On August 30, 2012, the Federal Circuit issued its decision in LaserDynamics v. Quanta (available here). In LaserDynamics, the Federal Circuit reversed the district court on several grounds, and remanded for a third trial. There were three notable aspects to the decision.
First, the Federal Circuit adopted Chief Judge Rader’s “smallest saleable unit” rule articulated in his district court Cornell decision (i.e., the rule he announced when he was sitting by designation in the district court in Cornell) and elaborated on the so-called entire market value rule:
[I]t is generally required that royalties be based not on the entire product, but instead on the “smallest salable patent-practicing unit.” Cornell Univ. v. Hewlett- Packard Co., 609 F. Supp. 2d 279, 283, 287-88 (N.D.N.Y. 2009) (explaining that “counsel would have wisely abandoned a royalty base claim encompassing a product with significant non-infringing components. The logical and readily available alternative was the smallest salable infringing unit with close relation to the claimed invention—namely the processor itself.”).
The entire market value rule is a narrow exception to this general rule. If it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product. . . . [T]he 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 Court noted that, “one way in which the error of an improperly admitted entire market value rule theory manifests itself is in the disclosure of the revenues earned by the accused infringer associated with a complete product rather than the patented component only.” (Of course, in many instances, only revenues for the complete product will be available; the Federal Circuit did not explain what to do in such a situation). Even “essential” patented features, without which the product at issue would be commercially unviable, do not meet the entire market value rule’s requirement that the patented feature be the basis for consumer demand:
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, the date for the hypothetical reasonable royalty negotiation with respect to induced infringement is not the date the defendant first had knowledge of the patent-in-suit (which was, in this instance, the date the lawsuit was filed), but rather the date of the underlying act of direct infringement:
Here, there is no dispute that while QCI first became liable for active inducement of infringement in August 2006 [the date the lawsuit was filed], QCI’s sales of accused laptop computers into the United States began causing the underlying direct infringement by end users in 2003 [the proper date for the hypothetical negotiation]. . . . [W]e 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 Federal held that the district court erred in denying a motion in limine filed by the defendant seeking to keep one of the plaintiff’s settlement agreements (the BenQ settlement agreement) out of evidence. The plaintiff had settled its claims against BenQ on the eve of trial after BenQ had been sanctioned several times by the district court. The Federal Circuit wrote:
Rule 403 provides for the exclusion of otherwise relevant evidence when the probative value of that evidence is substantially outweighed by the danger of unfair prejudice, confusing the issues, or misleading the jury. Along these lines, Federal Rule of Evidence 408 specifically prohibits the admission of settlement offers and negotiations offered to prove the amount of damages owed on a claim. The propriety of using prior settlement agreements to prove the amount of a reasonable royalty is questionable. See, e.g., Rude v. Westcott, 130 U.S. 152, 164 (1889) (“[A] payment of any sum in settlement of a claim for an alleged infringement cannot be taken as a standard to measure the value of the improvements patented, in determining the damages sustained by the owners of the patent in other cases of infringement.”); Deere & Co. v. Int’l Harvester Co., 710 F.2d 1551, 1557 (Fed. Cir. 1983) (holding that “as the White license was negotiated against a backdrop of continuing litigation and [defendant’s] infringement of the Schreiner patent, the district court could properly discount the probative value of the White license with regard to a reasonable royalty”); see also Hanson, 718 F.2d at 1078-79 (observing that “license fees negotiated in the face of a threat of high litigation costs may be strongly influenced by a desire to avoid full litigation” and “should not be considered evidence of an established royalty” (quoting Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1164 n.11 (6th Cir. 1978) (Markey, J.))). The notion that license fees that are tainted by the coercive environment of patent litigation are unsuitable to prove a reasonable royalty is a logical extension of Georgia-Pacific, the premise of which assumes a voluntary agreement will be reached between a willing licensor and a willing licensee, with validity and infringement of the patent not being disputed. See 318 F. Supp. at 1120.
Despite the longstanding disapproval of relying on settlement agreements to establish reasonable royalty damages, we recently permitted such reliance under certain limited circumstances. See ResQNet, 594 F.3d at 870-72 (explaining that a settlement license to the patents-in-suit in a running royalty form was “the most reliable license in [the] record” when compared with other licenses that did not “even mention[] the patents-in-suit or show[] any other discernable link to the claimed technology”). We permitted consideration of the settlement license on remand, but we cautioned the district court to consider the license in its proper context within the hypothetical negotiation framework to ensure that the reasonable royalty rate reflects “the economic demand for the claimed technology.” Id. at 872.
Unlike the license in ResQNet, the BenQ settlement agreement is far from being the “most reliable license in [the] record.” 594 F.3d at 872. Indeed, the BenQ settlement agreement appears to be the least reliable license by a wide margin. The BenQ settlement agreement was executed shortly before a trial—a trial in which BenQ would have been at a severe legal and procedural disadvantage given the numerous harsh sanctions imposed on it by the district court. The $6 million lump sum license fee is six times larger than the next highest amount paid for a license to the patent-in-suit, and ostensibly reflects not the value of the claimed invention but the strong desire to avoid further litigation under the circumstances. LaserDynamics executed twenty-nine licenses for the patent-in-suit in total, the vast majority of which are not settlements of active litigation and do not involve the unique coercive circumstances of the BenQ settlement agreement, and which are therefore far more reliable indicators of what willing parties would agree to in a hypothetical negotiation. Additionally, in light of the changing technological and financial landscape in the market for ODDs, the BenQ settlement, entered into a full three years after the hypothetical negotiation date, is in many ways not relevant to the hypothetical negotiation analysis. . . .
This record stands in stark contrast to that in ResQNet, where a lone settlement agreement stood apart from all other licenses in the record as being uniquely relevant and reliable. This case is therefore well outside the limited scope of circumstances under which we deemed the settlement agreement in ResQNet admissible and probative. The probative value of the BenQ settlement agreement is dubious in that it has very little relation to demonstrated economic demand for the patented technology, and its probative value is greatly outweighed by the risk of unfair prejudice, confusion of the issues, and misleading the jury. Fed. R. Evid. 403. Accordingly, we conclude that the district court abused its discretion by admitting the BenQ settlement agreement into evidence, and must exclude the agreement from the proceedings on remand.