Reasonable Royalty

A reasonable royalty is the statutory minimum measure of patent damages: STATUTORY BASIS: 35 U.S.C. § 284: 'Upon finding for the claimant the court shall award the claimant 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'; TWO MAIN DAMAGE MEASURES: (a) LOST PROFITS: what the patent holder actually lost due to infringement (sales diverted; price erosion; increased costs); higher damages but requires complex causation proof; not always available; (b) REASONABLE ROYALTY: the minimum available in ALL infringement cases; does not require proof of actual lost sales; even if the patent owner never practiced the patent, reasonable royalty is available; WHEN REASONABLE ROYALTY IS THE ONLY OPTION: the patent owner is not in the market (NPE; university; failed startup); the patent owner cannot prove market overlap; the patent owner cannot prove lost profit causation (Panduit test not met); REASONABLE ROYALTY AS FLOOR: reasonable royalty is the MINIMUM — patent owner can always try for lost profits, but if Panduit test fails for some sales, reasonable royalty applies to those; reasonable royalty does not 'cap' damages — the royalty base and rate together determine the amount; TIMING OF HYPOTHETICAL NEGOTIATION: the reasonable royalty is set as of the date infringement BEGAN (not the date of judgment); this is the date parties would have negotiated if they had sought a license; the negotiation is 'hypothetical' because the infringer chose not to license; WILLING LICENSOR, WILLING LICENSEE: both parties are willing (neither can hold out); both have full information; the patent is assumed valid and infringed; the infringer knows it will infringe (special knowledge).

Georgia-Pacific Corp. v. United States Plywood Corp. (S.D.N.Y. 1970) established the 15-factor framework: FACTOR 1: royalties received by the patent holder for licensing the patent in suit; comparable licenses are the most probative evidence; FACTOR 2: rates paid by the licensee for use of other patents comparable to the patent in suit; FACTOR 3: nature and scope of the license (exclusive or non-exclusive; fields of use; territorial restrictions); FACTOR 4: the patent holder's established policy to grant exclusive or non-exclusive licenses; FACTOR 5: the commercial relationship between the parties (competitors vs. non-competitors); FACTOR 6: the effect of selling the patented item on the sales of other products of the licensee (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; its current popularity; FACTOR 9: utility and advantages of the patent property over the old modes or devices; FACTOR 10: the nature of the patented invention; the character of the commercial embodiment of it; the benefits to those who have used the invention; FACTOR 11: the extent to which the infringer has made use of the invention; the value of that use; FACTOR 12: the portion of the profit or selling price that may be customary in the particular business for the use of the invention or analogous inventions; FACTOR 13: the portion of realizable profit attributable to the invention as distinguished from the profits attributable to elements supplied by the infringer; FACTOR 14: the opinion testimony of qualified experts; FACTOR 15: the amount that a licensor and licensee would have agreed upon at a voluntary negotiation with full information; EVIDENCE IN PRACTICE: prior licenses for the patent (Factor 1) are most persuasive; comparable licenses (Factor 2) second; expert testimony standard in all cases; industry royalty rates as background.

The royalty base — what the royalty rate is applied to — is as important as the rate itself: ENTIRE MARKET VALUE RULE (EMVR): the royalty base can include the entire market value of an accused product if: the patented feature drives customer demand for the entire product; WITHOUT THE EMVR: if the patented feature is one of many features and does not drive demand, the royalty base must be apportioned to the value of the patented feature only; APPORTIONMENT REQUIREMENT: Garretson v. Clark (S.Ct. 1884): 'the patentee must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features'; this is a longstanding requirement, frequently litigated in complex product cases; SMALLEST SALABLE PATENT PRACTICING UNIT (SSPPU): courts have pushed patent owners to use the SSPPU as the royalty base; the smallest component that embodies the patented technology; then apply the appropriate royalty rate to the SSPPU price; avoids royalty stacking on the entire end product; ERICSSON v. D-LINK SYSTEMS (Fed. Cir. 2014): for standard-essential patents (SEPs), the royalty must reflect the value of the patented technology over alternatives at the time it was incorporated into the standard; must not include value derived from the standard's adoption itself; UNILOC USA v. MICROSOFT (Fed. Cir. 2011): the 25% rule of thumb (apply 25% royalty rate to infringing sales as a starting point) was rejected as unreliable; must tie the royalty to specific facts; ROYALTY STACKING: in complex products (smartphones have thousands of patents), if every SEP is individually licensed at its claimed rate, the total royalties would exceed the product's value; royalty stacking arguments are relevant to FRAND negotiations and to setting reasonable royalties; NASH BARGAINING SOLUTION: some experts use game theory (Nash 50/50 split of joint gains) as a framework for the hypothetical negotiation; courts are skeptical without a tie to actual facts.

Comparable licenses are the most probative evidence in reasonable royalty analysis: WHY COMPARABLE LICENSES MATTER: actual licenses for the same technology are the closest real-world evidence of what the parties would have negotiated; they represent actual willing licensor/willing licensee negotiations; REQUIREMENTS FOR COMPARABILITY: to be used as a comparable, a prior license must be: technologically comparable (covers the same or similar technology); economically comparable (similar product markets; similar time period; similar business terms); a mere finding that licenses involve 'similar technology' is insufficient without economic comparability; ADJUSTMENTS FOR DIFFERENCES: if the comparable license was taken under duress (to settle litigation), it may undervalue the patent; litigation settlements often involve lower royalty rates due to uncertainty; courts allow adjustments to account for differences; the infringer gets to adjust downward to reflect the risk of invalidity in the original license negotiation; LUMP SUM vs. RUNNING ROYALTY: some licenses are lump sum (one-time payment); others are running royalties (per unit or % of sales); courts must convert between formats to make comparisons; PORTFOLIO LICENSES: many licenses cover large patent portfolios, not single patents; portfolio licenses must be carefully disaggregated to find the value attributable to the specific asserted patent(s); CROSS-LICENSING: cross-licenses involve mutual licensing; the value of the cross-license is what each party received, which may not reflect the absolute value of any single patent; PATENT POOL RATES: if the patent is in a pool (e.g., HEVC Advance for video compression), the pool rate is relevant evidence; pool rates tend to set reasonable upper bounds; HYPOTHETICAL NEGOTIATION vs. FRAND: for SEPs, the FRAND rate is based on non-discrimination and reasonable principles, not just Georgia-Pacific; different analytical framework.

FRAND (fair, reasonable, and non-discriminatory) licensing applies specifically to standard-essential patents: WHAT IS FRAND: standard-setting organizations (SSOs — IEEE, ETSI, 3GPP) require patent owners to commit to license their standard-essential patents on FRAND terms as a condition of participation; this prevents 'patent hold-up' — using the standard's adoption to extract above-FRAND royalties; FRAND RATE DETERMINATION: courts in the US, UK, EU, China have grappled with FRAND rate setting; major cases: TCL Communication Technology Holdings v. Telefonaktiebolaget LM Ericsson (C.D. Cal. 2017): Judge Selna set FRAND rates using multiple methodologies; Unwired Planet v. Huawei (UK Supreme Court 2020): FRAND involves a range, not a single number; global FRAND rates appropriate for global licensees; Microsoft v. Motorola (W.D. Wash. 2013): early US case applying comparable licenses to set FRAND rate; MODIFIED HYPOTHETICAL NEGOTIATION FOR SEPS: both parties knew the patent was SEP; both knew the FRAND commitment existed; the negotiation must result in a FRAND rate; the infringer cannot refuse to negotiate in good faith; ERICSSON v. D-LINK (Fed. Cir. 2014): the hypothetical negotiation must take place before standardization; must value the patent's technical contribution, not the value added by the standard's ubiquity; must avoid hold-up; ANTI-HOLD-UP: FRAND rates are set based on ex ante value of the technology before the standard was adopted, preventing hold-up through locking in; HOLD-OUT: some implementers use FRAND commitments to delay licensing and avoid paying royalties; courts have addressed hold-out as equally problematic; NON-DISCRIMINATION: a FRAND licensor must offer comparable royalties to similarly situated licensees; if terms offered to one implementer are significantly better, other implementees can demand the same; IMPLEMENTER REMEDIES: an unwilling licensor can be compelled to license at FRAND rates; an injunction may not be available for SEP infringement by a willing licensee (eBay standard + FRAND).