Settlement Agreements Can Provide a Yardstick for Measuring Damages in Subsequent Patent Infringement Lawsuits

Kerry L. Timbers

By Kerry Timbers. Co-Chair of our Litigation Practice Group

June 2017 IP Update

It’s easy to state that a patentee who proves infringement is entitled to recover from the infringer no less than a reasonable royalty.  It’s a lot harder to determine how to quantify these “reasonable royalty” damages.  In Prism Tech. v. Sprint Spectrum, L.P., the Federal Circuit says that, in many circumstances, judges and juries can rely on prior settlement agreement licenses as a guide to deciding these damages.

Sprint was found to infringe patents owned by Prism that involve managing access to protected information provided over “untrusted” networks. Sprint pointed to several low-rate Prism settlements in arguing for a low royalty rate, but sought to exclude a significantly higher-rate 2012 Prism settlement with AT&T.  The trial court denied Sprint’s request and allowed consideration of all the settlement agreements, and a Nebraska jury awarded Prism $30 million in reasonable royalty damages.

Prior guidance from the Federal Circuit had been murky at best:  A settlement agreement license was considered good evidence of a reasonable royalty “sometimes. . . and sometimes not.”  Without more to go on, district courts were left to view settlements through their own lens in deciding whether to allow them to be considered.

In Prism, the Federal Circuit affirmed the use of the AT&T settlement license and identified  factors which weigh in favor of using a prior settlement agreement to measure a reasonable royalty, including:

  • the technology is the same or comparable
  • the uses of the technology by the earlier licensee and the current infringer are comparable
  • no significant market changes have transpired between the time of the settlement and the relevant time for determining the royalty
  • where several patents or technologies are involved, the settlement agreement itself identifies the parties’ assessment of value of the patent or technology at issue
  • in the earlier settlement, the licensee was not at risk for enhanced damages (which might artificially increase the settlement amount)
  • the settlement was completed when the litigation was far along (indicating both that the parties are well informed, and that avoiding future litigation costs is not a primary motivation for settlement)

The Federal Circuit  noted that Prism had adequately demonstrated the comparability of the AT&T settlement license and the royalty rate to be assessed against Sprint.  Prism introduced expert testimony to support several of these factors, including the comparability of the technology, Sprint’s and AT&T’s uses of the patented technology, and the lesser uses made by licensees in the lower-rate settlements.

Sprint should not have been surprised by the result, as it sought to have its cake and eat it too: It wanted to rely on some but not all of the earlier settlement licenses, and ignored the fact that the very settlement license it sought to exclude was arguably the most relevant to damages.

The Prism decision does more than bring clarity to determining when a prior settlement license can be used to prove reasonable royalty damages. It also usefully alerts practitioners to the importance of weighing the potential impact of a settlement on future cases.

Parties may do well to specify the ascribed value of various patents in settlement agreements, or otherwise recite facts that illustrate the comparability (or non-comparability) of the settlement license to other alleged infringers in future lawsuits.  Further, a party that anticipates seeking to rely on, or to exclude, a particular license is well advised to lay the foundation for its arguments through expert testimony, especially where multiple settlement agreements are involved.