Apportionment of Reasonable Royalties for Patent Infringement

Apportionment of Reasonable Royalties for Patent Infringement

 Excerpt:

By 1866, the Supreme Court had established both that a patentee has the burden of apportionment when seeking damages for infringement and that a reasonable royalty was an available form of damages for patent infringement. However, it was not until 2011 that courts began to expressly explore the connection between the two principles. Courts continue to struggle with that connection because of an inconsistent focus on the two basic methods of reaching a reasonable royalty that necessarily satisfy the apportionment requirement.

Overview

It is tempting to think that reasonable royalty damages can be properly apportioned simply by starting with a reasonable royalty on an entire infringing product and then reducing the royalty by some amount or simply by basing a reasonable royalty on the "smallest sellable unit" that incorporates the claimed invention. Either method, in limited circumstances, could result in an award that happens to align with an apportioned value, but neither method necessarily satisfies the apportionment requirement. The first will typically miss the mark because merely reducing a stated royalty does not mean that the resulting royalty reflects the apportioned value of the patent. See, e.g., LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 69 (Fed. Cir. 2012) [an enhanced version of this opinion is available to lexis.com subscribers]. The second, although seemingly endorsed by the Federal Circuit, see Versata Software, Inc. v. SAP Am., Inc., 717 F.3d 1255, 1268 (Fed. Cir. 2013) [enhanced version], will not work where – as will typically be the case – the smallest saleable unit has patented and unpatented features. In that event, further apportionment is required. See, e.g., Rembrandt Soc. Media, LP v. Facebook, Inc., 2013 U.S. Dist. LEXIS 171127, **23-24 (E.D. Va. Dec. 3, 2013) [enhanced version].

There are two basic methods for calculating a reasonable royalty that necessarily satisfy the apportionment requirement: (1) basing the royalty on sufficient evidence of real world royalties for the patent in suit or, in the absence of such evidence, (2) constructing the royalty from the portion of the value of the patented article that is attributable to the patented invention and the portion of that value that should go to the patentee for use of the invention. Why these two methods satisfy the apportionment requirement becomes clear when they are viewed against the backdrop of the apportionment requirement, the entire market value rule, established royalties and the nature of a reasonable royalty. These are discussed below.

Discussion

Apportionment. In the patent context, apportionment is the separation of (i) the value of a product (or process) that is attributable to its patented feature and the basis for the patentee's recovery for infringement from (ii) the value of the product that is attributable to its nonpatented features. Between 1853 and 1815, the Supreme Court addressed apportionment of patent damages in more than two-dozen significant decisions at law and in equity. Each time, it adhered to the principle that in all cases, the burden of apportionment is on the patentee.

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