Overview
Amol Parikh co-authored this bylined article on the implications of Power Integrations v. Fairchild, in which the US Court of Appeals for the Federal Circuit took a narrow view of the entire market value rule. “Given the stricter ‘sole driver of demand’ requirement outlined in Power Integrations, we might expect district courts to be increasingly wary of allowing entire products to be used as the royalty base,” the authors wrote.
In Depth
This article was originally published in Law360 on August 2, 2018.
The Federal Circuit’s position on apportionment in reasonable royalty damages has been a moving target for several years now. The latest juke comes in Power Integrations v. Fairchild,[1], where the court vacated a $140 million jury verdict, taking a narrow view of the entire market value rule and finding that the royalty base should have been reduced to account for nonpatented features. Although the ruling appears to raise the bar on using an entire product as the royalty base, other recent decisions appear to relax requirements for certain plaintiffs or even provide an alternate path to the same damages figure.
Power Integrations and Fairchild both manufacture power supply controller chips used in chargers for electronic devices, such as cellphones and laptops. Power Integrations owns a patent directed to switching regulators that direct power delivery and sued Fairchild asserting infringement of that patent. At trial, a jury had awarded Power Integrations $140 million in damages.[2] Fairchild appealed.
On appeal, Fairchild argued the damages award should be vacated because it used the entire controller chip as the royalty base. Power Integrations countered that its expert properly used the entire controller chip as the royalty base since the entire market value rule had been met because:
The patented feature was essential to some customers;
Some customers asked for the patented feature;
Products with the patented feature outsold products without the patented feature; and
Technical marketing materials promoted the patented feature.
The Federal Circuit agreed with Fairchild and vacated the damages award, noting that both parties agreed that the accused products contained other valuable features, including jittering, the subject of a separate lawsuit over different patents. The court ultimately concluded that Power Integrations “did not meet its burden to show that the patented feature was the sole driver of consumer demand, i.e. that it alone motivated consumers to buy the accused products.”
The Federal Circuit explained that “the entire market value rule is appropriate only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts,” citing the court’s prior rulings in LaserDynamics,[3] Versata[4] and VirnetX.[5] However, this “sole driver of customer demand” requirement is not found in LaserDynamics, Versata or VirnetX. In LaserDynamics, the court applied a standard of “drives the demand,” or “creates the basis for customer demand,” or that “demand … is attributable to the patented feature.”[6] Versata describes the requirement as “creates the basis for customer demand or substantially creates the value of the component parts.”[7] The court in VirnetX repeated the standard enunciated from Versata.[8] Hence, the court’s new use of “sole driver of customer demand” seems to be a new, more stringent requirement.
The Federal Circuit further explained that in order to use the broader royalty base under the entire market value rule, “[w]hen the product contains other valuable features, the patentee must prove that those other features did not influence purchasing decisions.” This, too, was not a requirement of LaserDynamics, Versata and VirnetX.
Certainly the recent Power Integrations decision aligns with the court’s stricter apportionment decisions, as opposed to the more flexible structure from its Ericsson[9] and Exmark[10] rulings. For example, in VirnetX, widely seen as a strict ruling on apportionment, the court ruled that “a patentee’s obligation to apportion damages only to the patented features does not end with the identification of the smallest salable unit if that unit still contains significant unpatented features.” Yet in Ericsson (and the later Exmark), the court seemed to relax this requirement, finding that apportionment could be applied in the royalty rate instead of the base, or a combination thereof. However, the apportionment issue addressed by the court in Power Integrations (like VirnetX)[11] was limited to whether or not apportionment was required at all (i.e., had the entire market value rule been met). In Ericsson and Exmark, on the other hand, the patent owners had already acknowledged that apportionment was required, but disputed whether it should be applied to the royalty base or the royalty rate.
Going forward, patent owners have several possible strategies to deal with this higher bar to meet the entire market value rule. First, as the Federal Circuit ruled in AstraZeneca,[12] a patent owner can show that “the other features are simply generic and/or conventional and hence of little distinguishing character.” In these instances, “it may be appropriate to use the entire value of the product because the patented feature accounts for almost all of the value of the product as a whole.”[13]
Second, the Federal Circuit’s Ericsson and Exmark decisions suggest that a patent owner might succeed in achieving the same damages award, but using a different methodology where it accepts that apportionment is required, but argues that apportionment should be achieved through the royalty rate. In other words, the royalty base would be the entire product, but the royalty rate would be apportioned in some manner. The court ruled in Exmark that apportionment could be applied to the royalty rate (instead of the royalty base) because: (1) the patent covered the entire device at issue, and (2) industry licensing practices suggested a royalty base of the entire device. In applying this methodology, a patent owner would need to show that its royalty rate methodology considered the other features sufficiently enough to be deemed “apportioned,” which Exmark states could be done through a traditional Georgia-Pacific factor analysis.
Exmark, however, offers little clarity on the standards by which a royalty rate may be considered “apportioned.” The Federal Circuit’s decisions in Ericsson and Mentor Graphics, however, offer practitioners some guidance. In Ericsson, the court found that the expert properly apportioned damages by apportioning the royalty rate (not royalty base) since his analysis “separated the value of the patents at issue from any other patents covered by the licenses he referenced.” Ericsson also describes apportionment in the general sense, not as an arithmetic paring-down necessarily, but rather a process of separating the patented “results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated.”[14] Along those lines, in Mentor Graphics, the court stated that lost profits had been “apportioned” not by dividing or reducing them, but rather by virtue of the Panduit factor analysis that entails a market reconstruction and consideration of the unpatented features.[15]
Given the stricter “sole driver of demand” requirement outlined in Power Integrations, we might expect district courts to be increasingly wary of allowing entire products to be used as the royalty base. For now, some patent owners may be able to apply the guidance suggested in Exmark and Ericsson by apportioning damages through the royalty rate, while still using the entire product as the royalty base. It remains to be seen if that option will remain open, and what methods courts will accept for “apportioning” a royalty rate.
Eric J. Phillips is a damages and valuation consultant at VLF Consulting Inc., where he is president.
Amol Parikh is a partner at McDermott Will & Emery LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Power Integrations, Inc. v. Fairchild Semiconductor Int’l., No. 16-2691, 17-1875, slip op. (Fed. Cir. July 3, 2018).
[2] Power Integrations’ expert based his reasonable royalty damages on (1) expected sales by defendant that plaintiff would lose; (2) expected sales by plaintiff at a lower price given competition (i.e. price erosion); and (3) additional sales by defendant not included in item (1). (see Brief of Plaintiff-Appellee in case 2016-2691, document no. 54, p. 71).
[3] LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F. 3d 51 (Fed. Cir. 2012).
[4] Versata Software, Inc. v. SAP America, Inc., 717 F. 3d 1255 (Fed. Cir. 2013).
[5] VirnetX, Inc. v. Cisco Systems, Inc., 767 F. 3d 1308 (Fed. Cir. 2014).
[6] LaserDynamics, 694 F.3d at 67-68.
[7] Versata, 717 F.3d at 1268.
[8] VirnetX, 767 F.3d at 1326.
[9] Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed. Cir. 2014).
[10] Exmark Manufacturing Company Inc. v. Briggs & Stratton Power Products Group, LLC, 879 F.3d 1332 (Fed. Cir. Jan. 12, 2018).
[11] In VirnetX, the expert “did not even attempt to subtract any other unpatented elements from the base…” and “failed to apportion value between the patented features and the vast number of non-patented features …” VirnetX, 767 F.3d at 1328-1329.
[12] AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338-40 (Fed. Cir. 2015).
