In its January 2018 ruling in Finjan v. Blue Coat, the Federal Circuit reversed a $24 million jury award of damages and took a strict stance on apportionment that seems to reverse the more flexible position from its Ericsson decision. This creates some uncertainty about how a reasonable royalty base and structure should be determined going forward.
A jury had previously found that Blue Coat infringed four Finjan patents, and awarded $39.5 million in reasonable royalty damages. $24 million of this relates to Finjan’s ‘844 patent, which pertains to a system that analyzes and categorizes web sites to prevent malware and bar access. WebPulse, the infringing product, contains a DRTR module (“dynamic real-time rating engine”) that analyzes previously-uncategorized URLs for malicious code and for content (e.g. pornography, news, etc.). All of the ‘844 infringing activity occurs in DRTR, but some DRTR functions infringe and some do not. Plaintiff’s damages expert determined the royalty base by multiplying all WebPulse 75 million users by 4%, having found that DRTR processes roughly 4% of WebPulse’s total web requests. No further apportionment was done. The royalty was then calculated by multiplying the royalty base by an $8-per-user royalty rate.
The court rejected the jury’s award, finding that: (1) further apportionment was required to reflect the value of the patented technology compared to the value of the unpatented elements, and (2) the $8 royalty rate was unsupported by substantial evidence.
At first blush, the finding regarding apportionment of the royalty base seems reminiscent of Lucent v. Gateway, where the district court ruled on remand that if Plaintiff sought to use infringing Outlook revenues as its royalty base, it must apportion the revenues not just to account for usage of the infringing feature, but it also must further apportion to separate the patented from unpatented features. See Lucent Technologies, Inc. v. Microsoft Corporation, 07-CV-2000H (S.D. CA, July 13, 2011, Order) (Huff).
However, Finjan’s award was based not on infringing DRTR revenues, but rather 3 million users (multiplied by a royalty of $8 per user). Since Finjan presumably showed that each of these 3 million users infringed, this user count is not normally apportioned further. Apportioning 3 million users to separate patented from unpatented features would result in a user count that could be difficult to explain or understand.
As such, this court is demanding the relatively strict VirnetX approach to apportionment, when it writes: “[a]s we noted in VirnetX, if the smallest salable unit—or smallest identifiable technical component—contains non-infringing features, additional apportionment is still required.” VirnetX, 767 F.3d at 1329. This seems to be a reversal of the softened apportionment requirement from its subsequent Ericsson decision, where it explained:
“Logically, an economist could do this [apportionment] in various ways—by careful selection of the royalty base to reflect the value added by the patented feature, where that differentiation is possible; by adjustment of the royalty rate so as to discount the value of a product’s nonpatented features; or by a combination thereof. The essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” Ericsson, 773 F.3d at 1226.
The court then turns its attention to the $8-per-unit royalty rate. The court notes that there is no evidence that Finjan ever actually used or proposed this rate in any comparable license or negotiation. Moreover, it was based on testimony from Finjan that it would have sought such a rate. The court concludes that the rate “appears to have been plucked from thin air, and as such, cannot be the basis for a reasonable royalty calculation.”
In future cases, plaintiffs will need to be careful when seeking per-unit royalties, since the Federal Circuit is now signaling that apportioning the unit count may be required. Take, for example, a case where Plaintiff seeks a royalty on infringing corkscrews that infringe a patent related to one of many features. If Plaintiff seeks a per-unit royalty, will it be required to apportion the number of infringing corkscrews to somehow account for the patented features versus unpatented? Would such a calculation make any sense? Wouldn’t it mean that acts of infringement occurred for which no damages were levied? Perhaps the disconnect here stems from the differences between software and physical products (which, granted, should theoretically have no impact on how the law is applied). Regardless, we can expect the waters to remain murky for now.
Finjan, Inc. v. Blue Coat Systems, Inc., No. 2016-2520 (Fed. Cir. Jan. 10, 2018)