Feature Comment: The Impact of Uniloc USA, Inc. v. Microsoft Corp. on Patent Damages under 28 U.S.C. §1498(a)

By James G. McEwen[1]

While many of the aspects of infringement claims against the Government have seemingly similar elements to actions against private parties under 35 U.S.C. §271, it is important to understand that 28 U.S.C. §1498(a) is not an exact counterpart to 35 U.S.C. §271.  For instance, 28 U.S.C. §1498(a) does not allow for actions against the Government for inducement and contributory infringement, or infringement through infringement of product by process claims.[2]  At the same time, the Government is directly liable for infringement by its contractors if the Government has authorized and consented to such uses of the patented invention, which outside of claims of inducement, contribution, or vicarious liability, does not exist in private party litigation under 35 U.S.C. §271.  The requirement for such authorization and consent claims is to ensure that the Government is able to secure contractor-provided goods and services by extending its immunity to contractors and thereby ensure that the contractors cannot be enjoined.[3]

This same distinction exists in relation to damages.  Under 35 U.S.C §271(a), a court can award an injunction under 35 U.S.C §283 and “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer” under 35 U.S.C §284.  In contrast, the Government may not be enjoined for infringing a patent or authorizing a contractor to do the same. Instead, where the Government utilizes a privately owned patent, the exclusive remedy available to the owner is set forth in 28 U.S.C. § 1498 (a), which limits relief to “recovery of [the patentee’s] reasonable and entire compensation for such use and manufacture.” This limit also prevents the imposition of damages for willfulness under in 28 U.S.C. § 1498 (a) even where such damages would be appropriate under 35 U.S.C §284.[4]

Accepted measures of damages under 28 U.S.C. §1498(a) include (1) a “reasonable royalty” based on the hypothetical willing buyer/willing seller approach,[5] (2) a lost profits analysis,[6] or (3) the savings-to-the-Government approach.[7] The “reasonable royalty” analysis is the preferred approach.[8] Importantly, the “reasonable royalty” analysis generally tracks the analysis performed under 35 U.S.C §284 in regards to what royalty rate would be reasonable under a hypothetical negotiation, and what systems are included in the entire market of the invention.  Thus, given the distinction between damages awarded under 35 U.S.C §283 and those available under 28 U.S.C §1498(a), the Federal Circuit’s decision in Uniloc USA, Inc. v. Microsoft Corp.[9] is of interest to the procurement community as well as to third parties believing that the Federal Government has infringed their patent.

As noted in Gargoyles Inc. v. U.S,[10] “[w]hile perhaps in some cases government contractors can expect less profit when licensing to the government than in the private sector, the success in the private marketplace was a reasonable starting point for the trial court to analyze the hypothetical royalty negotiation.”  Given the reliance on commercial practices for royalty rates, the Unlioc decision at the very least is going to require use of true license comparisons to arrive at damages.  Short cuts, such as the now-discredited 25% rule of thumb, will not be usable as a matter of law.

In theory, starting without this 25% rule should result in lower royalty rates.  For instance, in Uniloc, there was evidence that the actual starting royalty rate used in licensing within the industry was rarely 25%.  At the same time, the starting point in a particular industry is generally not well known or publicized.  Therefore, what is likely to happen is experts will be sought who start at higher rates (and can testify that their normal starting point for negotiations is high), and then to a negotiated rate.  Indeed, it was Dr. Gemini’s whole reliance on a rule of thumb as opposed to testifying that, in fact, the industry standard is to start at 25% and work downward which doomed his testimony.  Therefore, it is just as likely that the battle of the experts will now focus on justifying a high starting royalty rate in order to obtain, from the plaintiff’s point of view, an adequate measure of damages.  And this battle will extend into damages under 28 U.S.C. §1498 in like manner.

[1] James G. McEwen is a partner at Stein McEwen, LLP.  The opinions in this article do not represent the official positions of Stein McEwen, LLP.

[2] Zoltek v. United States, 442 F.3d 1345 (Fed. Cir. 2007); Jerry Stouck, Patent Owners, Take Heed Of Zoltek Ruling, IP Law 360 (July 30, 2007), a copy of which is available at http://www.gtlaw.com/portalresource/lookup/wosid/contentpilot-core-2301-5927/pdfCopy.pdf?view=attachment (last visited April 8, 2010).

[3] 28 U.S.C. §1498. See also James G. McEwen, David S. Bloch, Richard M. Gray, Intellectual Property in Government Contracts, pp. 145-148 (Oxford University Press 2009); David R. Lipson, We’re Not Under Title 35 Anymore: Patent Litigation Against the United States Under 28 U.S.C. §1498(a), 33 Pub. Cont. L. J. 243, 247 (Fall 2003); TVI Energy Corporation v. Blane, 806 F.2d 1057, 1059-60 (Fed. Cir. 1986) (section 1498 exists “to relieve private government contractors from expensive litigation with patentees, possible injunctions, payment of royalties, and punitive damages”); Robishaw Eng’g v. United States, 891 F.Supp. 1134, 1141 n. 12 (E.D. Va. 1995) (“the primary purpose of § 1498 immunity is to prevent interference with the government’s procurement of needed materials”).

[4] James G. McEwen, David S. Bloch, Richard M. Gray, Intellectual Property in Government Contracts, pp. 149-150 (Oxford University Press 2009).

[5] See Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120) (S.D.N.Y. 1970); see also Calhoun v. United States, 197 Ct. Cl. 41, 453 F.2d 1385 (Ct. Cl. 1972); Amerace Esna Corp. v. United States, 199 Ct. Cl. 175, 462 F.2d 1377 (1972); Pitcairn v. United States, 212 Ct. Cl. 168, 547 F.2d 1106 (1976), cert. denied, 434 U.S. 1051 (1978); Penda Corp. v. United States, 29 Fed. Cl. 533, 573 (1993); Standard Mfr’g Co. v. United States, 42 Fed. Cl. 748 (Ct. Cl. 1999).

[6] See Gargoyles Inc. v. United States, 113 F3d 1572, 42 U.S.P.Q.2d 1760 (Fed. Cir. 1997), Data Enterprises, GSBCA 15607, 2004-1 B.C.A. (CCH) ¶ 32,539; Imperial Mach. & Foundry Corp. v. United States, 69 Ct. Cl. 667 (1930); Penda Corp. v. United States, 29 Fed. Cl. 533, 573 (1993).

[7] See Decca Ltd. v. United States, 640 F.2d 1156, 1167 (Ct. Cl. 1980); see also Shearer v. United States, 101 Ct.Cl. 196, cert. denied, 323 U.S. 676 (1944); Marconi Wireless Tel. Co. v. United States, 99 Ct.Cl. 1 (1942), aff’d in part and rev’d in part, 320 U.S. 1 (1943); Olsson v. United States, 87 Ct.Cl. 642, 25 F.Supp. 495 (1938), cert. denied, 307 U.S. 621 (1939); Penda Corp. v. United States, 29 Fed. Cl. 533, 573-574 (1993).

[8] Decca Limited, 640 F.2d at 1167, and n. 22; Leesona Corp. v. United States, 599 F.2d 958 (Ct. Cl.), cert. denied, 444 U.S. 991 (1979); see Penda Corp., 29 Fed. Cl. at 574 (“savings to the government are not used as a measure of compensation in preference to a reasonable royalty, but these savings may be employed in estimating the amount a willing buyer would offer a willing seller”) (citations omitted).

[9] 2011 U.S. App. LEXIS 11, Civ Case No. 2010-105, -1055 (Fed. Cir. January 4, 2011).

[10] 42 USPQ2d 1760, 1768 (Fed. Cir. 1997).


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