Federal Circuit ramps up the apportionment calculus for damages calculations

In yet another sign that the Federal Circuit is tightening the evidentiary standards for proving damages in patent utility cases—especially for those concerning “small elements of multi-component products”—it has just held, in a new case, that any royalties resulting from infringement must be based “on the smallest saleable patent-practicing unit.”

The “entire market value rule” (EMVR) is the only—and ever-narrowing—exception to this standard, the court added. Only when the patented feature “drives the consumer demand” for the product can the product’s entire revenues provide a baseline royalty. It is not enough to show that the patented feature was “valuable, important, or even essential” to the product—in this latest case, a laptop computer that contained the patented ODD (optical disc drive) technology. “Nor is it enough to show that a laptop computer without an ODD … would be commercially unviable,” the Federal Circuit held. Instead, the patentee must meet the “higher degree of proof” that the presence of the patented functionality “is what motivates consumers to buy a laptop computer in the first place.”

The court also affirmed well-established precedent (from an 1884 Supreme Court case) that a patentee “must in every case give evidence tending to separate or apportion” the defendant’s profits from a product between its patented and unpatented features, a calculus that has become—particularly for today’s more sophisticated electronic devices, which can include dozens of distinct and separately patented components—an “exceedingly difficult and error-prone task.” (For more commentary on this, see an earlier blog post.)

Applying this higher standard in the case, the Federal Circuit made several important rulings regarding the plaintiff’s expert evidence presented in two prior trials before the federal district court (E.D. Tex.). Among them, it found the expert had improperly applied the EMVR, used the wrong valuation date and pricing structure, and relied on a litigation-spawned license that was “far from reliable.” Read the complete digest of LaserDynamics v. Quanta Computer, Inc., 2012 U.S. App. LEXIS 18441 (Fed. Cir. Aug. 30, 2012) in the November Business Valuation Update; the Federal Circuit’s opinion will soon be posted at BVLaw.