The law in patent infringement cases is clear: the entire market value rule permits damages based on the value on an entire product containing multiple features, if the patented feature forms the basis for consumer demand. That was the recent holding by the Federal Circuit in Lucent Techs., Inc. v. Gateway, Inc. (2009).

“On the other hand,” says a new ruling by the federal district court (E.D. Tex.), Lucent also held that courts “must be cognizant” of the “fundamental relationship between the entire market value rule and the calculation of a running royalty damages.” Market value may serve as the royalty base, so long as the calculated rate is within an acceptable range. “Even when the patented invention is a small component of a much larger commercial product,” the court emphasized, “awarding a reasonable royalty based on either a sale price or number of units sold can be economically justified.”  In that case, the plaintiff’s damages expert provided such justification when he relied on more than a dozen comparable licenses that calculated a royalty rate for the patents-in-suit based on the entire value of the licensed products, the court found, in Mondis Technology, Ltd. v. LG Electronics, Inc. 2011 WL 2417367 (June14, 2011).

On the other hand—after receiving the Lucent case on remand, the federal district court (S.D.Cal.) has just denied the plaintiff’s expert’s reliance on the entire market value rule, finding that the landmark Uniloc v. Microsoft  (2011) decision “rejected the argument” that the royalty base could support a rate that was in an “acceptable range” of market value. Instead, if the plaintiff cannot meet the basic test of the entire market value rule then “it must in every case” apportion the defendant’s profits between the patented and unpatented features to calculate damages, the court held, in Lucent Techs., Inc. v. Microsoft Corp., 2011 WL 2728317 (July 13, 2011).

The Business Valuation Update will digest both the Mondis and Lucent decisions in the Sept. and Oct. issues, respectively; the courts’ opinions will be posted soon at BVLaw.