Ex-Post Figures Allowed in Hypothetical Royalty Calculation

ScreenShot017Honeywell v. Hamilton Sundstrand (HSC) (D. Del. 2005).

Conflicts between these two companies have already generated Federal Circuit precedent.  Now, in a case involving Honeywell’s patented power supply, the Delaware District Court has determined that HSC’s ex-post sales figures should be used in the calculation of a reasonable royalty.

Once infringement is found, a patentee is entitled to damages that are “in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 USC 284. The reasonable royalty is generally calculated through a legal fiction known as a “hypothetical negotiation” that would have occurred at a time before infringing activity began.

In this case, the patent issued in 2000, after HSC was already selling its allegedly infringing product. Demand changes due in part to the 9/11 tragedy caused product sales to increase dramatically in 2004 and 2005.  Honeywell argued that, despite their later date, these sales projections could not be ignored in the hypothetical negotiation.  HSC disagreed, arguing that post-negotiation sales projections should be rejected in the context of the hypothetical negotiation construct — particularly where pre-negotiation projections exist.

The court, noting a direct conflict between Fromson v. Western Litho (Fed. Cir. 1998) (later figures may be used) and the 2003 CAFC’s decision in Integra v. Merck KGaA (post-negation figures excluded because they change “risks and expectations of the parties”), sided with Honeywell and held that the post-negotiation figures could be used.

[T]he court is presented with two cases, both of which are binding, that dictate opposite results. . . . HSC suggests that the court should resolve the conflict by following the more recent case,

Integra. The court disagrees. The recent vintage of a case has no bearing on how well it was reasoned. In this case, the court is persuaded that the result dictated by Fromson is the most sensible. First, it promotes flexibility in damage calculations by not erecting an unnecessarily rigid barrier to relevant post-negotiation information. Second, it discourages infringement by placing the risk of success on the infringer. Third, it protects the quid pro quo underlying patent law by preventing a premature valuation of the patent. Finally, it permits a damage award more in keeping with the plain language of § 284 by adequately compensating the plaintiff for the “the use made of the invention” by the defendant. This list is probably not exhaustive, but is, in the court’s view, sufficient to demonstrate that Fromson should control in this case.

HSC’s motion to preclude post-negotiation sales figures denied.