Companies attempting to measure their potential exposure for patent infringement should review a recent decision by the Federal Circuit. Business often calculate their exposure based on the concept of a “reasonable royalty,” and look at the terms on which the patent holder has previously licensed the technology. Such an established royalty is usually the best measure of potential exposure. In a case addressing the issue of damages in a patent infringement case involving the burgeoning field of genetically modified crop seeds, the Federal Circuit has expanded the definition of what constitutes a reasonable royalty. The court indicated that in calculating the ”reasonable royalty,” a court may also consider costs and charges beyond those that the patent holder has labeled as royalties, as well as other benefits received by the infringer as a result of using the patented technology. When assessing potential patent infringement damages, businesses should consult with counsel before attempting to assess how a damages award might be calculated.
This important case arose out of a seemingly prosaic set of facts involving a dispute between a farmer and a seed company. While Paris Hilton might view farming as part of “The Simple Life,” American agribusiness is actually a high-tech industry with complex legal issues. Indeed, Monsanto Company v. McFarling, 2007 WL 1502080 (Fed. Cir. 2007), is the third opinion issued by the Federal Circuit in a closely watched dispute between a farmer and Monsanto. Monsanto developed a system for weed control using genetically modified crops that are resistant to the effects of certain herbicides. When the genetically modified seeds are planted, farmers are able to spray the herbicide on their fields to kill the weeds while sparing the resistant crops, making weed control more efficient. Monsanto patented this technology.
When McFarling purchased genetically modified soybean seeds from Monsanto in 1998, he paid a license fee and signed a “Technology Agreement” that included a promise not to replant seeds that were produced from the purchased seeds or to supply those seeds to others for replanting. The terms of the Technology Agreement also included payment of a $6.50 “technology fee” per bag of seeds and required the farmer to purchase seeds from an authorized distributor. Despite this agreement, McFarling saved seeds from the 1998 crop and planted those seeds in 1999 and did the same thing in 1999, saving soybean seeds from that crop and planting them in 2000. The saved seeds contained the patented genetic traits, and McFarland did not pay any license fee for 1999 or 2000.
In a previous decision, the Federal Circuit held that McFarling infringed on Monsanto’s patent by saving seeds and replanting them. The court also previously held that the liquidated damages provision in the agreement between Monsanto and McFarling was invalid. At trial, the jury returned a damages verdict of $40 per bag of saved seed. Under 35 U.S.C. § 284, damages for patent infringement are to be adequate to compensate for the infringement and must not be less than a reasonable royalty for use of the invention. McFarling argued that because Monsanto had charged a $6.50 “technology fee” to licensees who purchased the seeds under its Technology Agreement, that fee constituted the established reasonable royalty for use of the technology and should be used as an upper limit on his potential exposure.
The court stated, however, that the technology fee was actually only part of the royalty being charged by Monsanto. By requiring a farmer to purchase seeds only from an authorized distributor, which would charge between $19 and $22 per bag of seeds, Monsanto had elected to impose an additional royalty, although it was not labeled as such. The court concluded that the total out-of-pocket cost to the farmer – the technology fee plus the cost of the seeds purchased from an authorized distributor – should be characterized as a royalty payment for purposes of calculating the reasonable royalty and damages. To decide otherwise would create a windfall for infringers, who would have a huge advantage over other farmers by paying only the technology fee without having to purchase seeds from distributors. The court also held that it was reasonable for the jury, in calculating damages, to consider the benefits Monsanto’s damages conferred on farmers such as McFarling, such as the savings on weed control measures.
By allowing courts to consider charges and costs beyond what a patent holder has labeled as a royalty or technology fee, as well as the economic benefits conferred on the infringer by the technology, the decision in McFarling may lead to higher damages awards in patent infringement cases. It will certainly make it more difficult for businesses concerned about infringement claims to calculate their potential exposure.