The Federal Circuit Reaffirms Entire Market Value Concepts

On August 30, 2012, the United States Court of Appeals for the Federal Circuit issued its Laser Dynamics, Inc. v. Quanta Computer, Inc. opinion, which addressed the Entire Market Value Rule (“EMVR”) and other damage issues.

LaserDynamics, Inc. (“LaserDynamics”) owns U.S. Patent No. 5,587,981, which is directed to a method of optical disc discrimination that enables an optical disc drive to automatically identify the type of optical disc (CD, DVD) inserted into the drive. LaserDynamics sued Quanta Computers, Inc. (“Quanta”) for inducement. In its decision, the Federal Circuit further defined the metes and bounds of the EMVR, and the concept that the royalty base for patent damages should be directed to the “smallest salable patent-practicing unit,” and consumer demand for the patented feature goes beyond functionality:

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.

Moreover, the requirement to prove demand for the patented feature cannot be avoided by the use of a “small” royalty rate applied to revenue from the entire apparatus, as the Court had alluded to in its Lucent decision:

Importantly, the 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. We recently rejected such a contention, raised again in this case by LaserDynamics, and clarified that “[t]he Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate.” Uniloc, 632 F.3d at 1319-20 (explaining that statements in Lucent suggesting otherwise were taken out of context). 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.