Reasonable Royalty Damages

The hypothetical negotiation is the cornerstone of reasonable royalty analysis: LEGAL BASIS: 35 U.S.C. § 284: 'in no event less than a reasonable royalty for the use made of the invention by the infringer'; this is the statutory floor — patentees always get at least a reasonable royalty even if they cannot prove lost profits; HYPOTHETICAL NEGOTIATION CONSTRUCT: courts calculate reasonable royalty by asking: what would a willing licensor and a willing licensee have agreed to at the time infringement began?; DATE: the hypothetical negotiation is conducted as of the date of first infringement (not the filing date; not the trial date); PARTICIPANTS: the willing licensor (the patent owner, assumed willing to license) and the willing licensee (the infringer, assumed willing to take a license); both parties are presumed to know the patent is valid and infringed; KEY ASSUMPTIONS: the patent is valid and infringed (even though the infringer may dispute this in the actual case); the parties would have entered into a license (not walked away); the rate must be 'reasonable' — not just what the patent owner demands; GEORGIA-PACIFIC FACTORS: the primary analytical tool; 15 factors identified in Georgia-Pacific Corp. v. United States Plywood Corp. (S.D.N.Y. 1970) that inform the hypothetical negotiation; ANALYTICAL APPROACH ALTERNATIVE: the infringer's anticipated profit from using the patented technology (an alternative to Georgia-Pacific when comparable licenses are unavailable); BOOK OF WISDOM: after infringement began, courts can look at subsequent events that inform what the parties would have agreed to had they foreseen those events (Sinclair Refining Co. v. Jenkins Petroleum Process Co., S.Ct. 1933); subsequent events are admissible to inform (not replace) the hypothetical negotiation.

The Georgia-Pacific factors guide the hypothetical negotiation analysis: FACTOR 1: the royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty; FACTOR 2: the rates paid by the licensee for the use of other patents comparable to the patent in suit; FACTOR 3: the nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold; FACTOR 4: the licensor's established policy and marketing program to maintain its patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly; FACTOR 5: the commercial relationship between the licensor and licensee, such as whether they are competitors in the same territory in the same line of business, or whether they are inventor and promoter; FACTOR 6: the effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of its non-patented items; and the extent of such derivative or convoyed sales; FACTOR 7: the duration of the patent and the term of the license; FACTOR 8: the established profitability of the product made under the patent; its commercial success; and its current popularity; FACTOR 9: the utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results; FACTOR 10: the nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention; FACTOR 11: the extent to which the infringer has made use of the invention and any evidence probative of the value of that use; FACTOR 12: the portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions; FACTOR 13: the portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer; FACTOR 14: the opinion testimony of qualified experts; FACTOR 15: the amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement.

Apportionment is now required in virtually all multi-feature product cases: APPORTIONMENT REQUIREMENT: the reasonable royalty must be apportioned to the value contributed by the patented feature, not the entire product; failure to apportion is reversible error in the Federal Circuit; SMALLEST SALEABLE PATENT-PRACTICING UNIT (SSPPU): in cases involving complex multi-component products (smartphones; computers; automobiles), the royalty base should be the smallest saleable unit that practices the patent; NOT the entire smartphone price if the patent covers only the camera autofocus algorithm; NOT the entire car price if the patent covers only a tire pressure sensor; LUCENT TECHNOLOGIES v. GATEWAY (Fed. Cir. 2009): the Federal Circuit reversed a $358 million reasonable royalty award based on the entire price of Microsoft Outlook; the patent covered a date-picker feature used occasionally; the proper base was the value of that specific feature, not the entire software; ENTIRE MARKET VALUE RULE (EMVR): exception to SSPPU; can use the entire product as the royalty base ONLY if: the patented feature is the basis for customer demand for the entire product; customers buy the entire product primarily because of the patented feature; POST-2009 FEDERAL CIRCUIT: EMVR is very difficult to establish; courts presume the larger royalty base is wrong unless the patented feature is the PRIMARY driver of demand; APPORTIONMENT METHODS: comparable licenses (if industry licenses similarly situated patents as a fraction of price, that fraction reflects the apportioned value); incremental value analysis (what specifically does the patent add over the prior art?); technical expert testimony on the patent's contribution relative to other features; SMALLEST SALEABLE UNIT AS BASE + PERCENTAGE ROYALTY: the common current approach: identify the SSPPU; apply a percentage royalty rate to the SSPPU price; the rate may be higher because the base is smaller, but the mathematical product should reflect the value contributed by the patent.

Comparable licenses are the most important evidence in reasonable royalty cases: USING COMPARABLE LICENSES: licenses for the same patent (if any exist) set a near-direct benchmark; licenses for comparable patents (same technology area; similar claims; similar industry) are the next best evidence; ADMISSIBILITY: comparable licenses must be sufficiently similar to be admissible; mere existence of a license for a different technology at a different rate is insufficient; ADJUSTING FOR COMPARABILITY: licenses may be adjusted for differences in: scope (exclusive vs. non-exclusive; field of use); time period (older licenses may reflect lower market value); circumstances (lawsuit settlement vs. arm's-length negotiation); the hypothetical negotiation date vs. when the comparable license was signed; SETTLEMENT LICENSES: licenses entered to settle patent litigation are admissible but courts discount them; settlement value reflects the cost and risk of litigation (nuisance value), not just the patent's economic value; Ericsson, Inc. v. D-Link Systems (Fed. Cir. 2014): settlement licenses can be used but must be carefully adjusted to reflect that they may undervalue or overvalue the patent relative to a pre-litigation negotiation; LICENSES TO DIFFERENT TECHNOLOGY: EMVR and apportionment issues arise when the comparable license covered an entire product but the patent at issue covers only a component; must apportion the comparable license to reflect the relevant contribution; ROYALTY STACKING AWARENESS: in markets with many essential patents (wireless; video coding), the total royalty burden on a product if every patent holder sought its demanded rate would be impossibly high; courts consider the 'royalty stack' when calibrating individual royalty rates; FRAND-COMMITTED SEPs: for standard-essential patents with FRAND commitments, the hypothetical negotiation must produce a FRAND rate; comparable licenses from the same standards portfolio are strong evidence; top-down approaches (total permissible stack × proportional SEP ownership) provide a ceiling.

The analytical approach is an alternative when comparable licenses are unavailable: ANALYTICAL APPROACH: instead of looking at comparable licenses, the analytical approach looks at the infringer's own profit projections for the accused product; LOGIC: a willing licensee would not pay a royalty that exceeds the profit it can make from using the patent; the royalty rate is calibrated to leave the licensee with a reasonable profit after paying the royalty; CALCULATION: start with the infringer's anticipated profit margin from using the patented technology (from business plans, projections, or internal documents); subtract a reasonable profit margin the licensee should retain; the remainder is available as a royalty; EXAMPLE: infringer projected $100M revenue with 30% gross margin = $30M gross profit; courts might find a 25/75 split (25% of gross profit to licensor = $7.5M) or other split; LIMITATIONS: not universally accepted; some courts require both Georgia-Pacific analysis and analytical approach and reconcile the two; less common than comparable license approach; used when there are no good comparable licenses available; RULE OF THUMB REJECTIONS: courts reject simplistic approaches like the '25% rule of thumb' (automatically giving 25% of profits to licensor); Uniloc USA v. Microsoft (Fed. Cir. 2011): Federal Circuit rejected the 25% rule as arbitrary with no basis in the facts of the case; the reasonable royalty must be tied to the specific facts through a valid methodology; CONJOINT ANALYSIS: economic survey method measuring the market value consumers place on specific product features; used to apportion value to the patented feature; admissible in some circuits with proper foundation; ENTIRE NEGOTIATION RECORD: courts look at the full record including negotiations leading up to any comparable license, internal valuation documents, investment analyses — everything that would inform real-world willing buyer/seller negotiation.