Patentee overcompensation and the entire market value rule

Stanford Law Review

Volumn 60, Issue 1, 2007, Pages 263-294

  Love, Brian J ^a  

^a STANFORD LAW SCHOOL   (United States)

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EID: 38049032957     PISSN: 00389765     EISSN: None     Source Type: Journal    
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References (146)

1. See Imonex Servs., Inc. v. W.H. Munzprufer Dietmar Trenner GmbH., 408 F.3d 1374, 1379 (Fed. Cir. 2005) ("The entire market value rule 'permits recovery of damages based on the value of the entire apparatus containing several features, where the patent related feature is the basis for customer demand.'"
2. (quoting State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989))).
3. John R. Allison & Mark A. Lemley, The Growing Complexity of the United States Patent System, 82 B.U. L. REV. 77, 93 (2002) ("The percentage of mechanical . . . patents dropped precipitously from the 1970s to the 1990s. . . . Mechanical patents accounted for more than half of all patents issued in the 1976-1978 period, but less than a third of those issued twenty years later.").
4. "Patent trolling" is, generally speaking, the practice of using patents not as a tool for producing and selling goods but, instead, for obtaining licensing fees from potential infringers. See generally Amy L. Landers, Let the Games Begin: Incentives to Innovation in the New Economy of Intellectual Property Law, 46 SANTA CLARA L. REV. 307, 343-47 (2006).
5. King Instrument Corp. v. Otari Corp., 767 F.2d 853, 863 (Fed. Cir. 1985).
6. 35 U.S.C. § 284 (2000). In addition to damages, 35 U.S.C. § 283 (2000) permits courts to grant injunctive relief preventing the infringer from continuing its infringing activities. While permanent injunctive relief was generally entered as a matter of course following a finding of infringement, the Supreme Court's recent decision in eBay, Inc. v. MercExchange, L.L.C, 126 S. Ct. 1837 (2006), may make such relief less certain. Further discussion of injunctive relief, however, is beyond the scope of this article.
7. 35 U.S.C. § 284.
8. See, e.g., Mineo, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109, 1119 (Fed. Cir. 1996) ("The Patent Act permits damages awards to encompass both lost profits and a reasonable royalty on that portion of an infringer's sales not included in the lost profit calculation.").
9. 575 F.2d 1152, 1156 (6th Cir. 1978).
10. Id. at 1157-58 ("A reasonable royalty is an amount 'which a person, desiring to manufacture and sell a patented article, as a business proposition, would be willing to pay as a royalty and yet be able to make and sell the patented article, in the market, at a reasonable profit.'" (quoting Goodyear Tire and Rubber Co. v. Overman Cushion Tire Co., 95 F.2d 978, 984 (6th Cir. 1937))). Those familiar with contract law may recognize this ex post recreation of the hypothetical negotiation that the parties would have struck had they bargained as a form of restitution-style damages.
11. ROBERT PATRICK MERGES & JOHN FITZGERALD DUFFY, PATENT LAW AND POLICY: CASES AND MATERIALS 1078 (3d ed. 2002).
12. 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). The factors are: 1. The royalties received bv the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. 2. The rates paid by the licensee for the use of other patents comparable to the patent in suit. 3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or nonrestricted in terms of territory or with respect to whom the manufactured product may be sold. 4. The licensor's established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. 5. The commercial relationship between the licensor and licensee, such as. whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. 6. The effect of selling the patented specialty in promoting sales of other products of the licensee: that existing value of the invention to the licensor as a generator of sales of his non-patented items: and the extent of such derivative or convoyed sales. 7. The duration of the patent and the term of the license. 8. The established profitability of the product made under the patent; its commercial success; and its current popularity. 9. The utility and advantages of the patent property over the old modes or devices, if any. that had been used for working out similar results. 10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. 11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. 12. The portion of the profit or of the selling price that mav be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions. 13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer. 14. The opinion testimony of aualified experts. 15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is. the amount which a prudent licensee-who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention-would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license. Id.
13. See, e.g., T.J. Smith & Nephew Ltd. v. Parke, Davis & Co., 9 F.3d 979 (Fed. Cir. 1993) (unpublished table decision) ("Proof of an established royalty for the patent in suit is indeed one of the strongest measures of a reasonable royalty.").
14. See ROGER D. BLAIR & THOMAS F. COTTER, INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL DIMENSIONS OF RIGHTS AND REMEDIES 229-30 (2005) ("[F]or purposes of these hypothetical negotiations, the patent is presumed to be valid and the defendant's proposed use infringing . . . .");
15. DONALD S. CHISUM, CHISUM ON PATENTS §20.03[3][a] (7th ed. 2002) ("The [hypothetical reasonable royalty] negotiation is based on the assumption that the patent was valid.");
16. see also Rite-Hite Corp. v. Kelley Co., 774 F. Supp. 1514, 1535 (E.D. Wis. 1991) ("[T]he patentee is presumed to know that the patent is valid and infringed.").
17. BLAIR & COTTER, supra note 12, at 230 ("The presumption [that the patent at issue is valid in the hypothetical negotiation] nevertheless makes economic sense, because an award that reflected the parties' uncertainty at the time of the hypothetical negotiations in effect would require the plaintiff to bear the risk of uncertainty twice: first, at the time of those negotiations, and second when deciding whether to proceed to trial.").
18. See, e.g., Hynix Semiconductor, Inc. v. Rambus, Inc., No. CV-00-20905 RMW, 2006 WL 1991760, at *1 n.2 (N.D. Cal. July 14, 2006) (stating that the royalty base was given by the parties' stipulation of the amount of total sales of the accused products).
19. Here, the term "unpatented" is meant to convey that the components are not covered by the patent at issue in the case-not that they are completely unpatented. This convention is also followed in the case law.
20. See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1551 (Fed. Cir. 1995) (explicitly defining "unpatented" as "not covered by the patent in suit");
21. see also Imonex Servs., Inc. v. W.H. Munzprufer Dietmar Trenner GmbH., 408 F.3d 1374, 1379 (Fed. Cir. 2005) (describing the entire market value rule in terms of a patented feature sold along with "unpatented components" even though the plaintiff sought to recover damages under the doctrine based on laundry machine components, some of which were almost certainly independently patented). Components of a complex device may, of course, be covered by a multitude of patents. The practical effects of this fact are addressed below in Part II.B.2's discussion of "royalty stacking."
22. See, e.g., Seymour v. McCormick, 57 U.S. 480, 490-91 (1853).
23. Id. at 491 (internal quotation marks omitted).
24. Id. at 490. In this passage, the Court recognizes the possibility of what is commonly referred to as "royalty stacking." This idea is explored in detail by Mark A. Lemley & Carl Shapiro in Patent Holdup and Royalty Stacking, 85 TEX. L. REV. 1991 (2007),
25. and discussed infra Part II.B.2.
26. The entire market value rule may apply in both reasonable royalty and lost profits patent infringement damages computations. Rite-Hite, 56 F.3d at 1549 (explaining that the entire market value rule may apply "whether for reasonable royalty purposes, or for lost profits purposes" (internal citations omitted));
27. see also Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1371 (Fed. Cir. 2004) ("[T]he entire market value rule [is] a principle of patent damages that define[s] a patentee's ability to recover lost profits . . . ." (emphasis added));
28. Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001) ("In determining the appropriate basis for calculating a royalty base the court may use the 'entire market value rule.'"
29. (quoting Fonar Corp. v. Gen. Elec. Co., 107 F.3d 1543, 1552 (Fed. Cir. 1997) (emphasis added)).
30. See, e.g., Velo-Bind, Inc. v. Minn. Mining & Mfg. Co., 647 F.2d 965, 973 (9th Cir. 1981) ("[T]he entire market value rule ... is itself an exception to the more general rule that, where the patent creates only part of the profits, damages are limited to that part of the profits, which must be apportioned as between those created by the patent and those not so created.").
31. For further information on the history of apportionment, the entire market value rule, and legal standards for calculating reasonable royalty awards, see Landers, supra note 3, at 354-62.
32. 111 U.S. 120 (1884).
33. Id. at 121.
34. Id. (emphasis added).
35. 225 U.S. 604, 620-22 (1912).
36. See Landers, supra note 3, at 322.
37. 599 F.2d 958, 974 (Ct. Cl. 1979).
38. Id. at 975-76.
39. Id. at 973.
40. 745 F.2d 11, 23 (Fed. Cir. 1984).
41. Id. (quoting Tektronix, Inc. v. United States, 552 F.2d 343, 351 (Ct. Cl. 1977)).
42. Id.
43. 56 F.3d 1538 (Fed. Cir. 1995).
44. Id. at 1550.
45. See Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1372-73 (Fed. Cir. 2004) (allowing damages award for lost profits on sale of syrup used in patented juice dispenser);
46. Paper Converting Mack, 745 F.2d at 23 (affirming damages award based on separate auxiliary equipment sold as part of a line of paper-winding products).
47. Here, and throughout this Article, the phrase "entire value to the infringing firm" (or "entire market/consumer demand") should be read to mean the total value of the accused device to the infringing firm less the value of the next best noninfringing alternative-or, in other words, the entire value added by the accused device above its closest substitute.
48. See Amy L. Landers, Liquid Patents, 84 DENV. U. L. REV. 199, 256 (2006) ("[T]he trend over the past several years has been to award more of the infringer's innovative activity to the patentee .... In part, this has been because the court has expanded the 'entire market value' rule.").
49. This Part draws heavily from the economic model introduced in Lemley & Shapiro, supra note 18, at 1995-98.
50. See also Carl Shapiro, Injunctions, HoId-Up, and Patent Royalties (Aug. 2006) (unpublished manuscript), available at http://faculty.haas. berkeley.edu/Shapiro (deriving the equations relied upon by Lemley and Shapiro).
51. While this economic model addresses only overcompensation resulting from application of the entire market value rule in the reasonable royalty context, the doctrine also routinely overcompensates patentees when used to award damages for lost profits on entire accused devices. This Part demonstrates that it is economically unsound to award a patentee a royalty for the use of value that the patentee did not create. Thus, it is similarly unsound to award a patentee profits earned from value it did not create. For simplicity, and because reasonable royalty damage awards are far more common than lost profits awards, the following analysis will focus on overcompensation in the reasonable royalty context.
52. Lemley & Shapiro, supra note 18, at 1999.
53. More specifically, the Lemley-Shapiro benchmark royalty is given by the equation ⊖*B*V, where ⊖ represents the probability that the patent will be found valid and infringed in litigation (i.e., the patent strength). Id. at 1999-2000. This additional term takes into account the fact that in a true bargain struck between the parties at the time of infringement, the negotiated royalty rate will be discounted by the estimated strength of the patent at issue. Id. In the following analysis, we drop the patent strength term because patent infringement damages are calculated after the patent has been proven valid and infringed such that O=I.
54. While, in practice, courts typically announce reasonable royalty awards as a percentage royalty on the total price of the accused product, the most logical way to calculate a reasonable royalty award is to first consider the value added by the patented component and then divide that value between the patentee and the infringer. For example, assume that the margin that can be earned on the sale of a complex product is $50 and that the value added to the product by the patented invention is $5, such that if the product were sold without the invention the margin would only be $45.
55. See Lemley & Shapiro, supra note 18, at 2021 (explaining a similar example). Since a reasonable royalty is principally based on the ex ante license that the parties would have struck before infringement, the royalty is given by the negotiated division of the $5 surplus created by the invention. With equal bargaining power, for example, the parties would divide this surplus in half. The resulting reasonable royalty would then be $2.50. Assuming that the total price (margin plus costs) of the complex product is $150, the royalty could be equivalently stated as a 1.667 percent royalty on the price of the accused product. For a similar non-numerical example,
56. see BLAIR & COTTER, supra note 12, at 215-17. For a more technical exploration of calculating reasonable royalty awards,
57. see Roy J. Epstein & Alan J. Marcus, Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors, 85 J. PAT. & TRADEMARK OFF. SOC'Y 555 (2003).
58. The next best alternative to the entire product should not be confused with the next best alternative to the patented invention, which, as we shall see infra at Part II.A.3, cannot exist when the entire market value rule is applied in an economically sound manner.
59. Cf. Landers, supra note 3, at 362.
60. This makes sense because, intuitively, the value of a complex device is a linear combination of the values of its component parts.
61. Thus, when applied in an economically rational manner, the entire market value rule comes into play only when the value added by the patented invention equals the total margin earned on the sale of the accused product. Accord BLAIR & COTTER, supra note 12, at 216-17. For example, assume that the value added to an accused complex product by a patented invention is $50, which also equals the total margin earned on the sale of the entire product. In this case, the infringer cannot sell the product without including the invention. As a result, we would expect the patentee and infringer to negotiate a license dividing the entire $50 margin. With equal bargaining power, for example, the parties would split the margin. In that case, the resulting reasonable royalty amount would be $25 per unit.
62. The Federal Circuit has recognized this result in a number of cases.
63. See Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d 649, 656 (Fed. Cir. 1985) (holding that the entire market value rule is properly applied when the unpatented features cannot be sold or used without the patented feature);
64. see also State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989).
65. But cf. Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1372 (Fed. Cir. 2004) (applying the entire market value rule to allow damages based on sales of syrup used in a patented juice dispenser even though "other dispensers could use Juicy Whip's syrups"). However, it has never been used to overturn or rebut an entire market value rule damages claim.
66. See Equation (2) supra.
67. See Equation (6) supra.
68. 382F.3datl372.
69. Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984).
70. 883 F.2d 1573, 1579-80 (Fed. Cir. 1989).
71. 192 F.3d 1353, 1362 (Fed. Cir. 1999).
72. i.
73. See supra notes 43-44;
74. see also The Patent Reform Act of 2007: Hearing on H.R. 1908 Before the Subcomm. on Courts, the Internet, and Intellectual Prop, of the H. Comm. on the Judiciary, 110th Cong. (Lexis 2007) (statement of John R. Thomas, Professor of Law, Georgetown Univ. Law Center) ("[W]hen the Entire Market Value Rule effectively becomes the default damages principle, rather than one that applies under only particular circumstances, the actual scope of patent protection may greatly exceed the claim scope that has been sought and obtained.");
75. Eric E. Bensen, Understanding the Federal Circuit on Patent Damages for Unpatented Spare Parts, 12 FED. CIR. B.J. 57, 65 (2002) ("The most notable expansion of the patent monopoly is the Entire Market Value Rule.").
76. While developing and producing a product that might infringe a patent, an infringer may, in the process, discover new innovative features. As a result, when potential infringers engage in inventive activity (rather than leaving the market) the result will be more innovation overall. See Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839, 843-44 (1990) ("[Patent] law should attempt at the margin to favor a competitive environment for improvements, rather than an environment dominated by the pioneer firm . . . [because] the efficiency gains from the pioneer's ability to coordinate are likely to be outweighed by the loss of competition for improvements to the basic invention.").
77. See Marina Lao, Unilateral Refusals to Sell or License Intellectual Property and the Antitrust Duty to Deal, 9 CORNELL J.L. & PUB. POL'Y 193, 214 (1999) ("If the system overcompensates the inventor, the protection may actually impede innovation by denying competitors (and users) access to needed information and basic inventions that could serve as building blocks for further progress. In short, because competition also plays a role in fostering innovation, overprotection of a patent holder from competition may perversely result in less, rather than more, innovation.").
78. A rational producer will cease to produce a potentially infringing product if the expected cost of patent liability increases to exceed the otherwise expected margin on sales of the product. See, e.g., Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 1, 26-27 (1995) (noting that the specter of patent infringement liability may cause future innovators to avoid a market for fear that expected patent licenses will reduce profitability).
79. See The Patent Reform Act of 2007, supra note 55 ("Modern products and processes commonly embody numerous patented inventions, with some incorporating on the order of one thousand or more. Overly generous damages awards with respect to just a fraction of these patents may impose infringement liability upon manufacturers that dramatically exceeds the profits the infringer made. Such an outcome fails to recognize that the patent system serves not just to promote innovation, but also to encourage the dissemination of new products and processes to the marketplace.").
80. Allison & Lemley, supra note 2, at 78, 80.
81. For a detailed analysis of royalty stacking see Lemley & Shapiro, supra note 18.
82. i 63. It is not a total solution to this problem to simply preclude further liability after the entire market value rule has been successfully applied to a device. To the extent that the second patentee in this hypothetical has a legitimate claim for patent infringement, but is prevented from recovery because of the earlier award (by, for example, a change in the law), the patent system effectively only redistributes patent value to patentees who bring suit quickly. Furthermore, even in the absence of an additional infringement claim, an erroneous application of the entire market value rule will harm a defendant who owns a second patent on the accused device or who made unpatentable contributions to the device's value. See Patent Reform Act of 2007, supra note 55 ("Failure to apportion damages may cause a patent effectively to cover contributions that lie within the public domain, as well as technology that has been patented by third parties or even by the infringer.");
83. Landers, supra note 37, at 255 (noting that under current law a patentee can capture substantial value created by the infringer's efforts, including "the popularity of a product that is due to the infringer's advertising, development of a market, superior consumer support, the infringer's name or development of marketing and distribution channels").
84. As introduced supra note 16, the Supreme Court long ago recognized this possibility in Seymour v. McCormick, 57 U.S. 480, 490 (1853) (explaining that without apportionment, "the unfortunate mechanic [who sells a complex device] may be compelled to pay treble his whole profits to each of a dozen or more several inventors of some small improvement in the [device] he has built").
85. See Landers, supra note 3.
86. See, e.g., Toshiko Takenaka, Patent Infringement Damages in Japan and the United States: Will Increased Patent Infringement Damage Awards Revive the Japanese Economy?, 2 WASH. U. J.L. & POL'Y 309, 365 (2000) (noting that an increase in the size of patent infringement damage awards may encourage firms to engage in inefficient litigation).
87. Landers, supra note 3, at 345.
88. See, e.g., Gary L. Reback, Patently Absurd, FORBES ASAP, June 24, 2002, at 44 (criticizing the use of patents for generating royalties rather than the creation of "revenuegenerating products");
89. Erica Werner, Lawmakers Want "Patent Troll" Crackdown, USA TODAY, June 9, 2005, http://www.usatoday.com/tech/news/techpolicy/ 2005-06-09-patenttroll_x.htm? POE=TECISVA ("The broken patent system right now, and the rise in lawsuits, has unfortunately discouraged our companies from innovating, and patent trolls are gaming the system." (quoting Josh Ackil, Vice President of Government Relations, Information Technology Industry Council)).
90. See 35 U.S.C. § 284 (2000) (authorizing courts to award "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty");
91. see also Lemley & Shapiro, supra note 18, at 2044.
92. See Landers, supra note 3, at 335-40.
93. Id. at 337-38.
94. See Lemley & Shapiro, supra note 18, at 2037.
95. See 35 U.S.C. § 284 (2000)
96. BLAIR & COTTER, supra note 12, at 12.
97. See Landers, supra note 3, at 342 ("[A] deterrence premium should be limited to circumstances where the infringer should have actually known about the potential for infringement, as an innocent infringer by definition will not be deterred unless there is some reason to think it is infringing.");
98. Takenaka, supra note 66, at 364 ("[I]f the overcompensation scheme is justified by the policy of deterrence, the applicability of the new provision must be limited to those who willfully infringed patents.").
99. See Landers, supra note 3, at 341 (noting that companies that produce complex products or that develop technologies surrounded by "patent thickets" may find it "difficult, if not impossible" to assess whether new products may infringe existing patents).
100. See SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161, 1164 (Fed. Cir. 1991) ("[T]he amount of a prevailing party's damages is a finding of fact on which the plaintiff bears the burden of proof by a preponderance of the evidence. Thus, where the amount is fixed by the court, review is in accordance with the clearly erroneous standard ... .").
101. The Federal Circuit has affirmed numerous entire market value rule damages awards based on what can only be described as tenuous evidence relating to the basis of consumer demand for the accused product. See, e.g., Tec Air, Inc. v. Denso Mfg. Mich., Inc., 192 F.3d 1353, 1362 (Fed. Cir. 1999) (affirming entire market value rule damages award based on statements from defendant's internal documents that "the performance and price of the entire system were paramount to its customers" and a single complaint from a customer following defendant's abandonment of the patented method); Fonar Corp. v. Gen. Elec. Co., 107 F.3d 1543, 1552-53 (Fed. Cir. 1997) (affirming the entire market value rule damages award based solely on the fact that the defendant's "technical literature of record emphasized the [patented] feature"). The evidence in these cases nonetheless provided just enough support to create a not clearly erroneous basis for the jury's decision to apply the entire market value rule.
102. See supra Part II.A.3 for the derivation of these two conditions of benchmark level of recovery.
103. See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1550 (Fed. Cir. 1995).
104. See State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989) (stressing whether "the patent related feature is the basis for consumer demand' (emphasis added)); Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984) (stressing whether "the patentee (or its licensee) can anticipate sale of such unpatented components" (emphasis added) (quoting Tektronix, Inc. v. United States, 552 F.2d 343, 351 (Ct. Cl. 1977))).
105. This hypothetical is inspired in part by Forgent Network's recent efforts to enforce U.S. Patent No. 4,698,672 - a patent that it claims covers the ubiquitous JPEG image compression format-against dozens of companies that produce products or services related to digital cameras, scanners, personal computers, and other devices utilizing the JPEG standard. Forgent's assertion of its alleged patent rights resulted in over $110 million in licensing revenue, Press Release, Forgent Networks, Forgent Announces '672 Patent Settlement (Nov. 1, 2006), available at http://phx.corporate-ir.net/ phoenix.zhtml7c= 75983&p=irol-newsArticle&ID=925001&highlight=, before the PTO granted the Public Patent Foundation's request for reexamination and subsequently invalidated the patent's broadest claims, see Public Patent Foundation: Forget JPEG Related Patent, http://www.pubpat.org/forgentjpeg.htm (last visited Mar. 1, 2007) (linking to the PTO's grant of Public Patent Foundation's request for reexamination and the office action rejecting the patent's broadest claims). In November 2006, Forgent announced that it would surrender all pending infringement claims and no longer seek to assert the patent. Press Release, Forgent Networks, supra; Press Release, Public Patent Found., JPEG Patent Claim Surrendered (Nov. 2, 2006), available at http://www.pubpat.org/jpegsurrendered.htm.
106. Rite-Hite, 56 F.3d at 1550.
107. Id. at 1551.
108. Id.
109. Id.
110. Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1372 (Fed. Cir. 2004).
111. Id. at 1372.
112. Id.
113. See, e.g., Rite-Hite, 56 F.3d at 1550 ("The [entire market value rule] has been extended to allow inclusion of physically separate unpatented components normally sold with the patented components.").
114. Juicy Whip, 382 F.3d at 1372 (finding that district court erred by denying patentee the opportunity to present evidence on an entire market value rule theory including damages for syrups that could be used in juice dispensers other than the accused device, and thus had independent commercial value). Note that by allowing such a result Juicy Whip directly contradicts one of the conditions of benchmark-level application of the entire market value rule. As discussed supra in Part II.A.3, if an unpatented component has independent value, the patented invention cannot account for the entire value of the product to the infringing firm. As a result, application of the entire market value rule will overcompensate the patentee by at least the magnitude of that value.
115. See, e.g., Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001);
116. Tec Air, Inc. v. Denso Mfg. Mich. Inc., 192 F.3d 1353, 1362 (Fed. Cir. 1999).
117. See, e.g., Bose, 274 F.3d at 1361.
118. See, e.g., id.; Fonar Corp. v. Gen. Elec. Co., 107 F.3d 1543, 1552-53 (Fed. Cir. 1997).
119. 192 F.3d at 1362.
120. 168 F. Supp. 2d 181, 262-63 (D. Del. 2001).
121. 107 F.3d at 1552-53.
122. See, e.g., Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984).
123. Id.
124. Id.
125. Landers, supra note 3, at 341 ('"[S]oftware and computers are examples of 'system' products-they comprise thousands, even hundreds of thousands, of individually functioning components and features all assembled in a package for a customer. Because many of these features could be the subjects of a patent, it is often the case that thousands of patents may be relevant to a particular computer or software product.'"
126. (quoting Patent Quality Improvement, Hearing Before the Subcomm. on Courts, the Internet and Intellectual Prop, of the H. Comm. on the Judiciary, 109th Cong. 52 (2005) (statement of Richard J. Lutton, Jr., Chief Patent Counsel, Apple Computer, Inc., on behalf of the Business Software Alliance)));
127. see also Lemley & Shapiro, supra note 18, at 1992 ("[M]odem products such as microprocessors, cell phones, or memory devices can easily be covered by dozens or even hundreds of different patents.").
128. See, e.g., Fonar, 107 F.3d at 1552-53.
129. See, e.g., Paper Converting Mach., 745 F.2d at 23.
130. See supra Part II.A.2.
131. If adopted, currently pending legislation promises to offer some defense against the quiet expansion of the entire market value rule and patent infringement damages in general. Introduced in April 2007, the Patent Reform Act of 2007, H.R. 1908, 110th Cong., proposes to amend, among many other patent law provisions, section 284 by giving courts more direction in how to calculate patent infringement damages. Notably, the bill states that courts shall ensure that reasonable royalty damages are based "only [on] that economic value properly attributable to the patent's specific contribution over the prior art," and further "shall exclude from the analysis the economic value properly attributable to the prior art, and other features or improvements, whether or not themselves patented, that contribute economic value to the infringing product or process." Id. § 5(b)(2). In addition, the proposed bill would codify a version of the entire market value rule under which a patentee could recover based on the entire value of the infringing complex product but only after showing that the infringing component is the "predominant basis for market demand." Id. § 5(b)(3). While certainly a step in the right direction, these proposals offer an incomplete response to the expansion of the entire market value rule. In particular, the bill's vague standard for application of the entire market value rule-that the infringing component be the "predominant basis for market demand," id.-while abandoning the most-expansive "anticipation of sales" formulation of the doctrine, leaves the door wide open for courts to continue to award excessive damages under the rule when the infringing component accounts for far less than the entire value of the accused product.
132. See, e.g., Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1353 (Fed. Cir. 1999).
133. See, e.g., United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 393 (1956);
134. DEP'T OF JUSTICE & FED. TRADE COMM'N, HORIZONTAL MERGER GUIDELINES §§ 1.0, 1.3,3 (Rev' d ed. 1997).
135. See supra note 81 for further information on this litigation.
136. TIFF, or "Tagged Image File Format," is an image compression standard first published in 1986 by Aldus Corporation. ADOBE DEVELOPERS ASS'N, TIFF REVISION 6.0 (1992), available at http://partners.adobe.com/public/developer/en/tiff/TIFF6. pdf. Like the JPEG standard, TIFF is a popular format for storing high color depth images and is commonly utilized by image-manipulation applications such as Adobe Photoshop. Tagged Image File Format, Wikipedia, http://en.wikipedia.org/ wiki/Tagged_Image_File_Format (last visited Feb. 27, 2007). GIF, or "Graphics Interchange Format," is an 8-bit per pixel bitmap format introduced in 1987 by CompuServe, Inc.
137. See COMPUSERVE, INC., GRAPHICS INTERCHANGE FORMAT PROGRAMMING REFERENCE (1990), available at http://www.w3.org/ Graphics/GIF/spec-gif89a.txt. Like JPEG, GIF is used widely on the World Wide Web.
138. See Graphics Interchange Format, Wikipedia, http://en.wikipedia.org/wiki/ GIF (last visited Mar. 1, 2007). Another common alternative image compression formats is PNG ("Portable Network Graphics"). See Comparison of Graphics File Formats, Wikipedia, http://en.wikipedia.org/wiki/ Comparison_of_graphics_file_formats (last visited Feb. 27, 2007).
139. JPEG 2000 was developed by the Joint Photographics Expert Group committee as a replacement for the original JPEG standard. See JPEG 2000, http://www.jpeg.org/jpeg2000; JPEG 2000, Wikipedia, http://en.wikipedia.org/ wiki/ JPEG_2000 (last visited Mar. 1, 2007). JPEG 2000 offers several advantages over the original JPEG standard, including higher compression ratios and sophisticated "progressive" downloads. Id.
140. Lemley & Shapiro, supra note 18, at 2041 (suggesting the admission of such evidence is a general improvement to patent damages computation).
141. See, e.g., Scott Fetzer Co. v. House of Vacuums, Inc., 381 F.3d 477, 486-89 (5th Cir. 2004) (considering survey evidence with respect to likelihood of consumer confusion in trademark context);
142. United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1147, 1168-69 (N.D. Cal. 2004) (considering various types of introduced customer survey data in antitrust horizontal merger analysis);
143. see also Menasha Corp. v. News Am. Mktg. In-Store, Inc., 354 F.3d 661, 664-65 (7th Cir. 2004) (criticizing introduced survey data in antitrust market definition context).
144. Courts have long recognized the need to prevent patentees from using patent rights to control sales of unpatented staple articles. This idea is incorporated in the doctrines of contributory infringement and patent misuse. See generally Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176 (1980);
145. Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476 (1964);
146. MERGES & DUFFY, supra note 9, at 1374-75.