Utah court: refuses to apply entire market value rule to lump-sum damages; finds no marking violation where unmarked products were not within scope of license

Earlier today, we issued a post on a Utah case,Phillip M. Adams & Assoc. LLC v. Winbond Electronics Corp., Case No. 1:05-CV-64 TS (D. Utah, Sept. 8, 2010). The previous post summarized the court'sdecision on a motion in limine, in which the court refused to exclude testimony from the inventor concerning factual issues relevant to reasonable royalty damages. Only a week earlier, the Utah court also issued an opinion (click here) that addressed summary judgment on two issues: entire market value rule and patent marking. Both issues are interesting.

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First, the Utah court rejecteddefendants'summary judgment motion to limit damages on the ground that the damages theory advanced by plaintiff ("PAM") violated the entire market value rule. Defendant Sony argued that PAM's expert had improperly applied the entire market value rule when the expertused the average cost of Sony's computers to determine 2.9% as the reasonable royalty rate, even though the patented invention covered only a feature of the chips present in Sony's computers. Sony argued that the feature of the chip did not drive demand for Sony's computers and that, therefore, the expert could not rely on the value of Sony's entire computer in calculating damages. Sony argued that reasonable royalty damages should be based on a running royalty, not computed from the cost of Sony's computers, but from the smallest salable infringing unit (i.e., the chips), citing Judge Rader's decision in Cornell University v. Hewlett-Packard Co., 609 F.Supp. 2d 279 (N.D.N.Y. 2009).

PAM responded to this argument by pointing out that its expert was not computing damages based on a running royalty, but rather on a fully paid-up lump-sum royalty. The court agreed with PAM that the Cornell case did not apply because a lump sum royalty was sought as the measure of damages. The Utah court recognized the holding in Cornell that, under the entire market value rule, the royalty rate must be applied to the smallest salable infringing unit, rather than the entire machine, unless the plaintiff can prove that the infringing feature drives demand for the overall product. But, according the Utah court, Cornell only applies to situations where the plaintiff is seeking a running royalty. Instead, PAM was seeking a lump-sum royalty and not a running royalty and thus the entire market value rule was not applicable.

The court's language on this point is instructive: "It is well established that a paid-up or lump-sum royalty is a measure of damages that is available where the circumstances warrant." (Citing Lucent Tech, Inc. v. Gateway, Inc., 580 F.3d 1301, 1326-27, 1330 (Fed. Cir. 2009); and Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 2010 WL 2384958, at *10 (Fed. Cir. 2010) (reversing and remanding for new trial on the issue of damages because the evidence did not support the $250,000 lump-sum reasonable royalty award).) The court quoted Uniloc USA, Inc. v. Microsoft Corp., 632 F.Supp. 2d 147 (D. R.I. 2009): "A lump-sum or flat-fee may be proper if there is evidence to support finding [the alleged infringer] would have entered into such an agreement at the time the hypothetical negotiations is said to have occurred, or at least that such royalties are (or were) commonly utilized in the industry."

The court observed that there was evidence that the patents-in-suit had been subject to lump-sum royalty arrangements at the time of the hypothetical negotiation. Thus, the court reasoned that a lump-sum royalty was a feasible theory for damages, and found the entire market value rule inapplicable because the theory of damages was not a running royalty.

The second issue was a fairly narrow marking issue. The defendants argued that PAM was not entitled to pre-suit damages because PAM's licenseehad failed to mark the licensed products. The issue boiled down to the scope of the license­­ - the license grant was limited, and the court needed to determine whether the unmarked products were within the scope of the license; if not, then marking was not required.

After analyzing the license agreement under California law, the court determined that the license grant was limited to chips licensed by defendant (HP) from PAM. The allegedly infringing chips were purchased by HP from a supplier and were not licensed by HP from PAM. The court held that the license does not cover the transfer of unauthorized products allegedly covered by PAM's patents. (Citing Tulip Computers Int'l B.V. v. Dell Computer Corp., 262 F.Supp.2d 358, 366 (D. Del. 2003).The court concluded that HP's sales of computers containing the allegedly infringing chips could not be imputed to PAM for the purposes of the marking statute, and thus the alleged failure to mark had no impact on PAM's plaintiff's claim for pre-suit damages.