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IP Alert: Federal Circuit Finds Apportionment of Damages Was Built Into Royalty Rate from Prior License Between Parties

January 19, 2021

On November 19, 2020, in Vectura Limited v. GlaxoSmithKline, the Federal Circuit affirmed a reasonable royalty award relating to infringement of a single patent, using a royalty rate from a prior license agreement involving more than 400 patents without requiring any apportionment.

Vectura brought an action in district court against GlaxoSmithKline (“GSK”) for infringement of a patent covering a formula of ingredients used in a dry-powder inhaler. A jury found in favor of Vectura and awarded $89,712,069 in reasonable royalty damages using a 3% royalty rate. This royalty rate was derived from a prior license agreement involving more than 400 patents between the same parties, which included a 3% royalty on covered sales of dry-powder inhalers.

The Federal Circuit held that the district court had not abused its discretion in denying GSK’s motion for a new trial on damages, affirming the 3% royalty rate and the district court’s finding that the prior license agreement was economically and technologically comparable to the license in a hypothetical negotiation. The Federal Circuit stated that the fact that over 400 patents were included in the 2010 license “does not fatally undermine” the damage expert’s “theory of comparability” because the 2010 license and the hypothetical negotiation cover “roughly very similar technologies.” With the prior license agreement being comparable, the Federal Circuit held that apportionment is already built into the royalty rate and royalty base such that no further apportionment is required, and the 3% royalty rate may be applied to all of the accused infringing sales. 

GSK argued that even if the 2010 license was truly comparable, it was improper to discard the royalty cap in it while simultaneously retaining the royalty rate and royalty base. However, the Federal Circuit rejected that argument because there were changed circumstances as of the date of the 2016 hypothetical negotiation that justified not using the royalty cap from the 2010 license. Those circumstances included the assumption of validity and infringement in a hypothetical negotiation and the fact that by 2016 the accused inhalers had become “hugely successful,” which would increase Vectura’s leverage in the hypothetical negotiation. 

This case is one of a series of Federal Circuit cases analyzing reasonable royalty awards and evaluating apportionment in the royalty rate and/or base when the entire market value of accused product is used as the royalty base. It solidifies the theory of “built-in” or “baked-in” apportionment of the value of the patented technology relative to the accused product when using a royalty rate from a comparable license agreement. The case reinforces the importance of developing critical evidence of comparability (or lack thereof) of previous license agreements from both a technical and an economic perspective.

For more information on this ruling, please contact Fitch Even partner Karl R. Fink, author of this alert.

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