Originally published in IPExperts.com, December 2007.
The 35 USC § 284 statute clearly defines the compensatory nature of patent damages and outlines one form of relief commonly seen in patent infringement damages estimation – reasonable royalty. The other form of patent infringement damage remedy is lost profits.
Reasonable royalty is often estimated using the framework of a hypothetical negotiation between a willing buyer and a willing seller, engaged in an arms length transaction.1 An economic damages expert relies upon Georgia-Pacific factors and other case-specific factors to determine the bargaining power of each side as they come to the hypothetical negotiation table.2, 3
Two Georgian-Pacific factors that have received some attention recently are Georgia-Pacific factor #6 and Georgia-Pacific factor #2.
The Georgia-Pacific factor #6 relates to the royalty base to which the royalty rate is applied. The question address here is whether the royalty base should include sales of non-patented products that are often (or exclusively) sold with the patented product (Bose Corporation v. JBL, Inc. etal. 2001 U.S. App. LEXIS 26684, William G. Riles v. Shell Exploration & Production Company 2001 U.S. Dist. LEXIS 24373 and Interactive Pictures Corporation v. Infinite Pictures, Inc. 2001 U.S. App. LEXIS 26936).
For example, in Bose, the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") affirmed the district court's decision and held that even though the infringing part represented a small part of the loudspeaker system, the royalty must be calculated on the entire value of the loudspeaker system. It held this because the patented feature was the basis for consumer demand. Bose saw a substantial growth in sale of its loudspeakers after it incorporated the patented part in the loudspeaker system. Further, the patented part "worked with other components of loud speakers as a single functioning unit to provide the desired audible performance." Bose also presented evidence on its marketing efforts outlining the benefits of the patented elliptical port tube in eliminating port noise and reproducing improved base tones. There was also evidence that the product was sold as a complete system and not as separate pieces.
The Georgia-Pacific factor #2 relates to the comparable royalty rates including royalty rates actually paid by the infringer on patented technologies similar to the technology at issue. Often data on comparable licenses available from the infringer (and licenses on similar technology available from the patent holder) is limited. The economic damages expert relies frequently on other third party sources for licensing information on comparable technology. It is important that these third-party licenses be strictly comparable to the patent technology at issue and the licensing conditions that are negotiated are relevant for the case at hand (Integra Lifesciences I, Limited etal. v. Merck KGaA, 2004 U.S. Dist. LEXIS 20725 and 2007 U.S. App. LEXIS 17930).
The District Court for the Southern District of California, following a remand of its damages award by the Federal Circuit, decided in September 2004 that the royalty rate payable by Merck KGaA amounted to 28.9% and that was "excessive." Telios [subsidiary of Integra] was taking no risk. "That such a royalty is excessive is further supported by reviewing Telios' other RGD Peptide licenses where Telios was to received between a 5% and 10% royalty of sales for RGD Peptide." ... "There are a series of other licensing agreements for use of Telios' RGD Patent technology that were entered into the record. Those agreements [including Genentech Agreement] range in time from 1988 to 1996. However, none of those agreements here were negotiated in 1994, again limiting the relevance of those agreements for comparison to determine a reasonable royalty." The court also looked at "the parties' actual negotiations for a license of the RGD Patents." Note: on July 27, 2007, the Federal Circuit reversed the decision that Merck infringed the patents of Telios.
Further, if designing around the patented technology is possible at a reasonable cost and within a limited timeframe then such an option must be considered as a potential data point in determining a reasonable royalty rate for the case at hand (Grain Processing Corporation v. American Maize-Products Company 1999 U.S. App. LEXIS 18203 and Micro Chemicals, Inc. v. Lextron, Inc.2001 U.S. Dist. LEXIS 14503 and 2003 U.S. App. LEXIS 1413). In Micro, the district court stated "Micro's damages estimation distorts the reasonable royalty determination by incorrectly characterizing the market for microingredient machines as a "two supplier" market with Lextron being its only serious competitor. This argument ignores the Court's findings regarding the alternatives available to the cattle feedlot industry to meet their microingredient needs. In view of the broader market with head-to-head competition from feed supplement manufacturers, as well as the lack of demand for the patented machine, Micro was not in any position to retain the entire market as it asserts." ... "Lextron had a viable alternative machine, reducing the dynamic from Lextron's perspective to a choice between the cost of converting its machines to the Type 3 design versus the cost of accepting a license under the patent and paying Micro a similar sum in the form of a royalty to continue to manufacture the Type 2 machine."
A non-monetary form of relief granted in patent infringement cases is an injunction. The factors affecting grant of an injunctive relief such as a permanent injunction in patent infringement lawsuits have been recently expounded by the Supreme Court in its decision in eBay, Inc. v. MercExchange, LLC case (2006). Unlike the earlier "general rule" that a permanent injunction would be granted absent exceptional circumstances, the courts will now need to apply a four-part test on a case-by-case basis to determine whether a permanent injunction is an available/warranted remedy. One of the major factors affecting the grant of a permanent injunction is whether the infringer and patent holder/plaintiff are operating in the same market and vigorously competing with one another. Thus, the role of economic analysis to determine the relevant market and the extent of competition among the patent holder and infringer in granting of a permanent injunction has enormously increased.
Footnotes
1 Georgia-Pacific v. Unites States Plywood Corp. 318ESupp116 (ISDNY 1970)
2 William O. Kerr and Gauri Prakash-Canjels, Patent Damages And Royalty Awards: The Convergence of Economics And Law, les Nouvelles: Journal of the Licensing Executive Society, June 2003
3 There is sometimes no need to use a hypothetical negotiation framework because an established royalty rate exists on the technology in question.
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