Measuring patent damages — and excluding reexam evidence

The Federal Circuit again tightened the criteria for setting damages awards in patent infringement cases. But, in a bit of good news for infringement plaintiffs, it lent further support to the general inclination of district courts to exclude evidence of non-final results of patent reexaminations by the U.S. Patent and Trademark Office.

In VirnetX, Inc. v. Cisco Systems, Inc., No. 13-1489 (Fed. Cir. Sept. 16, 2014), a two-judge panel* ruled that a mistake in a jury instruction and a gap in the patent holder's damages evidence required the court to set aside a $368 million jury award against Apple.

The patents

VirnetX, the patent holder, sued Cisco, Apple, and others in the Eastern District of Texas for infringing two patents that relate to "secure communication links" using Internet "domain names". VirnetX's claim against Apple focused on the FaceTime feature in iPhones, iPods, and iPads.

FaceTime allows users of an Apple device to make a secure link with another user and to send and receive audio and video via packets.

The trial and verdict; Apple's appeal

In a five-day trial, the district court in Tyler excluded Apple's evidence that the USPTO had reexamined the patents and initially rejected them. The court also overruled Apple's critiques of VirnetX's damages evidence.

The jury found that FaceTime infringed VirnetX's patents and awarded the company $368,160,000 as a reasonable royalty.

Apple claimed on appeal to the Federal Circuit that the district court had made a great many errors. Two warrant notice.

No error in excluding reexam

Apple urged that the district court should have let it tell the jury about the reexams. It contended that the USPTO's initial rejection of the patents in the reexams supported Apple's claim that it reasonably believed the patents invalid and therefore did not infringe them willfully.

The panel disagreed. It noted that "this court's precedent has often warned of the limited value of actions by the PTO when used for such purposes." Id. at 23 (citing cases). It then held that the district court did not abuse its discretion "in finding that the probative value was substantially outweighed by the risk of unfair prejudice to the patentee, confusion with invalidity (on the merits), or misleading the jury, thereby justifying exclusion under Federal Rule of Evidence 403." Id. at 23-24 (citing cases).

Damages for "smallest salable unit"; Nash bargaining

Apple also attacked the underpinnings of the $368 million damages verdict. It urged that the jury based its award on the "entire market value" of Apple devices rather than the contribution of only the infringing feature. The Federal Circuit agreed.

The district court erred in two ways, the panel held. The court's instruction that the jury "should not use the value of the entire apparatus or product" did not go far enough, the panel concluded, because the instruction permitted the jury to use the "entire market value" of the infringing devices if it found "the product in question constitutes the smallest saleable unit containing the patented feature." Id. at 28 (quoting instruction).

As the panel explained:

[T[he instruction mistakenly suggests that when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base. That is wrong. For one thing, the fundamental concern about skewing the damages horizon — of using a base that misleadingly suggests an inappropriate range — does not disappear simply because the smallest salable unit is used.

Moreover, the smallest salable unit approach was intended to produce a royalty base much more closely tied to the claimed invention than the entire market value of the accused products. . . . Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as VirnetX claims it was here), the patentee must do more to estimate what portion of the value of the product is attributable to the patented technology.

Id. at 29.

The other error related to testimony by VirnetX's expert on "Nash bargaining", which John Forbes Nash, Jr. — he of A Beautiful Mind — originated. The expert used the "Nash Bargaining Solution" to opine that, in a hypothetical bargain, Apple and VirnetX would have agreed to split Apple's profits from the infringing feature on a 55-45 basis after using 50-50 as a benchmark.

The panel compared the approach to one it outlawed in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) — "the 25 percent rule of thumb", which posited that parties to a hypothetical reasonable royalty negotiation would start by assuming that 25 percent of the infringer's profits from the infringing product provided an appropriate starting point. See Blawgletter, Jan. 6, 2011, Rule Behind Huge Patent Damages Dies at Hands of Federal Circuit, Second Rule Lives to Fight Another Day.

Like the old rule of thumb, the panel observed, the 50-50 premise "would . . . run the significant risk of inappropriately skewing the jury's verdict." Id. at 39. The fact that the damages expert did not establish that the "premises" of the Nash model "fit" the facts of the case, the court held, "was an essential failing in invoking the Solution." Id. at 38-39.

The court remanded the case for further proceedings.


The rulings in VirnetX (a) bolster the inclination of most district courts to exclude evidence of non-final action by the USPTO in reexam proceedings and (b) clarify the sort of evidence that infringement clamants should submit in support of damages awards.

The court did not disapprove using an entire device as the "smallest saleable unit" but did require further analysis when the SSU has both infringing and important non-infringing features. The court also demanded more rigor from invocations of Nash bargaining but did not categorically preclude them.


*One of the panel members, Randall R. Rader, retired on June 30, 2014. The panel heard oral argument on March 3, 2014.

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Photo of Barry Barnett Barry Barnett

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

Barnett is a Fellow in the American College of Trial Lawyers, and Lawdragon has named him one of the top 500 lawyers in the United States three years in a row. Best Lawyers in America has honored him as “Lawyer of the Year” for Bet-the-Company Litigation (2019 and 2017) and Patent Litigation (2020) in Houston. Based in Texas and New York, Barnett has tried complex business disputes across the United States.

Barnett’s background, training, and experience make him indispensable to his clients. The small-town son of a Texas roughneck and grandson of a Texas sharecropper, Barnett “developed an unusual common sense about people, their motivations, and their dilemmas,” according to former client Michael Lewis.

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Barnett focuses on enforcement of antitrust laws, the “Magna Carta of free enterprise,” in Supreme Court Justice Thurgood Marshall’s memorable phrase. “Barry is one of the nation’s outstanding antitrust lawyers,” according to Joseph Goldberg, a member of the Private Antitrust Enforcement Hall of Fame. Named among Texas’s top ten antitrust lawyers of 2023, Business Today calls Barnett a “trailblazer” among the “distinguished legal minds” who “dedicate their skill and expertise to the maintenance of healthy competition in various sectors” of the Lone Star State’s booming economy. Barnett is also adept in energy and intellectual property matters and has battled for clients against a Who’s Who list of corporate behemoths, including Abbott Labs, Alcoa, Apple, AT&T, BlackBerry, Broadcom, Comcast, Dow, JPMorgan Chase, Samsung, and Visa.

Barnett commands a courtroom with calm and credibility and “is the perfect lawyer for bet the company litigation,” said Scott Regan, General Counsel of former client Whiting Petroleum. His performance before the Supreme Court in Comcast Corp. v. Behrend prompted the Court to withdraw the question on which it had granted review. The judge in a trial involving mobile phone technology called Barnett “one of the best” and that his opening statement the finest he had ever seen. Another trial judge told Barnett minutes after a jury returned a favorable verdict against the county’s biggest employer that he was one of the two best trial lawyers he’d ever come across—adding that the other one was dead.

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Clients and other hard graders have praised Barnett for his courtroom skills and legal acumen.

A client in a $100 million oil and gas case, which Barnett’s team won at trial and held on appeal, said Barnett and his team “presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom.” David McCombs at Haynes and Boone said Barnett “has a natural presence that goes over well with juries and judges.”

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Barnett relishes opportunities to collaborate with all kinds of people. At the Center for American and International Law (CAIL), founded by a former prosecutor at Nuremberg in 1947 and headquartered in the Dallas area, he has served on the Executive Committee, co-chaired the committee that produced CAIL’s first-ever strategic plan, supported CAIL’s Institute for Law Enforcement Administration and other development efforts, and proposed formation of a new Institute for Social Justice Law. CAIL’s former President David Beck said “Barry is extremely bright” and is “very well prepared in every lawsuit or professional task he undertakes.”

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Barnett understands that clients face many pressures. Managing the stress is important, especially in matters that take years to resolve. He encourages clients to call him whenever they have a question or concern and to keep the inevitable ups and downs in perspective. He wants them to know that he will do his level best to help them achieve their goals. He also strives to foster trust and to make working with him a pleasure.

Cyrus “Skip” Marter, the General Counsel of Bonanza Creek in Denver and a former Susman Godfrey partner and client, said Barnett is “excellent about communicating with clients in a full and honest manner” and can “negotiate for his clients from a position of strength, because he is not afraid to take a case through a full trial on the merits.” Stacey Doré, the President of Hunt Utility Services and a former client, said that Barnett is “an excellent trial lawyer and the person you want to hire for your bet-the-company cases. He is client focused, responsive, and uniquely savvy about trial and settlement strategy.” A New York colleague said, “Barry is a joy to work with as co-counsel. He tackles complex procedural and factual hurdles capably, efficiently, and without drama.”

Barnett’s wide-ranging experience and calm, down-to-earth approach enable him to connect with clients, judges, jurors, witnesses, and even opposing counsel. He grew up in Nacogdoches, Texas. He co-captained his high school varsity football team as an All-East Texas middle linebacker while also serving as the Editor of Key Club’s Texas-Oklahoma District, won the Best Typist award, took the History Team to glory, and sang in the East Texas All Region Choir. As Dan Kelly of client Vistra Corp. put it, Barnett is “a great person to be around.”

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Yale won, 14-0.