Court Rejects Two-Tiered Damages Theory of Simultaneous Hypothetical Negotiations at Two Levels in the Supply Chain

Abstract

The Federal Circuit vacated a $1.1 billion jury verdict against defendants Broadcom and Apple, ordering a new trial on damages. The theory presented by the damages expert and rejected by the court was that the parties would have engaged in two simultaneous hypothetical negotiations—one at the “chip level” with Broadcom and one at the “device level” with Apple. The negotiations would have excluded from the hypothetical chip license any chips incorporated into products, treating those identical chips as being subject to the separate hypothetical device license at a vastly different royalty rate.

Background

In May 2016, Caltech sued Broadcom and Apple alleging infringement of its wireless chip patents.  In the litigation, Caltech sought damages in the form of a reasonable royalty, which seeks to determine the royalty rate the parties would have agreed to in a “hypothetical negotiation” as of the date of the infringement.

Caltech’s experts proposed a two-tiered damages theory that calculated a reasonable royalty based on two simultaneous hypothetical negotiations—one at the “chip level” with Broadcom and one at the “device level” with Apple.  The experts explained that the negotiations with Broadcom would have excluded Broadcom chips incorporated into Apple’s devices. Instead, those chips would have been the subject of negotiations with Apple at a vastly different royalty rate. The experts also testified that, because both Broadcom and Apple were separate infringers, there would be no “cross-talk” between them as they engaged in their own hypothetical negotiations.

The jury reached a $1.1 billion verdict—$837 million against Apple and $270 million against Broadcom, plus interest—for the infringement of Caltech’s patents. This verdict was based on Caltech’s expert’s testimony, which was admitted over Broadcom and Apple’s objection to the two-tiered damages theory. The defendants filed several post-trial motions, including one challenging the damages award. The district court denied the motions and Broadcom and Apple appealed.

The California Institute-Broadcom Limited Decision

Specific to the issue of damages, on appeal before the Federal Circuit, Broadcom and Apple argued the district court’s damages judgment could not be sustained because Caltech’s damages model accounted for two hypothetical negotiations (one with Broadcom and one with Apple) for sales of the same chips. Caltech argued the district court properly rested on separate running royalty rates for Broadcom and Apple. The Federal Circuit held that Caltech’s two-tiered damages theory was legally unsupportable on the factual record, vacated the jury’s damages award, and remanded for a new trial on damages.

In reaching its decision, the Federal Circuit referred to the district court’s reasoning for allowing Caltech’s two-tiered damages award.  Specifically, according to the district court, patent owners can collect damages from accused infringers at different levels in the supply chain so long as they do not attempt to obtain a double recovery to violate other legal principles like patent exhaustion.  The Federal Circuit, however, explained that, under established legal precedent, a higher reasonably royalty rate is not available for the same device at a different point in the supply chain in the absence of a compelling showing otherwise. Once full recovery is obtained from one infringer with respect to a particular infringing device, at most nominal additional damages may be awarded against another with respect to the same device. Further, parties are precluded from suing a buyer or user for damages for direct infringement when actual damages covering that infringement have already been collected from the maker or seller of the product.

Here, Caltech failed to present any evidence showing Broadcom and Apple would engage in separate negotiations as Caltech’s experts proposed. Without such evidence, the mere fact that Broadcom and Apple were separate infringers did not support treating the same chips differently at different stages in the supply chain and did not justify submitting such a two-tier damages theory to the jury.

Because a reasonable royalty is what a willing licensor and a willing licensee would have agreed to at a hypothetical negotiation just before infringement began, and because there was nothing in the record suggesting that Broadcom and Apple would have been willing to negotiate separate licenses rather than a more convenient single license at a single rate for the same chips, the Federal Circuit found the district court’s damages award was erroneous.

Strategy and Conclusion

If a patent owner wishes to propose different reasonable royalty rates against alleged infringers at different levels in the supply chain, the patent owner should carefully consider what evidence would support separate and different hypothetical negotiations with each alleged infringer.

Further Information

The Federal Circuit’s decision can be found here.