Damages base - is the name of the game the claim?

"The name of the game is the claim." Chief Judge Rich wrote those words back in 1990. Giles S. Rich,The Extent of the Protection and Interpretation of Claims--American Perspectives, 21 Int'l Rev. Indus. Prop. & Copyright L., 497, 499 (1990) ("To coin a phrase, the name of the game is the claim."). That statement has typically been invoked in the context of claim construction. However, in the ever-changing landscape of patent damages law, it seems to have growing force and effect.

As we will see below, patentees had success arguing that the smallest salable patent-practicing unit ("SSPPU") was the end of the line in the royalty base analysis. Courts were accepting the argument that patentees were not obligated to apportion down from the smallest salable patent-practicing unit ("SSPPU"), even where the claim covered only one of several features within the SSPPU. In other words, once the patentee had identified the SSPPU containing the patented feature, it had found the proper royalty base. No further apportionment, to account for the relative value of the patented feature to the SSPPU, was required.

The Federal Circuit recently put this argument to rest in VirnetX, Inc. v. Cisco Systems, Inc. and Apple Inc., No. 2013-1489 (Fed. Cir. Sept. 16, 2014). The court reviewed the following jury instruction:

In determining a royalty base, you should not use the value of the entire apparatus or product unless either: (1) the patented feature creates the basis for the customers' demand for the product, or the patented feature substantially creates the value of the other component parts of the product; or (2) the product in question constitutes the smallest saleable unit containing the patented feature.

Slip op. at 28. The Federal Circuit stated:

We agree with Apple that the district court's instruction misstates our law. To be sure, we have previously permitted patentees to base royalties on the "smallest salable patent-practicing unit." LaserDynamics, 694 F.3d at 67. However, the instruction mistakenly suggests that when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base. That is wrong. For one thing, the fundamental concern about skewing the damages horizon of using a base that misleadingly suggests an inappropriate range does not disappear simply because the smallest salable unit is used.

Slip op. at 28-29. The court also observed that the SSPPU "is simply a step toward meeting the requirement of apportionment." Id.at 29. "Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as VirnetX claims it was here), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology." Id.

Before VirnetX, the district courts were split on whether the SSPPU is thesmallest possible royalty base, regardless of the importance of the patented feature to the SSPPU. Advocating a positive answer to this question, patentees had seized on language in LaserDynamics, 694 F.3d 51, to support the argument that once you identify the SSPPU, there is no need to apportion further. There, the Federal Circuit had stated: "Where small elements of multi-component products are accused of infringement," it is "generally required that royalties be based not on the entire product, but instead on the smallest salable patent-practicing unit." Id.at 67-68. Also: "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." Id. A number of district courts had relied on this language, and also Judge Rader's opinion in the Cornellcase, to conclude that the SSPPU is always the smallest possible base. Axcess Int'l, Inc. v. Savi Tech., Inc., No. 3:10-cv-1033-F (Doc. 272) (NDTX 1/25/13) (https://patent-damages.com/2013/02/ndtx-continues-trial-to-allow-plaintiffs-damages-expert-to-address-issues-in-damages-theory/) ("Thus, in both cases, the smallest salable patent-practicing unit (the processor in Cornell and the ODD in LaserDynamics) necessarily contained features or functionalities beyond the claimed technology, but was, nevertheless, the appropriate unit for calculating the royalty."); Brocade Comm's Sys., Inc. v. A10 Networks, Inc., No. C 10-3428 PSG (NDCA 5/15/13) (Doc. No. 998) (https://patent-damages.com/2013/07/ndca-finds-emvr-unnecessary-for-lost-profits-allows-royalty-based-on-entire-revenue-without-emvr/#more-760); Internet Machines LLC v. Alienware Corp., No. 6:10-cv-23 (EDTX 6/19/13) (Doc. No. 615) ("Because Mr. Bratic used the smallest salable unit as his royalty base, additional apportionment is unwarranted and the narrow exception of the entire market value rule is inapplicable.") (citing Cornell); Summit 6 LLC v. Research in Motion Corp., No. 3:11-cv-367 (NDTX 6/26/13) (Doc. No. 661) ("[U]sing the entire device as the royalty base is proper under LaserDynamicsbecause the device itself is the 'smallest patent-practicing unit.'").

Other courts had reached the opposite result. A leading case came from Judge Andrews in the District of Delaware, AVM Tech., LLC v. Intel Corp., No. 10-610-RGA (DDE 1/4/13) (Doc. 230) (https://patent-damages.com/2013/02/ddel-addresses-emvr-vs-smallest-salable-unit-and-comparability-of-portfolio-licenses/). There, Judge Andrews held: "The use of a saleable unit that is greater than the patented feature is going to introduce Uniloc error when the patented feature is a 'date picker' whether the saleable unit is a computer loaded with 'Outlook' or simply 'Outlook.' The Uniloc error will be greater with the computer loaded with 'Outlook' than with 'Outlook' alone, but the difference in error is one of degree, not of kind." Slip op. at 5-6.See also Network Protection Sciences, LLC v. Fortinet, Inc., No. C 12-01106 WHA (NDCA 9/26/13) (Doc. 334, at 12-13) (https://patent-damages.com/2013/10/ndca-excludes-damages-expert-because-emvr-not-satisfied-for-smallest-salable-unit-revised-report-not-allowed/) (excluding plaintiff's damages expert despite contention that expert "correctly performed the apportionment analysis ... by first ascertaining" the SSU, based on plaintiff's expert's failure to satisfy EMVR); Dynetix Design Solutions, Inc. v. Synopsis, Inc., No. C 11-05973, 2013 U.S. Dist. LEXIS 120403, at *7-12 (NDCA 8/22/13) (Because "Dr. Black relied on the blanket assumption that, once he selected the smallest saleable unit in this case the entire VCS product he could end the analysis, his determination of the royalty base is fundamentally flawed.").

The scope of asserted claims, however, may impact the damages base. Assume that the kernel of a patented invention is a feature of a SSPPU within a larger overall product. When a claim covers the overall product or the SSPPU, patentees have argued that the claim avoids questions of EMVR and apportionment. Defendants have responded that the assertion of a larger claim that covers more than the actual invention described in the patent and thus leads to a larger damages base creates an end-run around EMVR and apportionment.

There is some authority on the patentee's side of this issue.See Univ. of Pittsburgh v. Varian, Case 2:08-cv-01307-AJS (W.D. Pa. 2/10/12), aff'd in relevant part, No. 2012-1575 (Fed. Cir. 4/10/14) (non-precedential). In Varian, the district court was faced with an independent claim allegedly directed to the defendant's "RPM" software system and a dependent claim that added the defendant's linear accelerators that worked with the RPM software. The defendant argued that the RPM system was the true invention and that the linear accelerator was in the prior art. The defendant contended that, as such, the royalty base could not include the linear accelerator, which was a costly device and increased the damages base significantly. The district court sided with the patentee, concluding that the linear accelerator was a "critical component" of the accused apparatus for the dependent claim. ""[B]ecause the Court has concluded the linear accelerators are a part of the patented apparatus and not just a mere accessory, the added value of the linear accelerators may be used in determining the royalty base." (Seehttps://patent-damages.com/2012/03/emvr-and-%E2%80%9Cartful-drafting%E2%80%9D/).

The Federal Circuit, in a non-precedential opinion, affirmed in relevant part. The court concluded that the dependent claim "explicitly includes the beam generator [linear accelerator] as a component of the claim," slip op. at 22, and that, consequently, the EMVR need not be applied because the patentee was "not attempting to include the value ofunpatentedfeatures within its royalty base," slip op. at 24 (emphasis in original). The Federal Circuit further observed that even where a claimed dependent element is conventional, if the inventive featureadds value to that conventional element, the damages award may reflect that value. Slip op. at 24-25. Thus, given the right factual circumstances, a patentee can argue thatVariansupports a royalty base commensurate with claim scope. See also Thinkoptics, Inc. v. Nintendo of America, Inc., Case No. 6:11-CV-455 (EDTX June 21, 2014) (Judge Davis) (https://patent-damages.com/2014/06/edtx-excludes-expert-who-attempted-to-apportion-the-royalty-base-by-claim-elements-allows-do-over/) (excluding defendant's expert's opinion that royalty base should not include the value of parts of the accused product that were claimed but that the expert contended were not novel features of the claim); cf. MediaTek, Inc. v. Freescale Semiconductor, Inc., Case No. 11-cv-5341 YGR (NDCA June 20, 2014) (https://patent-damages.com/2014/08/ndca-addresses-damages-based-on-entire-chip-royalty-rate-estimates-of-importation/) (refusing to exclude patentee's expert's testimony that the SSPPU chip was the proper royalty base, where it was unclear "whether, in in light of the nature of the patented technologies at issue and their use on the alleged infringing chips, it would be possible to apportion the value of the patent-practicing technology compared to that of the apparent smallest salable unit here, the chip").

Not every case results in a larger damages base when claims cover more than the allegedly novel feature. The SDCA rejected the patentee's argument that a claim drafted to a cell phone should result in the cell phone as the royalty base without need to prove EMVR or to apportion. DataQuill Ltd. v. HTC Corp., 887 F. Supp. 2d 999, 1027 (S.D. Cal. 2011). Although the court agreed that the claim covered the entire accused cell phone, it found that the claim merely covered a "feature" of the cell phone that also had features that were not recited in the claim. The court thus concluded that the patentee would have to satisfy the EMVR.