Reasonable Royalty Figure Excludes Real Negotiations When Conducted For Settlement Purposes

When calculating reasonable-royalty damages, the “hypothetical license negotiation” assumes prominence in the factfinder’s decisionmaking process. But what happens when a party to an infringement action seeks to introduce evidence of real negotiations to prove a reasonable royalty? According to Magistrate Judge Thynge, when those failed talks are part of settlement discussions, the numbers are inadmissible.

The Court reaffirmed the vitality of FRE 408 in patent cases by holding that the policy of encouraging “freely negotiated” settlements outweighs the obvious probative value that licensing negotiations have on a damages calculation:

“[D]efendants’ argument for admission as providing a ‘reality check’ is directly contrary to FRE 408[,] which bars evidence when it is offered to prove the validity, invalidity or amount of a disputed claim.”

According to the Court, the only significance of the data was its “effect to validate [the party’s] assessment of the amount in dispute” – exactly what FRE 408 prohibits.

Interestingly, the Court implied that a potential exception exists: where an expert incorporates the underlying settlement data into his or her damages analysis, the rule may no longer apply.

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