Recent application of patent damages law

More recent patent actions in the United States have yielded nine and 10-figure damages awards. Although the standards for patents damages have remained largely unchanged over the past few years, several recent awards have highlighted the process and requirements of these monstrous verdicts. This chapter reviews well-settled standards for damages awards in the United States and identifies some of the key developments that US businesses should continue to monitor.

Which US courts award damages in patent cases?

US patents are litigated, often simultaneously, in multiple venues, before federal district courts, the International Trade Commission (ITC) and at the PTAB. Although the ITC awards injunctive relief in the form of exclusion orders and the PTAB addresses patent validity, neither tribunal awards damages for the infringement of patent claims. Damages for infringement are primarily awarded at the trial court level by US district courts after a bench or (more typically) a jury trial. Due to the breadth of discovery and the typically sensitive nature of the information underlying damages, much of the record in large-scale damages cases is under seal. However, a significant multi-patent case dealing with network hardware and security, Centripetal v Cisco, provides detailed and helpful insight into the underlying damages positions.

Table 1: Damages awards

What is the range for patent damages?

Although not all patent cases yield large damages awards, 2020 and 2021 yielded multiple billion and hundred-million-dollar awards. Despite the restrictions and practical burdens imposed by the pandemic, as illustrated in Table 1, the US district courts entered significant damages awards.

While the majority of patent cases do not implicate the scale of such awards, the same principles leading to these outcomes are generally applicable to patent cases and guide out-of-court patent transactions. Moreover, US damages law in several areas, such as the enhancement phase (following the US Supreme Court’s ruling in Halo) and FRAND rulings (following TCL) are becoming more well-settled. This relative predictability allows parties to give greater emphasis to their damage claims in the course of patent litigation.

What makes US patent damages awards so large?

Several key factors are driving the increased damages awards:

• clarity around comparable licences as a royalty base;
• awards based on single patents or an entire portfolio;
• the commercial relationship of the parties; and
• continued clarity around the nexus between economic impact and the accused product or functionality.

Judge-awarded enhancements for wilful infringement and bad litigation conduct have also contributed to the large awards by providing a basis for the potential tripling of adjudicated damages. These factors may be managed by parties either before or during litigation.

Surprisingly, the lack of predictable injunctive relief may also be partially responsible for such outsized awards. Injunctive relief outside competitor versus competitor litigation is now relatively rare. This is particularly true where the patent owner demonstrates a willingness to license its patents. Likewise, preliminary injunctions are exceedingly rare. In addition to having to meet the balance of factors favouring an injunction, the patentee must also show a strong likelihood of success on the merits at the outset of its case. For both reasons, parties typically litigate for monetary awards.

What (if anything) is keeping damages awards in check?

Risks around patent validity and the prospect of appeal mitigate damages awards. The PTAB and numerous avenues to attack a patent’s validity in the form of (to name a few) patent eligibility, enablement and written description, novelty and obviousness continue to offer defendants strong incentives to try and knock out an asserted patent or the claims that it is alleged to have infringed. Appeal to the Court of Appeals for the Federal Circuit also offers defendants a chance to reduce eye-watering awards if they can weather the adverse publicity around the initial award.

How does the United States calculate patent damages?

The framework of damages law in a district court patent action is well settled:

• damages are governed by statute;
• a patentee must prove damages by a preponderance of evidence; and
• the trial court awards the damages (often guided by the jury verdict).

Damages may either be in the form of lost profits or a reasonable royalty (Lucent Techs Inc v Gateway Inc, 580 F.3d 1301, 1324 (Fed Cir 2009)). A reasonable royalty is the minimum permissible measure of damages (Deere & Co v Int’l Harvester Co, 710 F.2d 1551, 1558 n.9 (Fed Cir 1983)). After awarding damages, a district court may consider applying enhancements of up to three times the damages award and may award attorneys’ fees based on a finding of an exceptional case (35 USC Sections 284 and 285).

Lost profits

The lost profits analysis is usually best suited to cases between competitors. However, it is a relatively rare measure of damages. To recover lost profits, a patent owner must prove a causal relationship between the infringement and its lost profits (Shockley v Arcan Inc, 248 F.3d 1349, 1362 (Fed Cir 2001)). The patentee must show a reasonable probability that ‘but for’ the infringing activity, it would have made the infringer’s sales. The Panduit case (Panduit Corp v Stahlin Bros Fibre Works Inc, 575 F.2d 1152, 1156 (6th Cir 1978)) lays out a four-factor test for using the lost profit model, where a patent owner must prove:

• demand for the patented product;
• absence of acceptable non-infringing substitutes;
• its manufacturing and marketing capability to exploit the demand; and
• the amount of profit it would have made.

Reasonable royalty

Damages based on a reasonable royalty are far more common than lost profits. To determine a reasonable royalty, the trier of fact (court or jury) applies the facts of the case to 15 factors set forth in Georgia-Pacific (Georgia-Pacific Corp v US Plywood Corp, 318 F Supp 1116, 1120 (SDNY 1970)). The trier of fact will consider the parties’ evidence on each of the factors, but not all of the factors will affect or even be relevant to every case. The overarching standard is a ‘willing licensee – willing licensor’ hypothetical negotiation to determine the royalty rate and the base of products against which the royalty rate will apply. The positions must be supported by evidence, although expert witnesses may opine on the process and outcome of the hypothetical negotiation.

Will a court consider conduct beyond infringement in calculating damages?

Yes. A district court may enhance damages up to three times the amount found or assessed (Halo Elecs Inc v Pulse Elecs Inc, 136 S Ct 1923, 1931 (2016)). Enhancement is discretionary to the court and takes into account the unique circumstances of the case. The enhancement analysis typically (but not always) follows a finding of wilful infringement or bad litigation conduct. Wilfulness is an issue of fact. Knowledge of an asserted patent by an infringer is necessary but is not by itself sufficient to establish wilfulness. Enhanced damages are warranted as a ‘punitive’ or ‘vindictive’ penalty for egregious conduct – wilfulness or during litigation. Several guidelines are available to identify conduct that justifies enhancement (Read Corp v Portec Inc, 970 F.2d 816, 826-827 (Fed Cir 1992)):

• deliberate copying;
• the defendant’s investigation and good faith-belief of invalidity or non-infringement;
• litigation behaviour;
• the defendant’s size and financial condition;
• closeness of the case;
• duration of the misconduct;
• remedial action by the defendant;
• the defendant’s motivation for harm; and
• attempted concealment of the misconduct.

Example of how a court determines reasonable royalties

The District Court for the Eastern District of Virginia’s ‘Rocket Docket’ analysis in Centripetal provides insight into damages trends in a reasonable royalty case (Case 2:18-cv-0094, Docket 621 (5 October 2020) and Docket 638 (17 March 2021)). In this non-jury trial, the court provided an exhaustive analysis of the Georgia Pacific factors (Centripetal Net’s Inc v Cisco Sys’s Inc, Case 2:18-cv-0094, Doc (ED VA, 5 October 2020)). This case is on appeal and savvy litigants will closely follow the outcome.

Do royalty histories or comparable licences matter?

Yes, very much. US patent law clarifies what reliably counts as a comparable licence – not all licences are equal. The Centripetal court found that a single licence from Centripetal to a competitor was the only comparable licence. The licence provided for two royalty rates:

• 10% if the licensed product was also a product that Centripetal offered; and
• 5% for other products.

The court found that even though Centripetal did not make the same products as Cisco, the two were competitors and elected the 10% rate as a starting point for the hypothetical negotiation.

Notably, the previous licence resolved litigation between Centripetal and another competitor. Historically, licences entered into during litigation are unsuitable to underpin the hypothetical negotiation. The Centripetal ruling marks a significant application of more recent law (see, eg, Elbit Sys Land & C4I Ltd v Hughes Network Sys LLC, 927 F.3d 1292, 1300 (Fed Cir 2019)).

How does a court treat comparable licence scope?

The scope and nature of comparable licences may significantly influence a damages award. In Centripetal, the court found that the scope of the comparable licence favoured reducing the hypothetical royalty rate (the rate could also have been increased). This was because the previous licence was to Centripetal’s entire patent portfolio, not just the four asserted patents.

This analysis raises issues for patentees who seek to license an entire portfolio but do not necessarily want to assert all the patents. A patentee should not expect the full value of its portfolio from a single patent assertion. As a practical matter, it is typical court practice to pressure parties into narrow asserted claims (and patents) at trial, which may foreclose or delay assertion of some patents that would otherwise lead to damages.

Does a party’s willingness to license matter?

Yes. The conditions that resulted in Centripetal finding that the Georgia Pacific factors weighed in favour of reducing the hypothetical royalty rate are a ‘double whammy’ to a patentee. Because Centripetal was previously willing to license its patents, the court found that it would have been more willing to license to Cisco in the hypothetical negotiation. The previous licence all but ended any conversation about the risk of a possible injunction (including while the case is on appeal) against Cisco. To preserve the possibility of an injunction and its place in the hypothetical negotiation, a patentee must be unwilling to license for monetary return. Rather, it must demand others to stop using the claimed invention. This is typically a difficult ask for patent owners who seek a financial return.

How does a court consider the importance of the accused technology relevant to the importance of the patented invention?

The connection between the claimed invention and the accused technology, balanced with the technology’s economic importance, is central and unavoidable in any US damages analysis. This analysis presents a very different scenario from, for example, a fixed statutory damages award. Under this factor, it is possible for a patentee to prevail in the litigation but to recover no, or minimal, damages because the accused technology had such low economic importance.

Real evidence matters. Documentary evidence, likely obtained through discovery, as opposed to expert testimony or demonstrative exhibits, is critical. The following are examples of how the evidence affected the outcome in Centripetal:

• The court credited Centripetal’s evidence connecting the accused technology to Cisco’s marketing statements trumpeting Cisco’s technology as a “breakthrough” and “solving problems that had never been solved before”.
• Centripetal provided Cisco’s profit impact associated with the infringing technology.
• Centripetal’s technical expert identified Cisco’s own descriptions of the claimed inventions’ high technical impact.
• Centripetal demonstrated the technology’s importance by highlighting a significant ($2.7 billion) Cisco acquisition in the same space.
• Centripetal established that Cisco improved its products after reviewing Centripetal’s technology (despite a non-disclosure agreement (NDA)).
• The court found that Cisco offered no contrary damages evidence and relied solely on characterisations from Cisco’s technical expert (with whom the court strongly disagreed).

How does apportionment fit into a damages analysis?

Apportionment determines the amount of revenue that will be subject to the determined reasonable royalty rate. It is the patent owner’s burden to provide evidence of the appropriate royalty base (ie, one that separates or apportions the value of the patented feature as compared to the contribution of the unpatented features to the product). This evidence must be reliable and tangible. It cannot be conjectural or speculative (Finjan Inc v Blue Coat Sys Inc, 879 F.3d 1299, 1310 (Fed Cir 2018)).

After finding a connection between the accused technology, the business and economic activity associated with the technology, and the asserted patents, the trier of fact must discern how much of the accused revenue is subject to the royalty rate from the hypothetical negotiation.

For example, Centripetal’s damages and licensing experts relied on Centripetal’s technical expert to identify the portions of each accused technology associated with the asserted patents. Centripetal’s technical expert had used Cisco’s marketing materials explaining the top-level functions of the accused products to underpin this analysis. The court agreed. This is a significant application of apportionment theory that will be tested on appeal.

Enhancement

Enhancement remains a significant driver of patent damages and the perception that a party is inauthentic in its evidentiary presentations or conduct at trial can trigger enhancement. The Centripetal court applied a two-and-a half-times multiplier to its base royalty of $755,808,545 for a total award of $1.9 billion.

Centripetal provides a list of examples that it would be advisable for others to avoid:

• Cisco appeared to have copied Centripetal’s technology despite an NDA.
• The court criticised Cisco for not introducing its own technical and sales documents as evidence and, instead, relying solely on animations and expert testimony.
• The court found that Cisco did not advance objectively reasonable defences at trial.
• The court found that Cisco’s damages evidence was deeply flawed. In an emphatic example, Cisco’s damages expert testified to a total damages amount of $3 million for the case, which, the court noted, is less than the cost of a single data breach for one of Cisco’s customers.
• The court credited each side’s counsel as being courteous and helpful to its staff, saying that this mitigated some enhancement.