Let’s Be Reasonable About Reasonable Royalties

In the absence of lost profits, patent infringement damages are generally measured by a “reasonable royalty,” which is in turn calculated through a “hypothetical negotiation” between the patent–owner and the infringer. As the Federal Circuit wrote way back in 1988, “The methodology encompasses fantasy and flexibility; fantasy because it requires a court to imagine what warring parties would have agreed to as willing negotiators; flexibility because it speaks of negotiations as of the time infringement began, yet permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.”

In this context, a Houston federal court provided a useful reminder of the outer limits on this fantastic and flexible calculation—any proposed calculation must treat both parties as rational actors that will not make business–killing choices. (HT: Docket Report) The court excluded expert testimony relating to the plaintiff’s proposed reasonable royalty because the underlying calculation was based on the assumption that the defendant would have agreed in the hypothetical negotiation to a “financially catastrophic agreement” that would have eliminated all profit (and most or all revenue) from the accused product. A hypothetical negotiation over a reasonable royalty must assume the baseline rationality of the hypothetically negotiating parties.

WesternGECo (SD Tex July 16, 2012)

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Posted by David Swetnam-Burland