Patent Lost Profit Damages and Apportionment

A Federal Circuit panel affirmed the jury's $36 million verdict against Synopsys, noting that Synopsys had not challenged the underlying factual findings on any of the Panduit factors: “(1) demand for the patented product,” (2) the “absence of acceptable noninfringing substitutes,” (3) “manufacturing and marketing capability to exploit the demand,” and (4) “the amount of profit” lost. Id. at 1285-87 (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978)). Given these undisputed factual findings, the panel determined that no further apportionment was necessary. Mentor Graphics Corp., 851 F.3d at 1287-88. Focusing on the first two factors, the panel found that “[t]ogether, requiring patentees to prove demand for the product as a whole and the absence of non-infringing alternatives ties lost profit damages to specific claim limitations and ensures that damages are commensurate with the value of the patented features.” Id. at 1285. The panel found that that”[i]n this case, apportionment was properly incorporated into the lost profits analysis and in particular through the Panduit factors,” id. at 1288, and therefore “the district court did not err in refusing to further apportion lost profits after the jury returned its verdict applying the Panduit factors. … [W]hen the Panduit factors are met, they incorporate into their very analysis the value properly attributed to the patented feature.” Id. at 1290.

Synopsys filed petitions for a rehearing en banc and a panel rehearing. On Sept. 1, 2017, 12 Federal Circuit judges denied both petitions in a short per curiam order. See, Mentor Graphics Corp., 2017 WL 3806141, at 1. Judge Stoll, joined by Judges Newman, Moore, O'Malley, Reyna, and Wallach, concurred in the denial of rehearing en banc. Their concurrence emphasized that although apportionment has long been required in patent cases, Mentor's lost profits damages were properly apportioned. Id. at 1-2 (citing VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326 (Fed. Cir. 2014); Commonwealth Sci. & Indus. Research Org. v. Cisco Sys., Inc., 809 F.3d 1295, 1301 (Fed. Cir. 2015); and Ericsson, Inc. v. D–Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014)). The concurrence reasoned that because the jury had found that: 1) Intel would not have purchased the infringing emulator system without the two patented features; and 2) there were no available alternatives, “Mentor proved that the patented features were what imbued the combined features that made up the emulator with marketable value,” making further apportionment unnecessary. Mentor Graphics Corp., 2017 WL 3806141, at 2 (citing Ericsson, 773 F.3d at 1227). The concurrence concluded that “[u]nder the narrow facts of this case … because the Panduit factors are satisfied, the damages award properly accounted for apportionment.” Mentor Graphics Corp., 2017 WL 3806141, at 2.

The Dissent

Judge Dyk, joined by Judge Hughes, dissented from the denial of rehearing en banc, writing that the panel decision “improperly holds that when lost profits are awarded for patent infringement, there is no requirement for apportionment between patented and unpatented features … .” Id. Their dissent noted that “the Supreme Court's patent cases make quite clear that more than but-for causation [as encapsulated by the first and second Panduit factors] is required for apportionment.” Id. at 3. The dissent reasoned that “even if 'but for' a patented feature the item would not have been purchased, it could be equally true that but for an unpatented feature . . . the item would not have been purchased.” Id. at 4. The dissent concluded that the panel improperly “equates consumer demand and but-for causation with apportionment,” and that because “the factual findings necessary to satisfy the Panduit factors are a necessary predicate for lost profits, the result here is that true apportionment will never be required for lost profits.” Id. at 5.

Thus, although the entire Federal Circuit agrees in principle that all patent damages, including lost profits, must be apportioned, the judges fundamentally disagree about the type and extent of apportionment required. The original panel and concurring judges suggest that the “but for” causation demonstrated by satisfying the Panduit factors is sufficient without consideration of non-patented features (at least in certain cases), while the dissenting judges argue that a true apportionment is not possible without a consideration of the relative value of all features — both patented and non-patented. These differing views have their roots in different legal principles. The original panel decision emphasized the patentee's entitlement “to be made whole for the profits it proves it lost.” Mentor Graphics Corp., 851 F.3d at 1284. In focusing on compensatory damages and making the injured party whole, the panel explained that, in cases where the patent holder would have made additional sales “but for” the infringement, the only way to make that party whole is to compensate it for all of the profits it lost on those lost sales. In this way, the panel claimed that patent damages are “no different than breach of contract or general tort damages.” Id. at 1285. The concurrence endorsed this focus, explaining that the panel's decision is “consistent with long-standing damages principles in property, tort and contract” and disagreeing that there should be distinct rules for patent damages “at odds with mainstream damages principles.” Mentor Graphics Corp., 2017 WL 3806141, at 1, n.1. These statements may evidence an appeal to similar reasoning in recent Supreme Court decisions, which have tended to move away from patent exceptionalism in favor of subjecting patent cases to the same rules as other substantive legal areas. See, e.g., eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

The dissent, however, focused less on policy goals underlying compensatory damages and more on ensuring that patent damages are limited to the claimed invention's incremental value. For example, the dissent explained that with complex products, features that are either unpatented or patented by other companies often contribute a portion of the end product's profits, making it unreasonable to attribute the entirety of those profits to a single patent. One mechanism for addressing this reality is the entire market value rule, which permits patent holders to calculate damages based on an entire product's value only where “the patented feature drives the demand for an entire multi-component product.” Mentor Graphics Corp., 2017 WL 3806141, at 1 (citing LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51, 67 (Fed. Cir. 2012)). The concurrence essentially concluded that the entire market value rule was satisfied by showing demand for the patented product and the lack of non-infringing alternatives, the first two Panduit factors whose purpose is to establish but-for causation. But in the context of reasonable royalty damages, the Federal Circuit has held that the entire market value rule requires more than but-for causation. See, LaserDynamics, Inc., 694 F.3d at 68 (“It is not enough to merely show that the [patented feature] is viewed as valuable, important, or even essential to the use of the laptop computer. Nor is it enough to show that a laptop computer without [the patented feature] would be commercially unviable. … [P]roof that consumers would choose the laptop computer having the [patented feature] says nothing as to whether the presence of that functionality is what motivates consumers to buy a laptop computer in the first place. It is this latter and higher degree of proof that must exist to support an entire market value rule theory.”). The concurrence's view that a but-for test, by itself, can satisfy the entire market value rule may open the door to new interpretations of the rule's scope, and could lead to arguments that but-for causation is also sufficient to satisfy the entire market value rule in calculating reasonable royalty damages.

The split Federal Circuit also disagreed about how broadly the panel's decision will be applied. As the dissent noted, the panel's decision may be interpreted as holding that in all cases where the Panduit factors are satisfied, the apportionment requirement is similarly satisfied. Aware of this concern, the concurrence expressly referenced “the narrow facts of this case,” writing that the panel's holding does not mean that “in all cases where lost profits are awarded, apportionment is not required.” Mentor Graphics Corp., 2017 WL 3806141, at 2 (“Under the narrow facts of this case, however, the panel determined that because the Panduit factors are satisfied, the damages award properly accounted for apportionment.”). In making this clarification, however, the concurrence explicitly distinguished only between “all lost profits analyses” and cases where “the Panduit factors are satisfied.” Id. In practice, as the dissent noted, the majority of successful lost profits analyses are premised on proving the Panduit factors, so the concurrence's distinction between “all lost profits analyses” and those relying on the Panduit factors may do little to narrow the panel decision's breadth.

Synopsys' petition for rehearing also asked the Federal Circuit to abolish assignor estoppel, which the district court applied to bar Synopsys from challenging the '376 patent's validity. Synopsys argued that the Supreme Court had eliminated a similar doctrine, licensee estoppel, in Lear, Inc. v. Adkins, 395 U.S. 653 (1969), and that the same logic should result in the elimination of assignor estoppel. See, Mentor Graphics Corp., 2017 WL 3806141, at 5-6. Judge Moore, joined by Judge Chen, concurred in the denial of Synopsys' petition for rehearing on this issue. Their concurrence explained that Synopsys' argument was foreclosed by Westinghouse Elec. & Mfg. Co. v. Formica Insulation Co., 266 U.S. 342, 353 (1924), in which the Supreme Court found an assignor could be barred from challenging an assigned patent's validity. Because of this precedent, Judges Moore and Chen stated that abolishing the doctrine was beyond the Federal Circuit's authority. Their concurrence also distinguished Lear by reasoning that “[w]hen an inventor/assignor assigns his patent rights to someone else for value, he may make an implicit representation that what he sold has value,” a representation that distinguishes the sale of a patent from the licensing of a patent, where no transfer (or corresponding implicit representation) is made. Mentor Graphics Corp., 2017 WL 3806141, at 5-6. Thus, the panel did not disturb the district court's summary judgment ruling that Synopsys was barred from challenging the '376 patent's validity under the doctrine of assignor estoppel. Synopsys may still petition the Supreme Court for a writ of certiorari and, unlike the Federal Circuit, the Supreme Court of course would not be bound by its own precedent in Westinghouse.

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Amy Proctor and Molly Russell are litigation associates in the Los Angeles office of Irell & Manella LLP, www.irell.com.