Some Recent Papers on Royalties

1. Greg M. Allenby, Jeff Brazell, John R. Howell, and Peter E. Rossi have published a paper titled Valuation of Patented Product Features, 57 J. L. & Econ. 629 (2014).  Here is the abstract:

Ultimately, patents have value to the extent to which the product features enabled by the patents have economic value in the marketplace. Products that are enhanced by inclusion of patented features should generate incremental profits. Incremental profits can be assessed by considering demand for products with patented features and contrasting that demand with demand for the same product without the patented features. Profit calculations must be based on valid estimates of demand as well as assumptions about how competitive forces affect demand via computation of market equilibria. A conjoint survey can be used to estimate demand. Recently, conjoint methods have been applied in the patent setting, but the measures of value used are purely demand based and do not involve equilibrium profit calculations. We illustrate our method using the market for digital cameras and show that current methods can overstate the value of a patent.

Hat tip to Norman Siebrasse for pointing this one out to me.  

2. Alan Cox and Natalia Soboleva have published a short article in Law360 titled Misuse Of Patent Citation Analysis In Finjan v. Blue Coat.  Here is a link to the paper, which argues that the district court in this case (2015 WL 4272870, N.D. Cal. July 14, 2015))  properly "excluded that part of the plaintiffʼs expert testimony in which patent citation analysis was purportedly used in establishing the value of the patent. The order is properly interpreted as a critique of the clear errors in the expertʼs execution of patent citation analysis. It is not a critique of the concept itself."  This case also has been discussed on the Patent Damages Blog, here.

3.  Reid Dodge has published a student note titled Reasonable Royalty Patent Infringement Damages: A Proposal for More Predictable, Reliable, and Reviewable Standards of Admissibility and Proof for Determining a Reasonable Royalty, 48 Indiana Law Review 1023 (2015).  Here is a link to the paper.  From the introduction:

This Note proposes reform that will promote certainty—through predictability, reliability, and reviewability—while having the added benefit of simplicity, in that its implementation can be effected virtually immediately (i.e., without Congress’ involvement). The proposal is two-fold. First, courts should require the use of comparable licenses as a starting point in every reasonable royalty analysis, and the court, in its gatekeeping role, should admit only the most comparable license for the jury’s use as a damages award starting point. Second, courts should require experts to attach numerical associations to each Georgia-Pacific factor assessment such that any evidentiary review can efficiently and accurately evaluate the evidence. Then, as the damages assessment diverges from the comparable license starting point, courts should increase the scrutiny by which they admit these numerical factor associations.

4.  Erik Hovenkamp has posted a new paper on ssrn titled A Broader Look at Patent Royalties and Antitrust.  Here is a link to the paper, and here is the abstract:

It is well known in antitrust economics that competitors can rely on patent licensing with high royalties as a surrogate for price fixing. This paper addresses a number of alternative situations in which patent royalty agreements may raise antitrust concerns, even if the royalty rate is ostensibly reasonable. For example, a royalty charged to a competitor creates an "alignment effect" by giving the licensor a stake in its rival's success. This is the same problem that arises when a firm buys stock in a competitor (a potential antitrust violation). By aligning the firms' interests, this blunts competition and benefits both parties independently of the underlying exchange. Thus, for example, if a firm charges a rival $5 per unit for an invention that lowers production costs by the same $5, then even the rival-licensee strictly benefits, because its net costs are unchanged, but now the market is less competitive. More generally, the alignment effect may lead welfare to decline overall even if the royalty rate is strictly lower than the licensing value (e.g. $4), just as a merger may reduce welfare even if it produces some cost efficiencies. 

Additionally, offsetting (i.e. reciprocal) license payments between competitors often warrant scrutiny even if each royalty appears individually reasonable. Even under cross-licensing, offsetting payments are never necessary for the parties to reach a mutually-beneficial agreement, which is generally the relevant antitrust question. Instead, the practical effect of offsetting royalties is to replicate a collusive agreement to restrain consumer pass-through, ensuring the firms retain more of the licensing surplus. The results shed new light on the competitive impact of patent pools, which typically create widespread royalty offset and alignment between competing members, even if patents are complementary.