Four Principles for Calculating Reasonable Royalties in Patent Infringement Litigation
31 Pages Posted: 10 Jan 2011 Last revised: 27 Feb 2011
Date Written: January 6, 2011
In recent years, juries in some patent infringement suits have awarded prevailing patentees "reasonable royalty" damages in the eight-, nine-, and even ten-figure range. Though not all of these awards have been upheld following postjudgment motions or on appeal, concern over the magnitude and frequency of such awards has led to calls for the reform of various practices relating to the calculation of patent damages. Other voices, not surprisingly, have either defended the current system or, at the very least, expressed reservations over the need for significant changes. Underlying some of these debates are fundamental differences of opinion concerning the risks of so-called "patent holdup" resulting from the discovery, ex post, that a firm has infringed (often inadvertently) a patent reading on one of perhaps thousands of components embodied in a complex end product. Moreover, ever since the Supreme Court’s decision in eBay Inc. v. MercExchange, L.L.C. freed district courts from the requirement of automatically awarding injunctions to prevailing patent owners, damages law has taken on a new twist as courts have struggled to define the proper methodology for calculating royalties not only for past infringement but, in some instances, for the prospective, postjudgment use of a patented invention.
In this Essay, I will argue that a rational system for awarding reasonable royalties for patent infringement would be premised on four related principles: (1) that in awarding retrospective damages (damages for past acts of infringement) courts should take the scope of substantive patent law as fixed; (2) that the baseline damages recovery for prevailing patent owners should be the amount that restores them to the position they would have enjoyed, but for the infringement; (3) that courts should depart from this baseline when doing so is necessary to attain optimal deterrence; and (4) that, in attempting to replicate the license the parties would have negotiated ex ante but for the infringement, subject to some exceptions courts should authorize the consideration of factors that the parties realistically would have used, and should exclude consideration of certain other factors that lack a sound basis.
Keywords: patents, remedies, royalties, damages
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