In Aqua Shield v. Inter Pool, the Federal Circuit explains in a bit more detail why an infringer’s profitability really, for sure, we-mean-it-this-time, definitely does not represent the ceiling on a reasonable royalty. It made the same point in its past decisions in Douglas Dynamics v. Buyers (Fed. Cir. 2013), Golight v. WalMart (Fed. Cir. 2004) and even back in the 1989 decision in State v. Mor-Flo (“There is no rule that a royalty be no higher than the infringer’s net profit margin.”).
The court first notes that an infringer’s actual profits are only relevant “in an indirect and limited way—as some evidence bearing on a directly relevant inquiry into anticipated profits.”
The court explains that “an especially inefficient infringer—e.g., one operating with needlessly high costs, wasteful practices, or poor management—is not entitled to an especially low royalty rate simply because that is all it can afford to pay without forfeiting or unduly limiting its profit if it uses the patented technology rather than alternatives.”
The court finds that “the district court did not err in considering [defendant’s] profits. But it did err in treating the profits [defendant] actually earned during the period of infringement as a royalty cap.” By incorrectly focusing on actual profits instead of anticipated profits, “the district court seems to have simply assumed that any royalty paid by [defendant] would have directly reduced its profits, dollar for dollar. But that would not be true, in general, if [defendant] could have raised its prices (over what it actually charged for infringing sales) to account (fully or partly) for a royalty payment. The district court did not find, and [defendant] has not argued here, that [defendant] was selling in a perfectly competitive market in which it was forced to act as a pure price-taker. We have not been shown proof that this case is different from the typical one in which pricing might be adjusted to account for a royalty based on sales price.”
So this then raises the question: if a defendant can show that (a) it anticipated and achieved low profitability, and (b) it was unable to raise prices, then will the court accept an argument that defendant’s low profitability sets the upper limit on the reasonable royalty rate if? This decision is not entirely clear on that scenario.
And an important takeaway for patent litigation plaintiffs – or prospective plaintiffs – is that they should not be overly concerned that low profitability of the infringer would necessarily result in low reasonable royalty rates.
Aqua Shield v. Inter Pool Cover, 774 F.3d 766 (Fed. Cir. 2014)