Entire Market Value Still Relevant for Calculating Reasonable Royalties Where Patents-in-Suit Considered "Must-Have" Technology

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

The Federal Circuit recently addressed the entire-market-value rule in LaserDynamics, Inc. v. Quanta Computer, Inc., holding that the rule represents a narrow exception to the general rule that reasonable royalties must be based not on the entire product, but instead on the smallest salable patent-practicing unit (see here for our previous discussion of LaserDynamics). In two recent orders, a Pennsylvania district court applied LaserDynamics in determining whether to exclude an expert report referencing the entire price, profit, and margin associated with an accused infringer's product. The court held that the total values could be used to support reasonable-royalty calculations where evidence showed that the patents-in-suit were considered "must have" technology, where that evidence was reliable, and where references to total values were necessary to explain and formulate a reasonable royalty at trial.

In Carnegie Mellon University v. Marvell Technology Group, Ltd.,¹ Carnegie Mellon sued Marvell in the Western District of Pennsylvania for infringement of two of its patents. To support its proposed $1 billion reasonable-royalty valuation, Carnegie Mellon submitted an expert report referencing the entire price, profit, and margin associated with Marvell's accused products. In response, Marvell submitted its own expert report concluding that a reasonable royalty would be a single lump-sum payment of $250,000. Marvell's expert relied on two valuations: (1) an option agreement between Carnegie Mellon and a third party where the two parties had negotiated and agreed to a price of $200,000 for one of the patents-in-suit; and (2) an internal forecast by Carnegie Mellon personnel estimating the value of a license from Marvell's alleged infringement of the patents of $2,000,000 per year.

The court first considered Marvell's motion to exclude Carnegie Mellon's expert report referencing the entire price, profit, and margin associated with Marvell's accused products. The underlying theme of the report was that Marvell considered Carnegie Mellon's technology a "must have." By way of background, the court had previously ruled on a motion by Marvell challenging the expert's analysis as improperly using the entire-market-value rule. The court, however, had found that the expert had not applied the entire-market-value rule simply by referencing Marvell's total operating profit on a per-unit basis because the references to revenues, margins, and values would be necessary to formulate and support a reasonable royalty. There was no indication that the expert had used the numbers to show the reasonableness of a reasonable royalty. Now, ruling on Marvell's motion in limine, the court readdressed the expert report in light of the Federal Circuit decision in LaserDynamics.

According to the court, LaserDynamics disapproved of the use of the entire-market-value rule when total values served only to make a patentee's proffered damages amount appear modest by comparison and to artificially inflate the jury's damage calculations. The court found evidence that the patents-in-suit were considered "must have" technology, and further, that some references to revenues, margins, and values would be necessary to explain and formulate a reasonable royalty at trial. The court further explained that at trial, if Carnegie Mellon were to introduce its basis to show the patents-in-suit are "must have" technology and the court were to find the evidence reliable, the expert could then refer to total revenue, total profit, or total margin of the accused products as a starting point for analysis. Thereafter, according to the court, the expert could refer to the total number of sales, total apportioned revenue, average price per product, and apportioned profit per product as part of the royalty calculations.

The court also considered the evidence urged to support the approach of Marvell's damages expert, who used a valuation beginning with an option agreement between Carnegie Mellon and a third party. As part of this option agreement, the two parties had negotiated and agreed to a price of $200,000 for one of the patents-in-suit. According to the court, this agreement showed, at a minimum, that Carnegie Mellon was willing to license the patents-in-suit to a third party on a lump-sum basis, and as result, the court denied Carnegie Mellon's motion to exclude that agreement. The court also noted that any differences between the option agreement and a hypothetical license between Carnegie Mellon and Marvell would be more appropriately addressed by cross-examination than by exclusion.

Finally, the court considered Carnegie Mellon's motion to exclude its internal forecast that estimated the value of a license. According to the court, Carnegie Mellon's estimate of a potential annual royalty from Marvell's infringement of its patents further suggested that Carnegie Mellon may have sought a lump-sum royalty payment. Coupled with the option agreement, the court found the internal forecast also tended to show that Carnegie Mellon's projection of the value of the patents-in-suit increased over time, leading to the current $1 billion valuation. As a result, the court held that both the internal forecast and the option agreement were relevant and probative of the negotiation—including Carnegie Mellon's state of mind during the negotiations about the type of license it would possibly grant Marvell and the value or price of the license.

Interestingly, several weeks after these decisions, a jury awarded Carnegie Mellon $1.1 billion in damages for Marvell's alleged infringement of its patents.

Strategy and Conclusion

This case illustrates that damage experts may reference entire market values as a starting point for their analysis, outside of the context of the entire-market-value rule. Whether a court permits reliance on the entire market value may depend, at least in part, on whether the patents-in-suit cover "must have" technology. Thus, even after the Federal Circuit's decision in LaserDynamics, entire market value may still be relevant for developing a framework for reasonable royalties.

Endnotes
¹ The two Carnegie Mellon orders can be found here and here.

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