Fact-specific profit apportionment in reasonable royalty analysis

Reasonable royalty analysis in patent litigation often involves apportioning value between the licensor and licensee based on their relative contributions to the invention’s commercialization. Comparable licenses are often considered for this purpose under the Market Approach. However, apportionment of profits determined through an Income Approach or Cost Approach has proven challenging over the years, with methodologies like the 25 percent Rule and Nash Bargaining rejected by the courts for lacking economic rigour and specificity to case facts. This article introduces the Reasonable Profit Approach, a fact-specific and economically sound methodology to address these issues.The Reasonable Profit Approach uses a three-step process: (i) determining the Apportioned Market Value generated by the implemented invention, (ii) calculating related Incremental Profit, and (iii) deriving Reasonable Profit and Royalty based on a reasonable and acceptable profit allocation to the licensee and licensor. Grounded in economic principles and consistent with case law, this approach has been successfully applied in numerous cases without admissibility challenges. By offering a robust solution, this article provides experts with a practical framework for profit apportionment in reasonable royalty analysis.