ResQNet.com v. Lansa: Proper Calculation of Reasonable Royalty Rates

The Federal Circuit clarified that extraneous and “inapposite” past license evidence should not be used to calculate reasonable royalty rates in patent infringement cases. In ResQNet.com Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), the Federal Circuit court affirmed a district court finding of patent infringement, but reversed and remanded as to damages, holding that the plaintiff’s expert had relied on improper evidence to calculate the royalty rate. Specifically, the Federal Circuit Court found that past license evidence used to calculate royalty rates should be reasonably related to the claimed invention.

BACKGROUND

ResQNet.com brought a patent infringement action against Lansa relating to two of its patents for screen recognition and terminal emulation software. The United States District Court for the Southern District of New York ruled that Lansa infringed on one patent, but not the other. Regarding the infringed patent, the court awarded damages of $506,305 for past infringement based on a hypothetical royalty of 12.5%, plus prejudgment interest. The district court denied ResQNet’s motion for permanent injunction and instead imposed a license at a 12.5% royalty. The district court also assessed Rule 11 sanctions against ResQNet and its counsel.

On appeal, the Federal Circuit affirmed the district court’s finding of validity and infringement, reversed the imposition of Rule 11 sanctions, and vacated the district court’s damages award, remanding the case for a redetermination of damages. ResQNet.com Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010). The key issue in the Federal Circuit’s per curiam opinion related to the determination of a reasonable royalty rate.

Past License Evidence Used to Calculate Reasonable Royalty Rates Must Relate to the Claimed Invention

The Federal Circuit found that ResQNet’s damages expert had relied upon improper and inappropriate past license evidence in calculating the reasonable royalty rate.

In Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), the Southern District of New York introduced a method of determining a “reasonable royalty” for patent infringement that requires the court to estimate the rate that the parties would have willingly negotiated before the infringement occurred. In calculating that rate, a party may rely on any substantial evidence, including royalty rates paid in connection with other actual licenses for the use of the infringed patent or sufficiently similar patents. Id. at 1120. The caveat, however, is that any such past license evidence used must be “sufficiently comparable” to the hypothetical license being calculated. Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1329 (Fed. Cir. 2009).

The Federal Circuit applied this Georgia-Pacific standard in Lucent Technologies, Inc. v. Gateway, Inc., supra, where it found that four of the eight license agreements used to calculate the royalty payment “differ substantially from the hypothetical negotiation” at issue in the case, and therefore they failed to support the damages awarded. Id. at 1330.

Similar to its holding in Lucent Technologies, the Federal Circuit determined that five of the seven licenses relied on by ResQNet’s expert were not comparable licenses in that they granted rights in the patent, but also included additional services that were unrelated to the claimed invention. ResQNet.com Inc. v. Lansa, Inc., 594 F.3d at 870. “[N]one of [the] licenses [relied on] even mentioned the patents in suit or showed any other discernible link to the claimed technology.” Id. The Federal Circuit held that “any evidence unrelated to the claimed invention does not support compensation for infringement but punishes beyond the reach of the statute.” Id. at 869.

The Federal Circuit also suggested that ResQNet’s expert purposefully used these extraneous licenses in order to inflate the royalty rate. Id. at 870. “Because the district court’s award relied on speculative and unreliable evidence divorced from proof of economic harm linked to the claimed invention and is inconsistent with sound damages jurisprudence, this court vacates the damages award and remands.” Id. at 868. The Federal Circuit directed that on remand, the District Court “should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology.” Id. at 872-873.

Plaintiff Claiming Infringement Retains the Burden of Proof on Damages

The Federal Circuit felt that the District Court was “heavily influenced by Lansa’s decision to offer no expert testimony to counter [ResQNet’s expert’s] opinion.” Id. at 872. The Federal Circuit court pointed out, however, that ResQNet retained the burden of persuading the court of an appropriate reasonable royalty rate; Lansa had no obligation to present its own expert to rebut ResQNet’s evidence until and unless ResQNet met its burden. Id. Moreover, Lansa was entitled to rely on evidence of similar licenses that were already in the record to show the reasonable royalty rate. Id.

CONCLUSION

The message sent by the Federal Circuit Court in its Lucent Technologies and ResQNet decisions is that plaintiffs must exercise vigilance when presenting evidence of past licenses in the calculation of reasonable royalties for patent infringement and ensure that the past licenses are sufficiently comparable to the hypothetical license to serve as sufficient evidence.

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Laura D. Castner

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