10/20/2009 08:08:26 AM EST
Bensen on Lucent Techs. v. Gateway and its Impact on Patent Damages
Although not offering bright-line holdings, the Federal Circuit’s much anticipated decision in Lucent Techs. v. Gateway, Inc., 2009 U.S. App. LEXIS 20325 (Fed. Cir. Sept. 11, 2009) may well portend a shift in the court’s patent damages jurisprudence. In Lucent v. Gateway, the jury awarded Lucent approximately $357.9 million for patent infringement. The jury form, which gave the jury the choice of awarding a "lump sum" or an amount based on a running royalty, indicated that the amount awarded was a "lump sum." However, the Federal Circuit later noted that the precision of the lump sum award, which was calculated to the penny, suggests the jury reached it using a running royalty calculation. Microsoft appealed, challenging the jury verdict on the grounds that it was not supported by substantial evidence and that the jury should not have applied the entire market value rule (EMVR). This important case and its implications are analyzed by Eric Bensen, co-author of Milgrim on Trade Secrets and Milgrim on Licensing. He writes:
Historical Context for the Lucent Decision
To best understand the Lucent decision, it will be helpful to first consider the oft-repeated parameters of the so-called "hypothetical negotiation" approach to determining a reasonable royalty and the EMVR in the context of the Patent Reform Era, the period that began in 2001 and that has produced dramatic changes in patent law crafted by the Supreme Court and the Federal Circuit along with parallel efforts in Congress, especially the Patent Reform Acts of 2007 and 2009, to bring about change.
The "Hypothetical Negotiation."
The ground rules for the hypothetical negotiation, which posits that the patentee and infringer would have individually negotiated a license for the patent, are well known: the "negotiation" is deemed to have taken place just prior to the first infringement, the patent is presumed valid and infringed, and the royalty is to be determined by considering pertinent factors, notably the factors identified in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).
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The Hypothetical Negotiation.
The gist of the Federal Circuit's holding was that the jury verdict was not supported by substantial evidence. Contrary to its usual practice of giving such matters summary treatment in deference to the lower court, however, the court undertook an unusually close analysis of the evidence offered in connection with a number of Georgia-Pacific factors. In doing so, it distilled a number of principles that will likely provide guidance in future cases.
The court focused much of its attention on Georgia-Pacific Factor 2, "[t]he rates paid by the licensee for the use of other patents comparable to the patent in suit." Lucent relied on eight licenses entered into by it, Microsoft or Dell that it argued supported the lump sum awarded. (The decision does not explain why Lucent's own licenses would be relevant to Factor 2.) The Federal Circuit rejected the relevance of the agreements for overlapping reasons. It rejected the relevance of several of the agreements on the grounds that they provided for a running royalty rather than a lump sum payment. As the Court explained, in reaching a lump sum amount, the parties' estimates regarding the anticipated usage of the patented method would be highly relevant, yet Lucent offered no evidence of what Lucent and Microsoft would have anticipated with respect to usage at the time of the hypothetical negotiation. Although the running royalty agreements could have been relevant to a lump sum royalty awarded by the jury, Lucent provided no evidence upon which the jury could make a meaningful comparison between the running royalties provided for in those agreements and the lump sum it awarded.