Adjusting patent royalty rates for inflation

IAM, September 2024

Among the Georgia-Pacific factors for determining reasonable royalty damages for patent infringement is the use of royalty rates from comparable intellectual property (IP) license agreements, adjusted as necessary for case-relevant factors. However, inflation is not always considered in experts’ adjustments to existing royalty rates, even when the comparable agreements are distant in time from a hypothetical negotiation. In an article published in the journal IAM, Analysis Group Vice President Mickey Ferri and coauthors advise experts to make case-specific determinations as to whether inflation adjustments to existing royalty rates are warranted.

In the article “Adjusting patent royalty rates for inflation,” the authors suggest that inflation adjustments may be particularly appropriate when the existing license takes the form of a per-unit royalty as opposed to a percentage of revenue (a structure that inherently captures inflation), especially when the hypothetical negotiation takes place years after (or prior to) the term of the existing license agreement. They use examples to illustrate both how experts could incorporate an inflation adjustment into a damages analysis and why such an adjustment may result in an assessment that more closely reflects the real value paid for the IP by willing licensees. Ultimately, the authors note that inflation adjustments are not always appropriate (e.g., when the value of the IP is not tied to product revenue) and advise experts to assess the merits of an inflation adjustment on a case-by-case basis.

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Authors

Yu P, Ferri M, Ferioli J, Fasules-Todd M, Bystritsky V