In recently affirming a $30 million damages award, the U.S. Court of Appeals for the Federal Circuit expounded on two key factors—prior settlement agreements and cost savings—that can impact "reasonable royalty" damages under 35 U.S.C. § 284. Prism Tech. LLC v. Sprint Spectrum L.P., No. 2016-1456, Slip Op. at 7 (Fed. Cir. Mar. 6, 2017). A reasonable royalty is determined in a hypothetical negotiation between the patent owner and the infringer at the time infringement began, with both parties assumed to take into account all factors that prudent businesspersons would consider. Slip Op. at 23-34. The Prism case is instructive because the Federal Circuit does not often discuss the relevance of these two factors to the determination of a reasonable royalty.
Relevance of Previous Settlement Agreements
Settlement agreements are often excluded as evidence of a reasonable royalty because a negotiation in the context of litigation is different from the hypothetical negotiation that results in a "reasonable royalty." Slip Op. at 11. Here, however, the Federal Circuit explained that settlements "involving the patented technology can be probative of the technology's value if that value was at issue in the earlier case." Slip Op. at 12. However, a settlement agreement can be excluded if, for example, circumstances indicate that the settlement royalty was either higher or lower than the rate that would result from a hypothetical negotiation. Id. For instance, a litigation settlement might undervalue the patented technology if the patent owner discounts the value of the patented technology to account for the probability of losing on validity or infringement. Id. Conversely, a settlement might overvalue the patented technology if the settlement included other technology, accounted for the possibility of enhanced damages, or reflected litigation or other transaction expenses. Slip Op. at 13.
In this case, the Federal Circuit found that the disputed settlement agreement was properly admitted because it covered the patents-in-suit, attributed amounts to particular patents, was entered into near the conclusion of trial, and settled a case in which enhanced damages apparently were not at issue. Slip Op. at 15-16. The Federal Circuit determined that these factors enhanced the reliability of the disputed settlement agreement as evidence of a reasonable royalty.
Evidence of Cost Savings Through Infringement
A reasonably royalty attempts, in part, to measure the value an infringer derives from infringement—for example, by generating additional sales or being able to charge a higher price. One measure of that value is the cost savings, if any, realized by the infringer as a result of using the patented technology. Slip Op. at 23. In Prism, the patentee argued that "a reasonable royalty would reflect [the defendant's] willingness, in a hypothetical negotiation, to pay an amount calculated by reference to the costs that Sprint, in order to provide its customers the kind of service it wanted to offer them, would have incurred if it had chosen not to infringe." Slip Op. at 23. The Federal Circuit agreed, finding that "[a] price for a hypothetical license may appropriately be based on consideration of the 'costs and availability of non-infringing alternatives' and the potential infringer's 'cost savings.'" Slip Op. at 24 (citations omitted). The Federal Circuit added that while "a patentee 'must carefully tie proof of damages to the claimed invention's footprint in the market place,' that requirement for valuing the patented technology can be met if the patentee adequately shows that the defendant's infringement allowed it to avoid taking a different, more costly course of action." Slip Op. at 24 (citations omitted).