Intellectual Property

Comparison Shopping

So few patent cases actually get to trial and verdict that damages appeal decisions are uncommon.

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No, this is not a Black Friday-themed column. My only feeling on that front is that we all should support local businesses to the extent we can. That shopping suggestion aside, I’d like to focus this week on an interesting recent Federal Circuit decision on one of my favorite topics, patent damages. I am always on the lookout for Federal Circuit treatment of damages issues, if only because damages remains an underdeveloped area of patent law relative to its importance to most disputes between litigants. Part of the reason for that of course is that so few patent cases actually get to trial and verdict, which makes damages appeal decisions uncommon.

Thankfully, however, at least some damages disputes do make their way up to the Federal Circuit. And when they do, they tend to present interesting factual circumstances. In our case of the week, Vectura Limited v. GlaxoSmithKline LLC (opinion here), the parties had some prior licensing history that ended up looming large on the resolution of the appeal. The case came to the Federal Circuit from the District of Delaware, where Vectura had won a jury verdict of nearly $90 million, based on a 3% royalty on GSK’s sales of inhalers containing magnesium stearate-coated lactose particles. It is upon those coated particles that the active ingredient particles are deposited according to the asserted Vectura patent. The presence of the magnesium stearate helps with the dispersion of the drug in the patient’s lungs, making the technology a key component of GSK’s inhalers, which themselves generated nearly $3 billion in the damages period through trial. In all, a $90 million damages award represents a significant verdict, both in terms of case value and the importance of the patented technology to the products at issue.

On appeal, the Federal Circuit affirmed the finding of infringement before turning to the two damages questions presented. First, GSK argued that a new damages trial was warranted because Vectura’s damages theory was legally flawed. That theory was based on an allegedly “comparable license” that Vectura and GSK had previously entered into in 2010 for similar magnesium stearate usage in inhalers. At trial, Vectura’s damages expert opined that — based on that 2010 license — GSK would have agreed to an uncapped 3% royalty rate applied to GSK’s total sales of inhalers. The presence of the 2010 license as a comparable license was critical, because without it, the use of GSK’s total sales as the royalty base would have been inappropriate without an accompanying apportionment analysis. Noting the “rather unusual circumstance” in this case, however, the Federal Circuit credited the testimony of Vectura’s damages expert on the comparability of the licenses, thereby negating the need for apportionment.

Further, the Federal Circuit also credited Vectura’s damages expert on the question of whether the royalty rate should be capped, finding “that by 2016 the accused inhalers had already become hugely successful, which would have increased Vectura’s leverage in the hypothetical negotiation.” Accordingly, even though the 2010 license between the parties had a cap on the royalty rate (with no royalties due on GSK sales over 500 million pounds), the outsized success of the accused products gave credence to the jury’s decision to not apply a royalty cap to Vectura’s awarded damages.

Next, the Federal Circuit addressed a common issue in big-ticket patent cases, namely, the allegedly prejudicial effect of having the jury hear references to an infringer’s huge total revenues. While that issue is usually the subject of pretrial motions in limine, GSK had only asked for exclusion of its foreign sales figures in this case. At trial, however, it objected to mentions by Vectura’s damages expert of the $3 billion in U.S. sales at issue. Those arguments gained some traction with the trial judge, who expressed displeasure with use of the $3 billion in total sales, especially in connection with a “pennies on the dollar”-type argument as a basis for Vectura’s damages. But since the “the total revenue was an appropriate base that the jury needed to hear to understand Plaintiff’s damages expert’s analysis,” there was no reason to overturn the jury verdict according to the trial judge. And the Federal Circuit found no “basis to second-guess the judgment of the experienced trial judge in this regard.” Verdict upheld in full, even as the Federal Circuit agreed in principle that “pennies on the dollar”-type damages pleas were improper, just like references to a defendant’s total revenues when the “total amount of sales of the accused products” was not an appropriate royalty base.

Ultimately, the Vectura case provides some important context for evaluating comparability of licenses as part of the analysis regarding apportionment. It suggests, at minimum, that prior licenses involving the parties themselves may support a finding of comparability even when there are differences in license scope or in the patents being licensed. With the increased number of well-capitalized NPEs targeting the same pool of deep-pocketed defendants over and over, the odds of prior licenses between litigants coming into play in a later trial over different patents increases by the day. Here, that dynamic ended up cutting against GSK, even as it had successfully negotiated a favorable royalty cap in the prior license found by both the trial court and the Federal Circuit as otherwise “comparable.” At bottom, defendants should probably assume that comparison shopping with prior licenses at trial will not lead to lower damages awards. In such cases, therefore, it might be a pretrial settlement that would be the real bargain.

Please feel free to send comments or questions to me at [email protected] or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

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Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at [email protected] or follow him on Twitter: @gkroub.

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