Federal Circuit Knocks Out Expert’s Application of Entire Market Value Rule in Damages Calculation

August 30, 2012

Chelsea A. Loughran

What This Means To You

  • Reasonable royalty damages will be calculated against a royalty base representative of the smallest saleable patent-practicing unit absent a showing that the patented feature drives or constitutes demand for a larger product. That the feature contributes to commercial viability of the larger product is not enough.
  • Damages expert theories should be carefully scrutinized before trial.
  • A reasonable royalty rate will be determined as of the date the first infringing act took place, even in induced infringement cases.

Overview

In LaserDynamics, Inc. v. Quanta Computer Inc., the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) scrutinized the reasonable royalty damages calculation permitted by the Eastern District of Texas. The Federal Circuit identified and struck down several erroneous aspects of the patentee’s damages theory including the patentee’s improper application of the “entire market value rule” (EMVR) which allows a patentee to recover damages on unpatented features sold with a patented feature if the patented feature is the basis for customer demand.

The Federal Circuit used this case to reaffirm that the application of the EMVR is limited to cases where the patented feature creates and drives demand for the product itself.

As a result of its decision, the Federal Circuit remanded for a new trial on damages.

Case Background

LaserDynamics held a patent on a method that enables an optical disc drive (ODD) to identify the type of optical disc—such as a CD versus a DVD—inserted into the ODD. LaserDynamics sued Quanta alleging that Quanta actively induced infringement by assembling laptop computers that include infringing ODDs and selling those laptops to customers who then employ the claimed method.

After two jury trials, a determination of infringement, and a damages award of $8.5 million, Quanta appealed, arguing, among other things, that the damages award should be vacated. The basis of Quanta’s argument was that LaserDynamics’ expert improperly applied the entire market value rule when he assessed a 6% royalty to the total sales of laptop computers incorporating the infringing ODD rather than to sales of the ODDs alone.

Quanta also appealed the use of the 6% rate itself, maintaining it was based upon unreliable and unrelated licensing surveys and improperly ignored lump sum license payments for the patent on the basis that such licenses occurred prior to Quanta’s knowledge of the patent.

Decision Analysis

Of most significance, the Federal Circuit ruled that LaserDynamics’ expert’s application of the EMVR to his damages calculation was improper. The Court reiterated that such an analysis is reserved only for the limited case where it can be shown that the patented feature creates and drives demand for the product itself.

In this case, while it was known that laptops were not commercially viable without the patented ODD drives, LaserDynamic’s expert did not and could not show that the consumer buys a laptop computer specifically because it has the patented ODD drive. Because this could not be shown, the reasonable royalty rate should have been applied to total sales of the smallest saleable patent-practicing unit (the ODD drives themselves) for purposes of a damages calculation.

Takeaways

This case again reminds us that the EMVR is to be applied only in a limited set of cases. Absent a showing that the patented feature drives or constitutes demand for a larger product, reasonable royalty damages will be calculated against a royalty base representative of the smallest saleable patent-practicing unit.

This case also reminds us of the importance of vetting experts’ theories (notably, damages experts) prior to trial as the Federal Circuit is presently keen on scrutinizing the propriety of damages awards and the underlying theories upon which they are based.

Finally, it is important to note that a reasonable royalty rate will be determined as of the date that the first infringing act took place—even in induced infringement cases—and not as of the date the alleged inducer gained actual knowledge of the patent.