Last year, the Court of Appeals for the Federal Circuit (“Federal Circuit”) issued two decisions: Exmark Manufacturing Company, Inc. v. Briggs & Stratton Power Products Group, LLC and Finjan, Inc. v. Blue Coat Systems, Inc. Both dealt with apportionment between patented and non-patented elements of multi-component products when calculating reasonable royalty damages. Based on the Federal Circuit’s decisions in both cases, apportionment is necessary but the method of apportionment varies depending on whether a patent’s claims cover the infringing product as a whole or only portions of the patented product or method.
The Federal Circuit issued its decision in the Exmark case on January 12, 2018. Exmark filed suit against Briggs & Stratton alleging infringement of claim #1 of its U.S. Patent No. 5,987,863, which covers the improvement of flow-control-baffles on a lawn mower deck. Claim #1 recites a “multiblade lawn mower” as a whole, “not a single component of a multi-component product.” The jury found that Briggs & Stratton willfully infringed Exmark's patent and awarded Exmark $24,280,330 in compensatory damages, which the District Court doubled as enhanced damages for Briggs' willful infringement.
On appeal, Briggs & Stratton argued that Exmark’s expert should have apportioned the value of the baffle from other non-patented features of the mower through an apportionment of the royalty base. While the Federal Circuit affirmed that the patent owner must apportion the damages between patented improvements and the conventional components of a multi-component product, it disagreed that apportionment is applied exclusively through the royalty base.
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.” [Ref. omitted] 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. [Ref. omitted]
The Federal Circuit clarified that apportionment of the royalty rate was appropriate when the patent claims cover the whole product including patented and non-patented components.
Using the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claim is, in fact, directed to the lawn mower as a whole. The preamble of claim 1 recites a “multiblade lawn mower.” [Ref. omitted] It is not the baffle that infringes the claim, but rather the entire accused mower. Thus, claim 1 covers the infringing product as whole, not a single component of a multi-component product. There is no unpatented or non-infringing feature of the product.
Additionally, the Federal Circuit examined the appropriate approach to apportioning the royalty rate. The Federal Circuit specified that the essential requirement is that a reasonable royalty be based on the incremental value that the patented invention adds to the end product.
We hold that such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate. We have recognized that one possible way to do this is through a proper analysis of the Georgia-Pacific factors.[Ref. omitted] As we have explained, “the standard Georgia-Pacific reasonable royalty analysis takes account of the importance of the inventive contribution in determining the royalty rate that would have emerged from the hypothetical negotiation.”[Ref. omitted] [Emphasis added]
Also deemed appropriate by the Federal Circuit is the application of real-world bargaining to hypothetical negotiations.
Finally, we note that 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.
Based on the Federal Circuit’s decision in the Exmark case, apportionment of the royalty rate is allowed to account for the inventive value of conventional components covered by the claim.
The Federal Circuit issued its decision in the Finjan matter on January 10, 2018. Finjan sued Blue Coat for infringement of four patents. A jury found Blue Coat Systems, Inc. (“Blue Coat”) liable for infringement of all four patents owned by Finjan and awarded approximately $39.5 million in reasonable royalty damages.
On appeal, the Federal Circuit affirmed the award of the ’731 and ’633 patents, but found no infringement of the ’968 patent, and with respect to the ’844 patent it agreed with Blue Coat that Finjan failed to apportion damages to the infringing functionality.
Finjan claimed infringement of the ’844 patent’s claims #1, #7, #11, #14, and #41 which recite a system and method for providing computer security by attaching a security profile to a downloadable. The Federal Circuit found that the infringing product was a multi-component product with patented and unpatented components and thereby required further apportionment.
When the accused technology does not make up the whole of the accused product, apportionment is required. “[T]he ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.” [Ref. omitted] “[W]here an infringing product is a multi-component product with patented and unpatented components, apportionment is required.” [Ref. omitted]
The decision states that “Finjan attempted to tie the royalty base to the incremental value of the infringement by multiplying WebPulse’s total number of users by the percentage of web traffic that passes through DRTR, the WebPulse component that performs the infringing method.” Finjan also argued that apportionment to the DRTR was adequate because the DRTR “is the smallest, identifiable technical component tied to the footprint of the invention.” However; the Federal Circuit disagreed that apportionment to the smallest saleable patent-practicing unit (SSPPU) was adequate in this case.
The entire market value rule is not at issue in this case, however, and the fact that Finjan has established a royalty base based on the “smallest, identifiable technical component” does not insulate them from the “essential requirement” that the “ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product” [Ref. omitted] As we noted in VirnetX, if the smallest salable unit—or smallest identifiable technical component—contains non-infringing features, additional apportionment is still required.
Based on the Federal Circuit’s decision in the Finjan case, a reasonable royalty award should reflect the incremental value that the patented invention adds to the end product. Additionally, based on the Federal Circuit’s decision, if the SSPPU contains non-infringing features, additional apportionment is still required.