As I mentioned at the end of last week, on Friday the Federal Circuit decided two cases addressing issues of patent damages law. I said I would provide an analysis this week, so here is my coverage of the first of the two, California Institute of Technology v. Broadcom Ltd. (opinion by Judge Linn, joined by Judge Lourie and, for the most part, by Judge Dyk, who dissents on infringement). I’ll have something to say about the other one, Apple Inc. v. Wi-LAN Inc. in a day or two.
The Caltech case involves three patents, ’710, ’032, and ’781. The first two “disclose circuits that generate and receive irregular repeat and accumulate (‘IRA’) codes, a type of error correction code designed to improve the speed and reliability of data transmissions,” while the third “discloses and claims a method for creating codewords in which ‘information bits appear in a variable number of subsets’” (pp. 3, 5). “Caltech alleged infringement by certain Broadcom Wi-Fi chips and Apple products incorporating those chips, including smartphones, tablets, and computers” (p.5). The majority concludes that
[b]ecause the district court did not err in its construction of the claim limitation “repeat” and because substantial evidence supports the jury’s verdict of infringement of the asserted claims of the ’710 and ’032 patents, we affirm the district court’s denial of JMOL on infringement thereof. We also affirm the district court’s conclusion that claim 13 of the ’781 patent is patent-eligible but vacate the jury’s verdict of infringement thereof because of the district court’s failure to instruct the jury on the construction of the claim term “variable number of subsets.” We thus remand for a new trial on infringement of claim 13 of the ’781 patent. We further affirm the district court’s summary judgment findings of no invalidity based on IPR estoppel and its determination of no inequitable conduct (p.2).
The court also affirms the district court’s jury instruction on extraterritoriality, which I mentioned on Friday. I initially thought this ruling might be the Federal Circuit’s first decision since the Supreme Court’s WesternGeco opinion permitting an award of damages under section 271(a) reflecting extraterritorial losses caused by acts of domestic infringement (consistent with my reading of WesternGeco). As noted previously, however, after have reviewed the public versions of the appellants' and appellee's opening briefs (see pp. 63-66 and 57-62, respectively) and the appellants' reply brief (see pp. 30-32), it appears that the dispute centered on whether Broadcom's sales of close to one billion infringing chips occurred in the U.S. or abroad, rather than on whether some initial infringing activity in the U.S. caused additional sales abroad. Assuming that is right, I will move on to discuss the principal issue of interest to readers of this blog, namely the court’s vacating of the award of damages on other grounds.
As the court explained:
To compensate for Broadcom and Apple’s infringement, Caltech proposed a two-tier damages theory, which sought different royalty rates from each of the infringers despite the fact that liability arose from the same accused technology in the same chips. Even though the district court voiced its discomfort with the two-tier theory, it allowed Caltech to present the theory to the jury, which relied on it to award Caltech $270,241,171 for Broadcom’s infringement and $837,801,178 for Apple’s infringement. . . . The district court entered judgment against Broadcom totaling $288,246,156, and against Apple totaling $885,441,828. These awards included pre-judgment interest, as well as post-judgment interest and an ongoing royalty at the rate set by the jury’s verdict (p.12).
More specifically, according to the court, “Caltech presented to the jury a two-tier reasonable royalty model based on simultaneous hypothetical negotiations with Broadcom and Apple in December 2009” (p.25). Broadcom and Apple argue, however, that the Caltech’s damages evidence was flawed because, inter alia, “Caltech’s damages model impermissibly applied two separate hypothetical negotiations for Broadcom and Apple for sales of the same chips” (id.). The court discusses the model in some detail before reaching its conclusion:
Caltech presented its damage theory to the jury through two experts, Dr. Catherine Lawton and Dr. David Teece. They opined that Caltech would have engaged in two simultaneous hypothetical negotiations, one with Broadcom at the “chip level” and one with Apple at the “device level.” Those negotiations would have excluded from Broadcom’s hypothetical chip license any Broadcom chips incorporated into Apple products sold in the United States and treated those identical chips as being subject to Apple’s separate hypothetical device license at a vastly different royalty rate. Both of Caltech’s experts testified that separate chip-level and device-level negotiations would have been proper, rather than a single hypothetical negotiation for all of the accused chips, because both defendants were separate infringers and there would be no “cross-talk” between them as they each engaged in their own hypothetical negotiation.
The district court considered the opinions of Caltech’s experts and, over Broadcom and Apple’s objection, permitted Caltech to present that theory to the jury. In doing so, the district court observed that “[p]atent owners will sometimes seek damages from accused infringers at different levels in the supply chain, and so long as they do not attempt to obtain a double recovery to violate other legal principles like patent exhaustion, they are free to do so” . . . . In ruling in Caltech’s favor, the district court saw no concern over double recovery because Broadcom and Apple were different companies and because the experts’ opinions carved out of the Broadcom hypothetical negotiation chips sold to Apple. . . .
Caltech argued that separate royalty rates at different levels of the supply chain are proper because the reasonable royalty inquiry focuses on the amount of value that the patent technology adds to a product, citing Ericsson, Inc. v. D-Link Sys., 773 F.3d 1201, 1226 (Fed. Cir. 2014) (pp. 27-28).
The Court of Appeals disagrees, however:
. . . in the absence of some evidence that companies in the positions of Broadcom and Apple would engage in such separate negotiations and in the absence of additional facts that might justify separate and different treatment of the same chips at different levels of the supply chain, the mere fact that Broadcom and Apple are separate infringers alone does not support treating the same chips differently at different stages in the supply chain and does not justify submitting such a two-tier damage theory to the jury. It is generally recognized that in the usual case, “a direct infringer or someone who induced infringement should pay the same reasonable royalty based on a single hypothetical negotiation analysis.” LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51, 76 (Fed. Cir. 2012). . . .
The district court concluded that Broadcom and Apple’s products were different and therefore possessed different values simply because Broadcom and Apple were “different companies at different levels in the supply chain.” . . . But to reach that conclusion without more ignores established precedent to the effect that, in the absence of a compelling showing otherwise, a higher royalty is not available for the same device at a different point in the supply chain. . . .
. . . It is well settled that a reasonable royalty is what a willing licensor and a willing licensee would have agreed to at a hypothetical negotiation just before infringement began. . . . Here, there is nothing in the record to suggest that Broadcom and Apple would have been willing to negotiate in this artificial way rather than to more conventionally negotiate a single license at a single rate for the same chips. Neither of Caltech’s experts offered any factual basis to conclude that Broadcom and Apple would have been willing to engage in separate negotiations leading to vastly different royalty rates for the same chips. . . (pp. 28-29).
I have a couple of observations. First, I believe that most economists would not find anything inherently troubling about a patent owner charging differently-situated customers different royalties, based on the customers’ disparate valuation of the use of the technology. (Whether this tolerance should give way in some instances, for example when a FRAND commitment is in place, is a separate issue.) If, on the other hand, as may be the case here, the end product manufacturers are not very different in terms of what they use the technology for, then maybe you wouldn’t expect the royalties, whether calculated on a per-chip or per-end product basis, to vary by much. Second, and relatedly, I think the court is right to reject the argument that entities at different levels of a supply chain would be expected to pay different royalties for the same technology. This issue has come up in the FRAND context, in the debate over license-to-all versus access-to-all. Here I think Judge Thomas Kühnen is correct in arguing that licenses should reflect the value of the patented invention is expected to have when incorporated in the end product, and therefore (regardless of what base is used) should not vary whether they are extracted at the component level or the end user level (except, perhaps, to reflect some difference in transaction costs resulting from extraction at one level or the other). (I would note that, according to Apple and Broadcom’s appellate brief, Caltech assigned “one rate for Broadcom at the chip level, and a significantly higher rate for Apple at the end-user device level, for the same technology in the same Broadcom chips” (emphasis in original). If so, then unless I’m missing something that would seem to be the exact opposite of the Kühnen principle, under which the component manufacturer would be expected to pay a higher rate on a smaller base, and an end user a lower rate on a larger base, such that the aggregate royalty (rate times base) is the same.) It will be interesting to see if courts adjudicating FRAND cases look to the Caltech opinion for support on this issue.