By: Bill Kerley, AccuVal Associates, Inc.
Access to real and relevant transaction information about patents comparable to those being litigated is essential to obtaining the right legal decision in the courtroom. AccuVal has built its practice around unearthing "impossible to find" information that provides the best and most accurate indication of value. This is essential to successfully litigating patent infringement cases in the future because the hurdle bar to prove damages just got higher. Here's how.
A number of recent appellate court cases have focused on the calculation of the appropriate royalty rate to be used in the determination of damages in patent infringement cases. The legal basis for the damage quantification, where a finding of infringement has been found, is Section 284 of Title 35 of the United States Code that states that damages shall "in no event [be] less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court" (emphasis added).
Reasonable royalty rates are typically determined as if a "hypothetical negotiation" has taken place between the patentee and the licensee to determine the rate. The negotiation is assumed by the courts to have occurred as of the time of the infringement. In three recent decisions, the United States Court of Appeals for the Federal Circuit has focused its opinions on three particular areas: The reliability of the methodologies utilized by the parties' experts in determining a reasonable royalty rate starting point; the comparability of the license agreements utilized to the patent in question; and the application of the "Entire Market Value Rule" (EMVR) that allows the patentee to determine damages based on the entire market value of the product that incorporates the patent.
The following is a discussion of the findings of the court in three individual cases:
The case involved Uniloc's patented technology for the prevention of illegal software copying. In the original trial, Uniloc was awarded $388 million by a jury for Microsoft's alleged infringement. The pivotal point in the appellate case was the use of the "25 Percent Rule of Thumb" by Uniloc's expert witness in the determination of the starting point for the determination of a reasonable royalty rate.
The 25 Percent Rule of Thumb was developed in the 1950s and has been commonly used in both litigation and non-litigation royalty rate calculations. The 25 percent benchmark was based on average royalty rates across a broad range of industries that indicated licensees earned approximately 25 percent of their profits by utilizing the licensed intellectual property.
In this case, the appellate court stated that the use of the 25 Percent Rule of Thumb as a starting point for the determination of a reasonable royalty rate was "fundamentally flawed" because it was not tied to the relevant facts and circumstances of the case. Further the court found that evidence did not support the use of the EMVR in the calculation of damages because the patent did not create the basis for customer demand of the finished product. The case was remanded for a new trial on damages.
The two patents at issue in this case related to MP3 audio technology and the ability of computers running Microsoft's Windows Media Player to both create and use audio files encoded in an MP3 format.
After losing at trial, Microsoft appealed the jury's lump sum award of $358 million for infringement. Microsoft argued that the evidence presented at trial did not meet the "substantial evidence" threshold in order to justify the damages awarded.
At trial, Lucent presented eight "comparable" license agreements to substantiate its damages claim. However, the appellate court found that some of these "comparable" agreements were radically different from a "hypothetical negotiation" for the patents at issue and should not have been considered by the jury. The court also found that the application of the EMVR was not appropriate because the technology contributed by the patents were only a minor element of the total computer and operating system. In addition, Lucent provided no explanation of how these "comparable" agreements related to a hypothetical negotiation for the patents at issue. The appeals court ordered a new trial to determine the appropriate damages.
The alleged patent infringement in this case relates to patented technology, owned by ResQNet, that facilitates the recognition of data sent by mainframe computers and translates it into the graphical user interface for displays used by personal computers.
Lansa appealed the $506,000 damage award granted at trial. The basis of the appeal was the methodology used by ResQNet's expert witness to calculate damages.
At the original trial, ResQNet's expert relied on seven existing ResQNet licenses as the basis for the 12.5 percent royalty rate in arriving at a determination of damages. These agreements were accepted by the district court.
On appeal, the appellate court found that these agreements provided "unreliable evidence that was divorced from proof of economic harm." The appeals court also found that only two of the agreements were actually relevant. The two agreements considered reasonable by the appeals court arose out of litigation involving infringed patents with other parties. In a departure from normal practice, the appeals court remanded the case with instructions to the lower court to give weight to the litigated licenses as being the most appropriate measure of damages.
These rulings substantially increase the burden of proof for plaintiffs in patent infringement cases. To be considered relevant, evidence must be presented that supports the hypothetical negotiation standard and that when "comparable" licenses are considered they must be relevant. Additionally, the use of the 25 Percent Rule of Thumb as the starting point for the hypothetical negotiation is no longer permitted. For the plaintiff, the substantiation of damage claims will become more time consuming and costly.
For defendants, these cases allow additional means by which to challenge the expert's methodologies utilized by plaintiffs and the "comparable" licenses used in their analysis. More importantly, there will be an increased likelihood of litigation to reduce damage awards on appeal rather than to pay the preliminary damages determined by the lower courts.
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