Uniloc and Its Impact on the Entire Market Value Rule
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In Uniloc USA, Inc. and Uniloc Singapore Private Limited v. Microsoft Corporation (“Uniloc”), the United States Court of Appeals for the Federal Circuit ruled that, among other things, the so-called “25 percent rule of thumb” is a “fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation” and that, therefore, “[e]vidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.”1
Additionally, the Court continued its recent focus on issues regarding the “entire market value rule.” The entire market value rule “permits recovery of damages based on the value of the entire apparatus containing several features, where the patent-related feature is the basis for customer demand.”2 Previously, in the Rite-Hite case, the Federal Circuit ruled that “[t]he entire market value rule has typically been applied to include in the compensation base unpatented components of a device when the unpatented and patented components are physically part of the same machine.3”
Until recently, the application of the entire market value rule by the Courts has been inconsistent. However, in the past two years, the Courts have more clearly defined and limited its applicability. For example, Judge Rader of the Federal Circuit, sitting by designation in the U.S. District Court for the Northern District of New York, in the Cornell v. Hewlett-Packard case, stated:4
The entire market value rule in the context of royalties requires adequate proof of three conditions: (1) the infringing components must be the basis for customer demand for the entire machine including the parts beyond the claimed invention; (2) the individual infringing and non-infringing components must be sold together so that they constitute a functional unit or are parts of a complete machine or single assembly of parts; and (3) the individual infringing and non-infringing components must be analogous to a single functioning unit.
According to Judge Rader, “these requirements are additive, not alternative ways to demonstrate eligibility for application of the entire market value rule.”5
In Lucent Technologies, Inc., v. Gateway, Inc., the Federal Circuit stated that “our law on the entire market value rule is quite clear” and that “[f]or the entire market value rule to apply, the patentee must prove that ‘the patent-related feature is the basis for customer demand.6’” The Court also stated that:7
Although our law states certain mandatory conditions for applying the entire market value rule, courts must nevertheless be cognizant of a fundamental relationship between the entire market value rule and the calculation of a running royalty damages award. Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence)...Thus, even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price or number of units sold can be economically justified.
In Uniloc, however, the Court specifically took exception to the use of the value of the entire product in the royalty base to the extent the royalty rate was deemed sufficiently low.
The 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 also included a further restriction. In Uniloc, plaintiff’s damages expert performed a “check” as to whether his determination of a royalty of approximately $565 million was “reasonable by comparing it to his calculation of Microsoft’s approximate total revenue for Office and Windows of $19.28 billion” during the relevant period.8 The Court ruled that Uniloc’s use of the entire $19 billion revenue base in its “check” was “improper under the entire market value rule” because, among other reasons, “[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.”9 Additionally, with regard to the argument that the $19 billion was only used as a “check,” the Court stated that “the fact that the entire market value was brought in as only a ‘check’ is of no moment.”10
The Courts appear to be applying the entire market value rule closely and, more recently, have either excluded or limited the experts’ opinions in a number of matters that did not follow the recent rulings.
In the Rolls-Royce v. United Technologies matter,11 the plaintiff’s expert had claimed lost profits on the entire engine, rather than the portion (swept fan blades) that practiced the allegedly infringing invention. The Court ruled, “To recover lost profit damages based on the full price of a product that contains both patented and unpatented features, a plaintiff must satisfy the requirements of the ‘entire market value rule,’ by demonstrating that the patented feature is the ‘basis for customer demand’ for the entire product.”12 The Memorandum Opinion goes on to state that United Technologies (“UTC”) “correctly argues that Rolls-Royce’s expert has not cited any economic evidence that the design of UTC’s fan blade is the basis for customer demand for the entire engine.”13
In another recent case, Inventio AG v. Otis Elevator Company, the Court ruled that “the evidence does not provide a sound economic connection between the product’s desirability and any contention that…[the allegedly infringing product] was the basis for public demand for an Otis …elevator system.”14 The Court further commented on the relationship between the allegedly infringing feature and the entire system, and concluded that because the plaintiff offered no competent evidence that “the system’s entire value derived from that single feature…I cannot allow [plaintiff’s damages expert] to base his damages estimate on the entire market value of the elevator installation.”15
Nevertheless, in Mondis Technology v. LG Electronics, the Court ruled that, although a patented feature may not provide the basis for demand, it still may be “‘economically justified’ to base the reasonable royalty on the market value of the entire accused product.”16 According to the Court, the entire market value rule was applicable “because there are between 13 and 16 comparable licenses…to the patents-in-suit that provide for a royalty based on the entire value of the licensed products” and “the Federal Circuit has repeatedly emphasized the importance of such licenses in the reasonable royalty analysis.”17 With regard to the use of the entire market value rule in this case, the Court continued, “If this rule were absolute, then it would put Plaintiff in a tough position because on one hand, the patented feature does not provide the basis for the customer demand, but on the other hand, the most reliable licenses are based on the entire value of the licensed products.”18
The Court in Mondis differentiated it from Uniloc:19
The court in Uniloc…rejected Uniloc’s argument because it stated that the 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.’ Here, however, Plaintiff is not simply asserting a lower rate to use the entire base of the accused products. Instead, Plaintiff bases its analysis on approximately 13 comparable licenses of the patents-in-suit that also use the entire base of the licensed product, and Defendants do the same.
Therefore, unlike the absolute abolishment of the 25 percent rule of thumb, Uniloc and other recent cases appear to provide guidance for interpreting and applying the entire market value rule to determine an appropriate royalty base and rate. A lack of demonstration of “basis for customer demand” likely will mandate an apportionment of defendant’s profits (and damages) between the patented and unpatented features in the vast majority of cases.
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1Uniloc USA v. Microsoft Corp., 10-1035, U.S. Court of Appeals for the Federal Circuit (Washington).
2State Industries, Inc. v. Mor-Flo Industries, Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989).
3Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1548 (Fed. Cir. 1995) (en banc).
4Cornell University v. Hewlett-Packard Co. 609 F.Supp. 2d 279 (N.D.N.Y. 2009). (Internal citations omitted)
5Ibid.
6Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009). (Internal citations omitted)
7Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009).
8Uniloc USA v. Microsoft Corp., 10-1035, U.S. Court of Appeals for the Federal Circuit (Washington).
9Ibid.
10Ibid.
11Rolls-Royce PLC V. United Technologies Corporation (d/b/a Pratt & Whitney), 1:10cv457 (LMB/JFA) (E.D. Va. 2011).
12Ibid.
13Ibid.
14Inventio AG V. Otis Elevator Co., 06 Civ. 5377 (CM) (S.D. N.Y. 2011).
15Ibid.
16Mondis Technology, Ltd. V. LG Electronics, Inc., et al., 2:07-CV-565-TJW-CE, (E.D.Tex. 2011).
17Ibid.
18Ibid.
19Ibid. (Internal citations omitted)