Using Apportionment to Rein in the Georgia-Pacific Factors

Abstract

In a dramatic departure from well established patented damages law, which would confine a reasonable royalty to a portion of the profit contributed by the infringed patent, current Federal Circuit precedent permits a reasonable royalty on an even relatively insignificant component to exceed not only the profit attributable that component, but, in some cases, the entire profit on the product. That precedent ignores the history of the reasonable royalty award, which originated as merely a substitute for an established royalty. Just as the real life negotiations that led to an established royalty would result in the licensor and each licensee splitting the profit attributable to the licensed patent, the hypothetical negotiation that results in a reasonable royalty should result in the patentee and infringer splitting the profits attributable to the infringed patent. The Federal Circuit's precedent also ignores longstanding apportionment principles, under which a patentee should not be entitled to recover any reasonable royalty on the unpatented features of an infringing product. Unbound as they are from their economic and legal foundations, royalty awards have, not surprisingly, become arbitrary and often punitive. This article argues that to rein in reasonable royalty awards, restore them to their historical role, and ensure that they are consistent with long-standing principles of patent damages law, apportionment should be the threshold question in every reasonable royalty analysis. That is, the first question should be: what portion of the profits on the infringing product is attributable to the claimed invention's advance over the prior art? It is that portion of the profits - and only that portion - that the patentee should receive as a share by way of a royalty. By treating apportionment as a threshold question, therefore, courts can ensure that the resulting reasonable royalty award is properly confined to a portion of the profits attributable to the patent. The proper magnitude of that portion can then be determined by reference to the remaining Georgia-Pacific and other relevant factors.