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Mar 11

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Patent Infringement Damages Under Fire

Seventh Circuit Judge Richard Posner is one of the foremost legal scholars in the United States, particularly on economic matters. He has written numerous influential opinions and almost forty books on law and economics, teaches at the University of Chicago Law School, and is widely respected in the legal community. And two of his recent damage rulings will have a signification impact on the patent litigation process, or more specifically reduce it.

Last summer in Apple vs. Motorola, Judge Posner, sitting by designation, threw out both sides’ damage witnesses.  This article discusses the Apple case and the damages ruling.  Posner’s current and second ruling affecting the patent damage landscape is Brandeis University and GFA Brands, Inc., vs. Keebler Co., No. District of Illinois, (Case no. 1:12-cv-01508, January 18, 2013), summarized below (with additional detail in this article).

In this second action, again sitting by designation, Judge Poser gutted the damage case for a plaintiff patentee involving the formula for cookies used by defendant Keebler. Judge Posner eliminated practically all of the damage calculation, not based on the plaintiff’s grotesque misuse of damage principles, but based on Judge Posner’s own detailed analysis and questions which occurred to him that had not been anticipated and answered by the plaintiff’s expert in their work.

The Keebler case underscores the importance of acceptable non-infringing alternatives in determining a reasonable royalty rate. When there is an acceptable economic alternative to use of the infringed patent, the royalty rate will necessarily be smaller than if no such alternative exists. The plaintiffs’ expert addressed this issue, but not to the thoroughness and in the manner that Judge Posner desired. The Order states:

“Dr. Layne- Farrar testified (in her report and in answer to my questions) that there was no cheap and satisfactory substitute for the plaintiffs’ fat blend that would not contain trans-fats. In order to avoid infringing while also avoiding trans-fats (the primary commercial value of the plaintiffs’ margarine is not its effect on HDL and the HDL/LDL ratio but that it does not contain trans-fats), Keebler would have had to consider the possible effects of substituting a non-infringing oil blend on other elements of consumer demand besides aversion to trans-fats. These elements, she testified, include consumer aversion to sogginess in cookies (a possible result if the cookies contained a non-infringing oil blend that had a high ratio of unsaturated to saturated fat), and aversion to saturated fat (a result if for example butter, which contains no trans-fats, was used in place of the patented margarine).”

Plaintiff’s expert reviewed licenses to support the reasonable royalty rate. This is a common and widely accepted analysis tool. As with practically any analysis that is based on comparable transactions, there were differences between the subject hypothetical license, and the comparable transactions. Judge Posner determined that two of the three licenses used by the plaintiff’s expert were not sufficiently comparable and excluded them. This left plaintiff’s expert with only one license, which the expert specifically concluded was a floor, and not the best indication of value. However, Judge Posner’s Order made this one license the only thing left in plaintiff’s entire damage presentation.

With the plaintiff’s damage case a shell of its former self, the matter settled. So, unlike the Apple case which is being appealed, the Keebler case will not provide an opportunity for appellate review.  However, both cases serve as a cautionary tale regarding how jurists may apply their gate keeping role.

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/2013/03/patent-infringement-damages-under-fire/

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