Fish & Richardson Explores the Wild West of Patent Damages

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Fish & Richardson attorneys recently presented an educational forum entitled “Taming the Wild West of Patent Damages – Is there a New Sheriff in Town?” to inform attendees about recent legislative changes and case law developments that have changed the way damages are awarded in patent infringement lawsuits.

Fish & Richardson attorneys recently presented an educational forum entitled “Taming the Wild West of Patent Damages – Is there a New Sheriff in Town?” to inform attendees about recent legislative changes and case law developments that have changed the way damages are awarded in patent infringement lawsuits.

“For years the law of patent damages was like the Wild West – it was pretty much open to anything, especially with reasonable royalty damages. But now Congress and the courts have taken notice and have begun to impose some structure on the law and on how litigants approach patent damages – in effect, the sheriff has arrived and is trying to tame damages law, at least in some ways,” states Chris Marchese, a patent litigator and principal with Fish & Richardson in San Diego. “Companies deciding whether to bring, as well as those who are defending, patent litigation need to understand these changes in order to assess risks associated with patent litigation.”

The presentations led with Marchese reviewing the legislative reform efforts regarding patent damages and the judicial response. Modern day patent reform by Congress dates back to 2003, when, spurred in part by non-practicing entities (also known as trolls), patent litigation skyrocketed and some juries began awarding huge sums to patent holders. The House and Senate introduced bills addressing numerous patent issues, with damages reform as the centerpiece. However, despite seven years of hard fought battles for reform, no bill has been passed, in large part because of a pitched battle over how to reform the damages law. A proposed Senate compromise earlier this year has created a judicial gatekeeper function to keep patent damages in check by having judges remove unfounded damages theories before trial and prevent irrelevant damages evidence from reaching the jury.

According to Congress, the proposed gatekeeper function is to provide “consistency, uniformity, fairness and certainty.” However, in Marchese’s view, even before this proposal was introduced, the attempts at legislative reform brought about some “judicial activism.” Judges who object to Congressional intervention into the issue of determining damages are legislating from the bench. States Marchese about recent court decisions, “Some judges are trying to curb the runaway damages awards and inject economic reality into the damages landscape.”

Michael Florey, a Fish & Richardson principal in the Twin Cities office, provided specific examples of rulings, primarily by Judge Randall R. Rader of the United States Court of Appeals for the Federal Circuit, that are redefining the ‘entire market value rule,’ which according to Florey is “one of the bedrock principles of the law governing patent damages.” One aspect of the entire market value rule, when applied, allows the owner of a component patent to base damages on the entire value of a larger infringing product that incorporates the patented component.

In a recent case, Judge Rader called a specific application of the rule “trying to take credit for something you didn’t invent.” When using the entire market value rule to determine royalties stemming from patent infringement, Judge Rader suggests proof based upon three conditions:

  •     The infringing components must be the basis for customer demand for the entire machine including the parts beyond the claimed invention.
  •     The individual infringing and non-infringing components must be sold together so that they constitute a functional unit or are parts of a complete machine or a single assembly of parts.
  •     The individual infringing and non-infringing components must be analogous to a single functioning unit.

Judge Rader goes on to suggest that “Notably, these requirements are additive, not alternative ways to demonstrate eligibility for application of the entire market value rule.”

However, a recent ruling by colleagues of Judge Rader in the Federal Circuit have “taken the court in two different directions,” states Florey.

According to Florey, “The law is really up in the air…the entire market value rule is changing. The challenge is to figure out how to marshal the facts of your particular case to achieve a good result for your client, no matter which branch of the developing law the Judge in your case elects to follow.”

Until the recent eBay v. MercExchange case, damages were an “afterthought” with the emphasis placed on proving infringement and obtaining an injunction against the infringer, states Justin Barnes, a principal in Fish’s San Diego office. There is now greater scrutiny of the methodology used for determining the value of intangible assets.     

For example, while surveys are often used in trademark law, they have rarely been used in patent cases. That is changing. He cited a recent ruling where the bench suggested surveys as a way to prove claims and the i4i v. Microsoft case, where survey evidence was upheld by the Federal Circuit. Customer surveys that ask about purchasing decisions and/or the use of features can be useful for plaintiffs to show the importance of patented features. Defendants can also find survey a useful tool by questioning end-users about their awareness and use of features.

The use of design-around cost evidence (the cost of redesigning the product to eliminate the patented feature), while not always favored by patent attorneys, can help frame hypothetical negotiations and give benchmarks, suggests Barnes. Determining design-around costs requires many items be considered including implementation costs (engineering, research and development and quality assurance), sales and marketing costs, loss of sales and market share and affect on profits. Costs and losses may require speculation on the part of an expert, weakening the credibility of the testimony, but in some instances the evidence may be easily quantifiable.

Jack Skenyon of Fish’s Boston office suggests that the new “sheriffs” on the bench are changing how expert testimony is viewed. “Until 2009, experts were rarely excluded,” he stated. He went on to discuss several cases in the past 18 months in which expert testimony was excluded due to flawed methodology regarding the entire market value rule and in which certain third party licenses were excluded. Skenyon suggests that successful challenges to expert testimony may be made on the misapplication of the entire market value rule and/or the failure to link third party licenses to the patented invention plus any other basis that an expert relies upon that the Federal Circuit may criticize in upcoming cases.

Skenyon also suggests that rights be preserved on appeal by always moving for judgment as a matter of law (JMOL) on the damages issue at trial and in post trial JMOL motions. “The challenge may not be successful at trial but could be at the Federal Circuit level on appeal,” he states.

Marchese closed the forum by noting, “The number of meaningful damages cases in the past couple years has really escalated, and people who follow patent damages law will tell you that the judiciary is waking up and trying to put some limits on damages theories and awards. Judges are trying to inject rational economic principles into how damages are calculated. And it’s highly likely that this trend will continue. Plaintiffs and defendants should exercise more care in how they present damages in patent cases.”

About Fish & Richardson:
Fish & Richardson is a leading global law firm with 400 attorneys and technology specialists practicing intellectual property strategy and counseling, intellectual property litigation and business litigation. Fish does cutting-edge legal work for innovative clients who value their intellectual property. The firm was recently named top patent prosecution firm (Managing Intellectual Property, February 2010), was honored as an IP Firm of the Year (Law360, January 2010) and named a finalist for top IP litigation department of the year (American Lawyer, January 2010). Fish handles more patent litigation than any other law firm (IP Law & Business, September 2009), is the number one IP firm for America’s biggest companies (Corporate Counsel, September 2009) and was named the number one firm in the world for PCT filings (Managing Intellectual Property, October 2009). The firm also handled two of the top ten most important IP cases of 2009 (Managing Intellectual Property, January 2010). For more information, visit http://www.fr.com.

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