Damages

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By Professor Amy Landers

The proposed 2007 Patent Reform Act (the “Leahy-Berman bill”)[1] details modifications to 35 USC § 284 that will most certainly reduce many patent infringement damages awards. Three portions of the Leahy-Berman bill concern monetary compensation: First, the bill seeks to limit reasonable royalty damages to the inventive aspects of the claim. Second, the bill restricts the use of the entire market value rule. Third, the bill expressly confirms a fact finder’s ability to rely on certain types of evidence to measure compensatory harm.[2]

Reasonable Royalty: Relationship to Contribution over the Prior Art and Consideration of Relevant Factors.

Perhaps the most striking change in the Leahy-Berman bill is a proposed limitation to reasonable royalty recovery. Under current law, a reasonable royalty is calculated by envisioning the result of the parties’ hypothetical negotiation for a license to the claimed invention at the time infringement began.[3] This determination is made by a fact finder (whether judge or jury) and is guided by the application of the Georgia Pacific fifteen-factor test.[4]

Current patent law permits a reasonable royalty calculation for use made of “the invention”—that is, an infringed claim. Of course, few--if any--patent claims are entirely novel. Most claims are an improvement over the prior art. Further, combination claims aggregate prior art elements in a novel way, or else a combination of novel elements together with prior art elements.

The Leahy-Berman bill specifically requires a limit on reasonable royalty recovery to the “economic value properly attributable to patent’s specific contributions over the prior art,”—that is, the inventive portion of the claim. Such an aggressive limit on monetary relief for patent infringement has not been apparent in the case law for decades.[5] A statement by Sen. Leahy (link) explains that this limitation is intended to provide for compensation solely for “the truly new ‘thing’ that the patent reflects,” in response to a concern that “litigation has not reliably produced damages awards in infringement cases that correspond to the value of the infringed patent.” This reasonable royalty limitation, which is likely to affect patents in all technology sectors, promises to be controversial.

Additionally, the Leahy-Berman bill asks trial courts to exercise more control over the fact finder’s consideration of the reasonable royalty and to create a more defined record for appellate review. Under current law, a typical reasonable royalty jury instruction lists all fifteen Georgia Pacific factors although fewer than all factors may be relevant in any particular case.[6] Further, a verdict form asks a jury to set a royalty figure, but jurors are rarely asked to create a record as to how their result was reached.

Under the Leahy-Berman bill, the trial court must “identify all factors relevant to the determination of a reasonable royalty” and then the fact finders are limited to consider only the factors identified by the district court in awarding a reasonable royalty. As an example of this provision in operation, a trial court might make an initial determination as to whether derivative or convoyed sales exist, such that the sixth factor of the Georgia Pacific test is relevant. If no such sales are in evidence, under the Leahy-Berman bill a trial court must preclude a jury’s consideration of this sixth factor.

Significantly, the proposed legislation’s use of the word “factors” does not appear to be limited to the Georgia Pacific factors specifically and presumably would apply to any factor that might be considered, including those listed in proposed section 284(a)(4).

Apportionment: The Entire Market Value Rule

As a general rule, patent damages are linked to the subject matter of the invention.[7] In some cases, an infringed claim relates to only one part of an entire multi-functional infringing product or system. In those circumstances, apportionment is the general rule—that is, damages are based on either lost profits or reasonable royalty apportioned for the infringing part as distinct from the remainder of a device that is outside the infringed claim’s scope. For example, damages for a claim directed to an improved windshield wiper are calculated based on the value of the infringing wiper, and not the sales price of the entire car into which the wiper is installed.

This general rule is modified under the judicially created “entire market value rule.” Where the entire market value rule applies, a patentee may recover damages based on the value of an entire apparatus or system that contains both infringing and additional, unpatented features.[8]

In “Let the Games Begin, Incentives To Innovation In The New Economy Of Intellectual Property Law,” I examine how the entire market value rule has recently received expansive application. Historically, the entire market value rule allowed recovery based on the price of entire product only where the “entire value” of the product was attributable to the infringing feature.[9] However, more recently, Federal Circuit cases more broadly apply the entire market value rule so long as there is a “functional relationship” between the infringing and the non-infringing components.[10] Further, patentees can recover for sales of non-infringing components where the patentee demonstrates a “reasonable probability” of selling the non-infringing components with the infringing part.[11]

An example of this expansive application of the entire market value rule can be seen in Lucent v. Newbridge Networks[12], where the district court determined that the jury’s addition of two software programs were properly included in the royalty base even where those programs were non-infringing, were not physically part of the infringing device and were not necessary for the device to operate. More recently, the Alcatel-Lucent verdict against Microsoft concerning the Windows® Media Player was reportedly calculated based on the average cost of a personal computer, and not limited to Microsoft’s Media Player or even Windows®.[13]

The Leahy-Berman bill provides an explicit, definitional standard for the application of the entire market value rule by requiring the patentee to show that the claim’s contribution is “the predominant basis for market demand” of an entire product or process. This standard reigns in the current expansive articulations of the entire market value rule by requiring a patentee to demonstrate that an infringing feature is the single primary reason users select an infringing product or process. If enacted, this subsection will have the overall effect of limiting damages to a particular infringing piece of a multifunctional product or process for both lost profits and reasonable royalty awards.

An open question exists as to the interaction between the proposed subsection (a)(2) governing reasonable royalties and (a)(3) governing the entire market value rule. Specifically, proposed subsection (a)(2) precludes recovery for the value of unpatented features of an infringing product or process. On the other hand, proposed subsection (a)(3) arguably permits such compensation where the inventive element is the “predominant basis for market demand.”

Marketplace Licensing and “Other Factors”.

The Leahy-Berman bill proposes one additional change, which appears of minor importance. That is, the bill expressly states that a fact finder may consider “the terms of a non-exclusive marketplace licensing of the invention” and any “other relevant factors” under the law in the damages determination. This subsection appears to be a codification of the existing law, which permits district courts wide discretion in considering evidence relevant to the damages determination.

Conclusion

As a whole, the Leahy-Berman bill represents an effort to refine and narrow available damages for patent infringement by building on an existing body of case law. The proposed changes to patent damages will undoubtedly present some challenging questions if adopted into law.

Two of the proposed sections require apportionment of inventive claimed matter from that outside the claim scope. The difficulty presented is that apportionment determinations can be difficult to implement. Perhaps the best evidence of this is the pre-1948 law, which relied on apportionment for calculating lost profits and had been described as a “complete failure of justice in almost every case in which supposed profits are recovered or recoverable” due to the time and complexity involved.[14]

Further, the Leahy-Berman bill has the potential for significant consequences for the licensing value of patents more generally. That is, to the extent that licensing determinations may reflect of potential results at trial, one might be expect that licensing negotiations will account for lowered damages the bill is passed into law. 2001).

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Litigation Misconduct and Enhanced Damages

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z4 v. Microsoft (E.D. Tex. 2006).

The Eastern District of Texas has been busy leading the post-eBay anti-injunction craze.  z4’s motion for injunctive relief against Microsoft was denied (see z4), but the small holding company was still awarded $115,000,000 in damages against the software giant.

Now, the court has added another $25,000,000 in enhanced willfulness damages and $2.3 million in costs and attorneys’ fees. z4 and its owner David Colvin successfully played the underdog:

[T]here is ample circumstantial evidence that to Microsoft[,] Colvin and his patent rights were insignificant because Microsoft never thought Colvin would be able to pursue his rights against it. The evidence presented at trial suggests that Microsoft considered z4 a small and irrelevant company that was not worthy of Microsoft’s time and attention, even if Microsoft was potentially infringing its patents.

In economics literature, this potential for "underenforcement" is a classic justification of punitive damages. 

The court then went through a laundry list of examples of Microsoft’s litigation misconduct that formed the basis for the finding of an exceptional case as well as a partial basis for the enhanced willfulness damages.  Some of these are listed below:

The Moncau email. It wasn’t until the Sunday one-day before trial that z4 was finally a able to depose Microsoft’s witness Moncau, and during that deposition Moncau revealed information about an important email that had been sent to two other Microsoft witnesses discussing critical information regarding operation of Microsoft’s product.  That email had never been produced even though Moncau testified that he had provided all his documents to Microsoft’s counsel over one year before the deposition.

Nevertheless, the email had never been produced by Microsoft during discovery despite the fact that it was between three Microsoft employees referenced in the email, all of whom allegedly gave all of their relevant documents to Microsoft’s counsel for production. Making matters even worse, Defendants admit they were aware of the Moncau email several hours before Moncau’s deposition, but still withheld it from z4 until z4 found out about it during questioning during the deposition. This raises a serious question as to whether the email would have ever seen the light of day, had z4 not uncovered it during Moncau’s deposition the day before trial.

At trial, the Court indicated to the Jury that Microsoft had improperly withheld the communication.

The Hughes Database. Microsoft attempted to use a summary chart at trial based on an underlying database.  In his deposition, however, Hughes, the chart’s creator, testified that the database did not exist.  One week after the deposition, Microsoft did, in fact, produce the data stored in file on a CD labeled “Source Code,” but z4 never found the database and, even after z4 asked, Microsoft never corrected Hughes original testimony or informed z4 of the database. 

It also turned out that the summary was an inaccurate representation of the database and that Microsoft had not accurately disclosed the method used to create the summary chart.

The Court determined that Microsoft had attempted to mislead z4, the Court, and the jury and excluded Hughes from testifying with regard to the database and his summary chart.

Voluminous Exhibit Tactic. Microsoft marked over 3,000 exhibits for trial, but only admitted 107 of these.

The Court concludes that Defendants attempted to bury the relevant 107 exhibits admitted at trial in its voluminous 3,449 marked exhibits in the hope that they could conceal their trial evidence in a massive pile of decoys. This type of trial tactic is not only unfair to z4, but creates unnecessary work on the Court staff and is confusing and potentially misleading to the jury.

Etc.

Finally, the Court is greatly disturbed by the repeated instances where Defendants actions go beyond what can be dismissed as a mere appearance of impropriety and collectively appear to represent a pattern which is of disappointment to the Court and a disservice to legitimate advocacy. The repeated examples, some of which are not even mentioned here, of what can be described as nothing less than misleading on the part of Defendants, justify a conclusion that Defendants committed litigation misconduct. This conduct, coupled with the fact that Microsoft was found to have willfully infringed the patents-in-suit results in this case being deemed exceptional. Accordingly, the Court awards z4 reasonable attorneys’ fees and expenses, excluding expenses related to expert witnesses.

Microsoft is expected to appeal this decision.  z4 will likely cross-appeal the denial of injunction.

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Plaintiff’s Misconduct Results in a Loss of Damages and a New Trial

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Schreiber Foods v. Beatrice Cheese (Fed. Cir. 2005).

Schreiber sued Keuster for infringement of a patented method of slicing and storing cheese.  (U.S. Patent No. 5,701,724).  At trial, a Schreiber director falsely testified that Schreiber Foods owned the patent that had actually been assigned to a third party during the litigation. After trial and verdict, Schreiber’s trial counsel assisted Schreiber in re-acquiring the patent, but did not disclose the assignment to the district court or to opposing counsel.

Upon a Rule 60(b) motion to vacate the judgment, the district court found that Schreiber’s lack of ownership during the litigation deprived Schreiber of standing and rendered the suit moot — thus voiding the judgment.  In the alternative, the district court found that the plaintiff’s litigation conduct constituted fraud, misrepresentation or misconduct.

On appeal, the CAFC first found that the case was not moot, because Schreiber had standing when the trial started (before the original assignment) and had now re-acquired standing.

A temporary loss of standing during patent litigation can be cured before judgment.

On the issue of fraud, the CAFC agreed that there “can be no claim that Schreiber’s conduct is not sanctionable.”

Quite apart from whether Schreiber’s misstatements in the period before September 1998 were sanctionable, the conduct of Schreiber and its counsel after September 1998, when counsel became aware of the assignment of the ’860 patent, was plainly sanctionable. Once counsel became aware that highly material false statements had been made by a witness, in pleadings submitted to the court and in response to discovery requests, and that highly material documents had not been produced as required, Schreiber and its counsel were under an obligation to promptly correct the record.

The CAFC therefore held that the district court properly vacated the entire judgment and that a new trial on all issues is the appropriate sanction.  

File Attachment: Schreiber Foods v. Beatrice Cheese.pdf (67 KB)