Court Excludes Reasonable Royalty Opinion for Improper Use of the Entire Market Value Rule and for Relying on Non-Comparable License Agreements

Authored by D. Brian Kacedon, John C. Paul, and Andrew J. Ra Jr.

Under United States law, patent owners are entitled to recover damages from the infringing party in the form of lost profits or a reasonable royalty. Typically, the parties in a patent infringement litigation rely on the testimony of experts to establish the appropriate "reasonable royalty." Recently, however, the courts have been more carefully scrutinizing the testimony of experts in certain aspects of the reasonable royalty determination.

One area that has come under increasing scrutiny is the proper selection of license agreements to use as bases of comparison in determining a reasonable royalty. In particular, the courts have been taking a harder look at when an agreement is sufficiently "comparable" to be an appropriate tool. In addition, there has been greater scrutiny over the use of the "entire market value" of a product as a royalty base when that product contains both patented and unpatented components or features. The courts have historically required that the patent owner prove that the patented component or feature is the basis for customer demand in order to use the "entire market value" of a product as a royalty base. But recently, the courts appear to be more vigorously enforcing this requirement.

The U.S. District Court for the Central District of California recently addressed both of these issues in Man Machine Interface Technologies, LLC v. Vizio, Inc., SACV 10-0634 AG (MLGx) (C.D. Cal. Feb. 27, 2012).¹

The Man Machine Decision

Plaintiff Man Machine Interface Technologies, LLC ("MMIT") sued Defendants Vizio Inc. and Panasonic Corporation of North America for infringing U.S. Patent 6,069,614 ("the '614 patent"), which concerned a remote control containing a specialized thumb switch. MMIT accused two different types of remotes of infringing the '614 patent: a less expensive remote containing few features and a more expensive remote, which included additional features, such as Bluetooth and a keyboard. Each of these allegedly infringing remotes were sold alone and with televisions.

MMIT's damages expert provided an opinion on the reasonable royalty for each type of remote when sold alone and for each type of remote when sold with a television. For remotes sold separately, the expert calculated damages based on the entire value of the remote-control unit for the lower and higher priced remotes and concluded that defendant's higher-priced remotes should have a higher royalty per unit. For remotes sold with televisions, the expert separated the value of the remote from the television-remote package and calculated damages by multiplying the value of the remote by the royalty rate. As with the remotes sold separate from televisions, however, the expert applied a higher royalty for the more expensive remotes. In determining the appropriate royalty rates, the expert relied on summaries of various third-party license agreements.

Vizio argued that the expert's opinion concerning the royalty base should be excluded because it violated the entire-market-value rule. Vizio first argued that using sales of the entire remote-control unit was improper when the patentable feature, the thumb switch, was not the basis for the consumer demand. For Vizio's lower-priced remotes, the court rejected Vizio's argument. It concluded that the '614 patent was not limited to just the thumb switch because it broadly described a remote control and also found that a reasonable juror could conclude that the thumb switch was the primary driver of consumer demand. For Vizio's more-expensive remotes, however, the court concluded that the entire-market-value rule was violated. It found that the expert failed to show that the higher price difference had anything to do with the technology of the '614 patent and further found that the evidence indicated that the higher price was driven by the additional features unrelated to the '614 patent.

Vizio also argued that the expert violated the entire-market-value rule by calculating damages based on revenues of sales of remotes included with a television. But the court disagreed. It concluded that the expert properly separated the value of the television and the remote in her damages calculation and that the entire-market-value rule was not violated. As with the remotes sold separately, the court prohibited the expert from applying the higher royalty per unit for those remotes with additional features unrelated to the '614 patent.

Finally, Vizio argued that the expert's opinions on the reasonable royalty rate should be excluded because it relied on third-party license agreements that were irrelevant, not comparable to the technology at issue in the '614 patent, and different from any hypothetical negotiation between MMIT and Vizio. The court agreed and found that the license agreements were not comparable because they were "based on mere 'summaries' of license agreements that are easily distinguishable from any hypothetical licensing agreement that [the parties] may have entered." In particular, the license agreement summaries involved licensing of more than one patent and at least one of the agreements involved a parent and a subsidiary.

Strategy and Conclusion

The Man Machine decision shows that when calculating damages for a group of similar products with different prices, the patent owner must provide evidence that the differences in pricing come from the patented technology, and not some other unrelated feature. Litigants should be aware that courts will scrutinize any differences in the royalty per unit for differently priced products and exclude any opinions that fail to show that the patent technology is the basis for the consumer demand. This decision also highlights the fact that courts may not allow experts to rely on license agreements that include additional patents beyond the patent-in-suit and that are between a parent and subsidiary when determining the reasonable royalty rate.

Endnotes 

¹  The Man Machine decision: http://www.lithosphere.com/patdekblog/wp-content/uploads/2012/03/Guilford-2012-Man-Machine-Interface-Technologies-LLC-v.-Vizio-Inc.pdf (link no longer active as of 10/28/13). 

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