The Georgia-Pacific factors and reasonable royalties

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A reasonable royalty is the payment that would have resulted from a hypothetical negotiation between a patent licensor and licensee, usually taking place prior to a patent infringement or misappropriation date and a measure of damages for patent, trademark and trade secret related matters. There are a variety of methods used to determine reasonable royalties, including the use of established royalties, application of analytical methods, application of a discounted cash flow analysis and the use of the Georgia-Pacific factors, based on a 1970 federal court ruling.

The Georgia-Pacific factors historically have not been used for trademark or trade secret cases. There are distinct legal differences between patents, trademarks and trade secrets, including governing law and the exclusivity of the legal duration of the intellectual property. These legal differences limit the use of the Georgia-Pacific factors to trademark and trade secret cases at face value because the factors consider the specific characteristics of patents.

However, the Georgia-Pacific factors can be modified to apply to the characteristics on non-patent intellectual property, and practitioners have modified the Georgia-Pacific factors to make them applicable to trademark and trade secret cases. In LinkCo, Inc. v. Fujitsu Ltd., a federal court ruled in 2002 the Georgia-Pacific factors were an applicable method for use in a misappropriation of a trade secret case. In University Computing Co. v. Lykes-Youngstown Corp., a federal appellate court in 1974 ruled on several factors the trier of fact should consider in determining a reasonable royalty for a misappropriation of a trade secret case.

The factors created in University Computing closely resembled the Georgia-Pacific factors. As a result, there are a growing number of cases in which the courts have accepted the use of the Georgia-Pacific factor method for non-patent cases.

In applying the Georgia-Pacific framework to non-patent cases, the utility of the framework remains the same, but the factors can be modified to fit non-patent cases. Each of the factors can be considered to provide a framework to determine the outcome of a hypothetical negotiation between the infringer and owner.

Here are a few examples of why the factors could be considered for these types of cases:

• Georgia-Pacific factors 1, 2, 3, 7 and 12 consider the historical royalty agreements between the parties and comparable royalty agreements and analyze these royalty agreements for the subject trademark or trade secret, using the parameters set in the historical agreements as a proxy for the hypothetical negotiation. These factors also consider comparable royalty agreements and customary royalty rates in the industry to use as a basis for determining a reasonable royalty.
• Georgia-Pacific factors 6, 8 and 13 consider of the success, profitability and sales of infringer’s products using the trademark or trade secret. The practitioner can use these factors to analyze any convoyed sales earned by the infringer as a result of using the trademark or trade secret. They also consider the success and profitability of the products that use the trademark or trade secret and compare them to comparable products in the industry and other non-infringing products sold by the infringer.
• Georgia-Pacific factors 9 and 10 can be modified to consider the characteristics of the trademark or trade secret and the benefits to the users of the trademark or trade secret. These factors analyze the distinctive characteristics of the subject trademark or trade secret and determine what the infringer’s benefits are from using the subject trademark and trade secret. For example, if the infringer used a trademark with significant brand value, one of the benefits to the infringer would be the goodwill received from use of the trademark.

The rest of the Georgia-Pacific factors are equally important, and overall they provide a framework that can be used in non-patent cases. These factors can be modified to fit the legal differences between patents and non-patents and the differences in the terms between a patent license agreement and a trademark agreement.

While many practitioners are still not using the Georgia-Pacific factors in non-patent cases — due to the fact that they were designed in the context of patent infringement cases — an attorney who is litigating a trademark infringement or trade secret misappropriation case should be aware that the Georgia-Pacific factors can be a method to determine a reasonable royalty.

Zachary Reichenbach is a manager in Ellin & Tucker’s Forensic and Valuation Service Group. He can be reached at [email protected].