Navigating Between The 'Hypothetical Negotiation' And Real World Facts In Proving Patent Damages

While there are many differences between patent cases and other complex commercial litigation, one notable distinction is the use of a "hypothetical" transaction to prove patent damages.

As a remedy for infringement of its patent, a patentee is entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." 35 U.S.C. § 284. A reasonable royalty is generally calculated by multiplying two separate and distinct amounts: (1) the royalty base, or the revenue pool implicated by the infringement; and (2) the royalty rate, or the percentage of that pool adequate to compensate the plaintiff for the infringement. Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 286 (N.D.N.Y. 2009).

Although not the exclusive method for doing so, the commonly used construct for proving a reasonable royalty for the infringer's use of the invention – a construct that has been endorsed by case law for decades – is a "hypothetical negotiation" in which the parties would have agreed to license the asserted patent just before infringement began.

Case law provides certain rules applicable to the hypothetical negotiation. For example, in the hypothetical negotiation, the asserted patent claims are deemed to be valid, enforceable, and infringed by the product or service that is the subject of the litigation (the "accused product"), and the parties are assumed to be a willing licensor and willing licensee acting reasonably in reaching an agreement. Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324-1325 (Fed. Cir. 2009); Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y.1970).

Complicating the use of a fictitious transaction as the basis for damages is the need to imbue the hypothetical negotiation with real world data grounded in the facts of the case because, in a number of aspects, real world business practices do not match up with the rules applicable to the hypothetical negotiation.

This dichotomy can arise when parties use "comparable licenses" from the real world as evidence of the "hypothetical license" that would have resulted from the hypothetical negotiation. Courts have long recognized that real world licenses of comparable technology – and particularly actual licenses of the patents-in-suit – may provide highly probative evidence of the value of the patented invention. LaserDynamics, Inc. v. Quanta Computer, Inc., 694...