While there was no marquee patent remedies decision in 2019, the courts still decided some important issues, especially in the context of reasonable royalties.
1. Expenses under Section 145 does not permit the recovery of USPTO attorney fees
Under Section 145 of the Patent Act, when an applicant appeals an adverse PTAB decision by filing an action in the district court, “[a]ll the expenses of the proceedings shall be paid by the applicant.”
In Peter v. NanKwest, the Supreme Court held that Section 145 “does not specifically or explicitly authorize the PTO to recoup its lawyers’ or paralegals’ pro rata salaries.” Under the American Rule, “[e]ach litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” The reference to “expenses” in §145 does not invoke attorney’s fees with the kind of “clarity … required to deviate from the American Rule.” “Expenses” and “attorney’s fees” appear in tandem “across various statutes shifting litigation costs,” indicating “that Congress understands the two terms to be distinct and not inclusive of each other.”
2. The Federal Circuit clarifies when an inadequate pre-suit investigation may warrant fees.
Under Section 285 of the Patent Act, “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”
An inadequate pre-suit investigation may make a case exceptional for attorney fees. ThermoLife v. GNC affirmed the district court’s exceptionality finding due to plaintiff’s inadequate pre-suit investigation. “Whether testing is necessary for a responsible accusation of infringement necessarily depends on the availability of the products at issue, the existence and costs of testing, and whether other sufficiently reliable information exists.” Here the claims related to biological methods and compositions, and an asserted claim required one gram of a particular ingredient. This case “was one in which there was no adequate substitute for simple testing of publicly available products.” “[T]he labels of at least some, perhaps many, of the accused products made clear that they did not contain one gram [minimum].”
The Federal Circuit in Blackbird v. Health In Motion similarly affirmed an exceptionality finding based on plaintiff’s “flawed claim construction and infringement contentions,” noting that “even a modicum of due diligence by [the plaintiff], as part of a pre-suit investigation, would have revealed the weaknesses in its litigation position.” Neither a defendant nor the district court is required to put the patent owner on notice of its weak position for attorney fees. Id.
A case is not necessarily exceptional where the costs of litigating exceed the plaintiff’s potential recovery at trial. ATEN International v. Uniclass. “Litigation strategies motivating a patent suit are many, with monetary damages being one.” Id. For example, a patentee may “bring suit to deter other competitors from infringement, encourage licensing, or test a patent’s ability to withstand validity challenges.” Here, plaintiff’s expenses “includ[ed] over $700,000 in expert witness fees alone,” and the plaintiff “could recover, at most, $678,337 in reasonable royalty damages.” The Federal Circuit affirmed the finding of no exceptionality over defendant’s arguments to the contrary.
3. A plaintiff may support a reasonable royalty with a third party settlement or a past jury verdict.
Under Section 284 of the Patent Act, upon finding infringement, “the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty.”
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The Federal Circuit endorsed third party settlements and past jury verdicts in calculating a reasonable royalty. Elbit Systems v. Hughes Network affirmed the reasonable royalty where the expert started with a third party settlement and increased the value by 20%. “Rather than parse out a value for each of the claims, [the expert] came up with a market, comparable royalty rate, and then he adjusted it as necessary for the hypothetical negotiation” based on statements by defendant’s executives indicating that the system incorporating the patented technology “provided a 20% increase in value over the old … system.” Sprint v. Time Warner affirmed a jury verdict based in part on a previous related jury verdict. “While there are some differences between the two proceedings, the core allegations in both were the same.” And while there “were several patents raised in each case that were not raised in the other,” the defendant did not show “any reason to believe that the technology asserted in the [earlier] case was materially different from the technology raised in this case.” The jury royalty rate of 5% of relevant revenue was supported by the verdict in the related case, and by two other licenses from the plaintiff for the patented technology. The Federal Cicuit in Elbit and Sprint found that the principle of apportionment was satisfied.
4. Intervening change in liability may reduce the plaintiff’s damages.
The Federal Circuit elaborated on instances when a change in liability at the PTAB or Federal Circuit may reduce the plaintiff’s damages after the fact.
In Chrimar Systems v. A.L.E. USA, the Federal Circuit vacated a final judgment (which included a jury verdict affirmed on appeal) and remanded the case for dismissal because of the PTAB finding of invalidity of all claims at issue (which was affirmed). The Federal Circuit held that the case was still pending, and not final, so the district court could consider the arguments made by the Defendant in light of the PTAB finding of invalidity. In WesternGeco v. ION, the Federal Circuit refused to disturb a final judgment. After a jury reasonable royalty and lost profits award, the parties entered into a stipulated final judgment on the reasonable royalty but not the lost profits. The PTAB held four of six of the asserted patents unpatentable and the Federal Circuit affirmed. The Federal Circuit held that the defendant could not contest the stipulated reasonable royalty based on the intervening invalidity at the PTAB because the amount was “agreed to by the parties and subject to an unappealable final judgment, which was satisfied and paid in full by [the defendant.]”
Invalidity on appeal may also affect the damages award. In Omega Patents v. CalAmp, the Federal Circuit vacated the damages award because the judgment of infringement was affirmed as to one patent claim and a new trial was ordered as to the remaining claims. Generally, the law “would require a new trial as to damages when the jury renders a single verdict on damages and liability as to a subset of asserted claims has been set aside on appeal.” There “was insufficient evidence to support the damages award of approximately $2.98 million based on the evidence presented based on infringement of” the sole claim as to which the Federal Circuit affirmed infringement. VirnetX v. Apple remanded for the district court to determine whether a new trial is required. “The jury’s verdict provided that VirnetX was entitled to a damages award of $502,567,709.00 but did not indicate which portions of the award were allocated to which patents.” Here, the Federal Circuit affirmed infringement as to some patents and reversed as to other patents.
5. Release payment for past infringement of standard essential patents is a jury question.
An owner of a standard-essential patent is entitled to a jury trial on a royalty for past unlicensed sales. TCL Communication v. Telefonaktiebolaget LM Ericsson held that the district court erred by determining the release payment for past unlicensed sales in a bench trial despite the patent holder’s repeated assertions of its jury trial rights. Payment for past unlicensed sales is not “in substance materially different from damages for past patent infringement.” The district court here also determined that the patent holder’s proposed offers were not fair, reasonable, and non-discriminatory (FRAND) and set forth terms for a binding worldwide license. Because these proposed offers incorporated a release payment, the Federal Circuit vacated the determination that they were not FRAND offers. On remand, the jury will decide the release payment for past unlicensed sales.
Conclusion
Federal Circuit law on reasonable royalties is uncertain right now, especially in the context of apportionment. While there are many acceptable methods to calculate a reasonable royalty, including comparable licenses, past jury verdicts, and third party settlements, the resulting royalty must reflect the incremental value of the patented invention. There is some tension in the law as to whether the smallest salable patent practicing unit must be used as the royalty base or whether one may use the entire product as the base and apportion the rate. See Exmark v. Briggs & Stratton (the sales price of the entire product can be used as the royalty base because apportionment can be addressed through the royalty rate); but see Finjan v. Blue Coat (damages award partially vacated because even the smallest salable unit had non-infringing features, requiring additional apportionment). Hopefully the Federal Circuit offers further guidance in this area in 2020.