Determining Reasonable Royalty Damages in Patent Infringement Cases

In a prior article, we talked about determining lost profits damages in patent infringement cases.  As discussed there, patent owners are to be compensated if their rights are infringed; and the compensation is to be no less than a reasonable royalty.  However, a patent owner instead may be entitled to the “lost profits” that it would have made had there been no infringement, if certain criteria are met. 

But, what happens if those criteria are not met?  How then is a reasonable royalty determined?

There is no one specific or required methodology for determining a reasonable royalty.  However, most analyses at least consider the 15 factors outlined in the Georgia-Pacific Corp. v. United States Plywood Corp. case, known as the “Georgia-Pacific Factors.” 

Georgia Pacific Factors

The most critical Georgia Pacific Factor is the last one, or what’s known as the “hypothetical negotiation.”  This factor requires the consideration of the amount a licensor and licensee would negotiate had they both been reasonably and voluntarily trying to reach an agreement.  Therefore, in determining a reasonable royalty, an analyst needs to put him or herself in the shoes of the licensor and licensee and analyze what factors would influence an actual negotiation.  The remaining 14 factors essentially provide a guideline for issues that would be part of this “hypothetical negotiation”:

  • Factors 1 and 2 – The first two factors relate to the royalties received by the licensor for the patent at issue and any royalties paid by the licensee for similar patents.
  • Factors 3 through 7 – These factors include commercial considerations made by both parties in a negotiation.  For example, the scope of the license (exclusive or non-exclusive), the licensor’s established licensing policy, the relationship between the licensor and licensee (i.e., are they competitors), the term of the patent, and if sales of the patented product generate sales of related, non-patented products (also known as convoyed sales).
  • Factors 8, 12, and 13 – These factors focus on three items: (a) the profitability of the product made under the patent; (b) the portion of profit or selling price that is customary to be paid for the patent (i.e., the royalties paid by other unrelated parties for similar patents); and (c) the portion of profit that is related to the patented feature(s), distinct from non-patented elements.
  • Factors 9 and 10 – The benefits of the patented product over prior products.
  • Factor 11 – The extent to which the infringer has used the patent and the value of that use.
  • Factor 14 – The opinion testimony of qualified experts.

Consistent with the lost profits analysis, the theory behind the determination of a reasonable royalty is simple.  However, the quantification of a reasonable royalty requires a significant amount of effort, experience and knowledge.  The professionals at Schneider Downs have been involved in numerous cases quantifying damages, including reasonable royalty damages in patent infringement cases.  If you have any questions, please contact Steve Thimons at 412-697-5281.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

Using External Data and Process Automation to Enhance Analysis
Paycheck Protection Program – Interim Final Rule: Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules
Update: Could your PPP loan affect the sale of your business?
Financial Modeling a Remote Workforce
Estate Planning and Valuation During an Uncertain Economy – and an Election Year
COVID-19: The Long Road to Recovery

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102