BOEING COMPANY, THE v. USA

Filing 234

PUBLISHED OPINION.Proposed Judgment due by 4/17/2009. Signed by Judge Francis M. Allegra. (si)

B O E I N G COMPANY, THE v. USA

D o c . 234

In The United States Court of Federal Claims
N o . 00-705C (F iled Under Seal: March 16, 2009) R e issu ed : April 2, 2009 1 _ _ _ __ _ _ __ _ T H E BOEING COMPANY, P l a i n t i f f, v. T H E UNITED STATES, D efen d an t. * * * * * * * * * * * T rial; 28 U.S.C. § 1498; Damages owing to infr ing em en t of patent by NASA in d ev elo p in g super lightweight external tank for S p a ce Shuttle; Hypothetical licensing agr eem en t; Georgia Pacific factors; R e aso n ab le royalty rate; Impact of prior licen sin g agreements involving same patent; R oyalty base; Entire market value rule; R eliance on prior licensing agreements; P r eju d gm en t interest; Compounding of i n t e r e s t.

_________ O P IN IO N _ _ _ __ _ _ __ _ A r th u r M. Lieberman, Ganfer and Shore, LLP, New York, NY, and Keith D. Nowak, C a rt e r, Ledyard & Milburn LLP, New York, NY, for plaintiff. K e n B. Barrett and Trevor M. Jefferson, United States Department of Justice, W a s h i n g t o n , D.C., with whom was Assistant Attorney General Gregory G. Katsas, for defendant. A L L E G R A , Judge: T h is case is before the court following a trial in Washington, D.C. and New Orleans, Lo u is ia n a . In this patent case, the Boeing Company (Boeing) seeks compensation from the U n i te d States, under 28 U.S.C. § 1498(a), for the unlawful use of U.S. Patent No. 4,840,682 (the `6 8 2 patent), which is directed to the low temperature underaging of aluminum lithium alloys. In tw o prior opinions, this court construed the `682 patent, found it valid, and held that the United S ta te s , through the National Aeronautics and Space Administration (NASA), had infringed the p a te n t when it employed the underaging technique in manufacturing parts of the Space Shuttle. See The Boeing Co. v. United States, 69 Fed. Cl. 397 (2006) (Boeing II) (validity and

An unredacted version of this opinion was issued under seal on March 16, 2009. The opinion issued today incorporates the majority of the parties' proposed redactions and corrects some minor typographical errors. The redacted material is represented by brackets [ ].

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Dockets.Justia.com

i n f ri n g e m e n t opinion); The Boeing Co. v. United States, 57 Fed. Cl. 22 (2003) (Boeing I) (M a r k m a n opinion). In this third installment, the court determines the amount of damages and p re ju d gm e n t interest owed by defendant to plaintiff. I. FIN D IN G S

B a s e d upon the record, including the parties' stipulation of facts, the court finds as fo l l o w s : In the 1970s and 1980s, prompted by high jet fuel prices, Boeing began to investigate w a ys to reduce the structural weight of its airplanes to make them more fuel efficient. It knew th a t there were three main ways to do this ­ use lighter engines, alter the design of the airframe, o r utilize improved structural materials. Prior to Boeing's efforts, the industry had focused p rim a rily on the first two of these. In terms of structural materials, a combination of aluminum a n d steel had been used consistently on aircraft since the 1930s. However, by the early 1980s, a d v a n c e s in metallurgy led Boeing to conclude that aluminum alloys could play a major role in re d u c in g the weight of airplanes. For these purposes, lithium ­ the lightest metallic element ­ held the greatest potential as a n alloying substance. Aluminum-lithium (Al-Li) alloys are lightweight, yet offer a high payload c a p a c ity, ostensibly a perfect match for Boeing. See Boeing II, 69 Fed. Cl. at 401-02. Historically, however, such alloys had been shunned by aircraft manufacturers because they te n d e d to have poor "fracture toughness," meaning that a crack in a part constructed of such a llo ys could very quickly propagate when stressed, potentially leading to a catastrophic failure. The industry's concerns stemmed, in part, from several well-publicized airline crashes in the 1 9 5 0 s that were attributed to poor fracture toughness. T o address this problem, Boeing experimented with several Al-Li alloys, varying the a m o u n t of time they were heat-treated (or "aged") and adjusting their chemical composition by a d d in g differing amounts of other elements, such as zirconium, magnesium, zinc, copper, and s ilic o n . See Boeing II, 69 Fed. Cl. at 402-08 (describing, in greater detail, this development p ro c e s s ). Eventually, Boeing found a composition that, when subjected to a heat-treatment p r o c e s s called "low-temperature underaging," produced the desired mix of density and fracture to u gh n e s s , making it suitable for aircraft structures. Boeing applied for, and, on June 20, 1989, was granted a patent for this process. The p a t e n t so issued, the `682 patent, consists of seven claims, the latter six of which are dependent, in some fashion, upon the first. That first claim recites as follows: A process for improving the fracture toughness of an aluminum-lithium alloy without d e tra c tin g from the strength of said alloy, said alloy consisting essentially of:

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E le m e n t Li [Lithium] Mg [Magnesium] C u [Copper] Z r [Zirconium] M n [Manganese] Fe [Iron] Si [Silicon] Zn [Zinc] Ti [Titanium] O t h e r trace elements Each Total A l [Aluminum]

A m o u n t (wt. %) 1 .0 to 3.2 0 to 5.5 0 to 4.5 0 .0 8 to 0.15 0 to 1.2 0 . 3 max 0 . 5 max 0.25 max 0 . 1 5 max

0 . 0 5 max 0 . 2 5 max B a la n c e ,

s a id alloy first being formed into an article, solution heat treated and quenched, s a id process comprising the step of aging said alloy article to a predetermined u n d era ge d strength level at from about 200E F. to less than 300E F. Claim 7 of the patent reads "[t]he product produced by the process of Claim 1" and is a "productb y-p ro c e s s " claim, meaning that it covers any structure made by the process articulated in the firs t claim. In 1991, Boeing granted three aluminum suppliers ­ Aluminum Company of America ( A l c o a ) , Reynolds Metal Company (Reynolds), and Pechiney Rhenalu (Pechiney) ­ licenses to m a k e products using the underaging process laid out in the `682 patent. Each of these licenses w a s retroactive to specified dates in 1989. Typical of the granting language in these licenses is t h e following taken from the Pechiney agreement: "Subject to the terms and conditions set forth h e re in , BOEING hereby grants to PECHINEY a nontransferable, nonexclusive license under the Li c e n s e d Property to use the Licensed Processes and to make and sell Licensed Products within th e Licensed Territory." Under each license, Boeing was entitled to a royalty of 1.25 percent of th e "Net Sales Price of Each Licensed Product sold." The Net Sales Price was defined as "the i n v o i c e d sale price (exclusive of prepaid freight charges, insurance, taxes, duties, and discounts a c t u a l l y allowed) of Licensed Products sold to a non-Affiliate Customer." In the event there were n o such sales, the agreements stipulated that an "Equivalent Sales Price" would be used to c a lc u l a te the royalties due Boeing. That price was defined as "the manufacturing cost of each Lic e n s e d Product plus overhead and a reasonable profit." Around the time Boeing began working on Al-Li alloys to lighten its aircraft, NASA faced a similar task in seeking to reduce the weight of the Space Shuttle, officially called the Space T ra n s p o rta tio n System. The latter effort centered, in part, on the shuttle's external tank ­ the l a r ge , brownish-orange tank upon which the orbiter sits during launch. That tank not only c o n ta in s the propellant used by the orbiter's main engines, but also functions as the structural

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b a c k b o n e of the spaceship during launch, providing support for the solid rocket boosters and the o rb ite r. NASA's efforts led to a redesigned external tank, known as the Lightweight Tank ( LW T ) , which was about five tons lighter than the original Standard Weight Tank (SWT) ­ 7 5 ,5 6 9 versus 65,539 pounds. In the late 1980s and early 1990s, NASA was planning the orbital laboratory that would b e c o m e the International Space Station (ISS). Originally, the ISS was to orbit the Earth at an a n g le of inclination of 28.5 degrees, to coincide with the latitude of the NASA launch center at C a p e Canaveral, Florida. But, when NASA agreed to build the ISS in partnership with the R u s s i a n Federal Space Agency, it had to adjust the orbit of the station to accommodate not only s h u ttle s launched from Cape Canaveral, but also Russian spaceships launched from the Baikonur C o s m o d ro m e in Kazakhstan. For reasons more fully explained in an earlier opinion, see Boeing I I, 69 Fed. Cl. at 400, changing the orbital inclination of the ISS threatened to reduce s ign ific a n tl y the shuttle's payload delivery capability for missions to the station. Left u n c o rre c te d , this problem, at the least, could have delayed the completion of the ISS, ballooning its cost. Seeking to reduce the weight of the shuttle, so as correspondingly to increase the p a ylo a d that could be delivered, NASA engineers pondered a lengthy list of options that included r e d u c i n g the crew size, redesigning the orbiter, and even using the powerful Saturn 5 rockets e m p l o ye d in the Apollo moon program. Eventually, though, a consensus arose that the best o p tio n was to further reduce the weight of the external tank. On February 18, 1994, Lockheed Martin Space Systems Company (Lockheed) received contract NAS8-36200 (also known as the Buy 5 contract) to design this new external tank. Lockheed intended to use a relatively new Al-Li alloy, Alloy 2195, in the Weldalite family of a lu m in u m alloys, to create a Super Lightweight Tank (SLWT).2 This alloy offered many a d v a n ta ge s : it was weldable, 30 percent stronger, and five percent less dense than the aluminum a llo y used on the LWT. But, like other aluminum alloys, it still had a fracture toughness p r o b le m , particularly when deployed in the intricately-carved orthogrid configurations envisioned fo r the SLWT. In the spring of 1994, a "tiger team" of Lockheed and NASA employees traced th e fracture weakness problem to the process used for tempering the alloy and, as reflected in a J u n e 1994, report, then found a solution: low-temperature underaging. Using the alloy in c o m b in a tio n with this underaging process ultimately reduced the weight of the SLWT to 58,039 p o u n d s , a full 7,500 pounds lighter than the LWT. This savings translated into an almost poundfo r-p o u n d increase in the shuttle's payload capacity. As reflected in a Lockheed summary of the S LW T program, that increased capacity not only made the ISS program once again viable, but

Martin Marietta, Lockheed's corporate predecessor, had granted licenses to Reynolds to : (i) produce Weldalite alloys, (ii) use the Weldalite trademark, and (iii) engage in the c o o p e r a tiv e development of related technology. Under these agreements, Reynolds was obliged t o pay running royalties on the sales of Weldalite products, at rates ranging from [] percent, d e p e n d in g on the amount sold per year, with a minimum annual royalty of []. In 1993, these a gre e m e n t were modified to increase gradually the amount of the minimum royalty paid by R e yn o ld s and to impose more stringent reporting and sublicensing requirements.

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a ls o "provide[d] NASA with the capability to place heavier payloads into typical low altitude, lo w inclination orbits, or to place typical payloads into higher altitude, higher inclination orbits." The first SLWT flew in a shuttle mission in 1998, and the SLWT continues to be used on the S p a c e Shuttle to this day. M e a n w h i le , in 1998, Boeing was embroiled in a dispute with [] over royalties due under t h e latter's 1991 license for the `682 patent. Boeing alleged that [] owed it royalties because it h a d been practicing the patent in its role as a Lockheed subcontractor for the external tank p r o d u c t io n contract referenced above. Based on information gained in pursuing this dispute, B o e in g came to believe that, under the same contract, Lockheed itself had been practicing the p r o c e s s e s described in the `682 patent. In a letter dated April 20, 1998, Boeing accused Lo c k h e e d of this and described its ongoing dispute with []. In the letter, Boeing noted, by c o m p a r i s o n , that Alcoa had a license to use the `682 patent, "ha[d] not disputed its obligation to p a y royalties when due under its patent license" and, indeed, "timely paid such royalties for p ra c tic in g our patented Low Temperature Underaging process in the performance of subc o n tra c ts with your company under NAS8-36200." Boeing offered Lockheed a license of the `6 8 2 patent, as follows: B a s e d on information that we have learned from our FOIA requests and based on in fo r m a tio n that we have learned from [], we believe that your company has been a n d is practicing our patented Low Temperature Underaging process. Therefore, w e hereby offer your company a patent license under our Low Temperature U n d e ra gin g patents on terms and conditions which are similar to the existing p a te n t licenses to Alcoa, Reynolds and Pechiney Rhenalu of France. In letters dated April 21 and June 3, 1998, Lockheed did not acknowledge this offer and instead d i re c te d Boeing to take up any issue of infringement with NASA. Boeing eventually did just th a t , filing an administrative claim of infringement with NASA on August 19, 1998 (later s u p p le m e n te d on December 8, 1999). NASA denied that claim on February 10, 2000, averring th a t there was no infringement because Alloy 2195 differed from the alloys made according to the `6 8 2 patent both in chemical composition, as well as in the type of heat treatment used to increase th e alloy's strength and fracture toughness. U n m o l lifie d , plaintiff filed its complaint in this court on November 21, 2000, alleging in frin ge m e n t by defendant of the `682 patent. A Markman hearing was held on May 13, 2003, at w h i c h the meaning of various elements in the `682 patent was explored. An opinion construing th o s e elements was issued on June 20, 2003. Boeing I, supra. On November 15-19, 2004, the c o u rt conducted a trial focusing on the validity of the `682 patent and whether NASA had in frin g e d that patent. Following post-trial briefing, on December 23, 2005, the court issued an o p in i o n in which it held that "the `682 patent is valid, that defendant had no license to practice th a t patent, and that defendant's use of the `682 patent in constructing the external tank of the S p a c e Shuttle constituted infringement." Boeing II, 69 Fed. Cl. at 431.

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F o l lo w i n g additional discovery, a trial on damages began on October 15-16, 2007, in W a s h in gto n , D.C., and then continued on November 8, 2007, in New Orleans, Louisiana. At tria l, plaintiff called Dr. Warren Hunt, Jr., the Executive Director of the Minerals, Metals, and M a t e r i a l s Society, who testified as an expert regarding the process of aging alloys. Dr. G. Hari N a ra ya n a n , a scientist employed by Boeing, and one of the inventors of the process covered by th e `682 patent, testified regarding his work that led to the `682 patent. Lynn Hess, a retired B o e in g attorney who specialized in intellectual property, testified regarding the licensing of the `6 8 2 patent, particularly to Alcoa. Paul Meyer, of Navigant Consulting, Inc., testified as an e x p e rt on the valuation of intellectual property and the reasonable royalty methodology for d e te rm in in g royalty damages. Jerry Smelser, a retired Lockheed employee who led the redesign o f the external tank, testified regarding the contract for the SLWT, as well as the exact nature of th e product to be delivered thereunder. Finally, testimony was received from Mara Leff, a p a ra le ga l who prepared a spreadsheet analyzing the chemical trace packages that tracked the u n d era gin g of the individual parts of the external tank. D e fe n d a n t called only one of plaintiff's witnesses ­ Mr. Smelser. It also called its own e x p e rt, John Jarosz, an economist employed by Analysis Group, Inc., to offer a methodology for d e t e rm in i n g royalty damages. Additionally, Robert Delpidio and Lowell Howard, Lockheed e m p lo ye e s at NASA's New Orleans-based Michoud Assembly Facility (MAF), where the SLWT is manufactured, both testified regarding Lockheed's performance under the SLWT contract and th e procedures associated with the construction and delivery of the external tanks. They focused, in particular, on various bookkeeping and billing entries. Plaintiff calculated damages for infringement of $43,149,260, plus delay compensation, b a s e d on a 3.5 percent royalty rate on a royalty base of the entire tank, equivalent to $1.24 billion. Defendant's calculation resulted in damages an order of magnitude smaller, with total damages e s tim a te d at $4,182,412, plus delay compensation, based on a 1.25 percent royalty rate on a ro ya lty base of the flight hardware alone, valued at $334.6 million. Post-trial briefs were filed, a n d closing arguments were held on May 27, 2008. II. D ISC U SSIO N

S e c tio n 1498(a) of Title 28 authorizes a patentee to recover in this court "reasonable and e n ti re " compensation from the United States for its or its contractor's unlicensed use of a p a t e n t e d invention. Specifically, subsection (a) of that section provides, in relevant part: W h e n e v e r an invention described in and covered by a patent of the United States i s used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner's remedy shall be b y action against the United States in the United States Court of Federal Claims fo r the recovery of his reasonable and entire compensation for such use and m a n u fa c t u r e . * * * * *

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F o r the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or a n y person, firm, or corporation for the Government and with the authorization or c o n s e n t of the Government, shall be construed as use or manufacture for the U n i te d States. 2 8 U.S.C. § 1498(a); see generally, Florida Prepaid Postsecondary Educ. Expense Bd. v. College S a v . Bank, 527 U.S. 627, 648 n.11 (1999) (describing this waiver provision). While similar to p ro v is io n s authorizing infringement actions against private parties, see, e.g., 35 U.S.C. § 271(a), th e waiver of sovereign immunity in section 1498(a) differs from those provisions in that it does n o t sound in tort, but rather authorizes an action analogous to one for a non-exclusive taking of a lic e n s e under the Fifth Amendment. The latter purpose is evident in the statutory language that p ro v id e s the patentee with "reasonable and entire compensation" for the use of its invention.3 N o t w ith s t a n d in g this difference, this court's determination of liability under section 1498(a) r e l ie s on many of the same premises utilized by the district courts in assessing compensatory d a m a ges under Title 35. See Standard Mfg. Co., Inc. v. United States, 42 Fed. Cl. 748, 757-58 (1 9 9 9 ). "Generally, the preferred manner of reasonably and entirely compensating the patent o w n e r is to require the government to pay a reasonable royalty for its license as well as damages fo r its delay in paying the royalty." Hughes Aircraft Co. v. United States, 86 F.3d 1566, 1572 (F e d . Cir. 1996), vacated on other grounds and remanded, 520 U.S. 1183 (1997), reinstated, 140 F .3 d 1470 (Fed. Cir. 1998); see also Wright v. United States, 53 Fed. Cl. 466, 469 (2002); S ta n d a r d Mfg. Co., 42 Fed. Cl. at 758. A reasonable royalty "may be based upon an established ro ya lty, if there is one, or if not, upon the supposed result of hypothetical negotiations between th e plaintiff and defendant." Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1544 (Fed. Cir. 1995) (e n banc) (citing Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078 (Fed. Cir. 1983)). "The hypothetical negotiation," the Federal Circuit said in Rite-Hite, "requires the court to e n v is io n the terms of a licensing agreement reached as the result of a supposed meeting between th e patentee and the infringer." Id. That negotiation is deemed to have occurred at the time the U n i te d States takes a license from the plaintiff, that is, at the time the invention "is used or m a n u fa c t u r e d by or for the United States." 28 U.S.C. § 1498(a); see also Decca Ltd., 640 F.2d at 1166.

See Zoltek Corp. v. United States, 442 F.3d 1345, 1350-51 (Fed. Cir. 2006); Motorola, In c . v. United States, 729 F.2d 765, 768 (Fed. Cir. 1984); Decca Ltd. v. United States, 640 F.2d 1 1 5 6 , 1166 (Ct. Cl. 1980); Leesona Corp. v. United States, 599 F.2d 958, 964 (Ct. Cl. 1979); see a ls o Richard J. McNeely, "Governmental Indirect Patent Infringement: The Need to Hold Uncle S a m Accountable Under 28 U.S.C. § 1498," 36 Cap. U. L. Rev. 1065, 1076-81 (2008); David R. Lip s o n , "We're Not Under Title 35 Anymore: Patent Litigation Against the United States Under 2 8 U.S.C. § 1498(a)," 33 Pub. Cont. L.J. 243 (2003).

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T h e royalty stemming from the hypothetical negotiation is often determined by reference t o factors such as those set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1 1 1 6 , 1120 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d Cir.), cert. denied, 404 U.S. 8 7 0 (1971); see also Minks v. Polaris Indus., Inc., 546 F.3d 1364, 1372 (Fed. Cir. 2008); M a x w e ll v. J. Baker, Inc., 86 F.3d 1098, 1109-10 (Fed. Cir. 1996); Rite-Hite, 56 F.3d at 1554-55. Using these factors (and others), the court must find the royalty rate and the base upon which that ra te is to be applied. Minks, 546 F.3d at 1372. This requires a "highly case-specific and facts p e c i fic analysis," Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1366 (Fed. Cir. 2008), re lyin g upon "mixed considerations of logic, common sense, justice, policy and precedent," RiteH i te , 56 F.3d at 1546; see also Herbert v. Lisle Corp., 99 F.3d 1109, 1119 (Fed. Cir. 1996). To c o m p le te the damages calculation under section 1498(a), the court must also determine the a m o u n t of prejudgment interest needed to make the patentee whole. See Waite v. United States, 2 8 2 U.S. 508, 509 (1931); Standard Mfg., 42 Fed. Cl. at 777; ITT Corp. v. United States, 17 Cl. C t . 199, 232-33 (1989). Before going further, it is necessary to ascertain the day on which the hypothetical a g re e m e n t here would have been reached. August 15, 1994, most likely is that day. To begin w i th , 1994 is the year in which NASA entered into its contract with Lockheed to build the re d e s i gn e d external tank. More importantly, it was during the spring of that year that the "tiger te a m " of NASA and Lockheed employees concluded that the solution to the problems being e x p e r i e n c e d with the fracture toughness of the 2195 parts was to drop the underaging temperature fro m 320E F. to between 290E and 295 EF. See Boeing II, 69 Fed. Cl. at 412. The report i n c o r p o r a t in g that recommendation was finalized on or about June 28, 1994. Although the record d o e s not reveal precisely when that recommendation was adopted, it appears it was no later than A u gu s t 15, 1994 ­ the last day that Lockheed could alter the specifications for the Aluminum Lith iu m Test Article, containing sample barrel panels and domes, which it was obliged to provide N A S A under the contract. Hence, by no later than August 15, 1994, Lockheed was committed to u s in g the lower temperature underaging to improve the fracture toughness of the 2195 parts and, i n the court's view, by that date had taken a license, as a contractor of the United States, to e m p lo y that process. See 28 U.S.C. § 1498(a). These same facts, of course, oblige the court to re je c t plaintiff's claim that the hypothetical licensing would have occurred in 1998, the year the firs t SLWT was delivered to NASA.4

Less important, as it turns out, is determining whether the licensee in the hypothetical a g re e m e n t should be deemed to be NASA or Lockheed. The parties shift back and forth on this p o in t, depending upon which Georgia-Pacific factor is being examined. This is understandable a s the Georgia-Pacific factors were not designed for cases against the United States under 28 U .S .C . § 1498(a). That said, because the latter subsection makes the United States liable for the a u t h o riz e d actions of its contractors, one can readily see how the United States might be viewed a s liable for royalties paid by its contractors under a hypothetical license. As another judge on th is court has elaborated ­ Whether to treat the government or [its contractor] as the licensee for purposes of th is analysis depends on the approach used and the factor involved. The contractor

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In the segments that follow, the court will determine, seriatim, the royalty rate and base th a t would have been incorporated into this hypothetical 1994 agreement, as well as the fra m e w o rk for determining the amount of prejudgment interest owed plaintiff. A. R o y a l ty Rate

A s noted, Georgia Pacific enumerated a "comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license . . . d ra w n from a conspectus of the leading cases," 318 F. Supp. at 1120 ­ fifteen factors in all. These heuristics, though designed for cases involving private infringement, have been applied a n a lo go u s ly to cases against the United States arising under section 1498(a). See, e.g., Wright, 5 3 Fed. Cl. at 469. In the latter instance, as in private infringement actions, it is rarely the case th a t all fifteen factors come into play and are matched with probative evidence; more commonly, owing to the general circumstances encountered or specific evidence presented, only a few fa c to rs predominate. See Mobil Oil Corp. v. Amoco Chems. Corp., 915 F. Supp. 1333, 1353 (D. D e l. 1994) ("In performing a hypothetical negotiation analysis, it is important to recognize that s o m e of the Georgia-Pacific factors may be of minimal or no relevance to a particular case and o t h e r factors may have to be molded by the court to fit the facts of the case at hand."); Wright, 53 F e d . Cl. at 475. Such is the case here. The record reveals a series of transactions involving the "licensing of the patent in suit, p r o v in g or tending to prove an established royalty." Georgia Pacific, 318 F. Supp. at 1120; see a l s o Minks, 546 F.3d at 1372; Maxwell, 86 F.3d at 1109; Breese Burners, Inc. v. United States, 1 4 0 Ct. Cl. 9, 26 (1957). Such agreements "carry considerable weight in calculating a reasonable ro ya lty rate." Unisplay, S.A. v. American Elec. Sign Co., Inc., 69 F.3d 512, 519 (Fed. Cir. 1995); s e e also Studiengesellschaft Kohle, m.b.H. v. Dart Indus., Inc., 862 F.2d 1564, 1568 (Fed. Cir. 1 9 8 8 ); 7 Donald S. Chisum, Chisum on Patents § 20.03[3][b][i] (2005) (citing additional cases). In separate transactions finalized in 1991, Boeing licensed the low temperature underaging p ro c e s s in the `682 patent to three aluminum manufacturers ­ Pechiney, Reynolds and Alcoa. In e a c h of these license agreements, the licensee agreed to pay Boeing "a royalty measured at the

operates under the aegis of the sovereign's power to take a license under the s e c o n d paragraph of section 1498(a). . . . Hence, at some points in the analysis, it is more useful to treat the government as the hypothetical licensee. . . . In the c o n t e x t of a hypothetical negotiation, however, it is sometimes more appropriate to consider the hypothetical licensee to be the manufacturer of the product, rather th a n the government. . . . The Georgia-Pacific factors were postulated in the c o n t e x t of a private infringement action. As such, they do not always fit squarely in an analysis under section 1498. Penda Corp. v. United States, 29 Fed. Cl. 533, 575 (1993); cf. Standard Mfg., 42 Fed. Cl. at 764. For reasons that will become more apparent below, the court believes that the result herein is not s ign ific a n tly affected by who is deemed to have been the hypothetical licensee.

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ra te of 1.25 percent of the Net Sales Price of each Licensed Product sold." 5 Boeing contends that t h e royalty rates listed in these agreements were negotiated with its largest aluminum suppliers a n d do not represent the rate it would have charged Lockheed, one of its arch competitors. But, a s defendant emphasizes, that claim is belied by a letter dated April 20, 1998, in which Boeing o ffe re d to license the `682 patent to Lockheed for the same royalty rate it had granted Alcoa, R e yn o ld s and Pechiney ­ 1.25 percent of the Net Sales Price. Moreover, around this same time, s p e c i fi c a l l y, on March 27, 1998, Boeing offered to assign []'s license to McCook Metals (M c C o o k ) if the latter would agree that []'s underaging process was covered by Boeing's patent c la im s . This is significant as there is nothing in the record to suggest that Boeing had the same s o rt of supplier relationship with McCook that it had with Pechiney, Reynolds and Alcoa. Accordingly, it appears that Boeing was amenable to other parties, beyond its core suppliers, h a v in g a license of the `682 patent at the royalty rate of 1.25 percent. See Atlantic Thermoplastic C o . v. Faytex Corp., 5 F.3d 1477, 1482 (Fed. Cir. 1993) (affirming a district court's finding of a r e a s o n a b l e royalty rate based upon an offer made by the patentee to a third party). In the court's v i e w , of all the evidence presented in this case, these two offers, together with the three licenses B o e in g granted its aluminum suppliers, constitute the most cogent and persuasive evidence of the fa ir and equitable royalty rate that should be employed here. In arguing for a royalty rate of 3.5 percent, plaintiff relies heavily upon its expert, Mr. M e ye r . He discounted the actual licenses of the `682 patent asserting that they were favorable a rra n gem e n ts negotiated before the benefits associated with the claimed invention were known. But, this view failed to account adequately for Boeing's willingness to offer the same rate to Lo c k h e e d and McCook and to do so in 1998, well after the benefits of the patent were known. Likewise erroneous was Mr. Meyer's claim that the 1.25 percent royalty rate in the `682 patent lic e n s e s was irrelevant because neither Alcoa, Reynolds nor Pechiney could have produced the in frin gin g products. This observation was predicated on evidence that those parties could not h a v e supplied finished hydrogen barrel panels because they lacked the metal rolling techniques n e e d e d to construct parts that would accommodate the necessary orthogrids. Debatable as this a s s e r t io n may be, it is quite beside the point. What is relevant is that one or more of the suppliers c o u ld have treated panels manufactured by Lockheed or other NASA contractors using the low te m p e ra tu re underaging license ­ a fact confirmed by Lockheed product flow documents and by v a rio u s letters that Boeing received from its aluminum suppliers. The record shows that, during th e years in question, not only did Alcoa make royalty payments under its license ­ confirming

Boeing's extended negotiations with [] and [] tend to contradict the notion, urged by d e fe n d a n t , that these agreements were lopsided. As various correspondence confirms, those n e g o t ia tio n s began in 1988. []. In making the latter counteroffers, Boeing stated that it believed " th e foregoing terms are reasonable in view of our multimillion dollar research program which le d to this process and in view of the present and future use of this important process." [] is also c o n t ra d i c t e d by its later dispute with [] over the payment of royalties under the license ­ a dispute th a t eventually led to the discovery that NASA (through Lockheed) had been using the `682 p a te n t.

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t h a t it was employing the `682 patent method ­ but also that some of those payments related to its s u b c o n tra c tin g activity under the SLWT contract. As such, the court concludes that Mr. Meyer lacked any reliable basis upon which to d is tin gu is h the prior Boeing licenses of the subject patent and Boeing's offers to Lockheed and M c C o o k . See Riles v. Shell Exploration and Prod. Co., 298 F.3d 1302, 1313 (Fed. Cir. 2002) (re je c tin g expert models that erroneously "ignored [the patentee's] established licensing p r a c t i c e " ) ; Studiengesellschaft Kohle, 862 F.2d at 1568 (rejecting a special master's rate that fa i l e d to give effect to the licensor's actual practice, stating that "[i]f the master had looked to [th e licensor'] actual practices . . . the guessing game as to the economic value of the up-front p a ym e n t s would have been unnecessary"); see also Stickle v. Heublein, Inc, 716 F.2d 1550, 1 5 6 1 -6 3 (Fed. Cir. 1983) (overturning royalty determination where "notably absent from [the c o u r t' s ] findings is any consideration of the actual negotiations between the parties"). On this gro u n d alone, the court would be inclined to reject Mr. Meyer's royalty rate. But this was not the o n ly deficiency in his approach. Mr. Meyer asserted that the baseline for calculating the royalty rate should be [] percent, b a s e d upon a survey of 48 prior Boeing licenses. He based this finding on the fact that ninety p e r c e n t of these licenses had royalty rates in excess of [] percent. The licenses in question were s e l e c t e d from a larger pool by Boeing's attorneys and involved a wide range of products with little resemblance to the underaging process at issue here. To be sure, a few of them involved m e ta l processes, but others involved such things as a motor-driven rotary floor scrubber, a r e a m e r , a hand-held wire stripper and a cleaning solvent. Despite the obvious differences in th e s e products, Mr. Meyer made little attempt ­ certainly, not nearly enough ­ to analyze the c o m p a r a b i lity of these inventions to that of the `682 patent. There was no analysis of such c o m m o n indicators as the degree of innovativeness of the technology transferred, how the p a r tic u l a r invention stood in the marketplace, the relationship between Boeing and the licensee, t h e remaining duration of the patent, the extent to which the licensee had actually used the patent, a n d the impact of having multiple patents being covered by a single license. Seeking to explain his nonfeasance, Mr. Meyer testified ­ "I knew that I couldn't drill into e a c h of those licenses and have all the particulars and get to the ­ sort of the best comparables." But, there is no indication that Mr. Meyer could not make these comparisons ­ he simply failed to d o so, even though Boeing almost certainly had significant information regarding each of these lic e n s e s in the survey. Yet, without these comparisons ­ and, indeed, with little idea as to how th e original study group was populated 6 ­ Mr. Meyer engaged in an extraordinary degree of

While Mr. Meyer was aware that Boeing's attorneys had excluded several categories of lic e n s e s from the survey (e.g., licenses involving universities or joint ventures), the record, as a w h o le , does not support a finding that he directed the selection process. Indeed, in answering, d u rin g cross-examination, why Boeing's attorneys had excluded joint venture licenses, he d is a s s o c ia te d himself from that process, stating ­ "Boeing was responsible for aggregating the lic e n s e s that were provided both to me and to you, and I believe that they ­ well they represented

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s p e c u la tio n in assuming that the `682 patent was roughly comparable to the ninety percent of the p a t e n t s in his sample that had a royalty rate in excess of [] percent, rather than the ten percent that h a d a rate below that level.7 Perhaps this might have made more sense had the royalty rates of all th e patents been clustered around the [] percent mark ­ but, indeed, they were not, and instead r a n g e d widely from a high of [] percent to a low of [] percent, with no discernable pattern. Mr. M e ye r ' s approach then was not, as he claimed, "conservative." Rather, unfortunately, it is more a p tly described as "capricious" ­ akin to valuing a painting by comparing it to ninety percent of t h e paintings hanging in the same gallery without knowing how the paintings came to be there a n d with little sense as to whether the painting to be valued is a Van Gogh or something bought a t a starving artist's auction. Such an adventitious approach is "too speculative to stand" and " b e a r [ s ] little relationship to what a willing buyer and a willing seller would use in the real world to negotiate a royalty rate." Dow Chemical Co. v. United States, 226 F.3d 1334, 1348 (Fed. Cir. 2 0 0 0 ) .8 S i n c e his baseline was little more than conjecture, it matters little how Mr. Meyer wielded th e remaining Georgia Pacific factors in asserting that they resulted in upward or downward " p r e s s u r e " on his initial postulate ­ plus or minus a guess, is, after all, still a guess. Yet, the court c a n n o t let pass, without comment, two additional flaws in his adjustments. First, Mr. Meyer attributed upward pressure to the notion that the use of the invention in th e Space Shuttle program increased the value of the license. But, there is utterly no evidence ­ n o n e ­ that either Lockheed or NASA would have agreed to pay a higher royalty rate not because o f the profitability of the tank contract nor the intrinsic value of the patent, but because of the n o t o r i e t y or "advertising value" associated with having the patent be used in the Space Shuttle p r o g ra m . If Mr. Meyer is right, then presumably NASA, with its grand history and high profile, o u gh t to expect always to pay more in the way of royalties ­ even in hypothetical transactions, a p p a re n tly. But this cannot be the case. For while defendant is not entitled to infringe a patent " a t a cheaper rate than a private infringer," Bendix Corp. v. United States, 676 F.2d 606, 607-08 ( C t . Cl. 1982) (per curiam), surely it should not be required to pay a higher rate than is customary

to me that those licenses were taken out of that aggregation. So I would have to look to Boeing to describe what they did there." Compare Utah Med. Prods. Inc. v. Graphic Controls, Corp., 350 F.3d 1376, 1385 (Fed. C ir. 2003) (rejecting reliance on an expert report where the accused infringer failed to show that " t h e license agreements used in its expert analysis were in any way comparable to the . . . patent" i n suit); Georgia-Pacific, 318 F. Supp. at 1140 ("Much, though not all, of the probative force of th e foregoing evidence is dissipated by the radically different features and controlling c irc u m s ta n c e s pertaining to the compared but widely diverse products and the various respective l ic e n s o r s and licensees."). While consideration of a hypothetical negotiation "necessarily involves an element of a p p ro x im a tio n and uncertainty," Unisplay, 69 F.3d at 517, an expert should be able to hazard s o m e t h i n g more than a guess, or at least show how, despite all reasonable efforts, his estimate is th e best that could be derived.
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s i m p l y because it is a highly-visible and desirable customer. As the Court of Claims instructed in B en d ix ­ Insofar . . . as the awards against the private infringer, and against the government ta k e r , both would apply to the same unauthorized, unlicensed uses of a patented in v e n tio n , and are both nonpunitive, and both undertake only to assess reasonable a n d entire compensation for the interest taken or infringed, the results ought to be s im i la r, just as the awards in many land taking cases would have been no more or le s s if they had been trespass cases. I d . (emphasis added). As this passage hints, given that an action under section 1498(a) finds it ro o ts in the takings law, it would be odd to hold that the royalty rate must be increased to account fo r the government's intended use of the patent, especially given the Supreme Court's long a d m o n itio n that the value of property taken by the government is "not enhanced by the purpose fo r which it is taken." United States v. Chandler-Dunbar Water Power Co., 229 U.S. 53, 76 ( 1 9 1 3 ) ; see also Dow Chemical Co., 226 F.3d at 1348; Paymaster Techs., Inc. v. United States, 6 1 Fed. Cl. 593, 611 (2004), aff'd, in part, vacated, in part, 180 Fed. Appx. 942 (Fed. Cir. May 4 , 2006); and see Leesona, 599 F.2d at 969. Mr. Meyer also erred in asserting that the royalty rate here should be increased to reflect th e court's ruling that the `682 patent is valid. While various decisions conclude that such an a d ju s tm e n t is warranted in setting damages for post-judgment infringement or the rate for p ro s p e c tiv e uses of the invention under an injunction, such is generally not the case where the c o u rt is faced solely with the prospect of determining a reasonable royalty rate for a hypothetical a g re e m e n t that was to occur pre-judgment.9 The latter, of course, is the case here, as the court, u n d er section 1498(a), is faced only with the issue of the royalties owed as to the SLWTs used for t h e 28 shuttle launches that occurred before the `682 patent expired. Moreover, while the record c o n ta in s some indication that there were ongoing disputes among the parties as to the scope of th e patent, there is no indication that the royalty rate in the prior licenses of the `682 patent was d is c o u n te d to take into account the potential invalidity of the patent. Accordingly, there was no n e e d for Mr. Meyer ­ or this court, for that matter ­ to correct for such a discount in determining th e hypothetical royalty rate here.

See Amado v. Microsoft Corp., 517 F.3d 1353, 1362 (Fed. Cir. 2008) ("Prior to jud gm ent, liability for infringement, as well as the validity of the patent, is uncertain, and damages a re determined in the context of that uncertainty."); Dynamics Corp. of Am. v. United States, 766 F .2d 518, 519 (Fed. Cir. 1985), aff'g, 5 Cl. Ct. 591 (1984) ("a finding of validity is not entitled to an y collateral effect"); see also Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1317 (Fed. Cir. 2 0 0 7) ("[P]re-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties' legal relationship and other factors.") (Rader, J., co n cu rr ing ); Riles, 298 F.3d at 1313 ("A reasonable royalty determination for purposes of making a damages evaluation must relate to the time infringement occurred, and not be an after-the-fact assessm ent.").

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B a s e d on the foregoing, the court finds that plaintiff's model does not reflect the royalty r a t e that a hypothetical negotiation between Boeing and Lockheed would have yielded. Rather, b a s e d on the record as a whole, it finds that the hypothetical royalty rate should be 1.25 percent.10 B. R o y a l ty Base

B o t h parties have expended considerable effort in arguing which parts of the external tank in frin g e d the patent. This debate, heavily animated by conflicting expert testimony and disputes o v e r test records, has focused on the temperatures at which these parts were aged and the lithium c o n t e n t of the alloys involved. Yet, despite these differences, both parties admit that the royalty b a s e ought to reflect a significant portion of the value of the entire tank ­ and one that exceeds th e value of the 2195 parts. Plaintiff sets that value at $1.24 billion corresponding to the price of th e tanks sold, while defendant, for its part, sets that value at $334.6 million, corresponding to the p ric e of the "flight hardware," a quantity that, unlike plaintiff's, does not include any overhead or p r o fit. In staking out their respective positions, both parties invoke permutations of the so-called " e n tire market value rule." Plaintiff does so more directly, arguing that those parts of the SLWT m a d e from Alloy 2195 were both physically and functionally inseparable from the non-infringing p a r ts . Defendant, however, is more subtle ­ objecting to plaintiff's implementation of the rule, b u t ultimately noting that its own expert "effectively takes the entire market value rule into a c c o u n t because [he] includes all of the flight hardware in the ETs, not just patented items." The entire market value rule "permits recovery of damages based on the value of the e n tire apparatus containing several features, where the patent-related feature is the basis for c u s t o m e r demand." State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1 9 8 9 ) . "This measure of damages arises where both the patented and unpatented components to ge th e r are `analogous to components of a single assembly,' `parts of a complete machine,' or `c o n s titu te a functional unit' but not where the unpatented components `have essentially no fu n c tio n a l relationship to the patented invention and . . . may have been sold with an infringing d e v i c e only as a matter of convenience or business advantage.'" Imonex Services, Inc. v. W.H. M u n z p r u fe r Dietmar Trenner GMBH, 408 F.3d 1374, 1379 (Fed. Cir. 2005) (quoting Rite-Hite C o r p ., 56 F.3d at 1550).11 Most commonly, the entire market value rule applies when the holder o f the patent would have sold additional items had the patent not been infringed, allowing the p a te n t holder to recoup lost profits on the sale-related items that the infringer should have re a s o n a b ly foreseen would be lost. For example, in Juicy Whip, the Federal Circuit held that the p a te n t holder was entitled to lost profits not only on the sale of a juice dispenser, but on the
10

The court has carefully examined both experts' analyses of the remaining Georgia P a c ific factors ­ bearing on other features of the patent, the products to be produced thereby, the re le v a n t marketplace and the bargaining positions of the parties ­ and is unpersuaded that the c o u n te ra c tin g "pressures" identified by the experts warrant any further adjustment of this rate. See also Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1371 (Fed. Cir. 2004); J o h n M. Skenyon, Christopher S. Marchese, John Land, Patent Damages Law and Practice § 2.5 (2 0 0 8 ).
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u n p ate n te d juice syrup, as well, finding that there was a "functional relationship" between the tw o items. 382 F.3d at 1372. A similar understanding of the rule was at work in Golden Blount, In c . v. Robert H. Peterson, Co., 438 F.3d 1354, 1370-72 (Fed. Cir. 2006), where the Federal C i rc u i t held that the patent owner was entitled to lost profits on the artificial logs and grate s u p p o rt that were ordinarily sold with the patented burner assembly. See also Gasser Chair Co. v . Infanti Chair Mfg. Corp., 943 F. Supp. 201, 215-19 (E.D.N.Y. 1996), aff'd, 155 F.3d 565 (Fed. C ir. 1998); Patent Damages Law and Practice, supra at § 2.5 (providing other examples). Nonetheless, several cases have invoked this rule in determining a reasonable royalty, operating o n the theory that "a willing licensee in a hypothetical negotiation . . . would have been more d is p o s e d to agree to a high royalty if he could expect to derive [the] collateral benefits" of a s s o c ia te d sales. Chisum, supra, at § 20.03[3][b][vi]; see also Fonar Corp. v. General Electric C o ., 107 F.3d 1543, 1552-53 (Fed. Cir.), cert. denied, 522 U.S. 908 (1997). Whether in the c o n te x t of recouping lost profits or determining a reasonable royalty rate, it must be shown, for t h e rule to apply, that "the patented feature is the basis for customer demand for the entire m a c h i n e ." Fonar, 107 F.3d at 1552; see also Rite-Hite Corp, 56 F.3d at 1549. A ga in s t this background, whether the rule applies here is a close call. To be sure, the s h u ttle parts produced with the patented process were integrated into the SLWT and thereby p ro v id e d valuable assistance to Lockheed and NASA in reaching their weight reduction goals. Yet, one must wonder whether there was the sort of symbiotic or intrinsic relationship between th e underaging process and the SLWT as would support a typical application of the entire market v a lu e rule. Again that rule is ordinarily invoked where there is some functional, economic or m a rk e t in g dependence by the unpatented item upon the invention ­ some indication, for example, th a t the patented feature was the basis for the demand for the item that incorporates it.12 Here, h o w e v e r, that nexus is not apparent, primarily because the external tank would have been built by Lo c k h e e d and sold to NASA whether vel non the underaging process of the patent was employed. Fortunately, though, this court need not decide whether this case is an appropriate vehicle for a p p lyin g the entire market value rule because, based on the record, it finds that the value of the S LW T is integral to the determination of the royalty base here, albeit for a different reason.

See Minco, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109, 1118 (Fed. Cir. 1996); RiteH ite, 56 F.3d at 1550, 1551; TWM Mfg. Co., Inc. v. Dura Corp., 789 F.2d 895, 901 (Fed. Cir. 1 9 8 6 ); Wright, 53 Fed. Cl. at 472 (the test is "whether the patented component cannot be operated ind epen den tly of the non-patented components"). Especially instructive in this regard is Leesona C orp ., in which the Federal Circuit stated ­ Under the entire market value rule, it is not the physical joinder or separation of the co n tested items that determines their inclusion or exclusion from the compensation base, so much as their financial and market dependence on the patented item under th e standard marketing procedures for the goods in question. 5 9 9 F.2d at 969; see also 8 Irwin Aisenberg, Modern Patent Law Precedent E440 (2008).

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A n d that reason is this ­ the various licenses of the `682 patent suggest that a hypothetical l ic e n s i n g agreement between Boeing and Lockheed would have defined the royalty base so as, in e ffe c t, to include therein the value of the SLWT. In each of these licenses, the royalty was set at 1 . 2 5 percent of the "Net Sales Price of each Licensed Product sold." The phrase "Net Sales P ric e " was defined as ­ the invoiced sales price (exclusive of prepaid freight charges, insurance, taxes, d u tie s , and discounts actually allowed, if any, included therein) of Licensed P ro d u cts sold to a non-Affiliate customer of [the licensee]. In the event there have b e e n no such sales to non-Affiliates, or the transaction in question involves a lease in s te a d of a sale, Equivalent Sales Price shall be used to compute the royalties due th e re u n d e r. The agreements, with slight differences that are immaterial, further defined "Licensed Products" a s "any products made by a Licensed Process or covered by the claims of" the patent. "Equivalent Sales Price" was defined as "the manufacturing cost of each Licensed Product plus o v e rh e a d and a reasonable profit." These provisions beg the question ­ what was the Licensed Product sold here? There are tw o obvious responses ­ that the product was the specific parts that were underaged using the in v e n tio n or that it was the entire external tank. Based upon the record, the latter appears to be th e case for several reasons. For one thing, the original procurement contract for the SLWT, N A S 8 - 3 6 2 0 0 , stipulates that, "the contractor shall . . . produce and deliver External Tanks" ­ in o th e r words, the SLWT is what was sold here, not its separate components. Second, the D D -2 5 0 s , the budget-tracking documents that Lockheed used, inter alia, to effectuate the transfer o f the external tanks to NASA, refer specifically to the tanks and provide an estimated cost for e a c h external tank. Contrary to defendant's claim, these documents, as well as the weight of te s tim o n y in this case, make clear that at no point was NASA sold separately the individual barrel p a n e ls or other 2195 parts. Third, Lockheed produced "Unit Cost Reports" to reconcile the e s tim a te d cost of each tank against Lockheed's total actual monthly costs ­ and, again, these re p o rts were broken down on a per tank basis, further reinforcing the notion that both NASA and Lo c k h e e d conceived of this contract as one for the sale of external tanks. Finally, even d e fe n d a n t 's expert, Mr. Jarosz, agreed that, "consistent with the licenses that Boeing entered into p r io r to the hypothetical negotiation, the base here went beyond the price of the individual p a n e l s , " and included the "flight hardware," which he defined as the cost of the tank less certain l a b o r , overhead and indirect expenses. While Mr. Jarosz protested otherwise, in the end, even his ro ya lty base was more in accord with the notion that the Licensed Product sold here was the e n tire SLWT. O f course, Mr. Jarosz asserted that the cost of the SLWT had to be reduced substantially to get to the royalty base. He began by assuming that had Lockheed relied upon Alcoa or R e yn o ld s to perform the underaging of the barrel panels, those manufacturers would have been r e q u i re d to pay the royalty only on the product they sold ­ namely, the parts of the tank that were u n d e r a g e d . To derive the value of those panels, Mr. Jarosz used what he described as a "multiple

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s te p process." He began with the total DD-250 cost of the SLWTs containing infringing parts, w h i c h totaled approximately $1.24 billion. (Of course, that figure, together with an allowance for p r o fit, is essentially what plaintiff claims is the royalty base here.) Mr. Jarosz, however, believed th a t this figure overstated the royalty base. He noted that the DD-250 costs included the labor c o s t s associated with building the SLWT, engineering and tooling costs, various support costs, m a te ria l costs, overhead and administrative costs, as well as facility operation and maintenance c o s t s . Deducting these costs from the DD-250 cost led him to conclude that approximately [] p e rc e n t of the DD-250 costs represented an estimate of the materials and subcontract costs of the S LW T s containing infringing aluminum-lithium parts, leading to a figure of []. To eliminate the c o s t of consumable materials that purportedly were used in building the tank but not incorporated th e re in , Mr. Jarosz then multiplied this figure by [] percent yielding the cost of the "flight h a rd w a re ," that is, the cost of all the materials that constituted the tank. In Mr. Jarosz's view, the re s u ltin g figure ­ [] ­ overstated the value of the infringing parts, but, nonetheless, represented a re a s o n a b le royalty base for calculating damages here. But, while Mr. Jarosz's mathematics are relatively clear, the rationale for his calculations is much less so. For one thing, his tightly-constricted approach for determining the royalty base b e a r s little relationship to either the licensing agreements of the patent in the record, or the offers m a d e by Boeing to Lockheed or to assign Reynold's license to McCook. While Mr. Jarosz relied h e a v ily upon the latter documents as establishing a reasonable royalty rate, and while he claimed t o rely on them in constructing his royalty base, he, in fact, made no attempt to reconcile his n o tio n of "flight hardware" with the definition of the royalty base in those agreements. And for go o d reason, as nothing in the agreements suggests that the royalty base should be stripped of la b o r, overhead or a reasonable profit. Per contra. The definition of Net Sales Price excludes fr e i gh t , taxes and a few other items not relevant here, but conspicuously does not exclude labor, o v e r h e a d or profit. Moreover, the definition of Equivalent Sales Price, to be used as a default w h e re the Net Sales Price cannot be derived, requires the inclusion not only of the " m a n u fa c t u r in g cost" of the item (which the DD-250s and reconciling documents indicate in c lu d e s the cost of labor) but also of "overhead and a reasonable profit." Thus, there is no c o n tra c tu a l foundation or other factual basis for using the stripped-down figure that Mr. Jarosz e m p lo ye d .13

In its post-trial briefs, defendant notes that, under the so-called "Buy 6" contract (the fo llo w -o n to the original contract), the flight hardware was "a separate component of the ET c o n tra c ts ." It relies on a document entitled "Attachment J-19 Procurement of Buy 6 Flight H a rd w a re " that was incorporated into the original Buy 5 contract by an amendment dated S e p te m b e r 16, 1997. This document orders that, "all costs and fees associated with Attachment J -1 9 of this contract shall be collected, reported and invoiced separately from the remainder of t h i s contract." Defendant suggests that this demonstrates conclusively that, even under a d e fin itio n of the royalty base culled from the prior license agreements of the `682 patents, the p ro d u ct sold was the flight hardware, not the entire tank. But, this claims proves too much. For o n e thing, it appears that the only reason that the flight hardware was accounted for in this fa s h i o n was to distinguish, for cost accounting purposes, between the tanks that Lockheed was

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M r. Jarosz's retort to this takes the form of a simple question ­ why would Lockheed a gre e to pay a royalty of 1.25 percent of the value of the entire tank, when it could have asked A l c o a or Reynolds to underage the parts and paid a much lower royalty under their agreements? Or to use the words from his report ­ "To the extent that NASA and Lockheed had a viable a lte rn a tiv e of paying under existing licenses, which appeared to specify the base as the a l u m i n u m - li th i u m panels, NASA and Lockheed would have viewed the aluminum-lithium panels a s the maximum royalty base in the hypothetical license." But, this line of inquiry takes the c o n c e p t of non-infringing alternatives too far ­ indeed, it threatens to replace the hypothetical a g re e m e n t construct with a damages model in which government infringers seemingly are re w a rd e d with the best licensing scenario conceivable. Further explanation of this point, of c o u rs e , is warranted. For good or naught, as the result of the taking, the hypothetical agreement here must be p re d ic a te d upon what Boeing and either NASA or Lockheed would have agreed. To be sure, the p rio r supplier licensing agreements provide a paradigm for that hypothetical agreement, but the a m o u n t of royalties that the aluminum manufacturers would have actually paid thereunder does n o t cap defendant's liability here because defendant chose not to take advantage of those a rra n g e m e n ts and instead took for itself (or Lockheed) a license of Boeing's patent. That is what 2 8 U.S.C. § 1498(a) presumes ­ and, in this regard, as in any other case of infringement, the c o u rt, in applying the hypothetical construct, takes the products sold by the hypothetical licensee a s it finds them.14 What was sold under the taken license here was not parts ­ as might have been th e case had Alcoa or Reynolds practiced the invention ­ but specifically-numbered external ta n k s (e.g., ET-61, ET-62, etc.). And those are the products to which the royalty formula in the h yp o th e tic a l agreement must be applied. Defendant and its expert may not avoid this reality by picking and choosing among the b a s i c terms of those agreements, selecting only those, such as the relatively low royalty rate, w h i c h are favorable to them, while discarding the rest. Indeed, it makes neither logical nor

still delivering under the Buy 5 contract and those that it was still to build under the Buy 6 c o n tra c t. There is no indication that this change in cost accounting also reflected a change in the p r o d u c t being sold ­ to the contrary, that product remained the external tank, the price of which c o n tin u e d to reflect not only the flight hardware costs, but also all the other associated labor and o v e rh e a d costs. The Federal Circuit recently rejected the argument that "reasonably royalty damages a re capped at the cost of implementing the cheapest available, acceptable, noninfringing a lte rn a t iv e . " Mars, 527 F.3d at 1373; see also Monsanto Co. v. Ralph, 382 F.3d 1374, 1383 (F e d . Cir. 2004) (rejecting infringer's argument that "a reasonable royalty deduced through a h yp o th e tic a l negotiation process can never be set so high that no rational, self-interested, wealthm a x im iz in g infringer acting ex ante would have ever agreed to it"); Chisum, supra, at § 2 0 .0 3 [ 3 ] [b ][ v ] . As further stated by the Federal Circuit, "what an infringer would prefer to pay is n o t the test for damages." Rite-Hite, 56 F.3d at 1555; see also Golight Inc. v. Walmart Stores, In c . , 355 F.3d 1327, 1338 (Fed. Cir. 2004).
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fa c t u a l sense to suggest, as defendant does, that the royalty rate here should correspond precisely to the 1.25 percent rate in those agreements, yet argue that the royalty base should be defined in a fa s h i o n dramatically different from how it is defined in those licenses ­ a formulation that would s ign ific a n tly diminish the royalties recovered by Boeing. As noted by one commentator, "[t]he r o ya l t y base cannot be considered in a vacuum, and its interaction with the royalty rate c o n s titu te s the multiplied combination whose product is `royalties' and thus `damages' within the c o n t e x t of § 284." 2 Robert Goldscheider, Licensing and the Art of Tech. Mgmt. § 18:5 (2008); s e e also Bendix Corp., 676 F.2d at 612; Gargoyles, Inc. v. United States, 37 Fed. Cl. 95, 103 (1 9 9 7 ) ("Generally speaking, the royalty rate and royalty base have an inverse relationship, so th a t when the base goes down the rate goes up, and vice-versa"). In short, the prior licenses p r o v id e guidance on what the hypothetical royalty rate and royalty base should be ­ a result s tre n gth e n e d by the fact that when Boeing extended its offers to Lockheed and McCook (the la tte r, in offering to transfer the [] license), it did not modify the definition of the royalty base. While Lockheed did not accept Boeing's offer, there is certainly no evidence that it would have o b t a i n e d a more favorable deal from its rival, particularly given the complexities associated with t h e royalty base offered by defendant. Indeed, it is at this point that the highly competitive relationship between Boeing and Lo c k h e e d perhaps most logically rears its head. See Georgia Pacific, 318 F. Supp. at 1120. While the April 1998 offer contradicts the view that Boeing would have demanded a higher ro ya lty rate from its competitor, it does suggest that, in any deal with Lockheed, Boeing intended to use the same definition of the royalty base it had used previously, presumably even if that m e an t that Lockheed would have to pay more royalties than it would have paid had the u n d e ra gi n g services been performed by Boeing's aluminum suppliers. In assuming the contrary, M r. Jarosz not only hypothesized a different agreement than was ever offered, but also imagined th a t the underaging services would have been rendered by one of Boeing's licensees, rather than th e unlicensed firms that actually performed most of that work. In this regard, he simply went too fa r. Contrary to Mr. Jarosz's theory, there is no indication that Boeing would have been willing to agree, in a license with either Lockheed or NASA, to a royalty base that required the sort of e x t ra p o l a t io n s that Mr. Jarosz performed to get to the cost of the "flight hardware." Nor is it r e a s o n a b l e to believe that Lockheed would have been willing to share contemporaneously with B o e in g the detailed operating cost data needed to make and verify that royalty calculation. Based on the foregoing, the court finds that the royalty base here corresponds to the value o f the external tanks that were sold to NASA and is not limited to some lesser permutation of the v a lu e of the parts that were underaged.15 To determine that base, the court must parse the

While the rationale employed here makes it unnecessary to address the failure of Lo c k h e e d 's subcontractors to maintain all the records associated with the underaging of the 2195 p a rts , there can be little doubt that this misfeasance ought to weigh against the defendant. See S e n s o n ic s , Inc. v. Aerosonic Corp., 81 F.3d 1566, 1572 (Fed. Cir. 1996) ("When the calculation o f damages is impeded