Hunting for Goodwill: Federal Circuit Says Goodwill Is Not Germane to Reasonable Royalty Analysis

The U.S. Court of Appeals for the Federal Circuit has now

ruled that courts may not consider that portion of a sale of an infringing

company's business attributable to "goodwill" when calculating the

base for a determination of reasonable royalty. Transclean Corporation v.

Bridgewood Services, Inc., Case No. 01-1268, 01-1269, 2002 U.S. App. LEXIS

9609 (Fed. Cir. May 21, 2002).

Transclean, the assignee of U.S. Patent No. 5,318,080,

directed to an automatic transmission fluid changing system, sued Bridgewood

claiming that Bridgewood's automatic transmission fluid changing device

infringed the '080 patent. Bridgewood was no longer in business, having sold

all its assets, including goodwill, to Century Manufacturing Company for

$7,744,000 $6,522,000 more that the book value of Bridgewood's tangible net

worth. Prior to the sale, Bridgewood's sole source of revenue was from the sale

of the allegedly infringing devices.

At trial, the jury found that Bridgewood willfully infringed

the '080 patent and awarded Transclean three types of damages: $934,618 as a

reasonable royalty based on Bridgewood's sale of infringing products;

$1,874,500 as additional damages to compensate Transclean for Bridgewood's

infringement; and $2,708,225 as a reasonable royalty based on Bridgewood's sale

of its business. The district court, on post-trial motions, overturned that

portion of the jury's award based on the sale of Bridgewood's business, finding

that, as a matter of law, Transclean was not entitled to a reasonable royalty

based on that sale.

On appeal, Transclean claimed it was entitled to the entire

$6,522,000 Bridgewood received for its goodwill because Bridgewood's sole

source of revenue was the sale of infringing products. Citing Minco, Inc. v.

Combustion Eng'g, Inc., Transclean argued that allowing Bridgewood to

retain the profits from its sale of goodwill would create an incentive for

others to infringe a patent and then sell their business.

The Federal Circuit rejected Transclean's argument, noting

that reasonable royalty damages arise from the sale of the infringing goods and

the portion of the sale of a business attributable to intangible goodwill

"is not the sale of...