The Federal Circuit recently clarified the proper application of common patent litigation damages principles in LaserDynamics v. Quanta Computer.¹

Among the issues on appeal was the proper measure of damages after defendant Quanta Computer was found to have actively induced infringement of LaserDynamics' patent for technology that allows devices to distinguish between DVDs and CDs inserted into optical disc drives.

First, the court reversed the use of the "entire market value" rule to calculate damages in situations in which the plaintiff's expert did not adequately show that demand for the entire product was driven by the infringing component or feature. In doing so, the Federal Circuit clarified the high standard of proof that a plaintiff must establish to attain damages using an "entire market value" rule theory:²

LaserDynamics' use of the entire market value rule was impermissible, however, because LaserDynamics failed to present evidence showing that the patented disc discrimination method drove demand for the laptop computers. It is not enough to merely show that the disc discrimination method 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 an [optical disc drive] practicing the disc discrimination method would be commercially unviable. Were this sufficient, a plethora of features of a laptop computer could be deemed to drive demand for the entire product. To name a few, a high resolution screen, responsive keyboard, fast wireless network receiver, and extended-life battery are all in a sense important or essential features to a laptop computer; take away one of these features and consumers are unlikely to select such a laptop computer in the marketplace. But proof that consumers would not want a laptop computer without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers. Put another way, if given a choice between two otherwise equivalent laptop computers, only one of which practices optical disc discrimination, proof that consumers would choose the laptop computer having the disc discrimination functionality 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.

Second, the Federal Circuit clarified the time at which a "hypothetical negotiation" should begin when calculating a reasonable royalty in the context of active inducement of infringement. The court held that LaserDynamics' expert erred in using the date on which the active inducement of infringement began. Instead, the court clarified that the proper date for the start of a hypothetical negotiation is the date of the first direct infringement—in this case, back in 2003—even in cases where a defendant is only liable for inducement.³

Third, where the plaintiff offered evidence of its licensing agreements to show the value of its technology, the court excluded evidence of one particularly high prior settlement agreement as "the least reliable license by a wide margin."⁴ The settlement in question was forced on the settling party due to a series of adverse decisions in the litigation, including sanctions for a variety of discovery abuses by counsel. The result was a license payment more than six times higher in value than the next closest payment. Due to the unusually coercive circumstances under which that license agreement was formed, the probative value of the license was too low and had too little relation to the demonstrated economic value for the patented technology. Because of the resulting likelihood of jury confusion and unfair prejudice, the outlying license was excluded pursuant to Federal Rule of Evidence 403.⁵

Finally, the court held that LaserDynamics' expert's use of a 6 percent running royalty was not reliable or admissible, stating, "In sum, the 6% royalty rate was untethered from the patented technology at issue and the many licenses thereto and, as such, was arbitrary and speculative." The court found that, in a context in which most of a company's licenses are lump sums, the calculation of a royalty rate is too arbitrary when based on licenses from differing technology areas and from a timeframe different than that of the hypothetical negotiation.⁶

In sum, the Federal Circuit's opinion should limit excessive damages in matters where only one component or feature of a whole product is infringed. A higher degree of proof is required to show that infringing features drove demand in order to obtain damages on an "entire market value" rule theory. The court also clarified the timeframe for calculations of hypothetical negotiations for damages resulting from a finding of induced infringement and maintained its stance that expert opinions can and will be excluded when they are not based upon credible economic analysis.

For more information on patent damages law in all of its various forms, please contact James Yoon, Stefani Shanberg, or another member of Wilson Sonsini Goodrich & Rosati's intellectual property litigation and counseling practice.

¹ F.3d; Nos. 2011-1440, 2011-1470; 2012 WL 3758093 (Fed. Cir., Aug. 30, 2012).

² Id. at *12.

³ Id. at *18 (emphasis added).

⁴ Id. at *21.

⁵ Id.

⁶ Id. at *25.