Source: http://lesi.org/les-nouvelles/les-nouvelles-article-of-the-month/les-nouvelles-article-of-the-month-archives/les-nouvelles-article-of-the-month-march-2016
Timestamp: 2019-04-18 20:55:00+00:00

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More than 80% of damages awards in patent liti­gation include reasonable royalties.1 In these litigations, reasonable royalty analyses by economic experts often involve a linear and monotonous march through the fifteen economic factors listed in Georgia-Pacific v. United States Plywood (S.D.N.Y. 1970), commonly referred to as the Georgia-Pacific factors. For readers that are unfamiliar with the Georgia-Pacific fac­tors, the factors include considerations relating to past technology agreements (factors 1, 2), the nature, scope, and duration of the license (factors 3, 7), licensing policy (factor 4), commercial relationship between the licensor and licensee (factor 5), sales of non-patented items (fac­tor 6), sales and profits (factors 8, 11), contribution of the patented technology (factors 9, 10, 12, 13), opinions of qualified experts (factor 14), and the amount that a licensor and licensee would have agreed to in a hypo­thetical negotiation for a license to the patent-in-suit (factor 15). Damages experts in patent litigation often perform an assessment of each of the fifteen factors as having an “upward,” “downward,” or “neutral” effect on the royalty in a hypothetical negotiation.
While rote recitation of the Georgia-Pacific factors was nearly a de facto standard for inclusion in reasonable royalty analyses, recent opinions of the Federal Circuit indicate otherwise. Because the Georgia-Pacific factors are neither mutually exclusive nor collectively exhaus­tive with respect to relevant economic issues, their utility in quantifying a reasonable royalty is inherently limited. In this article, we explore shortcomings and misapplications of the Georgia-Pacific factors as identi­fied by the Federal Circuit, indicating a diminishing role for the Georgia-Pacific factors in the future.
Fifteen Factors for All Situations and Circumstances?
While brief, the court’s introduction provides three indications that its factors are not applicable to all cases. First, the court explicitly stated that its fifteen factors are only “some” of the factors to be considered in a reasonable royalty analysis. This is consistent with our observation that the Georgia-Pacific factors are not collectively exhaustive from an economic perspective— i.e., the factors are not necessarily all of the factors that should be considered. Second, the court qualified the factors it presented as mutatis mutandis, a Latin phrase meaning “the things being changed which need to be changed.” This language indicates that the court pre­sented factors that were modified from the “evidentiary facts relevant…from a conspectus of the leading cases” that it observed in general. Third, the court stated that it identified factors that are “seemingly more pertinent to the issue herein.” This language indicates that the factors were not intended to be pertinent to each and every potential fact pattern that may arise in patent liti­gation, but rather pertinent to determining a reasonable royalty between Georgia Pacific Corporation and United States Plywood Corporation specifically.
Because the Georgia-Pacific factors do not provide a mathematical formula for calculating a reasonable royalty, application of the Georgia-Pacific factors by many experts has traditionally included an assessment of each of the fifteen factors as having an “upward,” “downward,” or “neutral” effect on the royalty in a hypothetical negotiation. In some instances, an expert will derive a royalty from another source as a starting point and then use the Georgia-Pacific factors to modify the starting point. In other instances, experts will not even specify a starting point, yet opine of “upward”, “downward”, and/or “neutral” effects in a vacuum, without reference to what or how the effects apply. In these instances, expert testimony on the Georgia- Pacific factors can be unhelpful and even misleading, as an “upward” effect from a vacuous starting point can provide limited insight into an economically appropriate reasonable royalty.
Nor do the Georgia-Pacific factors provide guidance on underlying conceptual principles, per se, for evaluating reasonable royalties. When recently seeking to clarify underling principles, the Federal Circuit in Ericsson v. D-Link (2014) cited back to Garretson v. Clark (1884), which stated that “the governing rule is that the ulti­mate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.”13 The Federal Circuit also recently reaffirmed a principle of reasonable royalties reflecting the “value of what was taken—the value of the use of the patented technology,” as stated in the 100 year old Supreme Court case Dowagiac v. Minn. Moline Power (1915).14 See also Warsaw Orthopedic v. NuVasive (2015): “A reasonable royalty, on the other hand, is intended to compensate the patentee for the value of what was taken from him—the patented tech­nology.”15 In contrast, the Georgia-Pacific factors provide one potential implementation of underlying principles rather than guidance on proper principles themselves.
As an illustration, consider a scenario in which a company offers two otherwise identical products that differ only in that one product includes an additional feature that is precisely the asserted invention of the patent-in-suit. An analysis of the difference in price and profitability between these two products may be the most relevant information from which to determine a reasonable royalty for the patent-in-suit, and that in­formation may inherently reflect a number of relevant Georgia-Pacific factors. Such a comparison is similar to a market-based valuation approach for real estate, where, for example, an appraiser may analyze two houses that are sufficiently similar for comparison (e.g., similar floor plans and neighborhoods) and observe differences in value attributable to differences in the homes (e.g., one home has a swimming pool). This approach to determin­ing value would not be considered economically invalid simply because a recitation to the Georgia-Pacific factors is not present.
While a traditionally enumerated presentation of the Georgia-Pacific factors may distract from key economic information, an economic and fact-centric analysis ad­dresses the relevant factors in an order that is most logical and economically informative with respect to the facts of the case. It is likely that a thoughtful and thorough economic analysis will inherently address all Georgia-Pacific factors, even if not explicitly or sequentially. Approaching expert analysis in this way is likely to be more helpful to the trier of fact because it can be logically organized around relevant economic principles rather than tethered to specific, pre-defined implementations.
We cannot say with certainty what the future holds, but it is possible that one day the Georgia-Pacific factors will become a method of the past. Until that happens, an approach that focuses on applying sound economic principles to case specific facts, rather than rote itera­tion of all fifteen Georgia-Pacific factors, appears to be a wise way to proceed. In the long run, we are quite certain that sound economic analysis is here to stay.
The opinions expressed are those of the author(s) and may not reflect the views of Intensity Corporation, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
PricewaterhouseCoopers, 2014 Patent Litigation Study, http://www.pwc.com/en_US/us/forensic-services/publications/ assets/2014-patent-litigation-study.pdf, at 9–10, chart 5.
Georgia-Pacific v. U.S. Plywood Corp, 318 F. Supp. 1116, at 1120 (S.D.N.Y. 1970).
Ericsson, Inc., et al. v. D-Link Systems, Inc., et al., No. 2013- 1625, -1631, -1632, -1633, at 48-49 (Fed. Cir. Dec. 4, 2014).
Ericsson, Inc., et al. v. D-Link Systems, Inc., et al., No. 2013- 1625, -1631, -1632, -1633, at 47 (Fed. Cir. Dec. 4, 2014). (em­phasis added).
WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10, at 31 (Fed. Cir. 2012). (emphasis added).
WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10, at 31-32 (Fed. Cir. 2012). (emphasis added).
Georgia-Pacific v. U.S. Plywood Corp, 318 F. Supp. 1116, at 1120¬–21 (S.D.N.Y. 1970).
Georgia-Pacific v. U.S. Plywood Corp, 446 F.2d 295, 297 (2nd. Cir. 1971).
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011).
Georgia-Pacific v. U.S. Plywood Corp, 318 F. Supp. 1116, at 1120–21 (S.D.N.Y. 1970).
Wordtech Sys. v. Integrated Network Solutions, Inc., 609 F.3d 1308, 1319 (Fed. Cir. 2010).
Apple, Inc. v. Motorola, Inc., 757 F.3d 1286, 1315, 1319 (Fed. Cir. 2014).
AstraZeneca AB v. Apotex Corp. No. 2014-1221, at 33 (Fed. Cir. Apr. 7, 2015).
United States Frumentum Co. v. Lauhoff, 219 F.610 (6th Cir. 1914). Sullivan, Ryan M. and John B. Sherling, Rational Reasonable Royalty Damages: A Return to the Roots (November/ December 2011, ABA Landslide, Volume 4, Number 2).
Lucent Technologies, Inc. et al. v. Gateway Inc., et al., 580 F.3d 1301, 1335 (Fed. Cir. 2009).
Ericsson, Inc., et al. v. D-Link Systems, Inc., et al., No. 2013-1625, -1631, -1632, -1633, at 48–49 (Fed. Cir. Dec. 4, 2014).

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