LaserDynamics, Inc. v. Quanta Computer, Inc., 2011-1440

• Decision Date: 30 August 2012
• Docket Number: 2011-1470,2011-1440
• Parties: LASERDYNAMICS, INC., Plaintiff-Appellant, v. QUANTA COMPUTER, INC., Defendant-Cross Appellant, and QUANTA COMPUTER USA, INC., QUANTA STORAGE, INC., AND QUANTA STORAGE AMERICA, INC. Defendants.
• Court: U.S. Court of Appeals — Federal Circuit

LASERDYNAMICS, INC., Plaintiff-Appellant, v. QUANTA COMPUTER, INC., Defendant-Cross Appellant and QUANTA COMPUTER USA, INC., QUANTA STORAGE, INC. AND QUANTA STORAGE AMERICA, INC. Defendants.

2011-1440

2011-1470

United States Court of appeals for the Federal Circuit

Decided: August 30, 2012

Appeals from the United States District Court for the Eastern District of Texas in case no. 06-CV-0348, Judge T. John Ward.

MATTHEW C. GAUDET, Duane Morris LLP, of Atlanta, Georgia, argued for plaintiff-appellant. On the brief were ROBERT L. BYER, of Pittsburgh, Pennsylvania, and GREGORY M. LUCK, of Houston, Texas, and KRISTINACAGGIANO, of Washington, DC. Of counsel was THOMAS W. SANKEY, of Houston, Texas.

TERRENCE DUANE GARNETT, Goodwin Procter, LLP, of Los Angeles, California, argued for defendant/cross-appellant. With him on the brief were VINCENT K. YIP, and PETER J. WIED.

Before DYK, CLEVENGER, and REYNA, Circuit Judges.

REYNA, Circuit Judge.

These appeals come before us after two trials in the district court—a first trial resolving the claims of patent infringement and damages, and a second trial ordered by the district court to retry the damages issues. The parties raise various issues relating to the proper legal framework for evaluating reasonable royalty damages in the patent infringement context. Also before us are questions regarding implied license, patent exhaustion, infringement, jury instructions, and the admissibility of a settlement agreement. For reasons explained in detail below, we affirm-in-part, reverse-in-part, and remand.

I. BACKGROUND

A. The Patented Technology and the OpticalDisc Drive Industry

LaserDynamics, Inc. ("LaserDynamics") is the owner of U.S. Patent No. 5,587,981 ("the '981 Patent"), which was issued in 1996. The patent is directed to a method of optical disc discrimination that essentially enables an optical disc drive ("ODD") to automatically identify the type of optical disc—e.g., a compact disc ("CD") versus a digital video disc ("DVD")—that is inserted into the ODD. Claim 3, which was asserted at trial, is representative:

3. An optical disk reading method comprising the steps of:

processing an optical signal reflected from encoded pits on an optical disk until total number of data layers and pit configuration standard of the optical disk is identified;

collating the processed optical signal with an optical disk standard data which is stored in a memory; and

settling modulation of servomechanism means dependent upon the optical disk standard data which corresponds with the processed optical signal;

(c) [sic] the servomechanism means including:

a focusing lens servo to modulate position of a focusing lens; and

a tracking servo to modulate movement of a pickup.

This automated process saves the user from having to manually identify the kind of disc being inserted into the ODD before the ODD can begin to read the data on the disc. The patented technology is alleged to be particularly useful in laptop computers where portability, convenience, and efficiency are essential. At least as early as 2006, a laptop computer was not commercially viable unless it included an ODD that could automatically discriminate between optical discs.

Yasuo Kamatani is the sole inventor of the '981 Patent. In 1998, viewing DVD technology as the next major data and video format, Mr. Kamatani founded LaserDynamics and assigned the '981 Patent to the company. Mr. Kamatani is the sole employee of LaserDynamics, whichis exclusively in the business of licensing Mr. Kamatani's patents to ODD and consumer electronics manufacturers.

When LaserDynamics was founded, the DVD market had reached few mainstream consumers, and there was some skepticism among electronics companies as to the likely success of this technology compared with the established VHS format. By 2000, however, DVD sales and the ODD market were sharply rising. By 2003, most homes had DVD players and nearly every computer had an ODD. An ODD having automatic disc discrimination capability quickly became the industry standard for DVD players and computers.¹

B. LaserDynamics' Licensing History of

the '981 Patent

According to LaserDynamics, it was initially difficult to generate interest in licensing the '981 Patent, due to the novelty of the technology and LaserDynamics' limited operating capital and bargaining power. Nevertheless, LaserDynamics entered into sixteen licensing agreements from 1998 to 2001. These licenses were granted to well known electronics and ODD manufacturers such as Sony, Philips, NEC, LG, Toshiba, Hitachi, Yamaha, Sanyo, Sharp, Onkyo, and Pioneer. All of the licenses were non-exclusive licenses granted in exchange for one time lump sum payments ranging from $57,000 to $266,000. There is no evidence that these licenses recited the lump sum amounts as representing a running royalty applied over a certain period of time or being calculated as a percentage of revenues or profits. These sixteen licenses were admitted into evidence in the first trial, as explained below.

Several other lump sum licenses were granted by LaserDynamics between 1998 and 2003 to other ODD and electronics manufacturers via more aggressive licensing efforts involving actual or threatened litigation by LaserDynamics. These licenses, in addition to the sixteen licenses from the first trial, were admitted in the second trial.

On February 15, 2006, LaserDynamics (and Mr. Kamatani) entered into a license agreement with BenQ Corporation to settle a two-year long litigation for a lump sum of $6 million. This settlement agreement was executed within two weeks of the anticipated trial against BenQ. Kamatani v. BenQ Corp., No. 2:03-CV-437 (E.D. Tex. Jan. 20, 2006) (pre-trial conference order indicating trial was expected to begin in the last week of February 2006). By the time of the settlement, BenQ had been repeatedly sanctioned by the district court for discovery misconduct and misrepresentation. The district court had allotted BenQ one-third less time than Mr. Kamatani for voir dire, opening statement, and closing argument, had awarded attorneys' fees to Mr. Kamatani for bringing the sanctions motion, had stricken one of BenQ's pleaded defenses, and had sanctioned BenQ $500,000.00 as an additional punitive and deterrent measure. Kamatani v. BenQ Corp., No. 2:03-CV-437, 2005 U.S. Dist. LEXIS 42762, at *20, *44-46 (E.D. Tex. Oct. 6, 2005). The district court believed that its harsh sanctions were justified because BenQ's extensive misconduct "demonstrate[d] aconscious intent to evade the discovery orders of this Court, as well as violate[d] this Court's orders and the rules to an extent previously unknown by this Court." Id. at *44-45. The BenQ settlement agreement was admitted into evidence in the second trial.

Finally, in 2009 and 2010, LaserDynamics entered into license agreements with ASUSTeK Computer and Orion Electric Co., Ltd., respectively, for lump sum payments of $1 million or less. These two licenses were admitted into evidence in the second trial.

In total, twenty-nine licenses were entered into evidence in the second damages trial. With the exception of the $6 million BenQ license, all twenty-nine licenses were for lump sum amounts of $1 million or less.

C. Quanta Computer Inc. and Quanta Storage Inc.

Quanta Storage, Inc. ("QSI") is a manufacturer of ODDs that was incorporated in 1999. QSI is headquartered in Taiwan and is a partially-owned subsidiary of Quanta Computer, Inc. ("QCI"), with which it shares some common officers, directors, and facilities. QCI's corporate headquarters are also located in Taiwan, and its factories are located in China. QCI holds a minority share in QSI and does not control QSI's operations.

QCI assembles laptop computers for its various customers, which include name brand computer companies such as Dell, Hewlett Packard ("HP"), Apple, and Gateway. QCI does not manufacture ODDs, but will install ODDs into computers as instructed by its customers. QCI will sometimes purchase ODDs directly from ODD manufacturers such as Sony, Panasonic, Toshiba, or QSI, as directed by QCI's customers. Predominantly, however, QCI will be required to purchase the ODDs from the customer for whom QCI is assembling the laptop com-puter. In other words, QCI's typical practice is to buy ODDs from Dell, HP, Apple, or Gateway, which in turn purchased the ODDs from the ODD manufacturers. Because QCI eventually sells the fully assembled laptop computers—including the ODDs—to its customers, this process is called a "buy/sell" arrangement. When QCI purchases ODDs from one of its customers in a buy/sell context, it buys the ODDs for an artificially high "mask price" set by the customer and designed to hide the actual lower price of the ODDs from the customer's competitors. Thus, the mask price is always higher than the actual price to the customer.

QSI first sold its ODDs for integration into laptop computers in the United States in 2001. In 2002, LaserDynamics offered QSI a license under the '981 Patent, but QSI disputed whether its ODDs were within the scope of the '981 Patent and declined the offer. QCI sold its first computer in the United States using an ODD from QSI in 2003. It was not until August 2006 that LaserDynamics offered a license to QCI concurrently with the filing of this lawsuit. To date, neither QSI nor QCI has entered into a licensing agreement with LaserDynamics relating to the '981 Patent.

D. ODDs Made by Philips and Sony/NEC/Optiarc

Just as computer sellers Dell, HP, Apple, and Gateway outsource the assembly of their computers to companies like QCI, some sellers of ODDs outsource the assembly of their ODDs. QSI assembles ODDs for Philips and Sony/NEC/Optiarc—two of the largest sellers of ODDs. As discussed above, Philips and Sony/NEC/Optiarc are licensed by LaserDynamics to make and sell ODDs within the scope of the '981 Patent. Under the license agreements, both Philips and Sony/NEC/Optiarc also enjoy "have made" rights thatpermit them to retain...