Ongoing Royalties for Patent Infringement
53 Pages Posted: 29 May 2018
Date Written: November 2016
Section 283 of the Patent Act provides that, to prevent the ongoing infringement of a patent, courts “may grant injunctions in accordance with the principles of equity.” If the court decides that the issuance of an injunction is not appropriate, it may direct the parties to negotiate a royalty for the infringer’s future use of the patented technology. When such a negotiation fails, the court will impose an ongoing royalty that the infringer must pay. The U.S. Court of Appeals for the Federal Circuit has clarified that the calculus for an ongoing royalty differs from the calculus for a reasonable royalty typically awarded for past infringement, but it has not prescribed any particular methodology for a court to apply when determining an ongoing royalty. I conduct an empirical analysis of the courts’ decisions on ongoing royalties, which shows that a court-awarded ongoing royalty typically exceeds the jury-determined reasonable royalty imposed for past infringement. However, my analysis does not identify any single variable that affects the court’s determination of an ongoing royalty, which suggests that the courts have not yet developed a consistent methodology for determining an ongoing royalty. This article aims to fill that gap in the existing legal guidance by providing a simple yet rigorous economic methodology that courts can apply when determining an ongoing royalty. Because an ongoing royalty is an equitable remedy, awarded in lieu of a permanent injunction, no jury needs to be involved in determining the ongoing royalty. Consequently, Daubert and its progeny are not implicated (or, at the very least, the role of Daubert differs from its role in cases in which a jury acts as the finder of fact). In addition, the rationale for the entire market value rule (EMVR) — namely, avoiding jury confusion because of a large damage base — is inapplicable when calculating an ongoing royalty. When determining an ongoing royalty for the prospective use of a patented technology, courts can apply a methodology similar to that used to calculate a reasonable royalty. Courts need to consider the changes in economic circumstances from the time of first infringement to the time of the jury’s verdict and then determine how those changes affect the hypothetical negotiation for an ongoing royalty. In economic terms, courts should examine how the information that became available after the first infringement affects the bargaining range for the use of the patent or patent portfolio. That is, courts need to identify any changes in the patent holder’s minimum willingness to accept and the infringer’s maximum wiliness to pay. Next, courts need to examine whether the parties’ relative bargaining positions have changed (compared to their bargaining positions at the time of first infringement) to determine a point royalty within the bargaining range. I show that, although the court’s determination of an ongoing royalty will be fact-specific and will vary on the basis of the specific circumstances of each case, the changes in the economic conditions between the time of first infringement and the time of the hypothetical negotiation for an ongoing royalty will typically support the award of an ongoing royalty that exceeds the reasonable royalty for past infringement. An ongoing royalty that exceeds the reasonable royalty for past infringement should not be confused with an award of enhanced damages for willful infringement, which courts rarely award.
Keywords: Patent Act, Patents, Royalty
Suggested Citation: Suggested Citation