Courts do not set patent settlement amounts. Parties bargain around likely trial damages: lost profits or a reasonable royalty, plus interest, costs, and possible willfulness enhancement.
A patent settlement is a private agreement to end an infringement dispute. Lost profits repay sales the owner likely lost to infringement. A reasonable royalty is the license fee a willing owner and willing user would have set before infringement began.
Official resources:
- Read the official notice from Wipo — Use this primary source to verify the official announcement.
- Read the official notice from Waltmire — Use this primary source to verify the official announcement.
Table of Contents
- What must a court award?
- When do lost profits apply?
- How is a reasonable royalty set?
- What shrinks or grows the award?
What must a court award?
Under 35 U.S.C. Section 284, a winning patent owner must receive damages adequate to compensate for infringement. The award can never fall below a reasonable royalty for the infringer's use.
The court also fixes interest and costs. The World Intellectual Property Organization describes this minimum in the WIPO Patent Judicial Guide. That floor matters in talks. A defendant knows it cannot pay less than a provable royalty at trial.
When do lost profits apply?
Lost profits require proof of a reasonable probability that the owner would have made the infringer's sales without infringement. Tucker Ellis LLP outlines this test in its patent damages overview.
Owners often use four Panduit factors to make that showing. If the owner cannot prove those points, the claim falls back to a reasonable royalty. That shift often lowers settlement value because a royalty may be smaller than full lost sales.
- demand for the patented product
- no acceptable noninfringing substitutes
- capability to meet the extra demand
- calculable profit on the missed sales
How is a reasonable royalty set?
When lost profits fail, courts use a hypothetical negotiation. It asks what a willing licensor and willing licensee would have agreed just before infringement began. Eric Waltmire explains that negotiation in a reasonable-royalty analysis, weighing 15 Georgia-Pacific factors including prior royalties, comparable licenses, exclusivity, competition, and expert opinion.
The math is generally royalty base multiplied by royalty rate. For products with many parts, Finnegan's apportionment primer says courts limit the base to the smallest salable patent-practicing unit. Owners do not get paid for unpatented components.
What shrinks or grows the award?
The entire-market-value rule is a narrow exception. It lets the base be whole-product sales only if the patented feature drives customer demand or substantially creates the product's value, as reiterated in LaserDynamics v. Quanta. Most multicomponent products do not meet that test.
For egregious, willful misconduct, Section 284 lets courts increase damages up to three times the assessed amount. The Supreme Court in Halo v. Pulse rejected a rigid objective-recklessness test and reviews that choice for abuse of discretion. In practice, Tucker Ellis LLP notes, parties bargain around provable lost sales or a Georgia-Pacific-style royalty, tempered by apportionment limits, willfulness risk, interest and costs, and comparable licenses. Expect settlement talks to discount headline demands for that uncertainty and expert risk.