Ways To Calculate Damages In SEP Litigation

The Georgia-Pacific Corp. v. United States Plywood Corp. case underlines 5 factors for determining reasonable royalty. These are: 

Factor 1: The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. 

Factor 2: The rates paid by the licensee for the use of other patents comparable to the patent in suit. 

Factor 3: The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold. 

Factor 4: The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. 

Factor 5: The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. 

Factor 6: The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales. 

Factor 7: The duration of the patent and the term of the license. 

Factor 8: The established profitability of the product made under the patent; its commercial success; and its current popularity. 

Factor 9: The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. 

Factor 10: The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. 

Factor 11: The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. 

Factor 12: The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions. 

Factor 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 or improvements added by the infringer. 

Factor 14: The opinion testimony of qualified experts. 

Factor 15: The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee—who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention—would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license. 

Source: https://www.analysisgroup.com/globalassets/content/insights/publishing/stlr_hypothetical_negotiation_royalty_damages_jarosz_chapman.pdf 

When determining the appropriate license fee to be paid, comparable license is an aspect to consider. It simply means referring to any similar license fees decided in the past to arrive at a reasonable royalty fee. For comparison purposes, various similar agreements must be studied before deciding on a suitable fee. 

Using the incremental value rule to determine the FRAND value has been recommended by the U.S FTC. It implies an incremental increase in the value of the SEP basis the number of contributions made by it to the standard to which the standard belongs. This approach was rejected by Judge Robart in the Microsoft v/s Motorola case as it lacked “real-world applicability”. Besides, he pointed out that it exists partly in Factor 9 of Georgia-Pacific. 

This approach involves defining the costs of implementing reasonable alternatives to an issued patent that could be adopted into the standard. Thereafter, this cost is to be divided by the number of infringing units to derive the maximum per unit royalty. This is based on the hypothesis that it does not make business sense for a licensee to pay an amount for a patent license that exceeds the expense required to adopt an alternative.  

Adopted in the Innovatio IP Ventures case by Judge Holderman, the top-down approach starts by calculating the average price of the identified royalty base and then computes the average profit earned by the maker on selling each unit. By doing so one can arrive at the part of the income the maker will have at their disposal to pay the royalty fee. This profit is then multiplied by the number of SEPs at issue and divided by the total number of SEPs in the standard.  

This traditional approach to calculating damages has largely been favoured by the federal circuits as the most suitable method to ensure that royalties are reasonable and non-discriminatory. Coined by Judge Randall Rader in the context of an evidentiary ruling, SSPPU stands for “smallest saleable patent-practicing unit”. Per this approach, the compensations should be based on the smallest unit or component that applies the patented technology. It was recently used by agencies in India (Ericsson) and China (Qualcomm) to decide whether the practice of charging royalties based on the profits earned from end products leads to unfair pricing.