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In effect, the entire market value rule acts as a check to ensure that the royalty damages being sought under 35 U.S.C.S. § 284 are in fact reasonable in light of the technology at issue. A reasonable royalty analysis requires a court to hypothesize, not to speculate. The trial court must carefully tie proof of damages to the claimed invention's footprint in the marketplace. A damages theory must be based on sound economic and factual predicates. The entire market value rule arose and evolved to limit the permissible scope of patentees' damages theories. Importantly, the requirement to prove that the patented feature drives demand for the entire product may not be avoided by the use of a very small royalty rate. The U.S. Supreme Court's and the U.S. Court of Appeals for the Federal Circuit's precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate. In any case involving multi-component products, patentees may not calculate damages based on sales of the entire product, as opposed to the smallest salable patent-practicing unit, without showing that the demand for the entire product is attributable to the patented feature.
LaserDynamics, Inc. ("LaserDynamics") is the owner of U.S. Patent No. 5,587,981 ("the '981 Patent"), which was issued in 1996. The patent is directed to a method of optical disc discrimination that essentially enables an optical disc drive ("ODD") to automatically identify the type of optical disc—e.g., a compact disc ("CD") versus a digital video disc ("DVD")—that is inserted into the ODD. Quanta Storage, Inc. ("QSI") is a manufacturer of ODDs that was incorporated in 1999. QSI is headquartered in Taiwan and is a partially-owned subsidiary of Quanta Computer, Inc. ("QCI"), with which it shares some common officers, directors, and facilities. QCI's corporate headquarters are also located in Taiwan, and its factories are located in China. QCI holds a minority share in QSI and does not control QSI's operations. In August 2006, LaserDynamics brought suit against QCI and QSI for infringement of the '981 Patent. Because asserted claim 3 of the '981 Patent is directed to a method of disc discrimination performed by an ODD, as opposed to the ODD itself, LaserDynamics relied on a theory of infringement that QSI's and QCI's sales of ODDs and laptop computers, respectively, actively induced infringement of the method by the end users of the ODDs and laptop computers. These appeals come after two trials in the district court—a first trial resolving the claims of patent infringement and damages, and a second trial ordered by the district court to retry the damages issues. The parties raise various issues relating to the proper legal framework for evaluating reasonable royalty damages in the patent infringement context.
Was LaserDynamics' use of the entire market value rule permissible?
The court held that the district court properly granted a new trial on damages following the first jury verdict. Reasonable royalty damages were deemed the minimum amount of infringement damages adequate to compensate for the infringement, 35 U.S.C.S. § 284. Use of the entire market value rule was impermissible under the facts of the case. On another issue, the district court erred in finding that the alleged infringer did not have an implied license to assemble and sell laptops using optical disk drives (ODDs) purchased via certain companies. Furthermore, the district court properly denied the alleged infringer's motion for judgment as a matter of law of non-infringement. The court also determined that the district court's jury instruction did not alone warrant a new trial on liability, and that the district court erred by setting the hypothetical negotiation date as August 2006. On other matters, the district court erred in admitting a certain settlement agreement into evidence, and erred in permitting a witness to offer his opinion concerning a 6 percent ODD running royalty rate based on ODD average price as a proper measure of reasonable royalty damages in the second trial.