Federal Circuit Affirms Reasonable Royalty Based on 71% Profit Split

The case is Exergen Corp. v. Kaz USA, Inc., a nonprecedential opinion authored by Judge Moore and handed down last Thursday.  (I'm a little surprised it's a nonprecedential opinion, because it covers some important ground on a number of topics.)  The patents in suit relate to thermometers that can read a person's temperature by being swiped across the forehead.  Exergen sued Kaz for infringement, and the district court held that the claims at issue to be patent-eligible.  (Most of Judge Moore's opinion, as well as Judge Stoll's dissent, focuses on the patent eligibility question, and is probably the most significant aspect of the case.)  The jury then found the claims infringed, and on this issue the Federal Circuit affirms in part and reverses in part, holding that only one of the two patents in suit was infringed.  For that reason, the court also vacates the damages award and remands for reconsideration, although it concludes that the actual damages awarded were supported by substantial evidence, and that there was no error in the district court's finding of no willfulness.  What follows relates to these parts of the opinion. 

First, as to actual damages, the jury awarded $9,802,228 in reasonable royalties and $4,840,320 in lost profits.  The court rejects Kaz's arguments that these awards were unsupported by substantial evidence, despite the facts that (1) the royalty amounted to 71% of Kaz's profit on sales of infringing units, and (2) the lost profits were premised on Exergen's argument that CVS, which did not sell Exergen thermometers, would have done so but for the infringement:

Kaz argues both the reasonable royalty and lost profits portions of the jury’s damages award are unsupported by substantial evidence. It argues that the reasonable royalty part of the jury’s award translates into a per-unit rate of 32% of the projected sales price and 71% of Kaz’s projected per-unit net profit. It argues the hypothetical, nonexclusive, U.S.-only royalty agreement contemplated in this case should be set at a rate less than 5.7%, the rate for the worldwide and exclusive license agreement Kaz entered for a different thermometer. Kaz also argues the lost profits portion of the jury award improperly included lost profits for CVS stores, where Exergen did not sell any products.

While a royalty that would have given Exergen 71% of Kaz’s projected net profit is certainly steep, we do not review such fact findings de novo. There was substantial evidence presented at trial which supports the jury’s conclusion that in a hypothetical negotiation, Kaz would have been willing to pay such a price to enter the market. Exergen’s damages expert went through each of the factors in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), explaining why each relevant factor weighed in favor of a high royalty rate. For instance, Exergen’s expert explained that the parties were “fierce competitors” at the time of the hypothetical negotiation, and Exergen would have known that if it licensed the patents to Kaz, it would have lost sales. J.A. 16287. He testified that Exergen had no licenses with respect to the patents-in-suit, and would have needed to be “highly incentivized” to license the patents for a technology with “advantages that other products didn’t have, namely, the noninvasive, the gentle nature of the product.” J.A. 16294, 16297. He further testified that Kaz would have been incentivized to “pay a slightly higher royalty” because there were nine years left on the patents, which would have been a long time to sit out of a growing market. J.A. 16296. The jury was not required to give more weight to Kaz’s license, particularly in light of mitigating testimony that the agreement was for a different type of thermometer “of unknown appeal,” was based on patent applications, and was not between competitors. J.A. 16419–20. Kaz has not presented any evidence that the jury’s reasonable royalty would not have been feasible from a business perspective—indeed, Kaz would have still made 29% of its projected per-unit profit. The jury was entitled to credit Exergen’s evidence that Kaz would have been highly motivated to pay a premium to enter the market.

The jury’s lost profits award with respect to CVS, the only retailer disputed on appeal, is also supported by substantial evidence. Trial testimony established that CVS offers its own generic products alongside a single branded product. The jury was entitled to find that had Kaz’s thermometers not been on the market, CVS would have chosen Exergen’s competing product to be the branded product. While “the patentee needs to have been selling some item, the profits of which have been lost due to infringing sales, in order to claim damages consisting of lost profits,” Poly-America, L.P. v. GSE Lining Tech., Inc., 383 F.3d 1303, 1311 (Fed. Cir. 2004), our precedent does not require sales to have been lost in any particular way. Even though the inventor testified that CVS did not carry Exergen’s products because Exergen previously sued them for patent infringement, the jury was entitled to find that in the absence of a feasible alternative product, CVS would have turned to Exergen despite their history of litigation. Trial testimony demonstrated that another major retailer who Exergen had previously sued “got over it” and later carried Exergen’s product. J.A. 16411–13 (pp. 18-20).

On balance, and despite the rather skewed nature of the profit split (which, by the way, appears to be a split of the entire profit made from sales of infringing devices), the court's reasoning seems resasonably persuasive, assuming there is no double-counting here; though I'd note that this may be one of those situations in which (in principle) the plaintiff would have been entitled to lost profits on Kaz's sales if it had been able or willing to provide sufficient proof on the matter.  As Lemley and others noted, sometimes an award of reasonable royalties is really a substitute for an unproven or unprovable lost profits award, and this may be one such case.

As for willfulness/enhanced damages, the trial court granted summary judgment of no willfulness prior to the Supreme Court's decision in Halo, based on its conclusion that Kaz's invalidity arguments were not objectively unreasonable.  After Halo, the court reconsidered but concluded that there was still no basis for finding the infringement to have been willful:

We cannot conclude that the district court abused its discretion in applying the Read factors and declining to award enhanced damages. Because the Supreme Court held that Seagate’s requirement of “a finding of objective recklessness in every case before district courts may award enhanced damages” unduly restricted the discretion of the district court, Halo, 136 S. Ct. at 1932, we have vacated previous enhanced damages decisions premised only on Seagate’s objective prong. . . . But in this case the district court’s summary judgment of no willfulness based on the objective prong of Seagate was not the only rationale on the record. The district court did not clearly err in its later consideration of the Read factors. For example, the district court found that no evidence of copying existed, that no concealment or litigation misconduct had occurred, and that Exergen was able to “more than adequately vindicate its rights.” Halo, 136 S. Ct. at 1933, the district court took into account the particular circumstances of this case and concluded “on balance, this case is not of an exceptional nature warranting an award of multiple damages.” J.A. 54.

Exergen argues a jury must consider willfulness before the district court may exercise its discretion to enhance damages under § 284, but such a blanket rule is directly contrary to the Supreme Court’s mandate that courts exercise their discretion free from inelastic rules like the Seagate test. Halo, 136 S. Ct. at 1933–34; see Arctic Cat Inc. v. Bombardier Recreational Prod. Inc., 876 F.3d 1350, 1371–72 (Fed. Cir. 2017) (refusing to adopt a blanket rule that a district court abuses its discretion by deciding an issue without briefing by the parties). Even if the jury had found that Kaz’s infringement was willful, “an award of enhanced damages does not necessarily flow from a willfulness finding.” Presidio Components, Inc. v. Am. Tech. Ceramics Corp., 875 F.3d 1369, 1382 (Fed. Cir. 2017). Under the circumstances of this case, the district court did not abuse its discretion in analyzing the Read factors, taking into account the overall circumstances of the case, and denying enhanced damages. We affirm the district court’s denial of enhanced damages (pp. 21-22).

I don't see anything in particular to take issue with on this issue, and (unlike the award of actual damages) on this matter there will be nothing for the district court to reconsider on remand.