April 23, 2012
LES Insights
By John C. Paul; D. Brian Kacedon; Andrew J. Ra Jr.
Authored by D. Brian Kacedon, John C. Paul, and Andrew K. Ra Jr.
Under United States law, patent owners are entitled to recover damages from the infringing party in the form of lost profits or a reasonable royalty. The court determines a reasonably royalty based on a hypothetical negotiation between a willing licensor and a willing licensee at the time the infringement began. To aid the court in this determination, each party usually provides an opinion from a damages expert on the appropriate royalty rate. When providing such an opinion, the expert may use the "market approach," which relies on comparable license agreements to determine the rate. A license agreement may be considered "comparable" if it provides relevant information about the value of a license to the patent-in-suit.
The U.S. District Court for the Central District of California recently addressed this issue in Raymond Caluori v. One World Technologies, Inc., No. CV 07-2035-CAS (VBKx) (C.D. Cal. Feb. 27, 2012).1 The defendant moved to exclude the opinion of the patent owner's expert, because, according to the defendant, the opinion relied on a "lump-sum" settlement agreement that is not comparable to the hypothetical negotiation between the patent owner and the defendant. The court, however, declined to exclude the expert's opinion on that basis, finding that the agreement is comparable.
Plaintiff Raymond Caluori sued Defendants One World Technologies ("OWT"), Ryobi Limited, Ryobi North America, Inc., and Does 1 through 100 for infringing U.S. Patent 6,915,727 ("the '727 patent"). The '727 patent concerned a device that used a light source to project light onto an object to be cut by a rotary saw to align the cut of the saw. Caluori retained an expert, Stephen P. Heath, to provide an opinion on damages in the case.
The expert's opinion primarily relied on the market approach for determining the reasonable royalty rate. Specifically, he relied on an agreement that settled litigation between Caluori and another allegedly infringing company, Bosch. In the Bosch Agreement, Bosch agreed to pay Caluori a lump sum of $350,000 for the first 100,000 units sold and $12.75 for every sale thereafter. The Bosch Agreement also gave Bosch a nonexclusive license to the '727 patent and two other patents. The expert concluded that the Bosch Agreement was a reliable benchmark for determining a reasonable royalty rate under a hypothetical license agreement between Caluori and OWT. Based on the Bosch Agreement, the expert estimated that the effective unit royalty would range from $3.50 to $6.09.
The expert corroborated his finding under the market approach by also applying the "income approach" and the "cost approach." Under the income approach, the expert attempted to determine the profits associated with incorporating the alleged invention of the '727 patent into OWT's products. And under the cost approach, the expert attempted to evaluate the cost to OWT of developing or incorporating a noninfringing technology. Ultimately, the expert concluded that the income approach and the cost approach supported his findings under the market approach and determined that a royalty rate of $3.50 per unit was appropriate. After applying the fifteen qualitative factors for determining damages set forth in Georgia-Pacific, the expert concluded that the royalty rate should be increased to $3.75 per unit.
OWT argued that the market-approach analysis was flawed because it was derived from a "lump sum" settlement agreement not comparable to a hypothetical negotiation between Caluori and OWT. According to OWT, the Bosch Agreement was not comparable because it resulted from litigation, did not identify a per-unit royalty rate for the first 100,000 units, and included two additional patents that were not at issue in the instant matter.
The court rejected OWT's arguments and concluded that the Bosch Agreement provided relevant information about the value of a license to the '727 patent. The court first noted the Federal Circuit's guidance that often the most reliable licenses arise out of litigation. It also recognized that numerous district courts had relied on settlement agreements for the purpose of establishing reasonable royalty rates. The court found that relying on a settlement agreement resulting from litigation was a question of weight and not admissibility. With regard to OWT's other arguments, the court found that the Bosch Agreement provided sufficient information to determine the per-unit royalty rate and also agreed with the expert that the other two patents were of no value.
The Caluori decision shows that courts are reluctant to exclude an expert's opinion merely because the opinion relies on a settlement agreement resulting from litigation to determine the reasonable royalty rate. Litigants should be aware that settlement agreements from a prior litigation may be used to calculate a reasonable royalty in a current litigation. When drafting the terms of a settlement agreement, the patent owner should also be aware that those terms may be used as a basis for a reasonable royalty in future litigations.
Endnotes
1 The Caluori decision: http://docs.justia.com/cases/federal/district-courts/california/cacdce/2:2007cv02035/385613/182/.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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