This March 2009 decision by the Federal Circuit’s judge Rader (sitting by designation) was the first of the recent cases that applied the Entire Market Value rule to royalty bases, thereby setting up more stringent requirements for computing the royalty base in patent infringement damages calculations.Specifically, the court found that the EMVR must be met in order to use the entire unit as the royalty base. This requires “adequate proof of three conditions: (1) the infringing components must be the basis for customer demand for the entire machine including the parts beyond the claimed invention, (2) the individual infringing and non-infringing components must be sold together so that they constitute a functional unit or are parts of a complete machine or single assembly of parts, and (3) the individual infringing and non-infringing components must be analogous to a single functioning unit. It is not enough that the infringing and non-infringing parts are sold together for mere business advantage. Notably, these requirements are additive, not alternative ways to demonstrate eligibility for application of the entire market value rule.”
The patented invention was a method for instruction issuance within a computer processor. The patent read on one component of the instruction reorder buffer (IRB), which was part of a computer processor (the smallest salable patent-practicing unit), a number of which go into a CPU module, which (with other components) goes into a CPU brick, a number of which go into a cell board, which is inserted into a server.
At the opening of trial, Cornell, through its damages expert Dr. Marion Stewart, sought reasonable royalty damages using the entire server as a base ($36 billion in sales, at a 2.5% royalty rate). Judge Rader excluded this testimony after holding a Daubert hearing during trial, and in response, Cornell proposed a smaller royalty base of $23 billion that included CPU bricks instead of the servers and workstations. The jury awarded damages of $184 million, calculated as $23 billion base and a 0.8% royalty rate.
Here, the Court rejects the $23 billion base because Cornell failed to meet the EMV requirements, such as:
- “Cornell did not offer a single demand curve or attempt in any way to link consumer demand for servers and workstations to the claimed invention.”
- No credible economic proof that including the unpatented components was necessary to fully compensate for the infringement.
- No evidence that the patented invention drove consumer demand for CPU bricks.
- Cornell did not identify “any real world transactions, or even any discernable market for CPU bricks.”
The Court concludes that the royalty base should be only the processor because it “was the smallest salable infringing unit with close relation to the claimed invention.” The Court then calculates damages to be $53 million, based on $7 billion in processors at a 0.8% rate.
This is a significant case because the EMV rule has not typically been used to reduce the royalty base within an assembly (it is typically used to include additional products/components, usually in a lost profits setting). It also prompts some interesting questions that will likely take some time to answer:
- What exactly is the court expecting for “demand curves”?
- The Court found it important that the royalty base be the “smallest salable infringing unit” and that some customers have actually purchased that unit. But if the EMV rule points to a royalty base that was not independently salable, then is that still an appropriate royalty base? In other words, will the courts accept a royalty base that is a mathematical construct intended to represent the sales value attributable to the invention instead of actual sales of the product in question? The district court decision on remand in Lucent v. Microsoft seems to respond affirmatively.
Citation: Cornell University v. Hewlett Packard Company, 609 F. Supp.2d 279 (N.D.N.Y. 2009) (Rader by designation)