Limiting Patent Infringement Damages for Complex, Multi-Featured Products

September 16, 2014

Stuart V.C. Duncan Smith

What This Means to You

  • Evaluate the question of damages early and plan on proving damages with objective reasoning rather than speculation.
  • Be prepared to either divide the value of an infringing product up based on infringing and non-infringing features or show that the infringing feature is the reason that people buy the whole product.
  • When asking the court to allow you to present a damages theory, be sure to establish that the theory’s presumptions apply to the facts of the case.


Overview

Calculating damages in patent infringement lawsuits is notoriously difficult. The jury is often asked to determine what the infringer would have agreed to pay to use the patent had it negotiated with the patent owner before it started infringing. This question could lend itself to speculation, if the judge does not carefully control the jury’s approach. Courts have long struggled with how to separate the wheat from the chaff—what distinguishes improper speculation from proper reasoned analysis? In VirnetX v. Cisco, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) offered some clarity.

Case Background

Following a trial, the jury found that VirnetX’s patents cover several features of the most popular products from Apple—one of the defendants in the case. On the issue of the amount of damages, VirnetX presented testimony from an expert in the field of patent infringement damages, who testified about several calculations that justified a high damage award. After hearing that testimony, the jury awarded VirnetX $368 million in damages—nearly all the damages that VirnetX’s expert calculated.

Decision Analysis


On appeal to the Federal Circuit, Apple argued that VirnetX’s expert stepped over the line into speculation. The Federal Circuit agreed with Apple, finding two flaws. First, regarding one damages calculation, VirnetX’s expert had used the entire value of the infringing devices—a huge amount that included sales of all iPhones and iPads. The Federal Circuit held that he should have used just the more modest value of the infringing features, unless the infringing features were the reason that customers bought the devices in the first place.

Second, to determine how Apple and VirnetX should split the profits from using the infringing feature in another damages calculation, VirnetX’s expert relied on Nash Bargaining Theory—the theory from Nobel Prize-winning economist John Nash. The Federal Circuit faulted VirnetX’s expert for using the theory without first proving that the Apple-VirnetX dispute satisfied its many initial presumptions. Unless those presumptions are satisfied, it is unreasonable to rely on the theory.

Takeaways

The Federal Circuit’s decision clarifies what had been an ambiguity in its prior decisions, and affirms the default rule that damages should be based on the value of the infringing feature rather than the value of the entire infringing device. The consequence of removing the ambiguity around this rule may be a shift in how patent cases are valued. Many companies with patents on a small part of a popular, multi-feature device have secured large settlements because of concerns that damages would be based on the total value of the product. However, the Federal Circuit’s instruction in VirnetX v. Cisco to generally separate the value of infringing and non-infringing features undermines that business model by limiting potential damages.