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Background and History of the Entire Market Value Rule
In some instances, a patentee may recover damages not only for the specific component or method accused of infringement, but also for related unpatented items. Damages on unpatented items fall into three main categories: (1) convoyed sales (unpatented items that are separate from the patented item but sold with it), (2) derivative sales (unpatented repair parts or spare parts or other items sold after the initial sale of the patented device), (3) and sales of a single multifaceted device (e.g., a personal computer) that incorporates a patented feature together with unpatented features. The Federal Circuit has distinguished convoyed sales from spare parts: “The expression “convoyed sales” should preferably be limited to sales made simultaneously with a basic item; the spare parts here [sold after the original infringing product was sold] should best be called ‘derivative sales.’” Carborundum Co. v. Molten Metal Equipment Innovations, Inc., 72 F.3d 872, 881 n.8 (Fed. Cir. 1995); American Seating Co. v. USSC Group, Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008). (“A ‘convoyed sale’ refers to the relationship between the sale of a patented product and a functionally associated non-patented product.”) (For more information specific to categories 1-3, see the links at the bottom of this page.)
Courts originally applied the “entire market value rule” (or “EMVR”) only in cases involving the situation identified in category 3 above. See, e.g., Garretson v. Clark, 111 U.S. 120, 121 (1884); Marconi Wireless Tel. of Am. v. United States, 99 Ct. Cl. 1, 46, 53 U.S.P.Q. 246, 249 (Ct. Cl. 1942), aff’d in part and vacated in part, 320 U.S. 1 (1943); Tektronix, Inc. v. United States, 552 F.2d 343, 352 (Ct. Cl. 1977). However, the EMVR was later applied to convoyed sales and spare parts (categories 1 and 2), involving physically separate patented and unpatented items. See, e.g., Paper Converting Machine Co. v. Magna-Grahpics Corp., 745 F.2d 11, 22-23 (Fed. Cir. 1984); King Instrument Corp. v. Otari Corp., 767 F.2d 853, 865-66 (Fed. Cir. 1985). Sitting en banc, the Federal Circuit in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir.), cert. denied, 516 U.S. 867 (1995), indicated that the EMVR applies in situations involving physically separate unpatented and patented items that are “physically part of the same machine.” 56 F.3d at 1549. The court then went on to address the history of the rule and its subsequent broadened application:
When a patentee seeks damages on unpatented components sold with a patented apparatus, courts have applied a formulation known as the “entire market value rule” to determine whether such components should be included in the damage computation, whether for reasonable royalty purposes, or for lost profits purposes. Early cases invoking the entire market value rule required that for a patentee owning an “improvement patent” to recover damages calculated on sales of a larger machine incorporating that improvement, the patentee was required to show that the entire value of the whole machine, as a marketable article, was “properly and legally attributable” to the patented feature. [Quoting Garretson.] Subsequently, our predecessor court held that damages for component parts used with a patented apparatus were recoverable under the entire market value rule if the patented apparatus “was of such paramount importance that it substantially created the value of the component parts.” [Quoting Marconi.] We have held that the entire market value rule permits recovery of damages based on the value of the patentee’s entire apparatus containing several features when the patent-related feature is the “basis for customer demand.”
Block quote is from Rite-Hite, 56 F.3d at 1549 (quote in last sentence is from State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989)).
Rite-Hite, the Federal Circuit has addressed the EMVR in numerous cases. The following section addresses how the EMVR is applied to categories 1-3 above. Links at the bottom of this page navigate to more specific pages on each category.
Application of the Entire Market Value Rule to Categories 1-3
Despite Rite-Hite, there seems to be some confusion over the EMVR and how it is applied to these three categories. The confusion stems from two different ways in which the rule has been formulated. For situations involving category 3 – a multifaceted machine having a patented feature as well as unpatented features – the rule has required since the earliest Supreme Court cases that the machine’s entire market value be attributable to the patented feature. See, e.g., Garretson v. Clark, 111 U.S. 120, 121 (1884) (stating that the patentee “must show, by equally reliable and satisfactory evidence, that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature”). In other words, “the entire market value rule permits recovery of damages based on the value of a patentee’s entire apparatus containing several features when the patent-related feature is the basis for customer demand.” Rite-Hite, 56 F.3d at 1549.
This “basis for demand” requirement has not always been used in articulating the EMVR for categories 1 and 2—convoyed sales and derivative sales. Some cases seem to require, instead, that the unpatented and patented components form a functional unit: “[W]hen recovery is sought on sales of unpatented components sold with patented components, … the unpatented components must function together with the patented component in some manner so as to produce a desired end product or result. All the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit.” Rite-Hite, 56 F.3d at 1550. The court in Rite-Hite also indicated when the EMVR is not satisfied for categories 1 and 2: “Our precedent has not extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage.” Id .
Subsequent cases have referred to this as the “functional unit” test. See Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367 (Fed. Cir. 2004) (“[T]he Rite-Hite ‘functional unit’ test set forth the key criterion for lost profits of unpatented materials used with a patented device); American Seating Co. v. USSC Group, Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008) (upholding refusal to award damages on convoyed sales where the requisite functional relationship did not exist between the patented and unpatented devices; however, when analyzing damages for the patented device (a machine with patented and unpatented features), the court observed it was undisputed that “the patented features … prompted customer demand”); Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354, 1370-72 (Fed. Cir. 2006) (applying the functional unit test); Tec Air, Inc. v. Denso Mfg. Mich., Inc., 192 F.3d 1353, 1361 (Fed. Cir. 1999) (affirming a judgment where a jury awarded damages based on the EMVR and the functional relationship between patented fans and unpatented radiator and condenser assemblies). These cases appear to dispense with the “basis for demand” requirement for categories 1 and 2. However, in formulating the “functional unit” test, the Rite-Hite court cited Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 22 (Fed. Cir. 1984). There, the Federal Circuit noted that even though “auxiliary components” had separate usage from the patented component, all the components “constituted one functional unit … to produce rolls of paper” and the “auxiliary components derived their market value from the patented rewinder because they had no useful purpose independent of the patented rewinder.” Id. (emphasis added).
In a recent district court opinion handed down by Chief Judge Rader of the Federal Circuit sitting by designation, the court set forth a three-part test for EMVR that includes both the “basis for demand” requirement and the “functional unit” test. Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 286-87 (N.D.N.Y. 2009).
The entire market value rule in the context of royalties requires adequate proof of three conditions: (1) the infringing components must be the basis for customer demand for the entire machine including the parts beyond the claimed invention, Fonar Corp. v. General Elec. Co., 107 F.3d 1543, 1552 (Fed. Cir. 1997); State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989); (2) the individual infringing and non-infringing components must be sold together so that they constitute a functional unit or are parts of a complete machine or single assembly of parts, Paper Converting Mach. Co., 745 F.2d at 23; and (3) the individual infringing and non-infringing components must be analogous to a single functioning unit, Kalman v. Berlyn Corp., 914 F.2d 1473, 1485, 16 USPQ2d 1093, 1102 (Fed. Cir. 1992). It is not enough that the infringing and non-infringing parts are sold together for mere business advantage. See Rite-Hite, 56 F.3d at 1549-50. Notably, these requirements are additive, not alternative ways to demonstrate eligibility for application of the entire market value rule. See id.
Cornell, 609 F. Supp. 2d at 286-87. Because the three-part test was laid out in “the context of royalties,” it is not clear if it would also apply to lost profits. In addition, the accused product fell into category 3—the patent covered only a single feature of a larger device.
In Lucent Tech., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), another category 3 case, the Federal Circuit summarized the EMVR without reference to the functional unit test: “In one sense, our law on the entire market value rule is quite clear. For the entire market value rule to apply, the patentee must prove that ‘the patent-related feature is the ‘basis for customer demand.’” Id. at 1335 (quoting Rite-Hite, 56 F.3d at 1549, which in turn was quoting State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989)). Like Cornell, Lucent involved reasonable royalty damages, and the patented feature was only one of many features in the accused product, Microsoft’s Outlook program. The court summed up the facts: “As explained above, the only reasonable conclusion supported by the evidence is that the infringing use of the date-picker tool in Outlook is but a very small component of a much larger software program. The vast majority of the features, when used, do not infringe. The date-picker tool’s minor role in the overall program is further confirmed when one considers the relative importance of certain other features, e.g., e-mail.” 580 F.3d at 1337.
The Federal Circuit addressed the EMVR in the context of category 2 – derivative sales or spare parts – in King Instrument v. Otari, 767 F.2d 853 (Fed. Cir. 1985). There, the Federal Circuit indicated that the EMVR must be satisfied for a patentee to recover damages for spare parts. Id. at 866 (“As we have seen, ‘spare parts’ in and of itself is an unclear term capable of more than one definition. Only when a spare part falls under the ‘entire market value’ rule may the patentee recover.”). Explaining how EMVR applies to repair/spare parts, the Federal Circuit stated: “The controlling touchstone in determining whether to include the non-patented spare part in a damage award is whether the patentee can normally anticipate the sale of the non-patented component together with the sale of the patented components.” Id. at 865-66.
Recent Federal Circuit Cases Involving the EMVR
Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009) (addressing reasonable royalty damages and the EMVR).
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) (rejecting the 25% rule of thumb and addressing the EMVR).
Click on the following links to see more information on categories (1), (2), and (3) from above:
Links to Significant Cases
Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir.), cert. denied, 516 U.S. 867 (1995).
King Instrument Corp. v. Otari Corp., 767 F.2d 853 (Fed. Cir. 1985).
Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009).