Industry Norms And Reasonable Royalty Rate Determination

by Michelle Porter, Robert Mills, and Roy Weinstein

Michelle Porter

Consultant, Micronomics, Inc., Los Angeles, CA., U.S.A.

Robert Mills

Vice-President, Micronomics, Inc., Los Angeles, CA., U.S.A.

Roy Weinstein

President, Micronomics, Inc., Los Angeles, CA., U.S.A.

Georgia-Pacific contemplates that parties to infringement litigation engage in a hypothetical negotiation assumed to occur just prior to the date of alleged infringement. The hypothetical negotiation is intended to produce a license agreement similar to what a willing licensor and willing licensee would have agreed to, neither under any compulsion to enter into an agreement, assuming the patents in question were understood to be valid and infringed. Consistent with Georgia-Pacific, the parties may consider 15 factors, among other things, in connection with their negotiation. Consideration of these factors often is referred to as a Georgia-Pacific analysis, the outcome of which is intended to provide damages “adequate to compensate” the patent holder for infringement.

Within the hypothetical negotiation construct, industry royalty rates often are considered as part of the analysis and determination of a reasonable royalty rate. Indeed, Georgia-Pacific factor 12, “the portion of profit or selling price that may be customary in the particular business or in comparable businesses to allow for the use of the inventions or analogous inventions,” calls for an evaluation of royalty rates paid for licenses to technology in the relevant industry.

The sections that follow set forth an empirical study of industry license agreements. Results from this study are used to discuss how observed industry average royalty rates properly can be utilized in the hypothetical negotiation construct. These results are not intended to serve as a substitute for analysis of Georgia-Pacific factors 1 and 2, which relate to established royalties for the specific technology in question. Instead, the agreements which we have analyzed here provide a useful context within which rates for specific patent claims can be assessed.

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