Federal Circuit Refines Patent Damages Analysis As To Apportionment And Standard-Essential Patents

On December 3, 2015, the Federal Circuit vacated a $16 million damages award and remanded for a new determination of a reasonable royalty, agreeing with the district court's apportionment analysis but finding legal error with respect to the court's failure to account for the value due to the patent being essential to a standard. See Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., No. 2015-1066 (Fed. Cir. Dec. 3, 2015). The decision reviewed the findings of fact and conclusions of law of the district court following a four-day bench trial on damages after the parties stipulated to infringement and validity. The Federal Circuit found that: (i) a reasonable royalty analysis on a patent covering a component in a multi-component product need not always begin with the smallest salable patent-practicing unit; and (ii) the royalty analysis for a patent essential to a standard must take into account the value flowing from the adoption of the standard itself. First, the Federal Circuit reiterated that reasonable royalty awards for multi-component products must be based on apportionment principles. Apportionment requires that damages awarded for patent infringement reflect the value attributed to the patented features and exclude any damages attributable to unpatented features. In other words, apportionment is the incremental value the patented invention adds to the end product. The decision provided guidance regarding the justification for and importance of apportionment to the proof of damages. It noted that apportionment, which dates back to the United States Supreme Court's decision in Garretson v. Clark, 111 U.S. 120 (1884), has even greater importance today, given "the great financial incentive parties have to exploit the inherent imprecision in patent valuation." In patent suits involving multi-component products, apportionment requires a patentee to separate the damages attributable to the patented features in the accused product. Generally, this means that royalties must be based on the "smallest salable patent-practicing unit" rather than on the entire product, unless the patented invention drives the entire demand for the end product, in which case the patentee may attempt to rely on the entire market value. Here, the Federal Circuit held that the district court did not err in using a damages model based on the parties' pre-suit informal negotiations relating to a patent essential to the 802.11 WiFi...