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Patent Infringement Damages – Reasonable Royalty

… what every lawyer should know

The Patent Guys, Arthur Peslak and Richard Malagiere wrote Patent Infringement Damages – Reasonable Royalty for the Bergen County Bar Association Intellectual Property Committee

In a patent infringement suit, there are two alternative measures of damages. First, the patentee’s lost profits (discussed in our April 2015 edition) and, second, a reasonable royalty patentee would have received through arm’s length bargaining with the infringer. In this edition we will focus our comments on the “reasonable royalty” type damages in patent infringement cases.

Per 35 U.S.C. §284, upon a finding of infringement, a patentee (owner of the patent) is entitled to damages adequate to compensate for the infringement in no event less than a reasonable royalty for the use made of the invention by the infringer. So, a reasonable royalty is the minimum measure of damage to which a patentee is entitled when infringement has been found.

A patent owner may recover as a measure of damages the royalty rate established by prior actual licenses for acts comparable to those engaged in by the infringer without authority. An established royalty rate is a uniform one freely negotiated and paid by a sufficient number of licensees. Rates agreed to under threat of suit or in settlement of litigation are not conclusive.

The established royalty usually sets the minimum recovery by a patent owner for infringement; it does not necessarily set the maximum recovery. Such an established royalty does not preclude the patent owner from recovering a greater sum under a reasonably royalty theory where the established rate was unfairly depressed because the patent had not yet gained recognition or because of widespread infringement activity. However, existence of an established royalty does preclude the owner from proving a greater sum as lost profits. An owner who exploits his patent by offering nonexclusive licenses at an established rate cannot logically complain of lost sales in his capacity as manufacturer or seller.

The courts developed the reasonable royalty measure as a means for providing a just recovery to a patent owner who could not, for evidentiary or other reasons, prove lost profits or an established royalty. Over time, 35 USC Section 284 evolved from this case law and now expressly provides the court shall award the successful claimant “in no event less than a reasonable royalty.”

A reasonable royalty for the use of the patented invention is judicially defined as the amount that would have been set in a hypothetical negotiation between a willing patent owner and a willing potential user as of the date when infringement began in fact and on the assumption that the patent was valid. In determining this hypothetical license rate, courts consider a variety of factors. Primary among them are consideration of prior
Bergen County Bar Association Intellectual Property Committee
existing licenses negotiated under the patent in suit. The profits or benefits to be anticipated from use of the invention are also given weight as such usually constitutes a limit on the amount a willing user would agree to pay as a royalty.

However, the setting of a reasonable royalty after infringement cannot be treated as the equivalent of ordinary royalty negotiations among truly ‘willing’ patent owners and licensees. That view would constitute a pretense that the infringement never happened. It would also make an election to infringe a handy means for competitors to impose a ‘compulsory license’ policy upon every patent owner. As such, determination of a ‘reasonable royalty’ after infringement, like many devices in the law, rests on a legal fiction created in an effort to ‘compensate’ when profits are not provable. There is, of course, no actual willingness on either side, and no license to do anything, the infringer being normally enjoined … from further manufacture, use, or sale of the patented product. See, Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152 (6th Cir. 1978).

Since 1970, courts have come to rely upon the factors enumerated in Georgia-Pacific Corp. v. U.S. Plywood Corp, 318 F.Supp. 1116 (S.D.N.Y. 1970) a case in which a district court judge articulated a comprehensive list of evidentiary facts that can bear upon the determination of a reasonable royalty – that is – the amount that a willing seller and a willing buyer would have agreed upon. The Georgia-Pacific factors generally fall into two groups. One group relates to the specific and general market conditions in the pertinent industry. The second group of factors in a sense sets the range of feasible rates since a willing patent owner would demand a greater than minimum rate for a profitable invention and a willing user would concede no more than the expected amount of profit (adjusted for the uncertainty as to its realization). The first group of factors points to the rate that the parties would have adopted within that range.

SOURCE: KickassFacts.com

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