An Analyst’s View of Methods for Valuing Patent Infringement Awards - August 16, 2011
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Building off the previous article on patent valuations, this article addresses the valuation of patent infringement awards. Valuation guidelines for settlements in patent infringement cases have largely evolved out of what has been allowed by the courts, but fundamentally the analysis and calculation of damages still rest on a similar market and financial examination as that presented in the previous article. Unlike other damages involved with other tort lawsuits, intellectual property infringement cases need not prove that material damages occurred to the patent owner. All that must be shown is that an infringement occurred. Once that is proven then damages can be awarded.
There are various guidelines that have been allowed by the courts in infringement cases for calculating awards. But the most basic guideline as defined in patent statute is that the patent owner is due an amount no less than the amount that the parties (patent owner and patent infringer) would have agreed to in the beginning if the patent was licensed lawfully. This is generally referred to as “reasonable royalty” damages and sets a pretty high bar in terms of the awards due in an infringement case. The analysis process for determining these reasonable royalty awards can thus lead back to a hypothetical negotiation process before the infringement took place, which may incorporate a market and financial analysis of the application, the differentiating product advantage, and the resulting profit advantage. This resulting profit advantage can be represented in monetary terms or in percentage terms per product sold. This can then be used to directly compute the reasonable royalty due, both on products already produced and those to be produced in the future.
The other important set of guidelines, that have largely become the industry standard approach, stem from a 1970 infringement case involving Georgia-Pacific Corp. and United States Plywood Corp., from which resulted 15 factors to be considered when determining reasonable royalty damages. These are generally referred to as the Georgia-Pacific factors. There is much written on these 15 factors and I will not repeat them here, but in general these factors include the minimum amount due statute mentioned above (in fact, Georgia-Pacific factor #15 is pretty much a replication of the minimum amount due statute), but also go much further in noting various other aspects that should be considered. It’s generally believed that some factors will tend to increase the reasonable royalty award and some factors will tend to decrease the award. But overall the net result seems to rest back on market and financial analysis whereby the resulting royalty award is computed as a percentage of the profit or revenue on a per product basis sold both prior to the infringement award and into the future. A discounted cash flow analysis is often used to analyze this revenue stream to calculate a present value of the royalty award.
Finally, there are cases that have allowed the application of variations to the Georgia-Pacific factors that all largely result from the fact that some operational history has usually been established by the infringer and/or the industry at large. While this actual operational information is not incorporated in the theoretical pre-infringement negotiations of the previous techniques, it can be very useful in determining how much the infringer has actually benefited from the patent. These valuation techniques typically analyze the actual revenue and/or profit numbers to determine the advantage that the infringer has established over the competing market and awards a royalty based on the products sold to-date and potentially future royalties on future sales. This situation thus requires the analysis of industry or market sector economic information to determine the operational status quo, as well as analysis of the infringer’s specific income statement, to determine the extent to which the infringer has benefited. One additional award analysis variation that been allowed utilizes the concept of an industry established royalty in situations where there is enough patent licensing activity where an industry norm license royalty can be determined. This sometime can be quite difficult to determine due to the lack of adequate licensing activity. It should be noted that most all variations to the Georgia-Pacific factors have a tendency to increase the award from the baseline minimum amount award resulting from a lawful licensing. In reality, infringement royalty awards are typically higher, and sometimes substantially higher, than the minimum amount award.
Jim Moeller, Managing Partner
Moeller Ventures, LLC