NDCA grants new trial based on violation of entire market value rule

The NDCA in Brocade Communications Systems, Inc. v. A10 Networks, Inc., Case No. C 10-3428 PSG (N.D. Cal. January 10, 2013), ruled on post-trial motions for JMOL and new trial. The case involved patent, copyright, trade secret, and tortious interference claims. The patens at issue involved global server load balancing and a database for storing round trip time data for host server switches.

The court addressed many issues in the order, the most interesting for patent damages involving EMVR in the context of reasonable royalty damages. The court determined that the jury was improperly presented with entire revenues and profits absent sufficient proof that the EMVR was appropriate. The court vacated the jury's royalty award and awarded A10 a new trial on the royalty damages.

The court relied on the Federal Circuit's LaserDynamics opinion concerning its reference to smallest salable article and the requirement that the patent feature(s) be the sole driver of demand. Neither was satisfied in this case, as evidenced by the court's opinion, which is worth quoting for the relevant discussion (footnotes omitted):

Plaintiffs may only collect damages from infringement of their patents and not from other features of the infringing product, and so the Federal Circuit requires that plaintiffs identify the "smallest saleable unit" in which their invention may be found to calculate the royalty base. When the infringing feature drives consumer demand for the product, however, plaintiffs may rely on the entire market value rule, an exception to the requirement to determine the smallest saleable unit. To employ the entire market value rule, plaintiffs first must show that the infringing feature is the primary reason that consumers buy the product; the necessity of the infringing feature to the product is insufficient. If the plaintiffs meet this threshold, they may rely on the revenues the defendants received for the entire product to establish the royalty base.

Brocade argues that the AX product and its competing ServerIron products are the smallest saleable unit for the infringing software patents. But the AX product and the ServerIron products are not composed entirely of the patented features. The products in fact have many components, including GSLB capability for which Brocade does not own the patents. In light of these other components, Brocade had to show that its patented features drove consumer demand for A10's product before it could use all of the profits A10 earned from the sale of the AX product as the royalty base.

Brocade, however, did not provide substantial evidence that the round-trip-time ordering feature of the '009 Patent, the ordering features of the '500 Patent, or the Layer 2 route redundancy of the '195 Patent drove consumer demand for A10's products. Brocade cites to Malackowski's testimony to support its argument that its patented features drove demand for A10's products. Malackowski's testimony highlights that the features were important, and even that A10 could not have sold the AX product without the features. But necessity is not enough. Brocade presented no evidence, such as consumer surveys or even customer testimony, that the patented features were the primary reason consumers bought the AX product. Malackowski did not testify that the patented features drove demand for the entire product. He in fact suggested the opposite. While discussing emails among A10 salespersons indicating that the GSLB and HA features were critical to avoid losing sales and that "those are the aspects that are specifically being demanded by customers," he noted that "the A10 marketing documents don't reference a patent number." Instead, "[t]hey talk about the feature generally." In light of A10's evidence that its customers purchased its products for other features, no reasonable jury could conclude that Brocade met its burden to show that its patented features drove consumer demand for A10's products.

Brocade argues that even if it failed to produce sufficient evidence that the patented features drove demand, Malackowski adjusted the royalty rate to apportion the amount of revenue Brocade should receive between the patented and unpatented features of A10's products. But the Federal Circuit has rejected Brocade's methodology. Absent evidence that the patented feature drives demand, Brocade should not have used the entire market value rule to establish its royalty base. Because it failed to show that its patented innovations were the primary reason for A10's sales, Brocade could not rely on the entire market value rule and could not use A10's entire profits from the AX product as the royalty base. In light of the Federal Circuit's guidance that jury's should not be presented with entire revenues or profits absent sufficient proof that the entire market value rule is appropriate, the court must vacate the jury's royalty damages award. A10 is entitled to a new trial on the royalty damages.