Proving that someone is reading our blog, one reader wrote in to inform us that we had overstated the holding in the below-identified case. We, therefore, reprint this blog post in amended form.
We have repeatedly advised our readers about proper royalty bases for damages calculations. Well, apparently some people are either not reading our blogs or can’t take advice. (LaserDynamics Inc. v. Quanta Computer, Inc. et al.)
LaserDynamics sued Quanta for infringement of a patent pertaining to computer disk drives. The jury found for the plaintiff and determined a “reasonable royalty” to be $52.0M. The court entered the judgment, adding $456K in pre-judgment interest. So far, so good for LaserDynamics.
How had the jury arrived at its damages award of $52.0M? The evidence showed that the average price of the disk drive, when sold as a “stand alone” unit, was $28.00, while the average price of a computer, with the disk drive installed, was $860.00. LaserDynamics’ damages expert had opined that the appropriate royalty rate, for the stand-alone units, was 6% (for those readers not “as smart as the average fifth grader,” that’s $1.69 per unit). He further opined that sales of computers with the disk drive installed should be subject to the “entire market value” rule, i.e. that a royalty should be applied to the sale price of the entire computer. He deemed a royalty rate of 2% to be appropriate in this case, yielding a royalty of $17.20 per computer. The jury adopted this view.
Quanta filed a motion for a new trial and/or a remittitur (lawyerspeak for “give back some of the damages”), on the grounds that the damages award was “clearly excessive and against the weight of the evidence [in part] because the royalty base presented to the jury was improper because there [was] insufficient support for the application of the entire market value rule.”
Application of the entire market value rule was improper, said the judge. “Damages are recoverable under the entire market value rule only ‘if the patented apparatus was of such paramount importance that it substantially created the value of the component parts … the patentee must prove that the patent-related feature is the basis for customer demand.” LaserDynamics had presented no evidence that its patented method drove the demand for the computers in which the disk drive was installed. “The claimed invention … is but one relatively small component of the entire assembled computer. The failure to offer any evidence that [the patented disk drive] drove demand for the much larger finished good precludes application of the entire market value rule.”
The result? The Court gave LaserDynamics ten (10) days to make a choice: either accept reduced damages of $6.2M - $1.69 per disk drive whether sold alone or installed in a computer – or face a new trial on the issue of damages.
THE LESSON TO BE LEARNED: The courts seem to be looking with increasing disfavor on the entire market value rule.