Fed. Cir. Clarifies Lost Profits Damages in Patent Cases

by Andrew Stewart

On Thursday, March 16, 2017, the Federal Circuit affirmed a $36 million verdict against Synopsys, Inc. in Mentor Graphics Corp. v. EVE-USA Inc. over computer emulator technology, ruling that, after performing the Panduit analysis for lost profits damages, the resulting damages do not need to be apportioned for the patented invention.

In patent cases, lost profits damages are awarded when parties are competitors. The lost profits compensate the patent owner for lost sales due to sales of infringing products by the competitor. A method of establishing lost profits damages is the Panduit test. Under the test, a patent owner is entitled to recover lost profits if it can show: (1) demand for the patented product; (2) the absence of acceptable non-infringing alternatives; (3) that it has the manufacturing and marketing capability to exploit the demand; and (4) the amount of profit it would have made.

In 2006, Mentor sued EVE over U.S. Patent Number 6,240,376, among others, for methods of debugging source code. The ‘376 patent addresses testing source code after the Hardware Description Language (HDL) is transformed into “netlists.” While prior methods involved developers viewing input and output of a netlist, the ’376 patent permitted developers to monitor intermediate lists with test probes at various stages of the transformation as well. The companies settled, and EVE entered into a license agreement for the patents, including the ‘376 patent. Notably, the license contained a provision terminating the license if EVE were acquired by another company in the emulation industry.

Synopsys began discussions to acquire EVE in 2012, and Mentor informed Synopsys that the license would terminate under the acquisition. Synopsys subsequently filed suit for declaratory judgment that the Mentor patents were invalid. Mentor then counterclaimed for infringement.

After the district judge found that none of Mentor’s patents (besides the ‘376 patent) could be asserted, the case went to trial on just the ‘376 patent. The jury found that Synopsys infringed, and found damages of $36 million owed to Mentor in lost profits.

In ruling that the jury correctly found the ‘376 patent to be infringed, the Federal Circuit also found the damages award to be appropriate. The court rejected Synopsys’ argument, alleging that because infringing features were just two of thousands of total multi-component product features, the appropriate damages award should have been limited to the value derived from only those features. However, the court reasoned that because Synopsys and Mentor were direct rivals and the only companies making such emulators, all of Synopsys’ sales would instead have belonged to Mentor, but for the infringing products. Therefore, Mentor “is entitled to be made whole for the profits it proves it lost because Synopsys infringed.”

The Federal Circuit concluded that “when the Panduit factors are met, they incorporate into their very analysis the value properly attributed to the patented feature,” thus discounting the notion that calculated damages resulting from the Panduit analysis need to be further apportioned to cover only the patented features or elements. Specifically, the first and second factors of the test address apportionment in requiring proof of demand for the whole product, and establishing a lack of non-infringing alternatives.

With this ruling, the Federal Circuit sheds light on the previously unclear issue of when lost profits damages do not need to be apportioned.

*The case is Mentor Graphics Corp. v. EVE-USA Inc. et al., case number 15-1470, in the U.S. Court of Appeals for the Federal Circuit.