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Twenty Percent Royalty Rate Appropriate Where Plaintiff Was Highly Unlikely to License Its Patent to Defendant, a Direct Competitor

After the district court determined that the plaintiff’s patent was infringed and was not invalid based on anticipation or obviousness, the district court held a bench trial on the issue of damages. The district court first analyzed the issue of lost profits. Finding that the plaintiff could not meet several of the Panduit factors because, among other things there were acceptable, non-infringing substitutes in the marketplace during the relevant time period, the district court denied plaintiff’s request for lost profits. “As plaintiff has not shown a reasonable probability that it would have made the majority of [defendant’s] sales given the existence of non-infringing switchblade divot repair tools on the market, the Court finds plaintiff has not met its burden in this regard.”

The district court next analyzed whether the plaintiff was entitled to a reasonable royalty. Plaintiff contended that it was entitled to a 20% royalty on the gross profits of defendant’s infringing tools because the patented tools sold by the plaintiff had a high gross profit of 70%, there were few competitors, the tools were an impulse buy because they had a low price, the tools were an effective and low-cost promotional product, they had a unique design and function and the tools were accepted and known in the marketplace. The defendant argued for royalty rate of 5% of net profits.

The district court, after reviewing the Georgia-Pacific factors, determined that it would only consider the factors of high gross profit, few competitors, low retail price and low-cost promotional product as there was insufficient evidence to establish unique design and function given that there were competitors with similar designs in the market. The district court also concluded that there was insufficient evidence to establish that plaintiff’s tools were well accepted and known in the marketplace.

The district court found that certain additional factors were appropriate to the royalty analysis, including defendant’s employment as a past president of the plaintiff, unique knowledge of the plaintiff’s pricing and manufacturing structure which enabled the defendant to undercut prices, there were few non-infringing substitutes in the market, and nearly half of defendant’s sales of the infringing device came from plaintiff’s customers.

Accordingly, the district court found that it was highly unlikely that the plaintiff would have issued a license to the defendant to sell the infringing tools. The district court also noted that the owner of the defendant had previously been fired from the plaintiff’s employment and that the defendant’s owner had threatened to ruin plaintiff’s business. Based on these additional facts, a higher royalty rate was appropriate. “If, however, the parties could have agreed to a willing licensor-licensee relationship after this course of events, the Court finds it reasonable to infer that a high royalty rate would be assessed. Accordingly, the Court concludes a royalty rate of 20% is appropriate here.”

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Although it is difficult to obtain royalty rates as high as 20%, the district court found it appropriate here given the past relationship between the parties and because they were direct competitors. All of these factors pointed to a high unlikelihood of a licensing negotiation taking place with a direct competitor and justified the 20% royalty rate.

Divix Golf Inc. v. Mohr, Case No. 05 CV 1488 JAH (CAB) (S.D. Cal. Aug. 19, 2011)

The authors of are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. We represent inventors, patent owners and technology companies in patent licensing and litigation. Whether pursuing patent violations or defending infringement claims, we are aggressive and effective advocates for our clients. For more information contact Stan Gibson at 310.201.3548 or