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Patent damages—A brave new world?

The Federal Circuit’s rejection of the 25 percent rule leads to a demand for market-based evidence

In its 1853 decision in Seymour v. McCormick, the Supreme Court established that reasonable royalty patent damages ought to be limited to the patented component’s contribution to the whole product. After 159 years and many damages theories that were “better entitled to the epithet of ‘speculative,’ ‘imaginary,’ or ‘fanciful’ than that of ‘actual,’” we are arguably at a point of inflection. Courts are closely scrutinizing reasonable royalty patent damages claims. Recent Federal Circuit decisions have banned the so-called “25 percent rule,” limited the circumstances in which the entire market value rule can be applied and rejected the use of royalty rates taken from licenses that do not involve technology comparable to that at issue.

A point of inflection or a return to basics?

How does one isolate the value of intellectual property? The answer depends on the facts of the case. In some cases, licenses of the technology at issue or similar technologies provide the market’s valuation. In other cases where there are no data on royalty rates for comparable technologies, one approach is to analyze market data on prices, quantities and features. An expert may be able use benchmarks and compare prices and/or sales of an infringing product with prices and/or sales of products without the infringing feature. When data availability is not a constraint, hedonic pricing, a technique to statistically relate price to different features, can be used.

Similarly, if appropriate data are available, the economic expert can calculate substitution elasticities and estimate how substitutable the infringing feature is compared to the next-best alternative on the supply and/or demand side. Consumer surveys also can be used to determine the use of an infringing product or the reasons why customers purchased a given product. In some situations, a carefully designed consumer survey can simulate the marketplace to determine customers’ willingness to pay for a feature covered by the patented technology. 

Contributing Author

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Michael Keeley

Michael C. Keeley is a senior vice president of Cornerstone Research in the firm’s Menlo Park office. He has consulted and served as an expert...

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