SDNY orders ongoing royalty as percentage of wholesale price

On December 11, 2013, Judge Rakoff in the Southern District of New York issued an order in Tomita Techs. USA, LLC v. Nintendo Co., Ltd., Case No. 11 Civ 4256 addressing ongoing royalties. After a jury verdict of infringement and $30,200,000 in damages, the district court halved the award on remittitur, which Tomita accepted. This order related to the only remaining issue, ongoing royalties. Nintendo argued that the ongoing royalty be the (remitted) royalty rate, expressed as a percentage of sales, or 1.36%. Tomita argued that the rate should be double the (remitted) royalty rate, expressed as a dollar figure, or $4.45 per unit. Thus, ironically, it was the defendant that was requesting the rate be based on a percentage of the product.

The Court opined that unless the price of the product changed over time, the distinction between a per-unit rate and a percentage of sales rate was a distinction without meaning. But the Court found it was likely that the price would likely drop over time, given technological advances and the history of price drops in the marketplace. According to the Court, unless the royalty dropped in parallel with the price of the accused products, "[t]his would result in an unearned windfall for Tomita, and, accordingly, the Court prefers an ongoing royalty rate expressed as a percentage of wholesale price." The Court did not accept Nintendo's proposed rate, however, because the Court recognized that courts routinely increase the royalty rate for ongoing royalties to reflect the fact the defendant is an adjudged infringer. The Court therefore bumped the rate by 1/3, from 1.36% to 1.82%.

This case is notable because Nintendo had argued - as part of its remittitur argument - that Tomita had improperly relied on the entire market value rule. Yet when it came to the ongoing royalty, it was Nintendo - and not Tomita - that requested a royalty rate based on the price of the product, presumably because it expected the price of the accused product to drop over time.