The battle over expert testimony on patent damages harkens back to medieval warfare. During that period, as would-be attackers developed new strategies for laying siege to a castle, defensive counter-measures were developed to thwart those siege tactics. As plaintiffs in patent cases have introduced expert testimony based on novel patent damages theories, defendants have asked courts to fulfill their gatekeeping role by preventing certain types of expert testimony from reaching the jury. In its recent VirnetX, Inc. v. Cisco Sys., Inc., decision, the Federal Circuit reinforced the damages “gate” in patent cases by further clarifying the district court's gatekeeping responsibility for ensuring that unreliable expert testimony on purported patent damages does not reach the jury. Vacating a $368 million jury award against Apple, the Federal Circuit concluded that the district court should have excluded expert testimony on damages because: 1) the purported royalty base was predicated on the “smallest salable unit” of the accused product and failed to apportion between patented and unpatented features; and 2) the purported royalty rate was determined using the assumption that the parties would have agreed to a 50/50 split of incremental profits as a starting point, without showing that this assumption was tied to the facts of the case. VirnetX, Inc. v. Cisco Sys., Inc., No. 2013-1489,—F.3d—(Fed. Cir. Sept. 16, 2014) (“slip op.”).

The VirnetX decision resolves discrepancies that had arisen among various district courts regarding apportionment and the use of generic assumptions such as the Nash Bargaining Solution in determining a proper royalty rate. The VirnetX decision, however, leaves open new potential strategies to be employed (and countered) by parties and their damages experts, which will have to be addressed by district courts in their role as gatekeepers.

Apportionment

The 'Smallest Salable Unit'

The term “smallest salable unit” was introduced in Cornell v. Hewlett-Packard, 609 F. Supp. 2d 279, 284-85 (N.D.N.Y. 2009) (Rader, J., sitting by designation). Judge Rader, sitting by designation, granted the defendant's motion for judgment as a matter of law on damages, because the plaintiff used CPU brick revenues as the royalty base rather than processors, which were “the smallest salable infringing unit with close relation to the claimed invention.” Id . at 288. The Federal Circuit subsequently explained in LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012), that calculating royalties on a multi-component product “carries a considerable risk that the patentee will be improperly compensated” for the non-infringing components. Thus, “it is generally required that royalties be based not on the entire product, but instead on the 'smallest salable patent-practicing unit.'” Id. (quoting Cornell, at 287-88).