Licensing Proposals May Be Used to Determine Reasonable Royalty Damages

Authored by D. Brian Kacedon; Rhianna L. Lindop, Ph.D.; and John C. Paul

Abstract

A District Court in Florida permitted licensing proposals to be used as a basis to calculate reasonable royalty damages when the expert reasonably explained and supported the methodology and calculations by comparing the technological and commercial circumstances at the time of licensing proposals to those at the time of the hypothetical negotiations.

Background

When expert opinion testimony is provided in patent infringement cases to determine a reasonable royalty in damages calculations, the experts and their opinions must meet admissibility standards based on qualifications, methodological reliability, and pertinence.

In determining whether an expert’s methodology is reliable, courts consider (1) whether the evidence has been or can be tested, (2) whether the evidence has been subjected to peer review, (3) whether a potential rate of error is known, and (4) whether the evidence is generally accepted in the scientific community.

The Arctic Cat Inc. Decision

In the damages phase of a patent infringement case in Florida, Arctic Cat asked the court to exclude the testimony of Bombardier Recreational Products’ (BRP’s) damages expert on reasonable royalty damages, arguing it was impermissible for the expert to use a non-specific "black box" approach, and it was impermissible for the expert to use licensing proposals as an indicator of value.

Specifically, Arctic Cat contended that BRP’s expert did not consider the differences in the technological and commercial circumstances between the time that Arctic Cat made its licensing proposals to BRP and the time of the hypothetical negotiation, and that the report on the range of possible royalty rate values provided by BRP’s expert did not include any information about the methodology or calculations for arriving at those possible royalty rates. BRP countered and argued that its expert’s opinion was based on a reliable methodology, was thoroughly reasoned, and used systematic calculations to arrive at its range of reasonable royalty rate values.

The court agreed with BRP and found its expert report provided detailed calculations and in fact outlined and explained each step in the methodology BRP’s expert used for calculating the royalty damage range. In particular, the court noted that BRP’s expert established the lower value of the royalty damage range based on systematic mathematical calculations fully explained in his opinion.

Similarly, BRP’s expert report showed that his use of Arctic Cat’s licensing proposals to establish the upper value of his royalty damage range was justified. Specifically, the expert explained that the technological and commercial circumstances at the time of Arctic Cat’s licensing proposals to BRP in 2000 were comparable to those at the time of the hypothetical negotiations in 2004. Accordingly, the court held it was acceptable for BRP’s expert to use Arctic Cat’s licensing proposals to BRP to establish the top of his royalty range.

Strategy and Conclusion

This case illustrates how licensing proposals may be used in determining reasonable royalty damages and may be admitted by the court to be used as evidence of reasonable royalty damages if the report clearly and reasonably explains and supports the expert’s methodology and calculations.

Further Information

The decision in Arctic Cat Inc. v. Bombardier Recreational Products, Inc., and BRP U.S. Inc. (BRP) can be found here.