Apportionment in Patent Infringement Damages: A Brief Overview
Black’s Law Dictionary (9th ed. 2009) defines apportionment generally as “[d]ivision into proportionate shares.” Professor Mark Lemley from the Stanford Law School defines apportionment as “dividing out the percentage of the production that is attributable to the patent and, therefore, ought to be paid to the patent owner.”
In U.S. law, the idea of apportioning defendant’s profits and the patentee’s damages goes back more than 130 years to the 1884 U.S. Supreme Court decision of Garretson v. Clark, 111 U.S. 120 (1884). This case was about an improvement to a mop head and the damages the plaintiff sought for alleged patent infringement. The language used by the Court is still applicable today.
The patentee…must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative, or he 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.
There is no magic formula to determine the appropriate level of apportionment – the appropriate share of the total value of the product attributable to the patented component. Indeed, in each and every patent infringement damages case, there needs to be careful consideration of all the facts to determine if apportionment of value is appropriate; and if so, the amount of such apportionment.
In patent infringement damages cases, damages are generally calculated using either lost profits or a reasonable royalty – or a combination. Lost profit damages are only available in limited situations, and therefore, for purposes of this article, are not further discussed.
There are two components to the determination of the amount of a reasonable royalty in patent infringement damages; the royalty base and the royalty rate. The royalty rate is multiplied by the royalty base to determine the amount of the reasonable royalty. The royalty base component of the calculation of a reasonable royalty is the component that is generally reduced or “apportioned” when circumstances require that less than 100% of the value derived from the product is attributable to the patented feature that is the subject of the dispute.
When the patented feature drives or forms the basis for demand of the product that is sold – the product that includes the patented feature – the sales revenues for the entire product are used as the royalty base. The requirement to utilize the entire sales’ price as the royalty base when the patented feature drives or forms the basis of demand for the product is known as the Entire Market Value Rule (“EMVR”). The EMVR requires that the entire sales price be utilized in the determination of the royalty base. Notwithstanding the use of the entire sales price as the royalty base, the royalty rate must reflect consideration for the portion of the profits attributable to any non-infringing features, if applicable.
When the patented feature does not drive or form the basis for demand of the product, the Smallest Salable Patent Practicing Unit (“SSPPU”) principle may be used to apportion the royalty base. This assumes that the accused product with the patented feature also includes other features/components, which have not been infringed, and that the patented feature does, in fact, have value.
Unfortunately, the courts have not provided any bright line rule for apportioning patent infringement damages. Generally though, any amount the patent owner seeks for infringement should be based solely on the value of the patented feature, which must be proven with reliable and satisfactory evidence.
As an example of apportionment, assume that Plaintiff owns a patent for software which allows for computers to connect to a secure communication link. Defendant manufactures and sells a smart phone that includes – and infringes upon – the Plaintiff’s patent. Plaintiff argues that it is due reasonable royalties and that the royalty base should be the entire value (selling price) of the smart phone. In this simple hypothetical example the EMVR would not apply and an apportionment of the entire value of the smart phone (to account for the value of the non-fringing components of the smart phone such as the touchscreen, camera, processor, speaker and programs) would be required. Therefore, the royalty base would be reduced (or apportioned) from the entire value of the smart phone, i.e., $400, to the value of the patented component limited to the value of the secure communications link, i.e., $20. Reasonable royalties would be calculated by applying a reasonable royalty rate to $20 per unit, as opposed to applying a reasonable royalty rate to the entire value of the smart phone of $400.
Rosenfarb LLC is a firm of forensic accounting and valuation experts. We understand how infringement of intellectual property rights impact damages. We understand lost profits and royalty damages. We have keen insights and we always connect the dots. We understand the litigation process. We frame the issues simply and in alignment with the litigation strategy. We use logic to support our opinions, while creating compelling stories. We are sincere, professional, and credible. We are accounting experts with legal acumen.
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[1] Mark A. Lemley, Professor, Stanford Law School, Panel 2 at the Federal Trade Commission Hearing at the University of California: The Evolving IP Marketplace 216 (May 5, 2009).