Patent Valuation

Retained by DiNovo Price

Economics provided a framework for determining the “surplus” or gains resulting from a hypothetical voluntary negotiation between a willing licensor and a willing licensee at a point in time (e.g., immediately before infringement), as well as how that surplus was to be divided between the licensor and licensee.

The surplus is the difference between (1) the licensee’s maximum willingness to pay, and (2) the licensor’s minimum willingness to accept. Division of the surplus was determined according to the relative bargaining power of the negotiating parties. Finally, the reasonable royalty was the amount of surplus apportioned to the licensor.

For example, consider a hypothetical negotiation where the licensee’s maximum willingness to pay is $100 and the licensor’s minimum willingness to accept is $20. The surplus in this negotiation is $80, the difference between the licensee’s maximum willingness to pay and the licensor’s minimum willingness to accept. If the licensor’s bargaining power is three times higher than the licensee’s bargaining power, the licensor will be apportioned 75 percent of the surplus and the licensee will be apportioned 25 percent of the surplus. Therefore, the reasonable royalty payment in this negotiation would be 75 percent of the $80 surplus, or $60. See Figure 1: Illustration of the Surplus-Division Approach to Determine the Reasonable Royalty below for the two steps of this approach in this example.

Figure 1: Illustration of the Surplus-Division Approach to Determine the Reasonable Royalty

The Georgia-Pacific factors provide a framework approved by courts that are helpful to establish the three key parameters in the surplus-division approach, and they include:

• Factor 1: The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
• Factor 2: The rates paid by the licensee for the use of other patents comparable to the patent in suit.
• Factor 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.
• Factor 4: The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
• Factor 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.
• Factor 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 his non-patented items; and the extent of such derivative or convoyed sales.
• Factor 7: The duration of the patent and the term of the license.
• Factor 8: The established profitability of the product made under the patent; its commercial success; and its current popularity.
• Factor 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.
• Factor 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.
• Factor 11: The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
• Factor 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.
• Factor 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.
• Factor 14: The opinion testimony of qualified experts.
• Factor 15: The amount that a licensor (such as the patentee) 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 patentee who was willing to grant a license.

Table 1: The Georgia-Pacific Factors That Affect the Three Parameters of the Surplus-Division Approach describes how each of the Georgia-Pacific factors can impact these three economic parameters (see Sidak, J. Gregory. “Bargaining Power and Patent Damages.” Stan. Tech. L. Rev. 19 (2015)).

Table 1: The Georgia-Pacific Factors That Affect the Three Parameters of the Surplus-Division Approach

In this engagement, Vega followed this table and analyzed each of the three key parameters and the associated relevant Georgia-Pacific factors to estimate a reasonable royalty for the online brokerage’s use of the patented technology.