13
`
`product
`IT products such as personal computers and cell phones are covered by thousands of
`patents As discussed in Chapters 2 and 3 the notice function is poorly served in these
`circumstances making it unfeasible for manufacturers to identify all patents that might read on a
`14 Proponents of reform explain that patentees often seek damages based on a percentage
`product
`of the whole product even though the patent's inventive contribution relates to a very small
`aspect of the product One proposed solution calls for damages rules that apportion the
`award 15
`
`B
`
`Opposition to Damages Reform
`
`Panelists and commentators representing a variety of industries and business models
`strongly warned against adopting any change in damages law intended to systematically lower
`awards They argued that reducing the value of patents or injecting additional uncertainty and
`complexity into damages calculations would undermine the patent system's incentives to invest
`in risky research and development
`in promising industries Lower patent values would also
`rather than licensing they worried reducing incentives
`encourage infringement
`to invent and the
`opportunity to engage in technology transfer licensing 16
`
`13Cotter at 134 198 12 508 describing how hold up can occur in the context of a patent on a
`component Lemley at 253 5509 Most of the discussion here has been
`pointing in the direction
`that the problem with reasonable royalty damages is that they are too high in manycomponent
`cases for a variety ofreasons NERA Economic Consulting Comment at 1923 3909
`14See Chapter 2 Section Ill A Chapter 3 Section Ill
`15Doyle at 210 5509 it seems to me that apportionment just by itself as a rule standing alone is the
`only thing that anyone's come up with that has half a chance of focusing the discussion Schlicher at
`210 55 09 agreeing with Doyle explaining that the award should be an approximation of the value of
`the invention given its advantages Squires at 167 68 12508 where the inventive contribution is
`one of many components in a complex product or service
`then valuation should be correlated to the
`Information Industry Association Comment at 7 2509 Coalition for Patent
`component Software
`Fairness and Business Software Alliance Comment at 6 2509 Cf Lemley at 215 55 09
`courts
`in a reasonable royalty case they just don't do it very well Thomas
`always already do apportionment
`at 149 12508 Apportionment is part of our law
`Many of us believe that it's been unevenly
`
`industry
`
`applied
`
`16Rhodes at 196 211 09 if you decrease damages you do lose part of the deterrent effect against
`infringement Layne Farrar at 51 21109 observing that we don't want to
`encourage
`under the radar infringement PhRMA Comment at 14 1820 21009 BIO Comment at 2 51509
`NanoBusiness Alliance Comment 2509 Changes which reduce our ability to receive adequate
`compensation for infringement of those patents will make it difficult
`to protect our intellectual property
`in our field National Venture Capital Association Comment
`and therefore will discourage investment
`at 2 210 09 Epstein at 169 5409 I think passing significant changes to damages law is the fastest
`way to shut down the overall
`licensing and secondary patent marketplace
`
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`Panelists opposed to changes in damages law dispute the argument that recent awards
`indicate any problem They point out that median damage awards
`adjusted for inflation have
`5 million an amount that is modest compared to
`remained stable since 1995 at approximately
`litigation costs 17 They also explain that where a jury's damage award is excessive courts can
`18 The current legal rules are effective and flexible for addressing the wide
`and have corrected it
`variety of fact scenarios that arise in damages calculation they maintain In particular those
`
`influence real world licensing negotiations19 and allow
`factors track the considerations that
`consideration of the value added by a patented component in an infringing product 20
`
`C
`
`The Need to Review Damages Law
`
`Aggregated statistics alone cannot answer the question of whether patent damages law
`appropriately compensates patentees As one commentator cautioned relying too much on
`
`17PricewaterhouseCoopers supra note 8 at 2 Chart 2a reporting that the median annual damages
`t he median was
`award has remained fairly stable over the last 13 years and that
`3.9 million from
`1995 through 2000 and
`3.8 million from 2001through2007 in 2007 dollars See also
`supra note 5 at 2 Chart 2a reporting that between 1995 and 2009 annual
`PricewaterhouseCoopers
`5.2 million and ranged from 2.2 million to 10.5 million in 2009 dollars
`median awards averaged
`but showed no discemable trend over that period Janicke at 10 211 09 reporting a median jury
`verdict of 5.3 million for the period January 2005 through January 2009 PhRMA Comment at 17
`21009 Innovation Alliance Comment at 10 26 09
`
`18Innovation Alliance Comment at 10 26 09 Innovation Alliance Moving Beyond the Rhetoric Jwy
`Damage Verdicts in Patent Infringement Cases 2005 2007 2008 available at
`
`http www innovationalliance net files JURY 20DAMAGE 20VERDICTS
`20IN 20PATENT 20I
`NFRINGEMENT 20CASES 5B1 5D pdf reporting that from 2005 to 2007 there were 47 patent
`cases where the jury found damages of 2 million or more and in 12 cases the damage verdict was set
`judge found the damages were not supported by the evidence PhRMA Comment at 13
`aside or the trial
`17 210 09 Chief Judge Paul R Michel of the Court of Appeals for the Federal Circuit argued that
`judicial review of excessive jury awards shows that the system is working not that it is broken CJ
`Mark A Lemley A Structured Approach to
`Michel at 116 17 12 0508 but see Daralyn J Durie
`CLARK L REv 627 634 2010 surveying 267 cases in
`Calculating Reasonable Royalties 14 LEWIS
`which damages were awarded and finding only three in which the district court granted JMOL on the
`issue of damages
`
`place in actual
`
`19Rhodes at 237 38 21109 the Georgia Pacific factors mirror a lot of the considerations that take
`are trying to replicate what type of dynamic would exist in
`licensing negotiations and
`the hypothetical negotiation Johnson at 243 44 211 09 pharmaceutical company representative
`explaining that when his company sit s down to negotiate licences we use methodologies that are
`very much like the Georgia Pacific factors
`
`20Johnson at 268 21109 pharmaceutical company representative suggesting that the award should be
`based on compar ing the invention with its closest non infringing altemative PhRMA Comment at
`20 210 09 when the patented invention is a small component of a product
`a reasonable royalty
`would be determined by assessing the value to the infringer of using the patented invention over the
`closest non infringing substitute
`
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`medians tell s you very little about
`the awards that matter most those for the very few very
`valuable inventions 21 Moreover it
`is an impossible and unproductive task to attempt to
`in the sense that they made a patent holder
`detem1ine whether a sampling of awards is incorrect
`better or worse off in court
`than it would have been in the marketplace 22
`
`That said a review of the available statistics on reasonable royalty awards combined
`with the recent controversy in the patent community suggests that a study of the relationship
`between the legal rules governing damages and the economic principles that should guide
`damages calculations would be beneficial On the one hand it
`to ensure that the laws
`governing patent damage awards protect incentives
`to invent and innovate by affording
`compensation equal to the loss caused by infringement On the other hand recent very large
`damage awards for minor components of complex products and dramatic industryspecific
`litigation do raise questions of whether damages law is sufficiently
`increases in patent
`economically grounded The question seems most pressing in that subset of cases where the
`invention is one component of a complex product Some panelists asserted that excessive
`reasonable royalty awards result from a failure to use economically correct approaches to
`calculation and legal rules that obscure the effort to match damage awards to the economic
`values of inventions 23
`
`is essential
`
`III
`
`OVERVIEW OF REASO ABLE ROYALTY DAMAGES LAW
`
`Section 284 of the patent statute mandates that patentees recover damages adequate to
`less than a reasonable royalty for the use made
`compensate for the infringement but in no event
`24 A reasonable royalty is available as a remedy in all cases
`of the invention by the infringer
`where the patentee has not proven entitlement
`to lost profits caused by the infringement 25
`Reasonable royalties may be awarded to a patent owner that was injured and competed but was
`unable to establish lost sales one that licensed exclusively or one that
`licensed broadly leading
`one author to call them a catch all category of patent damages 26
`
`21John Schlicher Comment at 39 5 1509
`
`22Douglas G Kidder
`
`Vincent E O'Brien Comment at 1 5 509
`
`23Schlicher Comment at 4 38 5 1509 see also NERA Economic Consulting Comment at 1920
`39 09 discussing specific unreliable approaches
`to determining reasonable royalty damages
`2435 USC 284
`25Rite Hite Corp v Kelley Co 56 F3d 1538 1554 Fed Cir 1995 A patentee is entitled to no less
`than a reasonable royalty on an infringer's sales for which the patentee has not established entitlement
`lost profits en bane JOHN M SKENYON CHRISTOPHER S MARCHESE
`JOHN LAND PATENT
`DA AGES LAW AND PRACTICE 13 2008
`
`to
`
`26SKENYON et al supra note 25 32 at 33
`
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`Courts invoke the hypothetical negotiation framework when calculating reasonable royalty
`damages The seminal case Georgia Pacific Corp v United States Plywood Corp described the
`proper measure of such damages The amount that a licensor
`such as the patentee and a
`such as the infringer would have agreed upon at the time the infringement began if
`licensee
`both had been reasonably and voluntarily trying to reach an agreement 27 The case law
`recognizes that the central tenet of this framework is the willing licensor willing licensee model
`under which the awarded amount must be acceptable to both parties 28 The royalty must
`adequately compensate the patentee for permitting the use and still
`leave the infringer an
`appropriate level of anticipated profits from using the invention 29 As discussed below however
`some recent cases seem to reject or ignore that the requirement of a willing licensee places an
`upper bound on reasonable royalty damages 30
`
`Courts apply two assumptions when implementing the hypothetical negotiation First the
`finder of fact must assume that the hypothetical negotiation takes place at the time the
`infringement began This timing determines the information available to the parties during the
`negotiation 31 Thus in setting a reasonable royalty rate considerations such as the infringer's
`to be determined not on the basis of a hindsight
`expected profit and available alternatives
`evaluation of what actually happened but on the basis of what
`the parties to the hypothetical
`32 Subsequent events
`license negotiations would have considered at the time of the negotiations
`a book of wisdom shedding light on the expectations
`may be considered as evidence
`
`that
`
`are
`
`27Georgia Pacific Corp v United States Plywood Corp 318 F Supp 1116 1120 SDN Y 1970
`modified and aff'd 446 F2d 295 2d Cir 1971 Chapter 7 Section II lists the Georgia Pacific factors
`
`28See eg Lucent Techs Inc v Gateway Inc 580 F3d 1301 1325 Fed Cir 2009
`
`The hypothetical
`negotiation tries as best as possible to recreate the ex ante licensing negotiation scenario and to describe
`the resulting agreement
`
`29 Applied Med Res Corp v US Surgical Corp 435 F3d 1356 1361 Fed Cir 2006 A reasonable
`use or sell a patented article as a
`royalty is the amount that a person desiring to manufacture
`business proposition would be willing to pay as a royalty and yet be able to make
`use or sell the
`quoting Trans World Mfg Corp v Al Nyman
`patented article in the market at a reasonable profit
`Sons Inc 750 F2d 1552 1568 Fed Cir1984
`
`30See Section IV infi a Monsanto Co v Ralph 382 F3d 1374 1383 Fed Cir 2004 rejecting
`infringer's argument that a reasonable royalty deduced through a hypothetical negotiation process can
`
`never be set so high that no rational selfinterested wealth maximizing infringer acting ex ante would
`have ever agreed to it
`
`31 Riles v Shell Exploration and Prod Co 298 F3d 1302 1313 Fed Cir 2002 reasonable royalty
`determination must relate to the time infringement occurred and not be an after the fact assessment
`Unisplay SA v American Elec Sign Co 69 F3d 512 518 Fed Cir 1995 rejecting a royalty based
`
`on evidence oflikely value at time of trial
`
`32Hanson v Alpine Valley Ski Area Inc 718 F2d 1075 1081 Fed Cir 1983
`
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`would have guided the parties during negotiation 33 but the focus remains on the value at the time
`infringement began
`
`Second courts require the finder of fact to assume that at the time of the negotiation the
`parties know with certainty that the patent is valid and infringed by the defendant's product or
`process 34 This assumption ensures that the patentee having incurred the risk and burden of trial
`and prevailed is fully compensated 35 As one panelist explained if the hypothetical negotiation
`incorporated the risk that the patentee might lose on liability the damages award would
`effectively discount twice for the legal risk The patentee would have run the legal risk once
`by going through trial
`to a judgment and then had its recovery discounted by the legal risk in the
`determination of the reasonable royalty36
`
`IV CONCERNS WITH THE HYPOTHETICAL NEGOTIATION FRAMEWORK
`
`As discussed in Chapter 4 the goal of compensatory damages is to put the patentee in the
`position it would have been but for the infringement by providing the market reward for the
`invention The case law rightly equates this goal with the statutory mandate that the patentee
`damages adequate to compensate for the infringement The law allows a patentee to
`receive
`show lost profits caused by the infringement And as discussed in Chapter 5 the law should
`in creating the but for world so that they can be fully compensated
`allow patentees flexibility
`
`However when a patentee fails to prove lost profits caused by infringement his legal
`redress is limited to compensation for the lost opportunity to license the infringer It is the return
`available from the right to license the patent that is injured in this case not the return from the
`exclusive opportunity to sell a product incorporating the patented invention A patentee who
`would not have lost sales or suffered other direct damages from infringement would rationally
`
`33Sinclair Refining Co v Jenkins Petroleum Co 289 US 689 698 1933 post infringement evidence
`represents a book of wisdom providing experience that is then available to correct uncertain
`prophecy
`
`34See eg Lucent Techs 580 F3d at 1325
`patent claims are valid and infringed
`
`The hypothetical negotiation also assumes that the asserted
`
`settlement
`
`35See Rite Hite Corp v Kelley Co 774 F Supp 1514 1535 ED Wis 1991
`In negotiating a
`the typical patentee is constrained by the risk and expense of litigating a patent suit Risk and
`royalty negotiation because the patentee is presumed to know
`expense are not factors in the hypothetical
`that the patent is valid and infringed aff'd in part vacated in part on other grounds 56 F3d 1538
`1554 Fed Cir 1995 en bane
`
`36Cotter at 85 21109 See also id at 8385 Thomas F Cotter Patent Holdup Patent Remedies and
`Antitrust Responses 34 J CORP L 1151 1182 83
`n156 2009
`
`167
`
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`want to license the patent at the maximum rate the infringer would pay 37 That rate will not be
`more than the incremental value of the invention compared to available alternatives because at
`38 A patentee would be unwilling to
`higher rates the infringer would choose an alternative
`license at this rate only if it expected greater returns from marketing the invention itself But in
`that case the patentee would have a claim to lost profits Thus absent proof of lost profits
`caused by infringement the appropriate measure of compensatory damages is the hypothetical
`negotiation amount between a willing licensor and willing licensee
`
`Despite this reasoning two lines of cases allow or comment favorably on damage awards
`that arguably added to or exceeded a reasonable royalty determined using the hypothetical
`negotiation framework In the first
`line of cases the Federal Circuit affirmed awards adding to
`In HM Stickle v Heublein the court stated that a trial
`the hypothetical negotiation amount
`court may award an amount of damages greater than a reasonable royalty so that the award is
`In Maxwell v J Baker Inc the court upheld a
`adequate to compensate for the infringement
`damage award where the district court had instructed the jury to determine two awards
`a
`reasonable royalty award based on the hypothetical negotiation and an additional award to the
`extent needed to provide adequate compensation 40 The opinions do not however describe the
`economic basis of any harm that the patentee might have suffered for which compensation is
`required beyond the absence of royalty payments for the infringing use41
`
`39
`
`A second line of cases purports to apply the hypothetical negotiation framework but
`arguably allows damage awards exceeding amounts to which a willing licensee would have
`
`37The negotiated royalty between the patentee and licensee hypothetical or otherwise may be less than
`the maximum amount the licensee is willing to pay depending on the bargaining power of the parties
`See SUZANNE ScoTCHMER INNOVATION AND INCENTIVES 137 2004
`
`38See Chapter 7 Section III A
`39H M Stickle v Heublein Inc 716 F2d 1550 1563 Fed Cir 1983 see also King Instruments Corp
`v Perego 65 F3d 941 951 n6 Fed Cir 1995 listing discretionary awards of greater than a
`reasonable royalty awards but see
`reasonable royalty as one response to the problem of inadequate
`Mahurkar v CR Bard Inc 79 F3d 1572 1579 80 Fed Cir 1996 rejecting augmentation ofa
`reasonable royalty damage award to cover litigation expenses
`
`40Maxwell v J Baker Inc 86 F3d 1098 1109 10 Fed Cir 1996 The court also described the jury
`verdict as consistent with a reasonable royalty Id at 1110
`
`41Mark A Lemley Distinguishing Lost Profits from Reasonable Royalties 51 WY1 MARYL REV 655
`666 67 2009 identifying the damages calculation in the HM Stickle and Maxwell cases as
`problematic Brian J Love The Misuse of Reasonable Royalty Damages as a Patent Infringement
`Deterrent 74 Mo L REV 909 920 2009 criticizing Maxwell decision for allowing damage award that
`was double what a jury identified as a reasonable royalty
`
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`42
`
`Inc v Wal Mart Stores Inc 43
`agreed
`In Golight
`the Federal Circuit affirmed a reasonable
`royalty award that was nearly four times greater than the infringer's forecasted profit The court
`explained that t here is no rule that a royalty be no higher than the infringer's net profit
`margin 44 In Monsanto v McF arling and Monsanto v Ralph the Federal Circuit affirmed a
`single use royalty rate that made it more expensive for a farmer to save infringing soybean seeds
`from crops that he grew and replant them than it would have been to buy new seeds and plant
`that licensing offer and buy new seeds
`those 45 Certainly a willing licensee farmer would reject
`instead 46
`
`The cases identify two concerns that may motivate courts to allow damage awards beyond
`what a willing licensor and licensee would have agreed to in a hypothetical negotiation
`counterfactual nature of the hypothetical negotiation and the insufficient deterrent to
`infringement provided by reasonable royalty damages As described below these concerns do
`
`the
`
`recent cases have highlighted that as a legal matter reasonable royalty
`420ne commentator notes that
`awards may exceed the amount the parties would have agreed to in the hypothetical negotiation
`He
`explains that such decisions make no economic sense Cotter supra note 36 at 1185 n163 citing
`Mars Inc v Coin Acceptors Inc 527 F3d 1359 Fed Cir 2008 Golight Inc v Wal Mart Stores
`Inc 355 F3d 1327 Fed Cir 2004 and Monsanto Co v Ralph 382 F3d 1374 Fed Cir 2004 See
`also Amy L Landers Let the Games Begin Incentives to Innovation in the New Economy of Intellectual
`Property Law 46 SANTA CLARA L REv 307 347 354 2006 describing Ralph and Golight cases as
`ignoring constraints that the requirement of a willing licensor should place on damage awards Love
`supra note 41 at 918 19 criticizing Monsanto cases for awarding inflated damages that were higher than
`the purchase price of seeds
`
`43355 F 3d 1327 Fed Cir 2004
`
`44ld at 1338 quoting State Indus Inc v MorFlo Indus Inc 883 F2d 1573 1580 Fed Cir1989
`rejecting defendant's contention that the royalty award left Wal Mart selling the accused product well
`should be capped at Wal Mart's profit forecast for the product and explaining that
`below cost and
`defendant's evidence showed what it might have preferred to pay which is not the test for damages
`See also Mars 527 F 3d at 1373
`stating an infringer may be liable for damages
`that exceed the
`amount that the infringer could have paid to avoid infringement and rejecting counter argument as
`wrong as a matter of law Chapter 7 Section Ill A discussing Mars and the role of alternative
`technologies in the hypothetical negotiation
`
`45Monsanto Co v Mcfarling 488 F3d 973 978 81 Fed Cir 2007 affirming 40 royalty per bag of
`26 and 29 Monsanto Co v Ralph 382 F3d 1374 1384 Fed Cir
`soybean seed costing between
`2004 affirming royalties of 5255 per bag of soybeans The court applied the reasonable royalty
`damage award in both cases to every bag of infringing seed replanted over a two year period of
`infringement The royalty was based on a single planting of infringing seeds so it did not encompass
`right to save and grow multiple generations of seeds Thus the damages royalty is analogous to the
`purchase of a bag of seed and not an unlimited license to grow multiple generations of seed McFarling
`488 F3d at 977 981 Ralph 382 F 3d at 1383 describing damage award of52 55 per bag of saved seed
`reasonable royalties for licenses to save and replant for a single year
`46See additional discussion of Ralph in Section IVA infra
`
`the
`
`as
`
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`not justify inflating the reasonable royalty award beyond the maximum amount a willing licensee
`would have paid assuming a valid and infringed patent Doing so can overcompensate
`patentees
`by awarding more than the economic value of the invention which leads to the problems
`described in Chapters 2 and 4
`
`A
`
`The Counterfactual Nature of the Hypothetical Negotiation
`
`The case law and some commentators and panelists worry that due to its counterfactual
`nature the hypothetical negotiation is unrcliablc 47 The Federal Circuit has characterized the
`notion of a voluntary agreement between parties in litigation as absurd48 and a pretense that
`the infringement never happened 49 Indeed the fact
`that the parties have litigated the matter
`is evidence of their inability to reach agreement on payments for use of the patented
`through trial
`These points are of course true and they raise many practical
`technology
`issues for
`implementing the hypothetical negotiation which are discussed in Chapter 7 Determining an
`accurate reasonable royalty award to fully compensate a patentee can be very difficult But the
`
`rather than reaching a licensing agreement does not
`that the parties litigated through trial
`fact
`justify giving short shrift to the willing licensor willing licensee model or inflating reasonable
`royalty damages beyond the economic value of the invention
`
`There are two reasons why the parties may have failed to reach agreement before trial
`where both otherwise would have been open to a licensing arrangement Neither should
`undermine the hypothetical negotiation analysis First one or both parties could have had
`unrealistic expectations about the likely size of the reasonable royalty award The patentee may
`overvalue the invention or the infringer may undervalue
`it Since one would expect a license in
`is appropriate for the court to award a
`this situation but for one party's imperfect
`information it
`reasonable royalty based upon information offered by the parties about
`the value of the invention
`50
`to set the award based on the expectations of more realistic negotiators
`
`It falls to the court
`
`See eg
`47Panelists worried about the ability offactfinders to implement the hypothetical negotiation
`Rooklidge at 15758 5509 discussing how results from mock trials suggested that juries were not
`constrained by the structure of the hypothetical negotiation in setting an award Robinson at 146
`21109 asking whether th is artificial
`legal construct really resonates to a typical juror Thomas at
`146 12508 One of the big questions now is ls th e hypothetical negotiation framework essentially
`useless
`
`48Rite Hite Corp v Kelley Co 56 F3d 1538 1554 Fed Cir 1995 en bane
`
`49Panduit Corp v Stahlin Bros Fibre Works Inc 575 F2d 1152 1158
`50See Roger D Blair
`Thomas F Cotter Rethinking Patent Damages 10 TEX lNTELL PROP L J 1 76
`2001 Vincent E O'Brien Economics and Key Patent Damages Cases 9 U BALT lNTELL PROP LJ
`1 27 2000 criticizing Rite Hite for justifying a high royalty on the basis that the patentee did not wish
`to grant a license
`
`6th Cir 1978
`
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`Second even if the parties had similarviews on the value of the invention they may have
`had very different views on the validity and infringement of the patent that made them unable to
`compromise on a litigation risk discount for the reasonable royalty Again it appropriately falls
`to the court to resolve the patent merits and award damages based on ascertained validity and
`in either circumstance does not make it
`infringement 51 The parties failure to reach agreement
`necessary to supplement the hypothetical negotiation amount or award more than a willing
`licensee would pay assuming validity and infringement
`to fully compensate the patentee
`
`important source of courts unease with the willing licensor willing licensee
`Another
`the maximum royalty the infringer
`is a concern that the patentee would never accept
`model
`would have paid in a hypothetical negotiation In some cases courts have been willing to
`determine reasonable royalty damages based on what
`the patentee would have accepted with less
`the infringer would pay 52 That might happen when the patentee could make
`concern for what
`more selling the invention exclusively than through licensing but the patentee fails to prove lost
`profits or chooses not to One treatise explains that
`in the vast majority of damage cases today
`the reasonable royalty damages awarded are rarely the floor represented by a negotiated
`royalty 53 The Federal Circuit the treatise continues
`routinely affirms reasonable royalty
`awards that are obviously well in excess of what
`the parties would have actually negotiated 54
`Arguably in these circumstances the court considers a reasonable royalty as not just the award
`the money awarded to the patent owner however it
`based on the hypothetical negotiation but as
`i e lost
`is computed in cases where the patent owner is unable to prove actual damages
`profits 55 One commentator posits that courts have expanded reasonable royalty damages
`beyond the hypothetical negotiation amount in order to adequately compensate patentees that fail
`to meet overly rigorous requirements for proving lost profits damages 56
`
`51See eg Lucent Techs Inc v Gateway Inc 580 F3d 1301 1325 Fed Cir 2009
`negotiation also assumes that the asserted patent claims are valid and infringed
`
`The hypothetical
`
`52See discussion of Monsanto Co v Ralph infra notes 5963
`
`53SKENYON et al supra note 25 32 at 33
`
`54SKENYON et al supra note 25 35 at 318 These include a number of cases in which the award was
`from the infringing sales SmithKline Diagnostics Inc v
`a substantial percentage of the revenues
`Helena Labs Corp 926 F2d 1161 1168 Fed Cir 1991 refusing to award a competing patentee lost
`profits but upholding a reasonable royalty award of25 of the infringing product's sales price Minco
`Inc v Combustion Eng'g Inc 95 F3d 1109 1119 Fed Cir 1996 emphasizing that the patentee and
`infringer competed head to head in awarding reasonable royalty of20 of the infringer's sales price
`for sales beyond 95 of the patentee's production capacity
`
`55SKENYON et al supra note 25 32 at 33
`
`56Lemley supra note 41 at 661 69 As discussed in Chapter 5 the law of lost profits must be flexible in
`allowing patentees to demonstrate the harm caused by infringement Rigid rules that reject claims to lost
`profits damages based on a lack of precision in proving the amount of damages rather than entitlement
`to
`them undermines the ability of damages law to fully compensate patentees See id at 657 61
`
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`Concerns about compensating unproven lost profits damages should not be allowed to
`inflate a reasonable royalty damage award beyond the maximum amount that a willing licensee
`that maximum amount are based on
`would have paid Arguments that the patentee would reject
`an assumption that the patentee could have made more by not licensing which means it sold a
`product But if the patentee were better off selling or licensing the invention exclusively it
`should be entitled to damages based on lost profits When a patentee has failed or chosen not to
`allowing amorphous or unproven claims of harm to override the
`prove its lost profits
`hypothetical negotiation's requirement of a willing licensee risks damage awards that are
`to the economic value of the invention 58 This result misaligns the patent system
`unconnected
`and competition policy by overcompensating patentees compared to a market absent
`
`57
`
`infringement
`
`Monsanto v Ralph59 illustrates how reasonable royalty calculations that reject the
`requirement of a willing licensee can overcompensate
`patentees whose harm is better measured
`through lost profits Monsanto developed and patented a series of Roundup Ready seeds that
`they not save and replant harvested seeds Ralph did just
`sold to farmers with the restriction that
`that however and infringed Monsanto's patents Each time the farmer replanted a bag of saved
`seed Monsanto and its distributors lost a sale Thus satisfying patent law's overarching goal of
`putting Monsanto in the position it would have been but for the infringement should have
`involved calculating its lost profits based on the number of saved bags 60
`In spite of this
`Monsanto pursued and the Federal Circuit affirmed a reasonable royalty damage award of about
`55 applied to each bag of saved infringing soybean seed That royalty significantly exceeded
`25 cost per bag of new seed the amount a willing licensee would have paid
`the approximately
`and presumably any profits that Monsanto lost due to the infringement 61
`
`it
`
`570ne commentator has asse1ied that some patentees that have lost profits claims choose to pursue
`reasonable royalty damages in hope ofa larger award Lemley supra note 41 at 667 68 Reasonable
`royalty has now become the more prevalent measurement of damages Levko at 19 21109 Aron
`Levko 2009 Patent Damages Study PreliminmyResults 9 presented at FTC llearing The Evolving IP
`Marketplace Feb 11 2009 available at
`http www ftc gov bc workshops ipmarketplace feb 11docs alevko pdf
`for 54 of awards since 2000 an increase over prior years
`royalties account
`
`reporting that reasonable
`
`58Lemley supra note 41 at 667 68 By importing compensation concepts from lost profits into the
`reasonable royalty context without importing the strict elements of proof these courts have turned the
`
`reasonable royalty from a floor on patent damages designed to avoid undercompensation into a windfall
`that overcompensates patentees
`
`59382 F3d 1374 Fed Cir 2004
`
`60Ralph did argue that lost profits were shown and those should have been the measure of damages The
`Id at 1383
`court did not respond to this argument
`
`61 fd at 1377 79 see n45 supra
`
`172
`
`178 of 309
`
`SNY ITC1284883
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`

`

`The court reached this result by accepting the limits of the hypothetical negotiation
`where Monsanto was unwilling to license farmers to save and replant seed at any price 62
`Those limits freed the court
`to affim1 a reasonable royalty award without concern for whether a
`willing licensee would have paid it 63 But the impossibility of identifying a bargain between a
`willing licensor and willing licensee in this case stems not from a flaw in the hypothetical
`negotiation framework but from the fact that lost profits are the more appropriate measure of
`damages for patentees that wish to market their inventions e