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David Donoghue: Reasonable Royalty Law Update

by R. David Donoghue on July 17, 2012

 

This post originally appeared here on July 3, 2012, and is reposted here with the author’s permission.

I recently attended and spoke at the Rocky Mountain IP Institute in Denver.  It was the second year in a row I have attended and spoken at the Institute.  In my opinion, the Rocky Mountain IP Institute is one of the two best IP CLE events (and destinations) in the country.    As evidence of that, the following is one of a series of posts from the excellent presentations over the two days of the conference.  I encourage you to consider joining me at next year’s Rocky Mountain IP Institute.

This post focuses upon a presentation regarding the state of patent damages law and specifically reasonable royalty analysis by Mark Pedigo of Crowe Horwath and Lee Johnston of Dorsey & Whitney.  As you are likely aware, a patentee with a valid and enforceable patent that is found to have been infringed is due damages in the amount of no less than a reasonable royalty.  Here are the highlights of the presentation:

  • A big area of change has been the Entire Market Value Rule.
  • There is an increased scrutiny on the basis of consumer demand required for the entire market value rule to apply.
    • How do you stand up to that scrutiny?
      • Consumer surveys (Lucent v. Microsoft)
      • Statistical or regression analyses
      • Cornell University v. Hewlett-Packard Co., 609 F. Supp.2d 279, 283-290 (N.D.N.Y. 2009) (Rader, J. by designation) the jury awarded $184M based upon the entire market value rule despite a lack of evidence from Cornell that the claimed invention (processors) formed the basis of the demand for the CPU bricks or even a market for CPU bricks.  Rader granted HP’s JMOL offering Cornell a remittitur to $53.5M (based upon the value of the processors) or a new trial.  The case settled.
      • Lucent v. Microsoft, 580 F.3d 1301, 1336 (Fed. Cir. 2009) involved a date picker for Outlook software.  It had no direct impact upon how Outlook functioned.  Jury awarded $358M using a royalty base of all Outlook software.  Because there was no evidence that the date picker functionality was the basis of consumer demand for Outlook, the Court ordered a new trial.  The second jury awarded less than 10% of the original award.
      • Laserdynamics, Inc. v. Quanta Computer, Inc. (E.D. Tex. Jun. 9, 2010) jury awarded $52M based upon a separate royalty for stand-alone drives and for computers the drives were sold in.  The district court held there was no evidence to support the entire market value rule and that the computers could not be included in the analysis.
      • Funai Elec. Co., Ltd. v. Daewoo Elecs. Corp., 616 F.3d 1357, 1375 (Fed. Cir. 2010) allowed the entire market value rule finding that at the time there was a significant demand for smaller VCRs and that the patented technology helped to reduce the size of the VCRs.
      • Uniloc v. Microsoft, 632 F.3d 1292, 1318 (Fed. Cir. 2011) rejected the 25% rule as not scientifically sound.  The Court also explained that it was not enough to use a sufficiently low royalty percentage of the entire market value.  The entire market value rule has to be independently justified.
      • Reasonable royalty analysis (Georgia-Pacific factors)
        • Lucent v. Microsoft, 580 F.3d 1301, 1325 (Fed. Cir. 2009) held that comparable licenses must have some relationship to the accused activities.
        • ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 868 (Fed. Cir. 2010) held that proof of damages must be carefully to the claimed invention’s industry footprint.  Comparable licenses should either be for the patents-in-suit or should only be used very carefully and sparingly.  The Federal Circuit cautioned the district court on remand not to rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology.  On remand, the district court awarded a 3% royalty instead of the 12.5% rate used by the jury.
        • IP Innovation LLC v. Red Hat, Inc., 705 F. Supp.2d 687, 690 (E.D. Tex. 2010) (Rader, J. by designation) held that plaintiff’s expert arbitrarily picked a royalty rate higher than the existing rates for patents-in-suit.  The proper analysis would have been to use the comparable licenses and adjust them for the age of those licenses.  There was no evidence that industry agreement relied upon by plaintiff’s expert were not tied to the case by evidence.  The damages issues were ultimately not decided because Red Hat was held not to infringe.

R. David Donoghue, a partner at Holland & Knight, was a faculty member at the 2012 IP Institute. He blogs regularly at the Chicago IP Litigation Blog and the Retail Patent Litigation Blog.

 

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