Wednesday, April 15, 2015

Drafting Around the Entire Market Value Rule?

Over at the Patent Damages blog, Chris Marchese published an interesting post a few weeks back titled Damages base--is the name of the game the claim?  Here's the set-up.  Under Federal Circuit precedent, the “entire market value” may serve as a royalty base only when “the patented feature drives the demand for an entire multi-component product,” and as a general rule the correct base is the “smallest salable patent-practicing unit.” LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) (quoting Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283 (N.D.N.Y. 2009)).  However, as the court further clarified in Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014), "the requirement that a patentee identify damages associated with the smallest salable patent-practicing unit is simply a step toward meeting the requirement of apportionment. Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature . . . the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. To hold otherwise would permit the entire market value exception to swallow the rule of apportionment. . . ."  Moreover, as explained in the even-more recent case of  Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014), the entire market value rule (EMVR) "actually has two parts, which are different in character."  The first is a "substantive legal rule" that the "the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more. . . .  When the accused infringing products have both patented and unpatented features, measuring this value requires a determination of the value added by such features."  The second is an evidentiary principle, "applicable specifically to the choice of a royalty base," that "where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product."  Once the jury hears that the defendant earned $1 billion from sales of an infringing product, in other words, it may be difficult for it to avoid awarding an inappropriately large royalty; as the court puts it, the large number may "skew the damages horizon for the jury."  (So does that mean that use of the entire value of the end product as a royalty base is all right in a bench trial, as long as the value of the infringing component is properly apportioned?  That would seem to follow, I think.)

Anyway, suppose an inventor invents component ABC, and that ABC serves as a small component in a larger, multicomponent product such as a smartphone.  Would the inventor be well-advised to include at least one dependent claim comprising "ABC incorporated into a smartphone"?  In a case in which a defendant infringes by incorporating ABC into a smartphone, could the inventor then assert that, with respect to the infringement of the dependent claim, the "smallest salable patent-practicing unit" is ABC plus smartphone?  Sure, the inventor would have to apportion the value of the patented feature further, under VirnetX.  But now the jury has heard the entire market value of the end product, which is what the EMVR is supposed to prevent.

According to Mr. Marchese, the case law thus far is not very clear on this issue.  But perhaps it wouldn't be surprising if patent owners started to include claims like the hypothetical dependent claim above, just in case it could come in handy later on in the event of litigation.  Indeed, in Ericsson the Federal Circuit was willing to allow the jury to hear about comparable licenses that use the EMVR as the royalty base as long as the court, on request, gives an appropriate cautionary instruction.

Assuming we don't want the jury to hear that number, however, perhaps a way around the problem would be to recast the EMVR as requiring the identification not of the smallest salable patent-practicing unit, but rather the smallest salable unit that incorporates the inventive principle or "point of novelty."  In the above hypo, this would mean that "smartphone + ABC" is not the appropriate base, but rather the smallest component of the smartphone that practices ABC (the inventive feature).  But then we would be inviting disputes over what the inventive feature is.  This introduces yet another complexity, and might be particularly hard to pin down in a case in which the inventive feature is a novel and nonobvious combination of preexisting features.

Alternatively, perhaps judges simply could be required to apply the "smallest salable unit" rule as long as the infringing product infringes the broader, independent claim (ABC), even if it also infringes the narrower dependent claim (ABC + smartphone).

If neither of these options work, however, are we stuck with a potential way to draft around the EMVR?  Does it really matter, or should we be less suspicious of juries' ability to understand the principle of apportionment?  Presumably the issue is much less pressing in other countries, where jury trials in patent cases are nonexistent . . . .    

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