Slicing and Dicing the Patent Damages Royalty Base

Two recent District Court decisions provide IP practitioners with guidance about royalty base in patent damages calculations.

Last week, in Inventio AG v. Thyssenkrupp Elevator Americas Corp., et. al., 1-08-cv-00874 (D. Del. Dec. 13, 2013), Judge Andrews denied defendants’ motion for summary judgment and motion to strike that plaintiff improperly calculated damages. The defendants argued that plaintiff’s expert incorrectly included revenue from defendants’ service contracts in the damages calculation. However, the court determined that the expert relied on the service contracts to increase the royalty rate not the base. Thus, the court denied the motion. This case provides support that revenue generated outside of the royalty base can still be used to increase the royalty rate, thus potentially achieving higher damages.

In contrast, in Rembrandt Social Media, LP v. Facebook, Inc., 1:13-cv-158 (E.D. Va. Dec. 3, 2013), Judge Ellis excluded plaintiff’s damages expert, and discussed the relationship between the entire market value rule, apportionment, and the smallest saleable unit. The opinion, though, did not start out on a high note for the defendant. The court first rejected defendant’s entire market value rule argument because plaintiff’s expert performed two apportionments on the revenue (rather than use the entire revenue stream). However, this was not sufficient to survive defendant’s other argument: that the apportioned revenue did not represent the allegedly infringing features. Plaintiff argued that its expert had apportioned down to the smallest saleable unit, thus making any further apportionment unnecessary. Citing Federal Circuit precedent, the court found further apportionment is required even if the smallest saleable unit has already been identified to ensure the damages awarded are for the infringing (not non-infringing) features.

This case especially highlights that the patentee and damages expert must continually slice (or apportion) the royalty base and compare the result to the infringing features to eventually converge upon the proper damages amount. Failing to do so could result in the expert’s opinions being excluded.

Ralph A. Dengler, a former Director in the Gibbons Intellectual Property Department, and Andrew P. MacArthur, a former Associate in the Gibbons Intellectual Property Department, co-authored this post.
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