Legal Definitions - hypothetical negotiation

Hypothetical negotiation is a legal concept used by courts, primarily in patent infringement cases, to determine the financial compensation (damages) owed to a patent owner. It involves the court imagining a fictional discussion between the patent owner and the party who infringed on the patent.

The court pretends that, just before the infringement began, both parties sat down to negotiate a license agreement for the use of the patented invention. The goal is to determine what a fair and reasonable royalty payment would have been at that time, had they actually negotiated. This approach helps the court calculate damages by establishing what a willing licensor and a willing licensee would have agreed upon, thereby compensating the patent owner as if a proper agreement had been made.

• Example 1: Software Algorithm Infringement

  Imagine a small software company, "InnovateCode," develops a groundbreaking algorithm that significantly speeds up video processing. A much larger streaming service, "StreamGiant," incorporates this exact algorithm into its platform without ever obtaining a license or permission from InnovateCode. When InnovateCode sues StreamGiant for patent infringement, the court needs to determine how much StreamGiant owes in damages. To do this, the court would engage in a hypothetical negotiation. It would consider what InnovateCode and StreamGiant *would have agreed upon* as a fair royalty rate for using the algorithm, had they negotiated a license *before* StreamGiant started using it. This might involve looking at industry standards, the value the algorithm added to StreamGiant's service, and other similar licensing deals.

• Example 2: Medical Device Design Copying

  Consider a scenario where "MediTech Innovations" patents a unique, minimally invasive surgical instrument. "Global Medical Devices," a large manufacturer, begins producing and selling a nearly identical instrument without any licensing agreement with MediTech Innovations. When MediTech Innovations files a patent infringement lawsuit, the court must calculate the financial compensation due. The court would use a hypothetical negotiation to determine what a reasonable royalty payment would have been. It would imagine MediTech Innovations and Global Medical Devices sitting down to negotiate a license for the instrument *before* the infringement occurred, considering factors like the instrument's market value, the cost savings it provides to surgeons, and the typical profit margins for such devices.

• Example 3: Industrial Manufacturing Process Theft

  Let's say "EcoBuild Solutions" patents an innovative, energy-efficient manufacturing process for producing lightweight building materials. "MegaCorp Construction," a major player in the construction industry, adopts this patented process in its factories without securing a license. When EcoBuild Solutions sues for patent infringement, the court will employ a hypothetical negotiation to assess damages. The court would envision EcoBuild Solutions and MegaCorp Construction negotiating a license for the use of the manufacturing process *before* MegaCorp Construction began using it. This would involve evaluating the cost savings MegaCorp achieved, the market demand for the energy-efficient materials, and what a willing licensor and licensee would have agreed to pay for the rights to use such a valuable process.