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Jul 05

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Federal Circuit Approves Evidence of Both Settlements And Related Negotiations In Reasonable Royalty Damages

Patent law (35 U.S.C. § 284) allows for lost profits in patent infringement cases, but requires damages of at least a reasonable royalty even if lost profits cannot be substantiated. The determination of a reasonable royalty is most often done through a hypothetical negotiation which attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began. Sound economic guidance regarding this determination appears in the landmark case Georgia-Pacific Corp. vs. U.S. Plywood Corp., 318 F. Supp. (S.D.N.Y. 1970), which lists 15 factors to be considered.

Over two years ago, in connection with a review of ResQNet.com, Inc. v. Lansa, Inc., Nos. 08-1365, -1366, 09-1030 (Fed. Cir. Feb. 5, 2010), I noted that it is generally accepted that licenses arising in settlement of litigation are not appropriate comparables for use in a reasonable royalty analysis. However, in reviewing a particularly poor reasonable royalty analysis, the Federal Circuit noted that litigation-related licenses would have generated a better answer than the incomplete analysis that the trial court accepted. The Federal Circuit commented:

This court observes as well that the most reliable license in this record arose out of litigation. On other occasions, this court has acknowledged that the hypothetical reasonable royalty calculation occurs before litigation and that litigation itself can skew the results of the hypothetical negotiation. See Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078-79 (Fed. Cir. 1983) (“[S]ince the offers were made after the infringement had begun and litigation was threatened or probable, their terms should not be considered evidence of an ‘established royalty,’ since license fees negotiated in the face of a threat of high litigation costs may be strongly influenced by a desire to avoid full litigation.”)

Nevertheless, based on the first sentence in the above quote, multiple district courts have accepted litigation-oriented licenses as useful and appropriate evidence. Supporting this position, in re: MSTG, Inc., No. 11-M996 (Fed. Cir. Apr. 9, 2012), the Federal Circuit ruled in connection with a discovery ruling that, in addition to settlement agreements, documents associated with the negotiation of the settlement are also discoverable. Obviously, if the underlying settlement agreements were not admissible, then there would be no need to even consider the issue that the Federal Circuit just decided.

Additional details are contained in this article.

 

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.

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