Opinion ID: 208049
Heading Depth: 3
Heading Rank: 2

Heading: Entire Market Value Analysis

Text: Microsoft argues that the damages award must be reversed because the jury erroneously applied the entire market value rule. Despite the jury's indication on the verdict form that it was awarding a lump-sum reasonable royalty, Microsoft believes that the only way the jury could have calculated a figure of $357,693,056.18 was by applying a royalty percentage to a total sales figure of the infringing software products. Indeed, it is difficult to understand how the jury could have chosen its lump-sum figure down to the penny unless it used a running royalty calculation. Furthermore, as Microsoft explains in its brief, working the math backwards strongly suggests that the jury must have used some calculation of a rate applied to the entire market value of the software. See Microsoft Response and Reply Br. 47 (Applying Lucent's 8% rate to all of Microsoft's sales and half of Dell's, using a weighted average of 85% OEM prices and 15% retail prices, yields damages of $358,835,648 extremely close to the jury's award. (footnote omitted)). Alternatively, the jury could have simply used a somewhat lower rate, such as about 5.5%, applied to the total sales figure. Assuming that the jury did apply the entire market value rule, such application would amount to legal error for two reasons. In one sense, our law on the entire market value rule is quite clear. For the entire market value rule to apply, the patentee must prove that the patent-related feature is the `basis for customer demand.' Rite-Hite, 56 F.3d at 1549 (quoting State Indus., 883 F.2d at 1580); see also Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed.Cir.2001); TWM Mfg., 789 F.2d at 901 (The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand.). In the distant past, before a contemporary appreciation of the economics of infringement damages, the Supreme Court seemingly set forth rigid rules concerning the entire market value rule. Shortly before the Civil War, in Seymour v. McCormick, 57 U.S. (16 How.) 480, 491, 14 L.Ed. 1024 (1853), a case involving one of Cyrus McCormick's famous reaping machine inventions, the Court warned that it would be a very grave error to instruct a jury `that as to the measure of damages the same rule is to govern, whether the patent covers an entire machine or an improvement on a machine.' About a century and a quarter ago, in Garretson v. Clark, the Court expressed further concern about basing damages on the value of the entire product: When a patent is for an improvement, and not for an entirely new machine or contrivance, the patentee must show in what particulars his improvement has added to the usefulness of the machine or contrivance. He must separate its results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated.... The patentee ... must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative; or he must show, by equally reliable and satisfactory evidence, that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature. 111 U.S. 120, 121, 4 S.Ct. 291, 28 L.Ed. 371 (1884) (quotation marks omitted). And early last century, the Court elaborated on this theme: [An] invention may have been used in combination with valuable improvements made, or other patents appropriated by the infringer, and each may have jointly, but unequally, contributed to the profits. In such case, if plaintiff's patent only created a part of the profits, he is only entitled to recover that part of the net gains. Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co., 225 U.S. 604, 614-15, 32 S.Ct. 691, 56 L.Ed. 1222 (1912). Translating the Court's early stylistic description into a precise, contemporary, economic paradigm presents a challenge. Notwithstanding this obstacle, the objective of the Court's concern has been two-fold: determining the correct (or at least approximately correct) value of the patented invention, when it is but one part or feature among many, and ascertaining what the parties would have agreed to in the context of a patent license negotiation. Litigants must realize that the two objectives do not always meet at the same precise number. Furthermore, licensors of patented technology often license an invention for more or less than its true economic value. Such is the inherent risk in licensing intangible assets that may have no established market value. The first flaw with any application of the entire market value rule in the present case is the lack of evidence demonstrating the patented method of the Day patent as the basisor even a substantial basisof the consumer demand for Outlook. As explained above, the only reasonable conclusion supported by the evidence is that the infringing use of the date-picker tool in Outlook is but a very small component of a much larger software program. The vast majority of the features, when used, do not infringe. The date-picker tool's minor role in the overall program is further confirmed when one considers the relative importance of certain other features, e.g., e-mail. Consistent with this description of Outlook, Lucent did not carry its evidentiary burden of proving that anyone purchased Outlook because of the patented method. Indeed, Lucent's damages expert conceded that there was no evidence that anybody anywhere at any time ever bought Outlook, be it an equipment manufacturer or an individual consumer, ... because it had a date picker. J.A 07821-22. And when we consider the importance of the many features not covered by the Day patent compared to the one infringing feature in Outlook, we can only arrive at the unmistakable conclusion that the invention described in claim 19 of the Day patent is not the reason consumers purchase Outlook. Thus, Lucent did not satisfy its burden of proving the applicability of the entire market value rule. As for Windows Mobile and Microsoft Money, a jury's conclusion might possibly be different. At this point in the litigation, we again need not decide these issues. Because the damages award based on the infringing date-picker feature of Outlook is not supported by substantial evidence and is contrary to the clear weight of the evidence, the damages award must be vacated. When the case is remanded to the trial court for further proceedings consistent with this opinion, it may be helpful to analyze the three infringing software products independently. The second flaw with any application of the entire market value rule in this case lies in the approach adopted by Lucent's licensing expert. He had first tried to apply the entire market value rule to the sale of the infringing computers loaded with the software, opining that Microsoft and Lucent would have agreed to a 1% royalty based on the entire price of the computer containing Outlook. In response, Microsoft filed a motion in limine to exclude such testimony, which the district court granted. At trial, Lucent's expert changed his opinion, contending that the royalty base should be the price of the software (and not the entire computer) but also that the royalty rate should be increased to 8% (from 1%). This opinion contrasted starkly to the rates he proposed for the other patents in suit, which were in the 1% range. In choosing 8%, he reasoned that, in a typical situation, if one applied a royalty to a smaller patented portion in a computer as opposed to the entire computer using typically infringed patents, 8-percent ... of the fair market value of the patented portion would equate to 1-percent of the fair market value of the entire computer. What Lucent's licensing expert proposed here does not comport with the purpose of damages law or the entire market value rule. Lucent's expert tried to reach the damages number he would have obtained had he used the price of the entire computer as a royalty base. Being precluded from using the computer as the royalty base, he used the price of the software, but inflated the royalty rate accordingly. This cannot be an acceptable way to conduct an analysis of what the parties would have agreed to in the hypothetical licensing context. The approach of Lucent's expert ignores what the district court's evidentiary ruling tried to accomplish. The district court implicitly recognized that any damages computation based on the value of the entire computer using common royalty rates (e.g., 1-5%) would be excessive. Furthermore, Lucent's expert admitted that there was no evidence that Microsoft had ever agreed to pay an 8% royalty on an analogous patent. See J.A. 07824 (Q: Did you find one license where Microsoft ever agreed to pay an eight percent royalty on Outlook for a tiny little feature? A: I didn't see any Microsoft licenses on Outlook, frankly.). Although our law states certain mandatory conditions for applying the entire market value rule, courts must nevertheless be cognizant of a fundamental relationship between the entire market value rule and the calculation of a running royalty damages award. Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence). Indeed, [a]ll running royalties have at least two variables: the royalty base and the royalty rate. Nimmer & Dodd, supra, at § 7:5. Microsoft surely would have little reason to complain about the supposed application of the entire market value rule had the jury applied a royalty rate of 0.1% (instead of 8%) to the market price of the infringing programs. Such a rate would have likely yielded a damages award of less than Microsoft's proposed $6.5 million. Thus, even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price or number of units sold can be economically justified. See, e.g., Kearns, 32 F.3d at 1544 (awarding a reasonable royalty of 90 cents per vehicle that had the infringing intermittent windshield wipers, when the average car price was approximately $4000 to $6000). Some commentators suggest that the entire market value rule should have little role in reasonable royalty law. See, e.g., Mark A. Lemley, Distinguishing Lost Profits From Reasonable Royalties, 51 Wm. & Mary L.Rev. (forthcoming 2009) (manuscript at 2), available at http:// papers. ssrn.com/sol3/papers.cfm?ab-stract_id=1133173 (suggesting that courts have distorted the reasonable royalty measure by importing inapposite concepts like the `entire market value rule' in an effort to compensate patent owners whose real remedy probably should have been in the lost profits category); Amy Landers, Let the Games Begin: Incentives to Innovation in the New Economy of Intellectual Property Law, 46 Santa Clara L.Rev. 307, 362 (2006) (The current iterations of the entire market value rule are inconsistent with the Patent Act's statutory language.). But such general propositions ignore the realities of patent licensing and the flexibility needed in transferring intellectual property rights. The evidence of record in the present dispute illustrates the importance the entire market value may have in reasonable royalty cases. The license agreements admitted into evidence (without objection from Microsoft, we note) highlight how sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products' sales price. There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature. We note finally that several amici seemingly challenge the district court's instruction to the jury on the entire market value rule. See Brief for Ten Amici Curiae Technology-Based Companies at 11-12 (asserting that the entire market value rule has no place in a reasonable royalty calculation); id. at 15 (Jurors are charged with the entire market value rule but are not given an apportionment charge. No Supreme Court authority justifies such a one-sided charge.); id. at 25 (The two errors detailed above justify a reversal of the damages award in this case and, assuming that the patents are valid and infringed ..., a remand of the case for a new trial on damages. For the remand, this Court should provide more specific guidance for reasonable royalty calculations.). While the amicus brief is informative, we need not address its assertion regarding jury instructions given or not given, for the simple reason that neither party at trial challenged any damages instruction that was given nor proposed an instruction and objected when it was not given.