On September 16, the U.S. Court of Appeals for the Federal Circuit decidedVirnetX, Inc. v. Cisco Systems, Inc., No. 2013-1489 (Fed. Cir. Sept. 16, 2014). The VirnetX decision represents a continuation of the Federal Circuit’s recent cases refining acceptable approaches to proving damages in patent infringement actions.
In VirnetX, as in earlier decisions including Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) and LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012), the Federal Circuit rejected expert analysis presented by the patentee to prove reasonable royalty damages. The patentee’s expert presented three alternative damage calculations at trial. One was a reasonable royalty calculation based on a historical 1.0 percent royalty rate applied to total sales of Apple’s accused iPhone, iPad, and MacBook products. In two other calculations, the expert used Nash Bargaining Solution to simulate the outcome of a hypothetical negotiation. Based on the expert testimony, a jury awarded VirnetX $360 million in damages. On appeal, the Federal Circuit vacated the award and rejected all three damage calculations.
First, the Federal Circuit ruled that the district court’s jury instruction on damages was erroneous because it misstated the law relating to apportionment. The court explained that when an accused product (such as Apple’s accused mobile devices) contains both features covered by the asserted patent and other unpatented features, the damages calculation must contain an apportionment of value attributable to the patented features, unless the patentee proves that the patented feature drives demand for the entire product, and thus represents the entire market value of the product. The district court instruction incorrectly suggested that apportionment is not required when a royalty is based on the smallest salable patent-containing unit. To the contrary, the appeals court ruled that the apportionment rule applies in all situations.
[T]he requirement that a patentee identify damages associated with the smallest salable patent-practicing unit is simply a step toward meeting the requirement of apportionment. Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as VirnetX claims it was here), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology.
VirnetX, slip op. at 28-29.
Two Brooks Kushman patent litigation attorneys, Frank A. Angileri and David C. Berry, recently published an article discussing the possible impact this aspect of VirnetX may have on future patent infringement damages. See “The Federal Circuit’s VirnetX Ruling Continues Its Focus On Requirements For Proving Patent Damages,” published on BrooksKushman.com.
Second, the Federal Circuit rejected VirnetX’s expert testimony using the Nash Bargaining Solution (“NBS”). The appeals court noted that NBS is an important contribution to game theory, but pointed out that the solution’s author, John Nash, described NBS as applying to a specific set of premises. J. Nash, “The Bargaining Problem, ” 18 Econometrica 155–62 (Apr. 1950). Virnetx’s damages expert, however, did not establish that those conditions were present in a hypothetical negotiation between VirnetX and Apple:
The Nash theorem arrives at a result that follows from a certain set of premises. It itself asserts nothing about what situations in the real world fit those premises. Anyone seeking to invoke the theorem as applicable to a particular situation must establish that fit, because the 50/50 profit-split result is proven by the theorem only on those premises. Weinstein did not do so. This was an essential failing in invoking the Solution.
VirnetX, Slip op. at 38-39. The Federal Circuit equated the use of NBS without confirming its applicability under the specific facts of the case to the use of “rules of thumb,” such as the so-called 25-Percent Rule. See Uniloc, 632 F.3d at 1317 (criticizing the use of the 25 percent rule as “fundamentally flawed’).