Insights

Federal Circuit Addresses "Reasonable Royalty" Standards in <i>Prism Tech. LLC v. Sprint Spectrum L.P.</i>

Federal Circuit Addresses "Reasonable Royalty" Standards in Prism Tech. LLC v. Sprint Spectrum L.P.

In recently affirming a $30 million damages award, the U.S. Court of Appeals for the Federal Circuit expounded on two key factors—prior settlement agreements and cost savings—that can impact "reasonable royalty" damages under 35 U.S.C. § 284. Prism Tech. LLC v. Sprint Spectrum L.P., No. 2016-1456, Slip Op. at 7 (Fed. Cir. Mar. 6, 2017). A reasonable royalty is determined in a hypothetical negotiation between the patent owner and the infringer at the time infringement began, with both parties assumed to take into account all factors that prudent businesspersons would consider. Slip Op. at 23-34. The Prism case is instructive because the Federal Circuit does not often discuss the relevance of these two factors to the determination of a reasonable royalty.

Relevance of Previous Settlement Agreements

Settlement agreements are often excluded as evidence of a reasonable royalty because a negotiation in the context of litigation is different from the hypothetical negotiation that results in a "reasonable royalty." Slip Op. at 11. Here, however, the Federal Circuit explained that settlements "involving the patented technology can be probative of the technology's value if that value was at issue in the earlier case." Slip Op. at 12. However, a settlement agreement can be excluded if, for example, circumstances indicate that the settlement royalty was either higher or lower than the rate that would result from a hypothetical negotiation. Id. For instance, a litigation settlement might undervalue the patented technology if the patent owner discounts the value of the patented technology to account for the probability of losing on validity or infringement. Id. Conversely, a settlement might overvalue the patented technology if the settlement included other technology, accounted for the possibility of enhanced damages, or reflected litigation or other transaction expenses. Slip Op. at 13.

In this case, the Federal Circuit found that the disputed settlement agreement was properly admitted because it covered the patents-in-suit, attributed amounts to particular patents, was entered into near the conclusion of trial, and settled a case in which enhanced damages apparently were not at issue. Slip Op. at 15-16. The Federal Circuit determined that these factors enhanced the reliability of the disputed settlement agreement as evidence of a reasonable royalty.

Evidence of Cost Savings Through Infringement

A reasonably royalty attempts, in part, to measure the value an infringer derives from infringement—for example, by generating additional sales or being able to charge a higher price. One measure of that value is the cost savings, if any, realized by the infringer as a result of using the patented technology. Slip Op. at 23. In Prism, the patentee argued that "a reasonable royalty would reflect [the defendant's] willingness, in a hypothetical negotiation, to pay an amount calculated by reference to the costs that Sprint, in order to provide its customers the kind of service it wanted to offer them, would have incurred if it had chosen not to infringe." Slip Op. at 23. The Federal Circuit agreed, finding that "[a] price for a hypothetical license may appropriately be based on consideration of the 'costs and availability of non-infringing alternatives' and the potential infringer's 'cost savings.'" Slip Op. at 24 (citations omitted). The Federal Circuit added that while "a patentee 'must carefully tie proof of damages to the claimed invention's footprint in the market place,' that requirement for valuing the patented technology can be met if the patentee adequately shows that the defendant's infringement allowed it to avoid taking a different, more costly course of action." Slip Op. at 24 (citations omitted).

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus/.

Kelsey I. Nix
New York
+1.212.326.8390
[email protected]  

Landon R. Clark
New York
+1.212.326.3785
[email protected]

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

We use cookies to deliver our online services. Details of the cookies and other tracking technologies we use and instructions on how to disable them are set out in our Cookies Policy. By using this website you consent to our use of cookies.