The Value of Patents
What Decision Makers Should Know
April 1, 2011
Whether an invention is independently developed or acquired from others, patents have value. Only the patent owner has the right to employ the invention in the marketplace—and that exclusivity has value. Licensing of patents by a patent owner also can generate value. Patents also have the potential to generate value when an outside party, without a license to do so, uses the patented invention and is required to pay patent infringement damages.
Whether or not your business owns patents, you may find yourself determining a patent’s value, perhaps in negotiating a patent license, deciding to purchase or sell a patent, or defending against a patent claim in federal court. Because damages recoverable in patent cases inform all patent-related decisions, this article discusses principles of patent damages that decision makers ought to know.
Once infringement of a valid patent has been established, the Patent Act requires the patent owner to be paid “damages to adequately compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” Courts have interpreted this law to provide two general types of recovery: (1) lost profits and (2) a reasonable royalty.
Recovering Lost Profits
If the patent owner markets the patented invention, it may be able to recover its lost profits once infringement is established. To recover its lost profits, the patent owner must show “causation”—that it would have sold products the infringer sold if the infringer had not infringed. Patent owners often seek to recover lost profits on every sale that the party accused of infringement made because it is the highest form of damages available.
To recover lost profits, a patent owner needs to prove (1) demand for the patented invention, (2) no acceptable alternatives to the invention were available and (3) the patentee’s capacity (marketing and manufacturing) to make the sales made by the infringer. Lack of demand or the presence of acceptable alternatives tends to disprove that the patent owner would have made the sales of the infringer. Additionally, if the patent owner doesn’t have the capacity to make the sales of the infringer, it cannot possibly show that it would have made those sales. As a result, recovering lost profits can be an uphill task for smaller companies with limited manufacturing capabilities, or downright impossible for patent-holding companies that do no manufacturing of their own.
Pursuing a Reasonable Royalty
A reasonable royalty is the most commonly sought damages award. The reasonable royalty is usually calculated by determining what a willing licensee and a willing patent owner reasonably would have paid/accepted for a license, if a license had been negotiated shortly before infringement began, assuming the patent was valid and soon-to-be infringed.
Parties to this hypothetical negotiation must take into account their particular situation and industry. Determining a reasonable royalty relies on a wide range of factors, such as whether there is an established or common royalty rate in the industry, and whether or not the patent owner has a policy of licensing its patents or whether it normally seeks to maintain its patent monopoly.
Other factors include the pre-litigation commercial relationship between the parties, the effect of selling the patented invention on other sales, the duration of the patent, the term and nature of the license, and the commercial success of the patented invention. The importance of the various factors—there are more than a dozen of them—varies across industries and according to individual circumstance.
Considering Enhanced Damages
In appropriate cases, the damages described above may be enhanced (up to triple the amount of damages awarded). Normally, a judge determines whether or not to enhance damages and by how much. For a judge to do so, there must almost always be a finding, usually by a jury, that infringement of the patent was willful.
The most recent test set forth by the courts for willful infringement is that the patent owner must show that an infringer acted despite an objectively high risk of infringing a valid patent. Once the objectively high risk is established, often by the copying of a patented invention or the release of a product or service that clearly is covered by a valid patent, then the patent owner must prove that the infringer knew or should have known about that risk.
The amount of enhancement is done at the court’s discretion, taking into account all factors. While enhancement of some sort is not uncommon after a finding of willful infringement, a full tripling of damages is rare.
When interacting with patents, every businessperson will want to keep in mind the value of a patent in the context of potential infringement damages. Being aware of a patent’s potential value could make a big difference to your business.
Ric Jackson is an intellectual property attorney in Holland & Hart’s Salt Lake City office, where he is engaged in complex patent litigation. He may be reached at firstname.lastname@example.org