On September 1, 2022, Altria, the parent company of Philip Morris USA, secured a shocking $95 million award after a federal jury concluded that rival R.J. Reynolds Vapor Co. infringed three of Altria’s patents for its pod-style vape. The jury’s number was based on Altria’s request for a 5.25% royalty rate for the infringed patents—light years away from Reynolds’ estimate of $3.6 million in damages. With damages this high for an instrument so integral to cannabis-based products, the industry should be mindful of how Altria was able to convince the jury to settle on its requested damage figure.

In patent cases, damages are governed by 35 U.S.C. § 284, which calls for damages “in no event less than a reasonable royalty for the use made of the invention by the infringer.” A “reasonable royalty” is generally based on convincing the jury of what the infringer would typically pay in a “hypothetical negotiation.” The “hypothetical negotiation” is not novel or specific to patent cases; it is frequently used in lost profits analyses proffered in, among other things, business divorces, trade secrets and trademark disputes.

The key to a successful “hypothetical negotiation” argument is convincing a jury that the infringed party’s version of the “hypothetical negotiation” would indeed have transpired. Thus, it becomes a battle of experts to paint the following picture: if, on the eve of infringement, the infringer and infringed were to make a legitimate deal, what would their agreement be? Courts allow experts to rely on comparable patent licenses to flesh out the hypothetical; however, there’s no bright line rule for comparability.

This was the strategy utilized by Altria; Altria relied on two different damage experts: one process expert and one economic expert. Both largely based the “hypothetical negotiation” upon settlement negotiations and an ultimate agreement proffered between Reynolds (the infringer) and an unrelated third party, Fontem. Altria’s process expert explained how the vapes at issue in this case were similar to the vapes being negotiated in the unrelated Fontem-Reynolds settlement. The damages expert then took that expertise and opined that the royalty rates Fontem and Reynolds used during settlement negotiations should apply comparably in this hypothetical.

Ultimately, the jury sided with Altria’s “hypothetical negotiation” and wholly rejected the lower number proffered by Reynolds. One of the important takeaways from this case is that it never hurts to keep tabs on publicly-available information related to competing products. The fact that comparable transactions can be used to formulate a “hypothetical negotiation” was key for Altria in this case.

The patents-in-suit are U.S. Patent Nos. 10,299,517; 10,485,269; and 10,492,541. The case is Altria Client Services LLC v. R.J. Reynolds Vapor Co., case number 1:20-cv-00472, in the U.S. District Court for the Middle District of North Carolina.