The U.S. Court of Appeals for the Federal Circuit affirmed a district court’s calculation of "reasonable royalties" that accounted for intangible benefits conferred on the market by the patentee’s licensing program. Monsanto Co. v. McFarling, Case Nos. 05-1570, -1598 (Fed. Cir., May 24, 2007) (Perry, J.).
In order to purchase Monsanto’s patented, genetically modified soybean seeds, farmers were required to sign a "Technology Agreement," which granted them a license to use the seeds, subject to various obligations: payment of a "Technology Fee" directly to Monsanto; a promise to purchase seeds only from authorized Monsanto dealers; and a promise to use the seeds only for that season. McFarling violated the terms of this agreement by improperly replanting seeds containing the patented technology. Monsanto successfully sued for infringement.
Pursuant to 35 U.S.C. § 284, Monsanto sought damages equivalent to "reasonable royalties" expected from the infringing period. The district court denied McFarling’s motions to limit these damages to only the Technology Fee, or $6.50 per bag of seed, and the jury returned an award of $40 per bag of seed.
The district court found, and the Federal Circuit affirmed, that because the Technology Agreement imposed an obligation to purchase from authorized distributors that charged an additional $19 to $22 per bag, "[i]n effect, the amount … that can be characterized as a pure royalty payment was $25.50 to $28.50." However, despite recognizing that "[a]n established royalty is usually the best measure of a ‘reasonable’ royalty," the Federal Circuit held that it would have been improper to limit the calculation of Monsanto’s damages to only that amount.
Evidence presented at trial showed that the licensing program was of great intangible value to Monsanto by protecting its reputation among the farmers and providing leverage with seed distributors. Even though it is difficult to assign a dollar value to these benefits, they "nonetheless justify the jury’s finding that a reasonable royalty for a license to engage in conduct like Mr. McFarling’s would exceed the amount of the payments made by farmers who participated in the licensing program."
The Court also relied on expert testimony to determine the actual dollar benefit conveyed to the farmers in having access to Monsanto’s technology through increased crop yield and cost savings. The Court noted that, based on those advantages alone, it was reasonable for the jury to suppose that, in a hypothetical negotiation, a purchaser would pay a royalty of $40 per bag for the seed. Noting that a jury’s award will be affirmed unless "grossly excessive or monstrous, clearly not supported by the evidence or based only on speculation or guesswork," the Court found sufficient reasons to affirm the jury’s verdict.
Practice Note: Under McFarling, practitioners will have more evidence at their disposal to define a "reasonable royalty." The Patent Reform Act of 2007 reflects the same flexible standard by proposing that in addition to the terms of non-exclusive licensing agreements, courts "may also consider … any other relevant factors under applicable law." Sec. 5(a)(4).
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