Depending upon your point of view, a matter that seems reasonable to you may appear as unreasonable, or even irrational, to someone else – particularly when the topic of debate is a reasonable royalty in a patent infringement engagement. In fact, in patent infringement matters, the courts require both parties to go through a hypothetical negotiation for a license of the technology at issue, thus theoretically working out their adversarial points of view.

“While the determination of a reasonable royalty is negotiable, it’s not a figure that we pull from thin air,” says Steve Thimons, a senior manager at Gleason & Associates who specializes in intellectual property claims analysis and consulting. In fact, in the precedent-setting case of Georgia Pacific v. U.S. Plywood, the courts established 15 factors to apply objectivity and analytics to the process of calculating a reasonable royalty.

“As experts we have to sit in both the patent holder’s and the infringer’s shoes, and identify where their boundaries overlap based on an evaluation of all of the empirical data,” Thimons explains.

To conduct a constructive hypothetical negotiation and arrive at a definition of reasonable royalty that can be defended, Gleason & Associates evaluates a wealth of financial and strategic planning documents.

What Factors Drive Sales?
Determining to what degree a patented technology contributes to the sales of a product is often a key factor in calculating a reasonable royalty. In a recent engagement involving a high-profile sporting goods manufacturer that was accused of infringing on a patent for one of its products, the patent owner had asked for one-third of the infringer’s gross profits as royalty. Based on a thorough analysis of the company’s financial documents and plans, Gleason & Associates developed a case for a significantly lower reasonable royalty.

“The technology at issue was only one component of the product and it was definitely not driving sales,” says Thimons. “It was the client’s extensive marketing, advertising, promotion and branding activities that made the product a successful seller. All of those costs had to be considered. We also applied the rates in licensing agreements that the client had for other patents to determine the more reasonable royalty.”

Comparing the cost of licensing a patented technology with the cost of an alternative strategy is another approach to developing a reasonable royalty. In another recent infringement case involving the use of patented computer software, the patent holder wanted more than half of the revenue the product generated as a royalty.

“By demonstrating the availability of a more affordable work-around that could have generated similar results,” says Thimons, “we justified a reasonable royalty that was significantly less than the plaintiff’s damage claim.”

Documenting a Reasonable Royalty
Providing the following information will help us develop a reasonable royalty calculation:

• Relevant financial projections.
  
• Profitability analyses, both historical and prospective.
  
• Market research and competitive analyses.
  
• Previously negotiated royalty and license agreements.
  
• Financial statements for the company and business units involved.
  
• Strategic plans.
  
• Research and development budgets and costs.
  
• Background reports on the financial and opportunity costs of alternatives to the use of patent at issue.
  
• Input from company management and the personnel responsible for sales, marketing, research, production, etc. of the product that uses the patented technology.