Federal Circuit Finds Computer Security Method Patentable, But Overturns Damages Award
On January 10, 2018, the United States Court of Appeals for the Federal Circuit issued an opinion considering the apportionment problem in patent damages and overturning a jury’s $40M reasonable-royalty award. Finjan, Inc. v. Blue Coat Systems, appeal no. 2016-2520.
The patent in suit is directed to computer-security methods by which potentially dangerous downloads can be identified. At trial, plaintiff Finjan, Inc. (Finjan) argued successfully that defendant Blue Coat Systems (Blue Coat) had infringed the patent, and the jury assessed damages.
On appeal, Blue Coat argued that the patents it was found to have infringed claim unpatentable “abstract idea” subject matter in violation of 35 U.S.C. § 101. The Federal Circuit rejected this argument, finding that the claimed methods are “directed to a non-abstract improvement in computer functionality, rather than the abstract idea of computer security writ large,” and moreover that despite the claims’ paucity of technical detail, they “recite specific steps”—that is, “more than a mere result”—and ultimately held that the claims are directed to patentable subject matter.
Blue Coat also argued that as to some of the patents in suit, the jury’s damages award should be overturned because “Finjan failed to apportion damages to the infringing functionality” and moreover because there was no sufficient evidentiary basis for Finjan’s proposed $8 per user royalty rate. The Federal Circuit agreed.
On the apportionment point, the Federal Circuit emphasized that when ascertaining a reasonable-royalty base, it is not enough to identify the revenues associated with the smallest saleable infringing component of an accused product. Plaintiffs must go further: even within the smallest saleable unit, they must isolate the value of the infringing functionality from the rest of the value of the unit. Even though Finjan had identified and apportioned revenues to just one part of the accused product, that part had multiple functions and therefore, “[f]urther apportionment was required to reflect the value of the patented technology compared to the value of the unpatented elements.”
On the royalty rate issue, the Federal Circuit took issue with Finjan’s proposal to the jury of an $8 per user royalty rate, when Finjan’s own witness had testified that this rate is “the current ‘starting point’ in [Finjan’s] licensing negotiations” and was based on the damages result in a different case. The court of appeals found this evidence to be insubstantial.
For these reasons, the Federal Circuit vacated the jury’s damages award. However, the court noted in the opinion its concern that “reversal of JMOL could result in a situation in which Finjan receives no compensation for Blue Coat’s infringement.” It therefore remanded to the district court for a determination of whether Finjan had waived other damages theories, and of whether to order a new damages trial.
This damages decision is another in a long line of Federal Circuit opinions that can make life very difficult for a patent owner that is seeking to recover a reasonable royalty (rather than actual damages). The decision emphasizes the critical importance of putting on as much evidence as possible, not of the value of the accused product or the accused functionality, but rather of the value of the particular function enabled by the patented invention. Apportioning this value will be a difficult task in many cases, but the Federal Circuit remains clear that no matter how difficult, the burden of quantifying a reasonable royalty is on the patent owner, not the accused infringer.