Understanding the Entire Market Value Rule: Legal Foundations and Evolution

In patent damages, apportionment reflects the fundamental principle that a patentee may recover only the value attributable to the patented invention, not the value of unpatented features or components. In practice, this means that damages must be tied to the incremental contribution of the patented technology to the accused product.

The entire market value rule (EMVR) is a doctrine in patent damages, in particular, reasonable royalty damages, that operates as a narrow “exception” to the apportionment principle. The exception states that the EMVR may apply if the patentee can prove that the patented feature is “the basis for customer demand or substantially creates the value of the component part,” or is the “driver of customer demand” for the accused product.

This article focuses on the legal foundations of EMVR and its relationship to the longstanding requirement of apportionment, tracing the doctrine’s development from early Supreme Court precedent through recent U.S. Court of Appeals for the Federal Circuit decisions.

Historical Foundations

The origins of apportionment trace back more than a century to Garretson v. Clark (1884), in which the Supreme Court established that a patentee “must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features.” The Court further made clear that recovery based on the entire product is permissible only where “the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature.” This formulation laid the groundwork for what would later become known as the EMVR.

Development in Federal Circuit Jurisprudence

Modern EMVR doctrine has been shaped largely through a series of Federal Circuit decisions grappling with the appropriate balance between economic rigor and evidentiary concerns. Below are the key decisions shaping the law in this area.

Rite-Hite Corp. v. Kelley Co. In this case, the court articulated that a patentee invoking the EMVR must demonstrate that the patented feature forms the “basis for customer demand.”

“The entire market value rule has typically been applied to include in the compensation base unpatented components of a device when the unpatented and patented components are physically part of the same machine… The rule has been extended to allow inclusion of physically separate unpatented components normally sold with the patented components. However, such components must be analogous to a single functioning unit, to the effect that the patent-related feature is the basis for customer demand.”

Cornell Uni. v. Hewlett-Packard Co. The smallest salable patent-practicing unit (SSPPU) is often considered as an alternative doctrine to the EMVR. Regardless of the century-old apportionment principle, the term SSPPU was only first introduced into case law in 2009 by Judge Rader. In that case, “the claimed invention is a small part of the IRB [instruction recorder buffer], which is a part of a processor, which is part of a CPU model, which is part of a ‘brick,’ which is itself only part of the larger server.”  Despite the judge’s multiple warnings to Cornell not to claim damages beyond the reach of its asserted invention, Cornell’s damages expert chose the royalty base to be HP’s entire server and workstation revenues, with HP’s “brick” revenues as an alternative royalty base, “without offering any evidence to show a connection between consumer demand for that product and the patented invention.”  Judge Rader then decided that “[t]he logical and readily available alternative was the smallest saleable infringing unit with close relation to the claimed invention”—the birth of the term SSPPU. The key issue in Cornell was not that SSPPU was inherently superior, but rather that Cornell failed to provide any evidence that linked consumer demand for the final product to the patented invention.

Lucent Techs., Inc. v. Gateway, Inc. The Federal Circuit rejected the use of revenues from entire computer systems as the royalty base where the asserted invention—a date-picker feature in software—lacked any demonstrated connection to overall consumer demand for the product. At the same time, the court suggested that apportionment might, in some cases, be achieved through the royalty rate, leaving open an alternative pathway for damages calculations.

“Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence). […] There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.”

Uniloc USA, Inc. v. Microsoft Corp. and LaserDynamics, Inc. v. Quanta Computer, Inc. The Federal Circuit in both cases emphasized that the use of the entire product as a royalty base is permissible only where the patented feature drives demand for the entire product. These decisions also highlighted the risk that presenting large revenue figures to a jury could improperly skew the damages analysis, reinforcing the preference for smaller, more targeted royalty bases. In Uniloc, the court held that:

“The Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate. […] The disclosure that a company has made $19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.”

Similarly, in LaserDynamics, the court reaffirmed that:

“[I]n any case involving multi-component products, patentees may not calculate damages based on sales of the entire product … without showing that the demand for the entire product is attributable to the patented feature. … [T]he requirement to prove that the patented feature drives demand for the entire product may not be avoided by the use of a very small royalty rate. […] Admission of such overall revenues … only serve to make a patentee’s proffered damages amount appear modest by comparison, and to artificially inflate the jury’s damages calculation.”

Ericsson, Inc. v. D-Link Systems, Inc. The Federal Circuit revisited these themes in Ericsson, describing the SSPPU requirement as primarily an evidentiary principle designed to prevent jury confusion:

“It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product—by, for instance, dramatically reducing the royalty rate to be applied in those cases—it is that reliance on the entire market value might mislead the jury.”

This characterization has been subject to differing interpretations. Some commentators view it as permitting greater flexibility in using broader royalty bases where appropriate safeguards are in place, including careful jury instructions and rigorous economic analysis. Others interpret Ericsson as reaffirming the underlying concern expressed in Uniloc and LaserDynamics: that large, unapportioned revenue figures carry an inherent risk of distorting the jury’s assessment of value.

Power Integrations, Inc. v. Fairchild Semiconductor International, Inc. In this case, the Federal Circuit reiterated the narrow scope of the EMVR in Power Integrations, stating that it applies only where the patented feature is the “sole driver” of customer demand or “substantially creates the value” of the component parts:

“The entire market value rule is appropriate only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts.”

Vectura Ltd. v. Glaxosmithkline LLC. More recently, the Federal Circuit affirmed that a patentee may apply a royalty rate to the entire value of the accused product where sufficiently comparable license reflects that practice. The court explained that such agreements may embody “built-in apportionment,” thereby satisfying the apportionment requirement through the economics of real-world negotiations between industry participants.

“Ordinarily, an entire-market-value royalty base is appropriate only when the patented feature creates the basis for customer demand or substantially creates the value of the component parts, and apportionment is required when an entire-market-value royalty base is inappropriate […] However, this court has explained that when a sufficiently comparable license is used as the basis for determining the appropriate royalty, further apportionment may not necessarily be required […] That is because a damages theory that is dependent on a comparable license (or a comparable negotiation) may in some cases have ‘built-in apportionment.’”

To summarize:

• Garretson (1884) introduces the EMVR concept.
• Rite-Hite Corp. (1995)
  defines EMVR application criteria: the patented feature is the “basis for customer demand.”
• Cornell (2009)
  introduces the SSPPU doctrine.
• Lucent (2009)
  clarifies that apportionment can also be done through the royalty rate.
• Uniloc (2011) and LaserDynamics (2012)
  caution the use of the entire product as a royalty base as a potential bias to the jury.
• Ericsson (2014)
  describes the SSPPU requirement as primarily an evidentiary principle.
• Power Integrations (2018)
  reiterates the narrow scope of the EMVR: applies only where the patented feature is the “sole driver” of demand.
• Vectura (2020)
  affirms that sufficiently comparable licenses may embody “built-in apportionment.”

Taken together, the case law reflects a consistent theme: EMVR remains a narrow exception to the fundamental requirement of apportionment. While courts have articulated the governing standards in increasingly precise terms, the application of those standards, particularly concepts such as the “driver of demand,” often raises complex economic and causal questions that extend beyond purely legal analysis.

In a subsequent article, we will address this issue from an economic perspective and examine how the economic analysis can inform the “driver of demand.”

Image Source: Deposit Photos
Author: zimmytws
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