September 13, 2011
Commercial Times
By E. Robert Yoches; Ming-Tao Yang
Authored by Ming-Tao Yang and E. Robert Yoches
The most important question facing companies accused of patent infringement or approached for a patent license is, "How much is this going to cost the company?" The Court of Appeals for the Federal Circuit (the court that decides appeals from all district court patent cases) has recently made it more difficult for patent owners to recover large damage awards. Most damage awards represent a "reasonable royalty" that the parties would have agreed to without litigation. The Federal Circuit, however, has both limited the royalty base (the revenue subject to royalty) for damages awards, and restricted the licenses that courts consider in setting royalty rates. The result has been lower damage awards. Companies can take advantage of this trend when negotiating their own patent licenses.
Patentees have tried to increase their damage awards by seeking royalties on the full value of the infringing product (known as the "entire market value" or "EMV"). For products involving complex electronic circuitry, consumer electronics, or software systems, this result seemed particularly harsh because the portion of the value attributable to the infringing feature was often very small. In two recent cases, ResQNet.com, Inc. v. Lansa, Inc. and Lucent Techs., Inc. v. Gateway, Inc., the Federal Circuit only allowed the patentee to obtain damages on the EMV when the patented features formed the basis for consumer demand.
Following these cases, the court in Mirror Worlds, LLC v. Apple, Inc. (E.D. Tx.) refused to allow testimony based on the EMV even though the proffered royalty rate was low and discounted. On the other hand, in Marine Polymer Technologies., Inc. v. Hemcon, Inc. (D.N.H.), the court allowed royalties on the EMV of the accused product because there was sufficient evidence that the patented compound provided the basis for consumer demand. Interestingly, the court in Mondis Tech., Ltd. v. LG Electronics., Inc. (E.D. Tx.), which involved Taiwan’s Top Victory Electronics, recently allowed damages based on the EMV despite no evidence that the patented features formed the basis for the consumer demand. The court reasoned that the evidence was proper because the licenses comparable to the patent-in-suit used the EMV. The Federal Circuit may review this decision.
Some courts had awarded high royalty rates based on licenses having little to do with the claimed invention. To address this problem, the Federal Circuit, in Uniloc USA, Inc. v. Microsoft Corp., required that district courts exclude from consideration licenses not sufficiently related to the patented technology or the accused product, and make sure the terms of any past license reflected the terms sought as damages. In Finjan, Inc. v. Secure Computing Corp. and Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., the Federal Circuit explained that a party seeking introduces a license for determining damages must account for any differences in technologies and economic circumstances. Other relevant factors include the relationship of the parties and other value received.
In most cases, this rule has eliminated from consideration licenses that had large royalty rates for reasons unrelated to the patents. District courts, however, have had some difficulty in knowing when to consider licenses based on settlements of litigations. See, e.g., Datatreasury Corp. v. Wells Fargo & Co. (E.D. Tx.); Volumetrics Med. Imaging, LLC v. Toshiba America Med. Sys., Inc. (M.D.N.C.); MSTG, Inc. v. AT&T Mobility, LLC (N.D. Ill.). Such licenses seem to be particularly important when the patentees are non-practicing entities because all their licenses are usually the result of litigation settlements. SeeClear With Computers, LLC v. Bergdorf Goodman, Inc. (E.D. Tx.).
When negotiating patent licenses, a company must worry about the consequences of having no agreement. There is little threat of injunction, however, because the United States Supreme Court has made it difficult for the patentee to obtain an injunction unless the patentee is a direct competitor and can show some special harm from the infringement. See eBay Inc. v. MercExchange, L.L.C.
Therefore, in most cases, the company need only worry about are the damages it will face from a lawsuit and the possible cost of defending it. If the amount of both is less that the patent owner’s best offer, there is little incentive to take a license. On the other hand, if that amount is greater than the cost of the proposed license, then the company should consider the license.
To estimate its potential damages, the company should make two calculations. The first calculation should determine the company’s greatest damage exposure consistent with the law. The greatest exposure reflects the maximum amount of revenue at risk consistent with the patents (up to the EMV) times the maximum royalty rate, which must take into account only comparable licenses. The second calculation should then determine the minimum exposure formed of the minimum revenue at risk times the minimum royalty rate.
These two amounts help form the upper and lower boundaries for any license negotiation. The company must then discount the amounts to reflect the estimated strength of any possible infringement. That discount should reflect the opinion of experienced patent trial attorneys. If the attorneys believe the patent claims likely cover the accused product and the validity challenges are weak, there should be little discount. The weaker the infringement case and the better the invalidity case, the greater the discount. This discounted range can then form the basis for negotiations. The company may even wish to share its computations (assuming there is no confidential information) with the patentee. The result can then be a license that properly reflects litigation risks.
License negotiations necessarily involve other issues, such as future business concerns, business relationships, and alternative designs, so the analysis in the prior section should not be the only factor in license negotiations. Nevertheless, the reduced litigation risks from recent cases should translate into guidance in effective negotiations and better license terms for licensees.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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