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Articles From Brisbane Consulting Group

Vectura Ltd. v. GlaxoSmithKline LLC – Reasonable Royalty Damages Reflect Built-In Apportionment

How are damages measured in patent infringement cases? Valuation experts commonly use a reasonable royalty for the patented technology based on a hypothetical negotiation between the parties at the time of the infringement. When a royalty base is the “entire market value,” the expert may need to apportion it among the product’s infringing and noninfringing components.

However, when reasonable royalty damages are based on a sufficiently comparable license, apportionment is often unnecessary because it’s already built into the expert’s model. So said the U.S. Court of Appeals for the Federal Circuit in the recent case of Vectura Ltd. v. GlaxoSmithKline LLC.

Trial Court Ruling

In Vectura, the plaintiff successfully sued GlaxoSmithKline (GSK) for infringing its patent for production of “composite active particles” used in dry-powder inhalers. At trial, the jury awarded Vectura a royalty of 3% on a base of $2.99 billion in inhaler sales, for a total of nearly $90 million in damages.

The plaintiff’s expert calculated damages based on a comparable license granted by Vectura to GSK in 2010. That license called for a tiered royalty structure: GSK agreed to pay Vectura 3% on its first 300 million British pounds in sales, and 2% on sales between 300 million and 500 million pounds. No royalties were owed on sales above 500 million pounds.

In determining a reasonable royalty for the litigated patent, the expert applied a 3% flat royalty rate to total sales of licensed products. But she didn’t adopt a royalty cap similar to the one applied by the 2010 license, citing changed circumstances.

Federal Circuit Opinion

On appeal, GSK challenged several aspects of the lower court’s verdict, including alleged flaws in the royalty calculations proposed by the plaintiff’s expert. Specifically, GSK claimed the expert failed to show that the patented substances drove consumer demand for the inhalers. Absent such a showing, GSK argued, the expert should have apportioned the royalty base to reflect the noninfringing components of the inhalers.

The Federal Circuit disagreed, noting that “when a sufficiently comparable license is used as the basis for determining the appropriate royalty, further apportionment may not necessarily be required.” The reason is that damages based on a comparable license or negotiation may in some cases have “built-in apportionment.”

The court found that the 2010 license was sufficiently comparable. Indeed, GSK’s own expert testified that it was “a very close comparable, much closer than you ever find in a patent case.” The evidence showed that the circumstances surrounding the 2010 license and the hypothetical negotiation in 2016 “were highly comparable and that principles of apportionment were effectively baked into the 2010 license.”

GSK also challenged the expert’s failure to use the 2010 license’s royalty cap. However, the expert testified that, between 2010 and the time of the hypothetical negotiation, the company’s circumstances had changed. For example, the business now had more leverage because of the success of the inhalers. And the Federal Circuit found that the jury was entitled to accept the expert’s explanation as a viable reason to discard the royalty cap.

Sidebar: Applying the Relief from Royalty Method to Value IP

A common method used to value intellectual property (IP) is the relief from royalty method. This market-based valuation technique assumes that, if the IP owner didn’t own the asset being valued, it would have to license the asset from a third party. Thus, the IP’s value is equal to the present value of the royalty payments from which the owner is relieved by virtue of owning the asset.

Applying this method is similar to valuing a business using the guideline transaction method (also known as the guideline M&A method). Under the relief from royalty method, the expert analyzes available market data for licenses of similar assets in similar industries, with similar territories and other characteristics. That data is used to derive a royalty rate that’s applied to the owner’s projected revenue attributable to the IP.

It’s important to carefully analyze comparable licenses and adjust the royalty rate for differences between comparables and the hypothetical license of the subject IP. For example, adjustments may be necessary if a comparable license includes:

  • Uncommon payment terms,
  • Unusually short or long license periods,
  • Royalties based on something other than revenue, or
  • Several IP assets combined in a single license.

Adjustments may also be needed to reflect changes in economic conditions over time, as well as differing financial circumstances or market positions between the comparables and the subject IP.

The last step in the relief from royalty method is to calculate the present value of the projected royalty payments using an appropriate risk-adjusted discount rate. Higher risk equates with higher discount rates and lower IP values (and vice versa).

Key Takeaways

Calculating damages in patent infringement cases can be challenging — particularly when the product contains noninfringing components. This decision illustrates the importance, when calculating reasonable royalty damages, of carefully analyzing comparable licenses or negotiations used to support the royalty rate and royalty base. By showing that apportionment was “baked into” its damages model, a plaintiff can avoid further apportionment and enhance its recovery.

Vectura Ltd. v. GlaxoSmithKline LLC – Reasonable Royalty Damages Reflect Built-In Apportionment

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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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