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16 Stan. Tech. L. Rev. 769 (2012-2013)
The Hypothetical Negotiation and Reasonable Royalty Damages: The Tail Wagging the Dog

handle is hein.journals/stantlr16 and id is 766 raw text is: STANFORD TECHNOLOGY LAW REVIEW VOLUME 16, NUMBER 3 SPRING 2013 THE HYPOTHETICAL NEGOTIATION AND REASONABLE ROYALTY DAMAGES: THE TAIL WAGGING THE DOG John C. Jarosz & Michael J. Chapman* CITE AS: 16 STAN. TECH. L. REV. 769 (2013) http://stlr.stanford.edu/pdf/royaltydamages.pdf ABSTRACT Reasonable royalty damages are the predominant form of relief awarded in patent infringement cases and, of late, have been a lightning rod for assertions that the patent protection system is out of control. The primary tool used to assess reasonable royalty damages is the hypothetical negotiation construct arising from the seminal Georgia-Pacific Corp. v. United States Plywood Corp. decision in 1970. The construct provides that a reasonable royalty should be determined by hypothesizing an imaginary negotiation between a patent holder and an infringer over use of a patented invention at the time offirst infringement. This Article examines the wisdom of the historically heavy reliance upon the construct. We question whether this construct is likely to achieve the ultimate goal of reasonable royalty damages-namely, to provide the patent holder with fair and adequate compensation for the unauthorized use of a patented invention. We find that the foundation for the construct is tenuous and that the use of the hypothetical negotiation construct introduces unnecessary and unproductive questions and conflict into the determination of reasonable royalty damages. We * John C. Jarosz and Michael J. Chapman are Managing Principal and Vice President, respectively, of Analysis Group, Inc., an economic, financial, and strategy consulting firm. Jarosz holds a B.A. (Creighton University), an M.A. in Economics (Washington University), and a J.D. (University of Wisconsin). Chapman holds a B.A. (University of Wisconsin), a Ph.D. in Economics (Massachusetts Institute of Technology), and a J.D. (University of Michigan). Collectively, we have been involved in hundreds of patent infringement litigations, often providing expert damages testimony. Our views are current, but may change over time. Many of our Analysis Group colleagues are not in agreement with many of our current views. We would like to thank several people for their insights and assistance: Abigail Adams, Thomas Cotter, Daria Killebrew, Amy Landers, Mark Lemley, Brian Love, Barbara Radding, Robert Vigil, and Matthew Wong.

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