Page 53 - Intellectual Property Disputes

Entire Market Value Rule and Apportionment — Lost Profits

Lost revenues in intellectual property disputes may be calculated based on the selling price of the
component of a system that is covered by the intellectual property in suit or, alternatively, the lost
revenue may be the amount lost on the sale of the entire unit, product, or system of which the
component piece was a part. This latter approach is referred to as the entire market value rule, which
allows for the recovery of damages based on the value of an entire apparatus containing several features,
even though only one feature is covered by the intellectual property in suit. fn 95 The entire market value
rule ordinarily applies when the non-patented and patented components are physically part of the same
machine, as in the Rite-Hite case. fn 96 However, some courts have extended the rule’s application to
physically separate non-patented components, so long as they are considered part of one complete
machine or constitute a functional unit. fn 97

The entire market value rule has been applied to both lost profits and a reasonable royalty. The rule
recognizes that, in some cases, the economic value of intellectual property may be greater than the value
of the sales of the covered part alone. fn 98 Essentially, the entire market value rule applies if the patent
holder would have sold the complete device (rather than just the patented component) if there had been
no infringement.

For example, in King Instruments Corp. v. Perego, the Federal Circuit awarded the patent holder lost
profits on sales made by the infringer of non-patented parts for a video tape splicing machine that used
the patented invention. fn 99 Similarly, in State Industries, the Federal Circuit awarded damages based on
the patent holder’s profit margin on the sales of an entire water-heating unit. This case concerned the
infringement of a patented method for adding foam insulation to the water heaters during the
manufacturing process. fn 100

In contrast, in Hughes Aircraft Co. v. United States, the Federal Circuit declined to award damages
based upon the entire market value rule. Hughes argued that the government had infringed its patent
controlling the altitude of a spacecraft and that the damage award should include the value of the
patented device plus the value of the payload. The payload was the non-infringing satellite that was

fn 95 Leesona Corp. v. United States, 599 F.2d 958, 974 (Ct. Cl. 1981).

fn 96 Rite-Hite, 56 F.3d at 1538, 1549.

fn 97 Id.; see also, Kalman v. Berlyn Corp., 914 F.2d 1473, 1485 (Fed. Cir. 1990). (affirming an award of damages for filter screens
used with a patented filtering device); TWM Mfg. Co., Inc. v. Dura Corp., 789 F.2d 895, 901 (Fed. Cir. 1986) (affirming award of
damages for non-patented wheels and axles sold with patented vehicle suspension); Kori Corp. v. Wilco Marsh Buggies & Draglines,
Inc., 761 F.2d 649, 656 (Fed. Cir. 1985) (affirming an award of damages for non-patented uppers of an improved amphibious vehicle
having a patented pontoon structure).

fn 98 Brunswick v. United States, 36 Fed. Cl. 204 (Fed. Cir. 1996), aff’d, 182 F.3d 946 (Fed. Cir. 1998); see also, Gargoyles, Inc. v.
United States, 37 Fed. Cl. 95 (Fed. Cir. 1997) (using the entire market value rule to calculate the royalty base), aff’d, 113 F.3d 1572
(Fed. Cir. 1997); Fonar Corp. v. General Elec. Co., 107 F.3d 1543 (Fed. Cir. 1997), cert. denied, 522 U.S. 908 (1997). But see, In re
Dahlgren Int’l, Inc., 811 F. Supp. 1180 (N.D. Texas 1992) (calculating a royalty base without including non-patented goods or
services, even though lost profit calculations account for such items).
fn 99 King Instruments Corp. v. Perego, 65 F.3d 941 (Fed. Cir. 1995) (Nies, J., dissenting), reh’g denied, petition for rehearing en banc
declined, 72 F.3d 855 (Fed. Cir. 1995) (Nies, J., dissenting).

fn 100 State Indus., 883 F.2d at 1573, 1577.

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