Court: District Court, S.D. New York; December 5, 2011; Federal District Court
An award of $164,265 has been entered in a patent infringement case involving ResQNet.com, Inc. and Lansa, Inc., following a Federal Circuit decision that vacated the original damages award and mandated a recalculation. The Court previously ruled that ResQNet's U.S. Patent No. 6,295,075 was valid and infringed by Lansa, initially awarding $506,305 based on a hypothetical royalty of 12.5%. The Federal Circuit affirmed the validity and infringement findings but reversed sanctions against ResQNet and found the damages award lacked sufficient legal support, primarily criticizing reliance on inappropriate licensing evidence. A hearing to determine a reasonable royalty was conducted in 2011. Under 35 U.S.C. § 284, a patentee is entitled to damages sufficient to compensate for infringement, with the burden of proof on the infringed party to establish a reasonable royalty. The damages analysis focuses on economic harm, and courts typically use a hypothetical negotiation model informed by the Georgia-Pacific factors to ascertain a fair royalty rate.
The first Georgia-Pacific factor evaluates past and present royalties received by the patentee for licensing the patent in question, focusing solely on licenses directly related to the patent and claims being litigated. It is established that damages calculations cannot utilize licenses that differ significantly from the hypothetical agreement at stake. This hypothetical negotiation is presumed to occur prior to any patent litigation to avoid skewed fee negotiations influenced by the threat of a lawsuit. The second factor examines rates paid by the licensee for comparable patents, while the third considers the nature and scope of the license (exclusive vs. non-exclusive). The fourth factor looks at the licensor's licensing policies, and the fifth addresses the commercial relationship between the licensor and licensee. Other factors include the impact of the patented invention on sales of non-patented items (sixth), the patent's duration (seventh), the product's profitability and commercial success (eighth), the utility of the patent over previous methods (ninth), the nature of the invention and its benefits (tenth), and the extent of the infringer's use of the invention (eleventh). The twelfth factor pertains to customary profits for the invention's use, while the thirteenth focuses on the infringer’s profits attributable to the invention. The fourteenth factor considers expert opinions, and the final factor evaluates what a reasonable agreement would have been between the licensor and licensee had they negotiated in good faith. Additionally, a reasonable royalty may reflect the necessity of a court order for damages rather than a voluntary agreement. The evidence from the June 7-8, 2011 hearing suggests a royalty rate of three percent should apply to all sales revenue, including maintenance fees, from September 25, 2001, to June 24, 2008. Expert testimonies were provided by Dr. Jesse David and Brian Blonder regarding the appropriate royalty rate.
Each party's expert performed a detailed analysis using the Georgia-Pacific factors to determine reasonable royalty rates for the patent in question. Of the fifteen factors, six were deemed neutral, and factor fourteen, concerning expert opinions, was not addressed by either expert. The primary focus for both experts was factor one, which examines past and present royalties for licensing the patent. The court confirmed that only direct licenses are relevant, excluding re-bundling licenses, and identified the IBM and Zephyr licenses as the pertinent agreements. The Zephyr agreement was a settlement of litigation, unlike the IBM agreement.
David, the plaintiff's expert, proposed a reasonable royalty rate of eight to ten percent based largely on the royalties received from the IBM and Zephyr licenses. He scaled one royalty rate based on the licensing language and interviews with ResQNet employees, which Lansa contested as relying on extrinsic evidence. David's scaling was deemed appropriate as it considered the broader revenue context of the license. However, he failed to appropriately apportion the royalties among multiple patents included in the licenses.
On the other hand, Blonder, Lansa's expert, suggested a lower royalty rate of one percent of revenues including maintenance, or 1.5% excluding maintenance, by dividing the rates of the licenses by the number of patents they covered. This method assumed equal value among all licensed patents, which is contrary to the Federal Circuit's ruling in Lucent, emphasizing the necessity for reliable evidence to separate the value of the patented feature from unpatented features. The court indicated that both experts' methodologies for determining the royalty rates were flawed: David's approach lacked proper apportionment, while Blonder's oversimplification was unsupported. A downward adjustment for the value of the '075 patent within the context of the licenses was necessary.
Blonder failed to provide justification for the appropriateness of a straight division method for determining the royalty. Factor four analysis by David indicated that ResQNet's practice of licensing software products and negotiating reseller agreements likely increased the royalty rate compared to straight patent licenses. Blonder countered that ResQNet’s execution of three license agreements implicitly including rights to the '075 patent would have a neutral or downward effect on the royalty rate. For factor five, David noted that the direct competition between Lansa and ResQNet would raise the royalty rate, while Blonder argued they were not direct competitors due to ResQNet’s practice of providing its program for resale or bundling, making this factor neutral. Evidence supported Blonder’s view.
Factors eight through eleven were found neutral by Blonder, while David believed they exerted upward influence, relying on bundling licenses that the Federal Circuit previously rejected, which was deemed improper. David's additional factors, including significant revenues for Lansa and long-term royalty payments from a straight licensee, were considered mildly upwardly influencing. Ultimately, after evaluating all Georgia-Pacific factors and the Federal Circuit's opinion, a three percent royalty rate was deemed reasonable.
The parties disagreed on the appropriate royalty base, specifically regarding the inclusion of maintenance fees. ResQNet argued for their inclusion based on the original court decision, while Lansa contended they were inappropriate. ResQNet's position was favored, as past trial proceedings included arguments over the royalty base. Dr. David calculated Lansa's revenue from NewLook sales including maintenance fees, and although Lansa did not dispute the calculations for certain years, it did claim figures were below estimates for other years. Lansa accepted the court's prior inclusion of maintenance revenue in the royalty base without objection. The court's earlier ruling mandated the inclusion of maintenance fees in the royalty base, and Lansa did not challenge this during appeal, making the issue settled under the mandate rule, which prevents relitigation of matters encompassed by the appeal judgment.
The Circuit affirmed the lower court's ruling on infringement, stating that maintenance fees are included in the royalty base, which is not subject to current review. The court referenced previous cases indicating that issues not raised in an appeal cannot be revisited upon remand, specifically noting that invalidity and waiver could not be argued again due to their prior adjudication. Lansa contended that maintenance fees should be excluded from the royalty base, arguing that the relevant IBM licenses did not incorporate these fees. An advertisement from IBM in 2011 suggested that maintenance was bundled with software licenses, but its relevance to 2001 practices was questioned. Testimonies from both parties indicated differing interpretations of IBM's maintenance policies, with ResQNet asserting that maintenance was included in the product price. Evidence showed that IBM paid royalties on upgrade licenses, implying that maintenance fees were royalty-bearing. Conversely, the Zephyr settlement explicitly excluded maintenance fees, but their advertisements suggested that a subscription plan included maintenance, which would be part of net sales for royalty calculations. Furthermore, maintenance fees, typically 15% of the software's purchase price, are linked to software updates, reinforcing their relevance to customer demand and royalty considerations.
Maintenance fees should be included in the royalty base, which totals $5,475,512 from September 25, 2001, to June 24, 2008. While the Court did not formally address maintenance fees, it noted that damages should be calculated for this period. Lansa contends that changes to NewLook on June 24, 2008, constitute an effective design around, limiting damages to this date. The Court emphasized that a party claiming redesign must be allowed to litigate infringement at a new trial. Insufficient evidence was presented to evaluate whether the redesigned NewLook infringes the '075 patent, as no technical expert testimony or assessment of damages in a hypothetical negotiation following the redesign was provided. The Court concluded that a new infringement claim against the redesigned product would necessitate a separate legal action. A damages award of three percent on the royalty base results in a total of $164,265, not including prejudgment interest. The judgment is to be submitted on notice, and the evidence supporting the royalty calculation is subject to a protective order.
