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continued from page 42
CBA RECORD 47
situation; in fact, recent articles on patent
damages have criticized approaches that
weigh all factors evenly and base royalty
analyses on the simple fact that more fac-
tors seem to suggest in favor of one party
than the other. See, e.g., J. Gregory Sidak,
The Meaning of FRAND, Part I: Royalties,
Journal of Competition Law & Econom-
ics (2013); John R. Bone et al., View from
the Federal Circuit: An Interview with
Chief Judge Randall R. Rader, SRR Journal
(2012).
Methods employed for reaching a
quantitative conclusion vary considerably
based on case facts, available evidence, and
changing case law. Three methods drawn
from asset valuation theory–the income
approach, market approach, and cost
approach–are often used in quantifying a
reasonable royalty. These approaches are
not mutually exclusive and, importantly,
need not be considered as separate from
the Georgia-Pacific factors. Rather, each
approach can be correlated to similar logic
embedded within the Georgia-Pacific Fac-
tors.
The income approach determines the
value of an asset based on the future cash
flows that the asset is expected to generate.
Relevant indicators for the determination
of a royalty based on the income approach
include those Georgia-Pacific factors which
relate to the profitability of the patented
product, the technology’s advantages over
non-infringing alternatives, the benefits of
its commercial embodiment(s), the portion
of the patented product’s profit or price
that can be attributed to the technology,
and the tendency of the technology to drive
sales of non-patented products.
As patented products become more
complex, a key challenge of using an income
approach relates to isolating the value
driven from the patented technology from
the value driven by non-patented elements
of the patented product. Various types of
technical and business documents may be
used to isolate value, however, recent court
decisions have provided differing standards
for applying such information.
The market approach determines the
value of an asset based on the prices asso-
ciated with similar transactions for similar
assets in a certain market. Relevant indi-
cators for the determination of a royalty
based on the market approach include
those Georgia-Pacific factors which relate
to the past licensing behaviors or current
licensing policies of either the licensee or
licensor and historical royalty rates for
the patent-in-suit or similar patents. The
technical and economic comparability of
licenses should be analyzed when using
a market-based approach. Similarities
and differences in any licenses reviewed
should be analyzed and accounted for when
determining a reasonable royalty under the
premise of a hypothetical negotiation.
The cost approach determines the value
of an asset based on an assessment of the
costs avoided by the alleged infringer
through its use of the patent-in-suit. The
logic is in certain ways analogous to the
income approach with one key difference–
it tends to focus on the costs avoided by
implementing an otherwise economically
comparable non-infringing alternative
rather than on the incremental cash inflows
attributable to the patented technology
over an economically inferior non-infring-
ing alternative. Relevant indicators include
many of the same Georgia-Pacific factors
considered in an income approach analysis;
however, they can be framed differently to
provide a comparison between the patented
technology and the costs of implementing
an acceptable non-infringing alternative.
Reasonable royalty calculations can take
different forms–some calculations identify
a single lump-sum payment while others
determine a running royalty using a royalty
base comprised of units or revenue and
a royalty rate that can be applied to that
base. There have been several recent Fed-
eral Court decisions that have attempted
to instruct on the proper composition
of a royalty base that is sufficiently tied
to the patented technology, including
descriptions of standards for narrowing the
royalty base to exclude extraneous, non-
patented value in the royalty calculation.
See, e.g., Cornell v. Hewlett-Packard, 609
F. Supp. 2d 279 (N.D.N.Y. 2009); Laser-
Dynamics v. Quanta Computer, 694 F.3d
51(Fed. Cir. 2012); VirtnetX Inc. v. Cisco
Systems, Inc., 767 F.3d 1308 (Fed. Cir.
2014). However, it remains understood, as
the VirntetX court noted, that courts “have
never required absolute precision in this
task; on the contrary, it is well-understood
that this process may involve some degree
of approximation and uncertainty.”
Lindsey G. Fisher, CFE, is a Director in the
Dispute Advisory & Forensic Services Group
at Stout Risius Ross where she assists clients
and counsel with complex financial, account-
ing, and damages matters. Kevin T. McElroy
is a Senior Manager in the Dispute Advisory
& Forensic Services Group at Stout Risius
Ross, and currently serves as Vice Chair of the
Economics of the Profession Committee in the
ABA Section of Intellectual Property Law.
spread throughout this bar year to help
connect our members. If you do not put
yourself out there, you are never going to
make the contacts necessary to help you in
your career and in life. Your next employer,
case, friend, or even fiancé (yes, it has
happened) may be unknowingly waiting
for you at the next YLS event. So again,
I invite and encourage every member to
participate in at least one YLS activity this
bar year. I look forward to meeting all of
our members!