In patent litigation, the use of prior licenses can significantly impact damages. The complexity of incorporating prior licenses into a case necessitates careful analysis, as the terms and conditions of such agreements can shape both the outcome of the litigation and the implications of pre-trial discovery.
The Role of Prior Licenses in Calculating Damages
One of the most critical uses of prior licenses in patent litigation is to establish a basis for calculating reasonable royalties, which are often central to damages awards. In theory, the royalty rate agreed upon in a previous licensing agreement can be used as a benchmark for the "hypothetical license". A hypothetical license is a theoretical license agreement that would have been formed had the parties engaged in negotiations prior to the alleged infringement.1 However, not all prior licenses are equally relevant. For a prior license to influence the damages calculation, it must be sufficiently comparable to the hypothetical license in question.
Courts typically look to several key factors in assessing comparability. First, the technology licensed in the prior agreement must be similar to the patented technology at issue in current litigation.2 This includes evaluating whether the underlying patents are in the same field, whether the technologies perform similar functions, and whether the scope of the patent rights granted is analogous. Second, the economic terms of the prior license should reflect a reasonable royalty rate within the context of the alleged infringement. This includes assessing whether the prior agreement's terms are economically similar to what a hypothetical negotiation would yield in the current case.3 Finally, the circumstances under which the prior license was negotiated should be considered.4 For example, was the license negotiated under similar market conditions, and were both parties under comparable economic pressures?
For instance, in Commonwealth Scientific and Industrial Research Organisation (CSIRO) v. Cisco Systems, Inc., the Federal Circuit held that prior licenses could be considered in damages calculations, but only if the prior agreements involved sufficiently similar technology and market conditions. If the previous licenses are based on different technologies or vastly different commercial contexts, they may be excluded from consideration.5
Courts are also cautious about relying on licenses that appear to have been negotiated under radically different conditions. In LaserDynamics, Inc. v. Quanta Computer, Inc., the Federal Circuit emphasized that a prior license agreement should only be used to establish a reasonable royalty rate if the license is sufficiently similar in terms of both technology and economic context. Vague or speculative connections between prior licenses and the hypothetical license are generally insufficient to meet the standard for damages calculations.6 This approach ensures that damages are calculated based on credible evidence rather than overly broad or unfounded comparisons.
The Implications of Prior Licenses in Discovery
While prior licenses can provide valuable insights into damages calculations, they also introduce significant discovery considerations. Discovery generally involves the exchange of documents and information that are relevant to the claims and defenses of a case. When a party seeks to introduce prior license agreements as evidence, documents and correspondence related to the license could also be discoverable.7
The discovery process can become particularly contentious when dealing with confidential or sensitive license agreements. In many cases, the terms of prior licenses may include confidentiality provisions that limit the extent to which the agreements can be shared with third parties. This raises the issue of whether these licenses will be fully discoverable or whether redacted versions may be sufficient for the purposes of litigation. Courts generally favor the disclosure of prior licenses, as they are considered relevant to damages and the hypothetical negotiation. However, confidentiality concerns must be addressed, and parties often seek protective orders to safeguard sensitive commercial information.8
Moreover, prior licenses may also reveal the existence of other potential defendants or related parties that are relevant to the current litigation. For example, if a plaintiff has previously entered into a license with a competitor or another entity in the same industry, that information may be critical in determining whether the alleged infringement is part of a broader pattern of infringement within a particular market. Discovery disputes may arise over the breadth of information required to be disclosed, with parties seeking to limit the scope of discovery to avoid disclosing sensitive business strategies or relationships.
Strategic Considerations for Patent Holders and Defendants
For patent holders, prior licenses offer both opportunities and risks. On the one hand, licenses can be a powerful tool to demonstrate that a reasonable royalty would have been negotiated in the event of infringement, potentially leading to higher damages. However, patent holders must be cautious of the terms of these prior licenses, as they may not be as favorable as they initially appear. For instance, if a prior license was signed during a period of market uncertainty, its royalty rate may not accurately reflect the current market value of the patented technology.9
On the other hand, defendants may seek to exploit prior licenses to reduce their exposure to damages. By showing that the plaintiff has already licensed the same or similar technology at a lower rate, defendants can argue that the reasonable royalty in the hypothetical negotiation should be lower. In some cases, defendants may also try to discredit the relevance of prior licenses by emphasizing differences in technology, market conditions, or the parties involved in the negotiations.10
Conclusion
Prior licenses play a crucial role in patent litigation, especially when determining damages and the appropriate royalty rates. While they can provide a valuable reference point for the "hypothetical license," their relevance depends on several factors, including the comparability of the technology, economic terms, and negotiation circumstances. Additionally, the discovery process introduces significant challenges, particularly regarding confidentiality and the breadth of information required. As such, companies licensing their technology, considering litigation, or amid litigation, should carefully consider the implications referenced above.
Footnotes
1 Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1327 (Fed. Cir. 2009).
2 LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012).
3 Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970); see also Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318-1319 (Fed. Cir. 2011).
4 See supra, note 1.
5 Commonwealth Scientific and Industrial Research Organisation (CSIRO) v. Cisco Systems, Inc., 809 F.3d 1295, 1306 (Fed. Cir. 2015).
6 LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 79 (2012).
7 In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012).
8 Id. at 1346.
9 ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010).
10 See supra, notes 1-3.
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