Federal Circuit Provides Guidance When Addressing $1 Billion Damage Award

Positions advanced by Caltech, Apple, and Broadcom altered the scope of IPR estoppel and could have had a dramatic effect on patent eligibility and damages computations

Before getting into particulars, the scorecard for the appeals concerning Caltech’s $1 billion damages award against Apple and Broadcom are: (1) Apple and Broadcom infringe two Caltech patents, (2) in a win for Apple and Broadcom, the verdict for infringement of a third Caltech patent is set aside and, in a win for Caltech, that patent is not found ineligible for patenting under 35 USC § 101, (3) Caltech’s patents are not invalid as obvious under 35 USC § 103, (4) Caltech did not commit inequitable conduct in obtaining its patents, and (5) Caltech’s damages award was vacated, not because the jury was improperly instructed, but because Caltech could not justify its damages model. The end result will be a new trial on damages for the two Caltech patents found valid and infringed and a need to determine infringement, and possible damages, relating to the third Caltech patent. Thus, Caltech manages to avoid complete disaster as one judge on the Federal Circuit panel would have ruled that Apple and Broadcom did not infringe any of the Caltech patents.

The infringement issues for the two patents found infringed were not unusual. Apple and Broadcom alleged that the district court’s claim construction was wrong and, in any event, that their products did not include that feature. In short, the dispute involved a classic tension between the features of complex technology (the particular coding process used) and limitations on the English language (what does “repeat” mean in the context of the complex technology). For the third patent, although the district court construed a term in the patent claim, it failed to provide that construction to the jury, which was found to be an error.

The § 101 issue was unusual as Apple and Broadcom sought to invalidate any patent that depended on mathematical operations. The Federal Circuit rejected such a sweeping expansion of the ineligibility doctrine, pointing out language from the Supreme Court holding that eligible patent claims could use “a mathematical formula, computer program, or digital computer” and finding that Caltech’s claim is directed to “an efficient, improved method of encoding data” that relies in part an irregular repetition of that data.

The obviousness validity issue involved Apple’s failed attempt to show the Caltech patents were invalid during inter partes review (IPR) proceedings before the U.S. Patent and Trademark Office (USPTO). The issue was whether Apple and Broadcom were properly precluded from basing their invalidity case on prior art references that they were aware of when Apple filed its IPR petitions but were not found in the petitions. The Federal Circuit found them properly precluded and, in so doing, overruled one of its prior decisions which had limited the scope of post-IPR estoppel under § 315(e)(2). The panel felt it could overrule a prior Federal Circuit decision without calling for a hearing before the full Federal Circuit due to a change in law from the Supreme Court. With this decision, “estoppel applies not just to claims and grounds asserted in the petition and instituted for consideration by the Board, but to all claims and grounds not in the IPR but which reasonably could have been included in the petition.”

The ruling of a lack of inequitable conduct was upheld because the allegedly withheld reference Apple and Broadcom relied on was not shown to be different than a reference considered by the USPTO when granting Caltech’s patents.

The damages issue that the Federal Circuit found troubling was Caltech’s use of a “two-tier” model where it sought to obtain a payment from a manufacturer of semiconductor chips, Broadcom, and a different payment from a customer, Apple, who used those chips into a product. It felt that a vastly different royalty rate is not available for the same device at a different point in the supply chain without some firm basis for the distinction. Rather, it felt a conventional negotiation would be for the parties to discuss a single license at a single rate for the same chips.

The Federal Circuit also left some damages issues open. For example, although it found the jury properly instructed that damages are for United States sales and not foreign sales, it did not address the sufficiency of the evidence as to the domestic or extraterritorial character of Broadcom’s sales. Those other issues, if still relevant, will have to be addressed during the new trial.