Thursday, June 17, 2010

Laserdynamics v. Quanta -- The Continuing Slow Death of the Entire Market Value Rule

Last September in Lucent v. Gateway, the Federal Circuit finally took control of the law of patent damages by, with one hand, upholding the entire market value rule and, with the other hand, killing it. Former Chief Judge Michel made it clear that, before the courts were going to allow damages for infringement of a patent covering a small component or feature of a larger product to be based on the revenues for the sale of the entire product, the plaintiff had to prove that the patented technology was the reason that customers bought the product in the first place, i.e. that the "entire market value" of the product was the patented technology.

The Lucent decision has had a pretty good run since last September -- although it has mainly come up in decisions where new Chief Judge Rader has taken the district court bench.

However, last week, Judge Ward of the normally plaintiff-friendly Eastern District of Texas applied the new strict standard to cut Laserdynamics' $52 million award down to a mere $6 million.

In this case, the patent covered an optical disk reading method enabling a computer to identify an inserted disk and find the appropriate software to read or play it. The plaintiff’s expert testified the royalty should be 6% on stand-alone disk drives ($1.69/disk drive) and 2% on assembled computers containing the disk drive ($17.20/computer), using the entire market value rule. The jury’s verdict of $52 million was based on this analysis

Judge Ward held that the application of the entire market value rule was improper and ruled that the price of the finished computer should not be included in the verdict. He held that Laserdynamics had presented no evidence that its patented method drove the demand for QCI’s finished computers and noted that “the claimed invention embodied in the disc-drive is but one relatively small component of the entire assembled computer."

Ward further observed that “there is nothing in the record that shows the demand for QCI’s assembled computers was in any way driven by LaserDynamics’ disc-discrimination method patent” and that LaserDynamics “did not carry its evidentiary burden of proving that anyone purchased [the assembled computer] because of the patented method.”

Indeed, LaserDynamics pointed to no evidence that Quanta sold more of the assembled computers because it included drives practicing LaserDynamics’ patent.

So, if your patent covers the bell on the bicycle instead of the bicycle itself and you can't show that customers are streaming into the shop asking for your special bell, don't think you will get any sympathy from the bench. Because if a plaintiff can't cut a break in EDTex, it isn't going to happen anywhere.

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