Damages, Licensing, Patent Litigation

Determining patent infringement damages is complicated and often borders on the metaphysical.  Under U.S. law, a patent holder is entitled to damages adequate to compensate for the infringement, but in no event less than a “reasonable royalty.”  In some cases, patent holders can establish damages through lost profits.  However, when that is not possible or when lost profits damages are relatively low, the patent holder is entitled to at least a reasonable royalty. 

In the reasonable royalty analysis, the court seeks to determine what would have happened had the infringer and the patent holder negotiated a patent license before the acts of infringement occurred.  The license is by definition hypothetical in nature, and the courts consider a number of factors identified in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

In AstraZeneca the Federal Circuit considered the infringer’s appeal of a $76 million judgment against Apotex based on reasonably royalty damages.  For a copy of the Slip Opinion, click here.

AstraZeneca concerns the infringement of a patent directed to an omeprazole formulation for treating heartburn.  An earlier patent covering the active ingredient alone had already expired. The patent in suit covered a formulation that included the active ingredient and two coatings: an enteric coating, and a subcoating.

A key issue in the case involved the application of the “entire market value” rule, which provides that damages may be assessed based on the entire market value of an accused product only when the patented feature creates the basis for customer demand or substantially creates the value of the component parts.  Otherwise, the patentee must estimate the portion of the product that is attributable to the patented technology.  The purpose of the rule is to prevent patent holders from collecting damages attributable to factors other than their invention. 

Apotex criticized the district court’s damages award as running afoul of the entire market value rule because the court did not apportion the damages between the active ingredient and the subcoating that made the claims novel.  The Federal Circuit held that the entire market value rule did not apply because the claims included the active ingredient. The fact that the active ingredient was no longer protected as a stand-alone composition did not trigger the application of the entire market value rule because the active ingredient was nevertheless recited in the claims. 

The Court explained that in those cases where the entire market value rule applies, the saleable unit of the accused product includes features that are not part of the patent claims.  Thus, the value of those features that are not part of the patent claims must be filtered from the analysis. Having made that distinction, the AstraZeneca Court noted that even under a standard reasonable royalty analysis, the Georgia-Pacific factors require consideration of the advantages of the patented invention over the prior art.  So, what is the difference between that Georgia-Pacific analysis and the application of the entire market value rule?

The answer is that when conventional components are combined with novel components in a composition claim, the synergy between old and new components can create value that is relevant in determining a reasonable royalty.  AstraZeneca indicates that such synergies cannot be considered if the entire market value applies.  Thus, if AstraZeneca’s claims covered the subcoating alone, it would not have been proper to consider the value of the active ingredient. However, AstraZeneca’s claims recited both the subcoating and the active ingredient.  In that case, “the question is how much new value is created by the novel combination, beyond what is conferred by the conventional elements alone.”  Slip Opinion at 23.  The Court held that “it has long been recognized that a patent that combines ‘old elements’ may ‘give the entire value to the combination’ if the combination itself constitutes a completely new and marketable article.” Id.  Based on AstraZeneca, it appears that under an entire market value rule analysis, the evaluation of the value provided by the combination of patented and unpatented items would not be permissible.

This holding has important implications for drafting patent claims.  It reinforces the need to draft combination claims that combine a novel ingredient or feature with other ingredients or features that may be included in a commercial product.  Although it is not necessarily the case in pharmaceutical patents, in mechanical patents, claims can often be drafted to cover a novel component as a stand-alone item and to cover a system or assembly including that novel component.  Both types of claims can be important. The claims directed to the novel component alone will be easier to enforce against someone who supplies only that component but not the other components with which it is ultimately combined.  On the other hand, the system or assembly claims can be readily asserted against someone who supplies the completed system or assembly, and will not trigger the application of the entire market value rule (at least as to all of the components in the system claims).  Thus, different claim strategies have different advantages and disadvantages depending on the particular target infringer in the supply chain.

Another noteworthy feature of AstraZeneca concerns the evidentiary value of license agreements arising out of litigation.  In some cases, courts have held that licenses arising out of litigation have little bearing on the reasonable royalty analysis because they do not reflect the negotiation that would have occurred prior to infringement, which is the relevant time frame for purposes of the hypothetical negotiation used to assess reasonable royalty damages.  In AstraZeneca the infringer challenged the district court’s reliance on licenses that AstraZeneca entered into with Andrx and Teva following litigation.  The Federal Circuit first noted that the litigation posture of such licenses may affect their relevance but that “there is no per se rule barring reference to settlements simply because they arise from litigation.”  Slip Opinion at 18.

However, the Court went further and said that the Andrx and Teva licenses were relevant because they were entered into following findings of infringement and validity.  As a result, the Court held that the “setting in which those events took place was . . . similar to the setting of a hypothetical negotiation in which infringement and patent validity are assumed.”  Slip Opinion at 18.  This holding was particularly damaging for Apotex because Andrx had taken a license for between 50 and 70 percent of its profits, and Teva had settled its infringement action for 54 percent of its net sales.  Notably, the AstraZeneca Court cites the treatise Patent Damages Law and Practice, which states that “[l]licenses negotiated to settle a case after a court has established validity and infringement of the patent are very probative of reasonable royalty.”  Slip Opinion at 19, citing J. Skenyon et al., Patent Damages Law and Practice § 1:15 at 25 (2013 ed.)(emphasis added).