Where do the Georgia-Pacific factors actually come from?
From a single district court opinion: Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). The court was determining a reasonable royalty for infringement of a plywood patent and introduced its list by saying that a comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license may be drawn from a conspectus of the leading cases. The fifteen factors are a synthesis of what earlier courts had found probative. They are not a statute, not a test with elements, and not a formula.
The subjects they cover are familiar to anyone who has read a damages report. What follows is this article’s summary of those subjects, not the court’s wording, which runs to a full paragraph for the fifteenth factor alone: royalties the patentee has received for the patent in suit; rates the licensee pays for comparable patents; the nature and scope of the license, including exclusivity and territorial limits; the licensor's licensing policy; the commercial relationship between the parties; convoyed sales; the term; profitability and commercial success; the advantages of the patented invention over older devices; the nature of the invention as commercially embodied; the extent of the infringer's use; customary profit splits in the business; the portion of profit attributable to the invention as against unpatented elements; opinion testimony from qualified experts; and, fifteenth, the hypothetical negotiation itself.
Two features of that provenance matter in practice. The list is unprioritized, so nothing in Georgia-Pacific tells a fact-finder which factor outweighs which. And the factors overlap heavily — the first and second both circle the same licensing evidence from different angles, and the twelfth reaches the same bargain from the profit side. Both features are why the list can be recited in full and still convey nothing.
What does the hypothetical negotiation construct assume?
It assumes an agreement that was never reached, between parties who were in fact in litigation, on terms neither of them disputes. The United States Court of Appeals for the Federal Circuit put the premise plainly in LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012): the premise of Georgia-Pacific assumes a voluntary agreement will be reached between a willing licensor and a willing licensee, with validity and infringement of the patent not being disputed, and the court cited 318 F. Supp. at 1120 for it.
That assumption carries a date. LaserDynamics restated the rule that in general the date of the hypothetical negotiation is the date that the infringement began, citing Georgia-Pacific, 318 F. Supp. at 1123, and Applied Medical Resources Corp. v. United States Surgical Corp., 435 F.3d 1356 (Fed. Cir. 2006), for the proposition that the hypothetical negotiation relates to the date of first infringement. The same opinion was careful to separate that date from the dates that bound recovery: the six-year limitation in 35 U.S.C. section 286 and the marking and notice provisions of 35 U.S.C. section 287 restrict when damages may be collected without moving the negotiation date.
The practical consequence is that every input has to be positioned relative to that date. LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012), found that the district court had set the hypothetical negotiation date at August 2006, when the suit was filed and the accused inducer first had notice, rather than 2003, when the direct infringement it induced began; the court held that in the context of active inducement the negotiation is deemed to take place on the date of the first direct infringement traceable to the inducing conduct. That error propagated: the patentee's expert had disregarded almost all of the twenty-nine licenses in evidence on the reasoning that the economic landscape had changed by the later date. Getting the date wrong does not merely shift an assumption. It changes which evidence the opinion is allowed to lean on.
What is the book of wisdom, and does it let an expert use evidence from after the negotiation date?
The book of wisdom is Justice Cardozo's phrase for the use of later experience to value something as of an earlier date, and it comes from Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689 (1933), a contract case concerning discovery about an allegedly misappropriated patent improvement. Cardozo wrote that experience is then available to correct uncertain prophecy, and that here is a book of wisdom that courts may not neglect.
Federal Circuit damages law has absorbed the idea. In ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), the court told the district court on remand that it could consider the panoply of events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators, quoting Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1575 (Fed. Cir. 1988). That permission came with its opposite in the same opinion: ResQNet.com, Inc. v. Lansa, Inc. vacated the damages award because the district court had relied on licenses that did not mention the patents in suit or show any other discernible link to the claimed technology, and cautioned that on remand the trial court should not rely on unrelated licenses to increase the reasonable royalty rate.
It is not, however, a door to any later document an expert would like to use. In the same opinion in which it invoked the willing-licensor premise, LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012), treated a settlement license executed a full three years after the hypothetical negotiation date as in many ways not relevant to the analysis, given the changing technological and financial landscape, and cited Odetics, Inc. v. Storage Technology Corp., 185 F.3d 1259 (Fed. Cir. 1999), where licenses entered four and five years after first infringement were treated as irrelevant for the same reason. Later evidence is admissible when it illuminates what the parties at the negotiation date would have been valuing. It is not admissible merely because it is later and larger.
What exactly do courts criticize about the way the Georgia-Pacific factors are used?
That the factors get recited in place of the evidence they are supposed to organize. The Federal Circuit said so directly in WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10 (Fed. Cir. 2012): the court does not require that witnesses use any or all of the Georgia-Pacific factors when testifying about damages in patent cases, but if they choose to use them, reciting each factor and making a conclusory remark about its impact on the damages calculation before moving on does no more than tell the jury what factors a damages analysis could take into consideration.
Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed. Cir. 2014), made the same observation about the institutional habit. The court noted that it had never described the Georgia-Pacific factors as a talisman for royalty rate calculations, that courts often parrot all fifteen factors to the jury even when some clearly are not relevant to the case at hand, and that damages experts often resort to the factors to justify urging an increase or a decrease with little explanation as to why they do so and little reference to the facts of record.
Read together, the criticism has a single shape. A factor is a question, and answering it requires record evidence that the answer is yes, no, upward or downward and by roughly how much. An opinion that names the factor, states a direction and moves on has skipped the only step that was ever doing work. That is an evidentiary failure rather than a computational one, which is why it surfaces on a Rule 702 motion and on a sufficiency challenge rather than in a battle of models. The same structural point runs through why patent damages experts are being excluded.
Which Federal Circuit decisions have said reciting the factors is not enough, and what did each require instead?
Four are worth knowing by name. WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10 (Fed. Cir. 2012), decided August 7, 2012, vacated the damages award and remanded for a new trial on damages, holding that this type of superficial recitation of the Georgia-Pacific factors, followed by conclusory remarks, cannot support the jury's verdict. What it required instead: expert witnesses should concentrate on fully analyzing the applicable factors, not cursorily reciting all fifteen, and while mathematical precision is not required, some explanation of both why and generally to what extent the particular factor impacts the royalty calculation is needed.
Exmark Manufacturing Co. v. Briggs & Stratton Power Products Group, LLC, 879 F.3d 1332 (Fed. Cir. 2018), decided January 12, 2018, applied that standard to an expert who walked through the factors and discussed evidence but never explained how that analysis produced the rate she proposed. The court held that when performing a Georgia-Pacific analysis, damages experts must not only analyze the applicable factors but also carefully tie those factors to the proposed royalty rate, citing WhitServe, 694 F.3d at 31, and it vacated the damages award and remanded for a new trial on damages.
Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed. Cir. 2014), moved the problem into the jury charge. The district court had included all fifteen factors in its damages instruction over objection without considering their relevance to the record created at trial, and the Federal Circuit held that it erred by instructing the jury on multiple Georgia-Pacific factors that are not relevant, or are misleading, on the record before it, identifying at least factors 4, 5, 8, 9 and 10 in a case involving patents encumbered by a commitment to license on reasonable and non-discriminatory terms. What it required instead was that the trial court carefully consider the evidence presented when crafting the instruction, and turn to the patentee's actual commitment.
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), closed the escape hatch. Having held the twenty-five percent rule of thumb a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation, and inadmissible under Daubert because it fails to tie a reasonable royalty base to the facts of the case at issue, the court added that it is of no moment that the rule is offered merely as a starting point to which the Georgia-Pacific factors are then applied, because beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts nevertheless results in a fundamentally flawed conclusion. The jury there had awarded 388 million dollars, and the Federal Circuit affirmed the grant of a new trial on damages.
How should a damages opinion use the Georgia-Pacific factors without inviting exclusion?
By treating each factor as a request for record evidence and dropping the ones the record cannot answer. The Federal Circuit has been explicit that using all fifteen is not required — WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10 (Fed. Cir. 2012), said the court does not require that witnesses use any or all of them — so an opinion that addresses six factors with documents behind each is on considerably stronger ground than one that marches through fifteen.
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), also made clear that rejecting the twenty-five percent rule was not intended to limit the application of any of the Georgia-Pacific factors, and singled out factors 1 and 2, looking at royalties paid or received in licenses for the patent in suit or in comparable licenses, and factor 12, looking at the portion of profit that may be customary. Those are the factors most likely to have real evidence underneath them, and they are where the comparability work described in what makes a patent license comparable and in the Institute's comparable licenses area is done.
Two boundaries are worth stating plainly. The technical predicate — which components practice the claim, what the accused functionality does — is separate work, and the base question is treated separately again in can whole-product revenue be the royalty base. And this Institute does not supply the number. What a factor should move, what any measure yields, and what is recoverable belong to our Economic Damages Institute. What we cover is whether the record underneath the opinion will hold when a court reads it.