Cornell Damage Apportionment Making Way Through Courts

The other week in Cornell University v. Hewlett-Packard, Judge Randall, sitting by designation in the Northern District of New York, chopped Cornell's damage award from $184M to $54M, stating that "Cornell simply stepped one rung down the Hewlett- Packard revenue ladder from servers and workstations to the next most expensive processor incorporating product without offering any evidence to show a connection between consumer demand for that product and the patented invention"(see more here).

In the high-profile case of Star Scientific v. R.J. Reynolds, (MJG 01-CV-1504, D. Md.) defendant counsel pounced on this ruling and filed a motion in limine to prevent Star from expanding their damages theory before the jury:

In Cornell University v. Hewlett-Packard Company, No. 01-CV-1974 (N.D.N.Y. Mar. 30, 2009) (Ex. 1), the Honorable Randall R. Radar, sitting by designation from the United States Court of Appeals for the Federal Circuit, issued a significant ruling limiting the scope of the royalty base for damages in patent infringement cases, and made clear that Star’s pie-in-the-sky damages theory in this case should be stricken.

[T]he decision in Cornell bears directly on three of the fatal flaws in Star’s damages theory, as addressed in RJR’s pending motions in limine on damages (see Dkt. Nos. 603 and 749): (1) Star seeks a royalty base derived from cigarette sales, even though the output of the patented proces sends with tobacco, not with the cigarettes that only result many steps later; (2) there is no nexus between the farmers’ alleged use of the patented process and cigarette sales sufficient to invoke application of the entire market value rule; and (3) Star improperly aggregates license agreements under an A + B + C + D formula, even though only A – a license agreement setting forth a royalty base tied to pounds of tobacco – is related to Star’s patents. If Star is permitted to mislead the jury with its seriously flawed damages theory, the decision in Cornell demonstrates why the resulting award could not withstand review.

See also, "With Tobacco-Patent Suit, Star Scientific Presses for Clout" (link)

Patent Reform Crawling Back In 2008? Lemley Proposal For Damages May Provide Answers

Friday's CongressDaily reported that Senate Minority Whip Kyl and his staff are in the process of drafting patent reform legislation, and they are expected to unveil their proposal in September. According to sources, the draft "is said to be much different from the version introduced by Senate Judiciary Chairman Patrick Leahy and Sen. Orrin Hatch."

While the details have not been revealed, the legislation is expected to address damages, post-grant review, inequitable conduct and "patent quality initiatives."

On damages, "litigants would be encouraged to use precise economic analyses to determine damages rather than less exact calculations." Post-grant reviews would be available for 12-18 months after issue, where reviews would be limited to issues of novelty and obviousness. On inequitable conduct, the legislation would "would require patent applicants to be more forthcoming to the PTO or face penalties." However, unlike previous legislation, the new proposal would address allegations of misconduct through administrative proceedings rather than in the courts.

Also, submission of search reports and analysis relevant to patentability will be required for every application. Commerce Secretary Gutierrez previously wrote to lawmakers that this provision would be "the strongest step toward improved patent quality."

For more information, see

- "Kyl Maps Out A Separate Course On Patent Legislation" (link)

- "Groups Plot Strategy For Patent Overhaul In Next Congress" (link)

Issues surrounding damages continues to divide the patent community however. Critics of the current regime argue that "reasonable royalty" damages are overcompensating (non-practicing) patentees. Accordingly, damage apportionment has been put forward as a means to curb the perceived overcompensation.

However, should Congress tweak reasonable royalty compensation, or should they look somewhere else? A recent paper by professor Mark Lemley suggests that easing restrictions on "lost profits" damages may provide a better means for market competitors to recoup damages, while reducing tendencies of courts to provide "kickers" on reasonable royalties. From the abstract:

[T]he lines between lost profits and reasonable royalties are blurring. In significant part this is because courts have insisted on strict standards of proof for entitlement to lost profits. Specifically, patentees must prove demand for the patented product, the absence of noninfringing substitutes, the ability to meet additional demand in the absence of infringement, and the proportion of those sales that represent profits. This in turn means that many patent owners who have in fact probably lost sales to infringement cannot prove lost profits damages, and turn to the reasonable royalty measure. The result is that courts have distorted the reasonable royalty measure in various ways, adding "kickers" to increase damages, artificially raising the reasonable royalty rate, or importing inapposite concepts like the "entire market value rule" in an effort to compensate patent owners whose real remedy probably should have been in the lost profits category.

In Part I, I explain the strict requirements for proving lost profits, and give examples of patentees who have failed to meet these requirements. In Part II, I explain how relegating these patentees to reasonable royalties has led to problematic changes in reasonable royalty law. Finally, I suggest in Part III that courts should draw a sharp division between the injury suffered by patentees who compete with infringers and those who do not. Patentees who compete should be entitled to the best estimate of lost profits, even if not all elements of proof are available. Doing so will avoid overcompensating patent owners in reasonable royalty cases.

Read more of Lemley's paper, titled "Distinguishing Lost Profits from Reasonable Royalties" here (link)

CAFC: Damage Apportionment in Action

American Seating Company v. USSC Group, Inc. (2007-1112) January 39, 2007

USSC appealed a jury verdict which awarded American Seating damages for patent infringment relating to tie-down wheelchairs for mass transit transportation. Likewise, American Seating was appealing a JMOL that reduced damages due to convoyed sales being improperly included in the calculations.

A "convoyed sale" refers to the relationship between the sale of a patented product and a functionally associated non-patented product. A patentee may recover lost profits on unpatented components sold with a patented item, a convoyed sale, if both the patented and unpatented products "together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit." A functional relationship will not exist when independently operating patented and unpatented products are purchased as a package solely because of customer demand.

In this case, the CAFC agreed with the district court that the damages were properly reduced, based on the language of the patent:

Tie-downs and passenger seats were usually but not always purchased by bus manufacturers from the same company; package sales were for reasons of convenience and "one-stop shopping," not because of an absolute requirement that the two items function together. Although the specification refers to a preferred embodiment in which the tie-down of the invention is located "adjacent chairs that fold against the side of the bus," . . . the claims make no mention of the passenger seats and the references to the "adjacent chairs" do not indicate any functional relation between the seats and the wheelchair tie-downs.

Also, the market demand was independent of the patented product:

A bus utilizing American Seating’s tie-down restraint system and outfitted by USSC’s passenger seats would be equally as functional as a bus furnished with only American Seating products. The evidence shows that passenger seats command a market value and serve a useful purpose independent of the patented product . . . Because it is clear that no interrelated or functional relationship inheres between the seats and the tie-down restraint system on a passenger bus, the district court was correct that the jury had no basis to conclude that lost profits on collateral sales of passenger seats were due American Seating.

AFFIRMED