By Gabriel M. Gelb and Betsy D. Gelb, Ph.D.
A quick summary of what’s happening in the very active patent infringement arena is that the “entire market value rule” [EMVR] is being modified by a much stronger emphasis on the concept of “consumer demand.” And Circuit Court Judge Randall Rader is partially responsible for this sea change in damages assessment.
This shift is most evident in the field of consumer and industrial electronics products, where one source has estimated that over 200 patent lawsuits are underway at any one time.
In recent lawsuits that are familiar to every patent attorney—Lucent Technology v. Gateway, Cornell University v. Hewlett Packard Company, and IP Innovation v. Red Hat Inc.—patent holders who allege infringement are finding it more difficult to claim royalties applied to the entire value of a product that contains the patent.
In Lucent Technologies v. Gateway, (and indirectly Microsoft), the jury in 2008 had awarded $357 million in damages to Lucent for a patent that allowed entering data without use of a keyboard, in the principal application a “date picker” function employed by Microsoft in its very popular Outlook software. This “mega award” was vacated by the Federal Circuit Court of Appeals, which said that the jury had improperly used the EMVR, concluding that “…numerous features other than the date-picker appear to account for the overwhelming majority of the consumer demand and therefore significant profit.” A new damages trial was ordered.
A similar finding was the conclusion of Judge Rader in Cornell University. In this case, the jury had found infringement of a part of what’s called a CPU brick and awarded $184 million to the university based on an 8% royalty of the CPU brick that contained the patented item. In effect, Judge Rader said “no way.” He reduced the award to $53 million because no evidence was offered to show “a connection between consumer demand for that product and the patented invention.”
And in the Red Hat case, Judge Rader said that EMVR may be in play only when the patented feature forms “the basis for consumer demand” for the larger product in which it is contained.
Thus, the courts are increasingly moving to an emphasis on to what extent, if any, the alleged infringing patent provides the basis for consumer demand.
In our opinion, there are two valid ways to estimate this “consumer demand” concept.
- Ask consumers how important are the benefits/features of the patented item in the product they purchased (stated demand), or
- Study how consumers make trade-offs in the purchaser decision, typically a process employing conjoint analysis (mathematically deriving the demand).
As experts involved in both methods in damage assessment, we discuss in the remainder of this blog why the trade-off measurement approach is superior to the direct questioning approach.
Asking consumers in a survey why they purchased a particular product is useful but typically results in a distorted picture. Consumers, upon reflection, usually respond that the majority of a product’s features are “very important.” This response is not useful when, in a legal case of alleged patent infringement, you are trying to determine the impact of a patented item on sales or market share.
In a recent damages case in which the senior author rebutted the plaintiff’s survey that involved asking which features of a product were important, saying, “…on average virtually all of the features studied for the [product named] were rated as important on the monadic rating scales.”
As noted in the textbook, Consumer Behavior, 3rd, edition [Hoyer and MacInnis), “…Our memory of details decreases over time. Thus, the attribute information we recall tends to be in summary or simplified form rather than in its original detail.”
Thus, the reason why consumers are likely to say that every feature or benefit is somewhat or very important is that they have, over time, discarded many of the original motivations and summarized what is left in memory.
Basically, another problem is that asking consumers to evaluate features one at a time does not take into account the multiple trade-offs that consumers are simultaneously making, for example, quality versus price, famous brand name against a lesser brand, and so on.
A 30-year-old mathematical concept that measures the trade-offs that people make in decision-making is now being applied to damages assessment. It’s called conjoint analysis and it’s used in a variety of fields, including government procurement, healthcare and operations research.
What conjoint analysis does is to learn how consumers value and choose among products that consist of multiple attributes and when trade-offs are involved across attributes.
Our firm has been using conjoint analysis since the 1980s and a firm in Boston, Applied Marketing Science, has successfully employed conjoint methods in two damage assessment cases, Barbara Schwab et al. v. Philip Morris et al. and in the Eastern District of Texas, TiVo v. EchoStar.
A product or service consists of a bundle of attributes. When conjoint analysis is employed. consumers view a set or “package “of features at the same time and are asked to choose from a series of multiple sets. Then, through computer analysis, the valuation of the individual attributes can be determined.
Today there are several forms of conjoint analysis such as discrete choice modeling, and care must be taken in organizing the design of the research. But the results are quite clear in formulating how consumers value each particular attribute or variations of that attribute.
Thus, for the purposes of assessing how a particular patented item contributes to consumer demand, conjoint analysis offers the best solution, especially when the courts require that consumer input be considered a crucial part of damages assessment.
