The following is excerpted from a May 11, 2011 article by Richard Raysman and Peter Brown published by Law Technology News:
The U.S. Court of Appeals for the Federal Circuit ruled in January that the longstanding "25 percent rule of thumb" standard used by damages experts in patent infringement cases to calculate a reasonable royalty was "fundamentally flawed."
The court's ruling striking down the 25 percent rule has important implications for patent damages in both existing and future litigation. However, it was not the only notable patent decision of the past year that impacted the issue of patent damages.
In helping to fashion a reasonable royalty, experts generally examine past licenses that are commensurate with what the alleged infringer has misappropriated. The question of which past licenses are comparable is often a point of contention.
Last year, in ResQNet.com Inc. v. Lansa Inc., 594 F.3d 860, the Federal Circuit issued an important decision concerning the admissibility of past licenses that had been negotiated as part of a settlement. The decision has reverberated through the lower courts as parties have sought to introduce additional evidence to bolster or challenge damage calculations.
To support a claim of damages, it is not uncommon for parties to offer testimony from economists, industry analysts, engineers and even consumers. Although some approximation is permitted, courts require "sound economic and factual predicates" for a reasonable royalty analysis.
...in general, the calculation of a hypothetical reasonable royalty assumes a time before litigation since license fees negotiated in the face of a large jury verdict or high-cost litigation may be skewed and may not necessarily reflect the reasonable market value of the technology in the market. Based on the statements in ResQNet.com, however, some courts are ruling that settlement licenses are admissible to prove a reasonable royalty.
In short, the statute authorizes two categories of monetary damages: lost profits and reasonable royalty damages.
To garner an award of lost profits, a patentee must show that but for the infringement, the patent owner would have made the sales that the infringer made, charged higher prices, or incurred lower expenses. But the lost profits analysis is rarely as simple as adding up the patentee's lost profit margins from these sales. To establish the requisite causation and entitlement to lost profits, "a patentee must reconstruct the market to show, hypothetically, likely outcomes with infringement factored out of the economic picture." Crystal Semiconductor Corp. v. Tritech Microelectronics Int'l Inc., 246 F.3d 1336, 1355 (Fed. Cir. 2001).
Consequently, a fair number of patentees either opt to not present a case for lost profits due to an inability to satisfy all of the necessary elements or because they are not practicing the patents in the market and do not have any sales or profits.
As such, the reasonable royalty rate is the more common form of patent damages.
Royalty rates may either be calculated by using established royalty rates charged by the patent owner on comparable existing licenses, or by determining a "reasonable royalty."
The common approach to calculating reasonable royalty damages is based on hypothetical negotiations between a willing licensor and a willing licensee on the date infringement began.
Excerpts from Brooks
