Patent Infringement and Royalty Rates: Is Litigation a 'Deterrent'?

Article excerpt

JEL K41

Patent infringement cases require that a damages expert put forth a reasonable royalty calculation to assist the trier of fact in determining damages absent the ability of the patent holder to make the sales that the infringer made. Numerous factors affect the calculation of a reasonable royalty including the industry in which the patent holder operates, the market size for the product, the growth potential of the product, and so forth. Industry-wide averages can be a useful starting point in calculating a reasonable royalty as royalty rates in various industries exhibit distinctly different central tendencies. In this paper, we compare the results of recent Federal Appeals Court decisions involving royalty rate awards with royalty rate data from arm's-length non-litigation sources to see if litigation results in higher royalty rates.

The venue for patent infringement cases typically resides in federal court because patents are governed by federal statutes. Moreover, in 1982, the Court of Appeals for the Federal Circuit was created specifically to hear intellectual property infringement appeals. Over the years, the courts have provided guidance for determining damages in patent infringement litigation with the two most often cited examples being the Georgia-Pacific [Georgia-Pacific Corp. v. U.S. Plywood Corp. 318 F. Supp. 1166, 1121 (S.D.N.Y. 1970), modified, 446 F. 2d 295 (2nd Cir. 1971), cert. denied, 404 U. S. 870, 92 S.Ct. 105, 30L.Ed. 2d 114 (1971)] and Panduit [Panduit Corp. v. Stahlin Brothers Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)] decisions.

Each of these cases provides a starting point for expert witnesses in calculating patent infringement damages. The Georgia-Pacific Court identified 14 factors to be considered in calculating damages while the Panduit Court provided yet more guidance in this area. Regarding royalty calculations, the Panduit Court was very clear regarding the 'reasonableness' of those calculations as illustrated in the following excerpt: "The setting of a reasonable royalty after infringement cannot be treated, as it was here, as the equivalent of ordinary royalty negotiations among truly "willing" patent owners and licensees. That view would constitute a pretense that the infringement never happened. It would also make an election to infifnge a handy means for competitors to impose a "compulsory license" policy upon every patent owner." (1158) The Panduit Court makes it clear that the award of a reasonable royalty, one determined as a result of a hypothetical negotiation between a 'willing licensor/willing licensee,' would be insufficient to serve as a deterrent for future infringers.

The data for our analysis were obtained from U. …