April 18, 2012 Articles

The Increased Scrutiny of Reasonable Royalty Damages Awards

Because the patent holder bears the burden of proof, scrutiny may collide with the statutory mandate that patent holders receive no less than a reasonable royalty.

By Steven R. Hansen

In Uniloc USA Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), the Court of Appeals for the Federal Circuit signaled that reasonable royalty damages awards in patent cases would be held to a higher level of scrutiny than in the past. The court condemned the widely used "25 percent rule of thumb" for apportioning the profits accruing from sales of an infringing product between a patent holder and infringer and also clamped down on the use of the "entire market value" rule for determining the "base" to which a royalty percentage would be applied. Uniloc came on the heels of Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), which restricted the range of licenses that could be considered in performing a reasonable royalty analysis. While the decisions may be hailed as an effort to curb windfall damages awards, especially for seemingly "minor" improvement patents, they require a level of proof and analysis that may be difficult or, in some cases, impossible to meet. Moreover, because the patent holder bears the burden of proof on damages, the heightened scrutiny of damages proof may ultimately collide with the statutory mandate that patent holders receive no less than a reasonable royalty on a finding of infringement.

Reasonable Royalty Damages
Under 35 U.S.C. ยง 284, upon a finding of infringement, "the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty . . ." "A 'reasonable royalty' contemplates a hypothetical negotiation between a patentee and the infringer at the time before the infringement began." Riles v. Shell Exploration & Production Co., 298 F.3d 1302, 1311 (Fed. Cir. 2002). "The statute guarantees patentees a reasonable royalty even when they are unable to prove entitlement to lost profits or an established royalty rate." Id. While the statute may guarantee a reasonable royalty, "[t]he patentee bears the burden of proving damages." Uniloc, 632 F.3d at 1315.

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