The Federal Circuit Court of Appeals has taken aim at sky-high patent infringement damages. In Power Integrations, Inc. v. Fairchild Semiconductor International, Inc., 2018 U.S. App. LEXIS 18177 (July 3, 2018), the court limited the use of the rule that allowed patent owners to recover damages based on the total sales of the infringing product, even if the patent covered only a part of the product.
Power Integrations owned two patents covering switching regulators in power supply controller chips. Power Integrations sued Fairchild for patent infringement in the Northern District of California. At trail in 2014, the jury found for Power Integrations and awarded it damages of $105 million for a reasonable royalty. Fairchild moved for judgement as a matter of law or for a new trial. The district court denied the motions.
After the Federal Circuit, decided another case involving damages for a product that contained both patented and unpatented features, the district court ordered a second trial on damages. After that trail, the jury awarded Power Integrations $140 million in damages as a reasonable royalty, based on the entire market value rule. Under that rule, a patent owner can recover damages for the sales of the entire infringing product, even though the product has unpatented features in addition to patented features.
Again, Fairchild moved for judgement as a matter of law or a new trail, and the district court denied the motions. On appeal, the Federal Circuit vacated the damages award and remanded the case. The court held, at *22:
“A patentee is only entitled to a reasonable royalty attributable to the infringing features. 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.”
The reasonable royalty must be based on the “value of what was taken,” which is only the value of the patented features, not the value of the whole product. Id. at *23.
The court explained that the determination of a reasonable royalty must start with a royalty base. The royalty base “should not be larger than the smallest salable unit embodying the patented invention.” Id.
The court cautioned against the application of the entire market value rule, finding that its application could result in an improper damage award because it is likely to overstate the amount that is attributable to the patented features of an infringing product. Id. at *24. The court said that the entire market value rule is only appropriate when the patented feature is the basis for the defendant’s sales. Id. at *25.
The court found that Fairchild’s products contained unpatented features of significance, as well as the patented features. Because Power Integrations has not met its burden of proof to show that the patented features were the “sole driver of customer demand,” the application of the entire market value rule was improper and the damages award had to be vacated. Id. at *28.