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.

The USPTO pilot ran for six months and ended August 20^th, 2016, and included 125 Examiners and 45 Supervisors (SPEs).  The purpose of the pilot was to develop best Examiner practices for prosecution record clarity.  Nothing about examination of an application has changed, however the record will be enhanced to better reflect the Examiner’s analysis.

The pilot had the following focus areas: (1) more detailed interview summaries; (2) enhanced documentation of claim interpretation; and (3) more precise reasons for allowance.  The best practices for Examiners that were identified by the pilot for each focus area are as follows:

1. Interview Summaries
   1. Adding the substance of the Examiner’s position
   2. Providing the details of an agreement, if reached
   3. Including a description of the next steps that will follow the interview

2. Claim Interpretation
   1. 112(f) Limitations

3. Reasons for Allowance
   1. Identify specific allowable subject matter or where found, if earlier presented, during prosecution
   2. Confirm applicant’s persuasive arguments
   3. Address all independent claims

At this point, Examiners are not required to abide by the best practices identified above.  However, these best practices will be the basis of ongoing recommendations to Examiners to provide better clarity in the record for improved prosecution.

In its second Inter Partes Review (IPR) decision on the merits, the USPTO’s Patent Trial and Appeal Board (PTAB) further clarified the standards for amending claims in Idle Free Systems Inc. v. Bergstrom Inc. (Case No. IPR2012-00027).

Not only did the PTAB hold all of Bergstrom’s claims invalid based on prior art, but it also denied their motion to amend claims because Bergstrom failed to satisfy its burden of proof to show that it should be allowed to make such claim amendments.  Claim amendments are not entered automatically in IPR, and instead are only entered upon a demonstration of the patentability of those claims.  In this case, the PTAB denied its motion because Bergstrom failed to demonstrate that its proposed amended claims were patentable over the prior art.

The PTAB explained that Bergstrom failed to prove that its proposed amended claims were patentable, and importantly had not shown what one of skill in the art would have known with regard to the proposed amended claims.  The PTAB stated as follows:  “without having discussed sufficiently … the level of ordinary skill in the art and what was previously known regarding the features on which Bergstrom focuses for establishing patentability, Bergstrom has not set forth a prima facie case for the relief requested or satisfied its burden of proof.”

Bergstrom had argued that it amended claims were distinguishable over the closest prior art addressed in the IPR.  The PTAB did not disagree with these arguments, but required Bergstrom to describe the level of skill in the art in terms of the skill set and ordinary creativity of one of ordinary skill in the art.  The PTAB explained that Bergstrom had an obligation to distinguish over not only the prior art of record, but also other prior art or which it was aware, and a blanket statement to this effect is insufficient.  In other words, Bergstrom had an obligation to generally address whether the features added by amendment were known in any context, and if so why its features are patentable in the context of the claimed invention.

In order to amend claims in IPR, the significance and usefulness of the added limitations should be established from the perspective of the level of ordinary skill in the art, which then should be defined in terms of the level of creativity and skill set.  The patent owner needs to explain what it knows about the level of ordinary skill in the art, and what was previously known regarding each feature on which it relies for establishing patentability of the amended claims.  In other words, the patent owner must establish, in the context of the prior art of which it is aware, that the added limitations are sufficiently different such that one of ordinary skill in the art would not have arrived at the claimed invention.

The PTAB’s explanation for the standard for amending claims in Idle Free Systems Inc. v. Bergstrom Inc. is significant because of the newness of IPR and corresponding lack of precedent.  According to this decision, the patent owner has the burden to show patentability of amended claims over the prior art because IPER constitutes an adjudicated proceeding as opposed to examination at the USPTO.  In other words, according to the Idle Free Systems case, the PTAB will not be examining claims such as would be performed by an examiner during prosecution.  Instead, the movant for amending claims in IPR is required to show that it is entitled to the relief requested.

The numbers of filed AIA post-grant proceedings, including Inter Partes review (IPR), Post-grant Review (PGR), and Covered Business Method (CBM), exceeds the numbers originally anticipated by Congress.  For example, Congress originally envisioned less than 300 such filings per year, but nearly 1000 IPR petitions have been filed to date.  A yearly breakdown of the IPR filings, i.e., 2012 – 17; 2013 – 514; 2014 – 393, indicates that the popularity of these post-grant proceedings is growing.

The popularity of AIA post-grant proceedings may be based upon a number of reasons, including the speed at which such proceedings are processed.  For example, AIA post-grant proceedings challenging patents before the PTAB must be concluded within 12 months of a trial order; however, 18 months is allowed in exceptional cases.  This schedule is contrasted with prior reexamination procedures, which could take five or six years with appeal.  Many district courts had been hesitant to stay litigation for five or six years until reexamination procedures were concluded, but AIA post-grant proceedings are not subject to these delays.

However, tactical decisions for pursuing such AIA post-grant proceedings remain subject to their applicability.  For example, Inter Partes Review (IPR), which is most similar to the previous reexamination procedures, has been available since September 16, 2012, but can only be used to challenge patents based on prior art patents and printed publications.  Any third party can file an IPR who:  1) has not filed a complaint in federal district court challenging the patent’s validity, 2) has not been the recipient of a complaint for infringement of the patent, or 3) is not otherwise estopped.

Contrarily, Post-Grant Review (PGR), the procedures of which are similar to those of IPR, is applicable to:  1) any business method patent that is eligible for CBM, or 2) any patent that includes at least one claim with an earliest effective filing date on or after March 16, 2013, or continuations thereof.  PGR remains applicable in many situations in which IPR is excluded.  For example, any type of prior art supporting a new anticipation for obviousness based ground of rejection can be used in PGR, and third parties who have been the recipient of a complaint for infringement of the patent at issue are not barred from pursuing PGR.