Getting the full value of economic experts in IP litigation: Two types of patent damages claims

There are two leading methodologies to determine reasonable royalty: the Georgia-Pacific and analytical approaches

Expert witnesses can make or break your intellectual property litigation. This series addresses how to get the most out of an economic expert to establish plaintiff’s case for damages for infringement of its intellectual property. Today’s article focuses on patent infringement.

A successful patent infringement plaintiff establishes that the defendant sold a product or used a method that was patented by a plaintiff in a manner that harmed the plaintiff. A damage award to the plaintiff compensates for the harm. The award can be “in no event less than a reasonable royalty” for defendant’s use of the invention. At best, the plaintiff can recover “lost profits” damages, which are profits from sales the plaintiff could have made if not for the defendant’s infringement. To recover lost profits, the plaintiff must be selling products made using the patented invention and not simply be an owner of the patent not active in the marketplace (a non-practicing entity or “NPE,” sometimes termed “patent troll”). This distinction prevents penalizing a defendant for making sales the plaintiff could not have made.

Where demanded, a jury determines patent damage awards, or the court awards compensatory damages. The fact-finder can consider expert testimony in determining damages or reasonable royalty. The court can increase a compensatory award by up to three times for defendant’s willful infringement.

Determination of lost profits damages

To establish a claim for lost profits, a plaintiff must meet the test established in the Panduit Corp. v. Stahlin Bros. Fibre Works case, which requires plaintiff to establish:

  • Demand for the patented product
  • Absence of acceptable noninfringing substitutes
  • Plaintiff’s manufacturing and marketing capability to exploit demand
  • ‎The profit it would have made

Expert testimony generally establishes the Panduit conditions. Next, the expert models how the market would have behaved if defendant had never released the infringing product. The plaintiff recovers the amount of profits it would have made minus profits it actually made.

Determination of reasonable royalty rate

Where lost profit damages are not recoverable, the plaintiff is entitled to recover a “reasonable royalty,” representing the amount someone wanting to use the patented invention would have agreed to pay the patent owner and the owner would have accepted to license the invention. It is normally calculated as a percentage of the defendant’s sales that it would have paid the plaintiff for the privilege of using the invention, or simply as a flat sum. There are two leading methodologies to determine reasonable royalty.



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Georgia-Pacific hypothetical negotiation

The leading methodology was established in the Georgia-Pacific Corp. v. United States Plywood Corp. case. The reasonable royalty rate is determined by constructing a hypothetical negotiation for licensing the patent between the plaintiff and defendant at the time infringement began. The law presumes this hypothetical negotiation occurred and that the plaintiff, who ordinarily would not be required to license its invention, did so willingly. The following 15 factors are considered to determine a reasonably negotiated rate. Not all factors may apply, or with equal effect; however, the net result can never fall below the statutory minimum of the last factor:

  1. Royalties the patent owner received for licensing the patent
  2. Rates the licensee paid to use other comparable patents
  3. The license’s nature and scope
  4. The licensor’s established policy and marketing program to maintain its patent monopoly
  5. The licensor and licensee’s commercial relationship
  6. The effect of selling the patented specialty in promoting sales of the licensee’s other products, the invention’s existing value to the licensor as a sales generator of its non-patented items and the extent of such derivative or convoyed sales
  7. The patent’s duration and the license’s term
  8. The product’s established profitability, commercial success and current popularity
  9. The patent invention’s utility and advantages over old modes or devices used for working out similar results
  10. The nature of the patented invention, character of its commercial embodiment as owned and produced by the licensor and benefits to those who have used it
  11. How the infringer used the invention, and any evidence probative of that use’s value
  12. The portion of the profit or selling price customary to allow for use of the invention or analogous inventions
  13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks or significant features the infringer added
  14. Qualified experts’ opinion testimony
  15. The amount that a licensor (patent owner) and licensee (infringer) would have agreed upon (at the time infringement began) if both had been reasonably and voluntarily trying to reach an agreement

Using these factors, the expert will reach a royalty expressed as a percentage of the defendant’s sales (such as 5 percent reasonable royalty), a per unit amount (60 cents per widget) or a flat sum. That number is applied to the defendant’s infringing sales to derive a damages figure, and the court may require that the plaintiff establish a connection between the sales and the patented invention to avoid a windfall to the plaintiff. That figure is then adjusted for interest.

Analytical approach

The “analytical approach” is the second approved methodology for computing reasonable royalty damages. This approach, established in the TWM Manufacturing Co. v. Dura Corp. case, requires jurors to assess the defendant’s internal profit projections for the infringing product made at the time infringing sales began and apportion the projected profit between the parties as a percentage of the defendant’s sales. The percentage assessed to plaintiff is then applied to defendant’s sales dollars for the actual infringing sales to determine the total reasonable royalty damages. Although this method relies less on expert testimony, an expert can still be helpful to address aspects of the product market.

Contributing Author

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Devon Zastrow Newman

Devon Zastrow Newman is a shareholder in the Portland office of Schwabe, Williamson & Wyatt, P.C., where she leads the Intellectual Property Litigation Group. She...

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