Lucent v. Gateway
In Lucent v. Gateway,1 the Federal Circuit confirmed its belief that patent damages law does not need congressional reform.2 The Lucent case addressed various elements of damages, including, in particular, the entire market value rule. The decision created no new law, but rather reiterated and emphasized existing case law and applied a dose of practical common sense to reasonable royalty damages in patent cases.
At issue was a Lucent patent that concerned a “date-picker” feature used in Microsoft Outlook (and other Microsoft programs). The date-picker tool is a “tiny feature of one part of a much larger software program.” The jury awarded Lucent a lump sum royalty of approximately $358 million, apparently equating to a royalty rate of approximately 8% of total Microsoft Outlook sales. The Federal Circuit found that the Lucent jury’s damages award of $358 million was not supported by the evidence, vacated that award and remanded the case for a new trial on damages.
Entire Market Value Rule – Value of the Patented Invention
Characterizing case law on the entire market value rule as “quite clear,” the Court explained that the entire market value rule allows for the recovery of damages based on the value of an entire apparatus (i.e., Microsoft Outlook) containing several features, when the feature patented constitutes the basis for customer demand. Thus, “for the entire market value rule to apply, the patentee must prove that ‘the patent-related feature is the basis for customer demand.’”
Lucent presented no evidence demonstrating that the patented method was a substantial basis of the consumer demand for Outlook. Apparently, Lucent’s damages expert had conceded that there was no “evidence that anybody anywhere at any time ever bought Outlook, be it an equipment manufacturer or an individual consumer . . . because it had a date-picker.” Additionally, given the importance of the many Outlook features not covered by the patent at issue, the Court arrived at the “unmistakable conclusion” that the invention described in the patent was not the reason consumers purchased Outlook. In other words, the entire market value rule did not apply.
However, even when the entire market value rule does not apply, the Court applied common sense logic. Clearly, the date-picker feature was not a stand-alone product sold separately from Outlook. Rather than requiring some artificial royalty base for the date-picker using some portion of Microsoft Outlook’s sales, for example, the Court observed that there might be circumstances when the royalty base used in a calculation could be the value of the entire commercial embodiment (i.e., Outlook sales), so long as the magnitude of the royalty rate for the patented invention is within an acceptable range.
Specifically, the Court stated, “there is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.” Recognizing the realities of patent licensing and the flexibility needed in transferring intellectual property rights, the Court noted that sophisticated parties routinely enter into license agreements that base the value of patented inventions as a percentage of commercial products’ sales price. As the Court observed, Microsoft would probably not have complained about the royalty base, if the royalty percentage had been 0.1% of Outlook sales instead of the 8% rate claimed by Lucent. In essence, the Court recognized the interrelationship in the royalty base and the royalty rate.
Ultimately, whether the royalty base or royalty rate goes up or down, the Court appears to, again logically, suggest the focus of the analysis should be on the underlying value of the patented invention. In analyzing the entire market value rule, while recognizing today’s economic realities, the Court noted the objective of its concern as being: (1) “determining the correct (or at least approximately correct) value of the patented invention, when it is but one part or feature among many, and” (2) “ascertaining what the parties would have agreed to in the context of a patent license negotiation.” [Emphasis added.]
Licenses – Sufficiently Comparable
The Lucent decision also analyzed evidence related to licenses relied upon by the parties’ experts in developing the hypothetical license at issue. In doing so, the Court distinguished the differences between lump-sum royalty amounts and running royalty rates (i.e., royalty rates applied to sales dollars, or a per unit royalty rate). Terming much of the expert testimony regarding the license agreements “superficial,” the Court concluded Lucent failed to carry its burden to prove that the licenses were sufficiently comparable to the hypothetical negotiation to support the damage award. The Court found testimony characterizing an agreement as covering “PC-related patents,” i.e., personal computer kinship, inadequate. The Court also found that a reasonable juror necessarily would have concluded that agreements covering multiple patents to broad PC-related technology presented a “vastly different situation” than the hypothetical licensing scenario involving only one patent directed to a narrow method of using the date-picker.
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1 No. 2008-1485, 1487, 1495 (Fed. Cir. Sept. 11, 2009)
2 Erin Coe, Patent Damages Best Left To Courts: Chief Judge (June 2, 2009) http://www.law360.com/print_article/102674