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Dec 02

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Federal Circuit again redefines a reasonable royalty

Lost profits are typically understood to yield higher damages than reasonable royalties, but this is not always the case. Higher reasonable royalty damages most frequently occur when the patent holder (inventor) is not in a position to exploit the invention by manufacturing the product himself. In such event, (i) there are no realistic profits to be earned from the self-manufacture, (ii) the royalty rate usually becomes lower, and (iii) the royalty is determined using the other Georgia Pacific factors that are normally considered in a reasonable royalty calculation. In Powell vs. The Home Depot USA, Inc., Case No. 07-CV-80435 (S.D. Florida), the Federal Circuit Court went far beyond these normal parameters.

The jury awarded royalties as a damage measure. The standard for a reasonable royalty is what a reasonable licensee and reasonable licensor would have agreed upon. Although the Federal Circuit Court mentions the Georgia Pacific factors, the Court never directly addresses the plaintiff’s demontrated willingness to provide the patented invention for around $2,000. Since the $2,000 price included the full manufacture and installation of the device, the plaintiff’s profits would be less than the approximate $2,000 selling price.

By focusing on the defendant’s cost savings, the trial identified a royalty of over $7,700. However, cost savings should not be the end of the analysis, with all other economic considerations ignored. The plaintiff was willing to sell the complete device that used the patent for around $2,000, so how could a royalty for just the patent reasonably exceed $7,700?

This article provides details of how the Federal Circuit reached this result.

 

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2011/12/federal-circuit-again-redefines-a-reasonable-royalty/

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