Reasonable Royalty

  • BASICS: Patent damages cannot be less than a “reasonable royalty.” “A reasonable royalty compensates the owner not for the damage he suffered, but for the value of what was taken.” Warsaw I (Fed. Cir. 03/02/15). “The reasonable royalty theory of damages … seeks to compensate the patentee not for lost sales caused by the infringement, but for its lost opportunity to obtain a reasonable royalty that the infringer would have been willing to pay if it had been barred from infringing…. [T]he district court was required to assess Astra’s injury not according to the number of sales Astra may have lost to Apotex, but according to what Astra could have insisted on as compensation for licensing its patents to Apotex as of the beginning of Apotex’s infringement.” AstraZeneca (Fed. Cir. 04/07/15) (aff’g award of 50% of infringer’s gross margins on its generic, leaving a profit margin of 36%; detailed discussion of supporting facts).
  • Court Must Determine A Reasonable Royalty Even If Plaintiff Does Not Submit Evidence On It: The patentee can still get damages, even if it fails to show lost profits and fails to submit evidence of what a reasonable royalty will be. While it is typically the patentee’s burden to show damages, the court must determine what a reasonable royalty amount is even if the patentee does not present evidence such as expert testimony of the amount. Dow Chem. (Fed. Cir. 09/05/03); Info-Hold (Fed. Cir. 04/24/15) (rev’g Summ. J. of no reasonable royalty after aff’g exclusion of damages expert). So a defendant should submit evidence of what a reasonable royalty would be even if the patentee does not. But, a patent owner can expressly waive right to a reasonable royalty. Promega II (Fed. Cir. 11/13/17).
  • Reasonable Royalty Amount Is Floor, Not Ceiling, For Damages: “the damages award based on a reasonable royalty rate is only the floor, not the exact amount. This rationale is well supported by the statutory language, see 35 U.S.C. § 284 (requiring that the court ‘award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty’), and our case law, see, e.g., Rite-Hite (Fed. Cir. 06/15/95) (en banc); Del Mar Avionics (Fed. Cir. 12/18/87) (stating that the purpose of § 284 ‘is not to provide a simple accounting method, but to set a floor below which the courts are not authorized to go’”). Revolution Eyewear (Fed. Cir. 04/29/09) (aff’g jury’s damages verdict).
  • Reasonable Royalty May Be Running Or Lump Sum: A reasonable royalty is typically determined by multiplying the amount of products sold by a rate, but other methods, such as lump sums, are allowable too. Carnegie Mellon (Fed. Cir. 08/04/15) (aff’g running royalty of 50 cents/chip, rejecting objection that existing licenses were lump sum; “hypothetical negotiation would have employed the number of units sold to measure the value of the method’s domestic use.”)
  • Reasonable Royalty May Exceed Patent Owner’s Expected Profit: “Damages to the patent holder cannot simply be calculated in all cases by determining ‘the difference between his pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.’” (Quoting Yale Lock Mfg. Co. v. Sargent, 117 U.S. 536, 552 (1885)). Powell (Fed. Cir. 11/14/11) (aff’g damages higher than patent owner’s expected profit from selling units to the infringer). See Aqua Shield (Fed. Cir. 12/22/14) (error to treat defendant’s actual profits as a royalty cap). Damages expert testified that royalty would be $98/unit despite accused Word selling for as low as $97/unit, by starting with third-party “benchmark” product having similar feature (which sold for $499/unit), applying Microsoft profit margin of 76.6% to that, then applying 25% “rule,” then applying Georgia-Pacific factors, even though “Microsoft’s infringing custom XML editor was found to be ‘merely one of thousands of features’ within Word.” i4i (Fed. Cir. 03/10/10) (but might be distinguishable on ground that the defendant had not moved for JMOL on damages), affirmed on other grounds (U.S. 06/09/2011). See Exergen (Fed. Cir. 03/08/18) (2-1) (non-precedential) (aff’g reasonable royalty award amounting to a per-unit rate of 32% of projected sales price and 71% of projected per-unit net profit, where parties were fierce competitors at type of hypothetical negotiation, patent offered advantages over other designs, and 9-year remaining life of patent would have been long time to sit out of market.)
  • Cost And Ease Of Design Around Relevant, But Not A Cap On Reasonable Royalty (Grain Processing): AstraZeneca (Fed. Cir. 04/07/15) (“reasonable royalty damages are [not] capped at the cost of implementing the cheapest available, acceptable, noninfringing alternative.”) Mars (Fed. Cir. 06/02/08). “If avoiding the patent would be difficult, expensive, and time-consuming, the amount the infringer would be willing to pay for a license is likely to be greater.” “A price for a hypothetical license may appropriately be based on consideration of the ‘costs and availability of non-infringing alternatives’ and the potential infringer’s ‘cost savings.’” Prism Tech. (Fed. Cir. 03/06/17) (aff’g $30 MM reasonable royalty award: “Sprint would have chosen to build its own backhaul network in the absence of a license.”).

a) Georgia-Pacific factors

  • Georgia-Pacific Factors May Be Used But Not All Factors Always Applicable: In determining the royalty, courts typically consider the non-exhaustive list of factors in the Georgia-Pacific “This court does not endorse Georgia-Pacific as setting forth a test for royalty calculations, but only as a list of admissible factors informing a reliable economic analysis.” Energy Transp. (Fed. Cir. 10/12/12); but see Ericsson (Fed. Cir. 12/04/14) (error to instruct jury on a Georgia-Pacific factor that does not apply in particular case; several factors do not apply in RAND-royalty context).
  • Expert Must Tie Georgia-Pacific Factors To Asserted Royalty Rate: “When performing a Georgia-Pacific analysis, damages experts must not only analyze the applicable factors, but also carefully tie those factors to the proposed royalty rate.” Exmark (Fed. Cir. 01/12/18) (vacating damages award because expert did not sufficiently justify 5% royalty rate). Experts need not address Georgia Pacific factors but if they do, “expert witnesses should concentrate on fully analyzing the applicable factors, not cursorily reciting all fifteen.” Whitserve (Fed. Cir. 08/07/12).
  • Courts Generally Consider 15 (Non-Exclusive) Georgia-Pacific Factors: “A comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license may be drawn from a conspectus of the leading cases. The following are some of the factors mutatis mutandis seemingly more pertinent to the issue herein: (1) the royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty; (2) the rates paid by the licensee for the use of other patents comparable to the patent in suit; (3) the nature and scope of the license, as exclusive or non-exclusive; or as restricted or nonrestricted in terms of territory or with respect to whom the manufactured product may be sold; (4) the licensor’s established policy and marketing program to maintain his or her patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly; (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; (6) the effect of selling the patented specialty in promoting sales or other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his or her nonpatented items; and the extent of such derivative or convoyed sales; (7) the duration of the patent and the term of the license; (8) the established profitability of the product made under the patent; its commercial success; and its current popularity; (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; (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; (11) the extent to which the infringer has made use of the invention; and any evidence probative of the value of that use; (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; (13) the portion of the realizable profit that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer; (14) the opinion testimony of qualified experts; and (15) the amount that the 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; that is, the amount which a prudent licensee– who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention—would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.” Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

b) hypothetical negotiation

  • “Hypothetical Negotiation At Time Of First Infringement” Methodology: Courts often focus on the last Georgia-Pacific factor: the amount that a willing licensor and willing licensee would have agreed to as a royalty at the time infringement began. “A key inquiry in the analysis is what it would have been worth to the defendant, as it saw things at the time, to obtain the authority to use the patented technology, considering the benefits it would expect to receive from using the technology and the alternatives it might have pursued.” Carnegie Mellon (Fed. Cir. 08/04/15). “There are multiple reasonable methods for calculating a royalty, and directly estimating the value a consumer places on the infringing feature is not a requirement of admissibility.” See Apple (Fed. Cir. 04/25/14) (rev’g trial court exclusion of expert’s damages opinion under Daubert). “In hypothetical-negotiation terms, the core economic question is what the infringer, in a hypothetical preinfringement negotiation under hypothetical conditions, would have anticipated the profit-making potential of use of the patented technology to be, compared to using noninfringing alternatives. If a potential user of the patented technology would expect to earn X profits in the future without using the patented technology, and X + Y profits by using the patented technology, it would seem, as a prima facie matter, economically irrational to pay more than Y as a royalty—paying more would produce a loss compared to forgoing use of the patented technology.” Aqua Shield (Fed. Cir. 12/22/14) (but court must consider that defendant typically would raise its price to account for royalty payment).
  • Hypothetical Negotiation At Date Of First Direct Infringement Not First Indirect Liability: “In the context of active inducement of infringement, a hypothetical negotiation is deemed to take place on the date of the first direct infringement traceable to [the defendant’s] first instance of inducement conduct.” Laserdynamics (Fed. Cir. 08/30/12).
  • Court May Consider Some Post-Negotiation Evidence: Fromson (Fed. Cir. 08/04/88) (“The methodology encompasses fantasy and flexibility; fantasy because it requires a court to imagine what warring parties would have agreed to as willing negotiators; flexibility because it speaks of negotiations as of the time infringement began, yet permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.”) See Sinclair (U.S. 05/29/1933) (permitting discovery into extent of use of patented invention in support of action for damages for failure to assign patent on improvement: “Experience is then available to correct uncertain prophecy. Here is a book of wisdom that courts may not neglect.”)
  • Hypothetical Negotiation May Grant Rights Infringer Later Does Not Use: Even though infringer delivered a non-infringing design after offering an infringing design, the parties would have negotiated a grant of unfettered license rights so reasonable royalty may be based on such a grant. Transocean (Fed. Cir. 11/15/12).
  • Patent Owner May Rationally Consider In Negotiation Its Per-Unit Profit Margin, And Potential Lost Profits Of Its Related Companies: “patent owner in a hypothetical negotiation would rationally consider not only its own potential losses from licensing but those of parent, sister, or similarly related companies.” Asetek I (Fed. Cir. 12/06/16), modified on other grounds, Asetek II (Fed. Cir. 04/03/17) (aff’g 14.5% reasonable royalty damages award based in part on the patent owner’s profit margin: “Negotiating for a per-unit payment equal to its per-unit profit can be a logical approach for a patent owner that is uncertain of how many sales might be lost by granting the license at issue or is just using its own experience to place a value on the right to use the technology at issue.”)

c) royalty base; entire market value rule

  • The Royalty Must Be Limited To An Appropriate Portion Of A Product’s Revenue Unless The “Entire Market Value” Rule Is Applied . . . Or Not: “It is generally required that royalties be based not on the entire product, but instead on the ‘smallest salable patent-practicing unit.’ The entire market value rule is a narrow exception to this general rule. If it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product.” Difficulty in assessing value of patented component (not sold by defendant alone) does not create a necessity exception to the rule. Laserdynamics (Fed. Cir. 08/30/12) (citation omitted); VirnetX (Fed. Cir. 09/16/14) (“‘[a] patentee may assess damages based on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts;” vacating reasonable-royalty award); Commonwealth Scientific (Fed. Cir. 12/03/15) (“the smallest salable patent-practicing unit principle states that a damages model cannot reliably apportion from a royalty base without that base being the smallest salable patent-practicing unit,” but does not apply where reasonable royalty based on parties’ license offers); but see AstraZeneca (Fed. Cir. 04/07/15) (“entire market value rule” not applicable where patents cover the infringing pharmaceutical as a whole, even though earlier patents on the active ingredient had expired). Traditional “EMV” rule analysis requires a patentee to limit or apportion the revenue associated with the patented feature, unless the patentee can prove that “the patent-related feature is the ‘basis for customer demand.’” Rite-Hite (Fed. Cir. 06/15/95) (en banc). “Not enough to merely show that the [patented feature] is viewed as valuable, important, or even essential.” Laserdynamics (Fed. Cir. 08/30/12) (EMV not met where “no evidence that this feature alone motivates consumers to purchase a laptop computer, such that the value of the entire computer can be attributed to the patented” method); VirnetX (Fed. Cir. 09/16/14). But, one Federal Circuit panel accepted a limiting of either the royalty base or the royalty rate to accomplish appropriate apportionment. Lucent Tech. (Fed. Cir. 09/11/09)).
    • Running Royalty Base Can Be Revenues/Sales Price Of Larger Product Even If Patented Invention Does Not Provide Demand For That Product: After finding that the patented invention was “not the reason consumers purchase Outlook” and thus “the entire market value rule” did not apply, Fed. Cir. panel nevertheless then held that “the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence). … There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.” Lucent Tech. (Fed. Cir. 09/11/09) (rev’g lump-sum reasonable royalty award for lack of substantial evidence). Where claim directed to entire product comprising an improvement and conventional elements, “such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate. We have recognized that one possible way to do this is through a proper analysis of the Georgia-Pacific factors.” Exmark (Fed. Cir. 01/12/18) (vacating damages award; even when claim directed to entire product (mower), damages must be apportioned to the allegedly improved part (baffle), but can apportion in royalty rate not royalty base, and “particularly appropriate” to do so when claim directed to entire product, citing Lucent Tech.).
    • But, Rejected By Other Panels: Rejecting patent owner’s [plain] reading of this portion of Lucent Tech.: “The Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate.” Uniloc (Fed. Cir. 01/04/11) (aff’g grant of new trial based in part on improper citation to entire revenues of accused software title; entire market value of accused products “cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.”); VirnetX (Fed. Cir. 09/16/14) (“Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature …, the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. To hold otherwise would permit the entire market value exception to swallow the rule of apportionment;” “VirnetX should have identified a patent practicing feature with a sufficiently close relation to the claimed functionality”); Laserdynamics (Fed. Cir. 08/30/12) (“the requirement to prove that the patented feature drives demand for the entire product may not be avoided by the use of a very small royalty rate.”); Power Integrations (Fed. Cir. 09/20/18) (admission of evidence of entire market value of product serves to “artificially inflate the jury’s damages calculation.)
  • Entire Market Value Rule Limited To Where Patented Feature Is Sole Driver Of Demand Or Accounts For Almost Entire Value Of Patented And Accused Products: “As LaserDynamics, Versata, and VirnetX held, the entire market value rule is appropriate only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts.” Power Integrations (Fed. Cir. 09/20/18) (modifying Power Integrations (Fed. Cir. 07/03/18)) (vacating reasonable royalty jury damages award of $139.8MM because improperly based on “entire market value” rule where patent owner did not show absence of non-accused valuable features in its own (smallest salable unit) power controller products and infringing products.) “If the product has other valuable features that also contribute to driving consumer demand—patented or unpatented—then the damages for patent infringement must be apportioned to reflect only the value of the patented feature. This is so whenever the claimed feature does not define the entirety of the commercial product. In some circumstances, for example, where the other features are simply generic and/or conventional and hence of little distinguishing character, such as the color of a particular product,  it may be appropriate to use the entire value of the product because the patented feature accounts for almost all of the value of the product as a whole.” Id. “Where the accused infringer presents evidence that its accused product has other valuable features beyond the patented feature, the patent holder must establish that these features do not cause consumers to purchase the product. …. the patentee must prove that those other features do not cause consumers to purchase the product.” Id. [This language is a revision of the panel’s prior ruling which framed the test as “the patentee must prove that those other features did not influence purchasing decisions.” Power Integrations (Fed. Cir. 07/03/18) (replaced by the 9/20/18 decision, after denying reh’g)].
  • Court Should Give Cautionary Jury Instruction Re. Apportionment: “when licenses based on the value of a multi-component product are admitted, or even referenced in expert testimony, the court should give a cautionary instruction regarding the limited purposes for which such testimony is proffered if the accused infringer requests the instruction. The court should also ensure that the instructions fully explain the need to apportion the ultimate royalty award to the incremental value of the patented feature from the overall product.” Ericsson (Fed. Cir. 12/04/14) (Georgia-Pacific factors insufficient to warn about need to apportion).
  • Related Line Of Cases: Requirement Of Casual Nexus Between Irreparable Harm And Infringement, For Injunctive Relief: To show irreparable harm, patent owner seeking preliminary injunction must show (typically) that the patented feature drives the demand for the product. Apple I (Fed. Cir. 05/14/12) (preliminary injunction context) (but noting exception where infringement will render patentee’s product obsolete); Apple III (Fed. Cir. 11/18/13) (“causal nexus” requirement applies to permanent injunction analysis also, as it distinguishes “between irreparable harm caused by patent infringement and irreparable harm caused by otherwise lawful competition;” but misapplied here by trial court). “The causal nexus requirement is not satisfied simply because removing an allegedly infringing component would leave a particular feature, application, or device less valued or inoperable.” Apple II (Fed. Cir. 10/11/12) (rev’g grant of preliminary injunction: “[where] the accused product would sell almost as well without incorporating the patented feature …., even if the competitive injury that results from selling the accused device is substantial, the harm that flows from the alleged infringement (the only harm that should count) is not.”)
  • Royalty Base May Include Non-Infringing Units Where Defendant Cannot Segregate Infringing From Non-Infringing Units: Damages award affirmed where some of defendant’s units were permissibly repaired (non-infringing) but some were impermissibly remanufactured (infringing), and defendant’s expert testified about convoyed sales, that hypothetical license would have included both infringing and non-infringing units in the royalty base, and that the negotiated royalty rate would have changed inversely to royalty-base changes. Fujifilm (Fed. Cir. 05/27/10); cf. AstraZeneca (Fed. Cir. 04/07/15) (high reasonable royalty award based in part on infringer’s expectation that infringing sales would increase its sales of other products as well).
  • Error To Admit Revenues From Product With Unpatented Components: “One way in which the error of an improperly admitted entire market value rule theory manifests itself is in the disclosure of the revenues earned by the accused infringer associated with a complete product rather than the patented component only.” Laserdynamics (Fed. Cir. 08/30/12); but see SynQor (Fed. Cir. 03/13/13) (no abuse of discretion to allow evidence of end-product sales revenue where not used to justify damages figure but to argue that price elasticity of demand for the component would be high because represent a small fraction of the end price.) An “important evidentiary principle” associated with the EMVR “rule” is that when the entire value of a machine is not attributable to the patented feature, “courts must insist on a more realistic starting point [than the value of the entire machine] for the royalty calculations by juries—often, the smallest salable unit and, at times, even less.” Ericsson (Fed. Cir. 12/04/14) (but refusing to exclude evidence of licenses whose royalty was based on price of entire machine).
  • Royalty Base Does Not Include Environment Outside Claimed ApparatusUniv. of Pitt. (Fed. Cir. 04/10/14) (non-precedential) (rev’g damage award based on larger system’s sales where claim recited that larger system only as an intended use, not part of the claimed apparatus).
  • Does Quanta Help Move Royalty Base Upstream?: Quanta (U.S. 06/09/2008) increases instances where upstream “component” sales exhaust patent rights, and thus presumably favors alleged infringers arguing that the hypothetical license negotiation would have been with the “component” supplier and would have presumed that royalty base is that supplier’s revenues, not (possibly higher) revenues of downstream entities.

d) royalty rate

  • License (and Settlement) Agreement (Georgia-Pacific Factor 1-3)
    • Form of Earlier Licenses Are Relevant: “Actual licenses to the patents-in-suit are probative not only of the proper amount of a reasonable royalty, but also of the proper form of the royalty structure,” but history of lump-sum licenses does not preclude a running royalty. Laserdynamics (Fed. Cir. 08/30/12).
    • Need To Tie Other License Agmts. To Instant Case: Patent owner has burden of proving “that the licenses [in evidence] were sufficiently comparable to support the lump-sum damages award.” Lucent Tech. (Fed. Cir. 09/11/09) (rev’g Jury Verdict award of lump-sum royalty for lack of substantial evidence). “The first Georgia-Pacific factor, …, must consider licenses that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology in question.” ResQNet (Fed. Cir. 02/05/10) (vacating bench-trial damages award where plaintiff’s expert inflated the rate by relying in part on the patent owner’s unrelated licenses on marketing and other services, despite no rebuttal expert testimony); Wordtech Sys. (Fed. Cir. 06/16/10) (remanding for new trial on damages where patentee presented insufficient evidence under Georgia-Pacific, e.g., failed to show amount of expected sales under prior lump-sum licenses); Whitserve (Fed. Cir. 08/07/12) (royalty rate based on proposed license offer by patent owner was conjecture and therefore not probative; overturning jury verdict of damages as unsupported); EPlus (Fed. Cir. 11/21/12) (not abuse of discretion to exclude patent owner’s damages expert (and damages case) where expert relied on license agreements obtained during litigation, included lump-sums received for multiple patents and cross-licensing deals, and expert ignored the settlements that produced smaller rates.); but see ActiveVideo (Fed. Cir. 08/24/12) (whether license agreements were sufficiently comparable went to weight not admissibility); VirnetX (Fed. Cir. 09/16/14) (not abuse of discretion here to admit evidence of license agreements on patents or related technology).
    • Settlement (License) Agreements May Or May Not Be More Prejudicial Than Probative: “[A] payment of any sum in settlement of a claim for an alleged infringement cannot be taken as a standard to measure the value of the improvements patented, in determining the damages sustained by the owners of the patent in other cases of infringement. Many considerations other than the value of the improvements patented may induce the payment in such cases. The avoidance of the risk and expense of litigation will always be a potential motive for a settlement” Rude v. Westcott, 130 U.S. 152, 164 (1889). Laserdynamics (Fed. Cir. 08/30/12) (citing Rude; abuse of discretion to admit into evidence outlier settlement agreement reached on eve of trial). But see Prism Tech. (Fed. Cir. 03/06/17) (aff’g $30 MM reasonable royalty award; not abuse of discretion to admit settlement agreement with AT&T settled during earlier trial at close of evidence (along with lower settlement agreements Sprint offered into evidence); requires “particularized evaluation of probativeness and prejudice;” distinguishing Rude as “established royalty” case.); Rembrandt Wireless (Fed. Cir. 04/17/17) (allowing expert reliance on settlement agreements with former co-defendant on same patents in suit).
    • No Settlement Privilege Absolutely Barring Discovery Of Settlement Negotiations: In re MSTG (Fed. Cir. 04/09/12) (but district court has discretion to block such discovery).
  • History Between Parties Matters (Georgia-Pacific Factor 4, 5): Affirmed award of 29.2% reas. royalty (equal to patent owner’s profit margin) in view of contentious relationship between the parties. Mitutoyo (Fed. Cir. 09/05/07).
  • Old Modes Not Limited To Commercialized Prior Art (Georgia-Pacific Factor 9): In 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”), the prior art modes need not have been commercialized. Exmark (Fed. Cir. 01/12/18) (vacating damages award; improper to exclude prior art patents offered to show patented advance was slight).
  • (Extent Of Use By Infringer) Includes Putting Feature In Software Even If Rarely Used (Georgia-Pacific Factor 11): Accused functionality in software was rarely used. “Factor 11 looks to ‘how often a patented invention has been used by infringers.’ [citation omitted] Here, the accused direct infringers are Defendants, not their customers. Because Defendants included proactive scanning on every accused product, their ‘use’ encompassed all of their sales, regardless of customer activation.” Finjan (Fed. Cir. 11/04/10). See Summit 6 (Fed. Cir. 09/21/15) (factor 11 supports expert’s reliance on percentage of infringer’s customers who used infringing feature in the reasonable royalty calculation).
  • Expected Use Of Invention Is Relevant To Lump Sum Royalty (Georgia-Pacific Factor 11): “Parties agreeing to a lump-sum royalty agreement may, during the license negotiation, consider the expected or estimated usage (or, for devices, production) of a given invention, assuming proof is presented to support the expectation, because the more frequently most inventions are used, the more valuable they generally are and therefore the larger the lump-sum payment. Conversely, a minimally used feature, with all else being equal, will usually command a lower lump-sum payment.” Lucent Tech. (Fed. Cir. 09/11/09) (rev’g Jury Verdict award of lump-sum royalty for lack of substantial evidence).
  • Relevant Whether Non-Infringing Features Provide Consumer Demand/Profit/Value (Georgia-Pacific Factor 13): “We find it inconceivable to conclude, based on the present record, that the use of one small feature, the date-picker, constitutes a substantial portion of the value of Outlook…. the infringing use of Outlook’s date-picker feature is a minor aspect of a much larger software program and that the portion of the profit that can be credited to the infringing use of the date-picker tool is exceedingly small.” Lucent Tech. (Fed. Cir. 09/11/09) (rev’g lump-sum reasonable royalty award for lack of substantial evidence); Exmark (Fed. Cir. 01/12/18) (vacating damages award; expert failed to itemize the relative value of other components (patented by the infringers) to determine “the value of the [patented improvement] baffle in relation to the other components of the accused multi-component mower.”); but see AstraZeneca (Fed. Cir. 04/07/15) (“improper to assume that a conventional element cannot be rendered more valuable by its use in combination with an invention;” “the question is how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone.”)
  • Incremental Value Of Invention May Be Based On Price Differential Between Products With And Without Accused Feature (Georgia-Pacific Factor 13): Rembrandt Wireless (Fed. Cir. 04/17/17) (aff’g refusal to exclude expert reasonable-royalty rate testimony based on higher price infringer paid for TI chip with accused functionality versus TI chip without that functionality.)

e) rejected reasonable royalties methodologies

  • 25% “Rule Of Thumb” Is Wrong And Inadmissible: “[T]here must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement.” “This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.” Uniloc (Fed. Cir. 01/04/11); cf. Energy Transp. (Fed. Cir. 10/12/12) (expert’s improper reliance on 25% “rule” did not require a new trial here).
  • 50% Nash Bargaining Solution Is Wrong And Inadmissible: VirnetX (Fed. Cir. 09/16/14) (rejecting as “rule of thumb” 50% split of incremental profits from use of patented feature as starting point based on Nash Bargaining Solution, without evidence justifying that its premises are supported by specific facts of this case).

f) FRAND standard essential patents

  • FRAND Requires Different Methodology Than Georgia-Pacific: Some Georgia-Pacific factors do not apply to patent subject to FRAND obligation and others must be modified. Microsoft (Motorola) (9th 07/30/15) (aff’g breach of contract damages award (compensating Microsoft for its mitigation costs of defending injunction suits and relocating its distribution center out of Germany) for failure to offer third-party beneficiary of RAND commitment to an SSO, a license even close to RAND rates and for seeking an injunction; factor 15 and other Georgia-Pacific factors may be modified in RAND context)., aff’g, Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013) (Robart, J.); Ericsson (Fed. Cir. 12/04/14).
  • Reasonable Royalty For Standard Essential Patents: “First, the patented feature must be apportioned from all of the unpatented features reflected in the standard. Second, the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” Ericsson (Fed. Cir. 12/04/14) (vacating jury award based on prejudicial error in jury instructions). “[D]istrict courts must make clear to the jury that any royalty award must be based on the incremental value of the invention, not the value of the standard as a whole or any increased value the patented feature gains from its inclusion in the standard but need not be instructed on patent hold-up or royalty stacking unless evidence presented in the record.” Id. Commonwealth Scientific (Fed. Cir. 12/03/15) (principles in Ericsson apply to SEP patents even if not subject to RAND obligation; vacating damages award and remanding for trial court to consider effects of standardization when evaluating Georgia-Pacific factors and relevance of the parties’ license offers.)

Grain Processing; Ease of Design Around: AstraZeneca (Fed. Cir. 04/07/15) (“reasonable royalty damages are [not] capped at the cost of implementing the cheapest available, acceptable, noninfringing alternative.”) Mars (Fed. Cir. 06/02/08). “If avoiding the patent would be difficult, expensive, and time-consuming, the amount the infringer would be willing to pay for a license is likely to be greater.”

–     History Between Parties Matters: Affirmed award of 29.2% reas. royalty (equal to patent owner’s profit margin) in view of contentious relationship between the parties. Mitutoyo (Fed. Cir. 09/05/07).

–     Reasonable Royalty Amount Is Floor, Not Ceiling, For Damages: “the damages award based on a reasonable royalty rate is only the floor, not the exact amount. This rationale is well supported by the statutory language, see 35 U.S.C. § 284 (requiring that the court ‘award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty’), and our case law, see, e.g., Rite-Hite (Fed. Cir. 1995) (en banc); Del Mar Avionics (Fed. Cir. 1987) (stating that the purpose of § 284 ‘is not to provide a simple accounting method, but to set a floor below which the courts are not authorized to go’”). Revolution Eyewear (Fed. Cir. 04/29/09) (aff’g jury’s damages verdict).

–     Expected Use Of Invention Is Relevant To Lump Sum Royalty: “Parties agreeing to a lump-sum royalty agreement may, during the license negotiation, consider the expected or estimated usage (or, for devices, production) of a given invention, assuming proof is presented to support the expectation, because the more frequently most inventions are used, the more valuable they generally are and therefore the larger the lump-sum payment. Conversely, a minimally used feature, with all else being equal, will usually command a lower lump-sum payment.” Lucent Tech. (Fed. Cir. 09/11/09) (rev’g Jury Verdict award of lump-sum royalty for lack of substantial evidence).

–     Reasonable Royalty May Be Based On Infringer’s Expected Cost Savings Compared To Non-Infringing Alternative: “A price for a hypothetical license may appropriately be based on consideration of the ‘costs and availability of non-infringing alternatives’ and the potential infringer’s ‘cost savings.’” Prism Tech. (Fed. Cir. 03/06/17) (aff’g $30 MM reasonable royalty award: “Sprint would have chosen to build its own backhaul network in the absence of a license.”).

–     Need To Tie Other License Agmts. To Instant Case: Patent owner has burden of proving “that the licenses [in evidence] were sufficiently comparable to support the lump-sum damages award.” Lucent Tech. (Fed. Cir. 09/11/09) (rev’g Jury Verdict award of lump-sum royalty for lack of substantial evidence). “The first Georgia-Pacific factor, …, must consider licenses that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology in question.” ResQNet (Fed. Cir. 02/05/10) (vacating bench-trial damages award where plaintiff’s expert inflated the rate by relying in part on the patent owner’s unrelated licenses on marketing and other services, despite no rebuttal expert testimony); Wordtech Sys. (Fed. Cir. 06/16/10) (remanding for new trial on damages where patentee presented insufficient evidence under Georgia-Pacific, e.g., failed to show amount of expected sales under prior lump-sum licenses); Whitserve (Fed. Cir. 08/07/12) (royalty rate based on proposed license offer by patent owner was conjecture and therefore not probative; overturning jury verdict of damages as unsupported); EPlus (Fed. Cir. 11/21/12) (not abuse of discretion to exclude patent owner’s damages expert (and damages case) where expert relied on license agreements obtained during litigation, included lump-sums received for multiple patents and cross-licensing deals, and expert ignored the settlements that produced smaller rates.); but see ActiveVideo (Fed. Cir. 08/24/12) (whether license agreements were sufficiently comparable went to weight not admissibility); VirnetX (Fed. Cir. 09/16/14) (not abuse of discretion here to admit evidence of license agreements on patents or related technology).

–     Settlement Agreements May Or May Not Be More Prejudicial Than Probative: “[A] payment of any sum in settlement of a claim for an alleged infringement cannot be taken as a standard to measure the value of the improvements patented, in determining the damages sustained by the owners of the patent in other cases of infringement. Many considerations other than the value of the improvements patented may induce the payment in such cases. The avoidance of the risk and expense of litigation will always be a potential motive for a settlement” Rude v. Westcott, 130 U.S. 152, 164 (1889). Laserdynamics (Fed. Cir. 08/30/12) (citing Rude; abuse of discretion to admit into evidence outlier settlement agreement reached on eve of trial). But see Prism Tech. (Fed. Cir. 03/06/17) (aff’g $30 MM reasonable royalty award; not abuse of discretion to admit settlement agreement with AT&T settled during earlier trial at close of evidence (along with lower settlement agreements Sprint offered into evidence); requires “particularized evaluation of probativeness and prejudice;” distinguishing Rude as “established royality” case.)

–     No Settlement Privilege Absolutely Barring Discovery Of Settlement Negotiations: In re MSTG (Fed. Cir. 04/09/12) (but district court has discretion to block such discovery).

–     Form of Earlier Licenses Are Relevant: “Actual licenses to the patents-in-suit are probative not only of the proper amount of a reasonable royalty, but also of the proper form of the royalty structure,” but history of lump-sum licenses does not preclude a running royalty. Laserdynamics (Fed. Cir. 08/30/12).

–     Damages Expert Methodology Seeking 100% Royalty Rate Survived Daubert Scrutiny: Damages expert testified that royalty would be $98/unit despite accused Word selling for as low as $97/unit, by starting with third-party “benchmark” product having similar feature (which sold for $499/unit), applying Microsoft profit margin of 76.6% to that, then applying 25% “rule,” then applying Georgia-Pacific factors, even though “Microsoft’s infringing custom XML editor was found to be ‘merely one of thousands of features’ within Word.” i4i (Fed. Cir. 03/10/10) (but might be distinguishable on ground that the defendant had not moved for JMOL on damages), affirmed on other grounds (U.S. 06/09/2011).

–     Royalty Base May Include Non-Infringing Units Where Defendant Cannot Segregate Infringing From Non-Infringing Units: Damages award affirmed where some of defendant’s units were permissibly repaired (non-infringing) but some were impermissibly remanufactured (infringing), and defendant’s expert testified about convoyed sales, that hypothetical license would have included both infringing and non-infringing units in the royalty base, and that the negotiated royalty rate would have changed inversely to royalty-base changes. Fujifilm (Fed. Cir. 05/27/10); cf. AstraZeneca (Fed. Cir. 04/07/15) (high reasonable royalty award based in part on infringer’s expectation that infringing sales would increase its sales of other products as well).

–     Reasonable Royalty For Standard Essential Patents: “First, the patented feature must be apportioned from all of the unpatented features reflected in the standard. Second, the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” Ericsson (Fed. Cir. 12/04/14) (vacating jury award based on prejudicial error in jury instructions). “[D]istrict courts must make clear to the jury that any royalty award must be based on the incremental value of the invention, not the value of the standard as a whole or any increased value the patented feature gains from its inclusion in the standard but need not be instructed on patent hold-up or royalty stacking unless evidence presented in the record.” Id. Commonwealth Scientific (Fed. Cir. 12/03/15) (principles in Ericsson apply to SEP patents even if not subject to RAND obligation; vacating damages award and remanding for trial court to consider effects of standardization when evaluating Georgia-Pacific factors and relevance of the parties’ license offers.)

Georgia-Pacific Factors: “A comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license may be drawn from a conspectus of the leading cases. The following are some of the factors mutatis mutandis seemingly more pertinent to the issue herein: (1) the royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty; (2) the rates paid by the licensee for the use of other patents comparable to the patent in suit; (3) the nature and scope of the license, as exclusive or non-exclusive; or as restricted or nonrestricted in terms of territory or with respect to whom the manufactured product may be sold; (4) the licensor’s established policy and marketing program to maintain his or her patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly; (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; (6) the effect of selling the patented specialty in promoting sales or other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his or her nonpatented items; and the extent of such derivative or convoyed sales; (7) the duration of the patent and the term of the license; (8) the established profitability of the product made under the patent; its commercial success; and its current popularity; (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; (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; (11) the extent to which the infringer has made use of the invention; and any evidence probative of the value of that use; (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; (13) the portion of the realizable profit that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer; (14) the opinion testimony of qualified experts; and (15) the amount that the 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; that is, the amount which a prudent licensee– who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention—would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.” Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).