Opinion ID: 3159695
Heading Depth: 2
Heading Rank: 1

Heading: Smallest Salable Patent-Practicing Unit

Text: Title 35, section 284 of the United States Code provides that “[u]pon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer . . . .” Under § 284, damages awarded for patent in- fringement “must reflect the value attributable to the infringing features of the product, and no more.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). This principle—apportionment—is “the governing rule” “where multi-component products are involved.” Id. Consequently, to be admissible, all expert damages opinions must separate the value of the allegedly infringing features from the value of all other features. VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1329 (Fed. Cir. 2014). Apportionment is not a new rule. Indeed, it dates at least to Garretson v. Clark, 111 U.S. 120, 121 (1884) (quotation marks omitted), where the Supreme Court explained: 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 evi- dence, that the profits and damages are to be cal- culated on the whole machine, for the reason that the entire value of the whole machine, as a mar- ketable article, is properly and legally attributable to the patented feature. In Garretson, the Supreme Court affirmed a special master’s report that the patentee had submitted no proof of its damages because it failed to apportion to the value COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 11 of the patented feature. Id. at 121–22. Likewise today, given the great financial incentive parties have to exploit the inherent imprecision in patent valuation, courts must be proactive to ensure that the testimony presented— using whatever methodology—is sufficiently reliable to support a damages award. See Summit 6, LLC v. Sam- sung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015) (“[E]stimating a reasonable royalty is not an exact science.”); VirnetX, 767 F.3d at 1328 (explaining that a district court must exercise “its gatekeeping authority to ensure that only theories comporting with settled principles of apportionment were allowed to reach the jury”). And as we have repeatedly held, “[t]he essential requirement” for reliability under Daubert “is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” Ericsson, 773 F.3d at 1226. In short, apportionment. Our law also recognizes that, under this apportionment principle, “there may be more than one reliable method for estimating a reasonable royalty.” See Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1315 (Fed. Cir. 2014), overruled on other grounds by Williamson v. Citrix Online, LLC, 792 F.3d 1339 (Fed. Cir. 2015). This adaptability is necessary because different cases present different facts. And as damages models are fact-dependent, “[a] distinct but integral part of [the admissibility] inquiry is whether the data utilized in the methodology is sufficiently tied to the facts of the case.” Summit 6, 802 F.3d at 1296. In practice, this means that abstract recitations of royalty stacking theory, and qualitative testimony that an invention is valuable—without being anchored to a quantitative market valuation—are insufficiently reliable. See Ericsson, 773 F.3d at 1234 (“The district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking.”); LaserDynamics, Inc. v. Quanta Comput., Inc., 12 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 694 F.3d 51, 68 (Fed. Cir. 2012) (“It is not enough to merely show that the disc discrimination method is viewed as valuable, important, or even essential to the use of the laptop computer.”). “[W]here the data used is not sufficiently tied to the facts of the case,” Summit 6, 802 F.3d at 1296, a damages model cannot meet “the substantive statutory requirement of apportionment of royalty damages to the invention’s value,” Ericsson, 773 F.3d at 1226. Recognizing that each case presents unique facts, we have developed certain principles to aid courts in determining when an expert’s apportionment model is reliable. For example, the smallest salable patent-practicing unit principle provides that, where a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base. See LaserDynamics, 694 F.3d at 67 (“[I]t is generally required that royalties be based not on the entire product, but instead on the “‘smallest salable patent-practicing unit.’”). Our cases provide two justifications for this principle. First, “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non- infringing components of that product.” Id.; see also Garretson, 111 U.S. at 121 (“[The patentee] must separate [the patented improvement’s] results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated.”). Second is the “important evidentiary principle” that “care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product.” Ericsson, 773 F.3d at 1226. As we stated in Uniloc USA, Inc. v. Microsoft Corp., disclosure of the end product’s total revenue “cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.” 632 F.3d 1292, 1320 (Fed. Cir. 2011). COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 13 In addition to the smallest salable patent-practicing unit principle, we have also explained that “[t]he entire market value rule is a narrow exception to this general rule” “derived from Supreme Court precedent” in Garretson. LaserDynamics, 694 F.3d at 67. Under the entire market value rule, if a party can prove that the patented invention drives demand for the accused end product, it can rely on the end product’s entire market value as the royalty base. Id. Fundamentally, the smallest salable patent-practicing unit principle states that a damages model cannot reliably apportion from a royalty base without that base being the smallest salable patent-practicing unit. That principle is inapplicable here, however, as the district court did not apportion from a royalty base at all. Instead, the district court began with the parties’ negotiations. At trial, the district court heard evidence that, around the time of the hypothetical negotiations, the parties themselves had brief discussions regarding Cisco taking a license to the ’069 patent. According to the district court’s factual finding—which is supported by the testimony at trial—Cisco informally suggested $0.90 per unit as a possible royalty for the ’069 patent. The district court used this rate as a lower bound on a reasonable royalty. For the upper bound, the district court looked to the $1.90 per unit rate requested by CSIRO in its public Rate Card license offer. Because the parties’ discussions centered on a license rate for the ’069 patent, this starting point for the district court’s analysis already built in apportionment. Put differently, the parties negotiated over the value of the asserted patent, “and no more.” Ericsson, 773 F.3d at 1226. The district court still may need to adjust the negotiated royalty rates to account for other factors (see infra Section II.B), but the district court did not err 14 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. in valuing the asserted patent with reference to end product licensing negotiations. 1 The rule Cisco advances—which would require all damages models to begin with the smallest salable patent-practicing unit—is untenable. It conflicts with our prior approvals of a methodology that values the asserted patent based on comparable licenses. See VirnetX, 767 F.3d at 1331; ActiveVideo Networks, Inc. v. Verizon Commc’ns, Inc., 694 F.3d 1312, 1333 (Fed. Cir. 2012); Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197, 1211–12 (Fed. Cir. 2010). Such a model begins with rates from comparable licenses and then “account[s] for differences in the technologies and economic circumstances of the contracting parties.” Finjan, 626 F.3d at 1211. Where the licenses employed are sufficiently comparable, 2 1 The choice of royalty base—which is often the fo- cus of the apportionment analysis—is irrelevant to the district court’s analysis. The particular rates relied on by the district court were contemplated as cents per end unit sold by Cisco, but they could equally have represented cents per wireless chip without affecting the damages calculation. 2 Note, of course, that this court has often excluded proffered licenses as insufficiently comparable. See, e.g., LaserDynamics, 694 F.3d at 77–78; ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 870–71 (Fed. Cir. 2010); Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1327–28 (Fed. Cir. 2009). Grounds for exclusion in our past cases have included, but are not limited to: the license being a litigation settlement agreement, LaserDynamics, 694 F.3d at 77 (“The propriety of using prior settlement agreements to prove the amount of a reasonable royalty is questionable.”); and the patented technology’s lack of a relationship to the licensed technology, ResQNet.com, 594 F.3d at 871 (“Dr. David offers little or no evidence of a COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 15 this method is typically reliable because the parties are constrained by the market’s actual valuation of the patent. See Georgia-Pacific, 318 F. Supp. at 1120 (declaring the first factor relevant to damages calculations to be “[t]he royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty”). Moreover, we held in Ericsson that otherwise comparable licenses are not inadmissible solely because they express the royalty rate as a percentage of total revenues, rather than in terms of the smallest salable unit. Ericsson, 773 F.3d at 1228. Therefore, adopting Cisco’s position would necessitate exclusion of comparable license valuations that—at least in some cases—may be the most effective method of estimating the asserted patent’s value. Such a holding “would often make it impossible for a patentee to resort to licensebased evidence.” Id. Accordingly, we conclude that the district court did not violate apportionment principles in employing a damages model that took account of the parties’ informal negotiations with respect to the end product.