You went through the complicated, expensive process to obtain a patent.  A big tech company copied you.  You’d think you would be made whole if someone infringes your patent.  You may be mistaken.

When I first started practicing patent law, I was taught to show and describe the largest system in which the invention could potentially be employed.  That was because this allowed for the possibility of obtaining damages based on the value of the entire system.  So if your client brought you an improved carburetor, for example, you would show and describe an entire car in your patent application.

Apportionment of Patent Damages

According to the patent statutes, damages for infringement shall be “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.”  But what exactly does this mean?

In the past, if your patent was infringed, damages would typically be calculated using the so called 25% rule.  The Rule suggests that a licensee or pay a royalty rate equivalent to 25 per cent of its expected profits for the product that incorporates the intellectual property at issue. The 25% Rule was been primarily used in valuing patents.  But it was also used in determining damages because a patent holder whose patent is infringed is entitled to at least a reasonable royalty.  If an infringer infringed “willfully,” up to treble damages were possible.

In Lucent Technologies., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009) the infringing feature was the date picker function in Microsoft Outlook. The Federal Circuit rejected the plaintiff’s use of revenues from the sale of entire computers as the royalty base because there was no evidence that the date picker function in Outlook drove consumer demand for computers. The court suggested that the royalty base would have to be apportioned down at least to Outlook itself and possibly even further. The decision thus implied that apportioning
through the base was the appropriate method in this particular case. Lucent left the door open to the possibility that damages could, in appropriate circumstances, be apportioned through the royalty rate: 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).

A reasonable royalty has two components:  the royalty rate and the royalty base to which the rate is applied, such as the sale revenue.

Courts struggle to set the royalty base when a patented feature is a sub-component of a product.

Royalties Based on Smallest Salable Patent Practicing Unit

In a case called Uniloc USA, Inc. v Microsoft Corp., the pendulum swung against the patent holder.  The Federal Circuit, our court of appeals for patent cases, held that royalties should be based not on the entire product but on the smallest salable patent practicing unit.  After the smallest salable unit has been identified, damages must be further apportioned to reflect the actual value of what is covered by the patent.

A narrow exception known as the “entire market value rule” applies when a patent owner can show that the patent feature is the real basis for consumer demand of the entire product but patent owners should not assume that they will be able to obtain application of this exception.

Efforts have been made, and are still underway, to reduce the amount of damages that a patent holder can obtain when their patent is infringed.   See, for example, The Broken Balance: How “Built-In Apportionment” and the Failure to Apply Daubert Have Distorted Patent Infringement Damages by William F. Lee* & Mark A. Lemley.

The bottom line is that after spending 2.5+ million dollars to enforce your patent, you may be disappointed in the damages awarded to you, assuming you win your case and appeals are exhausted.

This is Part 2 of a 4 part article.  Read Part 1,  Part 3, or Part 4.