Patent Appraisals - Apportionment and the Comparable Sales Method

Patent valuation is an important consideration for many stakeholders. As a patent professional, one is constantly looking for new ways to optimize portfolio value and mitigate licensing liabilities. Two recent US Court of Appeals for the Federal Circuit cases teach just that. Omega Patents and MCL Intellectual Property discuss the apportionment doctrine and comparable sales method as they apply to calculating reasonable royalty rates for infringement.

Omega Patents v. CalAmp teaches patent valuation as it pertains to an appeal of an infringement award from the Middle District of Florida. Case Nos 2020-1793 & -1794 (Fed. Cir. Sept. 14, 2021). The accused infringer, CalAmp, requested a new trial because its damages expert was precluded from testifying and the jury’s award lacked evidence demonstrating apportionment. The CAFC panel vacated the damages award and remanded the case for a new trial on damages.

As to the exclusion of expert testimony, the panel found that it was an abuse of discretion for the court to not allow CalAmp’s expert to offer rebuttal testimony on damages. The trial court first excluded the testimony under Daubert but without much explanation as to why, i.e., the witness’ qualifications or methods. The case was previously appealed and remanded with implicit instructions to reconsider damages. During the second set of trial proceedings, CalAmp sought to offer its expert’s testimony again but the court ruled that since CalAmp failed to object to the Daubert order during the first trial proceeding, it essentially waived its opportunity to object at the second trial. The court of appeals panel reasoned that CalAmp had not waived its opportunity to object to the exclusion of its expert since the initial remand re-opened discussions as to damages. Moreover, the Daubert order lacked sufficient detail to notify CalAmp of the need to object as it did not discuss the relevant merits of the exclusion.

As to support for apportionment in the jury award, CalAmp argued that the $5-per-unit royalty was not supported by the record because it did not reflect apportionment or, in the alternative, that the patented improvement drove demand for the entire product. In Omega Patents, the patentee (Omega Patents) could not demonstrate that the claimed feature drove demand at least because there were other conventional features that provided similar functionality and valuable utility to the product. Therefore, apportionment should have been incorporated in the jury’s appraisal of the patent. Under Georgia-Pacific, one of the factors courts consider in calculating a reasonable royalty is “[t]he portion of the realized profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.” 318 F.Supp. 1116, 1120 (SDNY 1970). Omega Patents argued that the jury award was supported because the scope of the claims covered the entire product or that “[e]ach of [the end product’s] components [was] found in the infringed claims.” at 22-23. Traditionally, the value basis for damages can be coextensive with the scope of the claims, even where the claim is of Jepson format, reciting the state of the art in the preamble. Railroad Dynamics v. A. Stucki, 727 F.2d 1506, 1519 (Fed. Cir. 1984). However, the panel in Omega Patents declined to use the entire product as a basis for damages citing Exmark Mfg. v. Briggs & Stratton Power Prods, 879 F.3d 1332, 1347-49 (Fed. Cir. 2018). In Exmark, the panel did state that a patent owner was required to apportion damages between the patented improvement and conventional components of a multicomponent product, but the Exmark panel still used the end product as a basis for damages. “We have held that apportionment can be addressed in a variety of ways, including ‘by careful selection of the royalty base to reflect the value added by the patented feature [or] ... by adjustment of the royalty rate so as to discount the value of a product's non-patented features; or by a combination thereof.’ ” Exmark at 1348. In other words, a patent drafter can control the basis for damages to optimize patent worth, however, valuations must still incorporate some method of apportionment.

Omega Patents tried to salvage the jury award by iterating that patent owners can avoid their burden of proving apportionment if they demonstrate that the royalty is based upon comparable licenses. Said method works like real estate appraisals. Courts can use comparable royalties as a gauge for determining an appropriate rate—this assumes nevertheless that the similar licenses are rationally comparable and have a “built-in” apportionment in their terms.

In Omega Patents v. CalAmp, the patentee tried to compare as many as 18 licensing agreements to the subject patent award. Omega had a policy of pricing all its patent licenses at $5 per product regardless of how many claims or patents were infringed. This generic policy, however, failed to account for substantial distinguishing facts between the licenses and the present award: like different and multiple patents being at issue in the licenses while the present award was only attributable to a single patent. Some licenses incorporated as many as 54 patents but were still valued at $5-per-unit. Judge Hughes in dissent argued that comparability is for the jury’s discretion. Still, the majority ruled that as with real estate appraisals, the comps must be similar and any material differences between the two properties should be monetized and considered.

The comps in Omega Patents also failed because there was no evidence that past licenses encompassed apportionment. The panel reasoned that Omega’s blanket policy of $5 per unit was insufficient to demonstrate the applicability of the comparable sales method, i.e., that the licenses had built-in apportionment. To the contrary, the royalty rate appeared to be based upon Omega’s generic $5/unit practice rather than the value of the improvement claimed in the patent. Accordingly, with the comparable sales method, apportionment should be built into the parallel agreements.

MCL Intellectual Property v. Micron Technology is another case involving a district court’s exclusion of damages expert testimony in part due to a lack of adequate proof of apportionment. Case No.: 2020-1413 (Fed. Cir. Aug. 26, 2021). The CAFC panel affirmed the exclusionary orders. (Other issues included a paucity of Daubert reliability with the calculation of a related license’s rate and failure to disclose material damages information during discovery). With respect to apportionment, the patentee tried, without success, to avoid the need to demonstrate apportionment by relying upon the comparable sales method. The panel was reluctant to characterize the offered licenses as comparable, however, because similar to Omega Patents, the comparable’s supposed 0.25% rate was not rationally explained and their valuation did not consider material differences between the licenses and proposed rate, especially the scope of infringement: “the [alleged comparable] agreement granted a license to a portfolio of forty-one U.S. and international patents and patent applications, and only one of those forty-one patents is at issue in the [present] hypothetical negotiation.” MCL Intellectual Property also further emphasizes that when valuating patents using the comparable sales method significant differences between infringement must be considered and apportionment implied.

Accordingly, Omega Patents and MCL Intellectual Property should be chewed over when negotiating a license, assessing your client’s portfolio or drafting claims. Other licenses may not be truly “comparable” if their rates are so ill-explained that apportionment cannot be inferred or the scope of present infringement is distinguishable from that of the past.