Page 103 - Intellectual Property Disputes

paribus [holding all other things constant], be equal to the profit attributable to the patented features." fn
162

For example, in TWM Manufacturing Co., Inc. v. Dura Corp., fn 163 the special master computed
"reasonable royalty" damages based on an internal memorandum, written by the infringer’s top
management before the infringement began. The memo indicated that the infringer projected a
substantial gross profit (52.7%) from the proposed infringing sales. Using this figure, the special master
subtracted overhead expenses to obtain the infringer’s projected net operating profit (37% to 42%) and
then divided the projected net operating profit between the infringer and the patent holder. The special
master concluded that, at the time infringement began, the infringer would have accepted the standard
industry profit on the item. The profit for the infringer was set at the standard industry rate (6.6% to
12.5%), and the remaining 30% became the "reasonable royalty."

On appeal to the Federal Circuit, the infringer contended that it was erroneous for the special master to
use this method, asserting that the more traditional "willing licensor–willing licensee" test was legally
mandated. The infringer also downplayed the significance of its pre-infringement memorandum, instead,
highlighting that the actual profits realized on the infringing products were much lower than the
projected figures. The Federal Circuit, however, rejected the infringer’s contentions and affirmed the
award. After noting that there is no single way to determine patent damages, the Federal Circuit held
that it was of no consequence that a lesser royalty may have resulted from another analysis. fn 164 "On
appeal, an infringer cannot successfully argue that the district court abused its discretion in awarding a
‘high’ royalty by simply substituting its own recomputation to arrive at a lower figure." fn 165 The
relevant question was whether the method used by the lower court was proper, and the appellate court
concluded that it was. In particular, the Federal Circuit upheld the special master’s use of the analytical
method because, unlike the infringer’s alternative, it focused on the critical time when infringement
began, rather than thereafter.

In its 2009 decision in Lucent v. Gateway, the Federal Circuit addressed the application of the analytical
method as one of "several approaches for calculating a reasonable royalty." In addition to the
hypothetical negotiation construct, the court described the analytical method, which "focuses on the
infringer’s projections of profit for the infringing product. (See TWM Mfg. Co. v. Dura Corp., 789 F.2d
895, 899 (Fed. Cir. 1986) [describing the analytical method as "subtract[ing] the infringer’s usual or
acceptable net profit from its anticipated net profit realized from sales of infringing devices"]; see also
John Skenyon et al., Patent Damages Law & Practice § 3:4, at 3-9 to 3-10 (2008) [describing the

fn 162 Metaswitch Networks LTD. v. Genband US LLC, et al. (EDTX 2:14-cv-744, March 5, 2016). In its opinion, the district court
addressed the defendant’s argument that plaintiff’s damages expert improperly considered profits from specific accused and non-
accused products offered by the defendant, rather than "standard industry profits," as considered in the TWM Mfg. case, addressed in
the subsequent paragraphs. Here, the district court ruled that "there is nothing about the analytical approach that precludes a
comparison between profit margins on specific products," rather than a comparison to "industry standard profit" and that the defendant
failed to demonstrate "why comparing the profitability of specific products is somehow less reliable...So long as the comparison
isolates the value of the patented features – and no more – it is immaterial whether the profitability of a specific product or of an
industry is used." The Federal Circuit does not appear to have specifically addressed the appropriateness of applying the analytical
method using profit margins of actual products, rather than "industry standard rates" or using actual results, rather than projected
results.

fn 163 TWM Mfg. Co., Inc. v. Dura Corp., 789 F.2d 895, 899 (Fed. Cir. 1986).

fn 164 Id.

fn 165 Id.

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