Reasonable Royalty

Under 35 U.S.C. § 284, a patent owner is entitled to 'damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.' The reasonable royalty floor ensures patent owners receive at least some compensation even when lost profits cannot be proven. The reasonable royalty is typically determined through the 'hypothetical negotiation' framework — what royalty would a willing licensor and willing licensee have agreed to just before infringement began, assuming both parties knew the patent was valid and infringed (Panduit Corp. v. Stahlin Bros. Fibre Works, 6th Cir. 1978; Georgia-Pacific Corp. v. U.S. Plywood Corp., S.D.N.Y. 1970).

Georgia-Pacific Corp. v. U.S. Plywood Corp. (S.D.N.Y. 1970) identified 15 factors courts and experts use to calculate reasonable royalty: (1) royalties received for the patent in suit; (2) rates paid for comparable patents; (3) nature and scope of the license (exclusive/non-exclusive, field of use); (4) licensor's established licensing policy; (5) commercial relationship between licensor and licensee (competitors vs. non-competitors); (6) effect of selling the patented item on sales of other products; (7) duration of the patent and license term; (8) established profitability of the patented product; (9) advantages of the patented invention over alternatives; (10) commercial embodiment nature and benefits; (11) extent of infringer's use; (12) portion of profit customarily allowed for use of invention in the particular art; (13) portion of realizable profit attributable to the invention vs. other elements; (14) opinion testimony of expert witnesses; (15) amount a willing licensor and licensee would have agreed to at arm's length.

The hypothetical negotiation takes place just before the first infringing act — the date infringement began. This date is critical because: (1) the parties' knowledge of the patent's value at that date is what the jury measures; (2) the licensor cannot benefit from infringement's success in hindsight (the 'book of wisdom' doctrine applies: courts may consider subsequent events to inform what the parties would have anticipated, but only to a limited extent); (3) the accused product's commercial success at the time of infringement may be different from later success; (4) royalty rates in the industry at the hypothetical negotiation date matter more than current rates. The willing-licensor/willing-licensee construct assumes both parties know the patent is valid and infringed — removing the bargaining uncertainty that exists in real negotiations.

The Entire Market Value Rule (EMVR) allows a patent owner to base the reasonable royalty calculation on the entire value of the accused multi-component product, rather than just the patent-practicing component. EMVR applies only when: (1) the patented feature drives demand for the entire product (i.e., customers buy the product because of the patented feature); and (2) the patented feature is the 'basis for customer demand' or the 'entire market value of the accused apparatus.' Courts have significantly restricted EMVR post-2011 — Uniloc USA v. Microsoft (Fed. Cir. 2011) rejected EMVR based on the 25% rule of thumb and required patentee to show the patented feature drove demand. In complex multi-component products (smartphones, software platforms), courts typically require apportionment to the smallest salable patent-practicing unit (SSPPU).

Apportionment requires that a reasonable royalty reflect only the value attributable to the patented technology, not unpatented features, brand, or other elements of the accused product. The duty to apportion comes from Garretson v. Clark (S.Ct. 1884) and has been reinforced by VirnetX v. Cisco (Fed. Cir. 2014) and Ericsson v. D-Link (Fed. Cir. 2014). Methods of apportionment: (1) smallest salable patent-practicing unit (SSPPU) — use the smallest component that practices the patent as the royalty base; (2) comparable license apportionment — if comparable licenses exist for similar-scope technology, use those rates (already implicitly apportioned); (3) feature apportionment — estimate the percentage of product value attributable to the patented feature (e.g., consumer survey showing X% of purchasing decisions driven by patented feature). Courts now scrutinize damages experts closely for proper apportionment methodology.