'; The Importance of Apportionment in Calculating Damages for Patent Infringement

The Importance of Apportionment in Calculating Damages for Patent Infringement

March 16, 2015 Chicago Daily Law Bulletin

Large monetary awards in patent infringement cases are certainly capable of grabbing headlines. For example, in 2012 a jury in California awarded Apple $1.05 billion in damages for Samsung’s infringement of several Apple patents. And just last month, Apple found itself on the other side of the coin when a Texas jury assessed it $500 million for patent infringement.

But such awards, even if they are reduced through subsequent proceedings as in the Apple-Samsung case, may give the wrong impression to patent owners and the general public, namely that the patent owner is always entitled to substantial monetary damages when an infringer is found liable.

Rather, a patent owner must be careful to ensure that the damages it seeks for infringement of its patent bear a sufficiently close relation to the patented invention. What if a patent covers only one small component of a larger product, for example windshield wipers on a car or the touch screen of a smart phone?

The Court of Appeals for the Federal Circuit, which hears all appeals of patent cases, has recently issued several opinions on this topic. One such case, Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1337 (Fed. Cir. 2009), emphasized that a patent owner is required to separate or apportion the damages attributable to the patented features contained in the accused product to the exclusion of any profits attributable to unpatented features.

This concept, known as apportionment, is not a new development in the law. In fact, it finds its roots in Supreme Court precedent from the late 1800s. See Garretson v. Clark, 111 U.S. 120, 121 (1884). But it is again coming to the fore as the Federal Circuit attempts to rein in oversized patent damages awards.

By way of background, there are generally two types of monetary damages in patent cases: lost profits and a reasonable royalty. Lost profits are only available in limited instances, such as when a true competitor is harmed by loss of sales of its product. A reasonable royalty, on the other hand, is much more common and the statutory minimum to which a patent owner is entitled when its patent is infringed.

A reasonable royalty has two components, the royalty base and the royalty rate, which when multiplied together determine the total royalty (i.e., royalty = base * rate). The royalty is intended to be the result of a hypothetical negotiation that would have taken place between the parties at the time just before infringement began, one in which the alleged infringer as a willing licensee would have taken a license from the patent owner, a willing licensor.

The choice of base is critical in a reasonable royalty analysis. Even though a large base (e.g., the entire value of a car) can be offset by a small rate, the Federal Circuit requires a reasonable choice of base so as not to “skew the damages horizon for the jury . . . .” Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1320 (Fed. Cir. 2011).

The Federal Circuit suggests use of the smallest salable patent-practicing unit (or “SSPPU”) for the base as a first step toward determining the royalty. LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012). But there is an exception to this rule, albeit a narrow one. If the accused technology is but one component of a product, such as the touch screen of a smart phone, then the entire market value of the product can be used as the base if the patent owner first proves the component covered by the patent serves as “the basis for customer demand” of the overall product. Id. It is only in this limited instance that apportionment does not apply, and the entire market value of the product, of which the infringing technology is but one component, may be used as the royalty base.

Aside from this exception, however, a patent owner must always apportion the base to ensure it is closely tied to the patented invention. VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014), another recent Federal Circuit case, reaffirms this duty. VirnetX holds that a patent owner must apportion even beyond the SSPPU if it contains significant non-infringing features with no relation to the patented feature. Id. at 1327. In other words, the patent owner may have to focus the royalty base even further to discount those unrelated features, all in an effort to more accurately “estimate what portion of the value of that product is attributable to the patented technology.” Id.

So just how far must a patent owner apportion? District courts acknowledge it is not an exact science, and competing damages experts may take differing approaches. The actual costs or profits of the accused device attributable to the patented feature may provide guidance. Another option may be a survey measuring the proportion of value customers or potential customers attribute to the patented feature.

But patent owners should pay attention: Some courts are applying VirnetX and strict apportionment rules as a means of striking expert reports, while others allow the jury to hear competing theories of apportionment and make its own determination of an appropriate royalty base.

In the end, a patent owner must “tie proof of damages to the claimed invention’s footprint in the market place . . . .” ResQNet, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010). But no matter the size of that footprint, the amount the patent owner seeks for infringement must have a sufficiently close relation to the patented invention.