Smallest saleable patent-practicing unit in life sciences disputes

November 2024  |  SPECIAL REPORT: HEALTHCARE & LIFE SCIENCES

Financier Worldwide Magazine

November 2024 Issue

Many intellectual property (IP) disputes arise from alleged acts of infringement. Determining a damages award often requires an expert to opine on a royalty, such as a lump sum or per unit rate, which the parties in suit would have negotiated had they counterfactually entered into a licence agreement prior to the onset of the allegedly infringing acts.

For example, consider a chip that solely contains a processing technology that when inserted into a mobile phone, makes the phone run more efficiently, thus using less battery power. The processing technology is patented and the patentee is alleging that another party is infringing its patented technology.

Alternatively, consider a prefilled syringe with a safety mechanism to prevent the medication from being inadvertently dispensed. The mechanism to disengage the safety on the syringe is patented and the patentee is alleging that its patent is being infringed by another party.

What is the appropriate base of sales of revenues on which a royalty for the patented technology should be applied? Is it the revenues from phone sales or chip sales in the first example? Is it the revenues from sales of the prefilled syringe or sales of the syringe alone in the second example? What needs to be considered when the infringed patent is part of a multicomponent product?

This article provides an overview of calculating patent infringement damages for such products. It will discuss considerations for apportionment and situations where the patented product is a component of a multicomponent product. Identifying the appropriate royalty base may be more complicated in these instances and applying the concept of the smallest saleable patent-practicing unit (SSPPU) can be used.

The SSPPU is often at issue in patent disputes relating to electronic devices and may, increasingly, be applicable to the calculation of patent damages relating to combination products in the life sciences sector.

Reasonable royalty analysis

Calculating a damages award due to an act of infringement requires an expert to assume that the patent-in-suit is both valid and infringed. In the US, damages due to infringement shall be “adequate to compensate for infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer”, as outlined in 35 US Code section 284.

The goal of a reasonable royalty analysis is to determine what royalty a patent owner, as the willing licensor of the patent in suit, and the infringer, as the willing licensee, would have agreed to in a hypothetical negotiation just prior to the start of infringement. A common and accepted method for determining a reasonable royalty in the US is a Georgia-Pacific factor analysis, whereby a set of economic and commercial factors provided in Georgia-Pacific are considered. While not all factors may be relevant nor carry the same level of importance in each case, the Georgia-Pacific methodology has been broadly adopted by courts in the US and experts when calculating a damages award due to patent infringement.

Determining the correct royalty base, or sales base, on which the reasonable royalty is calculated, may be an important aspect of this consideration. In some cases, the outcome of a reasonable royalty analysis is a lump-sum payment, and in many others it is a running royalty rate or per unit amount applied to a defined royalty base. The royalty base reflects revenue realised by selling the infringing product and the royalty rate reflects the percent of revenue owed, or a per unit amount due, on the sale of each infringing product that the licensee would agree to pay the licensor under the terms of a hypothetical licence.

Apportionment

In the assessment of damages for patent litigation, apportionment is the process of determining a reasonable royalty that is attributable to the value of the patented technology. Notably, Georgia-Pacific factor 13 states that the portion of the realisable profit attributed to the patent, independent of non-patented elements or features, should be considered when determining the reasonable royalty. Said another way, what portion of profit can be attributed to the patent-in-suit or the patented component in a multicomponent product?

Apportionment is necessary when components other than those covered by the asserted patents contribute to the value of the infringing product. An accepted method of apportionment commonly used by experts is to limit the royalty base to the SSPPU. However, the royalty base may require further apportionment if the SSPPU contains features or elements that are not covered by the patent-in-suit and contribute to the value of the SSPPU.

“Determining the correct royalty base, or sales base, on which the reasonable royalty is calculated, may be an important aspect of this consideration.”

If, for example, the previously mentioned syringe had multiple features in addition to the patented safety mechanism, then further apportionment would be needed. Apportionment is required to ensure that a damages award correctly compensates the patentee for harm due to patent infringement and the amount of the award aligns with the value of the patented technology.

The US Court of Appeals for the Federal Circuit has noted that for cases involving multi-component products, as in the examples above, damages may be calculated on the SSPPU, not on sales of the entire product (unless the patented feature is the cause for the demand for the entire product).

Applications in life sciences

While the concept of SSPPU is generally recognised in IP matters involving technology products, it is less commonly relevant in disputes in the life sciences industry. However, as biotech, MedTech, life sciences and pharmaceutical companies continue to innovate, and the use and sale of combination products continues to grow, SSPPU is likely to arise in more disputes involving combination therapeutics and products in the industry.

Combination products that combine a medical device with a drug or biologic, or that combine multiple drugs in a single dosage, can allow for more convenient treatments for patients. Licence agreements for combination products may contain combination product provisions in the definition of net sales. For example, net sales may be defined as the price of the patented component A (e.g., the syringe with the safety mechanism) when sold on its own, divided by the price of component A plus the price of component B (e.g., the therapeutic in the syringe).

The Food and Drug Administration provides examples of single-entity and co-packaged combination products. Examples of single-entity combination products include a monoclonal antibody combined with a therapeutic drug, a device coated or impregnated with a drug or biologic, prefilled drug delivery systems such as insulin injector pens and metered dose inhalers, transdermal patches, and catheters with antimicrobial coating. Examples of co-packaged combination products include drug or vaccine vials packaged with a delivery device, surgical trays with instruments, drapes and anaesthetic or antimicrobial swabs, and first aid kits containing devices such as bandages or gauze and drugs such as antibiotic ointment and pain relievers.

In co-packaged combination products, the SSPPU may be more easily distinguished, but single entity combination products may present more of a challenge. Regardless of the type of combination product or therapeutic at issue, combination product provisions in licence agreements in the life sciences industry are likely to increase, leading to an increase in life sciences disputes where SSPPU may be a relevant consideration for determining a reasonable royalty.

While this article focuses on methodologies for calculating patent infringement damages within the US, it is expected that SSPPU may be applicable to non-US disputes as well.

 

Erin McDermott is a principal at Charles River Associates. She can be contacted at +1 (617) 425 3070 or by email: emcdermott@crai.com.

Ms McDermott has a background in economics and over 10 years of experience in analytical and litigation consulting. At CRA, she focuses on antitrust and intellectual property litigation matters including class certification, commercial reasonable efforts, patent and breach of contract disputes, and damages claims and evaluation. Prior to joining CRA, Ms McDermott worked in the advanced analytics group for Aspen Marketing Services, a division of Epsilon, and in the antitrust & competition practice at NERA Economic Consulting.

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BY

Erin McDermott

Charles River Associates

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