A Structured Approach to Calculating Reasonable Royalties

Abstract

A significant part of the problem with patent damage awards comes from the non-exclusive, fifteen-factor “Georgia-Pacific” test now taken as the gold standard for calculating reasonable royalty damages. Simply handing the question of reasonable royalty to the jury, without more, is not a recipe for precision in damages analysis. But the fifteen-factor test may actually be worse, because it overloads the jury with factors to consider that may be irrelevant, overlapping, or even contradictory. And because the jury’s finding is the result of such a complex, multi-factor test, it is as a practical matter almost entirely immune from scrutiny by either district or appellate judges facing a deferential standard of review. With fifteen factors, lawyers can make an argument that some combination of factors will support virtually any number an expert (or a jury) might come up with. As long as juries have virtual carte blanche to pick a damages number, plaintiffs will continue to have an incentive to shoot for the moon, and the problems of excessive damages will continue.

We suggest a structured approach to calculating reasonable royalties. Most of the factors in the Georgia-Pacific test in fact boil down to three fundamental questions: (1) what is the marginal contribution of the patented invention over the prior art, (2) how many other inputs were necessary to achieve that contribution, and what is their relative value, and (3) is there some concrete evidence suggesting that the market has chosen a number different than the product of (1) and (2). By structuring the inquiry in this way, courts (or Congress) can not only simplify the question for the jury, but enable district courts and the Federal Circuit to easily review the factual basis for a jury award.