Patent Value Apportionment Rules for Complex, Multi-Patent Products

Abstract

This paper has been accepted for publication in the Santa Clara University Computer & High Tech Law Journal.

The vast majority of the products developed by the IT industry are technologically complex, incorporating hundreds or thousands of different components, and many of these components read on an increasingly large number of patents held by a number of third parties. Assessing patent value when multiple, complementary patents held by different patent holders are involved is a complicated exercise, which may need to be carried out in both litigation and non-litigation contexts. US federal patent law authorizes a patentee who successfully proves that its patent has been infringed to recover profits lost or damages that are due to the infringer’s unlawful conduct, “but in no event less than a reasonable royalty” for the use of the patented invention. A royalty payment is comprised of two components: a royalty rate and a base upon which the rate is applied, typically referred to as the royalty base. Defining a reasonable royalty rate is in many ways an art as opposed to a science, and as such rates are perennially the subject of heated debate. But the royalty base is not free from controversy. Given the growing complexity of products, whether the royalty base for a given patent should include only the component(s) of the product that the patent directly reads on or the product as a whole seems an important question, which has been hotly debated in courts, but also by scholars and policy-makers. Against this background, the objective of this paper is not to review the case law of US federal courts dealing with apportionment, a task for which we are not qualified, but rather to offer some thoughts on the economic principles or rules that can be applied to address the determination of the royalty base and rate in concrete situations.

Keywords: Patents, Intellectual Property, IP, Apportionment, Patent Damages, Reasonably Royalty, Lost Profits, Patent Valuation, Royalty Base, Royalty Rate, Licensing, Patent Litigation

JEL Classification: D54, K11, K40, G12, L63, O34