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Reasonable-Royalty Lessons From Prism V. Sprint

In an endeavor to determine a reasonable royalty for an infringed patent, damage experts using a hypothetical negotiation should carefully consider other license and settlement agreements. In August 2012, the United States Court of Appeals for the Federal Circuit concluded that the probative value of a dubious settlement agreement was outweighed by the risk of unfair prejudice, confusion of the issues, and misleading the jury.[1] In March 2017, the Federal Circuit noted in its Prism Technologies LLC v. Sprint Spectrum LP decision that “what is needed for assessing the probativeness and prejudice ...is consideration of various aspects of the particular litigation settlements.”[2] On Nov. 6, 2017, the U.S. Supreme Court declined to take up Sprint’s appeal, upholding Prism’s damages award. This article discusses various aspects of prior licenses and settlement agreements as set forth in Prism v. Sprint, along with other recent court decisions, to assist damage experts in determining a reasonable royalty, specifically (1) whether to rely on other license agreements, (2) whether to use other agreements as a reasonableness check, and (3) how to identify differences between other license agreements and the subject litigation.

Karen H. Romrell, Attorney

The U.S. Supreme Court recently declined to take up Sprint’s appeal, upholding Prism’s patent damages award. Here, Karen Romrell of Hampton IP & Economic Consultants LLC discusses various aspects of prior licenses and settlement agreements as set forth in Prism v. Sprint, along with other court decisions, to assist damage experts in determining a reasonable royalty.

Reliability

The Federal Circuit reaffirmed it “has recognized that, depending on the circumstances, a license agreement entered into in settling an earlier patent suit sometimes is admissible in a later patent suit involving the value of the patented technology, and sometimes is not.”[3] Until its landmark ResQNet.com v. Lansa Inc. decision in in 2010, the Federal Circuit had a longstanding disapproval of relying on settlements of litigation to establish reasonable-royalty damages. In ResQNet, the court held that settlement-related evidence can be compelling proof of damages in subsequent litigation.[4] In its recent LaserDynamics decision, the court weighed its findings in ResQNet against the LaserDynamics’ fact pattern. The court determined a settlement agreement was reliable if it reflects the economic demand for the claimed technology.

Settlement license to the patents-in-suit in a running royalty form was “the most reliable license in [the] record” when compared with other licenses that did not “even mention[] the patents-in-suit or show[] any other discernable link to the claimed technology”. We permitted consideration of the settlement license on remand, but we cautioned the district court to consider the license in its proper context within the hypothetical negotiation framework to ensure that the reasonable royalty rate reflects “the economic demand for the claimed technology.[5]

On the other hand, the court determined a settlement agreement in LaserDynamics was unreliable because severe legal and procedural disadvantages forced the patent owner to settle its litigation shortly before trial:

Indeed, the BenQ settlement agreement appears to be the least reliable license by a wide margin. The BenQ settlement agreement was executed shortly before a trial—a trial in which BenQ would have been at a severe legal and procedural disadvantage given the numerous harsh sanctions imposed on it by the district court. The $6 million lump sum license fee is six times larger than the next highest amount paid for a license to the patent-in-suit, and ostensibly reflects not the value of the claimed invention but the strong desire to avoid further litigation under the circumstances. LaserDynamics executed twenty-nine licenses for the patent-in-suit in total, the vast majority of which are not settlements of active litigation and do not involve the unique coercive circumstances of the BenQ settlement agreement, and which are therefore far more reliable indicators of what willing parties would agree to in a hypothetical negotiation. Additionally, in light of the changing technological and financial landscape in the market for ODDs, the BenQ settlement, entered into a full three years after the hypothetical negotiation date, is in many ways not relevant to the hypothetical negotiation analysis.[6]

The court was dubious, if not contemptuous, of the BenQ settlement agreement’s reliability as a benchmark of value, and remanded the case back to the district court with instructions to exclude the BenQ settlement agreement, since it did not demonstrate economic demand for the patented technology; its probative value was greatly outweighed by the risk of unfair prejudice; it confused the issues, and would ultimately mislead the jury.[7]

Subsequent to LaserDynamics, the Federal Circuit made clear in its Comcast Cable Communications v. Sprint Communications Company LP decision that in order to have probative value, a settlement agreement need not be the “most reliable” evidence in the record. Citing LaserDynamics, the court cautioned that the license must not be the “least reliable” among more reliable agreements.[8]

Acknowledging that reliability is highly fact dependent, rather than rule out the use of prior settlement agreements, a damage expert should weigh (1) the link between the technology in a settlement agreement and the patent-in-suit; (2) timing of settlement agreement compared to the hypothetical negotiation; (3) legal and procedural issues that out-weigh, or skew, the value of the patent; and (4) other more reliable licenses in the record. Any, or all, of these factors may cause a court to exclude a settlement agreement.

Reasonableness Check

Often, damage experts attempt to validate their reasonable-royalty calculation through a reasonableness test. One method of a reasonableness test considers comparisons to other litigation. In MobileMedia Ideas LLC v. Apple Inc., the district court denied Apple’s motion to exclude MobileMedia’s damages expert for relying on several settlement agreements in support of his reasonable-royalty opinion. Apple argued that the its litigation-induced licenses to other patents were not technologically similar or economically comparable to the patents in suit. The court rejected Apple’s argument noting that the expert used the settlements as a reasonableness test, explained similarities in the features of the technology, and adjusted for certain variables. Rejecting Apple’s argument, the court denied Apple’s motion to exclude the expert, noting that the expert’s analysis was “sufficiently detailed” with “reasons for his patent selection and acknowledge[d] and adjust[ed] the royalty rates for the differing circumstances of the prior litigation.”

Given this decision, damage experts may use license or settlement agreements that do not include the patent-in-suit as a reasonableness check, provided the expert gives sufficient and detailed reasons for selecting each license, and acknowledge and adjust for differing circumstances of the prior litigation. The following section discusses how to identify differing circumstances.

Identifying Differences

If the damage expert chooses to rely on other license or settlement agreements, the expert must account for differences between the agreements and the license contemplated in the hypothetical negotiation. Below is a nonexhaustive list of aspects to consider when comparing licenses or settlement agreements to determine a reasonable royalty, or even as a reasonableness check.

Are the agreements economically similar? It is significant to compare the date of comparable license to the hypothetical negotiation date and adjust for changes in the economy and changes in the market for the products using the patented technology. Further, if the patented technology in a prior license or settlement is used in different products than in the instant litigation, the economic importance of the patent may differ.

Do the agreements have the same scope as the license contemplated in the hypothetical negotiation? It is significant to consider and compare what is included in the comparable license, including the number of patents, other intellectual property included, such as trademarks, and the inclusion of know-how. The value of additional intellectual property in a comparable license must be apportioned in some manner.

An arms-length license between an inventor and promoter may also include payments for add-ons that a hypothetical negotiation would not, such as marketing or other services unrelated to the licensed technology. Moreover, differences in restrictions, in terms of geographic territory or products licensed, may be significant and must be considered and evaluated.

Is it a lump sum or running royalty? The structure of the license may be a lump-sum payment not calculated on a per-unit basis, or a running payment that varies with the number of infringing units sold, the dollar amount of revenue related to the patented feature, or some other metric related to sales. Noting certain fundamental differences between lump-sum agreements and running-royalty agreements, the Federal Circuit held, “this is not to say that a running-royalty license agreement cannot be relevant to a lump-sum damages award, and vice versa. For a jury to use a running-royalty agreement as a basis to award lump-sum damages, however, some basis for comparison must exist in the evidence presented to the jury.”[9] Courts have ruled that converting a lump-sum royalty to a running royalty is not a matter of exclusion, provided the expert provides a sufficiently detailed explanation of the conversion.[10]

Is the comparable license similar to the license contemplated in the hypothetical negotiation with respect to exclusivity? An exclusive license commands a higher royalty rate. The relationship of the parties has a significant impact on an exclusive license. On the other hand, a nonexclusive license is in substance a covenant not to sue.[11]

What is the relationship of the parties? A damages expert should address the differences between or among the parties’ licenses and each parties’ relative bargaining power, accounting for size differences and any relationship that may make a negotiation not an arms-length transaction.

Is it a settlement agreement? In a similar vein to the relationship of the parties negotiating, it is meaningful, when relying on a settlement agreement, to consider each party’s reasons for settling the case, including the probability that the parties faced an adverse judgment, the cost of the potential adverse judgment, and the costs of further litigation, because these factors influence the reliability of the agreement as evidence of the value of the patented technology. For example, if the patent owner’s probability of losing on infringement or validity was very high in the earlier suit, the resulting settlement figure may be too low to reflect a reasonable assessment of the value of the patented technology. The earlier suit may have included a risk of enhanced damages, a factor in the settling parties’ assessment of risk that would push settlement value above the value of the technology.

The timing of a settlement also has an impact on the dollar amount. Complete and fully developed discovery increases the likelihood that any settlement will reflect the value of the patented technology rather than a desire to avoid a potential unfavorable judgment.[12] Likewise, after a large share of litigation costs have been expended, the role of litigation-cost avoidance in the decision to settle is usually reduced. When validity and infringement are still open issues, possible nonliability is a factor that tends to lower settlements.[13]

While a settlement agreement may be less reliable than a license negotiated in the normal course of business, a jury verdict is even further removed from a hypothetical negotiation.[14]

Conclusion

Differences between a prior license agreement or a settlement agreement and the license contemplated in the hypothetical negotiation — including technology or products, terms and conditions — can make it difficult to extract probative information for a reasonable-royalty analysis. An expert may determine that prior licenses or settlements of prior litigation are too dissimilar to be useful. In such a case, the damage expert should carefully analyze the license or settlement agreements to establish they are not sufficiently comparable. Alternatively, an expert may determine that a license or settlement agreement is not similar enough to be a primary determinant of a reasonable royalty, but useful secondarily as a reasonableness check. Further, an expert may wish to use either prior license agreements, settlement agreements, or both as a primary determinant of value. Even a license that appears to be very similar requires careful analysis with a method of accounting for key licensing terms and economic conditions surrounding the hypothetical negotiation in order to compare and contrast aspects with those of real-world agreements and/or settlements. A careful analysis is highly specific to the facts of the case and the comparable licenses.

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Karen H. Romrell is a senior consultant at Hampton IP & Economic Consultants LLC in Centerville, Utah.

DISCLOSURE: Scott Hampton, principal of Hampton IP & Economic Consultants, was the damage expert on behalf of Sprint Spectrum LP in Prism Technologies LLC v. Sprint Spectrum LP, (Fed Cir. March 6, 2017).

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

  1. Laser Dynamics, Inc. v. Quanta Computer, Inc., (Fed Cir. Aug. 30, 2012)
  2. Prism Technologies LLC v. Sprint Spectrum L.P., (Fed Cir. March 6, 2017)
  3. Prism Technologies LLC v. Sprint Spectrum L.P., (Fed Cir. March 6, 2017)
  4. ResQNet Inc. v. Lansa, Inc. (Fed Cir. February 5, 2010)
  5. Laser Dynamics, Inc. v. Quanta Computer, Inc., (Fed Cir. Aug. 30, 2012)
  6. Laser Dynamics, Inc. v. Quanta Computer, Inc., (Fed Cir. Aug. 30, 2012)
  7. Laser Dynamics, Inc. v. Quanta Computer, Inc., (Fed Cir. Aug. 30, 2012)
  8. Comcast Cable Communications v. Sprint Communications Company, L.P., (E.D. P.A. Nov. 21, 2016)
  9. Lucent Technologies, Inc. v. Gateway, Inc., (Fed. Cir. Sept. 11, 2009)
  10. Affinity Labs of Texas, LLC v. Ford Motor Co. (E.D. Tex., Aug. 22, 2014)
  11. TransCore, LP v. Elec. Transactions Consultants Corp., (Fed. Cir. April 8, 2009)
  12. Prism Technologies LLC v. Sprint Spectrum L.P., (Fed Cir. March 6, 2017).
  13. Prism Technologies LLC v. Sprint Spectrum L.P., (Fed Cir. March 6, 2017)
  14. Flexuspine, Inc. v. Globus Medical, (E.D.Tex. Aug. 5, 2016)
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