Customers' Mere Preference for a Product with Infringing Component Does Not Support Damages Based on Entire Market Value of the Product

Authored by D. Brian Kacedon, John C. Paul, and Benjamin A. Saidman

When a patent covers a component of a larger product, patent owners often prefer to base patent infringement damages on the market value of the entire product rather than the component alone because the value of an individual component is often difficult to determine and such a calculation may result in a higher award of lost profits or royalties. Courts, however, limit the circumstances when a patent owner may rely on the value of the entire product based on application of the "entire market value rule." This rule typically requires that the patent owner demonstrate that the patented component drives demand for the patented product.

Courts have grappled with the difficult application of the entire market value rule, and recently, a Virginia district court found insufficient evidence to support the jury's award of lost profits based upon that rule, holding that the infringing defendants were entitled to either a reduction in damages or a new trial on damages.

In Electro-Mechanical Corp. v. Power Distribution Products, Inc.,¹ a jury found that the defendants willfully infringed five claims of Electro-Mechanical Corporation's (EMC) patent directed to a component used as part of a power-distribution system for coal-mining equipment. The component, a so-called "draw-out tray," reduced downtime when the power-distribution system failed. Because the jury also found that the infringed claims were not invalid, it awarded EMC $491,046 in damages and indicated that it accepted EMC's expert's calculation of lost profits based on the value of the entire product under the entire market value rule. The defendants filed renewed motions for a judgment to overturn the jury verdict and either a new trial on the issue of damages or reduced damages. EMC moved for a permanent injunction, an award of attorneys' fees, enhanced damages, and taxation of costs.

The Entire Market Value Rule

First, the court found that the defendants waived any right to judgment in their favor as a matter of law on the entire market value rule, anticipation, and obviousness because they orally requested such relief without providing specific grounds for the request as required by the Federal Rules. But this did not end the Court's inquiry. The court agreed to grant the defendants' alternative motion for either a new trial on damages or reduced damages, finding that EMC did not present adequate evidence at trial showing that any customer decided to purchase a power-distribution system in the first place for the purpose of obtaining the patented draw-out-tray technology. In fact, EMC's damages expert confirmed that customers first chose to buy a power-distribution system, and then chose whether the system would include the patented device. This kind of evidence, the court held, was insufficient to invoke the entire market value rule. EMC's damages expert testified that he was unaware of any customer that already owned a working power system without a draw-out tray and chose to replace it with a new system containing a draw-out tray in order to obtain the patented technology.

Because EMC's expert provided only a lost profits calculation based on the entire market value rule and failed to provide one based on sales of the infringing components alone, EMC was entitled to only a reasonable royalty. Based on EMC's expert's proposed royalty rate of 4.325%, the total reasonable-royalty damages would be $21,625 for the 25 devices sold at $20,000 per device, according to the court. If it chose to, EMC could reject those reduced damages and agree to a new trial on damages.

Attorneys' Fees

Next, the Court addressed EMC's motion for an award of attorneys' fees. The court held that EMC did not establish the required objective recklessness for an award of fees. While evidence at trial showed that the defendants were aware of EMC's patent while designing the infringing device, that fact alone was insufficient to show that they acted despite an objectively high likelihood that their actions constituted infringement of a valid patent. According to the court, the defendants reasonably believed the patent to be invalid, as shown through the invalidity case at trial. Although the defendants did not ultimately succeed on the invalidity defenses, the defenses were far from baseless. The defendants had also attempted to avoid infringement by modifying the accused devices, but the court did not view those attempts as undermining their belief of invalidity. Therefore, despite the jury's findings of willful infringement, the court denied EMC's motion for attorneys' fees and held that EMC failed to meet its high burden of proving by clear and convincing evidence that the defendants acted recklessly in designing and marketing the infringing device.

Enhanced Damages

Next, addressing EMC's motion for enhanced damages, the court again held that EMC failed to prove objective recklessness. In addition to the grounds on which it rejected EMC's argument for attorneys' fees, it further rejected EMC's argument that the defendants showed recklessness by failing to obtain a legal opinion on the validity or infringement of the patent. Rather, the court viewed the failure to obtain a legal opinion as only one factor to be considered in determining objective recklessness. The court also looked to what may commonly be viewed as subjective factors or factors courts weigh when determining whether to enhance damages once willful infringement has been determined: the defendants made efforts to make design changes to avoid infringement, infringed for only a brief period of time, did not conceal the infringement, and represented to the court that they had already amended their contracts with their customers to substitute a redesigned noninfringing device for the infringing device. In addition, the defendants' motivation for designing the infringing product was not malicious, but driven by customer demand and safety concerns. Thus, the court held the totality of the circumstances weighed against the award of enhanced damages.

Permanent Injunction and Costs

Finally, the court deferred ruling on EMC's motion for a permanent injunction pending further proceedings and reserved ruling on EMC's motion for taxation of costs until resolution of the remaining issues in the case.

Strategy and Conclusion

This case illustrates the challenges of presenting a case to obtain damages based on the value of the entire product rather than a patented component. A patent owner must prove that a customer's decision to buy the overall product in the first place was motivated by the patented component. In this case, it was insufficient for a customer to buy the overall product first, and then choose to purchase the patented component as opposed to a substitute component. In such instances, according to the court in this case, damages must be based on the value of the component, not the overall product. The case also illustrates the potential value in presenting calculations for alternative theories of damages that are presented in the event the court prefers to follow one of those alternative theories.

Endnotes
¹ The Electro-Mechanical decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/Electro-Mechanical_Corp_v_Power_Distribution_Prods.pdf.

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