The Entire Market Value of a Product May Be Used as a Base for Calculating Royalties Without Showing that the Inventive Features Drove Market Demand

Abstract

The Federal Circuit permitted a damages expert to use the entire market value of an accused lawn mower—the sales price of the mower—as a base for calculating royalties when the inventive features appear in only one component, concluding that the entire market value of a product may be used as a royalty base so long as the ultimate reasonable royalty award is based on the incremental value that the patented invention adds to the end product.

A reasonable royalty for patent infringement damages is often calculated by defining an appropriate royalty base and an appropriate royalty rate to apply to the royalty base.  When a product has several components, some courts have permitted  patent owners to use the value of the entire product as a royalty base only if they could show that the component with the inventive features drove demand for the whole product.  Otherwise, those courts have required the patent owners to base the royalty on the value of the component with the inventive features rather than the whole product.

In Exmark Manufacturing v. Briggs and Stratton, the Federal Circuit determined that the entire value of a lawn mower could be the royalty base for patent infringement damages, even though the improvement was a baffle feature in only one component of the lawn mower.  And it appears to have reached this conclusion without requiring the patent owner to show that the component with the inventive features drove demand.

Background

Exmark Manufacturing and Briggs & Stratton Power Products Group are competitors in the high-end commercial lawn mower industry. 

Exmark sued Briggs and Stratton for infringing a patent claim on a lawn mower having improved flow control baffles—structures under the mower deck that direct air flow and grass clippings during operation. 

Exmark’s damages expert arrived at a 5% royalty rate for the inventive feature, taking into account the value of the inventive feature and the conventional features, and using the market value of the lawn mower—the sales price of the mower—as the royalty base.  Based on the calculations using this royalty rate and royalty base, and a finding of willful infringement warranting enhanced damages, a jury awarded Exmark $24,280,330 in damages. 

Briggs and Stratton asked for a new trial on damages, arguing that Exmark’s damages expert improperly defined the royalty base as the sales price of the accused mowers, instead of using the market value of the inventive component —the flow control baffles.

The trial court refused to grant a new trial on damages, and Briggs and Stratton appealed the trial court decision to the Federal Circuit.

The Federal Circuit Decision on Appeal

On appeal, Briggs and Stratton argued that the royalty base to be used in the royalty calculation needed be the component with the improvements and that therefore the royalty base should have been the sales price of the baffles, and not the sales price of the entire lawn mower. 

The Federal Circuit disagreed and noted that the entire lawn mower could be used as the royalty base so long as Exmark "adequately and reliably apportion" the royalty rate to reflect the value added by the inventive features rather than merely reflecting the value of the improved and conventional features.  The court observed:

(1) Apportionment can be addressed in a variety of ways, including "by careful selection of the royalty base to reflect the value added by the patented feature [or] . . . by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof. . . . So long as Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology."

(2) "The essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product." 

(3) Using the well-known Georgia Pacific factors to determine reasonable royalty damages takes account of the importance of the inventive contribution in determining the royalty rate that would have emerged from a hypothetical negotiation between the parties before the infringement began.

(4) Using the accused lawn mower sales amount as the royalty base was particularly appropriate in this case because the asserted patent claim was actually directed to a lawn mower as a whole.  It recited a lawn mower including both inventive and conventional features.  Therefore it is not the baffle that infringes the claim, but the entire accused mower, leaving no unpatented or non-infringing features of the accused mowers. 

(5) Exmark’s use of the entire accused lawn mower sales amount as the royalty base was consistent with the realities of real-world bargaining reflective of a hypothetical negotiation, particularly in licensing where "sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price."

Strategy and Conclusion

When the inventive part of a patented invention is found in just one component of a larger product, some courts have not allowed the patent owner to use the sales price of the entire product as the royalty base unless the inventive component drives demand for the product.  Thus, absent this demand, such courts have required the patent owner to use the patented component as the royalty base.  This case demonstrates, however, that so long as the proposed royalty accounts for the incremental value that the patented invention adds to the end product, the market value of the entire product may be the royalty base for calculating damages for infringement, even when the inventive feature appears in one component of a multicomponent product.

Further Information
The Exmark decision can be found here.