On January 12, 2018, the Federal Circuit issued its decision in Exmark Manufacturing v. Briggs & Stratton Power Products (available here). In the case, the jury awarded over $24 million in compensatory damages, which the district court doubled as enhanced damages for willful infringement. The Federal Circuit ruled that Exmark’s damages expert failed to provide an adequate explanation as to how she arrived at a 5% royalty rate for the patented feature relative to the other conventional features of the accused products. (The Federal Circuit also concluded that the district court abused its discretion by excluding from the willfulness trial evidence relating to patent validity based on the district court’s determination that Briggs’ invalidity defenses were objectively unreasonable—willfulness is to be determined by the jury regardless of whether Briggs’ defenses were objectively reasonable.) As such, the Federal Circuit vacated the jury’s finding of willfulness, the jury’s damages award, and the district court’s enhanced damages award.
The parties did not dispute that apportionment was required—even though the claim of the patent broadly claimed a “multiblade lawn mower,” the Federal Circuit noted that a “reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” In this case, the patent made clear that the patented improvement related to the mower’s flow control baffle—e.g., the remaining limitations of the claim recite conventional features of a lawn mower. In such circumstances, the patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product. Such apportionment “ensures that Exmark is compensated for the patented improvement (i.e., the improved flow control baffle) rather than the entire mower.”
The Federal Circuit held that this apportionment could be done through either the royalty base or the royalty rate: “We have held that apportionment can be addressed in a variety of ways, including by careful selection of the royalty base to reflect the value added by the patented feature [or] . . . by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof. So long as Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology.” This is because the “essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.”
Even where the patent “cover the infringing product as a whole,” where the “claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.” The Federal Circuit held that “such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate.” One possible way to do this is through “a proper analysis of the Georgia-Pacific factors.”
Further, Exmark’s “use of the accused lawn mower sales as the royalty base is consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing . . . . Sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price, and thus there is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.”
In this case, using the lawn mower’s sales price as a base was “consistent with the settlement agreement relied on by Exmark’s damages expert, which the parties agree provided an effective royalty of 3.64% of the sales of the accused mowers.”
Nevertheless, the Federal Circuit held that Exmark’s damages expert’s opinion was inadmissible as it failed to adequately tie the expert’s proposed reasonable royalty rate to the facts of this case:
Exmark’s expert concluded with little explanation that Exmark and Briggs would have agreed to a 5% reasonable royalty rate on the sales of the accused lawn mowers as the value for the improved baffle. Nowhere in her report, however, did she tie the relevant Georgia-Pacific factors to the 5% royalty rate or explain how she calculated a 5% royalty rate using these factors. . . . [S]uperficial recitation of the Georgia-Pacific factors, followed by conclusory remarks, [cannot] support the jury’s verdict. . . . To sufficiently tie the advantages of the patented baffles to the royalty rate in this case, Exmark’s expert was required to explain the extent to which they factored into the value of the lawn mower and her 5% royalty rate. . . .
The expert’s analysis under Georgia-Pacific factor thirteen—the portion of realized profits attributable to non-patented elements—was also troublesome. Exmark’s expert acknowledged that other elements of the mowers affect sales and profits of the mowers, including durability, reliability, brand position, dealer support, and warranty. But she failed to conduct any analysis indicating the degree to which these considerations impact the market value or profitability of the mower and therefore impacted her suggested 5% royalty rate.
Other patents covering the product may impact the damages analysis:
Equally problematic, the expert acknowledged that Briggs and its co-defendant, Schiller, have patents covering other components of the accused mowers. But she ignored those components, opining without support that they do not relate to the quality of cut, which she considered “paramount” to selling mowers. We are skeptical that other patented components of the mower bear no relation to the overall value of the accused mowers, which would influence the relative value of the patented baffle and thus the royalty rate. . . . Merely concluding that other components do not affect the value of the accused mower amounts to nothing more than speculation. To cure this deficiency, the jury could have received evidence itemizing the relative value of these other components to better guide the jury’s understanding of the value of the baffle in relation to the other components of the accused multi-component mower. Without a more detailed analysis, the jury is simply left to speculate or adopt the expert’s unsupported conclusory opinion.
The Court rejected Exergen’s other argument–i.e., using a low royalty rate alone cannot overcome the lack of apportionment nor does it sufficiently tie the royalty rate to the facts of the case:
[W]e cannot agree that using an allegedly low royalty rate alone supports the admissibility of the expert’s reasonable royalty opinion. Regardless of how low the royalty rate, the expert must still apportion damages and sufficiently tie the royalty rate to the facts of the case. . . . [W]e recognize that Exmark’s expert discussed quantitative market evidence in her opinion. As explained above, however, we are troubled by the expert’s analysis because, even assuming she properly considered this record evidence, she failed to explain how the evidence factored into the proposed royalty rate. She merely addressed the Georgia-Pacific factors in light of the facts and then plucked the 5% royalty rate out of nowhere. It is not enough for an expert to simply assert that a particular royalty rate is reasonable in light of the evidence without tying the proposed rate to that evidence.