Smallest Salable Patent-Practicing Unit

A reasonable royalty must be based on the smallest saleable patent-practicing unit whenever the entire market value rule does not apply.

We reaffirm that in any case involving multi-component products, patentees may not calculate damages based on sales of the entire product, as opposed to the smallest salable patent-practicing unit, without showing that the demand for the entire product is attributable to the patented feature.

— LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F. 3d 51, 67 (Fed. Cir. 2012).

This rule is separate and distinct from the apportionment rule–this rule exists to prevent jury bias.

It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product—by, for instance, dramatically reducing the royalty rate to be applied in those cases—it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances[.]

— Ericsson, Inc. v. D-Link Systems, Inc., 773 F. 3d 1201, 1226–27 (Fed. Cir. 2014).

On the other hand, in meeting the apportionment requirement, a patentee must do more than base its royalty on the smallest saleable patent practicing unit.

[T]he requirement that a patentee identify damages associated with the smallest salable patent-practicing unit is simply a step toward meeting the requirement of apportionment. 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 that product is attributable to the patented technology.

— VirnetX, Inc. v. Cisco Systems, Inc., 767 F. 3d 1308, 1327 (Court of Appeals, Federal Circuit 2014).

A patentee is not allowed to base damages on more than just the smallest saleable patent-practicing unit out of necessity.

There is no necessity-based exception to the entire market value rule. Id. at 70. On the contrary, a patentee must be reasonable (though may be approximate) when seeking to identify a patent-practicing unit, tangible or intangible, with a close relation to the patented feature.

— VirnetX, Inc. v. Cisco Systems, Inc., 767 F. 3d 1308, 1329 (Fed. Cir. 2014).