Title: Four Principles for Calculating Reasonable Royalties in Patent Infringement Litigation
Abstract: INTRODUCTION In recent years, juries in some infringement suits have awarded prevailing patentees damages in the eight-, nine-, and even ten-figure ranges. (1) Though not all of these awards have been upheld following post-judgment motions or on appeal, (2) concern over the magnitude and frequency of such large damages awards has led to calls for the reform of various practices relating to the calculation of damages. (3) Other voices, not surprisingly, have either defended the current system or, at the very least, expressed reservations over the need for significant changes. (4) Underlying some of these debates are fundamental differences of opinion concerning the risks of so-called patent holdup resulting from the discovery, ex post, that a firm has infringed (often inadvertently) a reading on one of perhaps thousands of components embodied in a complex end product. (5) Moreover, ever since the Supreme Court's decision in eBay Inc. et al. v. MercExchange, L.L.C. (6) freed district courts from the requirement of automatically awarding injunctions to prevailing owners, damages law has taken on a new twist as courts have struggled to define the proper methodology for calculating royalties not only for past infringement but, in some instances, for the prospective, post-judgment use of a patented invention. (7) In this article, I will argue that a rational system for awarding reasonable royalties for infringement would be premised on four related principles: (1) in awarding retrospective damages (damages for past acts of infringement), courts should take the scope of substantive law as fixed; (2) the baseline damages recovery for prevailing owners should be the that restores them to the position they would have enjoyed but for the infringement; (3) courts should depart from this baseline when doing so is necessary to attain optimal deterrence; and (4) in attempting to replicate the license the parties would have negotiated ex ante but for the infringement, subject to some exceptions courts should authorize the consideration of factors that the parties realistically would have used, and should exclude consideration of factors that lack a sound theoretical or empirical basis. Part I provides a brief overview of the law of reasonable royalties and some of the current controversies surrounding this body of law. Part II elaborates on the four principles set forth above. Part Ill concludes. I. CURRENT LAW AND ITS CRITICS Section 284 of the U.S. Patent Act provides in relevant part: [u]pon 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. (8) Section 284 therefore authorizes a court to award the prevailing patentee its lost profit, if any, attributable to the infringement or, in the alternative, a reasonable royalty. (9) Conceptually, an award of lost profits would be appropriate in cases in which the patentee and the infringer compete in the same market and, but for the infringement, the patentee would have excluded the infringer from using the patented invention (rather than licensing its use). (10) When the patentee does not or cannot prove any lost profits, however, an award of reasonable royalties is said to serve as a floor or minimum compensation for the defendant's unauthorized use. (11) In awarding reasonable royalties, courts often recite (and instruct the jury on) the so-called Georgia-Pacific factors, a list of fifteen considerations that (at times) have been thought to be relevant to this determination. (12) Courts and commentators sometimes cite the fifteenth factor, the amount that a licensor ... and a licensee ... would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement as the overarching consideration, and the other factors as evidence that may be helpful in establishing this amount, (13) though it is not clear that this view has been universally accepted. …
Publication Year: 2011
Publication Date: 2011-05-01
Language: en
Type: article
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Cited By Count: 25
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