CAFC clarifies EMVR test, propriety of relying on settlement agreements

On August 30, 2012, the Federal Circuit in LaserDynamics, Inc. v. Quanta Computer, Inc., Case Nos. 2011-1440, -1470 (Fed. Cir.) ruled on two important issues related to damages law - the entire market value rule and use of settlement agreements as comparable licenses for a reasonable royalty analysis.

Entire Market Value Rule

The patent at issue related to automatic identification of the type of disc in an optical disc drive ("ODD") - i.e., identifying whether a disc was a CD or a DVD. The accused products were laptop computers, and the plaintiff's expert based his damages award off of the price of the laptop computers as opposed to the ODD itself. After citing Cornell for its language regarding "smallest salable unit" and Uniloc for its language about a low royalty rate not being a basis for using an improperly large royalty base, the Court explained why the Entire Market Value Rule was not satisfied in this particular case:

LaserDynamics' use of the entire market value rule was impermissible, however, because LaserDynamics failed to present evidence showing that the patented disc discrimination method drove demand for the laptop computers. It is not enough to merely show that the disc discrimination method is viewed as valuable, important, or even essential to the use of the laptop computer. Nor is it enough to show that a laptop computer without an ODD practicing the disc discrimination method would be com-mercially unviable. Were this sufficient, a plethora of features of a laptop computer could be deemed to drive demand for the entire product. To name a few, a high resolution screen, responsive keyboard, fast wireless network receiver, and extended-life battery are all in a sense important or essential features to a laptop com-puter; take away one of these features and consumers are unlikely to select such a laptop computer in the market-place. But proof that consumers would not want a laptop computer without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers. Put another way, if given a choice between two otherwise equivalent laptop com-puters, only one of which practices optical disc discrimina-tion, proof that consumers would choose the laptop computer having the disc discrimination functionality says nothing as to whether the presence of that function-ality is what motivates consumers to buy a laptop com-puter in the first place. It is this latter and higher degree of proof that must exist to support an entire market value rule theory.

This analysis is in line with analysis provided on this blog in the past, namely that if a product is not separable into constituent parts, the plaintiff is not necessarily entitled to a royalty base on that product (e.g., Outlook in the Lucent case), but that if a product is separable into constituent parts, the plaintiff almost certainly is not entitled to a royalty base on the overall product (e.g., this case, Cornell).

Settlement Agreements as Comparable Licenses

The Court distinguished the present facts from that of, aligning with the analysis laid out in ReedHycalog in EDTX - that settlement agreements are still generally disfavored for damages analyses, but may nevertheless be the "best" evidence in certain scenarios where there is a lack of other reliable indicia of value. Here, the settlement agreement relied upon was executed shortly before trial by a Defendant that was in a very disadvantageous bargaining position because of multiple sanctions. This lone settlement rate was a far cry from 28 other licenses to the patent-in-suit, most of which were entered into outside of litigation. The Court found that this scenario was "in stark contrast to that in ResQNet, where a lone settlement agreement stood apart from all other licenses in the record as being uniquely relevant and reliable."