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Federal Circuit Rejects Two-Tiered Royalty Patent Damages

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By Daniel M. Staren and David G. Barker

Last week, a Federal Circuit panel vacated a billion dollar jury verdict in favor of plaintiff-appellee California Institute of Technology (“Caltech”) and remanded for a new trial on damages because of Caltech’s unsupported two-tiered reasonable royalty patent damages theory.

Caltech sued Broadcom, Apple, and others in the Central District of California for patent infringement. Two of the asserted patents disclosed circuits that were designed to improve the speed and reliability of data transmissions (“Circuit Patents”). Caltech alleged infringement by Broadcom’s WiFi chips and Apple’s products incorporating them. The accused chips were developed and supplied to Apple pursuant to an agreement negotiated between Apple and Broadcom.

A jury trial found infringement. During the trial, Caltech proposed the two-tiered damages theory, which sought different royalty rates from Apple and Broadcom. Caltech’s damages experts opined that Caltech would have engaged in two simultaneous hypothetical negotiations: one with Broadcom at the “chip level” and one with Apple at the “device level.” They further opined that these negotiations would have been proper because there would be no cross-talk between Broadcom and Apple as each engaged in their own hypothetical negotiation.

The jury relied on the two-tiered theory to award Caltech $270,241,171 for Broadcom’s infringement and $837,801,178 for Apple’s infringement. The district court explained that the theory was proper and avoided double recovery because Caltech’s experts excluded from Broadcom’s hypothetical chip license any chips incorporated into Apple products; those chips were subject to Apple’s separate license at a different royalty rate.  Apple and Broadcom challenged the damages awards in posttrial motions and appealed. The Federal Circuit affirmed infringement of the Circuit Patents but vacated the jury’s damages award.

The 2-1 majority held that Caltech’s two-tiered damages theory was legally unsupportable. In a typical patent infringement case, “a direct infringer or someone who induced infringement should pay the same reasonable royalty based on a single hypothetical negotiation analysis.” The Federal Circuit explained that in the absence of a compelling showing, which was absent here, controlling precedent precludes a higher royalty “for the same device at a different point in the supply chain.”

The Federal Circuit found the evidence did not show that Apple and Broadcom would engage in separate negotiations and could not justify disparate treatment of the chips at different levels of the supply chain. The mere fact Broadcom and Apple were separate infringers was not enough. The Federal Circuit also rejected the district court’s conclusion that Broadcom’s and Apple’s products were different and therefore possessed different values merely because (1) Apple and Broadcom were “different companies at different levels of the supply chain,” and (2) Caltech’s experts excluded chips sold to Apple as part of Broadcom’s hypothetical chip license. The court held the exclusion is “wholly contrived, lacks any basis of fact and is contrary to the way patent infringement disputes are ordinarily resolved.”