Determinants of Patent Value in U.S. Litigation

3) To what extent would the accused infringer expect to make additional profits if it were granted a license to the patented technology? In addition to non-infringing alternatives and historical license agreements, the courts often allow evidence on both: a) the amount of profit that the alleged infringer stands to earn as a result of employing the patented technology, and b) the portion of that realizable profit that should be credited to the patented invention as distinguished from non-patented elements (e.g., the manufacturing process, business risks, or significant features or improvements added by the alleged infringer). If the profitability of the accused products is unknown to the prospective litigant, an estimate of firm and/or industry profitability may be obtained from EDGAR online (www.edgaronline.com), the Cost of Capital Yearbook published by Morningstar (www.morningstar.com), or Annual Statement Studies published by The Risk Management Association (www.rmahq.org). The portion of realizable profits that should be credited to the patented invention often requires an evaluation of qualitative business issues.

4) What other qualitative business issues would have been considered by the parties negotiating the license? In addition to the three quantitative assessments discussed above, a reasonable royalty should also consider any qualitative factors that might have affected the economic and bargaining positions of the plaintiff and defendant at the time of the hypothetical negotiation, including, but not necessarily limited to, those identified in the Georgia-Pacific case. While the specifics of the prospective infringement will ultimately dictate which qualitative factors should be considered and the relative impact of those factors on the determination of a reasonable royalty, some of the qualitative aspects of the hypothetical negotiation can be framed by the following questions:

• What is the commercial relationship between the parties to the negotiation? Are the parties considered competitors, and would granting a license to the alleged infringer negatively impact the business of the patent holder in any way?
• What is the nature of the license that would be granted to the alleged infringer? Would the alleged infringer's rights to the technology be exclusive or non-exclusive, and/or would there be any restrictions to the geographic scope of the license?
• What is the patent holder's established licensing policy? Does the patent holder have a history of actively licensing its technologies, or has it attempted to maintain its patent monopoly by not licensing its technologies?
• What contributions does the alleged infringer have to make in order to generate profits from the patented technology? What investments in terms of other technologies, financial capital, human capital, know-how, etc. must be contributed by the alleged infringer?
• What benefits are provided for by the patents relative to any other non-patented ways of accomplishing a similar result? Would the parties to the negotiation consider the benefits provided for by the patent a marginal or radical improvement?

The questions contemplated in this article are intended to introduce prospective litigants to some of the potential determinants of patent value in a litigation setting. A comprehensive evaluation of all considerations evaluated by the courts in determining patent infringement damages is beyond the scope of this article. Rather, by identifying and discussing several common issues that are often assessed by the courts, the authors hope to have provided some insight to business leaders wishing to make thoughtful and well-reasoned business decisions.

Part One of this series discussed reasonable royalty damages and the questions that a prospective litigant can ask to evaluate its litigation exposure. This month's installment continues the discussion of those questions.