« Deep Fryer | Main | Why the Hawk »

February 8, 2010

Unpublished

ResQNet sued Lansa in 2001 for infringing five patents related to terminal emulation. Lansa found art, two unpublished user manuals for a software product called Flashpoint, that it argued anticipated one of the asserted patents, 6,295,075. But the district court wouldn't admit the art as public, and hence not legally prior art. Lansa tried to argue that NewLook 1.0 anticipated '075 by being sold more than a year prior to 075's filing date, but NewLook 1.0 "lacked an essential limitation," so was not found to be invalidating prior art. Alas for Lansa, a later version of NewLook was found to have the feature, and so infringed. Then there were the issues of damages, and sanctions....

ResQNet.com v. Lansa (CAFC 2008-1365, -1366, 2009-1030) precedential

Prior Art Invalidation

With regard to Flashpoint invalidating '075 -

The only references on which Lansa relies for its validity challenge are two user manuals for a software product called "Flashpoint." The issue at trial was whether either or both of these manuals is a "printed publication" in terms of §102(b), and thus available as evidence of anticipation or obviousness. One of the Flashpoint manuals is marked "an unpublished work and is considered a trade secret belonging to the copyright holder." The second manual is not marked with any indicium of either publication or secrecy. There was no evidence as to the source, publication, or public accessibility of either manual. The district court found that "no witness testified, nor was any evidence presented, that either of these documents was ever published or disseminated to the public." ResQNet III, 533 F. Supp. 2d at 414.

Public accessibility is the "touchstone in determining whether a reference constitutes a 'printed publication' bar under 35 U.S.C. §102(b)." In re Hall, 781 F.2d 897, 899 (Fed. Cir. 1986). The only argument presented by Lansa was ResQNet's subsequent inclusion of these manuals in an Information Disclosure Statement (IDS) that ResQNet submitted to the Patent Office during a reexamination proceeding for a different patent. Lansa states that ResQNet amended the claims in reexamination, in response to the examiner's rejection based on one of the IDS manuals, and that ResQNet thereby admitted that the manuals were printed publications. ResQNet responds that it learned of these manuals only when Lansa produced them in this litigation, and deemed it prudent to submit them in the unrelated reexamination proceeding, rather than risk the charge of concealing them. ResQNet states that its submission of the manuals was not an admission that they were publicly available publications. In Abbott Laboratories v. Baxter Pharmaceutical Products, Inc., 334 F.3d 1274, 1279 (Fed. Cir. 2003), the court explained that "mere submission of an IDS to the USPTO does not constitute the patent applicant's admission that any reference in the IDS is material prior art." We agree that ResQNet did not convert these manuals into printed publication prior art by including them with the IDS submitted to the PTO. No other evidence of publication or public availability was provided.

The only references identified by Lansa are the Flashpoint manuals. No error has been shown in the district court's ruling that these documents are not printed publications under §102(b) and thus are not prior art. We affirm that invalidity on the ground of obviousness has not been shown.

Damages

ResQNet got a 12.5% reasonable royalty rate, resulting in a $506,305 damages award. On appeal -

Because the district court's award relied on speculative and unreliable evidence divorced from proof of economic harm linked to the claimed invention and is inconsistent with sound damages jurisprudence, this court vacates the damages award and remands.

Into damages case law as a setup for determining reasonable royalty, boiling down to the requirement that a "trial court must carefully tie proof of damages to the claimed invention's footprint in the market place."

Upon a showing of infringement, a patentee is entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." 35 U.S.C. §284. A "reasonable royalty" derives from a hypothetical negotiation between the patentee and the infringer when the infringement began. See, e.g., Unisplay, S.A. v. American Elec. Sign Co., 69 F.3d 512, 517 (Fed. Cir. 1995). A comprehensive (but unprioritized and often overlapping) list of relevant factors for a reasonable royalty calculation appears in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).

"Determining a fair and reasonable royalty is often . . . a difficult judicial chore, seeming often to involve more the talents of a conjurer than those of a judge." Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1574 (Fed. Cir. 1988). Still, a reasonable royalty analysis requires a court to hypothesize, not to speculate. Id. at 1575. At all times, the damages inquiry must concentrate on compensation for the economic harm caused by infringement of the claimed invention. See, e.g., Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507 (1964) ("[T]he present statutory rule is that only 'damages' may be recovered.").

Thus, the trial court must carefully tie proof of damages to the claimed invention's footprint in the market place. See, e.g., Grain Processing Corp. v. American Maize-Prods. Co., 185 F.3d 1341, 1350 (Fed. Cir. 1999) ("To prevent the hypothetical from lapsing into pure speculation, this court requires sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture."); Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302, 1312 (Fed. Cir. 2002) ("[T]he market would pay [the patentee] only for his product . . . . [The patentee's damages] model [does not support the award because it] does not associate [the] proposed royalty with the value of the patented method at all, but with the unrelated cost of the entire Spirit platform."). Any evidence unrelated to the claimed invention does not support compensation for infringement but punishes beyond the reach of the statute.

The first Georgia-Pacific factor:

1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.

The farther afield the license, the further afoul relevancy to the rule.

With these principles in mind, this court just recently rejected a patentee's reliance on licenses because "some of the license agreements [were] radically different from the hypothetical agreement under consideration" and the court was "unable to ascertain from the evidence presented the subject matter of the agreements." Lucent Techs., Inc. v. Gateway, 580 F.3d 1301, 1327-28 (Fed. Cir. 2009). The majority of the licenses on which ResQNet relied in this case are problematic for the same reasons that doomed the damage award in Lucent.

ResQNet's damages expert, Dr. Jesse David, in a showing targeted to previous licensing, "used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels."

This trial court, like the one in Lucent, made no effort to link certain licenses to the infringed patent. For his part, Dr. David did not provide any link between the re-bundling licenses and the first factor of the Georgia-Pacific analysis. Without that link, as this court explained in Lucent: "We . . . cannot understand how the [fact finder] could have adequately evaluated the probative value of [the] agreements." 580 F.3d at 1328.

Lansa did not try to counter Dr. David. It needn't have, the CAFC panel majority ruled.

The district court seems to have been heavily influenced by Lansa's decision to offer no expert testimony to counter Dr. David's opinion. But it was ResQNet's burden, not Lansa's, to persuade the court with legally sufficient evidence regarding an appropriate reasonable royalty. See Lucent, 580 F.3d at 1329 ("Lucent had the burden to prove that the licenses were sufficiently comparable to support the lump-sum damages award."). As a matter of simple procedure, Lansa had no obligation to rebut until ResQNet met its burden with reliable and sufficient evidence. This court should not sustain a royalty award based on inapposite licenses simply because Lansa did not proffer an expert to rebut Dr. David. See SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161, 1168 (Fed. Cir. 1991) ("A court is not restricted in finding a reasonable royalty to a specific figure put forth by one of the parties."). Moreover the record already contained evidence of licenses on the claimed technology. Lansa was entitled to rely on that record evidence to show a royalty rate reasonably related to the technology in this litigation.

This court observes as well that the most reliable license in this record arose out of litigation. On other occasions, this court has acknowledged that the hypothetical reasonable royalty calculation occurs before litigation and that litigation itself can skew the results of the hypothetical negotiation. See Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078-79 (Fed. Cir. 1983) ("[S]ince the offers were made after the infringement had begun and litigation was threatened or probable, their terms should not be considered evidence of an 'established royalty,' since license fees negotiated in the face of a threat of high litigation costs may be strongly influenced by a desire to avoid full litigation.") (quotations and alterations omitted). Similarly this court has long recognized that a reasonable royalty can be different than a given royalty when, for example, widespread infringement artificially depressed past licenses. See, e.g., Nickson Indus., Inc. v. Rol Mfg. Co., 847 F.2d 795, 798 (Fed. Cir. 1988); Fromson, 853 F.2d at 1577 n.15 ("[A] court should not select a diminished royalty rate a patentee may have been forced to accept by the disrepute of his patent and the open defiance of his rights.") (quotation marks and citation omitted). And a reasonable royalty may permissibly reflect "[t]he fact that an infringer had to be ordered by a court to pay damages, rather than agreeing to a reasonable royalty." Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1109-10 (Fed. Cir. 1996); see also TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 900 (Fed. Cir. 1986) ("That [the patentee] might have agreed to a lesser royalty is of little relevance, for to look only at that question would be to pretend that the infringement never happened.").

The damages award was vacated, and remanded for recalculation.

Judge Newman dissented on damages, with distaste for her colleagues who "create a new 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 by the defendant here."

My colleagues, in setting strict barriers as to what evidence can be considered, leave the damages analysis without access to relevant information. However, it is not necessary that the identical situation existed in past transactions, for the trier of fact to determine the value of the injury. Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563 (1931) ("it will be enough if the evidence show the extent of the damages as a matter of just and reasonable inference, although the result be only approximate"); State Industries, Inc. v. Mor-Flo Industries, Inc., 883 F.2d 1573, 1576-77 (Fed. Cir. 1989) ("Deciding how much to award as damages is not an exact science, and the methodology of assessing and computing damages is committed to the sound discretion of the district court.").

Judge Newman made a fine point that Lucent is not analogous to this case.

This damages assessment is not analogous to that criticized in Lucent, where the damages award was based on the entire market value of a system in which the infringing component was but a small part. Here, in contrast, the patented technology was a large part of the "bundled" licenses, and these licenses were fairly considered for their content and value.

As always, Judge Newman's analysis is incisive and cogent, and so her full dissent is worth review as argument material in an area of patent case law that remains in flux.

Sanctions

The district court had sanctioned ResQNet for keeping two patents in suit well after it had admitted non-infringement to Lansa. Yet "the district court's denial of summary judgment of noninfringement reflects the belief that it was reasonable for ResQNet to have retained that patent for suit." Sanctions were reversed on appeal as an abuse of discretion by the district court.

Posted by Patent Hawk at February 8, 2010 2:52 PM | Prior Art

Comments

To me, the most interesting aspect of this case is the reversal on the 12.5% royalty rate determination on which the damage award is based. You can clearly sense from the majority opinion that they felt the district court weighed too heavily the Georgia-Pacific factor 1 evidence (existing licenses). But as Judge Newman points out, there was other evidence for determining the royalty rate including factor 2 (royalties paid by the licensee to others) and factor 4 (licensor’s policies and practices regarding the grant of licenses to its technology).

Perhaps what is most distressing is that there is a complete disconnect between the majority and Judge Newman on what the "totality of evidence" was for determining the royalty rate of 12.5%. In fact, from reading the majority opinion v. Newman's opinion, you might think each was talking about a different factual record. That's not good for "reasoned" precedent that others can follow with certainty on damages determinations. Instead, this case appears to be a step back from Lucent Technologies in which Chief Judge Michel spilled quite a bit of worthwhile judiciial ink to render order out of how to prove what a "reasonable royalty" is to determine damages

Posted by: EG at February 8, 2010 3:21 PM