A Primer On Patent Apportionment

• Jurisdiction: United States,Federal
• Law Firm: Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
• Subject Matter: Intellectual Property, Patent
• Author: Ms Gracie K. Mills and Daniel Cooley
• Published date: 24 September 2023

Introduction

35 U.S.C. ' 284 provides that, where infringement is found, "the court shall award . . . damages 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." What is a reasonable royalty?

Typically, a reasonable royalty is estimated using the "hypothetical negotiation approach," which "attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agree- ment just before the infringement began."² While a reasonable royalty may be a lump sum, most commonly it is calculated as the product of two values: a royalty base and a royalty rate. The royalty base reflects the revenue netted by sale of an infringing product, while the roy- alty rate indicates the percentage of each product sale that would, in the hypothetical negotiation, be paid to the patentee.

At first glance, determining a reasonable royalty seems simple. Imagine a new drug. The "reasonable royalty," the Federal Circuit has explained, "is the amount that a person," desiring to sell the drug, "would be willing to pay as a royalty and yet be able to . . . sell the [drug], in the market, at a reasonable profit."³ But what happens when the patented technology covers only a portion of the product being sold? Imagine, for instance, a patent that covers an improvement to an existing product, or a patent that covers a component implemented into a larger product. There, the Federal Circuit cautions, "the patent holder should only be compensated for the approximate incremental benefit derived from his invention."⁴ This is where apportionment comes in.⁵

Apportionment

Apportionment has its roots in Garretson v Clark, a 19th century Supreme Court case that directed "[t]he patentee, . . . must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features."⁶ That is, the patentee must show what portion of the defendant's profits is attributable to the patentee's invention. This prevents the patentee from being overcompensated for his or her contribution. As the Federal Circuit put it, the patentee must "carefully tie proof of damages to the claimed invention's footprint in the market place."⁷ But, as the court has recognized, this "can be an exceedingly difficult and error-prone task."⁸

Thus, a patentee seeking to prove damages must first consider whether apportionment is needed to avoid over-compensation. If so, then the patentee must identify the most appropriate way for apportionment to be calculated. Both considerations are discussed below.

When Is Apportionment Needed?

Typically, the Federal Circuit has stated, "[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product."⁹ Thus, in these situations, "it is generallyrequired that royalties be based not on the entire product."¹⁰

Of note, apportionment may be required even when the claim does cover the entire multi-component product, if some aspects of the claim are not inventive. In AstraZeneca AB v. Apotex Corporation, for example, the Federal Circuit explained that ''[w]hen a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee's invention in comparison to the value of the conventional elements recited in the claim, standing alone.''¹¹

Importantly, not every multi-component product requires apportionment. As Garretson itself acknowledged, there are cases where "the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature."¹² That is, "when the patent-related feature" of a larger product "is the basis for customer demand," no apportionment is needed.¹³ This is called the entire market value rule (EMVR).

For the EMVR to apply, the patented feature must "drive[] the demand for an entire multi-component product."¹⁴ "It is not enough to merely show that [the patented feature] is viewed as valuable, important, or even essential" to the larger product, or even that, without the patented feature, the product "would be commercially unviable."¹⁵ It must be shown that "this feature alone motivates consumers to purchase" the product.¹⁶ "In...