Worlds Inc (WDDD)

[Long term]

The Life of an Appeal = chart

http://www.cafc.uscourts.gov/sites/default/files/rules-of-practice/notices/Life_of_an_Appeal_Narrative_and_flowchart.pdf

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enhanced damages

https://www.ipwatchdog.com/2017/09/14/enhanced-damages-since-halo/id=87716/
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The methods being explained below are frequently associated with a certain IP asset. An example of this is the Venture Capital Method, which is a technique that derives a value for a patent from the cash flows that arise over the asset’s life.

Group A – Generally Accepted
Brand Contribution Methodology: The Brand Contribution Methodology is another market-based methodology for valuing IP. The contribution made by the brand may be separated from the profit contributed from other elements of the business in multiple ways: 1) comparing costs charged by a manufacturer and distributor of the unbranded equivalent (also known as the “utility product”); 2) if one eliminates the value added by other assets, the appropriate return on capital employed with respect to the product may be deducted (this includes assets such as physical distribution systems, fixed assets, etc.); 3) the rate of return (or “profitability”) of the business can be compared with the rate of return of a comparable unbranded business (which is known as the “premium profits” method); and 4) comparing the premium price earned by the brand over the retail price of its comparable generic equivalent (known as the “retail premium” method).
Replacement Cost: When using the Cost Approach to value an intellectual asset, two separate methods under the cost approach shall be considered: the Replacement Cost method and the Reproduction Cost method. The Replacement Cost method aggregates the amount of money necessary to develop a replacement of the IP that provides the same functionality or utility, in the same stage of development as the IP being valued, as of the valuation date. It is important to note that the Replacement Cost measures the amount of money in today’s dollars, rather than the amount of money that was spent historically to develop the IP so inflation is accounted for. The logic behind this method is to calculate the amount, in today’s dollars, to provide an equivalent substitute. Finally, calculating the cost of an IP using the Replacement Cost method excludes the costs associated with any failed or ineffectual models.
Reproduction Cost: The Replication Cost method is very similar to the Replacement Cost method, but differs slightly in that it measures the aggregate costs necessary to develop an exact duplicate of the IP being valued, in the same stage of development as the IP being valued, as of the valuation date. Just like with the Replacement Cost, this calculation is done in today’s dollars to appropriately factor in for inflation. And unlike the Replacement Cost method, the Reproduction Cost method includes costs with associated prototypes.
Technology Factor Method: As the number of digital intangible assets rise, using The Technology Factor Method becomes all the more common because it is applicable only to technology. By measuring a technology’s contribution to a business’ total revenue, an asset’s value can be determined. Specifically, the Technology Factor Method is another method that is similar to the DCF method with respect to the calculation of an IP’s risk-free net present value. Once the NPV has been calculated, it can then be multiplied with an associated risk factor (what we will refer to as the “technology factor”). The Technology Factor value incorporates the intellectual property’s strengths and weaknesses associated with the related legal, market and economic risks.
Venture Capital Method: Analyzing the value of future cash flows over an asset’s life is a common technique used to value intellectual property, which is precisely how the Venture Capital method works. Although similar to the common DCF method, it is different in that a fixed, non-market based discount rate is used (generally, a rate of between 40 to 60 percent used). Additionally, no specific adjustment is made to account for the probability of success (e.g., a patent’s success). Unfortunately, the Venture Capital method’s weakness is such that it does not account well for specific risk factors associated with patents. Moreover, it assumes cash flows are static and the independent risk factors (new patent issuance, patent challenges or declared in valid, patent infringement suits, trade secrets, foreign governments’ failure to comply with Patent Cooperation Treaties, etc.) are marshaled. It is the simplicity of this method that harms its accuracy/credibility.
The Concept of Relative Incremental Value: This methodology works when one is trying to represent some percentage of value of an individual asset that is associated with a larger trademark or patent portfolio. For example, if an underlying trademark or brand has a value of $100 million, and the domain name associated with it is generating 10% of revenues (e.g.), then one can allocate a relative value of 10% of the total or, $10 million dollars for the domain name.
Decremental Cost Savings Valuation: This is the method that quantifies a decrease in the level of costs being experienced by the IP owner / operator. If, in fact, the IP owner can quantify lower levels of capital or operating costs connected directly with the ownership of the IP; then those lower costs can be a direct measurement of the value of the specific IP.
Enterprise Value Enhancement: The valuation analyst establishes the value of the IP owner’s overall business enterprise value as a result of owning the IP – and then compares that to the business enterprise value if the owner did not, in fact, have or control the IP or was not able to use it in its business enterprise. The value of the IP then would be the difference between the total business enterprise value and the business enterprise as calculated without the IP.
Imputed Income Analysis: A subset of traditional income approach methods, this imputed income analysis can be used quite effectively in valuing a domain name or sub brand attached to a trademark; or in valuing flanker patents for a core patent portfolio. In the case of a domain name, value is established by looking at the activity generated by the domain name and associated website assets, relative to the overall value of the core trademark and brand bundle. Therefore, one is able to estimate through imputation the relative value of a domain name to its parent trademark.
Income Capitalization or Direct Capitalization Methodology: This is a method sometimes used to estimate the value for intellectual property that has no predetermined statutory expiration (like trademarks) and for which net income (royalties or profit) is not expected to vary greatly over time (due to contractually-defined license fees, for example). This involves taking an estimate of expected annual royalty stream (or profit) and multiplying this amount by a factor known as the capitalization rate.
Income Differential Analysis: This particular variation simply means that a company manufacturing and selling a product with a particularly strong trademark or unique technology will receive more income than a competitive company producing the same product but without the addition of the specific IP, such as the trademark or patent.
Liquidation Value: Found most often in bankruptcy situations, as the name implies liquidation value for any piece of IP is the lowest price that the asset is virtually guaranteed to be sold in a distressed situation. Used almost solely in bankruptcy, other distressed situations or time critical contexts, litigation value scenarios arise most often in a Chapter 7 bankruptcy.
Premium Pricing Analysis: Of all the variations to the income approach, this is perhaps the most easily understood – because the value of an asset is established by looking at the difference in the price that it can command in the market, typically at wholesale, compared to the average product in the market. The difference between these two prices is the price premium. This, then, is projected out on an annual basis and a net present value established.
Profit Split Methodology: A form of the income approach, it can be tricky to apply accurately: because the profit split method attributes a share or portion of a company’s profitability to a particular intangible asset. This method requires that the valuation analyst have the ability to understand the IP to such an extent that he or she can isolate and expressly separate the intangible asset’s profit generation potential from all the other business assets – and then allocate that portion of profit split to the company’s operations and capitalize that value over a number of years.
 
Group B – Specialized/Proprietary
Auction Method: There are several market-based methods of valuing IP using recent comparable or similar IP transaction between independent parties (“arm’s-length transactions”). One of these methods is called the “Auction Method.” If a hypothetically perfect auction market existed, several potential buyers that each had all available information regarding the IP would compete with each other to bid on the IP. Through this auction process, a market-based price of the IP would be determined through bidding.
DTA (Decision Tree Analysis) Based Methods: While many people are familiar with the DCF methods of valuing intellectual property, it comes with inherent weaknesses because it relies on selecting discount rates appropriate to the risk associated with the various stages in a property’s life. Not only does it require calculating the possible cash flows which might occur, DCF methods do not account for the various possibilities open to project managers (for example, the levels of risk if a patent lapses or is abandoned at differing stages along the process). Unfortunately, there is no “exact science” to be applied for these and experience is necessary to influence these decisions.
Assumptions can be built into the DCF model in an attempt to account for the possible outcomes as the result of management decisions. Using what is known as Decision Tree Analysis, a limited number of such managerial decision possibilities can be accounted for. It is important to note, however, that the Decision Tree Analysis should be based on an underlying DCF analysis of each branch. The recommended way to perform such analysis is to begin with the final decisions and work backwards in time, which will result in a present value.
The Decision Tree Analysis Method offers a big advantage over the DCF analysis: it factors the value of flexibility associated with a project. However, assumptions still need to be made regarding the discount rate (as does the DCF method). It is important to use a discount rate appropriate with the level of risk involved at each stage of a managerial decision associated with the development of a brand or IP.
The Brand Value Equation Methodology (BVEQ™): In this methodology, a core value for the trademark is calculated, and then each of the individual other assets attached to the core asset have their values calculated. Therefore, the sum of the core brand value plus the incremental assets becomes a total brand value. Expressed in an equation it as follows:
BVEQ = CBV + IVE1 + IVE2… IVEn
The Competitive Advantage Technique: This technique is best used when the subject company has a complex portfolio of intellectual property and works on the supposition that the IP is giving its owner an advantage over its competitors because of proprietary patents, technology, trademarks, software or other intangibles.
Monte Carlo Analysis of Value: This is a method to evaluate how possible future outcomes can affect the decision of whether or not to use a new piece of IP based on possible value – remember that this methodology is most useful in valuing early stage, non-commercialized technology; and, in particular, where there are many unknowns and numerous scenarios about the future development of the technology.
Options Pricing Technique (The Black-Scholes): Patent licensing shares at least one attribute with all other relevant business decisions: it involves risk. Where decisions involving financial risk are concerned, sound management principles suggest considering ways and vehicles to hedge that risk. One of the central vehicles to hedge risk in modern finance is an “Option.” A patent can be seen as the right to invest in or to license (or enforce through litigation) an underlying technology or product line, during the term of the patent. Therefore, an un-commercialized patent can be valued from this “options” perspective using, for example, methods such as those derived from the famous “Black-Scholes” model.
Snapshots of Value Approach: This is similar in nature to the business enterprise value approach in that the snapshots value is based on establishing two different values for a company: one, based on the assumption that the company has full access to the ownership of the intellectual property and intangibles, and the second snapshot of value based on the fact that the company does not have these assets. Measuring the difference between the two snapshots establishes the value of the IP or intangible asset portfolio.
Subtraction Method of Value or Benchmark Method of Value: Establishing the value of a company against another company by comparing them on a so-called benchmark basis is the premise of this method of value. In one instance, the benchmark value will be a company that owns a particular trademark or patent and the second value for a comparable company that does not have that same asset.
The ValCalc Methodology: A proprietary approach employed by our firm, it is a variation on the return on assets employed approach (see above). ValCalc establishes the economic return that each intangible asset class should be earning. Calculations of adequate return are applied also to all classes of tangible assets within a company. Then the return for each intangible asset is calculated as a result.
Valmatrix Analysis Technique: This proprietary system was developed by our firm more than two decades ago and employs a matrix of the twenty most important predictors of value for a trademark, patent or piece of software. The predictors for each of these types of IP are, of course, unique. They are used in a common manner, however: To score a given IP asset against its peers on a numerical scale. Value is therefore established relative to similar trademarks or patents.
An important side note for the interested reader: whenever possible, we recommend the use of multiple valuation techniques when performing a valuation analysis. This is especially true with intangible assets because active markets may not exist and assumptions need to be relied on in making valuation conclusions. Moreover, uncertainty may develop if one depends on a single methodology to value an IP asset (especially a particularly complex family of technologies or brand assets). History has taught us that, as with any new practice, the evolution of methodologies will be ever-lasting.
 
Conclusion
Valuing and analyzing intellectual property is still at a premature stage, the field itself hardly more than a few decades old. As the process continues to evolve and experts refine a multitude of methodologies, the art of valuing IP will continue to witness developments, innovation, revision, and diligent progression of techniques to value intellectual property and intangible assets. In all probability, the techniques listed above will either be outdated or refined further to become industry standards.
Take, for example, the notorious Georgia-Pacific factors. For a long time, these standards were implemented as a reliable damages quantification method in patent litigation. However, in a 2012 interview between SRR Journal and Chief Judge Rader (considered to be one of the leading authorities in IP litigation), has said they “were never meant to be a test or a formula for resolving damages issues” and determined them to be “merely a list of things to consider.” Conclusions such as this made by authorities such as Chief Judge Rader alter the landscape of valuation calculation, ruling a once-standard technique to be just a “relic” and “a flawed methodology.”
While we cannot make any definite suppositions about which techniques will escalate to the forefront of IP valuation, it is safe to assume that some of these methods will become obsolete while others will move the ranks to mainstream.
 


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Keeping Up with the Game: The Use of the Nash Bargaining Solution in Patent Infringement Cases

https://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1597&context=chtlj
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Texas Intellectual Property Law Journal Fall 2001 Article RETHINKING PATENT DAMAGES
http://www.tiplj.org/wp-content/uploads/Volumes/v10/v10p1.pdf
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IV. THE NASH BARGAINING SOLUTION SHOULD BE A VIABLE METHOD USED IN CALCULATING REASONABLE ROYALTY DAMAGES IN PATENT INFRINGEMENT CASES Courts should allow the use of the NBS by damages experts as a viable method for calculating a reasonable royalty in patent infringement cases for three reasons. First the NBS, if properly used, adequately applies the facts of each specific case to its analysis. Second, the NBS is grounded in sound, unmanipulable economic theory that can be adequately explained. Finally, the NBS is more impartial than the Georgia-Pacific factor analysis. A. The Nash Bargaining Solution Applies the Facts of the Case When the NBS is properly used by utilizing the equations set forth by Choi and Weinstein, it ties the specific facts of each case to its analysis.147 One of the main criticisms by courts about the NBS is the lack of tying the specific facts of the case to its analysis.148 However, it is noteworthy that none of the courts that have excluded the use of the NBS have explicitly held that the NBS, in and of itself, does not utilize the specific facts of the case.149 Rather, courts have admonished damages experts’ lack of tying specific facts of the case in their analysis of the NBS.150 Therefore, it is not the NBS itself that has been criticized, but rather, experts’ application of the NBS. It is evident, upon further examination, that the NBS equations developed by Choi and Weinstein require facts that are specific to the parties of the case. First, the variables of the Choi and Weinstein equations require data that is specific to the parties involved in the hypothetical negotiation. For example, d1 represents the disagreement profit of the patent holder.151 To effectively utilize these equations, this variable must be satisfied with a value that is specific to the patent holder at issue. Likewise, d2 represents the disagreement profit of the infringer/licensee.152 This variable must also be satisfied with a value that is specific to the infringer at issue. Thus, these variables require direct use of the facts of the case. 147. For purposes of this discussion, it is assumed that a showing that the specific facts of a case fits the premises of the NBS has already occurred. Thus, an application of the Choi– Weinstein model is all that remains to properly apply the NBS. 148. See VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014); see also Oracle Am., Inc. v. Google Inc., 798 F. Supp. 2d 1111, 1119 (N.D. Cal. 2011). 149. See supra Part III-C. 150. See Oracle, 798 F. Supp. 2d at 1119. 151. Choi & Weinstein, supra note 9, at 54. 152. Id. 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 2015] NBS IN PATENT INFRINGEMENT CASES 451 As an example, we will assume that the disagreement profit for both the patent holder and infringer is zero. A value of zero for both of these variables would mean that “without a license, neither the licensor nor the licensee obtains benefits from the patented technology.”153 For purposes of the equations, d1 and d2 equal zero. When these values are plugged into equations (7) and (8), the result becomes: ????1 * = 1 2 ?, (10) ????2 * = 1 2?, (11)154 These resulting equations demonstrate that when, without a license, neither party obtains benefit from the patented technology, each party receives half of the total incremental profit, ?.155 This scenario demonstrates how the dreaded 50/50 split result from the NBS, admonished by courts, can occur.156 However, this split did not result without the use of the facts of the case. The above calculation is the most simplistic use of the NBS in the patent-damages context. Obviously, we live in a world with multiple suppliers, and one or both of the parties will typically have some disagreement profit—an alternative plan in the case that licensing negotiations fail. Therefore, d1 and d2 will rarely ever equal zero, but there are some cases when it will.157 For example, in a suit where infringement is found, the infringer will be required to stop utilizing the patented invention.158 Thus, d2 will generally equal zero. 159 Additionally, in cases where the patent holder is a non-practicing entity and does not offer products utilizing the patent, d1 will equal zero because there will be no profit to be made in the event that a license is not executed.160 Even when the NBS calculation does not result in a 50/50 split of incremental profit, the calculation of the NBS still requires the application of the facts of the case. For example, Choi and Weinstein demonstrated the result of their equations in a two-supplier world, where both parties possess production capabilities.161 There, “the 153. Weinstein, supra note 31, at 556. 154. Id. 155. Id. 156. See supra Part III. 157. Weinstein, supra note 31, at 556–57. 158. Id. 159. Id. 160. Id. 161. Choi & Weinstein, supra note 9, at 58. 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 452 SANTA CLARA HIGH TECH. L.J. [Vol. 31 disagreement payoff for the patent holder is the profit it can earn as the high-cost, sole producer of its patented product.”162 This produces the following function for solving d1: ????1 = ????1????1 - ????1????1 (12)163 In this equation, C1(Q1) is the patent holder’s cost function, P1 is the profit-maximizing price, and Q1 is the profit-maximizing quantity, absent the infringer.164 Furthermore, the disagreement profit for the infringer is “equal to the [infringer’s] opportunity cost,” which is the return foregone from manufacturing the technology.165 This results in the following total incremental profit function from licensing: ? = ???????????????? - ????2???????? (13)166 Plugging these functions into equations (7) and (8) results in the following: ????1 * = ????1 + ????????????????-????2(????????)-????1-????2 2 = ????????????, (14) ????2 * = ????2 + ????????????????-????2(????????)-????1-????2 2 = ???????????????? - ????2(????????) - ????????????, (15) ????1 * + ????2 * = ? = ???????????????? - ????2(????????) (16)167 In these equations, r represents the per-unit royalty.168 Solving for r results in the following: ???? = 1 2 [???????? - ????????2] + 1 2???????? [????1 - ????2], (17) where AC2 represents the infringer’s average total cost.169 162. Id. 163. Id. 164. Id. 165. Id. at 57. 166. Id. at 59. 167. Id. 168. Id. at 57. 169. Id. at 58. (The authors also develop a per-royalty function for the one-supplier world. Id. at 57–58. The function is as follows: ???? = 1 2 [???????? - ????????2] + 1 2???????? [????1 - ????2] Id. Additionally, the authors’ equations provide flexibility for other factors. Id. For instance, “if viable and noninfringing substitutes exist for the patented product, then the elasticity of demand for the patented product is larger,” which lowers the market power and profitability associated with the patent. Id. at 60. Furthermore, the existence of substitute products also will have the effect of lowering d1, which further lowers the royalty rate. Id.). 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 2015] NBS IN PATENT INFRINGEMENT CASES 453 It is worth noting that “f both sides have equal disagreement payoffs, then additional profits achieved from licensing are split equally.”170 Furthermore, the royalty rates change as the disagreement payoffs change.171 “As one side’s outside opportunity improves, the terms of the licensing agreement become more favorable.”172 While these equations are complex, and in most cases, will require a damages expert to calculate a reasonable royalty, it is easy to see that the NBS requires the use of the specific facts of each case. When used correctly, courts should not object to damages experts’ use of the NBS for the reason that it does not apply the specific facts of the case. However, courts have also complained that the NBS cannot be adequately explained. B. The Nash Bargaining Solution Can Be Adequately Explained Another common complaint among courts excluding the use of the NBS is the lack of adequate explanation of its theory.173 However, although mathematically complex, the theory behind the NBS can be adequately explained such that even a lay juryperson could understand. In the article by Weinstein, Romig, and Stabile, the authors use the equations developed by Choi and Weinstein to point out how easily understandable the NBS is in the context of reasonable royalty damages.174 The authors explain that: As previously discussed, the NBS must satisfy two very simple conditions: (1) no other feasible outcome is better than one side and not worse than the other and (2) neither side is worse off reaching an agreement than if no agreement were reached. Additionally, the “complex mathematical formulas” can be reduced to a single sentence: each negotiating party receives the profit it would have made absent an agreement and splits the remaining profits equally. These concepts are easily understandable by jurors.175 Because the NBS can be explained in a simplified manner, as demonstrated by Weinstein, Stabile, and Romig, its inadmissibility under Rule 403 of the Federal Rules of Evidence is unwarranted.176 Its simplified explanation, although grounded in complex mathematics, 170. Id. at 59. 171. See id. 172. See id. at 59–60. 173. See supra Part III-C. 174. See Weinstein, supra note 31. 175. Id. at 560. 176. See FED. R. EVID. 403. 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 454 SANTA CLARA HIGH TECH. L.J. [Vol. 31 does not pose any of the risks contained in Rule 403—unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.177 You will recall that in Oracle, the court took issue with the complex mathematics involved with the NBS and excluded the expert testimony under Rule 403.178 The court held that “[n]o jury could follow this Greek or testimony trying to explain it . . . [and the NBS] would invite a miscarriage of justice by clothing a fifty-percent assumption in an impenetrable facade of mathematics.”179 However, because the NBS does not pose any threat admonished in Rule 403, exclusion of damages expert opinion utilizing the NBS under Rule 403 is a grave misapplication of the law. Additionally, many opponents seek to exclude expert testimony of the NBS under Rule 702 of the Federal Rules of Evidence. Rule 702 explains that the role of an expert witness is to “help the trier of fact to understand the evidence or to determine a fact in issue.”180 The rule ensures that the expert is credible by requiring that his testimony is based on sufficient facts or data, the testimony is the product of reliable principles and methods, and the expert has reliably applied the principles and methods to the facts of the case.181 Nowhere in the rule does it provide that an expert’s testimony may be excluded because of its complex nature. In fact, most expert testimony is complex in nature—they are, in fact, experts. When the NBS is placed against the litmus test of Rule 702, it passes with flying colors. First, the testimony must help the trier of fact to understand evidence or determine a fact at issue.182 Here, the NBS is used to help the trier of fact determine a reasonable royalty rate—a fact at issue. Therefore, the NBS satisfies this condition. Next, the testimony of the expert must be based on sufficient facts or data.183 As discussed in Part IV-A, the calculation of the NBS requires many data points that are derived directly from the facts.184 In fact, none of the variables involve values that do not stem from the facts of the case. While an expert may attempt to apply inaccurate data that does not stem from the facts of the case, such a practice should go to 177. Id. 178. Oracle Am., Inc. v. Google Inc., 798 F. Supp. 2d 1111, 1120 (N.D. Cal. 2011). 179. Id. 180. FED. R. EVID. 720. 181. Id. 182. Id. 183. Id. 184. See supra Part IV-A. 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 2015] NBS IN PATENT INFRINGEMENT CASES 455 the weight of the testimony, not its admissibility. Therefore, the NBS also meets this condition. Additionally, the testimony must be the product of reliable principles and methods.185 As discussed previously, the NBS has been in existence for over 60 years.186 Over that span, many economists have tested its theory.187 Economic literature is replete with articles describing, testing, and commending the NBS.188 It is now held as generally accepted economic theory.189 This makes sense, given its receipt of a Nobel Prize in economics.190 Therefore, the NBS also meets this condition. Finally, the expert must reliably apply the principles and methods to the facts of the case.191 As discussed in Part IV-A, when the values, stemming from the specific facts of the case, are inputted into the variables of the NBS, a reasonable royalty rate is calculated. Accordingly, when a practitioner uses the NBS properly, it is inevitable that the method and principles of the NBS will be applied with the specific facts of the case. Thus, the NBS meets this condition and satisfies all of the conditions of Rule 702. However, the reliability inquiry of the NBS does not stop there. The testimony must also overcome a Daubert challenge.192 The notes of the advisory committee for Rule 702 explain: Daubert set forth a non-exclusive checklist for trial courts to use in assessing the reliability of scientific expert testimony. The specific factors explicated by the Daubert Court are (1) whether the expert's technique or theory can be or has been tested—that is, whether the expert's theory can be challenged in some objective sense, or whether it is instead simply a subjective, conclusory approach that cannot reasonably be assessed for reliability; (2) whether the technique or theory has been subject to peer review and publication; (3) the known or potential rate of error of the technique or theory when applied; (4) the existence and maintenance of standards and 185. FED. R. EVID. 720. 186. See supra Part II. 187. Id. 188. Id. 189. Id. 190. Id. 191. FED. R. EVID. 720. 192. See Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311, 1317 (9th Cir. 1995). 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 456 SANTA CLARA HIGH TECH. L.J. [Vol. 31 controls; and (5) whether the technique or theory has been generally accepted in the scientific community.193 Because the NBS is a long-standing, generally accepted economic theory that has been subject to peer-review and extensive publication, it is apparent that these factors weigh in favor of the NBS’s 193. FED. R. EVID. 702 advisory committee’s note (“Courts both before and after Daubert have found other factors relevant in determining whether expert testimony is sufficiently reliable to be considered by the trier of fact.”). These factors include: (1) Whether experts are “proposing to testify about matters growing naturally and directly out of research they have conducted independent of the litigation, or whether they have developed their opinions expressly for purposes of testifying.” Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311, 1317 (9th Cir. 1995). (2) Whether the expert has unjustifiably extrapolated from an accepted premise to an unfounded conclusion. See General Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) (noting that in some cases a trial court “may conclude that there is simply too great an analytical gap between the data and the opinion proffered”). (3) Whether the expert has adequately accounted for obvious, alternative explanations. See Claar v. Burlington N.R.R., 29 F.3d 499 (9th Cir. 1994) (testimony excluded where the expert failed to consider other obvious causes for the plaintiff’s condition). Compare Ambrosini v. Labarraque, 101 F.3d 129 (D.C. Cir. 1996) (the possibility of some uneliminated causes presents a question of weight, so long as the most obvious causes have been considered and reasonably ruled out by the expert). (4) Whether the expert “is being as careful as he would be in his regular professional work outside his paid litigation consulting.” Sheehan v. Daily Racing Form, Inc., 104 F.3d 940, 942 (7th Cir. 1997). See Kumho Tire Co. v. Carmichael, 119 S. Ct. 1167, 1176 (1999) (Daubert requires the trial court to assure itself that the expert “employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.”). (5) Whether the field of expertise claimed by the expert is known to reach reliable results for the type of opinion the expert would give. See Kumho Tire Co. v. Carmichael, 119 S. Ct. 1167, 1175 (1999) (Daubert’s general-acceptance factor does not “help show that an expert’s testimony is reliable where the discipline itself lacks reliability, as, for example, do theories grounded in any so-called generally accepted principles of astrology or necromancy.”); Moore v. Ashland Chemical, Inc., 151 F.3d 269 (5th Cir. 1998) (en banc) (clinical doctor was properly precluded from testifying to the toxicological cause of the plaintiff’s respiratory problem, where the opinion was not sufficiently grounded in scientific methodology); Sterling v. Velsicol Chem. Corp., 855 F.2d 1188 (6th Cir. 1988) (rejecting testimony based on “clinical ecology” as unfounded and unreliable). All of these factors remain relevant to the determination of the reliability of expert testimony under the rule as amended. Other factors may also be relevant. See Kumho, 119 S. Ct. at 1176 (“[W]e conclude that the trial judge must have considerable leeway in deciding in a particular case how to go about determining whether particular expert testimony is reliable.”). Yet no single factor is necessarily dispositive of the reliability of a particular expert’s testimony. See, e.g., Heller v. Shaw Industries, Inc., 167 F.3d 146, 155 (3d Cir. 1999) (“[N]ot only must each stage of the expert’s testimony be reliable, but each stage must be evaluated practically and flexibly without bright-line exclusionary (or inclusionary) rules.”); Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311, 1317 n.5 (9th Cir. 1995) (noting that some expert disciplines “have the courtroom as a principal theatre of operations” and as to these disciplines “the fact that the expert has developed an expertise principally for purposes of litigation will obviously not be a substantial consideration.”). 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 2015] NBS IN PATENT INFRINGEMENT CASES 457 reliability.194 Even still, a rejection of expert testimony is the exception rather than the rule.195 Courts should not abandon the use of the NBS simply because it may be too complex for a jury to understand. Instead, courts should leave this determination in the hands of the jury. If a jury feels that the testimony involving the NBS is “a fifty-percent assumption in an impenetrable facade of mathematics,”196 they can choose to not give any weight to the expert’s testimony. The reliability of the NBS, however, is well-established and should not provide a basis for courts to exclude its use. C. The Nash Bargaining Solution is More Impartial than the Manipulable Georgia-Pacific Factor Analysis While the Georgia-Pacific analysis has been used for over 30 years to calculate a reasonable-royalty rate,197 it is easily manipulable and should be abandoned in favor of the more impartial NBS. As Choi and Weinstein point out, the Georgia-Pacific analysis “can produce a royalty rate unsupported by economic theory.”198 First, the Georgia-Pacific analysis can be easily manipulated and difficult to understand. For example, a plaintiff, attempting to garner a high royalty rate, may emphasize a few factors while leaving out other important factors that may be detrimental to its position.199 Vice versa, a defendant may emphasize only a few factors in an attempt to establish a low royalty rate. 200 Choi and Weinstein explain that what can result is “an unsound calculation shrouded by ‘reliance’ on the GeorgiaPacific factors.”201 Professor Tom Cotter from the University of Minnesota Law School, opined that the “Georgia-Pacific factors . . . can be easily manipulated by the trier of fact to reach virtually any outcome.”202 Additionally, one commentator explained that, “[t]he 194. See supra Part I. 195. Id. 196. Oracle Am., Inc. v. Google Inc., 798 F. Supp. 2d 1111, 1120 (N.D. Cal. 2011). 197. See supra INTRODUCTION. 198. Choi & Weinstein, supra note 9, at 51. 199. See id. 200. See id. 201. Id. 202. Merritt J. Hasbrouck, Comment, Protecting the Gates of Reasonable Royalty: A Damages Framework For Patent Infringement Cases, 11 J. MARSHALL REV. INTELL. PROP. L. 192, 200 (2011) (quoting Tom Cotter, Briggs and Morgan Professor of Law, Univ. of Minn. Law Sch., Remarks at the Federal Trade Commission Hearing On: The Evolving IP Marketplace— Remedies, Panel 1: Standards for Assessing Patent Damages and Their Implementation by Courts 1, at 39 (Feb. 11, 2009)). 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 458 SANTA CLARA HIGH TECH. L.J. [Vol. 31 factors do not give clear guidance on how to calculate damages awards because there is no standardized way to apply or prioritize the factors.”203 Moreover, courts have expressed aversion for the GeorgiaPacific analysis. The Federal Circuit has described the Georgia-Pacific analysis as “a difficult judicial chore, seeming often to involve more the talents of a conjurer than those of a judge.”204 Finally, in Gasser Chair Co., Inc. v. Infanti Chair Mfg. Corp., the court held that “t would be an affectation of research to cite the countless cases which simply reiterate the ‘Georgia–Pacific’ factors to be considered in determining a reasonable royalty. . . . To set out those fifteen factors would also needlessly burden this decision.”205 Next, the NBS provides a more impartial reasonable-royalty-rate determination than the Georgia-Pacific analysis. Because the NBS is mathematical, it provides less wiggle room for manipulability than the Georgia-Pacific analysis. Conversely, because the Georgia-Pacific factors are not based upon mathematics, they are analyzed from a subjective perspective. It would be naïve, however, to assert that the NBS is wholly impartial. A damages expert could input incorrect values to manipulate the results, but this manipulation should be more readily apparent to a jury member. It would be easier for a jury member to ascertain that the cost variable of an NBS analysis has been manipulated, than it would to ascertain that a damages expert is advocating an unreasonable-royalty rate by simply stating the basis for his rate as a subjective analysis of the various Georgia-Pacific factors. While the NBS may be a better method than the Georgia-Pacific analysis, a detailed analysis of the effectiveness of the Georgia-Pacific analysis is beyond the scope of this article. However, a future article may be useful to analyze the effectiveness of the NBS compared to the effectiveness of the Georgia-Pacific analysis. CONCLUSION Courts should allow the use of the NBS as a viable method to calculate a reasonable royalty in patent infringement cases because, if properly used, the NBS adequately applies the facts of each specific case, is grounded in sound, unmanipulable economic theory, and is more impartial than the Georgia-Pacific analysis. Courts have excluded the use of the NBS due to its improper use by damages 203. Id. 204. Fromson v. W. Litho. Plate & Supply Co., 853 F.2d 1568, 1574 (Fed. Cir. 1988). 205. Gasser Chair Co., Inc. v. Infanti Chair Mfg. Corp., 943 F. Supp. 201, 216 (E.D. N.Y. 1996). 09_ARTICLE_WYATT (DO NOT DELETE) 6/25/2015 1:15 PM 2015] NBS IN PATENT INFRINGEMENT CASES 459 experts. However, as shown here, the NBS, when used correctly, provides an impartial theory to calculate reasonable royalty damages. Its theory has been established as sound, accepted economic theory over the past 60 years, and it is the most useful way to determine an accurate reasonable royalty. Furthermore, a proper application of the NBS takes into account the relative bargaining positions of both parties, and adjusts the royalty rate accordingly. As recently exemplified in a recent Federal Circuit opinion, proper use of the NBS is vital to its viability as a proper method to calculate a reasonable royalty. Accordingly, proper use can be encouraged by a simple technique used by many mathematics teachers—show your work. If the equations by Choi and Weinstein are utilized, and damages experts show how they calculated the values for the variables involved, courts can rest assured that the damages experts are tying the specific facts of the case to their analysis.
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Methodologies for Determining Reasonable Royalty Damages

Introduction
Section 284 of the Patent Statute states that a patentee is entitled to damages adequate to compensate for any infringement and that compensation cannot be less than a reasonable royalty for the use made of the invention by the infringer. In other words, the minimum the patentee can recover is the royalty that it and the infringer actually would have agreed upon had there been no infringement suit. In those cases where a patentee cannot prove actual damages (e.g., lost profits) for any or all of the infringing sales, the patentee is still entitled to damages for all the infringing sales. This class of “non lost profits” damages is referred to as “reasonable royalty” damages. Some consider this nomenclature to be misleading because historically the negotiated royalty rate to which the statute refers is frequently not the “reasonable royalty” awarded in court. In fact, reasonable royalty damages awards can be much higher than any actual royalty rate in the particular industry, sometimes exceeding lost profits damages. Further, the Federal Circuit has rejected attacks on such high reasonable royalty damages awards based on an argument that the awarded rate exceeds any actual one. Consequently, while it may be called “reasonable royalty” damages, the actual award may not be a reasonable royalty under the non-litigation meaning of that term.
Over the years, the Federal Circuit has made it clear that there is no one methodology for determining “reasonable royalty” damages. To date, it has specifically approved two different approaches. Here, we identify those two methodologies as well as a few other possible approaches, which, while not explicitly approved by the Federal Circuit, have been used in some cases.
Methodology #1: Georgia-Pacific Hypothetical Negotiation
In the seminal case of Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir. 1971), cert. denied, 404 U.S. 870 (1971), the district court came up with what it characterized as an approach to this damages question, which has now become the most common way to compute reasonable royalty damages. In general, the district court reasoned that a “hypothetical negotiation,” between a “willing licensor” (the patent owner) and a “willing licensee” (the infringer), at the time the infringement began, may be used to determine reasonable royalty damages, and it listed fifteen factors, which, according to the court, were some of the factors considered in other leading cases. Id. at 1120. In most cases, but not all, this Georgia-Pacific methodology attempts to set a percentage royalty rate, which is then multiplied by the dollar amount of infringing sales to calculate the dollar amount of “reasonable royalty” damages.
While the Federal Circuit considers the “willing licensor-willing licensee” label to be an “absurd” characterization of any attempt to determine reasonable royalty damages, see Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 n. 13 (Fed. Cir. 1995) (en banc); Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1109 (Fed. Cir. 1996), it nevertheless looks at the 15 Georgia-Pacific factors as a way to raise a truly negotiated royalty rate (where there was no infringement) to the level where it compensates for the infringement that did actually occur, id. at 1109-1110. As a result, while the Federal Circuit has expressly approved reasonable royalty damages findings based on the Georgia-Pacific approach, its view of this approach is not that it is a “willing licensor-willing licensee” analysis. And it has rejected reasonable royalty damages contentions based too literally on that label.
Key Assumption: Patent Is Valid and Infringed
The Georgia-Pacific approach first requires an assumption that, at the time of the hypothetical negotiation (which is when the actual infringement begins even if damages do not start then), both parties agree that the patent is valid and infringed. Because this assumption almost never exists in any real-world licensing negotiation, this is a further reason that the infringer must be careful in presenting a damages defense based on what the parties might have actually negotiated prior to the infringement and the subsequent lawsuit. Indeed, the Federal Circuit has affirmed “reasonable royalty” rates based on the Georgia-Pacific approach that are in excess of anything the parties would have actually agreed upon as a result of licensing negotiations prior to the infringement. For example, in Deere & Co. v. International Harvester Co., 710 F.2d 1551, 1554-58 (Fed. Cir. 1983), the Federal Circuit affirmed a damages award of a 15% royalty when patent-in-suit had been licensed and offered for license at 1%. Similarly, in other cases, the Federal Circuit has affirmed damages royalty rates of 20%, 33%, and 40% of the infringing sales, as well as other similar high rates that exceeded any actual rate in the particular industry, see e.g., Bio-Rad Laboratories, Inc. v. Nicolet Instrument Corp, 739 F.2d 604 (Fed. Cir. 1984); Biotec Biologische Naturverpackungen GmbH & Co. KG v. Biocorp, Inc., 249 F.3d 1341 (Fed. Circ. 2001); Minco, Inc. v. Combustion Engineering, Inc. 95 F.3d 1109 (Fed. Cir. 1996).
Fifteen Georgia-Pacific Factors
The fifteen Georgia-Pacific factors are as follows. Not all may be applicable in any given case. Further, some may, in certain cases, act to lower the damages royalty rather than increase it. Thus, in any given case, some factors may increase the royalty, while others could be neutral or tend to decrease it. The net result, however, can never be below the statutory minimum, which is really reflected by the last factor.
1. The royalties received by the patent owner for the licensing of the patent-in-suit, proving or tending to prove an established royalty;?
2. The rates paid by the licensee for the use of other patents comparable to the patent-in-suit;?
3. The nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold;?
4. The licensor’s established policy and marketing program to maintain its patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly;?
5. The commercial relationship between the licensor and the 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 licensor as a generator of sales of its non-patented items; and the extent of such derivative or convoyed sales;?
7. The duration of the patent and the 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 benefits 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 invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer;?
14. The opinion testimony of qualified experts; and?
15. The amount that a licensor (such as the patent owner) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount that a prudent licensee – who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention – would have been willing to pay as a royalty and yet be able to make a reasonable profit, and which amount would have been acceptable by a prudent patent owner who was willing to grant a license.??
Variations on the Georgia-Pacific Approach
The starting premise for the Georgia-Pacific approach is a licensing negotiation that occurs at the instant infringement begins. This would seem to mandate that the fifteen Georgia-Pacific factors are evaluated as of that time, and nothing thereafter counts. This is not necessarily the case. In fact, the Federal Circuit has approved consideration of some later events in this analysis. (This look-into-the-future concept is sometimes referred to as the “Book of Wisdom” approach.) For example, in SmithKline Diagnostics, Inc. v. Helena Laboratories, Inc., 926 F.2d 1161 (Fed. Cir. 1991), the Federal Circuit affirmed a 25% damages royalty based on evidence of the commercial success of the invention, not all of which necessarily pre-dated the infringement. In addition, Georgia-Pacific factor 11 specifically relates to the extent the infringer has made use of the invention and the value of that use, all of which must occur after the hypothetical negotiation, which is set at the instant the infringement begins. However, not all future events are considered relevant. In particular, the Federal Circuit has been reluctant to “look into the future” and reduce a damages royalty based on low actual profit margins for the infringer on the infringing product or process. See Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075,1081 (Fed. Cir. 1983).
Methodology #2: Analytical Approach
The “analytical approach” is the second methodology specifically approved by the Federal Circuit for computing reasonable royalty damages. In reality, it has nothing to do with any hypothetical negotiation, but rather, it involves calculating damages based on the infringer’s own internal profit projections for the infringing item at the time the infringement began, and then apportioning the projected profit between the parties as a percentage of sales. The patentee’s percentage is then applied to the sales dollars for the actual infringing sales to determine the reasonable royalty damages.
The Federal Circuit approved this method in TWM Manufacturing Co. v. Dura Corp., 789 F. 2d 895 (Fed. Cir. 1986), cert. denied, 479 U.S. 852 (1986). There, the infringer had an internal memo just before infringement began projecting a gross profit of about 50% for each infringing sale, from which the projected net profit was computed to be about 40% of the anticipated sales price. As the standard industry net profit was about 10% of the sales price, the special master awarded the patentee a reasonable royalty damages rate of the difference – 30%. This rate was then applied to the infringer’s actual sales figures to calculate the reasonable royalty damages. It had nothing to do with any hypothetical negotiation. Instead, it was strictly an apportionment based on the infringer’s projections. The Federal Circuit not only affirmed, but it also expressly rejected the infringer’s contention that the Georgia-Pacific approach was the only possible approach to computing reasonable royalty damages. The Federal Circuit made it clear that other approaches were possible, and this one was proper.
The existence of such a document as found in TWM is not all that unusual, at least in larger companies. Many require some sort of profit projection before the project goes forward or at least before a project is finally approved. Part of the approval process usually involves a comparison between projected profits for the proposed product and the company’s standard profit margins (with projects having projections above the standard margin being the ones that get approved). The amount of the projected excess profit could be the reasonable royalty damages under the analytical approach.
Possible Additional Methodologies: Rule of Thumb
Until recently, some commentators and experts had opined that, as a “rule of thumb,” about 25% (or a bit more) of the profit margin for any infringing products should be attributed to the infringed patent. Generally, when this has been used in cases, it becomes the starting point for a more traditional Georgia-Pacific analysis, which is then used to set the royalty rate that is actually applied to the dollar sales of the infringing products to compute the reasonable royalty damages.
For many years, the Federal Circuit avoided dealing directly with the “rule of thumb” approach. The court suggested that essentially the basic “rule of thumb” approach might, by itself, be enough. For example, in Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568 (Fed. Cir. 1988), the Federal Circuit rejected the lower court’s reasonable royalty damages calculation. The lower court had concluded (ostensibly in the context of a Georgia-Pacific analysis) that the infringer’s profit margin was 10%, of which (by several steps) about 0.8% constituted the damages royalty rate. In remanding, the Federal Circuit instructed the district court that it could measure reasonable royalty damages as a percentage of the infringer’s net or gross profits on the infringing product.
However, the Federal Circuit squarely rejected the “rule of thumb” approach in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). The court stated: “This court now holds as a matter of Federal circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.” Id. at 1315.
Possible Additional Methodologies: Established Royalty for the Patent
According to the Federal Circuit (based on 19th-century Supreme Court case law), an established royalty for a patent is the best measure of damages. Theoretically, while this is really the first of the Georgia-Pacific factors, it is essentially the end of the inquiry if it is proven. But the Federal Circuit has interpreted the “established royalty” question in such a way that acceptable proof of such a royalty may be difficult if not impossible in most cases, even if there are a number of licenses for the patent-in-suit. Factors that have been found to undercut an “established royalty” include an insufficient number of licenses to show that the industry as a whole accepted the royalty as reflecting the value of the patent; disregarding licenses in settlement of actual or threatened litigation; and the weakened condition of the licensor when it entered the licenses.
However, with the advent of standard setting and patent pools (which sometimes involve the patentee’s own proposal for a royalty of its patents involved), it is possible that this could change. Such a royalty may be offered and perhaps accepted virtually industry-wide and need not involve threats of litigation. There is no Federal Circuit case, however, holding that such facts create an “established royalty” for the patent. Nevertheless, this “established royalty” methodology may be viable in this context.
Possible Additional Methodologies: Many Licenses in a Small Range of Rates
Many large companies have a very significant number of patent licenses, involving both their own patents and patents licensed from others. It is not unusual for the range of royalty rates for such licenses to fall in a relatively small range. In at least one case, a patentee has tried (ultimately unsuccessfully) to base a damages royalty rate merely on the range of rates in its existing licenses. While this might at first seem like a poor way for the patentee to approach this, it can, in a given case with a very large number of infringing units or an unusually expensive royalty base, result in a windfall not attainable by the more traditional analysis. (While the case did not use this approach, in Hughes Aircraft Co. v. United States, 86 F.3d 1566 (Fed. Cir. 1996), the royalty rate of a mere 1% resulted in $3.5 billion in damages, affirmed by the court.)
Possible Additional Methodologies: Cost Savings
In general, reasonable royalty damages, even determined by the Georgia-Pacific approach, do not necessarily require the setting of a royalty rate that is applied to sales. This is particularly true when dealing with method patents. In one such case, Hanson v. Alpine Valley Ski Area, Inc., 718 F. 2d. 1075 (Fed. Cir. 1983), the invention involved snowmaking machines and a new method of making snow. The magistrate in the lower court case computed “reasonable royalty” damages using the patent method based on a percentage of the cost savings for each gallon of water used. The Federal Circuit affirmed, even though this royalty would exceed the cost of the machine over a few years. Id. at 1081. While the approach in Hanson was theoretically in the context of the Georgia-Pacific methodology, a careful review of the case finds that this cost savings was essentially the only factor involved in setting damages (although the infringer had unsuccessfully argued otherwise).


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