The Software IP Report

Reasonable Patent Royalties Require Proper Apportionment

Damages for patent infringement must be apportioned to the infringing features of an accused product and supported by substantial evidence. Finjan, Inc., v. Blue Coat Systems Inc., No. 2016-2520 (January 10, 2018) (precedential). After considering subject matter eligibility and infringement of the asserted patents, the Federal Circuit reviewed the damages awarded by the jury, reversing awards unsupported by substantial evidence and affirming awards properly apportioned.

Finjan asserted U.S. Patent Nos. 6,154,844, 6,965,968, 7,418,731, and 7,647,633, and the district court found infringement by Blue Coat for all four patents.  Upon reversing the infringement verdict of the ‘968 patent and affirming the infringement verdicts of the ‘844, ‘731, and ‘633 patents, the Court reviewed the damages awards for substantial evidence.

Damages for patent infringement are limited to those “adequate to compensate for the infringement.” 35 U.S.C. § 284. Finjan asked for a reasonable royalty, which includes a royalty base (here, the smallest identifiable technical component) and a royalty rate (here, a dollar amount based on sales of the accused product). Blue Coat’s accused product, WebPulse, is a cloud-based system that associates URLs with a plurality of categories, e.g., gambling, shopping, and malware. WebPulse uses a “dynamic real-time rating engine” (DRTR) for analyzing uncategorized URLs.

For the ‘844 patent, Finjan attempted to tie the royalty base to DRTR as the smallest identifiable technical component. The Court noted that DRTR performs both infringing and non-infringing functions. When the identified smallest technical component contains non-infringing features, further apportionment is required so that the reasonable royalty is based on the incremental value of the patented features. Because Finjan’s royalty base encompassed non-infringing features, use of DRTR alone “is not a proxy for the incremental value of the patented technology to WebPulse as a whole.”

Furthermore, Finjan applied a royalty rate of $8 per user. Finjan’s Vice President of IP Licensing stated that the $8 fee was a starting point in licensing negotiations. The Court noted that this fee was a conclusory statement made without evidence to support that the $8 rate would be applied at the end of a hypothetical negotiation for a license of the ‘844 patent. The fee “appears to have been plucked from thin air,” and the Court remanded the damages award to the district court.

The Court then considered and upheld the damages awards for the ‘731 and ‘633 patents. Finjan’s expert reviewed top-level functions of WebPulse, as identified by Blue Coat, noting that of the 24 top level functions, one infringed the ‘633 patent and three infringed the ‘731 patent. The expert used a 1/24 apportionment for the ‘633 patent and a 3/24 apportionment of the ‘731 patent. While Blue Coat provided testimony conflicting with Finjan’s expert analysis, the Court affirmed this apportionment as supported by substantial evidence. The Court further affirmed the royalty rate provided by Finjan’s expert without much explanation other than “the record contains evidence that the expert’s estimates” warranted the ultimate damages award.

Lessons for Practice

This case reaffirms a common thread of Federal Circuit damages decisions: focus royalty calculations on infringing features. Courts scrutinize royalty calculations that seem arbitrary and that appear to lack evidence to support the ultimate result, as with the ‘844 patent. A line of reasoning leading from an accused product to a reasonable royalty apportioned to infringing features, as with the ‘731 and ‘633 patents, gives courts support to uphold the royalty. While royalty calculations remain uncertain, this case provides an interesting comparison of royalties that are upheld (the detailed apportionment of the ‘731 and ‘633 patents) and royalties that are reversed (the arbitrary and overbroad apportionment of the ‘844 patent).