The injunction decision in Innogenetics deserves a second look. In that case, the Federal Circuit closely examined the Wisconsin District Court’s award of both injunctive relief and $1.2 million in forward looking damages.
The $7 million total damage award was divided into two parts by the jury: a $5.8 million “market entry fee” and a $1.2 million “ongoing royalty payment.”* This award “exactly tracked” the damage award proposed by the patentee’s expert and also fit within the jury instructions, which called for “both an up-front payment and an ongoing royalty payment.”
In addition to receiving a lump-sum to cover ongoing royalties, the District Court also awarded an injunction to stop ongoing infringement. On appeal, the CAFC rejected this double-dipping. In her opinion, however, Judge Moore, was careful to cast the reversal in the language of eBay v. MercExchange. Thus, the appellate panel held that a patentee who asked for and received future licensing royalties has no standing to complain of irreparable harm.
The reasonable royalties awarded to Innogenetics include an up-front entry fee that contemplates or is based upon future sales by Abbott in a long term market. When a patentee requests and receives such compensation, it cannot be heard to complain that it will be irreparably harmed by future sales.
Although the court did not use the words, the rule here appears to be akin to that of equitable estoppel. This is a simple case for the appellate panel because the patentee asked for the forward looking damages. However, the panel also implicitly accepts forward looking damages as an adequate substitute for injunctive relief. The collection of damages negates irreparable harm — the most important eBay factor.**
On remand, the CAFC also appears to have vacated the lump-sum future sale damages. Without discussion, the appellate panel ordered that the district court instead implement a compulsory license with a running royalty payment. The only clue to the court’s reasoning lies in Footnote 9, which notes that the shift to a running royalty would allow the district court to retain jurisdiction to “ensure the terms of the compulsory license are complied with.”
Notes:
* Innogenetics argued a semantic mix-up, that the “ongoing royalty” was intended only to apply from the point of infringement through judgment. The CAFC rejected that contention.
** Moreover, this factor [the lack of inequitable harm] greatly outweighs the other eBay factors in this case.
Mitutoyo and Central have been wrangling for more than a decade over Mitutoyo’s patent covering electronic calipers. The history includes Central’s 1994 agreement to exit the market; a 1995 DJ finding that the patent is not invalid or unenforceable; and a 2006 summary judgment against Central.
Both parties appealed on damages issues:
Reasonable Royalty: On appeal the CAFC found the lower court’s 29.2% reasonable royalty rate acceptable. Although a seemingly high number, Central’s profit margin is around 70%. Most interestingly, the appellate panel held that the parties “contentious history” supports a high royalty rate. This serves as a reminder that a the reasonableness of the royalty still takes-into-account the positions of the parties.
Lost Profits: Although Mitutoyo also sells calipers, Central was able to avoid lost profit damages by showing that the products had little customer or price overlap. (Central’s proof included economic evidence that the market for its $21 product was highly elastic – indicating few of its customers would have instead purchased Mitutoyo’s $100 product.)
Willful Infringement: Mitutoyo’s willful infringement claim was dismissed on the pleadings under FRCP 12(b)(6) for failure to state a claim and failure to prosecute. On appeal the CAFC reversed – finding that Mitutoyo’s allegation of willful infringement coupled with Central’s long history with the patent were “plainly more than sufficient to meet the requirement of Rule 8(a)(2) for pleading a willful infringement claim and avoid dismissal.” Similarly, the appellate court held that failure to file a summary judgment motion on willfulness does not indicate “an intent to abandon [the] willfulness claim.”
In its August 2007 Seagate en banc opinion, the CAFC raised the culpability standard for willful infringement. This case takes a step back to remind courts that the enhanced damages theory does not (yet) require a showing of fraud.
Standing of a licensee to sue: Mitutoyo’s primary US licensee was also a party to the litigation. However, a licensee only has co-plaintiff standing if it holds “at least some of the proprietary rights” of the patent. Here, the licensee has no standing because Mitutoyo also allows one other company to import and distribute its products in the US.
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.
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).
RFR holds patents covering a rubberized filler used on train-tracks that run over streets. The parties had a settlement agreement in place, but Century decided to stop payment — apparently believing that RFR’s claims were “barred by the doctrines of patent exhaustion and implied license.”
RFR sued. Century answered the complaint and faxed a copy to RFR, but did not post a copy to the plaintiff.
RFR then got cold-feet and asked the court to dismiss the complaint without prejudice. Under the Federal Rules of Civil Procedure (R. 41(a)(1)), the plaintiff has a right to dismiss an action before the other side serves its answer or a motion for summary judgment.
In any event, the lower court didn’t allow RFR to dismiss the case — instead it granted Century’s 12(c) motion on the pleadings (with prejudice) and awarded attorney fees.
On appeal, the CAFC reversed, finding that Rule 41 “means what it says.” (applying 5th Circuit law). Because RFR had not been “served with the answer” it still had a right to dismiss its case.
So long as a plaintiff has not been served with an answer or a motion for summary judgment, the plaintiff need do no more than file a notice of dismissal to dismiss the case.
The CAFC also reversed the award of attorney fees, holding that a voluntary dismissal under R.41(a) does not result in a “prevailing party” as required by the enhanced damages statute (35 USC 285).
Aero has patented an air mattress inflation control system that it advertises using the registered mark “ONE TOUCH.” A jury found that Intex (and Wal-Mart) were infringing both the patent and the trademark. The judge awarded $5.80 million for willful patent infringement ($2.95 in compensation, doubled for willfulness) and $1 million for the trademark infringement.
On appeal, the CAFC looked at the damage award and found some double-counting.
This case presents the question of whether Aero’s recovery of both patent and trademark infringement damages represents an impermissible double recovery.
Under Federal Circuit, double recovery for the “same injury” is inappropriate.
At trial, Aero had used similar evidence of Intex sales to show damages for both the patent and trademark claims. Because Aero did not show any other harm to its trademark apart from the sales of the patented product, the CAFC found that the injury was identical, and thus cancelled the trademark recovery.
The case is remanded to the district court for entry of judgment in Aero’s favor in the principal amount of $5.9 million. [Still enough for a good night’s sleep]
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.
Hazelquist v. Guchi Moochie and Mr. Yamaguchi. (Fed. Cir. 2006).
It is now my dream to cite this case in open court:
DDC: “Your Honor, I would refer you to Guchi Moochi and Mr. Yamaguchi for controlling precedent.” Court: “Quite compelling argument you have Counselor.” Opposing Counsel: “Foiled again!”
To cite Guchi Moochi, you need a bankruptcy situation, and to be asking the court to collect post-bankruptcy damages:
DDC: “Under Guchi Moochi and Mr. Yamaguchi, although a discharge in bankruptcy operates as an injunction against a plaintiff asserting a claim for a cause of action that arose before the date of bankruptcy discharge, it does not act as an injunction against a plaintiff asserting a claim for a cause of action that arose after the date of bankruptcy discharge.”
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.
Date: December 8, 2004 Time: 12:30 PM Eastern Duration: 1 Hour Phone in #: RSVP to info@aplf.org in order to obtain 1-800 dial-in number Fee: Participation is FREE
Topic: Patent Damages–Beyond the Basics: Lost Profit Consideration
This discussion will center on patent infringement damages. The presentation will address damage issues beyond the basics of Panduit and Georgia Pacific including recent court decisions on lost profits, reasonable royalty and price erosion. Joseph Egan and Michael Chase, expert witnesses on economic damages with Navigant Consulting, Inc., will also provide case examples from some of their recent engagements and expert testimony. Curt Whitenack, a litigator from McDonnell Boehnen Hulbert & Berghoff LLP, will moderate.
I had forgotten to post this notice until I saw it on I/P Updates.
A common patent question is whether products should be marked with any relevant patent number. The simple answer is that marking provides “constructive notice” to infringers and may allow a patentee to collect greater damages in an infringement suit.
According to the marking statute:
In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice.
The injunction decision in Innogenetics deserves a second look. In that case, the Federal Circuit closely examined the Wisconsin District Court’s award of both injunctive relief and $1.2 million in forward looking damages. 
Aero v. Intex and Wal-Mart (
Hazelquist v. Guchi Moochie and Mr. Yamaguchi. (Fed. Cir. 2006). 