Damage calculations based on entire market value rule is improper absent evidence that patented feature drives demand for entire multi-component product

Shuji Yoshizaki | September 19, 2012

LaserDynamics, Inc., v. Quanta Computer, Inc.,

August 30, 2012

Panel:  Dyk, Clevenger and Reyna.  Opinion by Reyna.

Summary

LaserDynamics, owner of a patent regarding optical disc drives, sued Quanta Computer Inc. and Quanta Storage Inc., etc. for patent infringement.  In calculating damages, the entire market value rule is a narrow exception to the general rule under 35 U.S.C. § 284 adequate to compensate for the infringement.  Only if showing that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits of the entire product.  The date of the hypothetical negotiation for the purpose of determining the reasonable royalty is the date that the infringement began, which is sometimes or often earlier than the date of the first notice of the infringer’s infringement.  To prove or tend to prove a reasonable royalty, the evidence of the granted licenses and the royalties received by the patentee for the patent in suit are probative.

原告は光ディスクドライブに関する特許の所有者であり、光ディスクドライブメーカーと、そのドライブを組み込んだラップトップPC組立メーカーとを特許侵害で訴えた。争点の一つは、損害賠償の計算方法であるが、特許技術の部品を含む完成品の市場価格に基づく計算方法(entire market value rule)は、合理的なロイヤルティ(reasonable royalty)について定めた特許法284条の例外であるため、特許の特徴が複数部品からなる完成品全体に対する需要を引き起こしたということを証明しなければ、そのような計算方法を使用することはできない。換言すると、そのような立証ができた場合にのみ、特許権者はその完成品の売上もしくは利益に乗じた損害賠償を受けることができる。また、合理的なロイヤリティを決定するための判断基準となる日は、いわゆる仮想的交渉日(hypothetical negotiation date)に基づいて判断されるのであるが、それは、被告による侵害開始の日であって、被告が侵害を最初に知った日(たとえば警告日や訴状提出日)ではない。さらに、合理的なロイヤルティを証明するためには、問題特許に関して、特許権者が受け取ったロイヤルティなどが、証拠の一つとなる。

Details

LaserDynamics is the owner of U.S. Patent No. 5,587,981 (“the ’981 Patent”).   The patent is directed to a method of optical disc discrimination that essentially enables an optical disc drive (“ODD”) to identify the type of disc (e.g., CD versus DVD) when a disc is inserted into the ODD.

Claim 3, which was asserted at trial, is representative:

An optical disk reading method comprising the steps of:

processing an optical signal reflected from en-coded pits on an optical disk until total number of data layers and pit configuration standard of the optical disk is identified;

collating the processed optical signal with an optical disk standard data which is stored in a memory; and

settling modulation of servomechanism means dependent upon the optical disk standard data which corresponds with the processed optical signal;

(c) [sic] the servomechanism means including:

a focusing lens servo to modulate position of a focusing lens; and

a tracking servo to modulate movement of a pickup.

An ODD having automatic disc discrimination capability became the industry standard.  LaserDynamics granted non-exclusive licenses to various manufacturers.  One time lump sum payments of $57,000 to $260,000 were paid for the sixteen licenses granted from 1998 to 2001.  A lump sum of $1 million or less was paid for 2010 and 2011.  In total, 29 licenses were entered into evidence.  All 29 licenses except for BenQ Corporation were in exchange for lump sum amounts of $1 million or less.  Licensing to BenQ Corporation in 2006 was paid in a lump sum of $6 million, after a two-year long litigation, settled just before the trial.  During the litigation, BenQ was repeatedly sanctioned for discovery misconduct and misrepresentation.

Quanta Storage, Inc. (“QSI”) is a manufacturer of ODDs.  Quanta Computer, Inc. (“QCI”) assembles laptop computers for its various customers, mostly by “buy/sell” agreements.  QSI first sold its ODDs in 2001.  QCI sold its first computer using the QSI’s ODD in 2003.  For example, QSI assembles ODDs for Philips and Sony/NEC/Optiarc, licensees of LaserDynamics.  Under the license agreements, the licensees enjoy “have made” rights, that permit them to retain companies like QSI to assemble ODDs for them.

In August 2006, LaserDynamics brought suit against QCI and QSI for patent infringement.

The Entire Market Value Rule

In the first trial, LaserDynamics’ damage expert, Mr. Murtha, opined that a reasonable royalty was a 2% running royalty of the laptop computer sales by QCI.   To arrive at this, he found that 6% of the ODD value would be a reasonable royalty rate in a hypothetical negotiation in August 2006, and that the ODD is responsible for one third of the laptop computer.  He relied on a survey for licensing, but this was not limited to any particular industry.  He dismissed the probative value of the sixteen lump sum licenses granted before August 2006, the hypothetical negotiation date decided by the district court.  He presented $52.1 million damages as a reasonable royalty.  QCI offers a lump sum of $500,000.  The jury awarded $52 million in damages to LaserDynamics.

After the verdict, QCI filed a motion for a remittitur or new trial.  QCI argued that the verdict was grossly excessive and based on an improper application of the “entire market value rule.”  The district court granted QCI’s motion for a new trial.

CAFC reviewed.  Reasonable royalty damages are deemed the minimum amount of infringement damages “adequate to compensate for the infringement.” 35 U.S.C. § 284.  It is generally required that royalties be based not on the entire product, but instead on the “smallest salable patent-practicing unit.”  Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283, 287-88 (N.D.N.Y. 2009).  The entire market value rule is a narrow exception to this general rule.  Only if showing that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits of the entire product.

CAFC found that the damage calculation theory by LaserDynamics in the first trial is the entire market value rule, since the 2% running royalty is applied to the sales of laptop computers.  LaserDynamics failed to present evidence showing that the patented method drove the demand for the laptop computers.  It is not enough to merely show that the 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 ODD practicing the disc discrimination method would be commercially nonviable.

LaserDynamics’ damage expert never conducted any market studies or consumer surveys to ascertain whether the demand for a laptop computer is driven by the patented technology.  There is no evidence that the feature alone motivates consumers to purchase a laptop computer, such that the value of the entire computer can be attributed to the patented disc discrimination method.  Thus, LaserDynamics cannot rely on the entire market value rule.  CAFC concluded that the district court properly granted a new trial

Implied License

By summary judgment, the district court found that Quanta defendants do not have implied license with respect to drives manufactured by QSI and sold to QCI, even when those drives are sold through Philips or Sony/NEC/Optiarc.  The district court relied on solely on E.I. Du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108 (Del. 1985).   In Du Pont, a third party manufactured a licensed product under the “have made” clause in the license agreement, and the licensee immediately sold back the product to the third party.

CAFC, however, reversed the summary judgment by finding that the case is different from Du Pont.  QSI made the ODDs to fulfill bona fide orders from licensees Philips or Sony/NEC/Optiarc, and sold to QCI by the licenses.  QCI did not make the ODDs for Philips or Sony/NEC/Optiarc and immediately purchase back the ODDs so as to effectively receive a sublicense and obtain as many ODDs as it wanted.  Therefore, QCI has an implied license to the ‘981 patent with respect to the ODDs made by QSI and sold to QCI via Philips or Sony/NEC/Optiarc.

Hypothetical Negotiation Date

Pursuant to Georgia-Pacific Corp. v. United Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), the district court deemed that the hypothetical negotiation date for the purpose of determining the reasonable royalty rate was August 2006, when QCI first became aware of the ’981 Patent when the complaint was filed.  Based on this date, the LaserDynamics’ expert disregarded almost all of the lump sum licenses in evidence.

CAFC reviewed.  The basic question posed in a hypothetical negotiation is:  if, on the eve of infringement, a willing licensor and licensee had entered into an agreement, what would that agreement be?  In general, the date of the hypothetical negotiation is the date that the infringement began.  See Georgia-Pacific, 318 F. Supp. at 1123.  The hypothetical negotiation date is different from the date of the first notice of the patent infringement.

Here, there is no dispute that QCI’s first sales of the accused laptop computers began in 2003.  CAFC, therefore, remanded for a new trial on damages pursuant to the 2003 hypothetical negotiation date, instead of 2006.

Admitting Mr. Murtha’s Opinions Concerning a 6% Royalty Rate Per $41 ODD

In the second trial, over the QCI’s objections, Mr. Murtha testified that the damages were $10.5 million based on a running royalty of 6% of a standalone ODD.  QCI’s expert testified about a lump sum payment of $1.2 million.  The jury awarded a lump sum amount of $8.5 million in damages.  QCI objected on the grounds that the evidence is unreliable under Federal Rule of Evidence 702 and should have been excluded.  CAFC reviewed.

The first of the fifteen factors in Georgia-Pacific is “the royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.”  318 F. Supp. at 1120.  Actual licenses to the patents-in-suit are probative not only of the proper amount of a reasonable royalty, but also of the proper form of the royalty structure.  Instead, Mr. Murtha relied on other evidence such as the 1997 survey, which was not specific to the ODD technology.  Relying on irrelevant evidence, he excluded probative licenses expressly for the ’981 Patent.  Therefore, the district court erred in admitting Mr. Murtha’s opinion concerning the 6% royalty rate.  On remand, LaserDynamics may not again present its 6% running royalty theory.

Takeaway

Patent applicants may consider drafting claims to cover various aspects and products including the inventive technologies.  To grant licensing at an early stage at a lower rate may hurt finding a reasonable royalty in the later litigation.

Full Opinion

Patent At Issue

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