Page 69 - Intellectual Property Disputes

Hypothetical Negotiation

A reasonable royalty analysis attempts to determine a royalty that the patent owner would have obtained
in an arm’s-length hypothetical negotiation between the patent owner (as a willing licensor) and the
infringer (as a willing licensee) just prior to the onset of infringement. This hypothetical negotiation
analysis in the litigation setting is inherently different from a real-world negotiation in that it assumes
that both parties agree that the patent is valid and the infringer’s use of the technology is infringing. In
light of the artificial nature of the hypothetical negotiation, a patent owner is not required to prove the
reasonable royalty and its resulting damages with exact certainty but, rather, "as a matter of just and
reasonable inference." fn 13

The hypothetical negotiation assumes that both parties would have been willing and able to negotiate a
license agreement and that the negotiation took place at the time of first infringement. Although the
hypothetical negotiation is assumed to occur at the time of first infringement, it would be wrong to
conclude that this timing should generally result in a last-minute premium to be applied to the
reasonable royalty.

Similar to a valuation, it may appear that information available only as of the date of the supposed
hypothetical negotiation could be used to determine the value of the royalty. However, despite the fact
that the hypothetical negotiation should be as of the date of first infringement, the courts have
considered information subsequent to the hypothetical negotiation date in determining the damage
award. fn 14 This information is typically referred to as the "Book of Wisdom" and is discussed in further
detail in subsequent paragraphs.

In deciding the reasonable royalty issues, the Panduit court addressed the following issues concerning
the hypothetical negotiation:

The setting of a reasonable royalty after infringement cannot be treated, as it was here, as the
equivalent of ordinary royalty negotiations among truly "willing" patent owners and licensees.
That view would constitute a pretense that the infringement never happened. It would also make
an election to infringe a handy means for competitors to impose a "compulsory license" policy
upon every patent owner. Except for the limited risk that the patent owner, over years of
litigation, might meet the heavy burden of proving the four elements required for recovery of lost
profits, the infringer would have nothing to lose, and everything to gain if he could count on
paying only the normal, routine royalty noninfringers might have paid. As said by this court in
another context, the infringer would be in a "heads-I-win, tails-you-lose" position. fn 15

The expert understands that in an actual negotiation between a willing buyer and a willing seller, neither
party is required to undertake the transaction. However, in a hypothetical negotiation conducted as part
of the damages analysis, both parties are required to consummate the transaction. Therefore, the
hypothetical negotiation needs to consider the specific circumstances surrounding both parties, such as
financial position, competitive strategies, and market position.

fn 13 SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161 (Fed. Cir. 1991).

fn 14 Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568 (Fed. Cir. 1988).

fn 15 Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1158 (6th Cir. 1978).

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