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Smallest Salable Unit May Not Be A Viable Royalty Base
Law360, New York (November 05, 2013, 12:48 PM ET) -- Where small elements of a multicomponent
product are accused of infringement, calculating a royalty using the price of the entire product as a
royalty base “carries a considerable risk that the patentee will be improperly compensated for
noninfringing components of that product.” LaserDynamics Inc. v. Quanta Computers, 694 F.3d 51, 67
(Fed. Cir. 2012).
Accordingly, in articulating the general rule for properly measuring a reasonable royalty in that situation,
the Federal Circuit recently explained that “it is generally required that royalties be based not on the
entire product, but instead on the ‘smallest salable patent-practicing unit.’” Id. (quoting Cornell
University v. Hewlett-Packard Co., 609 F. Supp. 2d 283, 287-88 (N.D.N.Y. 2009)).
As a narrow exception to that rule, the patentee can use the price of the entire product if the patentee
complies with the “entire-market value rule” by demonstrating through sound economic and factual
evidence that the patented feature drives customer demand. ResQNet.com Inc. v. Lansa Inc., 594 F.3d
860, 869 (Fed. Cir. 2010).
But what if the “smallest salable patent-practicing unit” itself contains both patented and unpatented
features? Do LaserDynamics and Cornell University create an exception to long-standing precedent and
excuse the patentee from further apportioning only the value of that unit attributable to patented
feature as the royalty base or, in the alternative, complying with the entire market value rule? Courts in
at least one district, the Northern District of Texas, have said yes.
For example, in Summit 6 LLC v. Research in Motion Corp. et al., Summit 6 presented a damages model,
using as its royalty base the entire price of a Samsung device that contained both patented and
unpatented features. No. 3:11-CV-367-O, at *30-35 (N.D. Tex. June 26, 2013).
Samsung challenged the use of the entire value of the device because Summit 6’s expert failed either to
further apportion to reflect the value of the patented feature or to otherwise comply with the entire
market value rule. Id.
Seizing upon the “least salable patent-practicing unit” language from LaserDynamics, the district court
held that the royalty base was proper, even though Summit 6’s expert presented no analysis of the value
of the patented feature compared to the unpatented features. Id.
(“[T]he entire device itself is capable of performing the [claimed invention] — no other smaller
component can perform this action. Thus, using the entire device as the royalty base is proper under
LaserDynamics because the device itself is the ‘smallest patent-practicing unit.’”).
Other districts, specifically the Northern District of California and the District of Delaware, have reached
the opposite conclusion. In AVM Technologies v. Intel Corp., AVM argued that it was appropriate to use
the entire sales price of Intel’s microprocessors as a royalty base because they were the smallest
saleable products containing the claimed invention. No. 10-610-RGA, at *2-7 (D. Del. Jan. 4, 2013).
But the District of Delaware held that AVM’s royalty base was improper because its expert did not
further apportion between the patented and unpatented features contained in the Intel
microprocessors or comply with the entire market value rule. Id. at *7-10.
The court further reasoned, comparing the situation to that in Lucent, that “[t]he use of a saleable unit
that is greater than the patented feature is going to introduce Uniloc error when the patented feature is
a ‘date picker’ whether the saleable unit is a computer loaded with ‘Outlook’ or simply ‘Outlook.’ The
Uniloc error will be greater with the computer loaded with ‘Outlook’ than with ‘Outlook’ alone, but the
difference in error is one of degree, not of kind.” Id.
Courts from the Northern District of California have agreed with this analysis. Network Protection
Sciences LLC v. Fortinet Inc., No. C 12-01106, at *17-26 (N.D. Cal. Sept. 26, 2013); Dynetix Design
Solutions Inc. v. Synopsis Inc., No. C 11-05973, at *7-12 (N.D. Cal. Aug. 22, 2013) (holding that, because
“Dr. Black relied on the blanket assumption that, once he selected the smallest saleable unit — in this
case the entire VCS product — he could end the analysis, his determination of the royalty base is
fundamentally flawed”).
In Network Protection Sciences, the plaintiff’s damages expert similarly used as a royalty base the entire
price of a product containing patented and unpatented features, but did not present evidence of further
apportionment or that the entire market value rule had been satisfied. Network Protection Sciences LLC,
at *17-26.
The expert argued that such a base was proper because the product used was the least-salable unit. The
district court disagreed, holding that using the least-salable unit did not excuse the expert from
complying with the entire-market value rule or allocating that portion of the value of the product that
should be attributable to the patented invention. Id. The district court ultimately struck the opinion as a
matter of law and refused the expert the opportunity to amend his opinion in advance of trial.
For guidance on how the Federal Circuit will ultimately clarify the issue, it is helpful to review the recent
LaserDynamics opinion, which both sides of the argument cite in support. A careful review suggests that
any damages analysis that ends with the least-salable unit as a royalty base is insufficient.
In fact, the LaserDynamics court affirmed the lower court’s decision that using the entire price of a
product that contained the patented feature among other unpatented features was improper.
LaserDynamics Inc., 694 F.3d at 70.
Further, the contrary opinion of Northern District of Texas discussed above cites Lucent Technologies v.
Gateway Inc. in support of the notion that use of the entire value of a product as a royalty base, without
more, is acceptable. But the LaserDynamics court actually clarified that the Lucent opinion does not
support such a position. LaserDynamics Inc., 694 F.3d at 67; see Lucent Techs. v. Gateway Inc., 580 F.3d
1301, 1338-39 (Fed. Cir. 2004).
Accordingly, it is doubtful that any new exception has been created to the well-settled rule that the
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,” Uniloc USA Inc.
v. Microsoft Corp., 632 F.3d 1292, 1318 (Fed. Cir. 2011), and the Federal Circuit will likely be asked to
clarify the point in the near term, given the recent disparate district court opinions on this issue.
--By W. Barton (Bart) Rankin and Jay F. Utley, Baker & McKenzie LLP
W. Barton Rankin and Jay Utley are partners in the firm's Dallas office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
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