Thursday, July 12, 2018

Federal Circuit Reverses Damages Award Based on Entire Market Value Rule

The decision is Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., handed down last Tuesday, July 3.  Judge Dyk authored the majority opinion, joined by Judges Clevenger and Chen.  This case involves a different set of patents than the ones that were in suit in the 2013 appeal involving these two parties, which involved a question of damages for extraterritorial losses.  (The status of the holding in that case is in question after WesternGeco.)  The court affirms the judgment of infringement, but vacates a $139.8 million award for violating the entire market value rule.  From the opinion:
Undertaking an apportionment analysis where reasonable royalties are sought generally requires a determination of the royalty base to which the royalty rate will be applied. We have articulated that, where multicomponent products are accused of infringement, the royalty base should not be larger than the smallest salable unit embodying the patented invention. We have cautioned against reliance on use of the entire market value of a multi-component product that includes a patented component because it “cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.” Uniloc, 632 F.3d at 1320. . . . Even when a damages theory relies on the smallest salable unit as the basis for calculating the royalty, the patentee must estimate what portion of that smallest salable unit is attributable to the patented technology when the smallest salable unit itself contains several non-infringing features. VirnetX, 767 F.3d at 1327.
The damages verdict here rests on Power Integrations’ reliance on a demanding alternative to our general rule of apportionment, the entire market value rule. Id. “The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for consumer demand.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009) . . . .
If the product has other valuable features that also contribute to driving consumer demand—patented or unpatented—then the damages for patent infringement must be apportioned to reflect only the value of the patented feature. This is so whenever the claimed feature does not define the entirety of the commercial product. In some circumstances, for example, where the other features  are simply generic and/or conventional and hence of little distinguishing character, it may be appropriate to use the entire value of the product because the patented feature accounts for almost all of the value of the product as a whole. See AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338–40 (Fed. Cir. 2015).
Power Integrations’ royalty rate is premised on the ’079 patent’s frequency reduction feature as driving consumer demand for Fairchild’s controller chips. To support this contention, Power Integrations provided evidence that the ’079 patented frequency reduction feature was essential to many customers, as it allowed the products to meet the federal government’s Energy Star program. In addition, Power Integrations provided evidence that some customers asked for the ’079 feature, that products with the ’079 feature outsold other products, and that technical marketing materials promoted the ’079 feature. Both parties, however, agreed that the accused products contained other valuable features as well. Power Integrations presented no evidence about the effect of those features on consumer demand or the extent to which those features were responsible for the products’ value. Power Integrations did not seek a separate jury determination as to damages for infringement of the asserted claims of the ’908 patent, and it is clear that the jury calculated damages only for the ’079 patent. . . .
As LaserDynamics, Versata, and VirnetX held, the entire market value rule is appropriate only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts. LaserDynamics, 694 F.3d at 67; Versata, 717 F.3d at 1268; VirnetX, 767 F.3d at 1326. The burden of proof in this respect is on the patent holder. LaserDynamics, 694 F.3d at 67. The question is whether the accused product, compared to other products in the same field, has features that would cause consumers to purchase the products beyond the patented feature, i.e., valuable features. Where the accused infringer presents evidence that its accused product has other valuable features beyond the patented feature, the patent holder must establish that these features are not relevant to consumer choice. A patentee may do this by showing that the patented feature “alone motivates customers to purchase [the infringing product]” in the first place. See id. at 69. But when the product contains multiple valuable features, it is not enough to merely show that the patented feature is viewed as essential, that a product would not be commercially viable without the patented feature, or that consumers would not purchase the product without the patented feature. Id. at 68. When the product contains other valuable features, the patentee must prove that those other features did not influence purchasing decisions. 
Here, the power supply controllers had other valuable features, such as jittering. . . . There is no proof that these features, including jittering, did not affect consumer demand. Without such proof, Power Integrations did not meet its burden to show that the patented feature was the sole driver of consumer demand, i.e., that it alone motivated consumers to buy the accused products (pp. 19-23).
The result doesn't seem all that surprising to me.  (Whether it's right or wrong as a matter of policy is another matter.)  To be sure, the Federal Circuit has permitted some variations from the EMVR--for example, in CSIRO v. Cisco, where the court (in a bench trial) used the entire market value as the royalty base, because the parties themselves had done so during their own (unsuccessful) negotiations over a royalty; in Ericsson v. D-Link, where the court allowed the plaintiff's expert witness to base his opinion on comparables that used the entire market value as the base; and in Exmark, where the claim covered the end product as a whole (see discussion here).  But this case doesn't appear to have any of these distinguishing features, or at least there's no mention of any such features in the opinion.

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