Determining the value of a patent or a patent portfolio is no easy task. This is especially true for the semiconductor industry, where a single infringing product may be covered by hundreds—if not thousands—of other patents. Adding to this complexity, new developments in U.S. patent damages law have the potential to alter the value of semiconductor patents significantly. Recent court decisions have increasingly emphasized the importance of the smallest salable patent-practicing unit (“SSPPU”) in assessing damages for infringement. In this article, we briefly discuss how semiconductor device manufacturers might be able to take advantage of this trend to maximize the value of their own patents and to minimize their infringement liability. In a separate article, we look at factors affecting the value of software inventions.
In Ericsson, Inc. v. D-Link Sys., Inc. , the United States Court of Appeals for the Federal Circuit recently underscored the following principles of patent valuation:
Where the entire value of a machine as a marketable article is properly and legally attributable to the patented feature, the damages owed to the patentee may be calculated by reference to that value. Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries—often, the [SSPPU] and, at times, even less.
Indeed, unless the SSPPU is “closely tied” to the patent, further apportionment may be required to discount the value attributable to any features not covered by the patent. The Northern District of California, for example, recently ordered a new trial in a semiconductor patent case for that exact reason. As the court put it, the patent owner “overlook[ed] the Federal Circuit’s clear directive” that damages be limited to injuries attributable to the infringing features.
Understanding these principles is important to attaining a favorable outcome, whether prosecuting a new patent application, entering into a patent licensing agreement, or resolving a dispute through patent litigation. In patent prosecution, for example, an applicant may want to consider including claims directed to high-value downstream products, not just claims directed to the device or chip level. To ensure that such claims are “closely tied” to those high-value downstream products, applicants should also consider detailing how the invention improves the functionality of those downstream products. This strategy may later provide valuable ammunition against potential licensees or defendants who will likely push for a smaller royalty base.
During licensing negotiations, parties on both sides of the table should carefully consider the potential implications when agreeing to use a particular royalty base. Even if the overall royalty is suitable or other concessions and discounts compensate for the stated royalty base, that royalty base may later become the metric by which a court determines damages in a different context. For example, if a court considers the technologies and parties sufficiently comparable, it may look to the royalty base from the prior license as evidence even in a dispute involving a different party, different products, and different patents. In fact, courts typically rely heavily on such licenses to determine damages. Thus, to avoid possible unintended consequences, patent owners may consider taking steps to establish larger royalty bases in their licensing agreements, whereas licensees may want to consider the opposite strategy.
Once a dispute lands in court, the parties must face the facts as they are; it is too late to do things differently. Accordingly, patent owners who prosecute their patents with an eye towards litigation and parties who negotiate their licenses with foresight tend to find themselves in better positions than their less thoughtful adversaries. Vigilant patent owners, for example, should be prepared to assert claims directed to high-value products, identify comparable licenses that use those high-value products as the royalty base, and highlight evidence showing that the patented invention drives sales of those products. On the other hand, well-prepared defendants should be able to show that the patented technology is not “closely tied” to downstream products, provide evidence that such products derive substantial value from sources other than the patented technology, and showcase their own comparable licenses drawn to smaller royalty bases.
Although, in principle, a smaller royalty rate can compensate for a larger royalty base (and vice versa), patent valuation is not an exact science—especially when conducted by a judge or jury. And variations in royalty rate can be felt much more acutely when the royalty base is, for example, a $4,000 television as opposed to a $4 chip. Thus, because semiconductor manufacturers typically find their products in more expensive downstream items, the Federal Circuit’s new patent valuation rules have the potential to affect the value of their patents significantly. But by utilizing the type of holistic, proactive patent strategy discussed above, parties can maximize the value of their own patents and minimize their potential infringement liability.
 773 F.3d 1201, 1227 (Fed. Cir. 2014) (quotation omitted).
 See, e.g. , MediaTek Inc. v. Freescale Semiconductor, Inc. , No. 11-cv-5341, 2014 WL 2854890, at *3 (N.D. Cal. June 20, 2014).
 Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc. , No. C 09-5235 MMC, 2014 WL 6859521, at *2 (N.D. Cal. Nov. 25, 2014).
 See, e.g. , Internet Machines LLC v. Alienware Corp. , No. 6:10-cv-00023, at *14 (E.D. Tex. June 19, 2013); Mondis Tech., Ltd. v. LG Elecs., Inc. , Nos. 2:07-cv-565, 2:08-cv-478, 2011 WL 2417367, at *2–3 (E.D. Tex. June 14, 2011).
Rajeev Gupta, Ph.D. is a partner in the Washington, D.C. office of Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. Dr. Gupta focuses his practice on patent litigation in the U.S. district courts and the U.S. International Trade Commission (ITC), strategic patent prosecution, and client counseling. He has considerable experience in telecommunications, semiconductors, wireless technologies, cryptography, lithography, material properties of semiconductors and metals, biometrics, software, microprocessors, security systems, optical fibers, telematics, human-computer interaction, among others technologies. Dr. Gupta can be reach .
J.P. Long , Ph.D. is an attorney in the Washington, D.C. office of Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. Dr. Long's practice includes patent litigation and appeals, patent office practice, and client counseling, primarily in the electronic and related arts. He has been involved in Section 337 investigations in the U.S. International Trade Commission (ITC), patent litigations in U.S. district courts, and inter partes review proceedings at the Patent Trial and Appeal Board (PTAB). Prior to attending law school, Dr. Long studied physics for more than ten years, specializing in solid-state and semiconductor physics, optics and optoelectronics, material science, and physical chemistry. Dr. Long can be reached at .