Even the Value of the Smallest Salable Unit Must Be Apportioned

When a user accesses a URL that is not already in the WebPulse database, DRTR analyzes its content, assigns it a category and performs other functions not covered by the '844 patent. DRTR examines the URLs for malware and when suspicious code that may contain malware is identified, DRTR attaches a security profile to the URL. This permits a customer of WebPulse to screen downloadables for malware. Other aspects of WebPulse identifying other categories of downloadable content can, e.g., prevent employees from using social media, shopping or viewing inappropriate content while at work. Id. at 17-18.

Attaching the security profile to the downloadable content infringes the '844 patent. However, other functions that are unrelated to the malware identification function, while desirable to purchasers of WebPulse, do not infringe the '844 patent. Consequently, DRTR performs both infringing and non-infringing functions. Id. at 18.

Finjan's Damages Theory

Patent damages are governed by 35 U.S.C. §284. It directs that patent damages must be “adequate to compensate for the infringement,” but in no event, less than a reasonable royalty. The “reasonable royalty” has been held to correspond to the amount a willing licensee and licensor would have agreed to at the time the infringement began, if the licensee would have been prevented from infringing the patent. Id. at 16-17.

The reasonable royalty calculation is typically made by multiplying a royalty base by a royalty rate. The combination of base and rate must reflect the value of the infringing features of the product, but no more. Id. at 17. Courts have recognized that if the base is too high, it can skew the royalty calculation even if it is multiplied by a small rate. For example, if the patented feature is an improved automobile headlamp filament, it might be prejudicial to a jury to calculate the royalty based on the price of the entire car, even if a small rate were employed. Consequently, an “entire market value rule” has developed. This rule seeks to identify the smallest salable unit of the infringing product, such as the headlamp bulb, in an effort to calculate a reasonable royalty that is more closely tied to the patented invention, and not unpatented features of an infringing product.

The smallest salable unit principle directs that “in any case involving multicomponent products, patentees may not calculate damages based on sales of the entire product, as opposed to the smallest salable patent-practicing unit, without showing that the demand for the entire product is attributable to the patented feature.” LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51, 67–68 (Fed. Cir. 2012).

Id. at 19

At trial, in an effort to provide evidence of how much use was made of the infringing method, Finjan submitted evidence regarding the total amount of Web traffic that passed through the DRTR. It argued that because the DRTR was the smallest identifiable technical component, essentially the smallest salable unit of WebPulse, evidence of how much it was used was a base measure of how much use was made of the patented method. However, Finjan did not further apportion DRTR usage between non-infringing uses and infringing uses. Finjan argued that “apportionment to DRTR [as a whole] is adequate because DRTR is the 'smallest, identifiable technical component' tied to the footprint of the invention,” i.e., the smallest salable unit. Finjan, at 19. Therefore, according to Finjan, the damages award was acceptable, because it was not based on total usage of WebPulse, but only on usage of the smallest salable portion performing the infringing feature.

The court acknowledged that Finjan is correct that basing a royalty on the smallest salable unit is a requirement for situations where the “entire market value rule” is an issue. Thus, it would have been improper for Finjan to base damages on total usage of WebPulse. However, the court clarified that identifying the smallest salable unit does not end the analysis. Even if a plaintiff identifies the smallest salable unit, it must still ensure that royalties are tied to the patented invention and not to unpatented portions of that smallest unit: identifying the smallest salable unit “does not insulate [the patentee] from the 'essential requirement' that the 'ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.' Ericsson, 773 F.3d at 1226.” Moreover, the case did not involve a multi-component product and a patent covering only one of those components. Rather, the patent covered a method and plaintiff attempted to isolate use of a feature as a proxy for use of the claimed invention. Thus, even after the smallest salable unit or smallest identifiable technical component is identified, an apportionment must be made between infringing and non-infringing aspects, when such a situation exists. Id. at 19.

Finjan also defended its position on the grounds that the patented function was an important driver of sales and that customers viewed many of the non-infringing functions as unimportant. However, the evidence established that customers considered at least some of the unpatented functions of DRTR to be important. Therefore, Finjan was required to apportion between patented and unpatented functionality: “whether 'viewed as valuable, important or even essential,' the patented feature must be separated. VirnetX, 767 F. 3d at 1329 (quoting LaserDynamics, 694 F. 3d at 68.” Id. at 20.

The Federal Circuit also found error in Finjan's alternate royalty calculation, which was based on an $8-per-user lump-sum royalty. The court found the $8-per-user lump-sum royalty to be unsupported by the evidence, regardless of apportionment issues. Finjan's representative testified that in 2008, it obtained an $8-per-user royalty against the defendant (Secure Computing) in an unrelated patent infringement litigation also involving computer security software. He testified that the $8-per-user rate from the earlier case would be a reasonable “starting point” of the subsequent hypothetical royalty negotiation with Blue Coat. Id. at 21. However, the Federal Circuit found his methodology to be unsupported.

The Federal Circuit pointed out that the Secure Computing case involved a different patent; that there was no evidence establishing the patents were economically or technologically comparable; and that the fact that both infringing products were in the field of computer security was a mere “surface similarity.” Therefore, the court concluded that the “$8-per-user rate appeared to have been plucked from thin air.” As such, the court could not consider it to be an acceptable basis for a reasonable royalty calculation. Id. at 22.

The Federal Circuit Holding

The Federal Circuit remanded the case to the district court for a new calculation of damages. First, the court noted that in its view, Finjan had “failed to present a damages case that can support the jury's verdict.” Id. at 22. However, it recognized that mere reversal would provide Finjan without any compensation for Blue Coat's infringement of the '844 patent. It explained that Finjan is entitled to no less than a reasonable royalty. Therefore, it remanded the case to the district court “to determine whether Finjan has waived the right to establish reasonable royalty damages under a new theory and whether to order a new trial on damages.”

Conclusion

The Federal Circuit emphasized that the goal of a patent infringement reasonable royalty calculation is to base the royalty on the incremental value the patented technology adds to the infringing product. Patentees that ignore apportionment between patented and unpatented features do so at their own risk.

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Matthew Siegal is Of Counsel to the intellectual property firm of Dilworth & Barrese in Woodbury, NY and a member of this newsletter's Board of Editors. He can be reached at [email protected]. Any opinions or positions expressed are not necessarily of the firm or any of its clients.