In Exmark v. Briggs & Stratton, the Federal Circuit added to the pool of cases dealing with royalty apportionment, ruling that even though apportionment was required in the reasonable royalty determination, the apportionment could be done on the royalty rate, instead of the base, mainly because the patent claims refer to the broader product.
Let’s start with the case facts. A trial court jury awarded $24 million in compensatory damages at a 5% royalty rate for Briggs’ infringement of Exmark’s ‘863 patent. The patent is directed to a lawn mower having improved flow control baffles (metal parts under mower deck that direct air flow and grass clippings). The Federal Circuit vacates the award primarily because Exmark’s damages expert failed to justify the 5% royalty rate.
Briggs had raised three arguments: (1) the district court erred by permitting Exmark to use the sales price of the accused mowers as the royalty base instead of the sales price of the flow control baffles; (2) Exmark’s damages expert failed to justify the 5% royalty rate, and (3) the district court improperly excluded evidence relevant to damages.
The court explains that “the parties do not dispute that apportionment is required in this case.” But the court rejects Briggs’ position that the royalty base must be apportioned, citing its flexible guidelines expressed in Ericsson:
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.” Ericsson, 773 F.3d at 1226. So long as Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology.
The court justifies allowing the mower as the royalty base since (a) the asserted claim is directed to a mower and (b) a real-world license would likely use the entire mower. The court states:
Using the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claim is, in fact, directed to the lawn mower as a whole. … There is no unpatented or non-infringing feature of the product. Nonetheless, “[w]hen a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.” AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338 (Fed. Cir. 2015) (citing Ericsson, 773 F.3d at 1233). We hold that such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate. We have recognized that one possible way to do this is through a proper analysis of the Georgia-Pacific factors. [emphasis added]
The court then explains that using the lawn mower sales as the royalty base reflects “the real-world bargaining that occurs,” noting that “[t]his is consistent with the settlement agreement relied on by Exmark’s damages expert, which the parties agree provided an effective royalty of 3.64% of the sales of the accused mowers.”
Just two days prior to this ruling was the Federal Circuit’s Finjan ruling, which took a strict VirnetX-style approach to apportionment. The Finjan decision stated: “[a]s we noted in VirnetX, if the smallest salable unit—or smallest identifiable technical component—contains non-infringing features, additional apportionment [of the royalty base] is still required.” VirnetX, 767 F.3d at 1329. Finjan and Exmark both require apportionment, but VirnetX requires it to be done in the base, while Exmark does not, due to the patent claims and real-world licensing considerations. A careful reader might note that the distinction between the two cases may lie in the Exmark court’s definition of “non-infringing feature.” We will spare you the unexciting details here, and suggest you contact us for more discussion than you probably want.
Of these two rationales, the ruling seems to emphasize the claim language instead of real-world bargaining. But only time will tell if the claim language will be sufficient alone. Indeed, Briggs warned that an owner of a windshield wiper patent could use the car as a royalty base if they drafted the claim language to include “A car having improved windshield wiper blades…” See Briggs brief 9-8-16, CAFC Case: 16-2197, docket no. 15.
Exmark leaves another question unanswered – how should the expert actually apportion the royalty rate? The court suggests that it can be done “through a proper analysis of the Georgia-Pacific factors.” Merriam-Webster defines apportion as: “to divide and share out according to a plan.” But it is unclear if the court has this in mind. In its two rulings in 2017 in Mentor Graphics v. EVE-USA, the court stated that lost profits had been “apportioned” not by dividing or reducing them, but rather by considering the unpatented features in the Panduit factor analysis. It is unclear what definition will apply to royalty rates under Georgia-Pacific, and whether courts will expect an expert to pare down some baseline royalty rate.
The court then goes to great lengths to rebuke Exmark’s royalty rate determination, explaining that Exmark’s expert discussed each Georgia-Pacific factor, then “concluded with little explanation” that a 5% royalty rate was appropriate. “Nowhere … did she tie the relevant Georgia-Pacific factors to the 5% royalty rate or explain how she calculated a 5% royalty rate using these factors.” It cited the G-P factor 13 analysis as “troublesome,” calling “nothing more than speculation” the expert’s “unsupported conclusory opinion” that other components (covered by different patents) do not affect the value of the mower. The court actually suggests a cure for the deficiency: “the jury could have received evidence itemizing the relative value of these other components to better guide the jury’s understanding of the value of the baffle in relation to the other components of the accused multi-component mower.”
The court finds that the expert “plucked the 5% royalty rate out of nowhere,” and vacates the damages award since the royalty rate lacked sufficient ties to the facts of the case.
The district court allowed the introduction of some prior art but excluded any prior art that had not been commercialized, holding that “prior art is relevant to damages only to the extent that the patent was used in a product.” The Federal Circuit finds that the district court abused its discretion by holding that prior art is relevant to damages only to the extent that the prior art was commercialized.
Exmark Manufacturing Company Inc. v. Briggs & Stratton Power Products Group , LLC, 879 F.3d 1332 (Fed. Cir. Jan. 12, 2018)