Royalty Rates and the Georgia-Pacific Factors

AuthorRussell L. Parr
ProfessionPresident of Intellectual Property Research Associates
Pages448-470
CHAPTER 28
ROYALTY RATES AND THE
GEORGIA-PACIFIC FACTORS
When infringement has been shown, a patentee is entitled to “damages adequate to
compensate for the infringement, but in no event less than a reasonable royalty for the use
made of the invention by the infringer” [35 U.S.C. § 284 (1994)]. In Stickle v. Heublein,
Inc., the court said, “The amount of the royalty should be that amount which adequately
compensates for the infringement.1
In 1955, a dispute began between Georgia-Pacic and U.S. Plywood Corp. when
Georgia-Pacic introduced striated plywood panels—grooved for decorative purposes.
Striation also prevented the plywood from having a tendency to expand and shrink under
changing moisture conditions. This began of a long litigation that culminated in the
issuance of a general model for the determination of a reasonable royalty rate to use for
the calculation of damages.
In Georgia-Pacic Corp. v. United States Plywood Corp.,2the court listed 15 factors
that it considered important for deriving a reasonable royalty. These factors are addressed
by every damages expert offeringan opinion about a reasonable royalty rate for establishing
infringement damages.
These factors are considered in the context of the patentee (licensor) and infringer
(licensee) engaging in a hypothetical negotiation for a license of the patent in suit at a
hypothetical date before infringement activities began.
The hypothetical negotiation approach makes ve assumptions:
1. The patent is “known to be valid” and enforceable “at the time infringement com-
mences.”
2. The patent is known to be infringed.
3. The patent holder “is willing to issue a license.”
4. The licensee is “willing to take a license.”
5. The appropriate “relevant business facts” (even subsequent to the date of negotia-
tion) “are deemed known to both parties.”3
1See Stickle v.Heublein, Inc. , 716 F.2d 1550, 1562, 219 USPQ2d 377, 386 (Fed. Cir. 1983).
2Georgia-Pacic Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), modied, 446 F.2d
295 (2d Cir. 1970), cert. denied, 404 U.S. 870 (1971).
3See Paul M. Janicke, Contemporary Issues in PatentDamages, 42 Am.U.L. Rev. 691, 722–24 (1993).
448
Royalty Rates and the Georgia-Pacific Factors 449
Theoretically, the hypothetical negotiation date is the date on which infringement rst
began. The question to be answered is: What royalty would the parties have negotiated
before the onset of infringement?
The Federal Circuit has stated the hypothetical negotiation “permits and often requires
a court to look at events that occurred thereafter and that could not have been known to or
predicted by the hypothesized negotiators.”4Sometimes, “factual developments occurring
after the date of the hypothetical negotiation can inform the damages calculation.”5Looking
into the future at actual facts not known at the date of the hypothetical negotiation is often
called the “Book of Wisdom.”6
A Supreme Court decision discussing the use of the Book of Wisdom is Sinclair
Rening v. Jenkins Petroleum (289 US 689, 698 (1933) (citations omitted)), in which
Justice Cardozo wrote:
At times the only evidence available may be that supplied by testimony of experts as to the
state of the art, the character of the improvement, and the probable increase of efciency or
savings of expense. This will generally be the case if the trial follows quickly after issue of
the patent. But a different situation is present if years have gone by before the evidence is
offered. Experience is then available to correct uncertain prophecy. Here is a book of wisdom
that courts may not neglect. Wend no rule of law that sets a clasp upon its pages, and forbids
us to look within.
Considering actual events makes sense. A hypothetical negotiation based solely
on information available at the negotiation date can result in inappropriate damages
compensation. Consider a case where information about prots was not available at the
negotiation date and the only prot information available to the negotiating parties is
forecast information. Basing damages on forecasts is proper if other information is not
available, but when actual prot information is available, the actual prots are superior to
forecasts. If actual prots were lower but forecast information dominated the negotiation,
then the plaintiff would be overcompensated. If instead prots were higher than forecasts,
focusing on a lower prot forecast would undercompensate the plaintiff.
Furthermore, juries and damages experts are allowed to consider any relevant informa-
tion falling outside the specic topics addressed by the 15 factors; still the Georgia-Pacic
factors remain the foundation for determining a reasonable royalty for patent infringement
damages.
When considering many of these factors, a specic royalty rate is not indicated but
qualitative indications are provided for a higher, lower, or neutral adjustment to some
sort of benchmark royalty rate. In Chapter 16, “Royalty Rates for Licensing,” the most
common royalty rate across all industries is 5% of net sales. This rate can sometimes
serve as a reference point for adjustments indicated by analysis of the 15 factors. Another
reference point might be an industry standard rate where licensing for a specic industry
falls within a specic range. The 25% rule7as discussed in Chapter 17 may provide a
reference point. A reference point might also be indicated from analysis of the rst two
Georgia-Pacic factors.
4Fromsonv. Western Litho Plate & Supp. Co., 853 F.2d1568, 1575 (Fed. Cir. 1988).
5Lucent, 580 F.3d at 1333–34.
6Sinclair Rening Co. v. JenkinsPetroleum Process Co., 289 U.S. 689, 698 (1933).
7As discussed in Chapter 16, the decision in Uniloc had called for the death of using the 25% rule to determine
a damages royalty rate. But in 2012 the Federal Circuit, in Energy TransportationGroup, Inc. v. William Demant
Holding A/S, upheld use of the 25% rule, when it was only a factor in determining the nal award and its usage
was supported by evidence.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT