Reasonable Royalty Depends on Incremental Price of a Product Attributable to Its Patented Features Rather than the Value of the Patented Features in a Vacuum

Authored by R. Benjamin Cassady, D. Brian Kacedon, and John C. Paul

Abstract

A court excluded testimony of experts who conducted a consumer survey that established values for each of four patented features relative to each other and then used those results to estimate an $80 million reasonable royalty the infringer would have paid for those features, finding the testimony unreliable for considering the value of the specific features in a vacuum without considering the value of the accused products as a whole.

In Visteon Global Technologies Inc. v. Garmin International, Inc., a Michigan federal court excluded expert opinions on damages for patent infringement as improperly based on the value of specific claimed features in isolation from their incremental value to consumers in the products accused of infringement, rather than the incremental value of the claimed features relative to the value of the accused products as a whole.

Background

Visteon accused Garmin’s navigation products of infringing four patents related to four specific features of navigation systems and calculated what it believed Garmin owed in reasonable royalty damages in two steps.

First, Visteon hired an expert who conducted a choice-based conjoint (CBC) consumer survey to determine the consumer value of the four features allegedly claimed in Visteon’s patents. A CBC survey offers respondents hypothetical products that include a combination of different product features. Through the respondents’ selections, economists can assign relative values to each of those features. Visteon’s expert’s CBC survey sought to determine the values of the four claimed features relative to each other.

Second, Visteon enlisted another expert to build on the findings of the first, factoring in product costs and competition with the relative consumer values determined from the results of the CBC survey. Visteon’s second expert considered factors such as Garmin’s profit margins and the parties’ relative positions in the marketplace. Based on the principle that accused patent infringers in every negotiation seek to pay "as little as possible," Visteon’s second expert concluded that Garmin would be willing to pay just under $5 per device, which amounted to a royalty of over $80 million over the relevant time period.

The Visteon Decision

A reasonable royalty award for patent infringement must be based on the incremental value that the patented invention adds to the end product as a whole. The value of the invention cannot be divorced from the product in which it is incorporated. In other words, determining a reasonable royalty requires determining the actual price a consumer would be willing to pay for a product with the patented features over an otherwise equivalent product that lacked those features.

In assessing the credibility of Visteon’s experts and reliability of their testimony, the Court noted that Visteon's burden was to tie its reasonable royalty to the incremental real-world value of the claimed features. Further, the Court observed, since at least 2009, the Federal Circuit has reiterated the requirement that infringement damages must be apportioned in relation to the patented features alone, separate and apart from any value attributable to any unpatented features.

Visteon’s experts, however, did not determine the actual value of either the four claimed features or the myriad unclaimed features. Critically, the CBC survey conducted by Visteon’s first expert did not attempt to determine (1) a "real world" price for any of the claimed features or (2) the value of those features relative to the non-patented features in the accused navigation systems. Visteon’s second expert never attempted to determine the price that consumers would pay for the individual technology provided by the infringing features. Nor did he attempt to determine the value of all of the features of the accused navigation system (i.e., the combined value of the patented and non-patented features). The Court ruled that considering the relative values of the claimed features alone, without assessing the value those features added to accused device, made it impossible to determine the profit attributable to those features, and therefore what a reasonable royalty would be. Accordingly, the Court excluded the testimony and reports of Visteon’s experts.

Strategy and Conclusion

This case confirms that in determining the proper base for reasonable royalty calculations, it is important to show the actual incremental price consumers are willing to pay for a device including the claimed features, compared with the price they would be willing to pay for an otherwise identical device without the claimed features (assuming claims do not cover the device as a whole). Simply assigning a value to the patented technology is typically insufficient to calculate a reasonable royalty. In arriving at a reasonable royalty, parties and experts should show how much (or how little) the patented technology affects the actual price consumers are willing to pay.

Further Information

The Visteon decision is available here.