Reasonable Royalty

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).

Factor 1

• Royalties received by the patent holder for licensing the patent in suit
• Comparable licenses are the most probative evidence

Factor 8

• The established profitability of the product made under the patent
• Its commercial success
• Its current popularity

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

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.

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.

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.

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

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).