The following is excerpted from an October 25, 2011 article by Eric Lobenfeld, co-head of the U.S. Intellectual Property Practice of Hogan Lovells, published by Inside Counsel:
Responding to increasingly large damages awards based on expert advice grounded more in speculation than fact, the Federal Circuit finally rejected the so-called “25 percent rule,” a rule of thumb used in calculating a reasonable royalty.
The 25 percent rule allowed an expert to opine that the accused infringer would pay a royalty rate equivalent to 25 percent of its profit on the product practicing the patent at issue.
Rejecting the 25 percent rule, courts returned to requiring the full-fledged “hypothetical modeling” approach outlined in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
A hypothetical royalty negotiation is modeled between the potential licensee and the patent holder on the assumption that the patent is valid and infringed. The model first defines a bargaining range with the upper end of the range set by the largest amount the potential licensee would willingly pay, but the lower end is pegged to the minimum amount the patent holder can accept.
Read the full article here.