Federal Courts Closely Scrutinizing and Slashing Patent Damage Awards
A series of recent decisions indicates that courts are more rigidly enforcing standards for the reasonable royalty calculation of patent damages awards. In particular, recent Federal Circuit decisions (as well as a district court case with Judge Rader of the Federal Circuit sitting by designation) show that the use of prior licenses of either the patentee or the alleged infringer to support high royalty rates, as well as the application of the entire market value rule to increase the size of the royalty base, will be more carefully scrutinized. These recent decisions promote tighter evidentiary standards that will force damage theories to be more closely tied to the value of the invention as claimed. While legislative reforms in the area of patent damages are still being contemplated in Congress,3 it appears that, as with the trends in recent case law discussed below, legislative reform efforts will also seek to put the burden on district court judges to act as "gatekeepers" and to closely scrutinize the evidence that is relied upon to prove patent damages.
Background Regarding Calculation of Reasonable Royalty
Section 284 of the Patent Act provides that a prevailing plaintiff in a patent infringement suit shall be entitled to damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer."4 The most common approach to determining the reasonable royalty that would be "adequate to compensate" the patent owner attempts to determine the royalty that the patentee and infringer would have agreed to had they successfully negotiated a license agreement just before the infringement began. The now-well-known framework for applying this "hypothetical negotiation methodology" is set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp.5 The Georgia-Pacific factors are a list of flexible factors that may be applied to the facts at hand in order to calculate the reasonable royalty that the parties would have arrived at in a hypothetical negotiation. These factors include, for example, past and present royalties received by the patentee "for the licensing of the patent in suit, proving or tending to prove an established royalty," "[t]he rates paid by the licensee for the use of other patents comparable to the patent in suit," "[t]he extent to which the infringer has made use of the invention; and any evidence probative of the value of that use."6 The Georgia-Pacific factors are not an exclusive list; the parties may argue any other factor that a reasonable licensee or licensor may take into account in determining the value of a patent.7
Calculation of a reasonable royalty requires determination of both (i) a royalty base, i.e., the pool of revenue implicated by the infringement; and (ii) a royalty rate, i.e., the royalty percentage of that royalty base.
1Cite as Michael Kasdan and Joseph Casino, Federal Courts Closely Scrutinizing and Slashing Patent Damage Awards, 2010 Patently-O Patent L.J. 24.
2Michael J. Kasdan is an associate and Joseph Casino is a partner at the firm of Amster, Rothstein & Ebenstein LLP. Their practice focuses on intellectual property litigation and licensing. They may be reached at [email protected] and [email protected].
3On February 25, 2010, Senator Patrick Leahy (D-VT) announced that a "tentative agreement" had been reached on the long-pending patent reform bill. In his public comments, Leahy noted that the compromise will "address" the issues of "runaway damage awards" and patent quality. See Dennis Crouch, Patent Reform Moving Forward, Patently-O at http://www.patentlyo.com/patent/2010/02/patent-reform-moving-forward.html (Feb. 25, 2010); see also Comment on Patent Reform Legislation, http://leahy.senate.gov/press/press_releases/release/?id=971907e8-425c-489a-ab48-b1eb307be795 (Feb. 25, 2010).
435 U.S.C. § 284(2006).
5318 F.Supp.1116, 1120 (S.D.N.Y. 1970).
7Id. at 1120-21.