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Articles From Brisbane Consulting Group

Focus on Infringement - Federal Court Provides Guidance on Reasonable Royalty Evidence

In Meridian Manufacturing, Inc. v. C&B Manufacturing, Inc., the U.S. District Court for the Northern District of Iowa ruled on various pretrial motions, including Daubert motions to exclude expert testimony on reasonable royalty damages. The court determined that certain evidence should be excluded, while other evidence should be admitted. The ruling provides valuable guidance on the standards that damages experts are expected to meet in patent infringement cases.

Hypothetical Negotiation

In patent infringement cases, plaintiffs are generally entitled to recover damages based on lost profits but never less than “reasonable royalties.” A common methodology for determining a reasonable royalty is to estimate the royalty rate that would have been agreed to in a hypothetical negotiation taking place just before the infringement began.

Under this method, experts generally consider 15 factors listed in the landmark Georgia-Pacific case. These factors are:

  1. Existence of an established royalty,
  2. Rate paid by the licensee for comparable patents,
  3. Nature and scope of the license,
  4. Licensing policy,
  5. Business relationship of licensor and licensee,
  6. Effect of selling the product to promote other products of a licensee,
  7. Duration of the patent and term of the license,
  8. Established profitability, commercial success and current popularity,
  9. The utility and advantages of the product over older ones,
  10. Nature of the patented invention and benefits to those who used it,
  11. The extent the licensee used the product and the value of that use,
  12. The customary industry portion of the profit or selling price,
  13. How much profit should be credited to the invention,
  14. Hypothetical license negotiation when the infringement began, and
  15. Testimony of qualified experts.

Agricultural Patent

In Meridian, the patent at issue was for an agricultural trailer designed to help farmers transport large seed bags or boxes to planters in the fields. The court ruled that the defendant’s trailer infringed specific claims in the plaintiff’s patent, generally dealing with guide plates used to facilitate the positioning of seed boxes. The defendant redesigned its trailer, but the parties still disagreed about whether the new design resolved the infringement issue.

The defendant’s expert explained that, because the patentable feature (the guide plates) was one of many features, apportionment of damages between the guide plates and other features was appropriate. However, no information was available to base an apportionment analysis on.

Reasonable Royalty Analysis

Instead, the defendant’s expert proposed a reasonable royalty of no more than the defendant’s cost to develop and implement an alternative, non-infringing design. This analysis implied a lump sum royalty of $15,000 to $30,000.

The plaintiff argued that it was improper to “cap” reasonable royalty rates at the cost of implementing the cheapest available non-infringing alternative. But, under the facts and circumstances of the case, the court opined that it was reasonable to assume that the licensee in a hypothetical negotiation wouldn’t have paid a royalty greater than the cost of the defendant’s redesign.

The plaintiff’s expert estimated reasonable royalties based on rates ranging from 3% to 10% of sales. He assessed damages based on a combination of reasonable royalties and lost profits ranging from $3.7 million to $5.7 million. This analysis relied on several Georgia-Pacific factors, particularly the second factor (the rate paid by the licensee for comparable patents).

The court found the expert’s testimony on reasonable royalty damages inadmissible, because he failed to show how the technologies in the licenses he relied on were comparable to the technology at issue. Additionally, he cited certain other Georgia-Pacific factors, but he failed to explain how those factors would influence the parties in a hypothetical royalty rate negotiation.

Detailed Analyses Are Critical

In Meridian, the court’s discussion of reasonable royalty damages illustrates how it’s critical for experts to fully explain their methodologies. A court concluded that “superficial recitation of the Georgia-Pacific factors, followed by conclusory remarks” isn’t enough.

Focus on Infringement - Federal Court Provides Guidance on Reasonable Royalty Evidence

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Doug is a Partner with Brisbane Consulting Group, LLC providing business valuation, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. Doug has experience consulting with publicly traded entities and valuing a variety of closely held companies in connection with mergers, acquisition and divestitures, business combinations, estate and gift tax planning, ESOPs, and purchase allocations.


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