Thursday, March 16, 2017

Mentor v. EVE-USA: No Apportionment of Lost Profits Award


This morning the Federal Circuit issued an opinion in Mentor Graphics Corp. v. EVE-USA Inc. (available here).  The underlying facts are somewhat complex, and the opinion (authored by Judge Moore and joined by Judges Lourie and Chen) addresses a number of issues (including infringement, assignor estoppel, claim definiteness, patentable subject matter, written description, and claim preclusion) that for present purposes I'll skip.  What I will address is the court's affirmance of a jury award of $36,417,661 in lost profits and $242,110.45 in reasonable royalties for the infringement of one of the patents in suit, and its vacatur of an order precluding the plaintiffs from introducing evidence relating to willful infringement.  To cut to the chase, I think the court’s analysis is spot-on right. 

All of the patents in suit involve simulation/emulation technology.  Prior to trial, however, the court granted summary judgment for the defendants on all but one, the '376 Patent, which "relates to debugging source code after synthesis," "the process of transforming Hardware Description Language (“HDL”) into gate-level 'netlists'" (p.5).  The court affirms the jury's finding that Synopsis infringed the patent, and the judge's conclusion that Synopsis was precluded from challenging its validity under the doctrine of assignor estoppel.  That leaves the question of damages:
Mentor argued it was entitled to obtain lost profit damages for lost sales of its Veloce emulators resulting from Synopsys’ infringing sales of its ZeBu emulators because Mentor would have made additional Veloce sales but for Synopsys’ infringing ZeBu sales. The district court gave detailed instructions to the jury about the standard for awarding lost profits, including extensive discussion of each of the four Panduit factors. . . .  Synopsys appeals arguing that the damage award should be vacated because the district court failed to apportion the lost profits (p.8).
The Federal Circuit disagrees, however, stating (pp. 9-10 & n.3):
The Patent Act provides: “the court shall award [the patent owner] damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. § 284. Under the statute, “damages adequate to compensate” means “full compensation for any ‘any damages’ [the patent owner] suffered as a result of the infringement.” Gen. Motors Corp. v. Devex Corp., 461 U.S. 648, 654–55 (1983). As the Supreme Court explained in Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S 476, 507 (1964) (plurality opinion), the statutory measure of damages is “the difference between [the patent owner’s] pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.  The Court went on to distinguish between disgorgement of defendant’s profits, which had been allowed prior to the 1946 statutory amendment, and the compensatory damages of § 284, which are defined as “compensation for pecuniary loss he (the patentee) has suffered from the infringement, without regard to the question whether the defendant has gained or lost by his unlawful acts.” Id. (quoting Coupe v. Royer, 155 U.S. 565, 582 (1895)).3/  Section 284 damages “have been said to constitute ‘the difference between his pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.’” Id. (quoting Yale Lock Mfg. Co. v. Sargent, 117 U.S. 536, 552 (1886)). Put simply, “[t]he question to be asked in determining damages is ‘how much had the Patent Holder and Licensee suffered by the infringement. And that question (is) primarily: had the Infringer not infringed, what would Patent Holder-Licensee have made?’” Id. 
3/Synopsys cites a number of pre-1946 Supreme Court cases discussing apportionment in the context of the pre-1946 state of the law which reference disgorgement of the defendant’s profits and patentee’s damages to argue that lost profits must be further apportioned after applying the Panduit factors. See Garretson v. Clark, 111 U.S. 120, 121 (1884); Dowagiac Mfg. Co. v. Minn. Moline Plow Co., 235 U.S. 641, 646 (1915); Seymour v. McCormick, 57 U.S. 480, 487 (1853). While these pre-§ 284 cases apply to a different damages regime, nonetheless, we find the basic principle of apportionment which they espouse applies in all of patent damages. We do not depart from this principle today. Rather we hold that in this case, on these facts, apportionment is achieved though the court’s use of the Panduit factors. 
The court further notes that "[c]ompensatory damages are a staple across most every area of law," and that "[t]heir form is fairly standard; 'but for' some harmful act by a defendant, a plaintiff would be in a certain position. When a plaintiff proves it would have been in a certain position but for a defendant’s harmful act, it is entitled to damages to put it in the same position it would have occupied had the harmful act never occurred" (p.10).  Therefore, "[i]n this regard, lost profit patent damages are no different than breach of contract or general tort damages. Thus, the fact finder’s job is to determine what would the patent holder have made (what would his profits have been) if the infringer had not infringed" (p.14).

The court then goes on to discuss the Panduit factors--"(1) demand for the patented product; (2) absence of acceptable non-infringing alternatives; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of profit it would have made"--while noting that (1) Panduit is only one "'useful, but non-exclusive' method to establish the patentee’s entitlement to lost profits," p.11;  (2) in some cases lost profits must be awarded on a market-share basis, p.14 n.5; and (3) "[d]amages under Panduit are not easy to prove," often due to the second factor, absence of acceptable non-infringing alternatives.  Expanding on this theme, the court states:
The first factor—demand for the patented product—considers demand for the product as a whole. DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314, 1330–31 (Fed. Cir. 2009). The second factor—the absence of non-infringing alternatives—considers demand for particular limitations or features of the claimed invention. Id. at 1331. Together, requiring patentees to prove demand for the product as a whole and the absence of non-infringing alternatives ties lost profit damages to specific claim limitations and ensures that damages are commensurate with the value of the patented features. . . .
Under [the second] factor, if there is a noninfringing alternative which any given purchaser would have found acceptable and bought, then the patentee cannot obtain lost profits for that particular sale. . . .  For example, if the customer would have bought the infringing product without the patented feature or with a different, non-infringing alternative to the patented feature, then the patentee cannot establish entitlement to lost profits for that particular sale. And this determination is made on a customer-by-customer basis. For this reason, it is quite common to see damage awards where, as in this case, the patentee proves entitlement to lost profits for some of its sales, but not others. See BIC Leisure, 1 F.3d at 1219–20; DePuy Spine, 567 at 1333–34. For sales in which the patentee cannot prove the elements necessary to establish entitlement to lost profits, the statute guarantees the patentee a reasonable royalty for those sales. In those circumstances, the patentee obtains its lost profits on the sales where it can prove all the Panduit factors and a reasonable royalty on the other infringing sales (pp. 13-15).
Applying the law to the facts, “The jury found, and Synopsys does not dispute on appeal, that Mentor satisfied all of the Panduit factors with regard to the sales to Intel for which the jury awarded lost profits . . . (p.15).  At length, then we get to the apportionment issue:
. . . Synopsys advocates for a two-step process for calculating lost profits. First, Synopsys argues a patentee must calculate the amount of profits it lost as a result of the infringement using the Panduit factors. Second, Synopsys argues a patentee must further apportion its lost profits to cover only the patentee’s inventive contribution. . . .  Synopsys does not dispute that “but for” its infringement, Mentor would have made $36,417,661 in lost profits. Instead, Synopsys argues that the allegedly infringing features were just two features of emulators that comprise thousands of hardware and software features. . . . Thus, according to Synopsys, Mentor is not entitled to recover what it lost, the amount necessary to make it whole for the sales it lost, but rather the value attributable to its patented features.
Synopsys argues that “[p]rinciples of apportionment play an especially vital role in this age of complex, multicomponent electronic devices.” . . .  Synopsys argues that the patentee does not “deserve,” . . . lost profits for the whole emulator when it only invented some of the features on the emulator. Thus, according to Synopsys the damages should not be the profits the patentee lost when it lost the emulator sale because of Synopsys’ infringement, but rather only the amount of profit properly attributable to its patented features.
We agree with Synopsys that apportionment is an important component of damages law generally, and we believe it is necessary in both reasonable royalty and lost profits analysis. . . . In this case, apportionment was properly incorporated into the lost profits analysis and in particular through the Panduit factors. Panduit’s requirement that patentees prove demand for the product as a whole and the absence of non-infringing alternatives ties lost profit damages to specific claim limitations and ensures that damages are commensurate with the value of the patented features. We leave for another day whether a different theory of “but for” damages adequately incorporates apportionment principles.7/. . . We hold today that on the undisputed facts of this record, satisfaction of the Panduit factors satisfies principles of apportionment: Mentor’s damages are tied to the worth of its patented features. , , ,
7/Synopsys argues that we have held in other cases that lost profits must be apportioned. Synopsys Br. 51–56. The cases cited by Synopsys, however, did not address whether lost profits were appropriate under the Panduit factors (where the apportionment was subsumed within the Panduit analysis). Id. (citing Ferguson Beauregard/Logic Controls v. Mega Sys., LLC, 350 F.3d 1327, 1345–46 (Fed. Cir. 2003); Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d 649, 656 (Fed. Cir. 1985)). Synopsys recognizes, however, that in other cases, we have declined to apportion when the four-part Panduit test establishing but for causation has been met. See, e.g., Synopsys Rep. Br. 24–25 (citing Paper Converting Mach. v. Magna-Graphics Corp., 745 F.2d 11, 22–23 (Fed. Cir. 1984) (declining to further apportion a lost profits award because the patentee proved it would have made the sales in question but for the infringing sales)).
Synopsys and the amicus brief argue that complex multi-feature devices necessitate change in patent damages law. They argue that not requiring an additional apportionment step after the Panduit test has been met would “allow multiple entities to obtain lost profits on the same product where each entity holds a patent on a different ‘but for’ feature of the same product.” Amicus Br. 11. This claimed threat of “serial infringement claims” is not correct. Again, we do not speak to all damages models. Under Panduit, however, there can only be one recovery of lost profits for any particular sale (pp.16-20).
The court then provides a very good example of why its analysis is correct:
With such multi-component products, it may often be the case that no one patentee can obtain lost profits on the overall product—the Panduit test is a demanding one. A patentee cannot obtain lost profits unless it and only it could have made the sale—there are no non-infringing alternatives or, put differently, the customer would not have purchased the product without the infringing feature. Consider the laptop example. If the only patented component is the extended life battery and a customer will only buy a laptop with this battery (meaning a laptop with a lower quality battery is not an acceptable noninfringing alternative to the customer), then when an infringer who appropriates the patented extended life battery sells a laptop, the infringer has deprived the patentee of the lost profits on the laptop sale which only it could have made. If a laptop with a lower-quality battery would be an acceptable non-infringing alternative to certain customers, the patentee would not be entitled to lost profits for these laptop sales. For those customers, the patented battery was not a factor in their purchasing decision; it was not necessary for the sale. The only sales for which the patentee can obtain lost profits are the customers who would refuse to purchase laptops without the patented extended-life battery. For these lost customers, the extended-life battery drives their purchasing decisions (pp. 21-22).
Finally, however, the court disagrees with the district court’s order precluding Mentor from seeking enhanced damages, which was premised on (1) the conduct at issue occurring only after suit had been filed, and (2) Mentor’s failure to seek a preliminary injunction, which the court believed prevented a finding of willfulness under Seagate.  The Federal Circuit vacates this order and remands, concluding that (1) the district court miscalculated the date on which suit had been filed with respect to the ‘376 Patent (defendants filed a declaratory judgment action regarding the '376 Patent, and the alleged willful infringement occurred after this but before Mentor filed a counterclaim for the infringement of that patent), and (2) even under the now-overruled Seagate standard, there was no hard-and-fast rule that the patentee must seek a preliminary injunction to obtain enhanced damages.   

As stated above, I think the court’s analysis is spot-on.  I’ve been arguing for years that the “entire market value rule” is basically irrelevant in the lost profits context, and that the only applicable principle is restoration of the patentee to the position it would have occupied but for the infringement.  See, e.g., Thomas F. Cotter, Comparative Patent Remedies:  A Legal and Economic Analysis 114-16 (Oxford Univ. Press 2013) (using a laptop example very similar to Judge Moore’s); Roger D. Blair & Thomas F. Cotter, Rethinking Patent Damages, 10 Tex. Intell. Prop. L.J. 1, 27-28 (2001).  I'm very happy to see that the court has now explicitly acknowledged the point.  Bravo, Judge Moore, for a very persuasive economic analysis.  

In closing I'll note two more things.  First, as the court acknowledges, in a case like this one it makes perfect sense to award a patent owner its lost profit on those sales it would have made but for the infringement, and a reasonable royalty for the infringing acts that didn't deprive the patent owner of any sales.  My understanding, though, is that in some countries (for example, Japan--see discussion in my book at pp. 317-18--and Germany) the patent owner can only use one single methodology (lost profits, reasonable royalty, or disgorgement) for any given patent; in my view, this can lead to undercompensation in some instances.  Second, I wonder if the case will be cited as support for the proposition that only conduct occurring prior to filing of the lawsuit counts for purposes of determining whether the patentee may recover enhanced damages?  That may well be a sensible rule; I'm just not sure whether the law is settled on this point post-Halo.  For somewhat related discussion, see here.

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