Laments about the scarred patent landscape—the patent trolls, the forum shopping, the exorbitant reasonable royalty awards—are nothing new. But a recent paper is noteworthy for proposing steps to restore the “reasonable” in the royalty analysis.

Simple solution: According to the author, Dan McManus, an intellectual property lawyer, the problem is simple and so is the solution. Patents are difficult to value. As a result, the jury (or sometimes the judge) often splits the difference between the two opposing values as a compromise. If the litigating parties know that this is likely to happen, they have an incentive to argue for damages as far away from the opposing party’s position as possible. In this way, each party tries to skew the midpoint of the resulting split to its side as much as possible. This “misaligned incentive,” says McManus, produces unreasonable and unpredictable royalty awards. We need to create an incentive for the parties to argue in favor of the most reasonable amount. How?

For one, McManus advocates for making Daubert challenges mandatory in jury cases because they allow the trial court to preclude problematic royalty calculations—last week’s BVWire case illustrates this point. Also, experts must give examples of royalty rates for licensing of similar patents or any existing exemplar licenses of the same patent. This means stating the number of patents on the product that was the royalty base for that similar royalty rate. Having to do so, says McManus, normalizes the royalty rates because a 3% royalty rate on a product containing 10 patents is not really comparable to a 3% royalty rate on a product containing 100 patents. Also, make the jury pick either the plaintiff expert’s or the defendant expert’s royalty rate as a starting point for the calculation, not just pick the midpoint. The author likens this approach to “final-offer arbitration” or “baseball arbitration”—a way of resolving salary disputes in Major League Baseball. All of these steps help to narrow the difference between the parties’ royalties and bring the process closer to how and what the parties might negotiate before the infringement. Willing licensors and licensees make reasonable arguments because they do not want to risk losing a potentially valuable royalty or license, McManus says.

Tiered system: Finally, he proposes a tiered system to lower damages where a nonpracticing entity (NPE) never licensed the patent and never made a good-faith attempt to license the patent. The reduction of damages would range from 25% if there is no attempt within one year after the patent was granted to 50% within three years following grant of the patent to 75% within five years following grant of the patent. This step, he says, serves as a major disincentive for NPEs to hold onto a patent and wait for infringement. The idea is to compel them to license so that the patent results in products being brought to market. Patents represent innovation, and rewarding innovation, at least in theory, is what the patent system aims for.

To read the complete paper, click here.