Wednesday, September 15, 2021

Split Federal Circuit Vacates Damages Award for Failure to Apportion

The case is Omega Patents LLC v. Calamp Corp., decided yesterday, with a majority opinion by Judge Prost, joined by Judge Dyk, and a dissenting-in-part opinion by Judge Hughes.  The patents in suit "generally relate to multi-vehicle-compatible systems that can remotely control various vehicle functions (for example, remote vehicle starting) . . . and read the status of various vehicle devices (for example, battery health)," and "can also be used to notify the driver, or the driver’s employer, if certain conditions occur (for example, speeding)" (pp. 2-3).  A first trial resulted in findings of direct and indirect liability, but was partially reversed on appeal (p.4).  On remand, the jury found, inter alia, that the defendant directly infringed "each asserted claim of the ’278 patent," and awarded a reasonable royalty equal to $5 per location messaging unit (LMU) sold by the defendant (pp. 4-5).  I'll focus on the damages issues on appeal.  The outcome is very fact-specific, so for present purposes I will emphasize what I see as the relevant legal principles.

First, the majority concludes that the district court erred by excluding the defendant's expert (whom it had previously excluded from testifying on direct) from testifying in rebuttal.  According to the majority, the district court misread the Court of Appeals' mandate from the first appeal as affirmatively precluding the defendant from offering the expert's testimony in rebuttal, and that in any event it was an abuse of discretion to preclude the rebuttal testimony (pp. 16-21).

Second, the majority concludes that the damages award "does not reflect apportionment" or show that the patented feature drove demand for the LMUs (p.21).  Plaintiff argued that the comparable licenses on which its proposed royalty was based properly reflected apportionment, but the majority disagrees:


We have, however, explained that “when a sufficiently comparable license is used as the basis for determining the appropriate royalty, further apportionment may not necessarily be required.” Vectura Ltd. v. Glaxosmithkline LLC, 981 F.3d 1030, 1040 (Fed. Cir. 2020). “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.’” Id. “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. at 1041. For built-in apportionment to apply the license must be “sufficiently comparable” in that “principles of apportionment were effectively baked into” the purportedly comparable license. Id.; see Commonwealth Sci. & Indus. Rsch. Organisation v. Cisco Sys., Inc., 809 F.3d 1295, 1303 (Fed. Cir. 2015). . . . 


Here, Omega first contends that it did not need to show apportionment at all because “[t]he jury heard [that] the infringing LMUs have no component parts outside what is found in the ’278 patent” and that “[e]ach of these LMU components [is] found in the infringed claims of the ’278 patent.” Cross-Appellant’s Br. 35–36. We disagree with Omega as a matter of law. See Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d 1332, 1348 (Fed. Cir. 2018). In Exmark, the asserted claim was directed to a lawn mower as a whole and covered the entire infringing lawn-mower product. Id. We held that the patent owner was still required to “apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product” to ensure that the patent owner was “compensated for the patented improvement (i.e., the improved flow control baffle) rather than the entire mower.” Id. Accordingly, here, even if the LMUs have the same components as those set forth in the asserted claims, Omega still must “adequately and reliably apportion[] between the improved and conventional features of the accused [product]” when using the LMUs “as a royalty base.” Id.; see Commonwealth, 809 F.3d at 1301. . . . 

Turning to the merits of apportionment, we conclude that Omega did not present sufficient evidence to the jury to sustain its damages award for infringement of the asserted claims of the ’278 patent. First, Omega failed to show that its patented improvement drove demand for the entire LMU product. Second, in the alternative . . . Omega failed to show the incremental value that its patented improvement added to the LMU product as apportioned from the value of any conventional features. . . . (pp. 22-24).

On then, to the comparable licenses theory, which the majority also rejects.  In particular, Omega relied on testimony of its president, who "testified that under Omega’s licensing program the licensing fee was “five dollars [per unit] whether it’s one patent or 50 patents” (p.26).  The majority does not view this as a sufficient basis for inferring that a reasonable royalty for the one patent at issue would have been $5:


. . . Omega’s theory would permit it to obtain a particular royalty rate merely by relying on its internal “policy” without regard to comparability—under the proffered licensing arrangement, Omega sought the same licensing fee regardless of what patents were included or what technology was covered. Put differently, Mr. Flick’s testimony does not sufficiently speak to “built-in apportionment” between the patented improvement added to the LMUs and the conventional features of the LMUs. . . .


Although a closer call, we likewise conclude that Omega failed to show built-in apportionment based on the license agreements presented to the jury. At trial, Omega introduced eighteen license agreements. Omega argues that “the licenses reveal devices that connect to the data bus with the multi-vehicle functionality found in the ’278 patent [and] generally carry a royalty at a rate of at least $5.00 per unit.” Cross-Appellant’s Br. 45. Omega’s fundamental problem is that it failed to show that these agreements attributed a $5.00-per-unit royalty to the value of the ’278 patent. . . .


. . . Most glaringly, each of the eighteen proffered licenses involves numerous patents, in contrast to a hypothetical negotiation for a single-patent license. . . (pp. 26-29).

Dissenting in part, Judge Hughes would have affirmed the exclusion of the expert's rebuttal testimony, and he disagrees with the majority's apportionment analysis, stating "First, to the extent CalAmp contests the testimony of Omega’s expert, Christian Tregillis, and the licenses introduced as comparable, both of these arguments more properly should have been made via Daubert motion or objection at trial. Second, to the extent the majority requires further accounting for the incremental value of the ’278 patent beyond that reflected in the licenses introduced as comparable, I believe that approach is too restrictive given our precedent" (dissenting opinion, p.4).

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