Potential Approaches to Calculation
Calculating a reasonable royalty involves predicting a hypothetical outcome under circumstances that may be uncertain and complex.
The inquiry, besides being hypothetical, asks about a comparative business prediction in an uncertain, complex world, and many variables may affect the hypothetical forecast.
— Aqua Shield v. Inter Pool Cover Team, 774 F. 3d 766, 771-72 (Fed. Cir. 2014).
Various forms of evidence may be informative for the calculation of a reasonable royalty including licenses, profitability, and alternatives technologies.
[V]arious kinds of evidence, such as licenses, business prognostications, and information about cost savings or value enhancements compared to alternatives, where such evidence is reliable, relevant, and not unduly prejudicial, may be used in the inquiry to determine the economic value of the patented technology in the marketplace at the relevant time.
— Aqua Shield v. Inter Pool Cover Team, 774 F. 3d 766, 771–72 (Fed. Cir. 2014).
Experts have applied a variety approaches in leveraging this evidence to calculate a reasonable royalty including: established royalty, the analytic approach, and the cost savings approach.
An established royalty exists when a technology is broadly licensed under sufficiently comparable terms at a consistent rate. When an established royalty exists, it may be a reliable basis for calculating a reasonable royalty.
Where an established royalty exists, it will usually be the best measure of what is a reasonable royalty.
— Nickson Indus., Inc. v. Rol Mfg. Co., 847 F.2d 795, 798 (Fed.Cir. 1988).
The analytic approach (or accounting approach) considers the anticipated incremental profitability of a patented invention, typically looking to actual profits during the infringement period. It then divides that incremental profitability between licensor and licensee.
The special master, citing Georgia-Pacific and Tektronix, used the so-called analytical approach, in which she subtracted the infringer's usual or acceptable net profit from its anticipated net profit realized from sales of infringing devices. […] Dura has cited nothing which would limit the district court's discretion in choosing the analytical approach to determine a reasonable royalty. Section 284 does not mandate how the district court must compute that figure, only that the figure compensate for the infringement.
— TWM Mfg. Co., Inc. v. Dura Corp., 789 F. 2d 895, 899 (Fed. Cir. 1986).
The cost savings approach considers the savings in cost an infringer would enjoy by licensing the patented technology and then divides that value between licensor and licensee.
the reasonable royalty in this case must be based upon a portion of the annual cost savings attributable to use of the Hanson patent. Expert testimony on this record indicates that one-third of the cost savings would be deemed acceptable to both parties in an arm's length license negotiation.
— Hanson v. Alpine Valley Ski Area, Inc., 718 F. 2d. 1075, 1077 (Fed. Cir. 1983).
The hypothetical negotiation approach considers the royalty parties would agree to in hypothetical negotiation. The approach is described in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y., 1970).
The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement.
— Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y., 1970).