Whole Market Value Rule Strikes Again in WDTX – Intellectual Property

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On January 3, 2022, Magistrate Judge Susan Hightower granted a defendant’s motion to exclude expert damages theory for violation of the total market value rule, reminding plaintiffs around the world to do exercise caution when applying whole product sales as the basis for royalties.

In Via Vadis, LLC et al. vs. Amazon.com, Inc., 1:14-cv-813, Dkt. No. 230 (WD Tex. January 3, 2022), Via Vadis, LLC (“Via”) alleged that Amazon.com, Inc. (“Amazon”) directly and indirectly infringed Via’s patent for access systems and data management based on Amazon’s use of the BitTorrent protocol in its S3 cloud storage product. Amazon argued that the correct royalty base is revenue generated from the BitTorrent interface alone, totaling $250,000. Although the Court stated that the excerpts from the filing do not indicate what Via’s royalty basis was, Via’s damages expert began the royalty calculation with the total revenue generated by the storage product in Amazon’s S3 cloud, 22 billion dollars, then distributed the value of the BitTorrent protocol. at S3, concluding that the value exceeded $30 million.

Judge Hightower granted Amazon’s motion to exclude Via’s adjuster’s damages calculations despite the lack of a royalty basis declared by Via, stating that “the entire market rule is implied by commencing the royalty calculation with total S3 revenue – notwithstanding subsequent distribution – rather than market value for the BitTorrent Service.”

In any patent infringement case, successful plaintiffs are entitled to at least reasonable damages attributable to the infringing use of an invention. A patentee seeking such a royalty should only seek damages attributable to the infringing features of the infringing product, not the full value of the product. Where multi-component products are involved, such as Amazon’s S3 platform, the entire market value rule requires that the combination of royalty base and royalty rate reflect only the value attributable to the infringing feature of the product and no more, unless it can be proven that the patented feature creates the basis for customer demand or substantially creates the value of the components. In granting the motion to exclude the calculation of Via’s royalties, Judge Hightower concluded that Via’s “one sentence regarding ‘the importance of price’ to Amazon’s S3 customers falls far short of its obligation to establish that BitTorrent “was the sole driver of consumer demand” for Amazon’s entire cloud storage service.” According to the Court, without such evidence, it was inappropriate for Via to use the full S3 revenue as a royalty basis.

Relying on the Federal Circuit’s decision in LaserDynamics, Inc. v. Quanta Computing, Inc., Judge Hightower found that such a starting point violated the market value rule in its entirety because “disclosure of . .. the complete product [revenue] rather than the patented component alone”, without demonstrating a correlation to the value of the patented feature alone, may “artificially inflate the jury’s calculation of damages”, and result in an award of damages that exceeds the amount sufficient to compensate Via for infringement. The Court therefore ruled that the theory of damages was unreliable and irrelevant since the offending feature, the BitTorrent interface, generated less than $250,000 of the $22 billion in revenue attributable to S3.

This decision provides an important reminder to patentees seeking to recover reasonable damages that in the absence of revenue data specifically attributable to a product’s infringing feature, patentees must provide strong evidence to prove that the infringing feature drives consumer demand for the larger product and, when allocating the total revenue of a component product, state and provide evidence of the royalty base. Without such evidence, patentees may end up with a favorable judgment but an insufficient amount of damages.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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