Vringo bought Lycos patents on search technology that keys ads to user search queries, then sued Google.  At the recently completed trial, Vringo convinced a Virgina jury to award, see page 11 of its Nov. 6 verdict, a reasonable royalty of 3.5% of that portion of Google’s revenue purportedly connected to the stolen technology, which the jury calculated as $15.8 million.

While the verdict (which to-date has not been entered as the court’s final judgment) might look like it satisfies the increasingly strict limitations against using unduly large revenue bases to calculate reasonable royalty damages, this may not be the case.

Vringo’s damage theory is effectively captured in the following trial exhibit:

Vringo introduced Google documents that supported Vringo’s theory that it’s search technology provided a quantifiable increase in revenue:

This approach appears to comply with the rule that patent royalty damages may be assessed against only the smallest portion of overall revenue attributable to the patented technology.  Vringo assessed what might be considered a small royalty percentage against only a “smaller” portion ($14 billion) of Google’s overall ad revenue.  Yet Vringo was nonetheless able to introduce the OVERALL revenue ($70 billion) to the jury, effectively bringing in entire market value through the back door.  See why after the jump.

The Entire Market Value Rule

Most recently, the Federal Circuit’s Laser Dynamics decision affirmed the general rule that the royalty base for multi-component products like computer software and hardware should be limited to the “smallest saleable patent-practicing unit.”  The strong policy is against allowing recovery based on use of the entire market value of the product:

Where small elements of multi-component products are accused of infringement, calculating  a royalty on the entire product carries a considerable risk that the patentees will be improperly compensated for non-infringing components of that product.

Likewise, allowing the patent owner to introduce potentially gazillions of overall revenue on a product can unduly influence the jury, according the Federal Circuit’s earlier Uniloc decision:

The disclosure that a company has made $19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.

The use of a product’s entire market value as the reasonable royalty basis is therefore, supposedly, a narrow exception, applicable according to Laser Dynamics only if the the patented feature is the motivating feature for the customer purchase – that the patented feature may be required, important or even essential, may not be enough.

Entire Market Value Comes In Through Back Door

To the trial court’s credit, it received extensive argument on the entire market value rule (a rough estimate is that it received and ruled on two different motions in limne, a Daubert motion and a Rule 50a JMOL at the close of evidence – all of which argued the point), plus it apparently excluded Vringo’s damage expert from expressly stating total overall revenue.  However, as Google complained in it’s JMOL brief, this may not have been enough to keep entire market value out of the trial:

In other words, it is no great stretch to imagine a juror, upon learning that one-fifth of Google’s revenue is $14.1 billion, i.e., “the dollar amount of the incremental royalty base,” multiplying by five and getting the OVERALL revenue of $70.5 billion.  In through the back door comes the overall market value and commence biasing the jury, or so says Google.  Of course, the patent owner and his damage expert are required to present a credible, non-speculative basis for calculating damages – don’t they need to be able to present to the jury exactly the type of methodology used in this case? – hasn’t the trial court gone out of its way to consider and comply with even the most recent of the Federal Circuit’s reasonable royalty decisions?

Footnote: a topic for another day is that the jury may have made a significant math error, awarding $15.8 million from Google where they intended to award $158 million! The juror confusion apparently stems from Vringo being limited to damages running from the filing of the complaint as compared to the earlier trigger date of September 2005.  Perhaps one more thing the court will address either before entering judgment or in the course of ruling on post-trial motions.