Royal(ty) Flush?, Inc. v. Lansa, Inc.

In, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010) a panel of the Federal Circuit seems to re-shuffle the deck on what constitutes competent royalty rate evidence when assessing damages for patent infringement. The panel's majority said the district court erred by considering license agreements which re-bundled the technology covered by the patent because the agreements did not mention the patents themselves and included licenses for other materials. Instead, the Federal Circuit said the only competent evidence that the lower court had, to determine the outcome and resulting royalty rate of a "hypothetical negotiation" between the patent holder and infringer, were litigation-induced license agreements related to the patents-in-suit. The result? Litigation-based licenses-which before were often excluded because avoidance of the risk and expense of litigation were seen as skewing the agreed upon royalty rate-look like the new trump card for determining (and reducing) patent infringement damages.

The patents in ResQNet .com cover technology that facilitates recognition of information sent by a mainframe computer to a personal computer working as a remote terminal for the mainframe. As evidence of damages, the patent holder offered five "re-bundling" licenses and two litigation-based licenses (although only one contained a usable royalty rate). After protracted litigation, the district court found that defendant Lansa had infringed the patent. The district court awarded a 12.5% royalty rate, significantly less than the rate in the re-bundling licenses and more than the rate achieved in the litigation-related license.

On appeal, the Federal Circuit affirmed the infringement finding but vacated the damage award. The court said it was error to consider the five re-bundling agreements, which had royalty rates of 25-40%, because there was no evidence showing that the patented technology at issue was linked to the agreements. According to the court,'s damages expert had offered "little or no evidence of the link between the re-bundling licenses and the claimed invention" and then improperly relied on those licenses to inflate his royalty recommendation.  The panel's majority said without that link, the district court's damage award was wrong as a matter of law under the Federal Circuit's decision in Lucent. Rather, the court found "the most reliable license in [the] record arose out of litigation" despite an acknowledgement that "litigation can skew the results of the hypothetical negotiation." The Federal Circuit remanded the case to the district court to redo the damages analysis and instructed that "the trial court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology."

Judge Newman offered a vigorous dissent. She said the district court recognized the differences between the re-bundling licenses and took them into account in setting the awarded royalty rate. She argued that the majority's decision creates a rule "whereby no licenses involving the patented technology can be considered, in determining the value of the infringement, if the patents themselves are not directly licensed or if the licenses include subject matter in addition to that which was infringed." Judge Newman also challenged the use of a litigation-induced license as the basis of a patent infringement award, stating that such a rule assures infringers that they will not have to pay a worse penalty than the lowest royalty previously accepted in settlement.

By allowing consideration of litigation-induced licenses to determine a royalty rate for damages, certainly sweetens the evidence pot for alleged infringers. Before the decision, courts typically excluded such licenses because of litigation's royalty skewing affects.  Now it's a good bet that courts will consider settlement agreements-and the negotiations that led up to them-when calculating royalties under the factors enumerated in Georgia-Pacific. If, as Judge Newman argues, limits infringement damages to the lowest royalty previously accepted in settlement then, throughout all stages of patent litigation, patent holders will have less room to bluff and potential infringers will have more. Our call? For the time being, when it comes to assessing the impact of, Kenny Rogers has the best advice.[1]


[1] You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.

Rogers, Kenny. "The Gambler."  The Gambler.  United Artists, 1978.

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