## Facts

- LaserDynamics owned U.S. Patent No. 5,587,981 covering a method for an optical disc drive (ODD) to identify inserted disc types (e.g., CD vs. DVD).
- Quanta Computer, Inc. (QCI) assembled and sold laptop computers that incorporated ODDs manufactured by Quanta Storage, Inc. (QSI).
- LaserDynamics entered multiple lump-sum licenses (generally $1 million or less) before suing QCI and related entities in 2006 for patent infringement and inducement based on end users’ operation of accused laptops.
- A first jury trial found infringement and awarded damages, but the district court ordered a new trial on damages due to improper reliance on the entire market value of the laptop.
- A second trial on damages resulted in an $8.5 million reasonable royalty verdict against QCI; the court also resolved portions of implied license and patent exhaustion by summary judgment.
- On appeal and cross-appeal, the parties disputed damages methodology (including the royalty base and comparable evidence), the hypothetical negotiation date, implied license/exhaustion scope, and liability issues (direct infringement by end users, inducement, and jury instructions).

## Issues

1. Whether a reasonable royalty could be based on the value of entire laptop computers under the entire market value rule rather than the ODD (and further apportionment within the ODD).
2. Whether QCI had an implied license and/or a patent exhaustion defense for laptops incorporating ODDs sourced through LaserDynamics’ licensees.
3. Whether substantial evidence supported the jury’s findings of end-user direct infringement and QCI’s inducement.
4. Whether alleged instructional error on infringement required a new trial on liability.
5. What date governs the hypothetical negotiation for calculating a reasonable royalty.
6. Whether a prior litigation settlement/license agreement was admissible as royalty evidence under Federal Rules of Evidence 403 and 408.

## Decision

- Affirmed in part, reversed in part, and remanded.
- Reversed the damages judgment and ordered a new trial on damages because the royalty analysis improperly used the entire laptop revenue base and admitted prejudicial settlement evidence.
- Held the entire market value rule did not apply; the patented disc-discrimination method was not shown to drive consumer demand for the laptop.
- Held the district court erred by using the lawsuit filing date (2006) as the hypothetical negotiation date; the correct date was when accused U.S. sales began causing underlying end-user infringement (identified as 2003).
- Affirmed the denial of JMOL on infringement and inducement; substantial evidence supported that end users practiced the claimed method and QCI induced that conduct.
- Held any instructional error on infringement did not amount to plain error requiring a new liability trial.
- Affirmed that QCI had an implied license for the subset of ODDs manufactured by QSI to fulfill bona fide orders from LaserDynamics’ licensees and then sold to QCI through those licensees; remanded to limit damages to non-licensed, non-exhausted units.

## Legal Principles

- The entire market value rule is a narrow exception; a patentee may use the value of an entire multi-component product as the royalty base only if the patented feature is shown to be the basis for consumer demand for the whole product (or substantially creates the value of its components).
- For reasonable royalty calculations, the royalty base should begin with the smallest salable patent-practicing unit (here, the ODD) and require further apportionment to isolate the value attributable to the patented feature unless the entire market value rule is satisfied.
- Royalty opinions that apply a rate to an overbroad product base without adequate apportionment may be excluded as speculative, and their admission may warrant a new damages trial.
- The hypothetical negotiation date is tied to the start of infringement-based sales (when accused sales begin causing direct infringement), not the complaint filing date.
- Settlement/license agreements from prior litigation may be excluded under Rule 403 (and may implicate Rule 408) when their probative value is substantially outweighed by risks of unfair prejudice, jury confusion, or misleading valuation.
- Implied license and patent exhaustion can shield downstream purchasers only for units sold through an authorized chain of commerce; components not traceable to authorized licensed sales remain potentially infringing and subject to damages.

## Conclusion

The Federal Circuit upheld liability for direct infringement by end users and inducement by the laptop seller, but required a new damages trial because the royalty analysis improperly relied on the entire laptop’s value, admitted prejudicial settlement evidence, and used an incorrect royalty start date; it also limited damages by recognizing an implied license for units sold through authorized licensees while leaving other units subject to recalculated, apportioned royalties.


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