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Has the entire-market-value rule survived the CAFC’s decision in Power Integrations v. Fairchild?

Zachary Silbersher

Every year, it seems, the Federal Circuit issues a precedential decision on damages, which seems to make the whole process more difficult.  The latest of these decisions comes in the long-running patent battle between Power Integrations and Fairchild.  In its latest opinion, the Court addresses the entire-market-value rule.  The Court essentially guts the rule, and leaves open the question whether there is an reasonable scenario where it will ever be applicable.

In 2014, Power Integrations and Fairchild went to trial over the allegation that Fairchild infringed patents covering switching regulators for power supply controllers chips.  Power Integrations prevailed, and the jury found the asserted claims infringed.  The jury awarded $105M in reasonable royalty damages.  Yet, before the decision went up on appeal, the Federal Circuit issued its damages decision in VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308, 1329 (Fed. Cir. 2014). 

Proving reasonable-royalty damages typically requires identifying the “base,” which is basically the defendant’s infringing sales, and then calculating a royalty to apply to that base.  This can get a bit tricky when the patent covers a feature or component that is sold inside a multi-component device.  The reason is that if the defendant is selling an infringing device for $10, but the infringing feature is only one of multiple components in that device, then using the $10 price-per-unit to calculate the base may, potentially, yield an inaccurate scope of damages.   

Before VirnetX, a working presumption was that to identify the “base,” it could be sufficient to calculate sales of the smallest-saleable-unit.  In VirnetX, the Court confirmed that was not so.  For multi-component devices, even after identifying the smallest-saleable-unit, the patentee must still “apportion” the base to account for the relative value of the patented feature relative to the unpatented features. 

In Power Integration’s first damages trial against Fairchild, Power Integrations did not apportion damages beyond the smallest-saleable-unit.  Thus, because its $105M damages verdict against Fairchild ran afoul of the Federal Circuit’s decision in VirnetX, the district court ordered a new trial on damages.  In the second trial, Power Integrations tried a different tactic.  Rather than relying on a reasonable-royalty analysis based upon calculating and apportioning the “base”, Power Integrations relied upon a slightly different theory for calculating the reasonable royalty—the entire-market-value rule (EMV).  Using the EMV rule, in the second trial, Power Integrations won $139.8M from the jury.

The EMV rule is best understood as an exception to the rule that a reasonable royalty be calculated off a “base” that apportions for the relative value of the patented feature.  Under the EMV rule, damages can be based upon the entire smallest-saleable product, without necessarily apportioning for the value of the patented feature, provided however that the patented feature drives consumer demand.  In other words, if everyone buys John’s lawn-mowers because they start so nicely, then the patent-holder for the lawn-mower starter can use the price of the entire lawn-mower as the base for calculating a royalty. 

To show damages under the EMV rule, Power Integrations submitted several types of evidence showing that the patented feature drove demand.  It showed that the patented feature was essential for many customers to meet the federal government’s Energy Star Saver program.  It showed that the patented feature was touted in marketing materials.  It showed that customers specifically asked for the patented feature, and products with the patented feature outsold those without it.

In its opinion in the recent Power Integrations case, the Federal Circuit held this also was not enough.  The Court held that if other features in the product also drive demand, then the patented feature must be apportioned relative to those other demand-driving features—even if the EMV rule is being used.  The Court pointed out that Power Integrations did not dispute that the entire accused products also included other valuable features, and Power Integrations did nothing to show how those other features affected consumer demand.  The Federal Circuit essentially emphasized that the EMV rule is only applicable when the patented feature is the sole driver for consumer demand.

The Court stated:

"[W]hen the product contains multiple valuable features, it is not enough to merely show that the patented feature is viewed as essential, that a product would not be commercially viable without the patented feature, or that consumers would not purchase the product without the patented feature. When the product contains other valuable features, the patentee must prove that those other features did not influence purchasing decisions."

While this technically makes sense, it may practically be an insurmountable standard to meet.  The Federal Circuit is demanding that patentees delineate precise contours around how much different features respectively drive consumer decisions to purchase a product.  Doing so is more art than science given that consumers, themselves, do not always know the answer to that question.

More importantly, with each additional hurdle, with each addition trial, the Federal Circuit—either directly or not—continues to hollow out the scope of recoverable damages, while simultaneously increasing the transaction costs for proving them.  Given today’s legislative climate, and the relatively low-priority given to patent reform in the U.S., we cannot expect any reasonable legislative guidance from Congress on what is required to show damages for patent infringement.  And so we are stuck with the Federal Circuit.  Which is something of a moving target.  Power Integrations will now have to tee-up its third trial to show damages for infringement.  Is there something amiss if it takes three trials to prove damages, which are interspersed with precedential damages decisions from the Federal Circuit, each clarifying what it actually takes to show damages?