Returning to our Roots with Reasonable Royalties

A new draft paper by Professor Michael Risch (Un)Reasonable Royalties positions itself as a major reconsideration of the way that we calculate damages in patent cases.  This revolution has been brewing in academic circles, but I expect the spillovers into case law will be coming soon.  Over the past few years the Federal Circuit has pushed for more explicit discussion and explanation of damages. (See Lucent and Uniloc).  However, Risch argues that the result has been a “piling” of “rigid rules” rather than economic rationality.  (This rule versus rationality debate seems to keep coming up…)

Risch favors the economic and practical justification for the reasonable royalty floor for patent damages, but argues that courts have departed widely from the doctrine’s century-old origin — in ways that have “led to both over- and under-compensation.”  Big targets for Risch are the hypothetical negotiation and the Georgia-Pacific factors. He writes:

The hypothetical negotiation is a staple of reasonable royalty analysis by parties and courts, but it is not—as currently applied, at least—consistent with the traditional reasonable royalty framework. . . .

The [traditional] willing buyer/seller analysis might sound the same, but it is not. The negotiation includes many extraneous elements that have no place in a damages calculation, like bargaining power and a guarantee of profit. Furthermore, a focus on negotiation implies that the value of a patent must be fixed before the infringement, and successful patents should go uncompensated if the success was a surprise. Neither of these was contemplated in early cases. . . .

[R]easonable royalties are supposed to be compensatory in nature. The question isn’t what the parties would have negotiated, it is what the appropriate amount of compensation should be. . . . And that is hard enough; trying to also speculate [particulars such as] whether the parties would have negotiated a lump sum or a running royalty adds a layer of complexity that is unnecessary.

I am drawn to Risch’s approach of discarding rules for the sake of rules – especially when the rules are piled in ways that are complex and contradictory.  I like to keep in mind that a jury of non-experts will actually be deciding the damage values and so the approach also needs to be simple and logical enough for that body to rule upon.  Although my justification is that the law needs to be simplified for the jury –simple and logical rules benefit us in myriad ways.

For litigators – Professor Risch also does a nice job of explaining contradictions between current practice and older case-law that may well be ripe for court challenge.

Read the article: (Un)Reasonable Royalties

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

6 thoughts on “Returning to our Roots with Reasonable Royalties

  1. During the 19th century, the legal remedies available to patent owners were a) lost profits or b) ESTABLISHED royalty. It was really hard to get either one of those (so most sought equitable relief).

    The reason why established royalties were hard to get is because you could only get those damages if the patent owner has fixed, for himself, the value of the patent through several royalties. One license was never supposed to be enough to establish the royalty, nor was a license granted through threat of litigation. You see, the courts viewed patent infringement as a contract damages issue, not tort damages. If you couldn’t prove ACTUAL damages, you got nominal damages.

    But that completely changed in the 20th century, as patent owners had trouble winning monetary awards in either law or equity. To avoid granting nominal damages. co courts adopted the reasonable royalty in the 1920s and 30s and started to view patent infringement as a tort.

    But then the Georgia Pacific case tried to adopt the ESTABLISHED ROYALTY principles and apply them to REASONABLE ROYALTIES. It brought back a system that didn’t work, because it doesn’t actually prove anything. But now there is this cottage industry on trying to find out the precise economical damages for infringement. In no other tort action is there so much emphasis on precision.

    Precision and reasonableness are two opposite things. I look forward to studying Professor Risch’s article.

      1. …and what if the patent holder simply does not want to license to that particular entity?

        Exclusive rights that omit the ability to, well, actually exclude, seem like a right not enforceable (which mirrors a question you recently put to Malcolm, that yes I know shockingly Malcolm refused to answer).

  2. I don’t see any easy fix, but surely the Fed. Cir. could do a better job of refining and simplifying the 15 old District Court “Georgia-Pacific Factors” that remain controlling law cited with approval by the Fed. Cir. I can’t see how any jury can operate on jury instructions merely reciting them, especially since these factors provide rather vague tests that are at least in part alternative or overlapping, and some of them have never even been mentioned specifically in any CAFC decision. Even patent attorneys can’t remember offhand all of these Georgia-Pacific factors, so how can lay jurors?
    As a reminder, the “Georgia-Pacific Factors” are from Georgia-Pacific v United States Plywood Corp. 318 F. Supp. 1116, at 1120 (S.D. NY, 1970) and are:
    [1] “A comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license may be drawn from a conspectus of the leading cases. The following are some of the factors mutatis mutandis seemingly more pertinent to the issue herein:
    1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
    2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.
    3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
    4. The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
    5. The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.
    6. The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
    7. The duration of the patent and the term of the license.
    8. The established profitability of the product made under the patent; its commercial success; and its current popularity.
    9. The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
    10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
    11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
    12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
    13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
    14. The opinion testimony of qualified experts.
    15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.”

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