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Sep 22

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Federal Circuit Corrects Recurring Errors with the Entire Market Value Rule

In LaserDynamics v. Quanta Computer, Case No. 11-1440 (Aug. 30, 2012) the U.S. Court of Appeals for the Federal Circuit overturned an $8.5 million lump sum jury award and remanded the case for a new damages trial. The Federal Circuit addressed three issues of interest to the calculation of reasonable royalties. See this longer article for the details.

The most important damage calculation insight pertains to the use of the entire market rule in establishing the base that is applied to the reasonable royalty rate. The Federal Circuit explained the rule as follows:

Where 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. Thus, it is generally required that royalties be based not on the entire product, but instead on the “smallest salable patent-practicing unit. …

The entire market value rule is a narrow exception to this general rule. If it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product. Rite-Hite, 56 F.3d at 1549, 1551. In other words, “[t]he entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand.”

An earlier case involving the same type of ruling is discussed here. The problem in the current case involves the importance of the patented technology relative to other important features on an entire computer. Here, while the patented item is certainly useful and important, the Federal Circuit used this as an example of the higher standard that is needed if one is to apply the entire market value rule.

The entire market value rule is sometimes justified because it is difficult to know the component’s value to which a percentage royalty is applied. In throwing out the trial court result, the Federal Circuit expressed little sympathy with such an explanation.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/09/federal-circuit-corrects-recurring-errors-with-the-entire-market-value-rule/

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