United States: Patent Litigation Settlement Agreements May Be Used To Support Reasonable Royalty Damages In Later Litigation

Litigation settlement agreements can be submitted as evidence to establish the amount of reasonable royalty damages and are more likely to be admitted into evidence when they occur at a later stage of the litigation, if the use of the patented technology by the party that settled is similar to the use made by the accused infringer, and if there are no enhanced damages at issue in the settled litigation.

Patent owners can recover reasonable royalty damages for patent infringement based on factors including royalty terms in other licenses involving the patented technology. In some instances, courts permit agreements that settled other litigations to be used to establish reasonable-royalty damages.

Background of the Litigation Before the District Court

Prism sued AT&T for patent infringement and settled on the last day of trial. Prism separately sued Sprint for infringing the same patents, and Sprint asked the district court to exclude the AT&T settlement agreement from evidence, arguing that the AT&T agreement was not comparable to the hypothetical negotiation in its case and would be prejudicial to consider as evidence of a reasonable royalty.

The district court disagreed and admitted the agreement into evidence. The jury found that Sprint infringed Prism's patents and awarded Prism reasonable royalty damages of $30 million. Sprint appealed the district court's decision to admit the AT&T settlement agreement into evidence.

The Decision on Appeal

The Federal Circuit held that the district court did not abuse its discretion by admitting the AT&T settlement agreement into evidence and concluding that the danger of undue prejudice from admitting the litigation settlement agreement into evidence substantially outweighed the value of the agreement in determining the proper amount of damages. The Court noted that there is no explicit rule against excluding litigation settlement agreements from evidence and then enumerated the factors a court should consider in determining to allow a settlement agreement to be admitted into evidence: (1) whether the same patented technology was at issue in the settled litigation, (2) how far along the settled litigation was, (3) whether the agreement covers non-comparable technologies or additional technologies to the patented technology, (4) whether the settled litigation included the risk of enhanced damages, and (5) whether the litigation costs at the time of settlement were high.

Applying these factors, the Federal Circuit held that the district court properly admitted the AT&T settlement agreement into evidence finding that (1) although the agreement between Prism and AT&T covered the patents at issue against Sprint as well as other patents, Prism satisfactorily explained how the unasserted patents related to AT&T's business, and presented sufficient evidence to establish the comparability of the AT&T settlement agreement; (2) Prism's agreement with AT&T was more reliable since it occurred at such a late stage of the litigation—after the trial; and (3) no enhanced damages were at issue in the AT&T case.

Strategy and Conclusion

Litigation settlement agreements can be submitted as evidence to establish the amount of reasonable royalty damages and are more likely to be admitted into evidence when they occur at a later stage of the litigation, if the use of the patented technology by the party that settled is similar to the use made by the accused infringer, and if there are no enhanced damages at issue in the settled litigation.

Further Information
The Prism Technologies opinion can be found here.

Originally printed in LES Insights on April 11, 2017.

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