Damages in Patent Litigation

Damages for patent infringement are governed by 35 USC §284 (1994). It states that damages are to be adequate to compensate the patent holder, which at minimum is a reasonable royalty. However, damages can also be based on the patent holder’s lost profits. Recovering lost profits is more difficult to prove in that the defendant must be a competitor of the patent holder, and the patent holder must prove that it lost the sales that the defendant made.

Accordingly, the predominant analysis of patent infringement damages is focused on what is a reasonable royalty. A reasonable royalty is a combination of the royalty base and the percentage of the royalty. For example, is the reasonable royalty 2% of the value of a subcomponent of the product, or .02% of the value of the whole product?

The courts have adopted a strategy called the “hypothetical negotiation” to formulate the reasonable royalty. In essence, the parties are to pretend they were in a negotiation as to the fair royalty rate. There are basically 14 issues to consider in the hypothetical negotiation that are discussed in the case Georgia-Pacific Corp. v United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir. 1971).

The problem with the hypothetical negotiation is that:

1. the parties can’t threaten to walk away,
2. it assumes infringement and validity,
3. it can be difficult to look back in time and try to capture the need for the product at the time of infringement (ex. CD burner for your computer), and
4. what if the patent holder did not want to license to a competitor?

These issues are not easily resolved. The court’s are doing their best to resolve these problems, but statistics show that mistakes are regularly being made.

If you would like to discuss this blog further or alternatively have questions relating to damages in patent litigation please be sure to give our specialist patent and trademark litigation attorney’s a call on:

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