New Math for the Entire Market Value Rule

The entire market value rule lets a patentee recover damages based on the market value of a product that includes a patented invention, even if the patented invention is only a small part of the entire product. Patentees favor this rule because it often lets them begin their damages calculations with a high dollar amount. But a recent order from the Eastern District of Texas shows that patentees may not be able to calculate damages under the entire market value rule using a simple (market value base ' royalty rate) formula. Such damages calculations may be excluded from trial, leaving the patentee seeking to recover a fraction of the original damages figure.

The Entire Market Value Rule

The entire market value rule stems from the 15 Georgia-Pacific factors, which establish a framework for determining the amount of reasonable royalty damages for patent infringement. The entire market value rule has been shaped by the courts over several years in an effort to calculate damages when an infringing component is a part of a larger product, especially when there is no established market for the infringing component in isolation. The Federal Circuit most recently reaffirmed the entire market value rule in Lucent Tech.
Inc. v. Gateway Inc., 580 F.3d 1301 (Fed. Cir. 2009), although it remains a special method of calculating patent infringement damages rather than the general rule for doing so.

Before a patentee can apply the market value of an entire product in calculating damages, the patentee must satisfy at least two major prongs. First, the patentee must show that the product's patented and unpatented components are analogous to a single functional unit. For example, unpatented filter screens used with a patented filtering device have been held to be a single functional unit. As a second example, the asserted patent in Lucent was directed toward a date-picker feature in Microsoft Outlook. The patentee initially tried to base damages on the price of computers loaded with Outlook, but was rebuffed by the district court. The patentee then based damages on the price of only the software, which was easier to characterize as a single functional unit because it was the smallest sellable unit containing the patented feature.

Second, the patentee must show that the patented feature is the basis for customer demand of the entire product. In Lucent, the Federal Circuit held that Lucent failed to satisfy this prong because it did not show that anyone purchased Outlook because of the date-picker feature. Certain cases, however, suggest that the patented feature must be only a substantial basis for customer demand of a product.

The Contribution Multiplier

Once the patentee has established that it is proper to use the market value of an entire product in calculating damages, the patentee can strengthen the damages calculation by applying an appropriate multiplier that takes into account “the relative significance of the patented inventions and their contribution to the overall value of the accused products.” See, e.g., Fenner Investments, Ltd. v. Hewlett-Packard Co., et al., No. 273-202 (E.D. Tex. Apr. 16, 2010). A court may strike a damages figure calculated by multiplying market value by a royalty rate rather than by using the formula: (market value base ' contribution multiplier ' royalty rate).

The Fenner court excluded from trial a proposed damages opinion for failing to identify and support an appropriate contribution multiplier. The court granted the patentee just one week to serve a supplemental opinion remedying that and other deficiencies. Any attempt by a patentee in such a situation to return to the original damages figure with a higher royalty rate will likely be rejected in light of Lucent. In Lucent, when the patentee was ordered to recalculate damages based on the market value of just Outlook rather than the computers loaded with Outlook, the patentee increased the proposed royalty rate from 1% to 8% to arrive at the same final damages figure. The Federal Circuit described this rate increase as unacceptably side-stepping the purpose of narrowing the market value base from the computers to just Outlook. Accordingly, damages calculated under the entire market value rule will be easier to justify when the patentee explicitly identifies and supports a contribution multiplier. Patentees who do not do so risk unnecessarily and significantly undercutting their damages model.

Establishing a proper contribution multiplier is highly fact specific, but will often overlap the analysis of whether a patented component or feature is the basis for customer demand of an encapsulating product. In addition, market surveys may be useful in supporting a selected contribution multiplier, and are admissible under a hearsay exception if they are demonstrated to be reliable and compliant with accepted survey methods. See, e.g., C.A. May Marine Supply Co. v. Brunswick Corp., 649 F.2d 1049, 1054 (5th Cir. 1981).

The Final Reasonable Royalty Figure

Such market research may also be useful in supporting a reasonable royalty calculation as a whole, under the 11th Georgia-Pacific factor, evidence of usage. For example, surveys may be used to quantify the number of end users practicing asserted method claims for purposes of showing a reasonable royalty stemming from indirect infringement. In addition to surveys, supportive market data may come from sales projections based on past sales, focus group testing, or other sources. Indeed, in Lucent, the Federal Circuit vacated the jury's $358 million reasonable royalty award because the evidence was “conspicuously devoid” of any data about how often consumers used the patented date-picker feature. No evidence described how many Outlook users had ever performed the patented method or how many times they had used it. In i4i Ltd. P'ship v. Microsoft Corp., 589 F. 3d 1246 (Fed. Cir. 2009), by contrast, the Federal Circuit affirmed the jury's $200 million reasonable royalty award based, in part, on a market survey that received only 46 responses. At the end of the day, any damages award must be economically justified and within an acceptable range as determined by the evidence.

Accused infringers who do not challenge improper damages opinions limit their right to attack damages awards on appeal. In i4i, for example, Microsoft argued on appeal that the jury's $200 million reasonable royalty damages award was excessive. But because it had not filed a pre-verdict judgment as a matter of law on the issue of damages, it waived its ability to have the Federal Circuit decide whether there was a sufficient evidentiary basis for the award. Instead, the Federal Circuit had to apply a highly deferential standard in which it could set aside the damages award only upon a clear showing of excessiveness. To be excessive, an award must exceed the maximum amount calculable from the evidence. Under this standard, the court declined to second-guess or substitute its judgment for the jury's. “Had Microsoft filed a pre-verdict JMOL, it is true that the outcome might have been different.” Id. at 1272. The Supreme Court has granted a writ of certiorari in i4i, but it has done so to address the question of whether patent invalidity must be shown by clear and convincing evidence.

Practice Pointers

In summary, patentees, accused infringers, and damages experts alike should consider these practice pointers regarding the entire market value rule:

• The entire market value rule does not apply unless the patentee can demonstrate at least that the product serving as the basis for the damages calculation is a single functional unit, and the patented feature is the basis for demand of that product.
• Basing damages on the largest accused system that encompasses a patented invention may not always be the best choice. A conservative but well-supported damages formula may provide a greater return.
• A damages calculation will have stronger footing when it is based on a separately and expressly set forth contribution multiplier that has support in the record. Evidence used to establish the basis of customer demand and market surveys may be useful in justifying a contribution multiplier.
• Defendants should bring a pre-verdict judgment as a matter of law motion to attack a damages opinion that does not identify and support a contribution multiplier or is otherwise deficient. Raising such issues for the first time on appeal will limit one's rights.
• Patent reform legislation or new case law may change the contours of the entire market value rule. It is important to always stay apprised of recent developments in the law, and the law of the relevant forum.

Robert Buergi is a senior patent litigation associate in the Silicon Valley office of DLA Piper LLP.

The entire market value rule lets a patentee recover damages based on the market value of a product that includes a patented invention, even if the patented invention is only a small part of the entire product. Patentees favor this rule because it often lets them begin their damages calculations with a high dollar amount. But a recent order from the Eastern District of Texas shows that patentees may not be able to calculate damages under the entire market value rule using a simple (market value base ' royalty rate) formula. Such damages calculations may be excluded from trial, leaving the patentee seeking to recover a fraction of the original damages figure.

The Entire Market Value Rule

The entire market value rule stems from the 15 Georgia-Pacific factors, which establish a framework for determining the amount of reasonable royalty damages for patent infringement. The entire market value rule has been shaped by the courts over several years in an effort to calculate damages when an infringing component is a part of a larger product, especially when there is no established market for the infringing component in isolation. The Federal Circuit most recently reaffirmed the entire market value rule in Lucent Tech.
Inc. v. Gateway Inc. , 580 F.3d 1301 (Fed. Cir. 2009), although it remains a special method of calculating patent infringement damages rather than the general rule for doing so.

Before a patentee can apply the market value of an entire product in calculating damages, the patentee must satisfy at least two major prongs. First, the patentee must show that the product's patented and unpatented components are analogous to a single functional unit. For example, unpatented filter screens used with a patented filtering device have been held to be a single functional unit. As a second example, the asserted patent in Lucent was directed toward a date-picker feature in Microsoft Outlook. The patentee initially tried to base damages on the price of computers loaded with Outlook, but was rebuffed by the district court. The patentee then based damages on the price of only the software, which was easier to characterize as a single functional unit because it was the smallest sellable unit containing the patented feature.

Second, the patentee must show that the patented feature is the basis for customer demand of the entire product. In Lucent, the Federal Circuit held that Lucent failed to satisfy this prong because it did not show that anyone purchased Outlook because of the date-picker feature. Certain cases, however, suggest that the patented feature must be only a substantial basis for customer demand of a product.

The Contribution Multiplier

Once the patentee has established that it is proper to use the market value of an entire product in calculating damages, the patentee can strengthen the damages calculation by applying an appropriate multiplier that takes into account “the relative significance of the patented inventions and their contribution to the overall value of the accused products.” See, e.g., Fenner Investments, Ltd. v. Hewlett-Packard Co., et al., No. 273-202 (E.D. Tex. Apr. 16, 2010). A court may strike a damages figure calculated by multiplying market value by a royalty rate rather than by using the formula: (market value base ' contribution multiplier ' royalty rate).

The Fenner court excluded from trial a proposed damages opinion for failing to identify and support an appropriate contribution multiplier. The court granted the patentee just one week to serve a supplemental opinion remedying that and other deficiencies. Any attempt by a patentee in such a situation to return to the original damages figure with a higher royalty rate will likely be rejected in light of Lucent. In Lucent, when the patentee was ordered to recalculate damages based on the market value of just Outlook rather than the computers loaded with Outlook, the patentee increased the proposed royalty rate from 1% to 8% to arrive at the same final damages figure. The Federal Circuit described this rate increase as unacceptably side-stepping the purpose of narrowing the market value base from the computers to just Outlook. Accordingly, damages calculated under the entire market value rule will be easier to justify when the patentee explicitly identifies and supports a contribution multiplier. Patentees who do not do so risk unnecessarily and significantly undercutting their damages model.

Establishing a proper contribution multiplier is highly fact specific, but will often overlap the analysis of whether a patented component or feature is the basis for customer demand of an encapsulating product. In addition, market surveys may be useful in supporting a selected contribution multiplier, and are admissible under a hearsay exception if they are demonstrated to be reliable and compliant with accepted survey methods. See, e.g., C.A. May Marine Supply Co. v. Brunswick Corp. , 649 F.2d 1049, 1054 (5th Cir. 1981).

The Final Reasonable Royalty Figure

Such market research may also be useful in supporting a reasonable royalty calculation as a whole, under the 11th Georgia-Pacific factor, evidence of usage. For example, surveys may be used to quantify the number of end users practicing asserted method claims for purposes of showing a reasonable royalty stemming from indirect infringement. In addition to surveys, supportive market data may come from sales projections based on past sales, focus group testing, or other sources. Indeed, in Lucent, the Federal Circuit vacated the jury's $358 million reasonable royalty award because the evidence was “conspicuously devoid” of any data about how often consumers used the patented date-picker feature. No evidence described how many Outlook users had ever performed the patented method or how many times they had used it. In i4i Ltd. P'ship v. Microsoft Corp. , 589 F. 3d 1246 (Fed. Cir. 2009), by contrast, the Federal Circuit affirmed the jury's $200 million reasonable royalty award based, in part, on a market survey that received only 46 responses. At the end of the day, any damages award must be economically justified and within an acceptable range as determined by the evidence.

Accused infringers who do not challenge improper damages opinions limit their right to attack damages awards on appeal. In i4i, for example, Microsoft argued on appeal that the jury's $200 million reasonable royalty damages award was excessive. But because it had not filed a pre-verdict judgment as a matter of law on the issue of damages, it waived its ability to have the Federal Circuit decide whether there was a sufficient evidentiary basis for the award. Instead, the Federal Circuit had to apply a highly deferential standard in which it could set aside the damages award only upon a clear showing of excessiveness. To be excessive, an award must exceed the maximum amount calculable from the evidence. Under this standard, the court declined to second-guess or substitute its judgment for the jury's. “Had Microsoft filed a pre-verdict JMOL, it is true that the outcome might have been different.” Id. at 1272. The Supreme Court has granted a writ of certiorari in i4i, but it has done so to address the question of whether patent invalidity must be shown by clear and convincing evidence.

Practice Pointers

In summary, patentees, accused infringers, and damages experts alike should consider these practice pointers regarding the entire market value rule:

• The entire market value rule does not apply unless the patentee can demonstrate at least that the product serving as the basis for the damages calculation is a single functional unit, and the patented feature is the basis for demand of that product.
• Basing damages on the largest accused system that encompasses a patented invention may not always be the best choice. A conservative but well-supported damages formula may provide a greater return.
• A damages calculation will have stronger footing when it is based on a separately and expressly set forth contribution multiplier that has support in the record. Evidence used to establish the basis of customer demand and market surveys may be useful in justifying a contribution multiplier.
• Defendants should bring a pre-verdict judgment as a matter of law motion to attack a damages opinion that does not identify and support a contribution multiplier or is otherwise deficient. Raising such issues for the first time on appeal will limit one's rights.
• Patent reform legislation or new case law may change the contours of the entire market value rule. It is important to always stay apprised of recent developments in the law, and the law of the relevant forum.

Robert Buergi is a senior patent litigation associate in the Silicon Valley office of DLA Piper LLP.