In recently affirming a $30 million damages award, the U.S.
Court of Appeals for the Federal Circuit expounded on two key
factors—prior settlement agreements and cost
savings—that can impact "reasonable royalty"
damages under 35 U.S.C. § 284. Prism Tech. LLC v. Sprint
Spectrum L.P., No. 2016-1456, Slip Op. at 7 (Fed. Cir. Mar. 6,
2017). A reasonable royalty is determined in a hypothetical
negotiation between the patent owner and the infringer at the time
infringement began, with both parties assumed to take into account
all factors that prudent businesspersons would consider. Slip Op.
at 23-34. The Prism case is instructive because the
Federal Circuit does not often discuss the relevance of these two
factors to the determination of a reasonable royalty.
Relevance of Previous Settlement Agreements
Settlement agreements are often excluded as evidence of a
reasonable royalty because a negotiation in the context of
litigation is different from the hypothetical negotiation that
results in a "reasonable royalty." Slip Op. at 11. Here,
however, the Federal Circuit explained that settlements
"involving the patented technology can be probative of the
technology's value if that value was at issue in the earlier
case." Slip Op. at 12. However, a settlement agreement can be
excluded if, for example, circumstances indicate that the
settlement royalty was either higher or lower than the rate that
would result from a hypothetical negotiation. Id. For
instance, a litigation settlement might undervalue the patented
technology if the patent owner discounts the value of the patented
technology to account for the probability of losing on validity or
infringement. Id. Conversely, a settlement might overvalue
the patented technology if the settlement included other
technology, accounted for the possibility of enhanced damages, or
reflected litigation or other transaction expenses. Slip Op. at
In this case, the Federal Circuit found that the disputed
settlement agreement was properly admitted because it covered the
patents-in-suit, attributed amounts to particular patents, was
entered into near the conclusion of trial, and settled a case in
which enhanced damages apparently were not at issue. Slip Op. at
15-16. The Federal Circuit determined that these factors enhanced
the reliability of the disputed settlement agreement as evidence of
a reasonable royalty.
Evidence of Cost Savings Through Infringement
A reasonably royalty attempts, in part, to measure the value an
infringer derives from infringement—for example, by
generating additional sales or being able to charge a higher price.
One measure of that value is the cost savings, if any, realized by
the infringer as a result of using the patented technology. Slip
Op. at 23. In Prism, the patentee argued that "a
reasonable royalty would reflect [the defendant's] willingness,
in a hypothetical negotiation, to pay an amount calculated by
reference to the costs that Sprint, in order to provide its
customers the kind of service it wanted to offer them, would have
incurred if it had chosen not to infringe." Slip Op. at 23.
The Federal Circuit agreed, finding that "[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.'"
Slip Op. at 24 (citations omitted). The Federal Circuit added that
while "a patentee 'must carefully tie proof of damages to
the claimed invention's footprint in the market place,'
that requirement for valuing the patented technology can be met if
the patentee adequately shows that the defendant's infringement
allowed it to avoid taking a different, more costly course of
action." Slip Op. at 24 (citations omitted).
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