Dennis Crouch's Patently-O: Federal Circuit OK’s Award of 50% of Gross Margin

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Federal Circuit OK’s Award of 50% of Gross Margin Posted: 07 Apr 2015 10:24 AM PDT Astrazeneca v. Apotex (Fed. Cir. 2015) Omeprazole (Prilosec) is a proton pump inhibitor (PPI) used to treat stomach acid issues.  In a prior portion of this case, the Federal Circuit affirmed that Apotex’s generic omeprazole infringed the AZ patents and that the patents were not invalid. After that 2007 decision, the company took the product off the market. The present appeal is simply about the damages that Apotex needs to pay based upon its infringement from 2003 – 2007. A patentee is entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." 35 U.S.C. § 284.  Thus, the statute sets a ‘floor’ of a reaonable royalty but offers the option of proving further damages that would not be accounted-for in such a royalty calculation. This second category is ordinarily thought of as the patentee’s “lost profits” due to the infringement. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009). Reasonable Royalty as 50% of gross margin: Here, the patentee asked for a reasonable royalty, which the district court set at 50% of Apotex’s $150 million gross margin (gross sales minus cost of goods) on the infringing sales.  On appeal, the Federal Circuit has affirmed. District courts (and juries) are given substantial deference in awarding damages for patent infringement.  Factual conclusions (including the ultimate award) are reviewed only for clear error and the damage computation approach is reviewed for abuse of discretion. Entire Market Value Rule for Pharma: The most interesting aspect of the case involved a discussion of the “entire market value rule.” When thinking about damages, the focus should be on the incremental value of the patented invention.  When the patent covers only a small-portion of a multi-component product, the damage award should be based upon how the invention improves that small-portion unless the patentee proves that the patented feature “creates the basis for customer demand” in the whole product or “substantially creates the value of the component part.” quoting Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011).  One way around this is for a patentee to claim the product as a whole, then reciting both the novel features and conventional elements that make-up the rest of the product.  Here, that is exactly what AZ did – claiming a pill containing the (novel) drug covered with a (standard) enteric coating and subcoating. For the Federal Circuit, that claiming trick was sufficient to allow the patentee to focus on the entire market value of the pills rather than on the value of the novel drug component: Astra's formulation patents claim three key elements—the drug core, the enteric coating, and the subcoating. The combination of those elements constitutes the complete omeprazole product that is the subject of the claims. Thus, Astra's patents cover the infringing product as a whole, not a single component of a multi-component product. There is no unpatented or non-infringing feature in the product. The court did note that the relative proportion of novel-to-conventional parts should have an impact on the ultimate damage awaard: When a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee's invention in comparison to the value of the conventional elements recited in the claim, standing alone. See Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1233 (Fed. Cir. 2014) ("[T]he patent holder should only be compensated for the approximate incremental benefit derived from his invention."). All of these thoughts and concerns regarding proportional valuation go back to the 1884 Supreme Court case of Garretson v. Clark, 111 U.S. 120 (1884). In that case, the court wrote that the patentee: must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative, or he must show by equally reliable and satisfactory evidence that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature. Thus, under Garretson, it should not really matter whether you calculate the reasonable royalty as a smaller percentage of the whole product or instead a larger percentage of the component.  However, there are two reasons why plaintiffs want to use the larger number.  First, there is a sense that a judge/jury is psychologically more likely to award a higher total amount when the pie appears larger.  Second is the reality that the whole product is sold at a point further down the supply chain where prices are higher as opposed to component supply where prices are generally much lower. = = = = See also In re Omeprazole Patent Litig., 84 F. App'x 76 (Fed. Cir. 2003) ("Omeprazole I"); In re Omeprazole Patent Litig., 483 F.3d 1364 (Fed. Cir. 2007) ("Omeprazole II"); In re Omeprazole Patent Litig., 281 F. App'x 974 (Fed. Cir. 2008) ("Omeprazole III"); and In re Omeprazole Patent Litig., 536 F.3d 1361 (Fed. Cir. 2008) ("Omeprazole IV"); All relating to U.S. Patent Nos. 4,786,505 and 4,853,230.

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