Federal Circuit Affirms Use of Comparable License Using Entire Value of End Product

The decision is Vectura Ltd. v. GlaxoSmithKline LLC, precedential opinion by Judge Bryson, joined by Chief Judge Prost and Judge Wallach.  The patent in suit "concerns the production of 'composite active particles' for use in pulmonary administration, such as in dry-powder inhalers" (p.2).  Vectura sued GSK for selling three types of allegedly infringing inhalers.  Vectura prevailed at trial, and "[t]he jury awarded Vectura a royalty of 3% on a royalty base of $2.99 billion in sales for the accused inhalers, which resulted in an award of $89,712,069 in damages for the period of infringement ending in December 2018" (p.5).  The Federal Circuit affirms on infringement and claim construction, as well as damages.  

 

On the damages issues in particular, Vectura's expert witness testified that an earlier agreement between the parties was comparable to the hypothetical license the parties would have entered into. The Federal Circuit affirms notwithstanding that the earlier license used the entire market value of the inhalers as a royalty base, noting among other things that apportionment was "baked into" the earlier license; and that presumption of validity and infringement as of the date of the hypothetical negotiation presents a change of circumstances supporting the omission of one feature of the earlier license, a royalty cap:  

 

Vectura’s damages expert, Kimberly J. Schenk, adopted the 2010 license’s first-tier royalty rate (3%) as a flat royalty rate and the 2010 license’s royalty base (total sales of the licensed products) as her royalty base. Ms. Schenk declined to adopt the royalty cap from the 2010 license, citing changed circumstances by the time of the hypothetical negotiation, which would have occurred in July 2016 when the 2010 license expired. GSK presented an alternative theory, also based on the total revenue produced by the licensed products. Under GSK’s theory, however, the royalty rate would have been much lower, only 0.0187%.

GSK argues that Vectura’s evidence was insufficient to support the jury’s damages award. GSK first attacks Ms. Schenk’s use of the total sales of the accused inhalers as her royalty base. GSK argues that, under this court’s precedents, Ms. Schenk needed to show that the patented vilanterol and umeclidinium mixtures drove consumer demand for the accused inhalers before presenting a damages theory based on the entire market value of the accused inhalers. GSK contends that Ms. Schenk did not make such a showing and, as a result, she needed to apportion her royalty base to account for the non-infringing components in the accused inhalers, such as the fluticasone blister in the Breo inhaler. Appellants’ 2014)).

The damages theories tried in this case present a rather unusual circumstance. Ordinarily, an entire-market-value royalty base is appropriate only when the patented feature creates the basis for customer demand or substantially creates the value of the component parts, and apportionment is required when an entire-market-value royalty base is inappropriate. Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326 (Fed. Cir. 2014). However, this court has explained that when a sufficiently comparable license is used as the basis for determining the appropriate royalty, further apportionment may not necessarily be required. See, e.g., Bio-Rad Labs., Inc. v. 10X Genomics Inc., 967 F.3d 1353 (Fed. Cir. 2020); Elbit Sys. Land & C4I Ltd. v. Hughes Network Sys., LLC, 927 F.3d 1292 (Fed. Cir. 2019); Commonwealth Sci. & Indus. Rsch. Organisation v. Cisco Sys., Inc., 809 F.3d 1295 (Fed. Cir. 2015). That is because a damages theory that is dependent on a comparable license (or a comparable negotiation) may in some cases have “built-in apportionment.” See, e.g., Commonwealth, 809 F.3d at 1303.

This is one such case. Although GSK refers to the 2010 license as being “purportedly comparable,” the evidence clearly supports Vectura’s contention that the 2010 license was sufficiently comparable for use in its damages calculation. Indeed, GSK’s own damages expert, Dr. William Kerr, testified that the 2010 license was “a very close comparable, much closer than you ever find in a patent case.” J.A. 1857–60.

Built-in apportionment effectively assumes that the negotiators of a comparable license settled on a royalty rate and royalty base combination embodying the value of the asserted patent. Id. As the district court noted, a party relying on a sufficiently comparable license can adopt the comparable license’s royalty rate and royalty base without further apportionment and without proving that the infringing feature was responsible for the entire market value of the accused product. Vectura, 397 F. Supp. 3d at 593 (citing Commonwealth, 809 F.3d at 1301–04).

That is what Ms. Schenk did when she adopted the royalty rate and royalty base that was used in the 2010 license. To support Ms. Schenk’s damages theory, Vectura offered evidence that the circumstances of the 2010 license and the hypothetical negotiation in 2016 were highly comparable and that principles of apportionment were effectively baked into the 2010 license. J.A. 1447–48; see Bio-Rad, 967 F.3d at 1373.

We have cautioned that “district courts performing reasonable royalty calculations [must] exercise vigilance when considering past licenses to technologies other than the patent in suit” and “must account for differences in the technologies and economic circumstances of the contracting parties.” Virnetx, 767 F.3d at 1330. Here, GSK argues that even if the 2010 license is superficially comparable, Ms. Schenk failed to account for the technical and economic differences between the 2010 license and the hypothetical negotiation that would have occurred when the 2010 license expired in 2016. GSK notes that the 2010 license encompassed rights to more than 400 patents and that the royalty established in that license was subject to a cap for sales above a certain amount.

Vectura introduced evidence, however, that the key component of the 2010 license was permitting GSK to use Vectura’s invention of coating lactose particles with magnesium stearate. The 2010 license and the hypothetical negotiation thus cover “roughly very similar technologies,” as Ms. Schenk testified. J.A. 1448. Similarity of scope is confirmed by the fact that the mixtures Vectura points to as infringing the ’991 patent would have been the very same mixtures covered by the 2010 license. On appeal, GSK has offered nothing to undermine that conclusion. Accordingly,the fact that other patents were included in the 2010 license does not fatally undermine Ms. Schenk’s theory of comparability.

Ms. Schenk also considered and rejected the argument that there were meaningful economic differences between the benefits of coating the lactose particles and coating the active ingredients. J.A. 1481–82. She also considered and rejected the suggestion that there were other technical or economic distinctions between the 2010 license and the 2016 hypothetical negotiation that rendered them not comparable. J.A. 1465–85. GSK cross-examined Ms. Schenk on those matters, and the disputes over that evidence were properly left for the jury to resolve. See Bio-Rad, 967 F.3d at 1374.

GSK’s second line of attack focuses on the absence of a royalty cap in Vectura’s damages theory. GSK argues that if the 2010 license is truly a comparable license, it was improper for Ms. Schenk to discard the royalty cap while simultaneously retaining the royalty rate and royalty base used in the 2010 license. For support, GSK asserts that the royalty cap was an integral part of the 2010 negotiations and that in 2016 Vectura had proposed an extension of the 2010 license that would have retained the royalty cap.

Ms. Schenk testified that the assumption of validity and infringement in a hypothetical negotiation, among other changed circumstances, supported not including a cap on her proposed royalty. J.A. 1458, 1484. The jury was entitled to credit that testimony and to note that by 2016 the accused inhalers had already become hugely successful, which would have increased Vectura’s leverage in the hypothetical negotiation. It was therefore permissible for the jury to credit Ms. Schenk’s testimony and to award damages without applying a royalty cap. In sum, the district court did not abuse its discretion in denying GSK’s motion for a new trial on damages (pp. 16-19).

 

The court also rejects the defendants' argument that the district court abused its discretion in not ordering a new trial based on Vectura's references at trial to GSK's sales revenue, noting among other things that "it was necessary for Vectura to reference GSK’s total sales, either directly or indirectly, considering that Vectura’s damages theory asked the jury to multiply the three-percent royalty rate by the royalty base, i.e., GSK’s total sales" (p.23).