In a prior article, we talked about determining lost profits damages in patent infringement cases. As discussed there, patent owners are to be compensated if their rights are infringed; and the compensation is to be no less than a reasonable royalty. However, a patent owner instead may be entitled to the “lost profits” that it would have made had there been no infringement, if certain criteria are met.
But, what happens if those criteria are not met? How then is a reasonable royalty determined?
There is no one specific or required methodology for determining a reasonable royalty. However, most analyses at least consider the 15 factors outlined in the Georgia-Pacific Corp. v. United States Plywood Corp. case, known as the “Georgia-Pacific Factors.”
Georgia Pacific Factors
The most critical Georgia Pacific Factor is the last one, or what’s known as the “hypothetical negotiation.” This factor requires the consideration of the amount a licensor and licensee would negotiate had they both been reasonably and voluntarily trying to reach an agreement. Therefore, in determining a reasonable royalty, an analyst needs to put him or herself in the shoes of the licensor and licensee and analyze what factors would influence an actual negotiation. The remaining 14 factors essentially provide a guideline for issues that would be part of this “hypothetical negotiation”:
Factors 1 and 2 – The first two factors relate to the royalties received by the licensor for the patent at issue and any royalties paid by the licensee for similar patents.
Factors 3 through 7 – These factors include commercial considerations made by both parties in a negotiation. For example, the scope of the license (exclusive or non-exclusive), the licensor’s established licensing policy, the relationship between the licensor and licensee (i.e., are they competitors), the term of the patent, and if sales of the patented product generate sales of related, non-patented products (also known as convoyed sales).
Factors 8, 12, and 13 – These factors focus on three items: (a) the profitability of the product made under the patent; (b) the portion of profit or selling price that is customary to be paid for the patent (i.e., the royalties paid by other unrelated parties for similar patents); and (c) the portion of profit that is related to the patented feature(s), distinct from non-patented elements.
Factors 9 and 10 – The benefits of the patented product over prior products.
Factor 11 – The extent to which the infringer has used the patent and the value of that use.
Factor 14 – The opinion testimony of qualified experts.
Consistent with the lost profits analysis, the theory behind the determination of a reasonable royalty is simple. However, the quantification of a reasonable royalty requires a significant amount of effort, experience and knowledge. The professionals at Schneider Downs have been involved in numerous cases quantifying damages, including reasonable royalty damages in patent infringement cases. If you have any questions, please contact Steve Thimons at 412-697-5281.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.