Federal Circuit Opinion Limiting Patent Damages

Today the Federal Circuit decided LaserDyamics v. Quanta Computer.  This is an interesting case on patent damages.  The case covers a lot of interesting areas, including limits on the use of the entire market value rule, admissibility of settlement licenses, the starting date for royalty calculations, and using Daubert to challenge a large damage calculation.

The case involved LaserDyamics' patent that can distinguish between DVDs and CDs inserted into an optical disc drive.  It's useful in personal computers, particularly laptops.

First, the court reversed the use of the "entire market value" rule to calculate damages.  LaserDyamics' expert had calculated damages based on the sales of the entire computer, instead of just the disc drive portion affected by the patent.

We reaffirm that 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’ use of the entire market value rule was impermissible, however, because LaserDynamics failed to present evidence showing that the patented disc discrimination method drove demand for the laptop computers. 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. Nor is it enough to show that a laptop computer without an ODD practicing the disc discrimination method would be commercially unviable. Were this sufficient, a plethora of features of a laptop computer could be deemed to drive demand for the entire product. To name a few, a high resolution screen, responsive keyboard, fast wireless network receiver, and extended-life battery are all in a sense important or essential features to a laptop computer; take away one of these features and consumers are unlikely to select such a laptop computer in the marketplace. But proof that consumers would not want a laptop computer without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers. Put another way, if given a choice between two otherwise equivalent laptop computers, only one of which practices optical disc discrimination, proof that consumers would choose the laptop computer having the disc discrimination functionality says nothing as to whether the presence of that functionality is what motivates consumers to buy a laptop computer in the first place. It is this latter and higher degree of proof that must exist to support an entire market value rule theory.

Second, an issue in the case was when the licensing experts should figure out the "hypothetical negotiation" began to calculate a royalty.  Since Quanta wasn't liable for actively inducing infringement until August 2006, LaserDynamics' expert used that date, instead of the earlier date when Quanta began selling the computers.  The Federal Circuit rejected that approach:

Thus, we hold that in the context of active inducement of infringement, a hypothetical negotiation is deemed to take place on the date of the first direct infringement traceable to QCI’s first instance of inducement conduct—in this case, 2003.

Third, the court excluded a prior settlement agreement as "the least reliable license by a wide margin."  The settlement in question was forced on the settling party due to a series of adverse decisions in the litigation.

Finally, the court held that LaserDynamics' experts use of a 6% running royalty wasn't reliable or admissible: "In sum, the 6% royalty rate was untethered from the patented technology at issue and the many licenses thereto and, as such, was arbitrary and speculative."

In sum, this opinion is quite favorable to limiting excessive patent damages.