Protecting Your Portfolio - Reasonable Royalties

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The value of a patent portfolio can hinge precariously upon a court’s determination of a reasonable royalty rate when assessing patent infringement damages. Furthermore, the standards for determining a reasonable royalty rate for assessing patent infringement damages continue to shift. Licensors wishing to maintain the value of their hard-earned intellectual property should consider the potential implications that recent decisions at the Federal Circuit and district courts may have upon future litigation-based royalty determinations. These implications should be considered when planning patent portfolios, crafting claims and drafting licensing agreements.

The recent decision raises several important points to consider for both licensing negotiation and earlier stages of patent development. This decision and several that follow indicate a shift in the standards regarding evidence for determining a reasonable royalty rate for assessing patent infringement damages.1 In, the plaintiff’s expert relied on seven licenses when providing testimony for use in establishing a reasonable royalty. Of these licenses, two were straight licenses to the patent-in-suit obtained under threat of litigation, and five were to technology bundles that covered the general technology of the patent. However, the bundled licenses failed to explicitly mention the patent(s) by name or number, and further included additional material and services.

In assessing the reasonableness of applying such data to a hypothetical negotiation for licensing the patent(s) in suit, the court’s majority found that the district court erred in considering both types of licenses. The court found the five licenses for [relating to] the technology bundles to be inapplicable and unrelated. The court found that the two straight licenses were induced by litigation but were the only competent evidence the court had for determining the outcome of a “hypothetical negotiation” needed for arriving at a reasonable royalty rate. The court remanded the case to district court to reconsider the reasonable royalty calculation. The court stated that the district court “may also consider the panoply of events that occurred hereafter and that could not have been known to or predicted by hypothesized negotiations …however, the trial court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology.” It appears that the court thus found that the technology bundles involved “unrelated licenses” because the licenses did not directly mention the patent-in-suit, despite the relatedness of the technology covered in the licenses.

Judge Newman offered a vigorous dissent with respect to the damages findings, arguing that the district court recognized the differences between the licenses covering additional subject matter and the straight patent licenses, and took these differences into account in setting the awarded royalty rate. She further argued that the majority’s decision creates a rule “whereby no licenses involving the patented technology can be considered, in determining the value of the infringement, if the patents themselves are not directly licensed or if the licenses include subject matter in addition to that which was infringed.” Judge Newman also challenged the heavy reliance on litigation-induced licenses as the basis of a patent infringement award for ignoring other Georgia-Pacific factors traditionally used in making the reasonable royalty determination.2

The holding of the case appears to have the effect that litigation-based licenses – which have often been excluded because settlement negotiations are often based upon a variety of factors not present in normal royalty negotiations —now hold much greater weight in the determination of patent infringement damages. This holding is further made despite the court’s acknowledgement of the general unreliability of such litigation-based licenses.

The court appeared to be most concerned that there be sufficient evidence linking the relied-upon licenses to the actual patent asserted, the subjectivity of which Judge Newman’s dissent addresses directly. In view of the decision, there are several things a patent holder can consider and implement in order to preserve the ability to obtain desirable royalty rates:

  • Consider licensing patents and other technology separately, relative to bundling patents and related technology together under a single license.
  • Taking the above a step further, consider filing separate patent applications with claims directed to separately-licensable technology; this can be particularly costeffective when differences in separately-filed applications are largely limited to differences in the claims.
  • When determining claim scope, consider single-actor infringement concerns as may be applicable to various stages of implementation or manufacture, together with potential licensing revenue that may be available for the respective stages. Such an exercise may warrant completely separate applications as discussed above.
  • When licensing bundles of patents, consider including language that helps justify a high royalty rate for licensed patents that may not hold significant value to the current licensee. This may help to preserve the ability to obtain higher royalty rates for those patents that may have been afforded a low value based upon the particular needs of the licensee.
  • When licensing a patent along with other considerations, consider language that helps bolster the value of the license for the actual patent. The court appeared, here and in the relied-upon Lucent case, to disregard evidence that was unclear as to the value attributable to non-patent factors, such as training, support and software code. 3
  • Consider including explicit reference to patents when licensing technology covering the patents, where doing so would serve to establish a desirable royalty rate. As applicable here, the plaintiff was unable to use the five bundled licenses due to the lack of explicit reference to the patent-in-suit, despite evidence linking the two.

Recent district court decisions have applied aspects of the case in diverging manners with respect to endorsing and limiting the use of litigation-induced licenses in determining reasonable royalties. It remains to be seen how district courts will further apply the majority’s new guidelines to future reasonable royalty determinations.

Mindfulness to potential future litigation continues to play an important part in drafting and enforcing licensing agreements involving technologies that relate to one or more patents in a licensor’s portfolio. Similar consideration should be given when planning and implementing a patent portfolio strategy.

1, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010)

2 Georgia Pacific Corp v. United State Plywood Corp. 318 F.Supp. 1116(S.D.N.Y. 1970)

3 Lucent Techs. Inc. v. Gateway 580 F.3d 1301 (Fed. Cir. 2009)

© Crawford Maunu PLLC. All rights reserved. This material is for informational purposes only and should not be construed as legal advice. Also, as this material was prepared by individuals and not prepared by Crawford Maunu PLLC acting on behalf of any particular client/factual situation, this material should not be construed as providing a specific position applicable to any legal matter. Communication of this material is not intended to establish an attorney-client relationship. Legal advice should be sought from legal counsel.