Drafting Around the Entire Market Value, Part 2?

Nearly three years ago I published a post titled Drafting Around the Entire Market Value Rule?, in which I wrote:

Over at the Patent Damages blog, Chris Marchese published an interesting post a few weeks back titled Damages base--is the name of the game the claim? . . .

. . . suppose an inventor invents component ABC, and that ABC serves as a small component in a larger, multicomponent product such as a smartphone.  Would the inventor be well-advised to include at least one dependent claim comprising "ABC incorporated into a smartphone"?  In a case in which a defendant infringes by incorporating ABC into a smartphone, could the inventor then assert that, with respect to the infringement of the dependent claim, the "smallest salable patent-practicing unit" is ABC plus smartphone?  Sure, the inventor would have to apportion the value of the patented feature further, under VirnetX.  But now the jury has heard the entire market value of the end product, which is what the EMVR is supposed to prevent.

According to Mr. Marchese, the case law thus far is not very clear on this issue.  But perhaps it wouldn't be surprising if patent owners started to include claims like the hypothetical dependent claim above, just in case it could come in handy later on in the event of litigation.  Indeed, in Ericsson the Federal Circuit was willing to allow the jury to hear about comparable licenses that use the EMVR as the royalty base as long as the court, on request, gives an appropriate cautionary instruction.

Well, we now have a Federal Circuit opinion in which (although it wasn't a dependent claim that was at issue) the court to some degree vindicates Mr. Marchese's speculation.  The case is Exmark Mfg. Co. v. Briggs & Stratton Power, decided last Friday (opinion by Judge Stoll, joined by Judges Wallach and Chen) and involving a patent "directed to a lawn mower having improved flow control baffles."  The district court "entered summary judgment that claim 1 . . . was not invalid because the claim survived multiple reexaminations involving the same prior art," and also denied summary judgment of indefiniteness.  The matter proceeded to trial on infringement and damages, and the jury awarded $24 million in compensatory damages, which the judge doubled following a jury determination of willfulness.  On appeal, the court vacates and remands for further consideration the summary judgment of invalidity based on prior art, and affirms the judgment as to definiteness.  On damages, which is what I will focus on, the court vacates and remands.

The first, and to my mind most important, damages issue relates to the royalty base, and the court's resolution of this issue arguably pulls back a bit from cases like LaserDynamics and VirnetX (as well as last week's opinion in Finjan, see discussion here).  Here are the most relevant portions of the court's discussion:

Briggs first argues that the district court erred by allowing Exmark to compute a royalty rate without properly identifying a royalty base to apportion the value of the patentee’s invention in comparison to the value of the whole lawn mower. The parties do not dispute that apportionment is required in this case. Although claim 1 of the ’863 patent is broadly directed to “a multiblade lawn mower,” our law recognizes that a reasonable royalty award “must be based on the incremental value that the patented invention adds to the end product.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). Here, the patent makes clear that the patented improvement relates to the mower’s flow control baffle, which through its structure and orientation within the mower deck purportedly efficiently directs grass clippings toward a side discharge and thereby improves the quality of grass cut in a manner that distinguishes it from prior art. See, e.g., ’863 patent col. 1 l. 30–col. 2 l. 9. The remaining limitations of claim 1 recite conventional features of a lawn mower, including a mower deck, a side discharge opening, and a power means for operating the mower. In these circumstances, the patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product. . . .

On appeal, Briggs argues that Exmark’s expert should have apportioned or separated the value of the baffle from the other features of the mower through the royalty base rather than the royalty rate. We disagree. We have held that apportionment can be addressed in a variety of ways, 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.” Ericsson, 773 F.3d at 1226. So long as Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology. Id. (citing Garretson, 111 U.S. at 121). “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.” Id.

Using the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claim is, in fact, directed to the lawn mower as a whole. The preamble of claim 1 recites a “multiblade lawn mower.” ’863 patent col. 5 l. 60. It is not the baffle that infringes the claim, but rather the entire accused mower. Thus, claim 1 covers the infringing product as whole, not a single component of a multi-component product. There is no unpatented or non-infringing feature of the product. Nonetheless, “[w]hen a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine 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.” AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338 (Fed. Cir. 2015) (citing Ericsson, 773 F.3d at 1233). We hold that such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate. We have recognized that one possible way to do this is through a proper analysis of the Georgia-Pacific factors. . . .

Finally, we note that Exmark’s use of the accused lawn mower sales as the royalty base is consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing. As we stated in Lucent Technologies, Inc. v. Gateway, Inc., “[t]he hypothetical negotiation tries, as best as possible, to recreate the ex ante licensing negotiation scenario and to describe the resulting agreement.” 580 F.3d 1301, 1325 (Fed. Cir. 2009). “[S]ophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price,” and thus “[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 1339. This is consistent with the settlement agreement relied on by Exmark’s damages expert, which the parties agree provided an effective royalty of 3.64% of the sales of the accused mowers (pp. 21-24).

Second, however--and I don't think I need to go into as much detail on this issue--the court agrees with the defendant that 5% royalty rate proposed by the plaintiff's expert was not sufficiently tied to the facts, stating that her report did not "tie the relevant Georgia-Pacific factors to the 5% royalty rate or explain how she calculated the . . . rate using these factors" (p.24).  In addition, the court holds that the district court erred by excluding evidence relating to certain prior art, which went to the question of whether the patent in suit was a major or minor advance over the state of the art (pp. 28-30).  

Moving on to willfulness:

Before trial, the district court found that Briggs’ litigation defenses were unreasonable. Based on that finding, the district court precluded Briggs from presenting any evidence regarding the validity of claim 1 or how closely the prior art tracks claim 1. Briggs argues that it should have been allowed to present such evidence to mitigate any finding that it acted with an objectively high risk of infringement. Briggs further argues that the district court’s exclusion of this evidence is inconsistent with Halo, which mandates that the inquiry into the degree of risk of infringement is for the jury, not the district court, to decide. We agree with Briggs that the district court erred to the extent it excluded this evidence without also determining whether it was relevant to Briggs’ state of mind at the time of accused infringement. . .  (p.31).

Finally, the court affirms the judgment dismissing the defendant's laches defense, noting that

The Supreme Court recently held in SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, that laches is no longer a defense against damages for patent infringement that occurred within 35 U.S.C. § 286’s six-year statute of limitations period. 137 S. Ct. 954 (2017). Because Exmark only seeks damages for the six-year period prior to filing its complaint against Briggs, we agree with the district court that Briggs cannot assert laches as a defense (p.32).