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CAFC Grants New Trial —€“ Royalty Base Can Be Total Sales, but the Royalty Rate Must Be Properly Apportioned

The United States Court of Appeals for the Federal Circuit, in Exmark Manuf. Co. Inc. v. Briggs & Stratton Power Prods. Grp, LLC, 879 F.3d 1332 (Fed. Cir. Jan. 2018) on appeal from the District of Nebraska, before Judges Wallach, Chen, and Stoll, with Judge Stoll writing the opinion, issued an order regarding apportionment, vacating the jury's $24,280,330 compensatory damages verdict, which had been doubled upon a finding of enhanced damages for willful infringement. The court held "that the district court erred in denying a new trial on damages" and "abused its discretion by limiting the evidence relevant to damages to prior art that had been commercialized." The court held that it was not wrong for the expert to use the royalty base as the sales price of the entire mower, but the opinion was fatally flawed because it did not properly tie the royalty rate to the facts of the case, "plucking the 5% rate out of nowhere."

Briggs & Stratton Power Products Group, LLC ("Briggs") appealed the district court's denial of a new trial on damages, presenting three arguments: (1) "the district court erred by permitting [Exmark Manufacturing Company, Inc. ("Exmark")] to use the sales price of the accused mowers as the royalty base instead of the sales price of the [allegedly inventive portion of the mower, the flow control baffles]"; (2) "Exmark's damages expert's opinion should have been excluded because she failed to adequately explain how she arrived at her proposed 5% royalty rate"; and (3) "the district court improperly excluded evidence relevant to damages." Because the case arose from Nebraska, the court applied Eighth Circuit law to procedural issues.

The royalty base can be the entire product, as long as it is properly apportioned to the inventive aspect of the product.

Claim 1 of the patent-at-issue is directed broadly to "a multiblade lawn mower," but "the patent makes clear that the patented improvement relates to the mower's flow control baffle." Briggs argued that Exmark did not properly identify a royalty base to apportion the value of the invention in comparison to the value of the whole mower. Briggs argued "that Exmark's expert should have apportioned or separated the value of the baffle from the other features of the mower through the royalty base rather than the royalty rate." The court disagreed, noting "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.'" Citing Ericsson. v. D-Link Sys. (Fed. Cir. 2014). The court also noted that "[u]sing the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claims is, in fact, directed to the lawn mower as a whole." Pointing out that the essential requirement that the ultimate royalty be based on the incremental value the patented invention adds to the end product can be done "through a thorough and reliable analysis to apportion the royalty rate." The court continued by noting that using "lawn mower sales as the royalty base is consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing."

An expert's damages opinion must be sufficiently tied to the facts of the case.

The court, however, did agree with Briggs that "Exmark's damages expert's opinion was inadmissible as it failed to adequately tie the expert's proposed reasonable royalty rate to the facts of this case." The court acknowledged that Exmark's expert discussed each of the Georgia-Pacific factors, but also noted "Exmark's expert concluded with little explanation that Exmark and Briggs would have agreed to a 5% reasonable royalty rate on the sales of the accused lawn mowers as the value of the baffle." And while the expert explained her understanding of the benefits of the mowers covered by the patent and noted these advantages were relevant to the Georgia-Pacific factors, "she did not explain how these advantages, or her analysis of the Georgia-Pacific factors, led to her proposed 5% royalty rate." The court noted that "superficial recitation" of the Georgia-Pacific factors were insufficient: "damages experts must not only analyze the applicable factors, but also carefully tie those factors to the proposed royalty rate." And while "mathematical precision is not required, some explanation of both why and generally to what extent the particular factors impact the royalty calculation is needed." The court specifically pointed out flaws in the expert's analysis of Georgia-Pacific factor thirteen (profits attributable to non-patented elements), stating "[t]he opinion is devoid of any analysis tying either the evidence or the specific factors to the proposed 5% royalty rate."

The court also pointed out problems with Exmark's expert's treatment of the fact that Briggs had patents covering other components of the mowers: "she ignored these components, opining without support that they do not relate to the quality of cut, which she considered '€˜paramount' to selling mowers." The court noted that it "was skeptical that other patented components of the mower bear no relation to the overall value of the accused mowers … Even assuming, however, that they do not, the expert was required to support her opinion to that effect with sound economic reasoning. … Without a more detailed analysis, the jury is simply left to speculate or adopt the expert's unsupported conclusory opinion."

The court rejected Exmark's arguments in defense of its experts report. The court did not agree that "using an allegedly low royalty rate alone supports the admissibility of the expert's reasonable royalty opinion. Regardless of how low the royalty rate, the expert must still apportion damages and sufficiently tie the royalty rate to the facts of the case." And while the expert "discussed quantitative market evidence in her opinion … she filed to explain how the evidence factored into the proposed royalty rate. She merely … plucked the 5% royalty rate out of nowhere." For all of these reasons, the court vacated the damages award and remanded the case for a new trial on damages.

Prior-art need not be commercialized to be relevant to damages, but prior art should be limited commensurate with the scope of the asserted claims.

The court held 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." Georgia-Pacific factor nine considers old modes or devices that had been used for working out similar results, but the court noted there is no case law supporting the view that "factor nine limits evidence of prior art to commercialized modes or devices. … The fact that some prior art mowers were not commercialized does not make them immaterial…" The court further noted that the Georgia-Pacific factors "do not bind the district court and should not be construed as limiting."

The court did, however, agree that the district court properly limited prior art to mowers that were side discharging, "commensurate with the scope of the asserted claim." The court also agreed with the district court that "Briggs' attempt to introduce evidence of Exmark's delay in filing suit for infringement is not relevant to damages," noting "[t]here are many reasons to forego filing a lawsuit, to imply that Exmark did so because it did not think the invention had a value is speculative."