“There are two alternative categories of infringement compensation: the patentee’s lost profits and the reasonable royalty the patentee would have received through arms-length bargaining.”
In calculating a reasonable royalty, patentees often seek to apply the “entire market value rule [which] allows a patentee to assess damages based on the entire market value of the accused product [if] the patented feature creates the ‘basis for customer demand’ or ‘substantially creates the value of the component parts.’”
However, the law requires that the patentee … must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented features and the unpatented features.” This requirement of apportionment is not only burdensome for the patentee, but invariably results in the markedly lower damage awards. With the courts increasingly focusing on this requirement, patentees turned their arguments to the so-called “25% rule” which posits that a willing licensor and a willing licensee would determine the profit to be realized from the use of a patented invention and, in a hypothetical negotiation, would agree on 25% of that amount as a “reasonable royalty.”
Earlier this year, however, the Federal Circuit rejected the 25% rule of thumb, holding that it “fails to tie a reasonable royalty base to the facts of the case.” Now, a federal district court has rejected a patentee’s proposed damages model on substantially the same grounds. Lucent Technologies, Inc. et al. v. Microsoft Corporation.
Lucent’s damages “expert” – we use this term advisedly – had utilized three “approaches” in his calculation of damages in this case, which he identified as the Georgia-Pacific Approach, the Business Realities Approach, and the Alternative Analysis. Miraculously, all three approaches yielded approximately the same result – about $70M. Microsoft challenged all three approaches and moved to exclude the “expert’s” report.
The Court dealt first with the Georgia-Pacific Approach, holding that it “failed to properly apportion its damages calculation to separate between the patented features and unpatented features of [the accused product].” Such apportionment must be “tied to the facts of this case and economic realities.” The Court rejected the proposed apportionment, but will allow Lucent to try again, at trial, to present an acceptable apportionment.
The “Business Realities Approach” relied upon a previously approved (by the Court) valuation of the patented technology at $138.7M. The expert then adjusted this number “based on the parties’ knowledge of their respective bargaining positions, influenced by a host of factors…including competitors in the marketplace, and the risk of negotiations breaking down.” The Court approved of this approach.
We come, at last, to the Alternative Analysis, where the “expert” – who seemingly was reaching for support for the damages calculations of the other two approaches – opined that “around $70 million, [the parties] would realize that they would be giving up too much if they held out any longer and would therefore agree to meet in the middle of the $0 to $138.7 million range.” Well, you’ve got to love the simplicity. The Court, however, did not. The “expert” had failed to provide any support that the parties would meet around $70 million versus any other number in the range between $0 and $138.7 million.” Moreover, his “vague statement on his reliance on other Georgia-Pacific factors…[is] not tied to any factual predicates.” This analysis will be excluded from trial.
The Lesson to Be Learned – any damages model that does not include an acceptable apportionment will simply not be allowed to be presented to the jury.