United States: Actual Negotiations Trump 40-Year "Georgia-Pacific" Test To Determine Type Of Patent Licensing Royalties

The Grigoleit Co. v. Whirlpool Corp.

Addressing a lower court's reasonable royalty determination that chose not to rely on the Georgia Pacific factors, the U.S. Court of Appeals for the Seventh Circuit recently affirmed the district court's reasonable royalty determination without discussing the Georgia-Pacific factors at all, instead framing the patent licensing dispute as a matter of contract interpretation and not one of patent law. The Grigoleit Co. v. Whirlpool Corp., Case No. 14-1663 (7th Cir., Oct. 16, 2014) (Easterbrook, J.)

Grigoleit supplies knobs and other components to Whirlpool for use in its washers and dryers. After years of sourcing parts from Grigoleit, Whirlpool removed Grigoleit as its preferred supplier and began sourcing from Phillips Plastic. Grigoleit then informed Whirlpool and Phillips that they allegedly were practicing Grigoleit's patents directed to a method of assembling appliance knobs.

To resolve the dispute, Grigoleit and Whirlpool entered into a patent licensing agreement. The licensing agreement provided that "Whirlpool shall not be obligated to pay Grigoleit any monies as royalties . . . so long as" Whirlpool continued to purchase from Grigoleit knobs for the "Estate" and "Roper" brand lines of washers and dryers, and Whirlpool continued to give "serious consideration" to Grigoleit for the purchase of its other products.

The licensing agreement was silent as to the appropriate measure of royalties should there be a failure to meet such conditions. For example, the licensing agreement did not include any provisions directed to whether royalties should be paid as running royalties, percentage or fixed-price royalties, or a lump-sum royalty.

Later, Grigoleit sued Whirlpool for breach of the parties' licensing agreement. Specifically, Grigoleit alleged that Whirlpool failed to give "serious consideration" to its other product lines. Grigoleit demanded damages under a contract theory. Specifically, Grigoleit sought its lost profits that it would have made had Whirlpool purchased its knobs exclusively from Grigoleit.

Whirlpool argued that the appropriate compensation, if any, was not lost profits for breach of contract, but rather a royalty for use of Grigoleit's patented technology. Whirlpool urged the district court to apply the Georgia-Pacific factors to determine a reasonable royalty and argued that the royalty rate should be a fixed-price royalty of $.01 and $.12 per part sold.

The district court agreed with Whirlpool that the text of the contract provided for royalties instead of lost profits damages under contract law. However, the district court found "no need to resort to the Georgia-Pacific factors to hypothesize negotiations on this issue." Even though the parties had not reached an actual agreement on a specific type of royalty, the court explained that the parties ultimately entered into a binding agreement. By contrast, the court said, "Georgia-Pacific was a pure patent-infringement case where the parties did not engage in actual negotiations that produced an actual license agreement, necessitating that the court construct hypothetical negotiations to reach a reasonable royalty."

Furthermore, the court explained that "this is, at its heart, a contract interpretation case." The court relied on extrinsic evidence of a draft of the parties' licensing agreement, where Grigoleit had proposed a $.12 per part, or fixed price, royalty. "Based on the extrinsic evidence and the generally accepted measure of royalties," the court held that the appropriate measure of royalties was a royalty of $.01 and $.12 per part.

In affirming the district court, the Seventh Circuit did not opine on the district court's decision to not apply the Georgia-Pacific factors. Instead, the Court framed the licensing dispute as one in contract and not patent law. Relying on the text of the licensing agreement, the Court found that "[t]he phrase 'so long as' permitted Whirlpool to change how it performed, getting a royalty-free license in some periods and paying royalties in others." Specifically, the Seventh Circuit read the text of the patent license as providing a royalty-free license, subject to the satisfaction of certain conditions. The failure to satisfy such conditions, the Court explained, meant that "royalties" would be owed. The Court did not opine on how the district court reached a determination that the reasonable royalty specifically ranged from $0.01 to $0.12 per part.

Actual Negotiations Trump 40-Year Georgia-Pacific Test To Determine Type Of Patent Licensing Royalties

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