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Reasonable Royalties

This document summarizes empirical data on reasonable royalties awarded in patent cases. It finds that in the US, reasonable royalties make up the majority of damages awarded and median awards are in the millions. Data from other countries shows reasonable royalties are also common but awards tend to be lower, especially in Japan where most awards are under $2 million. The document also outlines the theoretical purpose of reasonable royalties as restoring the patent owner's position and preserving patent incentives.

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0% found this document useful (0 votes)

91 views44 pages

Reasonable Royalties

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Vartika Prasad

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Download as PDF, TXT or read online on Scribd

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1

Reasonable Royalties

Thomas F. Cotter, John M. Golden, Oskar Liivak, Brian J. Love,

Norman V. Siebrasse, Masabumi Suzuki, and David O. Taylor

1.1 PRELIMINARY MATTERS

This section will briefly describe (a) the extent to which reasonable royalties are
awarded in the major jurisdictions for which descriptive statistics are available; (b)
the principal theoretical justifications for awarding them; and (c) at a very general
level, the principal methods for calculating them.

1.1.1 Empirical Literature

The empirical literature on reasonable royalties consists largely of descriptive statis-
tics reporting median, average, or largest-ever patent damages awards for selected
countries. These statistics provide insight into different jurisdictions’ approaches
and priorities related to awarding damages.
The most extensive literature on this subject pertains to the United States.
According to a 2014 Lex Machina Patent Litigation Damages Report, for example,
in 708 U.S. patent cases filed and terminated from 2000 to 2013, district courts
awarded over $8 billion in reasonable royalties, slightly less than $3 billion in lost
profits, and slightly more than $2 billion in compensatory lump sum damages for
which “the specific sub-type (reasonable royalties or lost profits) is not specified or
the apportionment of the award between sub-types is not specified.”1 Lex Machina’s
list of median reasonable royalty, lost profit, and compensatory lump sum awards
from 2000 to 2013 indicates that reasonable royalty awards are more common than
lost profits awards, but that in some years the median lost profit award exceeded the
median reasonable royalty award.2 Lex Machina’s Patent Litigation Year in Review
2016 reports median reasonable royalty damages in 2016 of $3,552,600, based on

1
Byrd et al. 2014, 1–4.
2
See id. at 6.

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Reasonable Royalties 7

thirty-six cases; median lost profits damages of $1,631,231, based on eight cases; and
median “Other/Mixed Damages” of $67,785, based on eighteen cases.3
PricewaterhouseCoopers (PwC) also publishes annual patent litigation reports.
However, PwC reports median patent damages awards in the United States (exclud-
ing summary and default judgments) without separately accounting for lost profits
and reasonable royalties. Interestingly, PwC’s reported median award for 1997–2016
($5.8 million in 2016 dollars) is considerably higher than the medians reported by
Lex Machina for 2000–2015, most likely due to methodological differences between
the two studies.4 PwC also reports that in 80 percent of the cases in which courts
awarded damages to practicing entities from 2007 to 2016 they awarded reasonable
royalties.5 (Courts awarded lost profits in 40 percent of these cases; the percentages
exceed 100 percent because courts sometimes award lost profits on a portion of
infringing sales and reasonable royalties on the remainder.) Further, although
nonpracticing entities (NPEs) had a lower win rate than practicing entities during
the time period studied, the median award to NPEs that prevailed at trial from 2012
to 2016 was almost four times the median award to practicing entities ($15.7 million
versus $4.1 million).6 Awards to NPEs almost always consist of reasonable royalties,
rather than lost profits.
For other countries, less data is available, and the data that is available is
generally less precise. Studies of Japanese damages awards indicate that reason-
able royalty awards make up a plurality of all such awards7 but that the amounts
awarded tend to be low by U.S. standards. For example, according to a 2014 study
of all sixty-eight cases from January 1, 1999, to March 5, 2013, in which Japanese
courts awarded reasonable royalties, in only five cases did the award exceed
¥200,000,000 (equal to about U.S. $1.7 million).8 The royalty rate was 5 percent
in 28 percent of cases, 3 percent in 22 percent, and 10 percent in 16 percent (based
on the value of the infringer’s sales revenue from the infringing product). Like the
PwC studies of U.S. damages, the reports of which we are aware on average or
median damages awards in France do not distinguish between royalty and lost
3
See Howard & Maples 2016, 32.
4
For discussion of some differences in methodology, see Cotter & Golden 2018, 15 n.65.
5
We use the phrase “courts award” above even though in the majority of U.S. cases a jury awards
damages. A judge ultimately must decide whether or not to enter final judgment in accordance with
the verdict and the applicable rules of civil procedure.
6
See Barry et al. 2017, 9–11, 16.
7
See Matsunaka 2004, based on a review of all cases “published in the list of IPR related judgments on
the Supreme Court website, in which the right holder claimed damages relating to IP . . . and for
which judgment affirming all or part of the claim was rendered during the period from January 1, 1998,
to December 31, 2003,” reporting that reasonable royalty awards made up the plurality in both patent
(forty out of seventy-nine) and utility model (twenty-two out of forty-two) cases from 1999 to 2003.
8
Second Subcommittee of the Second Patent Committee 2014 (in Japanese); Cotter 2015 (discussing
this article). See also Nakamura 2014, 407–10 (listing all Japanese patent damages judgments from
January 1, 2003 to January 30, 2014); Yamaguchi 2016, 136 (reporting that there were thirteen first
instance patent damages judgments in 2014, the top one being in the amount of ¥1,568,040,000, equal
to about $13.3 million as of December 21, 2016).

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8 Thomas F. Cotter et al.

profits awards.9 In China, statutory damages predominate and awards of reason-

able royalties are comparatively rare.10

1.1.2 Theoretical Justifications

As noted in the Introduction, for purposes of this project we take the sub-
stantive law of patents as a given, and do not advise courts to use the law of
remedies to correct for perceived flaws in the substantive law. It follows from
this premise that, in general, the law of patent damages should work to
preserve the patent incentive, such as it is, by restoring the patent owner to
the position it would have occupied, but for the infringement. Consistent with
this rationale, courts and other observers often view reasonable royalty awards
as a substitute for the royalty the patent owner would have earned, and that the
infringer would have paid, absent the infringement. Commentators neverthe-
less sometimes express concern that such a standard threatens to encourage
infringement (and to discourage ex ante negotiation), since it leaves the
infringer no worse off for having infringed. This concern is particularly applic-
able if the royalty award is exactly the same as the royalty the patent owner
would have negotiated, if the infringement was intentional, and if the infringer
rationally could expect to avoid detection some nonzero percent of the time.11
In addition, the infringer may avoid some of the risks that a real-world licensee
would incur12 – though of course, if the infringer is sued, it may wind up
incurring substantial attorney fees, which it otherwise could have avoided, to
9
See, e.g., Dumont 2015 (reporting mean and median damages of €323,270 and €60,000, respectively,
based on analysis of “483 patent infringement suits encompassing 673 patents” filed in the Tribunal de
la grande instance de Paris from 2008 to 2013). But see République Française, Ministère du
Redressement Productifs 2014, 58, 154–56 (in a study comparing awards in France, Germany, and
the United Kingdom from January 1, 2010 to August 1, 2013, and believed to cover approximately
25 percent of all decisions rendered during the applicable time periods, reporting inter alia that
36 percent of reasonable royalty awards in France and 50 percent of such awards in Germany were for
more than €100,000). For discussion of other French studies, see Cotter & Golden 2018, 17.
10
See Cotter & Golden 2018, 18 (citing literature).
11
This underdeterrence concern is likely to be less pronounced in cases in which the patent owner seeks
an award of lost profits rather than reasonable royalties, because a patent owner presumably would
seek lost profits only when it would have refused to license the infringer at all, due to the patent owner’s
or its exclusive licensee’s superior efficiency in producing the patented product. See Blair & Cotter
2005, 58. In addition, concerns that a reasonable royalty might discourage patent owners from
commercializing their technology, by not taking the value of commercialization efforts into account,
should be alleviated if the fact finder considers the impact such investments would have had on the
bargain the patentee would have struck ex ante, including its timing and the relevant information set;
the appropriate division of the value of the invention between the parties; and the selection of
appropriate comparator licenses. See infra Sections 1.3.1 through 1.3.6.
12
For example, in many countries a licensee may be able to avoid paying royalties once the patent is
invalidated, but it would be unable to recover back the royalties it paid prior to invalidation. By
contrast, an infringer who challenges validity can avoid paying royalties altogether if the patent is
invalidated (and in some countries with bifurcated infringement and validity proceedings, the
“infringer” may even be entitled to recover back any damages it paid prior to invalidation). In addition,

defend itself.13 To the extent that restorative damages risk underdeterring

infringement, the law in the United States already ensures that royalty awards
will not be exactly the same as what would have been negotiated, because the
royalty awards must be calculated based on an assumption that the patent in
question is valid and infringed, whereas in actual negotiations the parties
commonly reduce the royalty based on the possibility of invalidity and
noninfringement.14 In addition, to address the risk of underdeterrence due to
nondetection, policymakers could authorize courts to (1) grant injunctions, (2)
award the disgorgement of the infringer’s profits, (3) shift fees to the prevailing
party, (4) impose criminal sanctions, or (5) award enhanced damages. Other
chapters of this book discuss these alternatives in depth. However, as specifi-
cally discussed in Chapter 3, many countries decline to award enhanced or
punitive damages on public policy grounds – though in some of these coun-
tries, courts occasionally award reasonable royalties above the “normal” rate to
reflect the infringer’s avoidance of risks that a good-faith licensee would have
incurred.15
Alternatively, one could view reasonable royalties as a form of restitution, in
the sense that the award forces the infringer to pay back the royalty it wrongfully
withheld from the patentee.16 Whether the characterization of royalties as
restorative or restitutionary makes any practical difference may depend on
whether the focus is on awarding the royalty the parties would have negotiated
absent the infringement, or the royalty the infringer should be required to pay in
light of some normative criterion. The “hypothetical bargain” or “willing licen-
sor-willing licensee” approach, as it is often applied in the United States, might
seem to be an example of the former approach, insofar as it attempts to
construct the terms of the bargain the parties themselves would have negotiated
prior to the date of infringement. But even that approach does not construct the
exact bargain the parties would have made, because the hypothetical negotia-
tion assumes the patent in question was valid and infringed, as discussed above.
Without these assumptions, there would appear to be little difference between

an intentional infringer may be aware from the time it begins infringing that there is a market for the
patented product – unlike a licensee, who at the time the license is concluded may face an uncertain
demand for the product – and may avoid other disadvantages, such as upfront royalty payments or
submitting to periodic inspections by the patentee.
13
See AIPLA 2015, I-105–8 (reporting that the median cost of litigating a patent infringement suit with
less than $1 million at risk through to judgment is $600,000; for a suit with between $1 million and
$10 million at risk, $2 million; for a suit with between $10 million and $25 million at risk, $3.1 million;
and for a suit with over $25 million at risk, $5 million). For estimates of the cost of litigating a patent
infringement action in other countries, see generally Elmer & Gramenopoulos 2016; Heath 2015.
14
See generally Taylor 2014.
15
For discussion, see, e.g., Cotter 2013a, 269–70 (discussing this possibility under French and German law).
Although the theory is economically sound, courts and commentators in France and Germany have not
universally embraced such awards due to their resemblance to disfavored enhanced or punitive damages.
16
See R ESTATEMENT (T HIRD ) OF R ESTITUTION AND U NJUST E NRICHMENT § 42 cmt. a.

characterizing reasonable royalties as restorative or restitutionary. The royalty

the court believes the patent owner would have earned absent the infringement
is identical to the infringer’s gain (i.e., the royalty it withheld, if not adjusted
upward to reflect certainty as to validity and infringement).17 On the other hand, an
approach that attempts to determine the royalty the infringer should be required to
pay does not necessarily entail restoring the parties to the positions they actually
would have occupied but for the infringement – though any such approach needs to
specify just what the appropriate normative criterion is. Some recent scholarship
recommends focusing more on the benefit the infringer actually derived from the
use of the invention (as opposed to its expected benefits ex ante), so that the resulting
award will more closely correlate with the invention’s contribution to the art. As
discussed in Sections 1.2 and 1.3, one would then have to determine how to divide
that benefit between the parties. In theory, the division could be based on what the
parties likely would have negotiated ex ante, or on industry custom or other criteria.18
Other recent scholarship also suggests that a restitutionary approach to patent
damages would provide courts with more flexibility to adjust the requisite level of
proof based on factors such as the stakes involved and the extent to which the
infringer was at fault.19

17
See Cotter 2013b. One drawback of an approach that attempts to construct the bargain the parties
would have struck is that it does not provide much guidance in cases in which (1) no bargain would
have been struck, because the patentee preferred exclusivity and would not have licensed the infringer
at any rate the infringer would have accepted, but (2) the plaintiff cannot, or chooses not to, prove its
own lost profits. It also does not provide much guidance on what to do when the parties’ evidence is
defective but the court is statutorily obligated to award some royalty anyway, as is arguably the case for
example under 35 U.S.C. § 284. In such instances, reliance on industry standard rates or other
nonspecific evidence may be the only available fallback.
Note also that when the infringer is required to give up the entire profit or cost saving it derived from
the use of the patented invention, the remedy is more appropriately characterized as “disgorgement”
or an “accounting of profits,” as opposed to a reasonable royalty. For further discussion, see Chapter 2.
18
See, e.g., Risch 2018 (arguing that reasonable royalties should reflect the value of the use of
the patented invention to the infringer); Siebrasse & Cotter 2016 (proposing that, consistent with
the standard sometimes articulated by German courts, U.S. courts aspire to construct the bargain the
parties would have negotiated ex ante with full knowledge of all relevant information that is made
known ex post); Taylor 2014 (arguing that reasonable royalties should reflect the value of the use of the
patented technology). Compare BGH v. 14.3.2000 – X ZR 115/98 (Ger.) (stating that “what is owed is
what reasonable contracting parties would have agreed to, at the conclusion of a licensing agreement,
if they had foreseen the future development and specifically the duration and amount of the use of the
patent”), with General Tire & Rubber Co. Ltd. v. Firestone Tyre & Rubber Co. Ltd. (HL 1975, p.186–87)
(UK) (in a case in which the trial court had awarded a royalty of one U.S. cent per pound of tire tread
stock (T.T.S.), based on evidence that the infringer’s use of the patented method reduced its costs by
1.8 old pence per pound of T.T.S., holding on appeal that a proper royalty would have been only 3/8 of
a U.S. cent per pound of oil extended rubber (O.E.R.), based on the “going rate” the patentee had
charged others for the use of the invention).
19
See Golden & Sandrik 2017. It is also conceivable that, if restitutionary awards are characterized as
equitable in nature, there might not be a constitutional right to trial by jury on the amount of the
award under U.S. law, though the point is highly debatable. See Cotter 2013b, 25–29.

1.1.3 Principal Approaches

Courts throughout the world often consider a range of factors in calculating reasonable
royalties. One approach often used in the United States, the United Kingdom, and
some other countries is to construct the hypothetical bargain to which the court believes
the parties would have agreed to avoid infringement.20 As discussed above, the hypothe-
tical bargain approach may be viewed as either restorative or restitutionary. If the
resulting royalty reflects what the parties actually would have negotiated, the patentee
is rendered no worse off, and the infringer no better off, compared to the positions they
would have occupied had they actually negotiated a license. As discussed in the
following Sections, however, among the issues courts may need to address in construct-
ing such a hypothetical bargain are (1) the timing of the bargain, (2) the knowledge the
court should impute to the parties (including knowledge of validity and infringement of
the relevant patent, as discussed above), and (3) the relevant factors that are probative of
the terms of the bargain. Alternatively, as suggested above, an approach that focuses on
dividing the actual gain to the infringer could still be cast as a hypothetical bargain,
albeit one in which the parties agree ex ante on how to divide the benefit the infringer
actually derives ex post.21 This approach would be less concerned than the more
common Georgia-Pacific approach with trying to accurately construct the terms the
parties themselves actually would have negotiated ex ante.
Another option under U.S. law is the so-called analytical approach, which “focuses
on the infringer’s projections of profit for the infringing product.”22 The leading case is
TWM Mfg. Co. v. Dura Corp.,23 in which the Federal Circuit approved a damages
award that involved subtracting “the infringer’s usual or acceptable net profit from its
anticipated net profit realized from sales of infringing devices.” Although courts
sometimes permit the patentee who employs the analytical approach to use the
infringer’s actual profits as a proxy for expected profits,24 the approach does not appear
to be used very frequently. Critiques of the analytical approach argue, among other
things, that the method is indistinguishable from disgorgement; that the concept of
a “usual or acceptable net profit” is not very precise; that the approach does not
account for various other factors that can explain a divergence from the normal rate of
return, including the presence of other product features, or for the fact that different

20
See, e.g., Georgia-Pacific Corp. v. U.S. Plywood Corp. (S.D.N.Y. 1970, p.1120) (U.S.); General Tire &
Rubber Co. Ltd. v. Firestone Tyre & Rubber Co. Ltd. (HL 1975, p.178–79 (opinion of Lord
Wilberforce), 188–89 (opinion of Lord Salmon)) (UK).
21
See Siebrasse & Cotter 2016.
22
Lucent Techs., Inc. v. Gateway, Inc. (Fed. Cir. 2009, p.1324) (U.S.).
23
TWM Mfg. Co., Inc. v. Dura Corp. (Fed. Cir. 1986, p.899) (U.S.). The infringer’s expected profit from
the sales of products incorporating the patented technology also was an important factor in the Second
Circuit’s modification of the royalty awarded in Georgia Pacific. See Georgia-Pacific Corp. v. U.S.
Plywood Corp. (2d Cir. 1971, p.289–99) (U.S.). For further discussion of the analytical approach, see
Skenyon et al. 2016, § 3.8; Cox 2017; Gooding 2012; Pedigo 2017; Rooklidge 2014.
24
See Pedigo 2017.

products can have different profit margins; and that the approach can unfairly
penalize an infringer who has a higher profit rate due to efficiencies in production.25
Where an established royalty rate exists, courts sometimes have used that rate
rather than endeavoring to construct a hypothetical bargain or an appropriate
division of the profits projected or earned from the use of the invention.26
Where no such established rate exists, courts nevertheless frequently turn to
comparable license rates as an aid in constructing the hypothetical bargain. In
some countries, courts also make extensive use of what are believed to be
industry standard rates for various technologies. For example, in Japan courts
often start with the standard royalty rate for a given technological field, as
reported in publications of the Japanese Institute of Inventors and Innovation
(Hatsumei Kyokai), and then adjust the rate up or down based on factors such
as “the technical or economical value and importance of the invention,” the
plaintiff’s own high profit margin, the contribution of the invention to the
infringer’s profitability or to the value of the end product, the existence of
alternatives, and the infringer’s sales volume.27
A fourth possibility would be to employ some sort of “top-down” approach as
in In re Innovatio IP Ventures, LLC Patent Litigation,28 whereby the court
identifies an appropriate royalty base, decides how much of the revenue
attributable to the base should be payable as aggregate royalties, and then
determines what portion of those aggregate royalties should accrue to the
patents in suit, based on their relative importance. Some form of “top-down”
approach may be used in cases involving complex products, but the accuracy
of the approach in estimating the value of the patents in suit depends upon
obtaining a considerable amount of arguably difficult-to-obtain information.29

25
See Cox 2017 (arguing that the analytical approach is economically deficient, for reasons stated in the
text above); Gooding 2012, 7 (critiquing the analytical approach on the ground, inter alia, that it
“assumes that every penny of additional profit (above the infringer’s ‘usual’ or ‘acceptable’ profit) is
attributable solely to the patented invention. It therefore makes no attempt to account for the
importance of the infringed technology in generating those incremental profits and does not reflect
‘the invention’s contribution to the infringing product or service’”) (quoting Uniloc USA, Inc.
v. Microsoft Corp. Fed. Cir. 2011, p.1313) (U.S.); Rooklidge 2014.
26
See, e.g., Rude v. Westcott (U.S. 1889, p.164–65) (U.S.) (stating that, to qualify as an established royalty,
the rate “must be paid or secured before the infringement complained of,” “must be paid by such
a number of persons as to indicate a general acquiescence in its reasonableness by those who have
occasion to use the invention,” “must be uniform at the places where the licenses are issued,” and
should not be paid in settlement of another infringement claim). For discussion, see Cotter 2013a, 108.
27
See Second Subcommittee of the Second Patent Committee 2014 (in Japanese); Cotter 2015. See, e.g.,
Fulta Elec. Machinery Co. v. Watanabe Kikai Kogyo K. K. (IP High Ct. 2015) (Japan).
28
In re Innovatio IP Ventures, LLC Patent Litigation (N.D. Ill. 2013) (U.S.). See also Samsung Elecs. Co.
v. Apple Japan LLC (IP High Ct. 2014, p.132–38) (Japan) (applying a form of top-down analysis);
Unwired Planet Int’l Ltd. v. Huawei Techs. Co. (Pat 2017, ¶¶ 475–80) (UK) (applying a top-down
approach as a cross-check on the FRAND royalty derived from analysis of comparables).
29
See Cotter 2018, 206–11.

This approach is discussed further in Chapter 5 on the effect of FRAND

commitments on patent remedies.

1.2 REFORMULATING GEORGIA-PACIFIC

Judicial systems throughout the world often permit the finder of fact to con-
sider a range of factors of arguable relevance to the calculation of reasonable
royalties. In the United States, for example, damages expert witnesses fre-
quently base their opinions on the fifteen factors first compiled in Georgia-
Pacific Co. v. U.S. Plywood Co. (set forth below).30 Courts in other countries,
30
1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to
prove an established royalty.
2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.
3. The nature and scope of the license, as exclusive or nonexclusive; or as restricted or nonrestricted
in terms of territory or with respect to whom the manufactured product may be sold.
4. The licensor’s established policy and marketing program to maintain his patent monopoly by not
licensing others to use the invention or by granting licenses under special conditions designed to
preserve that monopoly.
5. The commercial relationship between the licensor and licensee, such as, whether they are
competitors in the same territory in the same line of business; or whether they are inventor and
promoter.
6. The effect of selling the patented specialty in promoting sales of other products of the licensee;
the existing value of the invention to the licensor as a generator or sales of his non-patented items;
and the extent of such derivative or convoyed sales.
7. The duration of the patent and the term of the license.
8. The established profitability of the product made under the patent; its commercial success; and
its current popularity.
9. The utility and advantages of the patent property over the old modes or devices, if any, that had
been used for working out similar results.
10. The nature of the patented invention; the character of the commercial embodiment of it as
owned and produced by the licensor; and the benefits to those who have used the invention.
11. The extent to which the infringer has made use of the invention; and any evidence probative of
the value of that use.
12. The portion of the profit or of the selling price that may be customary in the particular business
or in comparable businesses to allow for the use of the invention or analogous inventions.
13. The portion of the realizable profit that should be credited to the invention as distinguished from
non-patented elements, the manufacturing process, business risks, or significant features or
improvements added by the infringer.
14. The opinion testimony of qualified experts.
15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would
have agreed upon (at the time the infringement began) if both had been reasonably and
voluntarily trying to reach an agreement; that is, the amount that a prudent licensee – who
desired, as a business proposition, to obtain a license to manufacture and sell a particular article
embodying the patented invention – would have been willing to pay as a royalty and yet be able
to make a reasonable profit and which amount would have been acceptable by a prudent
patentee who was willing to grant a license.

Georgia-Pacific Corp. v. U.S. Plywood Corp. (S.D.N.Y. 1970, p.1120) (U.S.). Notice that the fifteenth
Georgia-Pacific factor is the hypothetical bargain discussed above in Section 1.2. In one view, the
fourteen preceding factors are best viewed as aids in determining the fifteenth. See Durie & Lemley
2010, 643.

including Canada,31 Germany,32 and Japan,33 sometimes look to a similar range

of factors.
Critics nevertheless have noted several potential problems with the Georgia-
Pacific framework. First, depending on the facts of the case, some of the Georgia-
Pacific factors may simply be irrelevant,34 thus potentially distracting the trier of fact
from focusing on the economically relevant considerations.35 Second, the frame-
work offers little or no guidance to either the trier of fact or the judge on how to
weigh or prioritize the factors.36 Third, and following from the first two points, it is
sometimes said that a clever expert can manipulate the factors in support of virtually
31
See AlliedSignal Inc. v. DuPont Canada Inc. (Fed. Ct. 1998, ¶ 209) (Can.) (listing as potentially
relevant factors in constructing a hypothetical license: (1) whether the patentee would have need to
transfer technology to the implementer; (2) differences in the parties’ practice of the invention; (3)
whether the patentee would have agreed to an exclusive or nonexclusive license; (4) the territory
covered by the license; (5) the term of the license; (6) whether there were available competing
technologies; (7) whether the patentee and the implementer are competitors; (8) the demand for
the infringing product; (9) the risk that the product would not sell; (10) the novelty of the invention;
(11) the compensation needed for research and development costs; (12) whether the invention would
result in increased revenues accruing to the licensee; and (13) whether the patentee has the capacity to
meet market demand itself). See also Jay-Lor Int’l Inc. v. Penta Farm Sys. Ltd. (Fed. Ct. 2007, ¶¶ 147,
160–73) (Can.) (approving the use of these factors).
32
See Cotter 2013a, 268 (stating that German courts may take into account a range of factors, including
the existence of noninfringing alternatives; “the terms of comparable licenses; the significance of
the invention as suggested by the defendant’s profit expectations; whether the use interferes with the
patentee’s monopoly position (Monopolstellung); the increase in value brought about by the use of the
patented invention, including revenue from other goods that are sold and used together with it; and
whether the revenue derived from the infringement is attributable in part to the infringer’s (or third
parties’) technology”).
33
See id. at 321–22 (stating that Japanese courts often use as a starting point the standard rate for a given
technological field as reported by the Japanese Institute of Inventors and Innovation (Hatsumei
Kyokai), as well as “a variety of additional factors similar to those used in the United States and
Canada, including the scope and significance of the patent and the benefits the defendant derives
from its use”); Second Subcommittee of the Second Patent Committee 2014 (article, in Japanese,
discussing the factors that explain the royalty rates awarded by Japanese courts); Cotter 2015 (discuss-
ing the preceding article).
34
See Ericsson, Inc. v. D-Link Sys. (Fed. Cir. 2014, p.1231, 1235) (U.S.) (vacating a damages judgment
where the jury was instructed, among other things, on factors that were irrelevant to the facts of the
case); Durie & Lemley 2010, 628 (stating that Georgia-Pacific “overloads the jury with factors to
consider that may be irrelevant, overlapping, or even contradictory”).
35
See Contreras & Gilbert 2015, 1499 (stating that “the Georgia-Pacific fifteen-factor analysis muddied
the water substantially in 1970, allowing litigants and courts to focus on any number of confounding
factors that distracted from the core inquiry regarding the value of the patented technology”); Durie &
Lemley 2010, 628.
36
See Durie & Lemley 2010, 631 (stating that “a non-exclusive fifteen-factor test that requires balancing
and consideration of the interactions between the factors is likely to give little or no practical guidance
to a jury”); Patent Reform Act of 2009: Hearing on H.R. 1260 (H. Comm. on the Judiciary 2009, p.75)
(prepared statement of Professor John R. Thomas, Georgetown University Law Center) (stating that
“the Georgia-Pacific factors are difficult to apply consistently” because the case “offers no recipe – that
is to say, no principles for deciding whether one of the seemingly randomly ordered elements should
be weighed more heavily than another in a given determination”) (quoted in Seaman 2010, 1703–04);
Schlicher 2009, 22 (stating that “juries are not given useful guidance on how to apply the so-called
Georgia-Pacific factors”).

any award.37 As a consequence, it can be very difficult for the parties to predict how
the trier of fact will apply the factors, and for a reviewing court to detect errors in
their application.38 In combination, these problems threaten not only to reduce
accuracy and increase costs, but also to make settlement more difficult and to place
the more risk-averse party at a disadvantage.39
In response to these problems, some recent scholarship and other initiatives
advocate restructuring the analysis to focus on a smaller number of economically
relevant factors. Most prominent, perhaps, are the Federal Circuit Bar Association’s
Model Patent Jury Instructions, which propose that U.S. courts instruct juries to
“consider all the facts known and available to the parties at the time the infringement
began,” but that “[s]ome of the kinds of factors that you may consider in making your
determination are: (1) The value that the claimed invention contributes to the
accused product. (2) The value that factors other than the claimed invention
contribute to [the accused product]. (3) Comparable license agreements, such as
those covering the use of the claimed invention or similar technology.”40 In a similar
vein, Durie and Lemley argue that the Georgia-Pacific factors largely “boil down to
three fundamental questions: (1) what is the marginal contribution of the patented
invention over the prior art?; (2) how many other inputs were necessary to achieve
that contribution, and what is their relative value?; and (3) is there some concrete

37
See Cotter 2018, 193 (stating that “unless the judge exerts very tight control over the presentation of
evidence, a clever expert could manipulate the factors to find support for virtually any damages
amount”); Durie & Lemley 2010, 632 (stating that “[t]he breadth of the available factors also means
that it is difficult to exclude evidence or expert testimony espousing virtually any theory of reasonable
royalty damages, no matter how outlandish,” and that because “Georgia-Pacific provides little
guidance as to which factors must be accorded the most weight in any given case, the expert’s ultimate
conclusion, no matter how extreme, can usually be justified by at least some combination of them”).
38
See Durie & Lemley 2010, 628, 632 (stating that “because the jury’s finding is the result of such
a complex, multi-factor test, it is as a practical matter almost entirely immune from scrutiny by either
district or appellate judges facing a deferential standard of review,” and that “the fifteen-factor test
makes it extremely difficult for judges to review a jury damage award for substantial evidence, either
on judgment as a matter of law (JMOL) or on appeal”); The Evolving IP Marketplace (Fed. Trade
Comm’n 2009, p.15) (testimony of Professor Paul M. Janicke, University of Houston Law Center)
(stating that Georgia-Pacific leads to “erratic results” because the test is like a “grab bag” where “the
judge throws the grab bag with all the factors to the jury and says, ‘Do what you think is right’”)
(quoted in Seaman 2010, 1704); Seaman 2010, 1665, 1703 (stating that “the so-called Georgia-Pacific
test . . . has become increasingly difficult for juries to apply in lengthy and complex patent trials,
resulting in unpredictable damage awards,” and that “Georgia-Pacific’s absence of guidance for
balancing the various factors contributes to a lack of certainty and predictability in reasonable royalty
awards”); Taylor 2014, 151–52. (“No doubt one contributing factor to inaccuracy, uncertainty, and
unpredictability regarding reasonable royalties is the relatively unbounded expert testimony and
evidence allowed by the Georgia-Pacific factors and the hypothetical negotiation construct.”)
39
See Cotter 2018, 168 (stating that “the greater the range of possible outcomes (that is, the greater the
variance around the expected mean), the smaller the probability that the parties will settle their
dispute (thus raising administrative costs), and the greater the likelihood that the more risk-averse
party will be willing to settle on unfavorable terms”).
40
FCBA 2016. In a recent article, Contreras and Eixenberger advocate the uniform adoption of the
Federal Circuit Bar Association’s proposed jury instructions. See Contreras & Eixenberger 2016.

evidence suggesting that the market has chosen a number different than the calculus
that results from (1) and (2)?”41 Jarosz and Chapman also have advocated a three-step
framework, focusing on the incremental value of the invention over alternatives,
comparable licenses, and design-around costs.42
Following from the above, our principal recommendation is that, when applying
a “bottom-up”43 approach to estimating reasonable royalties, courts should replace
the Georgia-Pacific factors (and analogous factors used outside the United States for
calculating reasonable royalties) with a smaller list of considerations. More specifi-
cally, courts should collapse the Georgia-Pacific factors into the following three
steps. (We defend each of the individual parts of this recommendation in detail in
Section 3.1 below.)
1. Calculate the incremental value of the invention and divide it appropriately
between the parties. A license for the use44 of a patented technology typically
requires the licensee to share with the licensor some portion of the incre-
mental value the licensee derives or expects to derive from the use of that
technology. To ensure that a reasonable royalty for the unauthorized use of
a patented technology accurately reflects this incremental value, ideally
a court would (1) estimate the difference between the value the infringer
derived from the use of the patented invention (as distinct from the value
contributed by other features of the infringing end product), and the value
the infringer would have derived by using the next best available noninfring-
ing alternative instead; (2) divide that differential value between the patent
owner and the infringer; and (3) as an aid in carrying out this division,
consider any relevant evidence, including possibly the use of a rebuttable

41
Durie & Lemley 2010, 629.
42
See Jarosz & Chapman 2013.
43
This chapter uses the term “bottom-up” to refer to approaches in which the royalties due to patent
holders in separate cases are for the most part determined independently of one another. As discussed
supra note 28 and accompanying text, as an alternative to such an approach courts sometimes may
employ a “top-down” approach, in which they first determine the aggregate royalty burden for
a specific product or standard and then apportion that burden among the patents reading on that
product or standard (see TCL Commc’ns Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson (C.
D. Cal. 2017) (U.S.); Unwired Planet Int’l Ltd. v. Huawei Techs. Co. (Pat 2017) (UK); Samsung Elecs.
Co. v. Apple Japan LLC (IP High Ct. 2014) (Japan)). Although top-down approaches may help to
reduce risks of holdup and royalty stacking, they may lend themselves more to cases involving patents
declared essential to the practice of standards embodying a discrete set of technologies. Outside that
context, the evidence needed to employ a top-down approach may be more difficult to obtain, given
the lack of both a finite set of declared patents and a defined set of technological features for which
royalties are due. Given this chapter’s emphasis on complex products generally, therefore, its focus
will be on improvements to the bottom-up approach, though in the end the decision whether to apply
a bottom-up or top-down approach in FRAND or other complex product cases ultimately may depend
on the availability and quality of the evidence before the court.
44
As a shorthand, we employ the word “use,” as in “use of the invention over alternatives,” though
strictly speaking the infringer’s conduct at issue could consist of any selection or combination of the
specific activities, such as manufacturing, use, or importation, that can constitute infringement.

presumption that the parties would have agreed, ex ante, to an even (50/50)
split.
2. Assess market evidence. In negotiating licenses for the use of patented technol-
ogies, parties often consider the rates and other terms disclosed in relevant
comparable licenses (or, where applicable, the rates charged by relevant patent
pools or disclosed in publications of industry standard rates). Courts also should
consider such evidence for purposes of calculating reasonable royalties for the
unauthorized use of patented technologies, albeit subject to appropriate adjust-
ments and with due appreciation for the potential limitations of such evidence as
discussed in Section 1.3.6.
3. Comparison. When it is feasible and cost justified, courts should carry out both
steps described above – each one acting as a “check” on the accuracy of the other –
and then attempt to reconcile or adjust the results, as the evidence warrants. That
said, one can expect only that courts do the best they can with the evidence available
to them. Thus, when the evidence necessary to carry out Step 2 is available but the
evidence necessary to carry out Step 1 is not45 – as will likely often be the case in
litigation involving complex products – courts may need to rely exclusively on
market evidence. (The converse will be true when the available evidence relates
only to Step 1, not 2.) Furthermore, as discussed in greater detail in Chapter 5 on the
effect of FRAND commitments on patent royalties, in appropriate cases courts also
may consider applying a “top-down” approach either as direct evidence or as a check
on the value derived from the use of comparables and other market evidence.
Explanation. As discussed in Section 1.3.1 below, economists generally accept
“incremental value” – that is, the difference between the value derived from the
patented invention over the next best available noninfringing alternative – as an
accurate measure of the value of patented technology.46 By necessity, such an
inquiry also requires the trier of fact to apportion the value attributable to the
patented invention as opposed to other features of the infringer’s product, assuming
that the noninfringing alternative end product sold by the infringer would have
retained those other features.47 The first part of Step 1 above therefore combines

45
See Unwired Planet Int’l Ltd. v. Huawei Techs. Co. (Pat 2017, ¶ 182) (UK). (stating that “There was
ample evidence before me that . . . parties negotiating SEP licences in fact use methods which are
based on patent counting. That is evidence which supports a finding that a FRAND approach to
assessing a royalty rate is to engage in some kind of patent counting. Indeed when one thinks about it
some sort of patent counting is the only practical approach at least for a portfolio of any size. Trying to
evaluate the importance of individual inventions becomes disproportionate very quickly.”)
46
As is also discussed above, however, there are legitimate debates over whether the focus should be on
actual or only expected advantages, and on how to proceed when the next best alternative is itself
patented.
47
The simplest example would be one in which the infringer has sold both comparable products, one
containing the patented feature and one without that feature, under similar market conditions, such
that it is possible to infer the incremental benefit conferred by the patent. See, e.g., Grain Processing
Corp. v. Am. Maize-Prods. Co. (Fed. Cir. 1999) (U.S.); Carson et al. v. American Smelting & Refining

Georgia-Pacific factors 8, 9, 10, and 13 into one overarching concept.48 Step 1

presumably will be easier to accomplish, however, when the infringing product
embodies relatively few patented features. We defend our recommendation regard-
ing the division of incremental value in Section 1.3.3 below.
Step 2 recommends that courts also make appropriate use of comparables and
other market evidence of how actors in the real world value the technology in suit.
To be sure, courts and commentators have identified numerous potential pitfalls in
the use of comparables, which we discuss in greater detail in Section 1.3.6 below.
These theoretical problems notwithstanding, however, we do not advocate forgoing
the use of comparables (nor do we see that as a likely development, in any event), but
rather emphasize the need for careful judgment in applying them. Moreover, at least
in some cases a patent pool rate or other comparable may have a very high probative
value, though that rate may need to be adjusted (for example, to account for the
reasons why the patentee did not join the pool).49
Step 3 recommends that, where feasible, courts apply both Step 1 and Step 2, and
then compare the results. To the extent the numbers generated by each step diverge,
the court will then have to decide how best to reconcile them based on all of the
relevant facts and circumstances. For example, a court may be more confident in the
result generated by Step 1 when the end product embodies only a small number of
patents or when there are few if any licenses that are closely comparable. By contrast,
Step 2 may seem more probative when the product’s complexity makes it difficult to
distinguish the value contributed by a single patent over the next best alternative.
(On the other hand, even in complex products cases it sometimes may be possible to
estimate the value of a specific patented feature relative to other features, through
the use of conjoint or discrete choice analysis, testimony from technical experts, or
application of some form of “top-down” approach as discussed in the FRAND
chapter.)50 Further, in cases (1) involving relatively small stakes, or (2) arising in
countries that impose substantial limits on pretrial discovery or the use of expert
witnesses, or (3) in which the parties’ evidence on damages is inadmissible or
incompetent, the best practice may be to consider comparables, industry standard

Co. (W.D. Wash. 1928) (U.S.). To the extent the patented invention is complementary to other
features of the infringer’s product, however, as it often will be in complex products cases, apportion-
ment becomes more complicated. See infra Section 1.3.1 (discussing a hypothetical in which the
patented invention provides 20 percent longer battery life to a smartphone).
48
See Cotter 2018, 192 n.133 (stating that among the most important Georgia-Pacific factors are “factors 8
through 10, all of which relate to the value of the patented technology, in terms of its effect on the
implementer’s profit or cost, in comparison with alternatives,” and “factor 13, ‘the portion of the
realizable profit that should be credited to the invention as distinguished from non-patented ele-
ments, the manufacturing process, business risks, or significant features or improvements added by
the infringer’”).
49
See, e.g., Microsoft Corp. v. Motorola, Inc. (W.D. Wash. 2013) (U.S.).
50
For discussion of the use of conjoint and discrete choice analysis in litigation, see, e.g., Platt & Chen
2013; Sidak & Skog 2016; Verma et al. 2002 (providing an accessible discussion of discrete-choice
analysis).

rates, or other such market evidence, despite its potential drawbacks, rather than to
award zero damages or rely on other, even more speculative, evidence of the value of
the technology over alternatives.

1.3 INCREMENTAL VALUE AND OTHER ISSUES

In this Section, we present the analysis underlying our principal recommendation as
described in Section 1.2. We also present our recommendations relating to various
issues that may arise either in the application of our principal recommendation or in
the event courts continue to employ a multifactor, Georgia-Pacific-like approach to
reasonable royalties.

1.3.1 Incremental Value

1 Overview
We perceive a widespread consensus among innovation economists and lawyers
that the social value of a technology is its incremental value over the next best
alternative, and that the economic value of a patented technology to an imple-
menter is the (actual or expected) profit or cost saving the implementer derives
from the use of the patented technology over the next best available noninfring-
ing alternative.51 We therefore recommend that policymakers adopt, subject to
the systemic considerations noted in the Introduction, the guiding principle that
the royalties awarded in litigation should be commensurate with the value of the
patented technology as so defined.52 We also recognize, however, that there are
substantial difficulties, both practical and conceptual, in assessing that value –
particularly in the case of complex products, where the patented technology
contributes only a small part to the overall value of the product. In those contexts,
a patented feature might be the deciding factor for a few purchasers, and it might
increase the value to others, but for most purchasers it is likely to be one of a host
of factors that shift buying preferences as a whole. We discuss the conceptual
difficulties below.

51
See, e.g., Swanson & Baumol 2005, 10–11; Farrell et al. 2007, 610–11; Elhauge 2008, 541; Denicolò et al.
2008, 577–78; Layne-Farrar et al. 2009, 448; Shapiro 2010, 286; Gilbert 2011, 864; Camesasca et al. 2013,
304; Cotter 2013a, 128; Carlton & Shampine 2013, 536, 545; Jarosz & Chapman 2013, 812; Taylor 2014,
95–97; Cotter 2014a, 357; Sedona Conference 2014, 23–24; Contreras & Gilbert 2015, 1467–69,
1499–1500; Siebrasse & Cotter 2017a; Lee & Melamed 2016, 411–12; Epstein & Marcus 2003, 557–58.
See also Taylor 2014, 91–97 (contrasting the value of the technology with the value of patent rights,
where the latter might include for example the ability to use an injunction to extract holdup value.)
52
Our recommendation that royalties should be “commensurate with” the value of the technology,
however, does not amount to a recommendation that courts should aspire to award patentees the
entire social value of their inventions. For discussion, see, e.g., Frischmann & Lemley 2007; Golden
2010, 529–39; Lemley 2005, 1036–37; Taylor 2014, 138–41.

2 Complements
The first conceptual difficulty involves complementarity between the infringing
technology and other patented technologies that are also implemented in the
same product. The problem is illustrated most clearly in a case in which two
versions of a complex product are sold, with no difference between the two except
that one version embodies the patented technology while the other does not.53 It
may seem that this is a case in which it is easy to determine the incremental
value of the patented technology; it would seem to be simply the difference
between the two prices. However, this is not correct if, as is commonly the case,
the patented technology depends on other patented technology. For example,
suppose the patented invention provides for 20 percent longer battery life in
a smartphone, and a smartphone with the longer battery life sells for $50 more
than the phone would with the shorter battery life it would otherwise have. The
incremental value of the patented invention would appear to be $50. But the
price consumers are willing to pay for the phone depends on its patented wireless
technology, and without that wireless technology the phone would be worthless,
no matter how long the battery life. In that case, the $50 price difference is only
partially attributable to battery technology, because it is also partially attributable
to the wireless technology.54 Put another way, the patentee holding the wireless
technology might reasonably demand a higher royalty for the phone with the
battery-extending technology than for the base phone, leaving only some part of
the $50 to be split between the battery patentee and the phone vendor. Whether
the wireless patentee actually demands a higher royalty in such a case is
a different question – though it is not unlikely that it would do so. It is common
for patentees, particularly those with basic technology patents, to charge an ad
valorem royalty on the product price, with the result that the wireless royalty
would be higher for the more expensive phone.

3 Patented Alternatives
A second conceptual difficulty arises from the proposition that the value of the
invention is its value over the best noninfringing alternative. This proposition is
uncontroversial so long as the alternative is unpatented, but its application is not so
clear if the alternative is patented. It is not at all uncommon that the best substitutes
for a patented technology are also patented, as several inventors devise different
solutions to the same problem.55 The problem is illustrated most clearly when the
53
See Samsung Elecs. Co. v. Apple Japan LLC (IP High Ct. 2014, p.134) (Japan).
54
In economic theory the independent value of the complementary technology is given by the Shapley
value. See Siebrasse & Cotter 2017a. However, it will rarely be possible to compute Shapley pricing
directly.
55
In the standards context it also quite likely that in practice all the relevant technologies will be
patented, precisely because of the incentive provided by the prospect of being included in the

inventions are near perfect substitutes,56 and it is particularly salient in the context of
standard-essential patents (SEPs), where it is often the case that multiple alternative
patented technologies competed for inclusion in the standard.
One possibility is that in such a case the value of the patented invention is zero, on
the view that the infringing user in the hypothetical negotiation should be imagined
to play one patentee off against another until the patentee is haggled down to its
minimum willingness to accept.57 More generally, on this view the value of the
invention is its incremental value over the patented alternative, ignoring the royal-
ties that would have to be paid to use that alternative, on the rationale that those
royalties do not reflect the value of the alternative technology but merely the value of
the patent right.58 By the same token, if the infringed technology were not quite as
good as the patented alternative, the value of the infringed technology would be
zero. We recommend rejecting this approach, on the ground that although it makes
sense from a static welfare perspective, it provides a facially inadequate incentive to
invent (zero compensation) and therefore appears inconsistent with the convention-
ally understood purpose of the patent system.
Another possibility would be to assume that a patented alternative that is on the
market is available for its established market price, which is normally above mar-
ginal cost. Put another way, “[t]he proper comparison is between the cost and value
of the patentee’s component and the cost and value of the alternative, including
patent royalties that would have to be paid on the alternative where appropriate.”59
This approach has some support in the case law, though it cannot be considered
established law.60 Nevertheless, although this approach might seem appealing when
both technologies are mature and both have an established price, it might be
difficult to apply if both technologies are new to the market and neither has an
established price. This suggestion is therefore likely to be unhelpful in the SEP
context, where alternative technologies competed for inclusion in the standard ex
ante, and the alternative that was not selected may not have a market presence at all
ex post, or will have a value that is much lower than if it had been selected for
inclusion in the standard. Another problem arises when the alternative technology is
mature and has an established price, and the infringed technology is new. If the
technologies are close substitutes, we would expect the new technology to drive
down the price of the established technology, even in the absence of infringement.
Thus, if the established price of the alternative is used for comparison purposes, the

standard; see, e.g., Layne-Farrar 2014 (discussing the competition among patentees to have their
technology included in the standard).
56
Consider, for example, the near-simultaneous invention of Viagra (sildenafil) and Cialis (tadalafil).
57
Swanson & Baumol 2005, 10–21 (auction model).
58
Taylor 2014, 161.
59
Lemley & Shapiro 2007a, 2039 n.153.
60
See In re Innovatio IP Ventures, LLC Patent Litigation (N.D. Ill. 2013, p.20) (U.S.) (stating that the
court would consider patented alternatives, but “that they will not drive down the royalty in the
hypothetical negotiation by as much as technology in the public domain”).

patentee will be overcompensated in comparison with the royalties it would have

received but for the infringement. Perhaps, then, the proper approach in principle
would be to assess how the price of the patented alternative would have evolved in
response to the introduction of the infringed technology, in the absence of infringe-
ment. On the other hand, simply using the established price has clear advantages in
terms of ease of proof.
We are not aware of any literature providing a thorough theoretical analysis of this
problem.61 We therefore propose further research on this issue.

1.3.2 Hypothetical Bargain

In the United States, the most common approach to assessing a reasonable royalty is
usually referred to as the “hypothetical negotiation” approach:62
The hypothetical negotiation tries, as best as possible, to recreate the ex ante
licensing negotiation scenario and to describe the resulting agreement. In other
words, if infringement had not occurred, willing parties would have executed
a license agreement specifying a certain royalty payment scheme.63

While this approach is now deeply entrenched, the leading cases emphasize that the
goal of the hypothetical negotiation framework is not to replicate the bargain that
actual willing parties would have arrived at; that would be “inaccurate, and even
absurd,”64 given that “[t]here is, of course, no actual willingness on either side, and
no license to do anything, the infringer being normally enjoined . . . from further
manufacture, use, or sale of the patented product.”65 The hypothetical negotiation is
a “legal fiction,”66 “employed by the court as a means of arriving at reasonable
compensation,”67 and it is to be “flexibly applied as a ‘device in the aid of justice.’”68
We recommend that courts embrace this view of the hypothetical bargain frame-
work as a tool – a proxy for the issues of how to split the surplus from the invention –
rather than as a goal in and of itself.69 For example, it is well established in U.S. law
that the parties to the hypothetical negotiation are assumed to have known that the
61
For a brief discussion, see Siebrasse & Cotter 2017a.
62
Lucent Techs., Inc. v. Gateway, Inc. (Fed. Cir. 2009, p.1324) (U.S.). It is also sometimes referred to as
a “hypothetical bargain” or “willing licensor/willing licensee” approach.
63
Id. at 1325.
64
Rite-Hite Corp. v. Kelley Co. (Fed. Cir. 1995, p.1554 n.13) (U.S.) (en banc).
65
Panduit Corp. v. Stahlin Bros. Fibre Works Inc. (6th Cir. 1978, p.1159) (U.S.).
66
Id.
67
Hanson v. Alpine Valley Ski Area, Inc. (Fed. Cir. 1983, p.1081) (U.S.) (quoted with approval in Rite-
Hite Corp. v. Kelley Co. (Fed. Cir. 1995, p.1554 n.13) (U.S.)).
68
TWM Mfg. Co., Inc. v. Dura Corp. (Fed. Cir. 1986, p.900) (U.S.) (quoted with approval in Rite-Hite
Corp. v. Kelley Co. (Fed. Cir. 1995, p.1554 n.13) (U.S.)).
69
See similarly Janicke 1993, 726–27 (“The engrafted ‘assumptions’ of validity, infringement, and
business information would be better viewed as reminders to the decisionmaker on reasonable royalty
to help him or her reach a just result, rather than as facts artificially deemed ‘known’ at an artificial
negotiation.”).

patent was valid and infringed, even though actual parties would not. This rule is
required to achieve just compensation, because the opposite view – that the parties
should be assumed to discount the royalty to allow for the probabilistic nature of the
patent (as would presumably be done by parties to an actual negotiation) – would
result in so-called double discounting;70 not only would the court-approved royalty
derived from the hypothetical negotiation include a discount for the risk of non-
liability, but then pre-litigation negotiations in which royalties were based on the
expectation of such a court award occurring with a less than 100 percent probability
would include a further discount for risk of non-liability. For that reason, we agree
that this well-established principle of U.S. law is sound. Moreover, based on similar
reasoning, the hypothetical negotiation should include an assumption of liability,
not just validity and infringement, as well as entitlement to relief and
enforceability.71 And more generally, departures from a strict attempt to reconstruct
what real parties would have done had they actually bargained are justified when-
ever such a departure would be a better means of arriving at reasonable compensa-
tion – in particular, compensation that reflects the value of the patented technology
over its best noninfringing alternative. Indeed, if sound principles of reasonable
compensation require an unwieldy number of departures from a hypothetical nego-
tiation framework, the proper course would be to abandon the framework rather
than the sound principles.72

1.3.3 Dividing Incremental Value

The second and third parts of Step 1 involve identifying the appropriate division of
the incremental value. Both sides often can make a substantial claim to at least
a portion of the incremental value – the patentee because this value results from use
of the claimed invention, and the adjudged infringer because it made complemen-
tary or supplementary investments that resulted in a commercial embodiment of
that invention. How then should the value be divided?
In theory, an invention can give rise to pure economic rents, reflecting the value
of the invention over the best noninfringing alternative. If two parties, such as
70
Cotter 2013a, 135–36; see also Choi 2009, 154–55 (arguing that the use of ex post information is
necessary to cure this problem); Taylor 2014, 115–16 (reviewing the development of the law on this
point, and arguing that the problem is not only one of double discounting, but circularity, because the
discounted value that the parties would negotiate would itself then be reflected in the damages award,
and the parties, anticipating this, would further discount the negotiated price, and so on).
71
Taylor 2014, 127–29.
72
See Janicke 1993, 726 (suggesting that “[i]n view of the increasing number of assumptions engrafted
onto the underlying fiction of hypothetical negotiation, the Federal Circuit should consider whether
the time has come to abolish the fiction altogether . . . ”); Taylor 2014, 125–26. Similarly, although real-
world negotiations sometimes might result in a degree of royalty stacking in cases involving complex
products, for purposes of awarding reasonable royalties courts could make the assumption that the
parties would have bargained to avoid this outcome, in order better to align royalties with the value of
the technology.

a patent owner and a licensee, must cooperate to realize those rents, there is no
simple theoretical answer as to how the parties will split the rents between them,
since even a very lopsided split, in either direction, would leave both parties better
off as compared with using the noninfringing alternative. The most prominent
solution to the problem is the Nash Bargaining Solution (NBS), which implies
a 50/50 split. However, the NBS requires unrealistically restrictive assumptions
about the parties, such as that they are identical in every way. Economic theory is
relatively underdeveloped in terms of fleshing out how pure rents would be split
when the parties are modeled more realistically.73 The Nash Bargaining Solution is
sometimes used, not because it is a particularly accurate model, but for lack of
anything better.
Moreover, the division of the incremental profit due to the invention is
unlikely to be a split of pure rents. Turning a patented invention into
a commercialized innovation that actually commands a premium in the market-
place requires some or all of manufacturing, distribution, marketing, process
refinement, technical support to the licensee by the patentee, end-user support,
and so on, all of which involve risk and investment by one party or the other. The
royalty paid by the licensee to the patentee does not reflect a split of pure rents,
but also, or even instead, compensation to the party who made the investments
and shouldered the risks relating to these ancillary services.74 Georgia-Pacific
factor 13 recognizes this possibility,75 as have cases such as Tights, Inc. v. Kayser-
Roth Corp.:
The Court finds, in the context of this case, that the patentee would have been
reasonably entitled to receive from 25% to 50% of the cost saving as reasonable
royalties. This Court finds that 25% of the cost saving is a reasonable entitlement
where the parties anticipate that the licensee will have to make substantial con-
tributions to practical commercialization. This Court finds that 50% of the cost

73
The main theoretical refinement is by Ariel Rubinstein, who shows that under certain conditions,
a party with a higher discount rate (higher time value of money) will have less bargaining power.
Rubinstein 1982.
74
See Siebrasse & Cotter 2016, 954–55:
In an actual license agreement, both parties bring something to the table in the process of
turning an invention into a commercially valuable revenue-generating product. The patentee’s
most obvious contribution is the invention, but bringing the final product to market generally
requires further development and technical implementation, such as clinical trials, as well as
marketing, manufacturing, and distribution, all of which require further investment at risk
beyond the investment made by the patentee in the invention itself. Either of the parties may
provide these further services, and the way the parties split the incremental profit in an actual
negotiation depends on who provides what services and the relative importance and cost of
those services.
75
Georgia-Pacific Corp. v. U.S. Plywood Corp. (S.D.N.Y. 1970, p.1120) (U.S.) (“13. The portion of the
realizable profit that should be credited to the invention as distinguished from non-patented ele-
ments, the manufacturing process, business risks, or significant features or improvements added by
the infringer.”).

saving is a reasonable entitlement where the parties anticipate that the licensee will
have to make only routine creative contributions toward commercialization.76

We therefore recommend that, to the extent possible, the split of the incremental
profit should reflect the value of any such ancillary services or risks that either the
patent owner or the infringer, in fact, undertook. In our view this is consistent with
the hypothetical bargaining construct because it reflects the agreement the parties
themselves would have arrived at in similar circumstances. Recall that the principal
justification for the hypothetical bargain is that it preserves the patent incentive by
restoring the patent owner to the position it would have occupied absent the
infringement. That position would depend in part on how the parties would have
agreed, ex ante, to divide the value to be derived from the use of the patented
invention, in comparison with alternatives. However, we emphasize that we recom-
mend taking such services into account to the extent they are actually incurred. Even
if an actual licensee would have provided marketing for the invention, and an actual
royalty would have reflected that value, the reasonable royalty award should only
reflect that if in fact the infringer undertook the marketing.77
More broadly, we propose further research to unpack and refine the nature of
“bargaining power” as it relates to the division of the incremental value of the
invention.78 We suspect that the division in any given case is determined in part
by compensation for ancillary services and in part by industry norms (which may
themselves reflect reflect standard practices about provision of ancillary services). To
some extent this unpacking is a matter of obtaining better evidence as to what factors
actually drive the division of the incremental profit in practice. In addition, there are
some conceptual or normative issues to be resolved. In particular, one intuitive
understanding of “bargaining power” is that a party with deeper pockets has greater
bargaining power, and so would be able to extract a greater share of the incremental
value in an actual licensing negotiation. For example, if the patent owner was
a small cash-strapped start-up, and the potential licensee was a large company, the
licensee might in practice be able to extract very favorable terms. It can be argued
that it would be appropriate to replicate that unequal division in a reasonable royalty
assessment, on the view that the patentee should not be made better off than it would
have been had the parties actually licensed. On the other hand, the favorable terms
might be considered to be an illegitimate holdout by the licensee, which should not
be replicated in a reasonable royalty, on the view that it does not reflect the
incremental value of the invention, just as the courts should not give the patentee
a higher royalty if it would have been able to engage in holdup in an actual
negotiation. These questions deserve further exploration.
76
Tights, Inc. v. Kayser-Roth Corp. (M.D.N.C. 1977, p.164) (U.S.).
77
See Siebrasse & Cotter 2016, 989–90.
78
In economic theory, “bargaining power” is used largely as a label rather than an explanatory variable.
If the observed split is 80/20, and there is no evident reason for an uneven division, then we say that
one of the parties has greater bargaining power than the other.

Having decided which factors should be relevant to the division of the incre-
mental profit, the second question is what evidence should be used to establish that
division. A few possibilities come to mind. First, comparables may shed light, either
explicitly or implicitly, on how the parties would have agreed to divide the surplus.
As discussed above, evidence also could reflect any ancillary services or risks that
either the patent owner or the infringer, in fact, incurred, so as to adjust the royalty
derived from the comparable license. Second, there may be evidence of what the
parties would have agreed to based on their own prior negotiations, the patentee’s
course of dealing with other parties, or the custom of the industry. To illustrate, in
United States Frumentum Co. v. Lauhoff, the U.S. Court of Appeals for the Sixth
Circuit held that evidence was admissible as to what share of the profits or of the
selling price “it may be customary in that or similar business to allow for the use of
such an invention.”79 (Of course, questions may arise as to just how similar a “similar
business” must be.) When there is no such evidence of how the parties would have
agreed to split the incremental value, however, what then? On the one hand, it
would seem wrong to award the patent owner nothing – and in any event U.S. law
normally would preclude such a result because section 284 of the U.S. Patent Act
requires courts to award “damages adequate to compensate for the infringement, but
in no event less than a reasonable royalty for the use made of the invention by the
infringer.”80 Indeed, one of the reasons for the gradual adoption of the reasonable
royalty remedy in the United States in the early to mid-twentieth century was
precisely to avoid situations in which courts could award only nominal damages,
due to difficulties in quantifying the owner’s loss or the infringer’s gain with
sufficient certainty.81 Rather, as Judge Learned Hand expressed it back in 1933, “[t]
he whole notion of a reasonable royalty is a device in aid of justice, by which that
which is really incalculable shall be approximated, rather than that the patentee,
who has suffered an indubitable wrong, shall be dismissed with empty hands.”82 By
the same token, it would seem equally wrong to award the patentee 100 percent of
the profit the infringer earned from the use of the claimed invention simply because

79
U.S. Frumentum Co. v. Lauhoff (6th Cir. 1914, p.617) (U.S.); see also Georgia-Pacific Corp. v. U.S.
Plywood Corp. (S.D.N.Y. 1970, p.1120) (U.S.) (listing factor 12, which refers to “[t]he portion of the
profit or of the selling price that may be customary in the particular business or in comparable
businesses to allow for the use of the invention or analogous inventions,” and is likely based on
Frumentum).
80
U.S. Patent Act, 35 U.S.C. § 284 (emphasis added); see also Apple, Inc. v. Motorola, Inc. (Fed. Cir.
2014, p.1328) (U.S.) (stating that, even when a patent owner fails to introduce admissible evidence
quantifying its loss, the court is obligated to “determine what constitutes a reasonable royalty from the
record evidence”); Schönknecht 2012, 311–13 (discussing the German courts’ “free discretion” to
estimate damages under § 287 of the Code of Civil Procedure, and stating that “[t]he injured party
is not required to prove the exact amount of its damage; rather, it is sufficient if it presents a factual
basis on which the court can establish ‘at least a rough estimate’ of the damage.”) (citing BGH
v. 6.3.1980 – X ZR 49/78 – Tolbutamid (Ger.)).
81
Taylor 2014, 97–101, 112–13 (describing this history of the development of reasonable royalties).
82
See, e.g., Cincinnati Car Co. v. New York Rapid Transit Corp. (2d Cir. 1933, p.594–95) (U.S.).

the infringer couldn’t prove the appropriate division (unless the patentee was
seeking, and was entitled to under the relevant substantive law, an award of the
infringer’s profits).83
Arguably then, the best practice would be to permit the parties to introduce
whatever competent evidence they have on the division of profits, including com-
parables, while also permitting the fact finder to take note of, for example, findings
from behavioral psychology and economics (e.g., the ultimatum game) suggesting
that people in Western societies generally view a 50/50 split of benefits as fair.
(Similarly, the Nash Bargaining Solution, application of which often may result in
a 50/50 split, is a widely used construct in game theory – albeit with economists often
employing the 50/50 split as a plausible assumption, rather than substantiating it as
an empirical fact of how two actual parties would have bargained.)84 For example, in
Summit 6, LLC v. Samsung Electronics Co., the Federal Circuit recently affirmed
a damages judgment based on an expert witness’s purported isolation of the incre-
mental profit Samsung had derived from the use of the patented invention, and his
subsequent division of that profit between the parties based on analysis of Samsung’s
bargaining power and application of the Nash Bargaining Solution.85
We therefore recommend that, when faced with the question of how to divide the
incremental value derived from the use of the invention over the next best alter-
native, courts permit the parties to introduce any competent evidence on this issue –
including, where necessary to estimate a royalty “in aid of justice,” empirical
findings that people in Western societies generally view a 50/50 split of benefits as
fair, and that economists often use the Nash Bargaining Solution in modeling
bargaining behavior. Further to this point, policymakers may wish to consider
adopting a rebuttable presumption that the parties would have agreed to a 50/50
split – which presumption, however, should come into play only after there has been
an initial determination of the incremental profit derived from the use of the
invention, and should not be difficult for the parties to rebut by means of more
specific evidence (comparables, industry practice, risk allocation, etc.).86

83
Such awards are no longer available in the United States other than in design patent cases, as
discussed in Chapter 2.
84
See, e.g., Henrich 2015, 191–92, 358–59; Stout 2011, 52–54.
85
Summit 6, LLC v. Samsung Electronics Co. (Fed. Cir. 2015, p.1297) (U.S.). Compare VirnetX, Inc.
v. Apple Inc. (Fed. Cir. 2014, p.1333–34) (U.S.) (disapproving of the use of the Nash Bargaining
Solution on the ground that use of a 50–50 split as the proposed starting point for a damages
calculation was “insufficiently tied to the facts of the case”).
86
Various bodies of law, including patent law, make use of presumptions in a variety of contexts in
which a fact of interest (call it X) is difficult to prove but likely correlated with the presence of some
other, more easily provable, fact (call it Y). In such cases, presuming the existence of fact X upon proof
of fact Y may reduce adjudication costs and better promote the goal of accurate fact finding than
would a rule requiring that, absent competent proof of fact X, the trier of fact must find not-X.
Relatedly, a rebuttable presumption encourages the party against whom the presumption operates to
come forward with evidence justifying a departure from the presumption, which makes sense if that
party is likely to be better positioned than its counterpart to have access to such information. For

By contrast, we would not recommend use of a stronger presumption (e.g., one

that can be rebutted only by clear and convincing evidence) out of concern that,
inter alia, the trier of fact (particularly a lay jury) might accord such a presumption
too much weight. Further, a weak presumption of this sort should be sharply
distinguished from the 25 percent rule of thumb previously used by U.S. courts
and rejected by the Federal Circuit in Uniloc USA, Inc. v. Microsoft Corp.87 Unlike
that rule of thumb, under which a damages expert was permitted to presume that
“the licensee pay a royalty rate equivalent to 25 per cent of its expected profits for the
product that incorporates the IP at issue,”88 the presumptive value split suggested
here would apply only after the incremental profit properly attributable to use of the
claimed invention has been isolated from all other portions of overall revenue and
profit. In complex product cases, there are likely to be multiple innovations besides
the claimed invention that have contributed to overall revenue and profit.
Consequently, in such cases, 50 percent of the incremental profit attributable to
the claimed invention can be expected to often be only a small percentage or even
only a small fraction of a percent of the overall profit from the complex product.

1.3.4 Timing of Hypothetical Negotiation

The standard view in U.S. case law is that the hypothetical bargain occurs just prior
to the date on which the infringement began.89 This timing has been controversial
in two main respects. First, it is the basis for the mainstream view in U.S. law that the
hypothetical bargain should be based only on information that is available to the
parties ex ante, and that ex post information is relevant only as indirect evidence of
what the parties would have expected ex ante (the “book of wisdom” approach).90
The standard in Germany, by contrast, states that the court should consider the
bargain the parties would have reached ex ante had they foreseen all relevant ex post
information;91 and a few commentators argue for the expanded use of ex post
information in U.S. law as well, on the view that this allows for a more accurate

discussion of the function and working of presumptions generally, see, e.g., Mueller & Kirkpatrick
1999, 126–31; McGowan 2010, 582; Posner 1999, 1503–04.
87
Uniloc USA, Inc. v. Microsoft Corp. (Fed. Cir. 2011) (U.S.).
88
Goldscheider et al. 2002, 123.
89
See Lucent Techs., Inc. v. Gateway, Inc. (Fed. Cir. 2009, p.1324–25) (U.S.) (stating that “the hypothe-
tical negotiation or the ‘willing licensor-willing licensee’ approach . . . attempts to ascertain the royalty
upon which the parties would have agreed had they successfully negotiated an agreement just before
infringement began,” recreating “as best as possible . . .the ex ante licensing negotiation scenario
and . . . resulting agreement”); Georgia-Pacific Corp. v. U.S. Plywood Corp. (S.D.N.Y. 1970, p.1120)
(U.S.). In the SEP context, courts have begun to shift the time frame for the hypothetical negotiations,
from just before the patent was infringed to just before the standard was adopted. See In re Innovatio IP
Ventures, LLC Patent Litigation (N.D. Ill. 2013, p.19) (U.S.); Microsoft Corp. v. Motorola, Inc. (W.D.
Wash. 2013, p.19) (U.S.); Apple, Inc. v. Motorola, Inc. (N.D. Ill. 2012, p.913) (U.S.).
90
See infra Section 1.3.5.
91
See Schönknecht 2012.

valuation of the patented technology.92 Second, there is substantial scholarly com-

mentary, particularly in the SEP context, suggesting that the timing of the hypothe-
tical negotiation should be earlier, just prior to the time when sunk costs93 were
incurred; this commentary reflects the view that the user would inevitably have
incurred sunk costs by the time of the first infringement, so that a license negotiated
at that time would allow the patentee to hold up the user for part of those sunk costs,
leading to a royalty in excess of the value of the invention.94
With these critiques in mind, we recommend that, to the extent courts continue
to employ a hypothetical bargaining construct at all, they should apply a flexible
approach that takes into account the hypothetical bargain’s status as a legal fiction
employed as an aid to arriving at reasonable compensation, rather than as
a foundational principle in its own right to be applied strictly and literally. With
regard to timing in particular, in many cases the precise date of the hypothetical
negotiation does not have any impact on the reasonable royalty, and the early
U.S. decisions invoking the hypothetical negotiation approach did not usually
specify the time when the negotiation took place. On the other hand, in the cases
establishing the time of the first infringement as the appropriate date, courts have
chosen the infringement date not because it reflects the time of a negotiation
between truly willing parties, but because that timing does justice on the facts of
the particular case. As discussed in Sections 1.2 and 1.3.5, our preferred approach is
not to employ a hypothetical negotiation as such, but rather to identify the surplus
that the parties are negotiating over, and to divide that surplus in an appropriate
manner. But whichever construct is used, the ultimate goal is to ensure that the
division does not reflect lock-in but that it does reflect any ancillary services or risks
that either party has shouldered.
To illustrate our recommendation, consider a case in which the court deems the
hypothetical negotiation to have taken place at the time of first infringement, but
after the infringer has incurred sunk costs. In such a case, the patentee might be able
to extract some of the value associated with those sunk costs even if it has no
substantial relation to the value of the patented technology, contrary to the con-
sensus view that the patentee normally should not be able to extract such unrelated
value.95 Fortunately, we are not aware of any cases in which the courts have
approved of allowing the patentee to extract value associated with such sunk costs
specifically on the basis that this would have happened had the parties bargained on
the infringement date. In our view, the key point is to ensure that the evidence used
92
See Siebrasse & Cotter 2016.
93
We use the term “sunk costs” throughout in the economic sense of costs that have been incurred and
cannot be recovered, rather than in the accounting sense of fixed costs.
94
See, e.g., Taylor 2014, 129 (noting that “[t]o avoid extraction of value from patent holdup, the time
period for the hypothetical negotiation should be assumed to be just prior to any investment by the
infringer in developing or using the patented technology”).
95
Unless there is some specific reason for allowing a supracompensatory remedy, such as the need to
deal with the problem of opportunistic infringement, as discussed in Chapter 3.

to establish the reasonable royalty avoids problems associated with sunk costs. If, for
example, the bargain is constructed using comparable licenses, a strict adherence to
the principle that the bargain takes place prior to infringement would bar the use of
any comparable licenses entered into after that date. But if the party to the relevant
comparable had negotiated its license prior to incurring any sunk costs, then neither
that license nor a royalty based on it would reflect sunk-costs holdup, and there
would be no reason to reject the use of that comparable based on its date of
execution.
Further, while the view that a reasonable royalty should not reflect the infringer’s
sunk costs is generally sound, it doesn’t necessarily require that the royalty be based
on evidence that predates those sunk costs. The previous example highlights one
such scenario. As another example, often it may be easier to determine the date on
which infringement began than the date on which the infringer began incurring
sunk costs, in which case – as long as the sunk costs are not too large – the marginal
increase in accuracy resulting from moving up the date of the hypothetical negotia-
tion may not be justifiable in view of the additional administrative expense.
Alternatively, consider the facts of Tights, Inc. v. Kayser-Roth Corp.,96 in which the
court noted that a licensee would pay a lower royalty if it would be required to make
substantial contributions to practical commercialization, and a higher royalty if it
made less contributions toward commercialization. The timing of the hypothetical
negotiation was important because the product market was relatively mature by the
time of the first infringement, and so the reasonable royalty was higher than it would
have been had the infringer entered a nascent market.97 If the bargain date were
moved back to avoid sunk-costs holdup, this would imply that the reasonable royalty
in Tights would have to be reduced correspondingly. In our view, Tights was
correctly decided on its facts, and a lower royalty to notionally avoid sunk-costs
holdup – which was not in issue – would be inappropriate.
This illustrates the importance of addressing the underlying issue rather than
focusing solely on the date of the hypothetical negotiation. A negotiation date that is
appropriate for some purposes (avoiding sunk-costs holdup) may be inappropriate for
others (ensuring that the royalty reflects the infringer’s contribution to commercializa-
tion). Moving the negotiation date back to solve one problem might simply create
other problems, when all that is really necessary is to ensure that the specific evidence
on which the royalty is based does not inappropriately incorporate sunk-costs holdup.

1.3.5 Information Set

We now turn our attention to the issue of changed information. Suppose that at the
time of the first infringement, the parties anticipated that the invention would be

96
Tights, Inc. v. Kayser-Roth Corp. (M.D.N.C. 1977) (U.S.).
97
See id. at 164.

a great success, and so they would have contracted for a very high royalty, but in fact
the invention was a failure. If the royalty is to be based only on the information that
was available to the parties at the time of the first infringement, the damages award
would be very high; but if it is based on the knowledge that the invention is in fact
worthless, then the royalty would be very low. For example, following a jury trial in
2012, a federal district court entered judgment in the amount of $1 billion in favor of
Monsanto in a patent infringement dispute against DuPont. This amount reflected
the jury’s best estimate of the lump-sum amount that DuPont would have agreed to
pay and that Monsanto would have accepted, just before the infringement began,
even though DuPont never sold any of the infringing seed at all.98 Notably, the
opposite story may also be told. A technology expected to be worthless may prove to
be valuable. The mainstream view in U.S. law nevertheless is that ex post informa-
tion can be used only to establish what the parties believed at the time of first
infringement, and if it can be established that their views turned out to be wrong,
then the reasonable royalty will be calculated on the basis of those wrong views, and
not on the basis of what actually transpired.
We recommend, however, that contrary to the mainstream U.S. approach, courts
should adopt what Siebrasse and Cotter refer to as the “contingent ex ante approach”
under which the hypothetical negotiation is generally assumed (subject to the
caveats noted in the preceding section) to take place before any sunk costs are
incurred, but with the benefit of ex post information.99 The rationale for this
approach is that the bargain must be assumed to take place ex ante, so that the
patentee is not entitled to extract any holdup value; but at the same time, using ex
post information more accurately reflects the true incremental value of the inven-
tion, and so provides a more accurate reward to the patentee. This is not really
inconsistent with a hypothetical negotiation framework, because parties often
negotiate on a contingent basis. For example, it is routine to negotiate a running
royalty, the effect of which is to make the return to the patentee contingent on ex post
information. Using ex post information in the hypothetical negotiation posits that
the parties would contract on a broadly contingent basis, taking into account all
relevant factors, not just the volume sold. This approach would not exclude evidence
that the parties actually would have agreed upon a lump sum royalty, but merely
presumes that the parties would have preferred a royalty that took into account the
risk of lack of success of the patented technology. This approach is also consistent
with the established rule that the parties to the hypothetical negotiation are assumed

98
Monsanto Co. v. E.I. DuPont De Nemours & Co. (E.D. Mo. 2013) (U.S.). No reported opinion
followed the entry of judgment, and the case settled shortly thereafter. For discussion, see Chao &
Gray 2013.
99
See Siebrasse & Cotter 2016; Sidak 2016a. The Sedona Conference also discusses expanded use of ex
post information: see Sedona Conference 2016, 22–28. Note, however, that as discussed in the
preceding subsection, there may be cases in which the timing of the hypothetical negotiation to
avoid sunk costs may not be particularly relevant.

to know that the patent is valid and infringed even though during actual negotiations
they would have discounted the royalty for risk of non-liability.
This view also has some support in U.S. case law, most prominently in the
statement by Justice Cardozo in Sinclair Refining that:
An imaginary bid by an imaginary buyer, acting upon the information available at
the moment of the breach, is not the limit of recovery where the subject of the
bargain is an undeveloped patent. Information at such a time might be so scanty
and imperfect that the offer would be nominal. The promisee of the patent has less
than fair compensation if the criterion of value is the price that he would have
received if he had disposed of it at once, irrespective of the value that would have
been uncovered if he had kept it as his own.100

This is often said to reflect only the principle that ex post information may be used as
evidence of what the parties would have believed at the time of the first infringe-
ment, but on its face it supports the use of ex post information more generally.
Similarly, in Georgia-Pacific, the district court actually did consider post-
infringement evidence, and on appeal the Second Circuit held that the district
court had not erred in so doing.101 More recently, it appears that the courts have
begun to be more liberal in the use of ex post evidence.102
On the other hand, one objection to the use of ex post information is that courts
have tended to invoke the “book of wisdom” asymmetrically to benefit patentees but
not infringers.103 One obvious response to this objection is that it is wrong to do so.
Presumably clarifying that the use of ex post evidence is generally permissible would
help avoid an unprincipled asymmetric approach.104 Lee and Melamed further
argue that using ex post information substantively, rather than merely as evidence
of what the parties would have known or believed at the time of the first infringe-
ment, leads to two mistakes:
First, the rationale assumes that the actual profits would have been unforeseen
entirely at the time of the hypothetical negotiation, when the parties negotiating ex
ante would likely have understood that there would be a range of possible outcomes
(some leading to higher profit and some leading to little or no profit for the
infringer) and would have taken all of them into account in selecting

100
Sinclair Ref. Co. v. Jenkins Petroleum Process Co. (U.S. 1933, p.699) (U.S.).
101
Georgia-Pacific Corp. v. U.S. Plywood Corp. (2d Cir. 1971, p.297) (U.S.).
102
See Lee & Melamed 2016, 414 (reviewing the cases and suggesting that “following [Fromson v. W.
Litho Plate & Supply Co. (Fed. Cir. 1988, p.1575) (U.S.)], courts have regularly relied on the book of
wisdom doctrine to permit the consideration of ex post developments, regardless whether those ex
post developments provided any insight into the parties’ ex ante bargaining positions or whether the
case involved willful infringement”).
103
See Janicke 1993, 725–27.
104
See id. (criticizing the court for using ex post information asymmetrically, and arguing that the
appropriate response is to formally recognize that “the court should examine the business realities at
the time infringement began and subsequently, independent of any theory that a hypothetical
negotiation has occurred”).

a reasonable royalty ex ante. Second, . . . a royalty determined on the basis of ex post

evidence will generally include a premium based on ex post economic develop-
ments that increase the infringer’s reliance on the patent – in particular, lock-in
costs – and that are unrelated to the incremental benefit the patent confers.

The first objection, however, misses the point. When the parties’ expectations are
accurate ex ante, there is no difference between an approach that uses ex post
information and one that does not.105 The rationale for the use of ex post information
is that it allows more accurate determination of the royalty when the parties are
mistaken. The second objection is sound so far as it goes, though it actually applies
equally to the standard position that the negotiations are assumed to take place at the
time of first infringement, by which time the infringer will normally have already
incurred lock-in costs. The response is the same whether or not ex post information is
to be taken into account; it is to refuse to award royalties that reflect lock-in costs. Put
another way, Lee and Melamed implicitly assume that in order to take into account
ex post information, it is necessary to assume that the hypothetical negotiation takes
place ex post; but under the Siebrasse and Cotter proposal, the hypothetical negotia-
tion is assumed to take place before sunk costs have been incurred, but in light of all
ex post information, not just information regarding validity and infringement.
In short, rather than excluding ex post information entirely, the better response is
to clearly articulate the rationale, which is not simply to increase the patentee’s
reward, and thereby make it clear that ex post information is admissible no matter
what effect it has on the reasonable royalty damages. Consequently, we are of the
view that the contingent ex ante approach is sound.

1.3.6 Comparable Licenses

If we imagine a reasonable royalty as the product of a hypothetical negotiation
between the parties using certain assumptions, the use of comparable licenses – what
similarly situated parties “did in fact agree to”106 – as an aid in making this
determination seems quite sensible.107 Indeed, when a license meets the stringent
105
Unless there is a bias in which cases get litigated: see Siebrasse & Cotter 2016.
106
Durie & Lemley 2010, 641; see also Masur 2015, 120 (“At first blush this approach makes sense; if the
courts must reconstruct a hypothetical royalty negotiation, actual preexisting royalty agreements
might well constitute the best available evidence of the contours of such a negotiation. Not
surprisingly, scholars, commentators, and courts nearly unanimously bless the use of existing licenses
to calculate patent damages.”).
107
The first two Georgia-Pacific factors, for example, focus specifically on prior licensing agreements. See
Georgia-Pacific Corp. v. U.S. Plywood Corp. (S.D.N.Y. 1970, p.1120) (U.S.) (listing “1. The royalties
received by the patentee for the licensing of the patent in suit, proving or tending to prove an established
royalty” and “2. The rates paid by the licensee for the use of other patents comparable to the patent in
suit”). Other factors refine the relevance of prior licenses by adding context. For example, the third and
fourth factors consider the nature of the patentee’s licensing program by weighing the exclusivity of the
prior licenses and any geographic restrictions or other special conditions found in them. See id. Courts
outside the United States also frequently look to comparable licenses, or sometimes industry standard

requirements to qualify as an “established” one, its probative value might seem

clear.108 There are nonetheless significant practical and conceptual problems
involved with using comparable licenses – even “established” ones109 – as evidence
of a reasonable royalty. Although we do not suggest that courts should forgo the use
of comparable licenses, we recommend that courts should be aware of the problems
discussed below, and to the best of their ability take these considerations into
account when using comparables.

1 Comparability
The most obvious hurdle in using comparable licenses is to ensure comparability. It
is rare to find actual licenses entered into in exactly the circumstances of the
hypothetical negotiation. In theory, a license may be sufficiently comparable to be
considered as evidence of a reasonable royalty even though it was not negotiated in
circumstances exactly corresponding to the hypothetical negotiation, though adjust-
ments then may have to be made to allow for the differences. And if the license is too
dissimilar, it may be properly excluded – particularly in U.S. practice, in which
judges play an important gatekeeper role by excluding evidence from consideration
by juries.
While licenses involving different patents for related technologies may in princi-
ple be useful comparators, there are evident problems in determining whether
a different technology is sufficiently comparable. Consequently, courts prefer to
rely on licenses granted by the patent owner for the same patent,110 but even then
rates, as an aid in calculating reasonable royalties. For discussion of practice in Germany and Japan, see
Cotter 2013a, 268, 321–22; Second Subcommittee of the Second Patent Committee 2014. Our discussion
in the text above to “comparables” therefore should be understood to apply to other analogous forms of
evidence, such as industry standard rates.
108
Dowagiac Mfg. Co. v. Minn. Moline Plow Co. (U.S. 1915, p.648) (U.S.) (stating that where the
patentee undertakes “a course of granting licenses” then those “established royalties . . . [afford]
a basis for measuring damages”); Rude v. Westcott (U.S. 1889, p.164–65) (U.S.) (stating that, to qualify
as an established royalty, the rate “must be paid or secured before the infringement complained of,”
“must be paid by such a number of persons as to indicate a general acquiescence in its reasonableness
by those who have occasion to use the invention,” “must be uniform at the places where the licenses
are issued,” and should not be paid in settlement of another infringement claim); Nickson Indus., Inc.
v. Rol Mfg. Co. (Fed. Cir. 1988, p.798) (U.S.) (“Where an established royalty exists, it will usually be
the best measure of what is a ‘reasonable’ royalty.”).
109
See, e.g., Consol. Rubber Tire Co. v. Diamond Rubber Co. of NY (S.D.N.Y. 1915, p.459) (U.S.)
(describing the inappropriateness of awarding established royalties in circumstances where the
licensed patent was widely believed to be invalid); Taylor 2014, 101–04 (explaining that, “[i]n an
unbroken line of succession, later courts have followed Judge Hand’s reasoning [in Consol. Rubber
Tire Co.] by awarding reasonable royalties rather than diminished royalties established during
periods of ‘disrepute’ and ‘open defiance’ of patents”).
110
See Masur 2015, 123–24 (noting the difficulties with using different technologies); see also Cotter 2011,
748 (“Strictly speaking, then, for a license to be economically comparable it should relate to the same
patent or patents at issue . . . ”); Weinstein et al. 2013, 553 (“In view of ResQNet and Lucent,
comparable licenses can only include licenses to the patent-in-suit itself, essentially removing from
consideration licenses contemplated under Georgia-Pacific Factors 2 and 12.”).

problems arise. Licenses often bundle many patents together, including the
patent of interest, which makes it difficult to separate out the value of the
technology protected by the patent in suit. Licenses involving technology transfer,
as opposed to a mere promise not to sue, routinely include other forms of
supporting IP such as trademarks or trade secrets relevant to the patented tech-
nology, as well as other obligations on both sides such as grantback clauses or
obligations to provide ongoing technical support. In litigation, the hypothetical
negotiation concerns a very different transaction, often one involving a bare
license to the patent itself. Nevertheless, it may be possible to make adjustments
to compensate for the value attributable to other factors.111 At least U.S. courts
appear generally well attuned to this problem, and commonly exclude licenses
including substantial non-patent benefits.112
Moreover, even licenses to the same patent with similar ancillary clauses are
not necessarily comparable in terms of the royalty, because patentees are likely
to price discriminate – that is, to charge different users prices that reflect the
variation in value among those users.113 A few square centimeters of Gore-Tex
may save a life when used in a vascular graft, while a square meter of it may be
needed for added comfort in a rain jacket. If the patent owner charged the same
amount per unit area to the raincoat manufacturer as to the stent manufacturer,
it would either forego substantial profits on the license for the stent, or forgo the
raincoat license entirely. Price discrimination is consistent with the principle,
enunciated at the outset of this chapter, that the patentee should be entitled to
a reward commensurate with the value of its technology over the next best
alternative. If that value varies between applications, the patentee is likely to
charge a different price for those applications. This means that the royalty in
a license for the use of the patented technology in a raincoat is probably not
a valid comparable in litigation of the use of the technology in a stent, even if
the ancillary clauses (and even the licensee) are exactly the same. (Indeed, even
licensees that manufacture both stents and raincoats may well pay a different
royalty to the patentee for the different uses.)114 Similarly, a patentee may also
price discriminate between different users, even for the same application, if for
example one of the users has access to complementary technology while the
other does not.115

111
See, e.g., Microsoft Corp. v. Motorola, Inc. (W.D. Wash. 2013, p.79–92) (U.S.) (quantifying the value
to Microsoft of access to the technology in the pool); Unwired Planet Int’l Ltd. v. Huawei Techs. Co.
(Pat 2017) (UK) (awarding FRAND royalties based on adjustments to the royalties earned by the
assignor of the relevant patent families).
112
See Hovenkamp & Masur 2017, 407 n.48.
113
See, e.g., id. at 12.
114
See Samsung Elecs. Co. v. Apple Japan LLC (IP High Ct. 2014, p.134) (Japan) (awarding different
royalties for the same technology to the same manufacturer of phones and tablets).
115
See Hovenkamp & Masur 2017, 395–96.

2 Circularity
Another possible problem with using comparable licenses is circularity. Because the
use of comparables to determine a reasonable royalty is one of the most predictable
aspects of a reasonable royalty assessment, one would expect the parties to anticipate
the use of comparables if the matter were to proceed to litigation, and to factor this
into their bargaining. Thus, if there is any systematic and predictable error in the
courts’ assessment of the royalty, this error will then be amplified through the use of
comparables. Moreover, circularity can arise even if the parties never litigate, as it
depends only on the parties’ expectation of the litigation outcome.116
Circularity can come in two distinct forms, which we will refer to as “holdup/
holdout circularity” and “probabilistic circularity.” First, if the prior licenses being
used as comparables were negotiated in circumstances where the licensee was
subject to holdup or the patentee subject to holdout, the comparable will reflect
holdup or holdout value, not just the value of the patented technology over the
noninfringing alternative.117 One cure for holdup circularity would be to eliminate
the risk of holdup itself by denying injunctive relief, though the question of whether
denying injunctions in a broader class of cases is desirable, is a significant issue in
and of itself (and one that probably should not be driven by the problem of holdup
circularity). Alternatively, courts can avoid holdup circularity even if they grant
injunctions by excluding evidence of licenses that were negotiated in circumstances
giving rise to holdup. This implies excluding evidence of licenses that were nego-
tiated after the licensee had incurred sunk costs. But this may not be easy, as it
requires knowledge not just of the prior license itself, but the circumstances under
which it was negotiated. In addition, Lemley and Shapiro argue that a form of
holdup arises when the user would have had to keep its product off the market after
litigation to allow for redesign, and this form of holdup also can be magnified by
circularity. This “redesign holdup circularity” can be avoided by excluding licenses
negotiated in those circumstances, but this rule too would seem difficult to imple-
ment, since it would require knowledge of what the licensee would have thought its
best option was in the counterfactual world in which its licensing negotiations failed.
The problem of redesign holdup circularity nevertheless can be mitigated if stays are
normally granted to allow redesign, as discussed in Chapter 4 on injunctions.118

116
See Masur 2015, 133; Taylor 2014, 112–15.
117
See Shapiro 2010, 314–15; Lemley & Shapiro 2007a, 2021–22. As discussed in Chapter 4, the Lemley &
Shapiro model assumes that a court will always grant a permanent injunction to the successful
patentee, and reasonable royalties for the prejudgment infringement. The longer the trial takes as
a proportion of the term of the patent, the greater the effect of the reasonable royalty on the litigation
outcome, and so the larger the multiplier. In Shapiro’s formal model, if litigation always takes the
same amount of time, the circularity effect will result in a multiplier that is inversely proportional to
the post-trial patent term. See Shapiro 2010, 314.
118
Lemley and Shapiro also argue that the probabilistic nature of patents can give rise to holdup, even
when a license is negotiated ex ante: see the discussion of “probabilistic holdup” in Chapter 7.3.1.

A different kind of circularity can arise due to the probabilistic nature of patents.
As discussed in Section 7.3.1, parties to an actual negotiation would discount the
value of the patented technology by the probability of liability, thus potentially
giving rise to the double discounting problem if courts use a negotiated royalty as
the basis for a reasonable royalty. (The doubly discounted reasonable royalty
awarded by the court then would serve as background to the negotiation of the
next license, which would then be trebly discounted and so on.)119 In contrast with
the problem of holdup circularity, which potentially inflates negotiated royalties as
compared with the benchmark value of the patented technology, this problem of
“probabilistic circularity” deflates negotiated royalties as compared with the bench-
mark. (Note too that it is likely to infect even established royalties, notwithstanding
their more elevated status in the hierarchy of comparables as noted above.)
Furthermore, unlike holdup circularity, which does not arise if the parties do not
anticipate that a permanent injunction will be granted, probabilistic circularity
arises whether or not the parties expect a permanent injunction to be granted.
Conceivably, holdup circularity and probabilistic circularity may offset one
another in some cases, but given the difficulty in assessing the magnitude of both
types of circularity, it will be impossible to determine the degree to which this is so.
The most that might be said is that when the prior license involved a license to
a patent that was not already known to be valid and infringed, and it was negotiated
after the licensee had incurred sunk costs, the negotiated royalty might be too high or
too low, depending on which effect dominates.
In principle, the problem of probabilistic circularity can be avoided by suitably
enhancing the actual royalties to compensate for discounting.120 There are two
problems with this response, however. The first is that, in practice, it seems that
such an enhancement is rarely made.121 The second, and more fundamental,
problem is the difficulty of making an appropriate adjustment. The ideal multiplier
would turn on the belief of the parties to the comparable license as to the probability
of liability at the time they negotiated the license. But this will be very hard to prove,
as it turns “upon private information, available only to the parties to the first
licensing agreement, about the plaintiff’s probability of success in litigation.”122
The information may not exist at all outside the minds of the negotiators, and

Probabilistic holdup, however, does not result in circularity, because the overcharge arises because
the potential licensee’s threat point is not to use the patented technology entirely; that is to say, the
licensee acts as if the patent was valid and infringed. But that is the appropriate assumption once
validity and infringement have been established at trial.
119
See Taylor 2014, 115–16.
120
See id. at 130–31.
121
See Masur 2015, 132 n.76; Taylor 2014, 144–48 (explaining why this is so). For a rare exception, see
St. Lawrence (E.D. Tex. Feb. 21, 2017) (permitting St. Lawrence’s expert to offer an opinion that the
royalty rate that St. Lawrence had previously negotiated with Samsung for the use of the patents in suit
in the pending case against ZTE and Motorola should be increased by 50 percent to reflect
a “settlement discount” and 18 percent to account for an “invalidity discount”).
122
Masur 2015, 120; see also Taylor 2014, 147.

because the prior licensee is not a party to the current litigation, any internal
memoranda shedding light on the licensee’s view of the probability of liability
probably would not be discoverable. (In some cases, the patentee’s internal memor-
anda might shed light on the issue, but even using this information would be
problematic, as it would normally represent only the patentee’s view.)123 And in
any event, this inquiry would require time-consuming and expensive satellite litiga-
tion. An alternative would be for the court to try to estimate the discount based on
objective factors relative to the particular prior license, such as the testimony of
experts as to the probability of liability. But this would be a difficult inquiry on a new
issue that would not otherwise have to be litigated, and that does not seem especially
susceptible to the production of reliable results.124 Thus, in many situations, courts
might be better off without adjusting for the implicit discount, and instead simply
being mindful that the comparable license provides “a floor for valuing the patent,
not [necessarily] a reasonable estimate.”125
Finally, one could imagine using a standard multiplier. For example, if “any
given patent owner has a 25% chance ex ante of prevailing against any given alleged
infringer, then the appropriate multiplier is four.”126 But a standard multiplier not
calibrated to evidence of discounting in a particular case merely recasts the circu-
larity problem.127 This is because a standard multiplier will overcompensate paten-
tees with strong patents. Anticipating this, parties bargaining in the shadow of the
expected trial outcome will negotiate a royalty based on the inflated damages value,
and that inflated royalty will feed back into future awards, and so on.128 This would
result, in effect, in a new source of holdup that would allow a patentee with a strong
patent to extract more than the value of its invention. The same spiral would happen
in the other direction with patents that are weaker than average.129

123
Though it is not unreasonable to assume the patentee’s estimated probability of liability would be in
the same ballpark as the licensee’s, or they would not have been able to come to an agreement.
124
See Masur 2015, 149–52 (arguing persuasively that an inquiry of this type would be unsatisfactory);
Taylor 2014, 147–48 (same).
125
Masur 2015, 131.
126
Id. at 149–52; see also Taylor 2014, 146 (“If infringement and validity are independent variables, then
the multiplier resulting from the assumption of liability should be four; that is, the jury should
multiply the negotiated royalty reflecting 50% probability of validity and 50% probability of infringe-
ment by four to obtain a reasonable royalty reflecting certainty as to liability.”).
127
A separate problem with the standard multiplier is that it would probably not be admissible in
U.S. law as not being tied to the facts of the case. See Masur 2015, 146. Regardless, even in instances of
reliable evidence tied to the facts of the case, there is reason to think a jury in particular would not use
an appropriate multiplier. Taylor 2014, 146 (“[D]oes anyone really think that in a close case a jury will
multiply pre-litigation royalties by four, while in a case of blatant liability a jury will not increase pre-
litigation royalties at all?”).
128
For example, if the parties to the actual negotiation thought there was a 90 percent chance of liability,
the royalty in the prior comparable license will hardly be discounted at all, and a reasonable royalty
based on that prior license, augmented by a standard multiplier of four, will therefore be almost four
times too large. See Masur 2015, 154.
129
See id. at 155.

It therefore would appear very difficult in most cases to reliably enhance the
actual royalty arrived at in prior comparable licenses, even though the licenses are
themselves otherwise very similar to that at issue in litigation. An alternative
approach would be to try to select licenses in which the royalty was not discounted,
because they were negotiated in circumstances in which the probability of liability is
high. One example would be licenses negotiated after a patent had been held to be
valid in other litigation. But even then, the previous judgment of validity would not
be binding in litigation involving a different infringer, so it is likely there would still
be some discount for the probability of invalidity. And unless the implementation
was exactly the same (as might be the case in the SEP context), there might be
substantial discounting as to infringement as well, let alone discounting due to risks
of invalidity or unenforceability. Further, this approach would severely restrict the
cases in which comparables could be used.
In the same vein, some authors have suggested that prior settlements, which courts
in the United States normally (though not always) exclude from evidence,130 actually
should be preferred, particularly if the settlement was entered into when the patent
owner appeared to be winning the underlying litigation.131 This proposal is again only
helpful in a relatively narrow range of cases, as prior settlements are not always
available. Moreover, it must be clear that the patentee was winning on the basis of
objective factors, such as preliminary motions favoring the patentee, or the discount-
ing problem will not be addressed.132 Further, if the patentee in the prior litigation
would have expected to obtain an injunction if successful, the settlement may reflect
holdup value – thus solving the problem of probabilistic circularity at the expense of
inviting the problem of holdup circularity. Another concern with settlements is that
they may reflect the value of avoiding litigation costs rather than the value of the
patented technology, though this would be a significant problem only when litigation
costs are at least comparable to the value of the patented technology.133

3 Dynamic Considerations
Some of these problems are likely to get worse in contexts where patentees can
predict that a reasonable royalty will be the primary remedy, because we would
130
See, e.g., Rude v. Westcott (U.S. 1889, p.164) (U.S.); but see ResQNet (Fed. Cir. 2010, p.868)
(approving use of settlement as a comparable, on the facts of the case); Narechania & Kirklin 2012.
131
See Taylor 2014, 131 (suggesting that “to the extent settlement agreements reflect more certainty
regarding liability, economists may be able to use them, rather than other agreements, to identify
more easily the true value of patented technology”). This suggestion is more fully developed by Masur
2015, 145–46. See also Prism Techs. (Fed. Cir. 2017) (approving the use of a settlement license on the
facts of the case, and discussing the circumstances under which settlements are more or less likely to
be probative).
132
See Masur 2015, 145–46, 148.
133
In such a case, it may even be that the royalty will be too low, not too high. If the patent is weak,
litigation value settlement may make sense, but once it is adjudged to be valid and infringed, those
low-value settlements no longer reflect the true value of the patented technology.

expect them to adjust their licensing practices to reflect this expectation.134 These
adjustments might have two kinds of unwanted effects. First, they may make
determining accurate damages in the particular case even more difficult.
A patentee worried about probabilistic discounting depressing its recovery in future
litigation may insist on artificially bundling unnecessary trade secrets or other sham
terms into a license solely to ensure that it cannot subsequently be used as
a comparable. This is wasteful in itself, though if the parties are careful to include
terms that they know are in fact of no value, it will not otherwise distort the
transaction.135 Another possibility is that a patentee would include self-indulging
statements in license agreements about large discounts in light of significant risks of
non-recovery.136 Conversely, the patentee may try to game the system by negotiating
licenses with artificially high rates, in hopes that these will be used as
comparables.137 This tactic is also wasteful in terms of increased transaction costs,
but again it will not affect the licensing terms more generally if courts can detect and
exclude such licenses from being used as comparables (which, however, is
debatable).
Second, such adjustments may distort the general licensing behavior of the
patentee in ways that will have more general effects. As discussed above, price
discrimination means that a patentee will rationally charge a high royalty to a high-
value user and a low royalty to a low-value user. But if the patentee anticipates that its
license to a low-value user will be used as a comparable in subsequent litigation
against a high-value user, it may prefer not to license the low-value user at all. This
hurts both parties, and society as a whole.138 The cure for this, in principle, would be
for courts to exclude licenses negotiated with a low-value user as comparables in
subsequent litigation with the high-value user, but it is far from clear that courts
could reliably and predictably differentiate the two cases.139 And of course, the first
step would be for courts to acknowledge the need to do so. Otherwise, the use of
comparable licenses to assess reasonable royalties may actually result in restricted
licensing of the technology. This would be highly undesirable if it is now, or is likely
to become, a problem in practice.
All of this is not to say that comparables are not probative at all, or that the above
problems can never be mitigated or avoided. For example, Judge Robart’s use of the
134
As discussed in Chapter 4, awarding ongoing royalties in lieu of injunctions generates a risk of error in
the calculation of such royalties – though whether such errors systematically favor one party or the
other, and whether they are justified in view of the holdup risk resulting from injunctions, are
debatable questions.
135
See Hovenkamp & Masur 2017, 406.
136
Taylor 2014, 149.
137
See Hovenkamp & Masur 2017, 406–09; Cotter 2018, 195 (noting that this seems to have been the case
in Microsoft Corp. v. Motorola, Inc. (W.D. Wash. 2013) (U.S.)).
138
See Hovenkamp & Masur 2017, 403–04.
139
See id. Note that it is not enough that the courts could make the distinction; they would have to do so
in practice with sufficient predictability that the patentee would not need to worry about the low-
value license affecting its recovery in a high-value lawsuit.

MPEG LA H.264 patent pool rate in Microsoft v. Motorola probably did not trigger
a serious probabilistic discounting problem, because even if some individual patents
in the pool might have been invalid or not infringed, parties to the pool could be
highly confident that it was necessary to take a pool license to practice the technol-
ogy in question. The price discrimination problem also did not appear to arise in
that case, because the pool did not price discriminate other than on the basis of
volume,140 and a pool license would have been available to the infringer. Sunk-costs
circularity also probably did not arise because, at least as it appears, the pool rates
were set to attract licensees who had not yet incurred sunk costs. Moreover, it may be
the case that the circularity problems noted above are more theoretical than
practical. Although the annual patent litigation studies produced by PwC and Lex
Machina, discussed above in Section 1.1.1, reveal some variations from year to year,
there does not appear to be any trend toward consistently higher (or lower) median
damages awards in the United States over the past decade. Theoretical difficulties
aside, therefore, it may be that courts already are adequately counteracting the
potential spiraling effects of circularity.
Overall, then, we recommend that courts should apply comparables and other
market evidence with caution. Such evidence often may be the best that is available,
and even when there is other evidence of the value of the technology over alter-
natives, it may still be useful to consider market evidence by way of comparison.
Nonetheless, courts probably could make more accurate determinations if more
license terms were publicly accessible. We therefore recommend (and propose
further research devoted to) ongoing efforts to encourage such disclosure.141

1.3.7 Entire Market Value Rule and Smallest Saleable Unit

Another practical concern that often arises when applying a multifactor approach to
reasonable royalties is that the parties may make strategic choices with respect to the
royalty base and royalty rate that they present to fact finders. To reach a specific
reasonable royalty award, a patentee could argue (or a fact finder could determine)
that a relatively small rate should be applied to a relatively large base, or conversely
that a relatively large rate should apply to a relatively small base. For example,

140
See Microsoft Corp. v. Motorola, Inc. (W.D. Wash. 2013, p.78) (U.S.) (stating that “[t]he MPEG LA
H.264 patent pool charges royalties to licensees for products that incorporate an H.264 codec
according to the following schedule: • the first 100,000 units are royalty-free; • for unit volumes
between 100,000 and 5 million, the royalty is $0.20 per unit; and • for unit volumes above 5 million,
the royalty rate is $0.10 per unit”).
141
See, e.g., Contreras et al. 2016 (proposing a study aimed at providing “researchers, litigants, judges,
policy makers, regulators and the public with previously unavailable information regarding com-
mercial patent licensing practices, including royalty rates, in a manner that does not compromise
firm-level confidential information”); see also Ward 2017 (discussing recent German case law
intended to increase the disclosure, subject to confidentiality order, of comparables for use in
FRAND licensing disputes).

a 1 percent royalty rate applied to a $10,000 base and a 25 percent rate applied to
a $400 base both lead to a $100 reasonable royalty award.
In theory, it should be irrelevant which method a litigant elects when presenting
a damages case in court, and a fact finder should be able to determine an appropriate
royalty employing either method. In line with this observation, in many jurisdictions
courts routinely use the value of the end product as the royalty base.142
In recent years, however, U.S. law has placed limits on patentees’ ability to
introduce evidence of the profit or revenue derived from sales of the entire accused
product. These restrictions have been motivated at least in part by the long-
recognized need to ensure that damages are properly apportioned to the patented
features of the accused device, and not to other elements.143 Concerns over large
bases resulting in overcompensation thus have led the Federal Circuit to articulate
a general rule that the royalty base should be the “smallest saleable patent-practicing
unit” (SSPPU) in the accused product, and that use of the “entire market value” of
the end product as the base is permissible only when the patent drives the demand
for the end product.144 In yet more recent cases, however, the Federal Circuit has
permitted use of the entire market value when the parties themselves negotiated ex
ante on the basis of the entire accused product,145 or comparable licenses were
negotiated on the basis of entire products.146
142
In Germany, for example, even when the patent covers only a portion of an end product, courts
consider what reasonable parties would have selected as the royalty base, and often though not
invariably use the value of the end product, taking into account such factors as industry custom; the
convenience of the parties; whether the invention accounts for all or most of the value of the end
product; whether the component is often sold separately; and whether it invests the product with its
own distinctive stamp (kennzeichnendes Gepräge). See Cotter 2013a, 268; Kühnen 2015, 700–02;
Schönknecht 2012, 322–24. Similarly, in Japan courts typically use the value of the end product as the
base. See Second Subcommittee of the Second Patent Committee 2014; Cotter 2015; Samsung Elecs.
Co. v. Apple Japan LLC (IP High Ct. 2014) (Japan).
143
Garretson v. Clark (U.S. 1884, p.121) (U.S.) (“The patentee . . . must in every case give evidence
tending to separate or apportion the defendant’s profits and the patentee’s damages between the
patented feature and the unpatented features.”).
144
See, e.g., VirnetX, Inc. v. Apple Inc. (Fed. Cir. 2014) (U.S.) (reversing a damages award based on the
entire value of accused smartphone, rather than the smallest saleable infringing component);
LaserDynamics, Inc. v. Quanta Comp., Inc. (Fed. Cir. 2012, p.67) (U.S.) (“[I]t is generally required
that royalties be based not on the entire product, but instead on the ‘smallest salable patent-practicing
unit.’”). Though the term “entire market value rule” is generally now understood to have this
meaning, earlier case law gave the doctrine much broader application. See Love 2007, 272 (discussing
older case law under which the entire market value rule acted as “a broad exception to the general
rule of apportionment”).
145
See CSIRO v. Cisco Sys., Inc. (Fed. Cir. 2015, p.1301–04) (U.S.) (holding that it was permissible for
a court to consider evidence of the parties’ previous negotiations, which were based on the entire
value of the accused product).
146
See Ericsson, Inc. v. D-Link Sys. (Fed. Cir. 2014, p.1225–29) (U.S.) (holding that it was permissible for
a court to admit evidence of comparable licenses that were based on the entire value of allegedly
infringing products). See also Teece & Sherry 2016 (criticizing case law requiring litigants to use
a smallest saleable unit royalty base on the grounds that “very few real-world licenses comport with
the SSPPU doctrine, making it difficult to appeal to the terms of real-world licenses in assessing
reasonable royalties”).

In addition to concerns over apportionment, the Federal Circuit justifies its

preference that the royalty base be the smallest saleable unit on the grounds that
the value of the entire accused product will tend to have an undue influence on
jurors in cases where the asserted patent covers just one of many components or
features that comprise the entire product, and in such cases may lead to damages
awards that are overcompensatory.147 The concern may stem from a cognitive bias
known as “anchoring,” i.e., the human tendency to give undue weight to the first
data point one encounters, even if that data point is arbitrary or irrelevant.148 In the
context of U.S. litigation, anchoring tends to reinforce the importance of the
plaintiff’s damages case,149 which is virtually always presented first and in some
cases is not countered at all by the infringer.150 Experimental studies using fact
patterns involving personal injury cases and punitive damages awards have found
evidence of an anchoring effect and suggest that, all else equal, a plaintiff that
requests more damages will tend to receive a larger award.151 Thus, there is a risk that
reasonable royalty awards based on the entire value of the accused multicomponent
products will systematically overvalue patent rights that cover just a fraction of the
products’ components or features.
A related problem is that, according to one study based on royalties awarded from
1982 to 2005, U.S. juries tend to award royalty rates that are within the general
vicinity of 10 percent, regardless of the size of the base that the rate is applied to.152

147
See VirnetX, Inc. v. Apple Inc. (Fed. Cir. 2014, p.1327) (U.S.) (noting that the “smallest saleable unit”
requirement is based on a “fundamental concern about skewing the damages horizon” by “mislead-
ingly suggest[ing] an inappropriate range” of damages); LaserDynamics, Inc. v. Quanta Comp., Inc.
(Fed. Cir. 2012, p.68) (U.S.) (“Admission of . . . overall revenues, which have no demonstrated
correlation to the value of the patented feature alone, only serve to make a patentee’s proffered
damages amount appear modest by comparison, and to artificially inflate the jury’s damages
calculation beyond that which is ‘adequate to compensate for the infringement.’”).
148
See, e.g., Furnham & Boo 2011, 35 (defining the “anchoring effect” as “the disproportionate influence
on decision makers to make judgments that are biased toward an initially presented value”).
149
See Greene & Bornstein 2003, 149–73 (reviewing the literature on anchoring’s effect on juries). See
also Posner & Sunstein 2005, 593 (“Juries lack reference points, so their judgments will depend
heavily on the presentation of evidence by lawyers, and on whatever anchors, prejudices, and
expectations citizens bring to the jury box.”).
150
See Chao 2012, 136–37 (noting that the anchoring effect of the plaintiff’s royalty base “is often
exacerbated by the tactics defendants use at trial,” including failure to offer a counter-anchor due
to “fear that presenting a damages case will be interpreted as an admission of liability”).
151
See Campbell et al. 2016, 546 (finding in an experimental study of mock jurors deciding a medical
malpractice case that “powerful anchoring effects dominate much smaller but still statistically
significant credibility effects” that result from presenting “outrageous[ly]” large anchors);
Chapman & Bornstein 1996, 519 (finding in an experimental study of mock jurors deciding
a personal injury case that “anchoring occurs in legal applications, and that plaintiffs would do
well to request large compensation awards”); Hastie et al. 1999, 445 (finding in an experimental study
in which mock jurors were asked to award punitive damages that “plaintiff’s requested award values
had a dramatic effect on awards: the higher the request, the higher the awards”).
152
See Lemley & Shapiro 2007a, 2034 (finding in a study of fifty-eight patent verdicts awarded between
1982 and 2005 that “[t]he royalty rate for components is approximately 10.0%, compared with 13.1% for
all inventions and 14.7% for integrated product claims”).

Combined with anchoring, this finding (if it is still valid) suggests that a patentee
who is permitted to present large revenue figures to a jury or judge153 might receive
a larger damages award as a result, even if the revenue figures themselves bear little
relation to the value of the patented technology. On the other hand, we are not aware
of any more recent studies on the issue, and it is possible that the effect has
diminished over time (due, perhaps, to the abolition of the 25 percent rule of
thumb). There is also concern that juries prefer whole-number rates even when
the evidence suggests that the appropriate rate is less than 1 percent. We therefore
propose further research on the question of whether juries are susceptible to award-
ing inappropriately high damages given concerns with apportionment, anchoring,
and preferences for particular royalty rates.
In addition, there may be a risk that use of the entire market value as the royalty
base will skew litigation outcomes by encouraging patentees to sue downstream
parties that are ill suited to defend patent cases. Imagine for example, an allegedly
infringing component that is produced by manufacturer M, incorporated into
a consumer electronics product produced by company C, shipped to retailer R,
and sold to user U. Because infringement can occur by making, selling, or using
patented technology, M, C, R, and U are all potential targets for suit. However, in all
likelihood it is M that is best positioned to defend a patent suit.154 R and U, in
particular, may well know nothing about how the component operates, not to
mention the intricacies of patent law. Nonetheless, the effect of anchoring will
tend to inflate the amount of damages a patentee can expect to recover from C, R, or
U. While M may sell the chip to C for pennies or a few dollars, C may earn dozens or
hundreds of dollars per unit in sales to R, and R may sell the final product to users for
several hundred dollars more per unit.155 In addition, U may use the product as part
of a business that generates many thousands of dollars a year. Given the option to
choose, a patentee will find it advantageous (for reasons that have little to do with the
value of the patented technology) to seek damages from component purchasers,
retailers, or even users, all of whom have suboptimal incentives to test the patent’s

153
Generally speaking, we think it is likely that judges, by virtue of their legal training and experience,
will be less susceptible to this effect than lay jurors. As a result, this concern may be particularly acute
in countries in which juries award damages, and less of a concern in countries where damages are
calculated by judges. However, we do not believe that judges are completely immune. Indeed,
experimental studies have shown that judges are susceptible to anchoring effects when awarding
damages and determining criminal sentences. See Rachlinski et al. 2015, 695 (finding “that the
presence of misleading numeric reference points (or ‘anchors’) affected judges’ decisions in a series of
hypothetical cases”).
154
See Love & Yoon 2013, 1620–35 (explaining that, compared to their downstream customers, manu-
facturers are less susceptible to litigation cost holdup and are better positioned to both test the merits
of infringement allegations and appropriately value infringed patent rights). See also Europe
Economics 2016, 5, 28, 48 (noting that European PAEs tend to target telecom companies, “the
most vulnerable segment of the supply chain”).
155
Consider, for example, an allegedly infringing $6.50 3G wireless chipset installed in a smartphone
that retails for $500. See Love & Yoon 2013, 1634 n.104 (using the example of a new iPhone 4S in 2013).

validity and the patentee’s infringement contentions.156 On the other hand, if

patentees are suing retailers and users who are ill-positioned to defend themselves
in an effort to obtain inappropriately high royalties, the first best solution may be to
rein in the ability to maintain patent infringement lawsuits down the chain of
distribution, rather than to alter damages law.
Finally, limiting damages to the smallest saleable unit may have certain practical
benefits. For example, defaulting to a smaller royalty base will tend to reduce the
effect of error in royalty rate selection.157 It will also tend to narrow the range of
possible trial outcomes, which benefits risk-averse parties and increases the like-
lihood of pretrial settlement.
At the same time, there are several economic arguments in favor of using the
entire market value as the royalty base. First, limiting damages calculations to
the component level may undervalue patented technology by failing to share with
the patentee a portion of the spillover value created by its invention.158 A new high-
resolution computer screen, for example, may be undervalued by U.S. patent law
because, though demand for computers is not primarily driven by their screens,
better screens enable or improve other computer functionality, such as video gaming
and movie watching.159 While in many circumstances we would expect spillover
value to be reflected in the sales price of the patented component, it may not be in

156
Love & Yoon 2013, 1628 (arguing that “[a]s between a similarly situated customer and manufacturer,
it is virtually always the manufacturer that is best suited to vigorously litigate the case in a manner that
challenges the patent’s validity and delineates its claim scope” because customers are often “compan-
[ies] outside the technology industry that . . . have no expertise in the accused technology[,] . . . were
not involved in the design, development, or manufacture of the accused technology[, and] . . . have
no understanding of the field of the patent and no knowledge of the prior art to the patent”). Though
it is true that a patentee will generally find it more costly to sue multiple downstream parties rather
than a single manufacturer, experience suggests that many patentees will nonetheless make this
choice. In the United States, retailers are commonly sued for selling allegedly infringing products.
For example, according to Lex Machina, Wal-Mart, Target, and Best Buy were each sued for patent
infringement more than eighty times between 2012 and 2016. Moreover, some patentees have even
pursued large numbers of end users of allegedly infringing products. Id. at 1610–11 (describing patent
monetization campaigns undertaken by patentees like Innovatio IP Venutres, LLC, MPHJ
Technology Investments, LLC, and ArrivalStar S.A., which collectively sued hundreds of end
users and threatened to sue thousands more).
157
See Stern 2015, 554 n.26 (“[C]onsider a $1 chip in a $500 smartphone. Suppose the invention
contributes 10% of the value of the chip and that the reasonable royalty is half of that or 5 cents,
i.e., 5% of the $1 chip price. In principle, the reasonable royalty based on the smartphone price would
be the same 5 cents or 0.02% of $500. But how is a jury or judge to determine the difference between
a royalty of 0.02% and 0.01% or even 0.1%? Yet the cash value of the error is multiplied greatly by
starting out with an inflated royalty base. Choosing between infinitesimals is an inherently error-
prone exercise.”).
158
See Petit 2016 (arguing that use of a “smallest saleable unit” benchmark for patent damages may
undervalue “general purpose technologies” that “yield countless positive production externalities”);
Geradin & Layne-Farrar 2010, 774–76 (arguing that a strict application of the U.S. entire market
value rule may undervalue patent rights to a component of a complex product “if the component in
question ‘enables’ other components but does not rise to the level of driving demand”).
159
See Geradin & Layne-Farrar 2010, 775 (using this same example).

some instances. Thus, as Petit has argued, “general purpose” technologies with
many relatively low-value uses may be undervalued in patent suits against parties
that use the technology for less common applications that produce especially large
cost savings or profits.160
Relatedly, to the extent price discrimination is economically efficient, it makes
sense to allow patent owners to extract a higher royalty from implementers who
market comparatively expensive end products for which the patent confers substan-
tial value. In addition, as noted above, in real-world licensing transactions parties
often, though not invariably, use the entire market value as the base. To the extent
reasonable royalty awards should mimic real-world licenses, use of the entire market
value often would seem unexceptional.161
Given the wide variety of arguments for and against the entire market value/
SSPPU rules as employed in the United States, we first propose further research,
both with regard to the economic issues highlighted above and into the psychology
of judges and juries (e.g., can anchoring and other biases be overcome in other
ways?). Given the likelihood that anchoring does play a role in jury deliberations,
however, we further recommend that, for now at least, the Federal Circuit retain
rules substantially restricting the use of the entire market value. By the same token,
given the likelihood that professional judges are less affected (though perhaps not
unaffected) by anchoring, for now we do not recommend that other countries
(which do not employ juries to decide patent cases) alter their more liberal approach
to the use of the entire market value.

1.4 PRACTICAL CONSIDERATIONS

In this final Section, we briefly address three remaining practical issues that courts in
some countries either have considered or may devote further attention to in the
future, namely (1) the evaluation of individual pieces of expert evidence to satisfy
a basic threshold of quality; (2) the enhancement of reasonable royalty awards to
achieve additional deterrence; and (3) the calibration of damages awards based on
context-specific factors.

160
See Petit 2016 (using the example of wireless technology that, when adopted for use in airplanes, led
to substantial cost savings by reducing aircraft weight and, consequently, fuel costs). See also
Régibeau et al. 2016, 77 (comparing wireless technology in a smartphone, which “do[es] appear to
influence a number of important functionalities,” to wireless technology in a car, which “it would be
rash to argue . . . contribute to a very substantial share of the value that consumers place on specific
cars”); Layne-Farrar 2017 (recommending that courts focus on valuing the use of a technology to the
implementer, not on trying to pinpoint its location in a particular component; and that they should
permit experts to use as the royalty base the implementer’s properly apportioned revenue, without
disclosing to the jury the infringer’s overall revenues or profits).
161
See also Baron & Pentheroudakis 2017, 93–94 (noting that “[t]he practicability (and traceability) of
the SSPPU is questionable in the context of portfolio licensing: it is often not possible to map
a portfolio of hundreds or even thousands of diverse patents to a single SSPPU”).

1.4.1 Expert Evidence and Daubert Gatekeeping in the United States

In the United States, there are two main ways by which judges can police proof of
reasonable royalty damages. First, they can enforce and, as appropriate and neces-
sary, develop legal doctrine directly regulating what constitutes adequate evidence
for reasonable royalty damages. Second, they can enforce and, as appropriate and
necessary, develop legal doctrine regulating the admissibility of evidence for pur-
poses of such proof.
The second, admissibility oriented mechanism looms large in the United States,
where the primary fact finder is commonly a jury, rather than the trial judge. Under
the United States’ Federal Rule of Evidence 702, which essentially embodies
a requirement previously articulated by the Supreme Court of the United States
in Daubert v. Merrell Dow Pharmaceuticals, Inc.,162 trial judges police the admissi-
bility of expert testimony to ensure that this evidence “will help the trier of fact to
understand the evidence or to determine a fact in issue,” “is based on sufficient facts
or data,” and results from the application of “reliable principles and methods.”163
Because expert testimony is often a vital component of the proof of reasonable
royalty damages, judicial gatekeeping under Daubert has become a powerful tool
for limiting the permissible evidentiary bases for such damages. The U.S. Court of
Appeals for the Federal Circuit has reversed or vacated a number of damages
verdicts in patent cases on Daubert grounds.164
In the absence of a jury or other fact finder distinct from the trial-level adjudi-
cator of questions of law, there is probably less significance to the distinction
between (1) the ultimate assessment of the overall sufficiency of evidence to
support a damages award and (2) gatekeeping for the relevance and reliability of
expert testimony. But although the particular standard for expert testimony gate-
keeping has been controversial within the United States,165 something like
Daubert-style review might generally be useful even in the absence of juries. We
recommend that courts consider whether individual pieces of expert evidence

162
Daubert v. Merrell Dow Pharm. Inc. (U.S. 1993) (U.S.); see also Bernstein & Lasker 2015, 6 (“In 2000,
the Judicial Conference of the United States . . . amended Federal Rule of Evidence 702 for the
express purpose of resolving conflicts in the courts about the meaning of Daubert.”).
163
F ED . R. E VID . 702.
164
See, e.g., VirnetX, Inc. v. Apple Inc. (Fed. Cir. 2014, p.1329, 1333–34) (U.S.) (holding that damages
expert’s testimony on the royalty base and in support of a fifty-fifty split of profits was inadmissible);
LaserDynamics, Inc. v. Quanta Comp., Inc. (Fed. Cir. 2012, p.79) (U.S.) (holding that a damages
expert’s testimony on the value of a reasonable royalty rate “was unreliable under Federal Rule of
Evidence 702 and should have been excluded”); Uniloc USA, Inc. v. Microsoft Corp. (Fed. Cir. 2011,
p.1318) (U.S.) (affirming grant of a new trial on damages where expert testimony based on a “25% rule
of thumb” for the proportion of product value constituting a reasonable royalty “fail[ed] to pass
muster under Daubert”).
165
See, e.g., Bernstein & Lasker 2015, 9 (reporting “continued divisions among federal courts over the
proper standards for admission of expert testimony . . . ”); Faigman & Imwinkelreid 2013, 1695 (“Even
if Daubert is the right choice for the federal judiciary, a state could reasonably conclude that it is not
the right path for it to take.”).

satisfy a basic threshold of quality in addition to separately examining the overall

sufficiency of all relevant evidence.

1.4.2 “Kickers” for Reasonable Royalties

There has been discussion in the United States about whether there should be the
possibility of a “kicker” that increases damages beyond a straight reasonable royalty
for any of multiple reasons: for example, compensation for litigation costs,166
deterrence,167 compensation for lost profits that a royalty rate might not ordinarily
reflect,168 and correction for pre-existing royalty rates’ incorporation of a discount
because of uncertainty about patent claim validity or scope.169 The U.S. Court of
Appeals for the Federal Circuit has indicated that courts may combine a reasonable
royalty award with compensation for other damages that the royalty does not cover –
for example, lost profits from depression of royalties obtained from others because
infringement has bred “widespread and open disregard of [relevant] patent
rights.”170 But the Federal Circuit has also held that monetary awards to compensate
for litigation expenses or to punish an infringer may only be awarded in accordance
with statutory provisions and precedent specific to awards of attorney fees or
enhanced damages.171 Thus, under current law in the United States, courts may
not include a kicker for such purposes when assessing standard compensatory
damages.
Consideration of awarding a kicker beyond reasonable royalties generally seems
best addressed under other rubrics, which we explore in other parts of this book. In
this chapter, we have already addressed questions about the need to correct for pre-
litigation uncertainty in the context of the hypothetical negotiation framework.
Likewise, questions about when and how to award lost profits are addressed in
Chapter 2, and questions about when and how to punish infringement or com-
pensate for litigation costs are discussed in Chapter 3. Rather than handle such
concerns obliquely through the use of kickers added to reasonable royalties, we

166
Cotter 2004, 316 (noting a “Federal Circuit decision stating that courts may not incorporate into the
reasonable royalty award a damages ‘kicker’ so as to compensate the patentee for litigation and other
expenses”).
167
Id. (indicating that a damages “kicker” might advance goals of deterrence).
168
Lee & Melamed 2016, 459 (“[S]ince the royalty may include a ‘kicker’ based on Georgia-Pacific
Factor 4 (the patent holder’s policy of licensing or not licensing the patent), patent holders are
generally compensated at least to some extent for their loss of market exclusivity.”); Yang 2014, 655
(noting scholarly speculation that “[c]ourts, worried about undercompensating patentees who could
not prove lost profits, added ‘kickers’ to reasonable royalty awards . . . ”).
169
Lemley & Shapiro 2007a, 2019–20 (contending that “[c]ourts have recognized [the discount]
problem and periodically seek to modify the market-based royalty data by adding ‘kickers,’ either
expressly or sub rosa.”); see also supra note 15 (noting the occasional practice in France and Germany
of increasing royalties to account for risks the infringer has avoided).
170
Maxwell v. J. Baker, Inc. (Fed. Cir. 1996, p.1109) (U.S.) (quoting jury instruction).
171
Whitserve, LLC v. Computer Packages, Inc. (Fed. Cir. 2012, p.34 n.18) (U.S.).

recommend that they be addressed directly through remedial doctrines created for
those particular purposes.

1.4.3 Calibrated Evidentiary Burdens or Royalty Measures

As an alternative to applying the same standards for measuring or proving
reasonable royalty damages in every case, courts could apply standards for
measuring or proving reasonable royalty damages that are responsive to context-
specific factors. These factors could include (1) the relative blameworthiness of
the parties; “(2) the state of the art or the availability of evidence for proving
damages,” including one or another party’s status as a cheaper information
provider; and “(3) the amount of damages alleged.”172 Calibration of damages
measures or evidentiary burdens based on context-specific factors has occurred
in other legal areas, such as contract law173 and the law of restitution.174 In
these areas of law, doubts are often resolved against parties viewed as
blameworthy,175 and courts have relaxed “demands of reasonable certainty
when . . . the state of the art or other circumstances do not permit more precise
or robust proof of damages.”176 Extension of such calibration to encompass
sensitivity to “the amount of damages alleged” seems plausible and perhaps
even natural for a form of monetary relief that uses the word “reasonable” in its
very name. At least if the law wishes to ensure that smaller claims for damages
are practically enforceable, the law should not generally demand that
a claimant for such limited damages expend more on proving these damages
than the claimant alleges the damages to be worth. Nonetheless, because there
is enough immediate challenge in articulating basic principles for computing
reasonable royalties, we propose further research on more context-specific
calibration.

172
Golden 2017, 274; see also Chiang 2017 (advocating two principles for the assignment of evidentiary
burdens in damages law: (1) “courts should only require a party to produce information when the
social benefit of the information . . . exceeds the costs of producing the information” and (2) “courts
should impose the burden of proof on the party that can produce the required evidence at lower
cost”).
173
Golden 2017, 272 (observing that, in contract law, “courts have allowed for pragmatic or fairness-
oriented tuning of certainty standards on a retail as well as a wholesale basis”).
174
Golden & Sandrik 2017 (“The law of restitution illustrates how, in addressing difficult-to-quantify
monetary relief, courts can develop a context-sensitive yet coherent approach that . . . deploys both
[monetary-relief] measures and burdens of proof or production in ways that distinguish between
levels of relative responsibility or fault.”).
175
See Golden 2017, 271 (discussing treatments of doubts and blameworthiness in the First and Second
Restatements of Contracts); Golden & Sandrik 2017 (discussing how the Restatement (Third) of
Restitution and Unjust Enrichment assigns evidentiary burdens in accordance with “‘the equitable
disposition that resolves uncertainty in favor of the claimant against the conscious wrongdoer’”
(quoting R ESTATEMENT (T HIRD ) OF R ESTITUTION AND U NJUST E NRICHMENT § 51 cmt. i)).
176
Golden 2017, 272.

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Reasonable Royalties

Uploaded by

Reasonable Royalties

Uploaded by

1

Thomas F. Cotter, John M. Golden, Oskar Liivak, Brian J. Love,

1.1 PRELIMINARY MATTERS

1.1.1 Empirical Literature

profits awards.9 In China, statutory damages predominate and awards of reason-

1.1.2 Theoretical Justifications

defend itself.13 To the extent that restorative damages risk underdeterring

characterizing reasonable royalties as restorative or restitutionary. The royalty

1.1.3 Principal Approaches

This approach is discussed further in Chapter 5 on the effect of FRAND

1.2 REFORMULATING GEORGIA-PACIFIC

including Canada,31 Germany,32 and Japan,33 sometimes look to a similar range

Georgia-Pacific factors 8, 9, 10, and 13 into one overarching concept.48 Step 1

1.3 INCREMENTAL VALUE AND OTHER ISSUES

1.3.1 Incremental Value

patentee will be overcompensated in comparison with the royalties it would have

1.3.2 Hypothetical Bargain

1.3.3 Dividing Incremental Value

By contrast, we would not recommend use of a stronger presumption (e.g., one

1.3.4 Timing of Hypothetical Negotiation

valuation of the patented technology.92 Second, there is substantial scholarly com-

1.3.5 Information Set

a reasonable royalty ex ante. Second, . . . a royalty determined on the basis of ex post

1.3.6 Comparable Licenses

requirements to qualify as an “established” one, its probative value might seem

1.3.7 Entire Market Value Rule and Smallest Saleable Unit

In addition to concerns over apportionment, the Federal Circuit justifies its

validity and the patentee’s infringement contentions.156 On the other hand, if

1.4 PRACTICAL CONSIDERATIONS

1.4.1 Expert Evidence and Daubert Gatekeeping in the United States

satisfy a basic threshold of quality in addition to separately examining the overall

1.4.2 “Kickers” for Reasonable Royalties

1.4.3 Calibrated Evidentiary Burdens or Royalty Measures

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