Federal Circuit: "reliance on an obviously minor clerical error is not a defense to willful infringement"

The case is Pavo Solutions LLC v. Kingston Technology Co., precedential opinion authored by Judge Prost, joined by Judges Lourie and Chen.  The principal issue on appeal is one of claim construction and correction.  As the court states, the patent in suit “is generally directed to ‘[a] flash memory apparatus having a single body type rotary cover’” (p.2).  More specifically, the claim recites a flash memory apparatus comprising (1) “a flash memory main body including,” inter alia, "a rectangular shaped case within which a memory element is mounted” and a “hinge protuberance”; and (2) a cover including, inter alia, parallel plate members “having at least one hinge hole receiving the hinge protuberance on the case for pivoting the case with respect to the flash memory main body . . .” (p.4).  The district court determined that the claim drafter clearly meant to say “for pivoting the cover,” not “for pivoting the case,” and that this error was “evident from the face of the patent” because “[t]he case is described as a part of the main body, so it is not possible for it to rotate with respect to the body” (p.5).  Long story short, the Federal Circuit agrees with this “judicial correction” of what it characterizes as a “minor clerical error.”  

Since this blog is about remedies, I will leave it to others to debate whether this was correct or not, and focus on willful infringement and damages.  In particular, the jury awarded $7,515,327.40 in compensatory damages, which the district court "enhanced by 50 percent" (p.2).  The damages issues are actually pretty interesting.

First, Kingston argues “that it could not have formed the requisite intent to support a willfulness finding because it did not infringe the claims as originally written and because it could not have anticipated that a court would later correct the claims” (p.9).  The court rejects this argument, holding that “that reliance on an obvious minor clerical error in the claim language is not a defense to willful infringement” (p.10).  At first blush, this seems right to me, assuming that the major premise (that the error here was a "minor clerical" one) is correct.

Second, the court concludes that there was no abuse of discretion in permitting the plaintiff’s expert, Mr. Bergman, to testify that an appropriate royalty would be 40 cents per unit, reflecting 18.75% of the profits Kingston would have earned from its infringing products, even though the cost of producing the infringing products was only 35 cents:

 

At trial, Pavo presented a reasonable-royalty theory of damages under a hypothetical-negotiation framework and proposed a 40-cent-per-unit royalty rate. Mr. Bergman used the negotiations and agreement between CATR and IPMedia as his starting point; both parties’ experts agreed that the IPMedia license was a comparable license. . . . That license included a 1-cent running royalty for sales of the licensed product. . . . The license also included a representation from IPMedia to CATR that “the amount of One U.S. Cent ($0.01 USD) per unit is approximately equal to Twenty Five Percent (25%) of IPMedia’s profits recognized from the sale of a Covered Product, excluding profits attributable to any upgrades or value-added features or services (i.e., higher memory capacity, custom printing, software preloads, etc.).” . . . Based on those two provisions, Mr. Bergman opined that a profit-split model was appropriate to use as a factor to determine damages; differences in profitability and business models between IPMedia and Kingston led Mr. Bergman to reduce the profit split from 25 percent to 18.75 percent. He applied that figure to Kingston’s profits from the sale of the accused USB device and concluded that the appropriate royalty rate was 40 cents per unit.

 

Kingston first argues that Mr. Bergman’s methodology is unsound because it relies not on what CATR actually received but, instead, on what Kingston characterizes as a non-binding non-payment term, i.e., the 25-percent-of profit representation. But the IPMedia agreement itself says that the 1-cent royalty that CATR received represented 25 percent of IPMedia’s profit for sales of its product, so that representation provided context for the royalty and was not a separate payment provision. Under the circumstances, Mr. Bergman’s testimony is not unduly speculative, and the district court did not abuse its discretion in declining to exclude it. Mr. Bergman’s analysis then accounted for the differences in the economic circumstances of the contracting parties, which is exactly what our case law requires. See VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1330 (Fed. Cir. 2014). . . .

 

Kingston next suggests that Mr. Bergman failed to apportion for non-infringing features. Kingston argues that, because the undisputed evidence at trial shows that it paid just 35 cents in casing costs for the accused products, which is less than the 40-cent royalty Mr. Bergman proposed, Mr. Bergman necessarily failed to account for the value of the infringing features. We disagree. First, the costs to Kingston for the materials are not the same as the value of the patented feature, so Kingston’s argument compares apples to oranges. Second, Mr. Bergman’s analysis correctly apportioned for non-infringing features. . . .

 

Here, both parties agree that the IPMedia license was comparable. That license granted rights in the ’544 patent, and it plainly reflected the value that the contracting parties settled on for the patent. As the starting point for Mr. Bergman’s analysis, it provided sufficient evidence of “already built[-]in apportionment.” See Commonwealth Sci. & Indus. Rsch. Org. v. Cisco Sys., Inc., 809 F.3d 1295, 1303 (Fed. Cir. 2015) . . . (pp. 17-20).

This is interesting, because (1) it recognizes that a profit-split based on actual evidence can be an acceptable way of estimating the hypothetical bargain, as my coauthors and I argued at pp. 26-27 of the Reasonable Royalties chapter of Patent Remedies and Complex Products: Toward a Global Consensus; and (2) it recognizes that a reasonable royalty can exceed the cost of producing the tangible (infringing) product (a matter that could be important to the “license to all” versus “access to all” debate, as I noted in this Law360 piece two years ago (see in particular sources cites in note 16).

Finally, the court concludes that Kingston did not preserve for appeal its argument that Pavo’s disclosure to the jury of Kingston’s total revenue was unduly prejudicial (pp. 23-24).