Federal Circuit Provides Guidance

On Patent Damages and Apportionment

In two recent cases, the U.S. Court of Appeals for the Federal Circuit provided important guidance when applying apportionment principles to calculate reasonable royalty damages.  See Finjan, Inc. v. Blue Coat Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018); Exmark Mfg. Co. v. Briggs & Stratton Power Products Group, LLC, 879 F.3d 1332 (Fed. Cir. 2018).  The Federal Circuit signaled greater flexibility when apportioning damages, which may permit using the royalty rate and not just the royalty base, to value a patented invention’s contribution to a larger, multicomponent product.  The Circuit also reaffirmed, however, that appropriate support is required for any damages analysis, including to support apportionment and any proposed royalty rate.

[su_pullquote align=”right”]Resources:

Calculation of Economic Damages in Patent Litigation Matters

Patent Damages, Part 1

Patent Damages, Part 2

What You Can’t See Has Value—The Valuation of Intangible Assets

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In two recent cases, the U.S. Court of Appeals for the Federal Circuit provided important guidance when applying apportionment principles to calculate reasonable royalty damages.  See Finjan, Inc. v. Blue Coat Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018); Exmark Mfg. Co. v. Briggs & Stratton Power Products Group, LLC, 879 F.3d 1332 (Fed. Cir. 2018).  The Federal Circuit signaled greater flexibility when apportioning damages, which may permit using the royalty rate and not just the royalty base, to value a patented invention’s contribution to a larger, multicomponent product.  The Circuit also reaffirmed, however, that appropriate support is required for any damages analysis, including to support apportionment and any proposed royalty rate.

Finjan: Application of Apportionment Principles Based on Evidence

In Finjan, the company asserted several patents directed to identifying and protecting against malware.  After trial, a jury awarded reasonable royalty damages for three patents, including $24 million for the ‘844 patent (U.S. Patent No. 6,154,844); $1.67 million for the ‘633 patent (U.S. Patent No. 7,647,633); and $6 million for the ‘731 patent (U.S. Patent No. 7,418,731).  Blue Coat argued on appeal that these awards were defective because Finjan had failed to correctly apply required apportionment principles.

The Federal Circuit agreed that apportionment was improper with respect to the ‘844 patent.  The ‘844 patent “is directed to a method of providing computer security by scanning a downloadable and attaching the results of that scan to the downloadable itself in the form of a ‘security profile.’”  879 F.3d at 1303.  Blue Coat’s infringing product, known as “WebPulse,” “is a cloud-based system that associates URLs with over eighty different categories,” including one category that is intended to identify potential malware.  Id. at 1310.  WebPulse is not sold or used as a stand-alone product, but is used by other products to determine whether a computer user attempting to access a specific URL should be provided access.  WebPulse used a dynamic real-time rating engine (DRTR) to analyze new URLs that had not previously been evaluated and categorized for access purposes.  The DRTR, however, “performs both infringing and non-infringing functions.”  Ibid.

Because DRTR is the only part of WebPulse that can infringe the ‘844 patent, Finjan incorporated DRTR processing frequency into its damages model.  Finjan’s damages expert calculated a royalty base by multiplying WebPulse’s total number of users (75 million) by the percentage of web traffic processed by DRTR (four percent).  On appeal, Finjan defended this approach to apportionment because DRTR is the smallest technical unit tied to the invention.  The Federal Circuit disagreed that this model sufficiently apportioned for damages purposes.  Although malware detection is one important aspect of DRTR, that importance could not excuse the need to apportion damages so that “the ‘ultimate reasonable royalty award’” is “‘based on the incremental value that the patented invention adds to the end product.’”  Id. at 1311, quoting Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014).  “Because DRTR is itself a multi-component software engine that includes non-infringing features, the percentage of web traffic handled by DRTR is not a proxy for the incremental value of the patented technology to WebPulse as a whole.”  Ibid.  Accordingly, Finjan was required to apportion damages further, “to reflect the value of the patented technology compared to the value of the unpatented elements.”  Ibid.

In contrast, the Federal Circuit found apportionment satisfied regarding the ‘731 patent and ‘633 patent.  For those patents, Finjan’s expert apportioned based on a Blue Coat diagram that identified 24 different functions of the accused Secure Web Gateway (SWG) system.  Id. at 1312–13.  A Blue Coat engineer testified that this reflected all functionality of SWG, and Finjan’s technical expert provided information to the damages expert concerning this functionality and which specific functions infringed each patent.  The damages expert then applied an apportionment ratio for each patent, based on the number of infringing features relative to all features (1/24 for the ‘633 patent because only one function infringed, and 3/24 for the ‘731 patent because three functions infringed).  Id. at 1313.  Despite conflicting testimony presented at trial regarding the 24 functions, the Federal Circuit concluded the jury could accept Finjan’s version; thus, there was substantial evidence to support and affirm the damage awards for the ‘731 patent and ‘633 patent.  The Court further ruled that the jury properly awarded damages greater than the amounts proposed by Finjan’s damages expert, because “the expert’s estimates were conservative” and “the underlying evidence could support a higher award.”  Id. n.2.

Exmark Manufacturing: Can Royalty Rate Be Used to Apportion?

Exmark sued Briggs & Stratton for infringing its ‘863 patent (U.S. Patent No. 5,987,863) on a multiblade lawn mower having improved flow control baffles that more efficiently direct grass clippings toward a side discharge opening, and thereby improved the quality of the mowing operation.  879 F.3d at 1348.  Although the claims covered a complete multiblade mower, including a mower deck, side discharge opening, power means, and other conventional elements, the claimed improvement related only to the flow control baffle.  The parties thus agreed that damages had to be apportioned to distinguish between the patented improvement (the improved baffles) and the mower’s conventional components.  Ibid.  The district court permitted Exmark to present at trial a damages model that sought to apportion damages using the royalty rate as the means to compensate Exmark for the value of the patented improvement.  Briggs argued that it was an error to apply the royalty rate to the entire mower; instead, the royalty base should be apportioned down to the patented improvement (baffles), not the whole mower.  Ibid.

The Federal Circuit rejected Briggs’ argument.  “[A]pportionment can be addressed in a variety of ways,” the Court held, “including by careful selection of the royalty base to reflect the value added by the patented feature [or]…by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof.”  Ibid.  (internal quotes omitted).  Deriving the royalty base from sales of complete mowers was “particularly appropriate in this case,” the Court found, because the patent claimed an entire “multiblade lawn mower,” and not only “a single component thereof.”  Ibid.  Thus:  “It is not the baffle that infringes the claim, but rather the entire accused mower.”  Ibid.

The Federal Circuit noted that evidence and “real world bargaining” also supported using sales of the accused mowers as the royalty base, and “[t]here is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.”  Id. at 1349, quoting Lucent Techns., Inc. v. Gateway, Inc., 580 F.3d 1301,1339 (Fed. Cir. 2009).  The Court concluded, “As long as Exmark [the patentee] adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as the royalty base and apportioning through the royalty rate is an acceptable methodology.”  Id. at 1348.

The Court cited its prior decision in Astrazeneca as addressing “how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.”  Id. (citing AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338 [Fed. Cir. 2015]).  Specifically, certain Georgia-Pacific factors can be used to evaluate the inventive contribution when deciding a hypothetically negotiated royalty rate.  Id. at 1349.  Exmark thus focused on how to account for the value of the patented invention when the patent “covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements.”  Id. at 1348.  The scope of the Court’s holding, and how it will be applied by district court judges, remains to be seen.

Three Takeaways from Finjan and Exmark Manufacturing

These recent cases provide useful insights in three areas.

First, apportionment principles remain hotly disputed and vigorously enforced.  The Federal Circuit continues to reinforce the importance of apportionment in the reasonable royalty context.  Fundamentally, the “essential requirement” is that the “ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.”  Finjan, 879 F.3d at 1311.  Even if the patent claim broadly covers the entire accused product, the damages claim needs to reflect the value that the invention contributes to that product, and thus apportionment may be necessary.  Exmark, 879 F. at 1348 (“In these circumstances, the patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multi-component product.”).

Second, apportionment must be tied to the relevant facts and the scope of the invention, as reflected in Finjan.  Even when basing damages on a discrete unit or aspect of the accused product, further apportionment may be necessary.  And, even though courts may now be more flexible in how to apportion, courts will examine the factual and evidentiary support relied on for apportionment in each case.

Third, any proposed royalty rate also needs to be supported and tied to the facts of the case.  In Finjan, the Federal Circuit rejected an eight dollar per-user royalty rate because it “appears to have been plucked from thin air and, as such, cannot be the basis for a reasonable royalty calculation.”  879 F.3d at 1312.  Similarly, in Exmark, the Federal Circuit rejected a five percent royalty rate “plucked…out of nowhere” and reasoned that a damages expert cannot “simply assert that a particular royalty rate is reasonable in light of the evidence without tying the proposed rate to that evidence.”  879 F.3d at 1351.

These cases serve as a cautionary reminder that any expert opinions on reasonable royalty damages must be closely tied to the facts of the case.  Damages opinions that are purely speculative and unsupported by the facts of the case are likely to be found inadmissible.  As a result, apportionment approaches will continue to be case-specific, variously focusing on the royalty base, the royalty rate, or a hybrid model involving both elements.

Cass W. Christenson is partner at Dentons DC office. He has more than 20 years of experience in complex, high-stakes litigation, including numerous trials and appeals. His practice focuses on successfully asserting and defending claims involving trade secrets, patents, trademarks, and other intellectual property. He has tried, litigated, arbitrated, and settled cases throughout the country, including: for clients operating in aerospace and defense, consumer products, VoIP and telecommunications, internet technologies, banking and financial services, franchising, real estate, medical devices, and other industries.

He can be contacted at (202) 496-7218 or by e-mail to cass.christenson@dentons.com.

Robert F. Kramer is partner and co-chair of Dentons’ Patent Litigation practice. He is based out of the Northern California office. He leads a large team of top-notch litigators with diverse legal and technical backgrounds having a strong track record of success winning in the district courts, at the International Trade Commission (ITC), and in inter partes reviews (IPR) in the U.S. Patent and Trademark Office. He is a trial lawyer with decades of experience and he is recognized as one of the most experienced and aggressive patent litigators in the country.

He can be contacted at (650) 798-0356 or by e-mail to robert.kramer@dentons.com.

Carl P. Bretscher is of counsel at Dentons DC office. He has over 12 years of experience as a patent litigator, he is well-versed in all aspects of appellate and trial litigation. Mr. Bretscher has participated in more than a dozen appeals to the U.S. Court of Appeals for the Federal Circuit in cases involving the electrical, mechanical, biotechnology, and chemical arts. His in-depth experience spans a wide range of technologies, from semiconductor devices, light emitting diodes, and mass spectrometers to biotechnology and the chemical and pharmaceutical arts.

He can be contacted at (202) 496-7584 or by e-mail to carl.bretscher@dentons.com.