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Nortek v. Energy Lab: District Court Guidance on the Entire Market Value Rule

Tuesday, August 2, 2016   (0 Comments)
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Nortek v. Energy Lab: District Court Guidance on the Entire Market Value Rule

By Philip Kline and Ryan Penkowski

In a July 15, 2016 order in the matter of Nortek Air Solutions, LLC (“Nortek”) v. Energy Lab Corporation, et al. (“Energy Lab”), the U.S. District Court for the Northern District of California found that a defendant’s marketing materials alone are an inadequate basis for establishing that a feature drives demand for a product and therefore applying the Entire Market Value Rule.  Additionally, the District Court reiterated the Federal Circuit’s finding in LaserDynamics, Inc. v. Quanta Computer, Inc., et al. that demonstrating that the accused feature is essential to the operation of a product is not an adequate basis for applying the Entire Market Value Rule.

In general, courts have found that the appropriate royalty base for the determination of reasonable royalty damages is often the “smallest salable unit” (for instance, LaserDynamics, Inc. v. Quanta Computer, Inc., et al.); however, under the Entire Market Value Rule, a multi-component product that incorporates the accused features may be the appropriate royalty base if the accused features drive demand for the entire product.

In the Nortek v. Energy Lab matter, Nortek alleged that Energy Lab’s “air handling units” infringed a variety of Nortek patents covering fan elements.  The District Court found that the asserted patents did not – either individually or collectively – cover the entire air handling system.  Despite the limitations of the asserted patents, Nortek’s damages expert contended that the asserted patents drove demand for the entire air handling system and that it was therefore appropriate to calculate reasonable royalty damages using the entire system as the royalty base.  Nortek’s expert provided two bases for this conclusion: (1) the patented features were highlighted by Energy Lab in its marketing materials; and (2) the patented features are essential to the use of the accused systems.  Both of these bases were rejected by the District Court.

The District Court found that “the fact that a company chooses to advertise its products in a certain way says nothing about why a customer chooses to purchase a particular product.”  It therefore found that Energy Lab’s marketing materials did not provide adequate support for Nortek’s expert’s application of the Entire Market Value Rule.  Additionally, the District Court reiterated the Federal Circuit’s finding in LaserDynamics, Inc. v. Quanta Computer, Inc., et al. that “it is not enough to merely show that the [patented technology] is… essential to the use of the [accused product]” to support the application of the Entire Market Value Rule.  The District Court therefore found that Nortek’s expert’s claims that the patented features were the “heart” of the system and “essential” to the operation of the accused air handling units did not provide adequate support for the application of the Entire Market Value Rule.

Ultimately, the District Court found that Nortek’s expert’s application of the Entire Market Value rule was inappropriate and excluded his reasonable royalty opinion on that basis.  Professionals in the field may wish to consider this guidance when assessing damages in future cases involving multi-component products.


Authors: Philip Kline is a Managing Director at 284 Partners, LLC.  Ryan Penkowski is a Senior Associate at 284 Partners, LLC.