tion of lost profits is not acceptable to a court; neither should it be to a good valuation. Projections that take into account historical performance, the riskiness of the cash flows, the financial condition of the company, and char- acteristics of the market are some of the ingredients required to do the valu- ation right.
Relating Panduit to the PIE-B
It is hoped that at this stage, readers can relate the Panduitcriteria to PIE- B’s dimensions: If demand for the asset is greater, economic benefit is greater.
If there are no acceptable substitutes for the asset, then ownership of the ben- efits is more secure. (The opposite, of course, is that the features of the asset are not unique: Properties are shared by many owners.) If the owners of the asset can exploit demand, then economic benefit is greater. And, last, the less speculative a calculation of profit, the more certainly economic benefit can be calculated.
has shown a willingness to expend effort and money to protect its patent “monopoly,” a higher hypothetical license fee may be proper.
This factor looks to what the licensor has achieved with others in com- parable circumstances.)
5. The commercial relationship between the licensor and licensee, such as whether they are competitors in the same territory in the same line of business, or whether they are inventor and promoter.
6. The effect of selling the patented specialty in promoting sales of other products of the licensee, the existing value of the invention to the licen- sor as a generator of sales of his or her nonpatented items, and the extent of such derivative or convoyed sales.
7. The duration of the patent and term of the license.
8. The established profitability of the product made under the patent, its commercial success, and its current popularity.
9. The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
10. The nature of the patented invention, the character of the commercial embodiment of it as owned and produced by the licensor, and the ben- efits to those who have used the invention.
11. The extent to which the infringer has made use of the invention, and any evidence probative of the value of that use.
12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
13. The portion of the realizable profit that should be credited to the inven- tion as distinguished from the nonpatented elements, the manufactur- ing process, business risks, or significant features of improvements added by the infringer.
14. The opinion of qualified experts.
15. The amount that a willing licensor would have agreed to accept, and that a willing licensee would have agreed to pay at the time the infringement began.2
Some of these factors can be interpreted as overlapping with the economics of the Panduitcriteria. Factor 8, for example, is a little like Panduit1 and 4 together. Georgia Pacific13 requires similar thinking to Panduit2. It is the last factor—“the amount that a willing licensor would have agreed to accept, and that a willing licensee would have agreed to pay at the time the infringement began”—that captures the essence of the Georgia Pacific framework. It describes a world but forthe patent infringement.
For example, suppose our hammer grip patent holder wants to charge a royalty of at least $1.00 per hammer. Suppose that the infringer has determined that a fee of $1.50 per hammer will wipe out any incremental
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profit. Georgia Pacificfactor 15 tells us that a reasonable royalty must lie between $1.00 (the least the licensor is willing to take) and $1.50 (the most that the potential licensee would be willing to pay).
Exceptions
Interestingly, there can be some exceptions. Imagine that the infringing good is part of a bundle of goods—maybe the patent covers a certain socket wrench that is always sold as part of a set of socket wrenches. Then the upper bound on what the licensee may be willing to pay could be more than just the incremental profit on the particular wrench covered under the patent. The licensee will consider the overall increase in profit of the bun- dled goods—with the inclusion of the patented wrench—and compare that to the cost of the royalty. This actually relates to Georgia Pacificfactor 6, which indicates that the promotional value or the value due to convoyed sales also should be considered in assigning a reasonable royalty.
Another exception is demonstrated by the case of the Black & Decker SnakeLights. Black & Decker sued an infringing manufacturer over patents covering its flexible flashlights. In this case, the court actually found that a reasonable royalty could exceed the selling price of the infringer’s product.
The results of this seemingly odd decision were explained by the lawyers and experts3 in an article in the Federal Circuit Bar Journal. They intro- duced the idea that a reasonable royalty should be set to the patent owner’s profit margin, if three conditions were met:
1. The infringed technology must be more valuable to the plaintiff than to the defendant. If this is true, then the groundwork is laid in a hypothet- ical negotiation such that the plaintiff patent holder has no economic incentive to license the technology. Why should the patent holder? He or she makes more profit by not sharing the patent. At what price would the patent holder become indifferent to licensing? This patent holder needs to get the price that achieves his or her own incremental profit margin. In the valuation context, this condition is important to be able to recognize. There are times when it makes sense not to license.
2. The plaintiff must meet the legal test for lost profits. This is similar to the third criteria of the Panduittest. If the plaintiff does not have the ability to make product that would supplant the infringing sales, then he or she could not have been damaged (at least that way). Again, relat- ing this to valuation, we recognize that the value of a given patent is rel- ative to its owner’s ability to capitalize on it.
3. The defendant’s sales must displace the plaintiff’s on a one-for-one basis.
In the case of SnakeLight, the plaintiffs were able to rely on this as a
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rebuttable presumption. In valuation, or as defendants in a patent infringement suit, we would not be afforded this convenience. Rather, it would be our job to estimate how likely and how strong displacement would be. Remember our earlier discussion of the cross-price elasticity of demand? It returns again here as a way of determining displacement.
Relating Georgia Pacific to the PIE-B
Many of the economic underpinnings of the Georgia Pacificfactors are, of course, related to PIE-B criteria. Readers are encouraged to think about how each of these factors reflects on ownership and economic benefits of some intangible asset. For example, consider the ninth factor: the utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. The greater the utility, the greater the benefit. And by definition, if there are advantages, then owner- ship conveys benefits over nonowners.