On January 4, 2011, the Federal Circuit Court of Appeals issued an important decision on the determination of reasonable royalties in patent infringement damages. InUniloc USA, Inc. v. Microsoft Corporation, the Court soundly rejected the use of the 25% Rule of Thumb, a topic discussed in the class material. Attached is a copy of the opinion. Please take a look at pages 33 - 47.

Also read, beginning p.4 of this copy of theWitness Chair, an article titledRule of Thumb No More.

In addition, the Court also discussed the entire market value rule (pages 47 - 54). The EMVR is discussed in the class material as well.

Here is your discussion topic: Just one page

1). Define the 25% rule and provide an example.

2). Now that the 25% percent rule is obsolete, what can companies or valuators use as a starting point in determining a fair royalty rate? Provide different examples.

Page 1 LEXSEE 1999 U.S. CLAIMS LEXIS 11 Caution As of: Feb 19, 2009 STANDARD MANUFACTURING CO, INC. AND DBP, LTD., Plaintiffs, v. UNITED STATES, Defendant. Nos. 641-85C and 95-431C UNITED STATES COURT OF FEDERAL CLAIMS 42 Fed. Cl. 748; 1999 U.S. Claims LEXIS 11 January 25, 1999, Filed DISPOSITION: [**1] Court held that the compensation base for a reasonable royalty includes a total of $ 64,195,217.00 for the 136 infringing MHU-196/M trailers and a total of $ 32,798,003.58 for the thirty-six infringing MHU-204/M trailers. CASE SUMMARY: PROCEDURAL POSTURE: Plaintiff company moved for damages after a determination that plaintiff's patent was infringed by defendant United States. OVERVIEW: The court found that plaintiff company's patent regarding aerial weapon handling trailers was valid and was infringed by defendant United States. Subsequently, the matter came before the court for a determination of damages. The court ordered that plaintiff was to receive royalty damages in the amount of 16.31% of the value of its individual royalty compensation base. The court found that while plaintiff could not prevent defendant from taking such a license to use plaintiff's product, plaintiff was entitled to its reasonable and entire compensation for such use and manufacture. The court applied the "reasonable royalty" approach and the "Georgia-Pacific" factors in its determination of damages. The court found that the royalty computation involved two steps: (1) determination of a reasonable compensation base, and (2) determination of a reasonable royalty rate to apply to that compensation base. The court found further that the 25 percent rule was an appropriate rationale for determining a base royalty rate. In addition, the court found that plaintiff was to receive delay damages at interest rates equal to the applicable 1-year treasury bill rates for the pertinent time periods. OUTCOME: The court, employing the "reasonable royalty" approach and the "Georgia-Pacific" factors in its determination of damages, awarded plaintiff company royalty damages in the amount of 16.31% of the value of its individual royalty compensation base. LexisNexis(R) Headnotes Constitutional Law > Bill of Rights > Fundamental Rights > Eminent Domain & Takings Environmental Law > Zoning & Land Use > Eminent Domain Proceedings Real Property Law > Eminent Domain Proceedings > Page 2 42 Fed. Cl. 748, *; 1999 U.S. Claims LEXIS 11, **1 Constitutional Limits & Rights > General Overview [HN1] Use by the government of a patented invention without an express license from the patentee is properly viewed as a taking of property under the U.S. Const. Amend. V through the government's exercise of its power of eminent domain. The patent holder's remedy for this infringement is prescribed by 28 U.S.C.S. 1498(a). Constitutional Law > Bill of Rights > Fundamental Rights > Eminent Domain & Takings Patent Law > Remedies > General Overview [HN2] See 28 U.S.C.S. 1498. Patent Law > Infringement Actions > Corporate & Government Infringers Patent Law > Ownership > Conveyances > Licenses Patent Law > Remedies > Damages > Reasonable Compensation Against the United States [HN3] Under 28 U.S.C.S. 1498(a), the United States is not an ordinary infringer, but rather a compulsory, nonexclusive licensee. Thus, the patent owner cannot prevent the government from taking such a license, but the owner is entitled to its reasonable and entire compensation for such use and manufacture. Patent Law > Remedies > General Overview Real Property Law > Eminent Domain Proceedings > Constitutional Limits & Rights > Just Compensation Real Property Law > Eminent Domain Proceedings > Title Acquired [HN4] When determining just compensation for any type of eminent domain action, including the unlicensed use of a patent, equitable principles of fairness control. Because recovery is based on eminent domain, the proper measure of compensation is what the owner has lost, not what the taker has gained. This rule continues to be cited with approval. However, avoidance of excessive compensation to the patent owner is equally important as ensuring that the owner is not paid too little. Constitutional Law > Bill of Rights > Fundamental Rights > Eminent Domain & Takings Patent Law > Remedies > Damages > Reasonable Compensation Against the United States [HN5] 28 U.S.C.S. 1498 does not instruct a court on what method to use when computing "reasonable and entire compensation" for the government's taking of a compulsory license. A trial court has discretion both in selecting the method and calculating the damages. Generally, the preferred manner is to require the government to pay a reasonable royalty for its license as well as damages for its delay in paying the royalty. Patent Law > Infringement Actions > General Overview Patent Law > Remedies > Damages > Reasonable Royalties [HN6] A reasonable royalty is the amount that a person who desires to manufacture, use, or sell a patented article would be willing to pay as a royalty and yet still be able to make a reasonable profit. Calculation of a reasonable royalty necessarily depends on the particular facts of a case, and the patent owner bears the burden of proof on damages. The royalty computation involves two steps: (1) determination of a reasonable compensation base, i.e., the total value of the infringing items on which the plaintiffs are entitled to royalty payments, and (2) determination of a reasonable royalty rate to apply to that compensation base. Patent Law > Remedies > Damages > Reasonable Compensation Against the United States [HN7] When determining a reasonable royalty rate, a court first looks for an established royalty applicable to the patent at issue. Where an established royalty rate for patented inventions is shown to exist, that rate will usually be adopted as the best measure of reasonable and entire compensation. A court may, for example, adopt a royalty rate if a substantial number of licensees in a relevant market have considered it reasonable. Patent Law > Remedies > Damages > General Overview [HN8] Without an established royalty rate, a court will retroactively construct a hypothetical "arms-length" negotiation between a willing licensor and a willing licensee to determine the royalty rate upon which the parties would have agreed. Patent Law > Remedies > Damages > General Overview [HN9] The hypothetical negotiation is considered to have taken place on the date of first infringement by the government because just compensation is the value of the property taken at the time of the taking. However, in order to ensure that a plaintiff receives full compensation, a court also properly may consider events which Page 3 42 Fed. Cl. 748, *; 1999 U.S. Claims LEXIS 11, **1 occurred, and facts which were known, after the original infringement. The hypothetical negotiation methodology encompasses fantasy and flexibility; fantasy because it requires a court to imagine what warring parties would have agreed to as willing negotiators; flexibility because it speaks of negotiations as of the time infringement began, yet permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators. Patent Law > Remedies > Damages > General Overview [HN10] In regard to constructing a hypothetical negotiation, consideration of later-occurring events may be necessary to approximate a fair royalty to which negotiators with access to such knowledge would have agreed. Patent Law > Ownership > Conveyances > Licenses Patent Law > Ownership > Conveyances > Royalties Patent Law > Remedies > Damages > General Overview [HN11] The following is part of a comprehensive list of factors relevant to the determination of the amount of a reasonable royalty for a patent license: (1) The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty; (2) The rates paid by the licensee for the use of other patents comparable to the patent in suit; (3) The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold; (4) The licensor's established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly; and (5) The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. Patent Law > Infringement Actions > Infringing Acts > General Overview Patent Law > Ownership > Conveyances > Licenses Patent Law > Remedies > Damages > Reasonable Royalties [HN12] The following is part of a comprehensive list of factors relevant to the determination of the amount of a reasonable royalty for a patent license: (6) The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales: (7) The duration of the patent and the term of the license; (8) The established profitability of the product made under the patent; its commercial success; and its current popularity; (9) The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results; (10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention; and (11) The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. Copyright Law > Civil Infringement Actions > Remedies > Damages > Infringer Profits Patent Law > Ownership > Conveyances > Licenses Patent Law > Remedies > Damages > Reasonable Royalties [HN13] The following is part of a comprehensive list of factors relevant to the determination of the amount of reasonable royalty for a patent license: (12) The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions; (13) The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer. Patent Law > Infringement Actions > Infringing Acts > General Overview Patent Law > Ownership > Conveyances > Licenses Patent Law > Remedies > Damages > Reasonable Royalties [HN14] The following is part of a comprehensive list of factors relevant to the determination of the amount of a reasonable royalty rate for a patent license: (14) The opinion testimony of qualified experts; and (15) The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee--who desired, as a business proposition, to obtain a license to Page 4 42 Fed. Cl. 748, *; 1999 U.S. Claims LEXIS 11, **1 manufacture and sell a particular article embodying the patented invention--would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license. Contracts Law > Performance > Substantial Performance Patent Law > Ownership > Conveyances > Licenses Patent Law > U.S. Patent & Trademark Office Proceedings > Continuation Applications > General Overview [HN15] In addition to the Georgia-Pacific factors, a court has discretion to consider additional factors such as reducing the royalty rate when the government procurement is voluminous or where there are non-infringing alternatives available. A court might also adjust the rate upward if there were substantial capital expenditures associated with performance of the government contract. Another consideration is a comparison of an infringer's profits with the patent holder's risks and ability to license the subject matter. In any case, a court should not feel constrained by the Georgia-Pacific factors, nor is it required to consider each of them if conflicting or inconclusive. No cases have relied on all fifteen of the factors. Therefore, to support an award of damages based on a reasonable royalty, a party must adduce evidence only with respect to the factors relevant in that case. Patent Law > Remedies > Damages > General Overview [HN16] When determining a reasonable royalty rate using the Georgia-Pacific factors, cost savings may be a relevant consideration. Patent Law > Remedies > Damages > General Overview [HN17] The 25 percent rule in regard to a baseline royalty rate, or a close variant of it has been recognized as a "rule of thumb" or "typical" in the licensing field. Patent Law > Infringement Actions > Exclusive Rights > Manufacture, Sale & Use Patent Law > Remedies > Damages > Reasonable Compensation Against the United States [HN18] In a suit under 28 U.S.C.S. 1498, a patent owner is entitled to recover delay damages in the form of interest to compensate for loss of the use of royalties. The well-recognized standard for delay damages mandates that a patentee whose exclusive rights to the patent have been infringed is entitled to receive that measure of compensation that would place it in the economic position it would have held had royalties been timely paid and prudently invested. Patent Law > Remedies > Damages > General Overview [HN19] Determining delay compensation is a factual question and it is a judicial function left to the sound discretion of the trier of fact. However, there is a strong judicial policy in just compensation cases which favors establishing uniform interest rates in order to avoid discrimination among litigants. Additionally, it is well-settled that a trial court has discretion on whether to award simple or compound interest. Governments > Federal Government > Claims By & Against [HN20] 31 U.S.C.S. 3727(b) provides that for claims against the United States, an assignment may be made only after a claim is allowed, the amount of the claim is decided, and a warrant for payment of the claim has been issued. 31 U.S.C.S. 3727(a) defines an assignment as (1) a transfer or assignment of any part of a claim against the United States Government or of an interest in the claim or (2) the authorization to receive payment for any part of the claim. An assignment to a financial institution under prescribed circumstances is the only exception which the statute gives to its general prohibition on assignment of claims against the government. 31 U.S.C.S. 3727(c). Governments > Federal Government > Claims By & Against [HN21] Despite the broad language of the Assignment of Claims Act, 31 U.S.C.S. 3727 and the courts' tendency at an earlier time to read it as an all-inclusive prohibition, numerous classes of assignments, although literally within the statutory ambit, have been judicially exempted from its operation. The largest category of excised assignments are those which, in one form or another, occur by operation of law. Various such assignments which are regularly held to be unaffected by the Act include passage of claims to heirs or devisees, transfers made incident to proceedings in bankruptcy or receivership, transfers by the succession of one business entity for another, assignments made by judicial sale or Page 5 42 Fed. Cl. 748, *; 1999 U.S. Claims LEXIS 11, **1 order, and assignments produced by operation of the law of subrogation. These classes of assignments are all though to be outside the statute's scope because none of them threatens the dangers Congress sought to avoid by enacting the prohibition. HEADNOTES Patent Infringement, 28 U.S.C. 1498; Damages COUNSEL: PETER F. RIENT, Gainer, Rient and Hotis, Washington, D.C., attorney of record for plaintiff, with whom was Maureen E. Gevlin, attorney, Gainer, Rient and Hotis, Washington, D.C. JOHN FARGO, Assistant Director, United States Department of Justice, Washington, D.C., with whom were Vito J. DiPietro, Director, and Frank W. Hunger, Assistant Attorney General, attorneys of record for the defendant. Gary L. Hausken, attorney, of counsel. JUDGES: MARIAN BLANK HORN, Judge. OPINION BY: MARIAN BLANK HORN OPINION [*751] OPINION HORN, J. This matter comes before the court for a determination of damages pursuant to the court's previous holding that United States Patent No. 4,522,548, issued to plaintiff Standard Manufacturing Company (Standard) in 1985, was valid and infringed by the procurement and use of certain weapons loaders by the United States. After careful consideration of the record, the parties' filings, and the relevant law, the court holds that the compensation [**2] base for a reasonable royalty includes a total of $ 64,195,217.00 for the 136 infringing MHU-196/M trailers and a total of $ 32,798,003.58 for the thirty-six infringing MHU-204/M trailers. The court further holds that Standard Manufacturing Company and DBP, Ltd., to whom Standard later assigned the rights in the '548 patent, are entitled to a 16.31% reasonable royalty on the value of infringing procurements which took place during their respective periods of ownership of the '548 patent rights. FACTUAL BACKGROUND Plaintiff Standard Manufacturing Company, Inc. (Standard), was the original holder of United States Patent No. 4,522,548 (the '548 patent), which issued June 11, 1985, for an "Aerial Weapons Handling Trailer." On October 28, 1985, Standard filed suit under 28 U.S.C. 1498 (1994) seeking reasonable and entire compensation for the defendant's use of its patented invention in two aerial weapons handling trailers, designated as the MHU-196/M and MHU-204/M trailers. These trailers are used to load weapons into the B-52, B-1B and Advanced Technology [*752] (B-2) Bombers used by the United States Air Force. The United States conceded that it had made use of the invention embodied [**3] in the '548 patent, but argued that the patent was invalid and unenforceable. The issues of liability and damages were bifurcated, with the issue of damages deferred until after the court's determination of liability. After the first trial to determine liability, this court found that the '548 patent was valid and that the defendant had infringed Claim 9 of the patent: the court finds that the patent as issued is valid and enforceable. The court also finds that infringement has occurred, in accordance with a stipulation entered into by the parties that if any asserted claim of the patent-in-suit is valid and enforceable, such claim is infringed by both the MHU-196/M and MHU-204/M trailers. Standard Mfg. Co., Inc. v. United States, 25 Cl. Ct. 1, 100 (1991). A second trial was subsequently held to determine appropriate damages. While the published liability decision should be referenced for a complete and thorough description of the facts of this case, a brief synopsis of the facts pertinent to the damages trial is set out below. Standard is a privately held corporation organized under the laws of the State of Texas. 1 For over forty years, Standard has been in [**4] the business of designing, developing, testing, manufacturing and supporting vehicles and special equipment for military and industrial use. Until recently, a major part of Standard's business was the design, development, manufacture and support of munitions handling equipment (variously known as munitions handling trailers (MHT), munitions handling units (MHU), or munitions lifting trailers (MLT)), also known as weapons Page 6 42 Fed. Cl. 748, *752; 1999 U.S. Claims LEXIS 11, **4 loaders, for the United States Armed Forces. These trailers are employed to load bombs, missiles, and other aerial weaponry into or onto military aircraft. Thousands of weapons loaders designed, developed and manufactured by Standard are in use by the Armed Forces of the United States and those of more than forty other countries throughout the world. 1 The other plaintiff in this action, DBP, Ltd. (DBP), is a Texas limited partnership created in April of 1993 by the owners of Standard for the sole purpose of acquiring, by assignment, Standard's rights under the patent-in-suit and managing the litigation of this suit. The individual limited partners of DBP are the same as the individual stockholders of Standard, and each has the same percentage interest in DBP as in Standard. [**5] Air Launched Cruise Missile Program/Development of the MHU-173/E Trailer In the 1970s, a program which developed under the Air Launched Cruise Missile Program, known as the Cruise Missile Integration Program, evolved to provide B-52 bombers with the capability of delivering air launched cruise missiles from rotary launchers contained in the bomb bay or pylon adapter packages on the wings of B-52 bombers. 2 Boeing, as the prime contractor for the program, was responsible for the support equipment and modifications to the B-52. Boeing issued a request for proposals soliciting bids for the design, development and manufacture of a trailer capable of loading both rotary launchers and pylon adapters into the bomb bay and onto the wing stations of a B-52 bomber. Both Standard and its competitor, Aircraft Armaments Incorporated (AAI), submitted bids in response to the request. Boeing awarded AAI the contract to design, develop and manufacture this trailer, which came to be designated the MHU-173/E. 2 Rotary launchers and pylon adapters are made to carry cruise missiles on the B-52 in multiple packages. [**6] The MHU-173/E loaders had problems from the time of their initial use. They were expensive, overly complex and considerably more difficult to operate and maintain than existing trailers. In their first months of operation, the trailers experienced almost daily failures which impaired their operational and nuclear safety. The in-commission rate for their first six months of field operation was only slightly better than 50% and never got much better than 70% to 80%. By the end of 1982, the Strategic Air Command (SAC) concluded that the MHU-173/E loader was not a good engineering design and that [*753] action needed to be taken to remedy the situation. The B-1B Program Prior to 1981, the Air Force had identified a need for approximately 150 munitions trailers capable of loading cruise missiles onto its fleet of B-52 bombers. In 1981, the President reactivated the B-1 Bomber project, which had been canceled in 1977. With the resumption of this program, the Air Force recognized that it would also need approximately ninety trailers capable of loading the new aircraft, which became known as B-1B bombers. In addition, during the same time frame, the Air Force was making plans to acquire a [**7] third generation of strategic bomber. This bomber later became known as the Advanced Technology Bomber (ATB), or Stealth bomber, and is now designated the B-2 bomber. Persons knowledgeable in the industry, including personnel at Standard, believed that the B-2 fleet would number between 100 and 150 planes, and would require at least 100 munitions loaders. It was readily apparent to everyone in the industry that the Air Force's requirements could not be met with then-existing munitions handling equipment, such as the MHU-173/E trailers. The MHU-173/E was inadequate because it was (1) complex, (2) costly to maintain, (3) could not lift the required weight or achieve the lift height needed to load the B-1B bomber, and (4) could not load the B-2 bomber. Standard recognized that there might be a need for an improved, simplified, less expensive weapons loader that could load both the B-52 and B-1B bombers without auxiliary equipment. Because of differences in the heights of the B-52 and B-1B bombers, as well as in the vertical and horizontal clearances needed for the bomb packages, it was a challenging problem to design a single trailer for loading both bombers in a single-stage process. [**8] Standard began conceptual work on such a loader in late 1981. After devoting more than a month to the problem, Standard's inventors conceived the solution which is embodied in the '548 patent. Work on the loader design commenced in January of 1982 with five or six employees of Standard working on the project full time Page 7 42 Fed. Cl. 748, *753; 1999 U.S. Claims LEXIS 11, **8 until July, 1982, at which point the basic design was complete. Standard referred to its design as the "60K Loader" because the loader was designed to have a lift capacity of 60,000 pounds to meet what Standard believed would be future Air Force requirements. On September 28, 1982, Standard filed a patent application on the 60K Loader that led to the issuance of the '548 patent on June 11, 1985. On July 9, 1982, Standard formally submitted to the Air Force an unsolicited proposal to supply 60K Loaders for loading weapons packages into and out of the Air Force's strategic aircraft. Standard proposed to produce two 60K Loaders for test and evaluation by the Air Force for a lot fixed price of $ 1,250,000 including hardware only. The Air Force would then have the option to purchase a single lot of approximately fifty trailers for a price not to exceed $ 385,000 per trailer. [**9] 3 In that event, Standard also offered to provide complete production drawings, including unlimited rights in data at no extra charge. If the government alternatively decided not to purchase any additional trailers, it would pay an additional $ 1,000,000 4 and receive copies of the drawings for the Loaders and unlimited rights in data. The unsolicited proposal also stated that a U.S. patent application had been filed covering the 60K Loader and that Standard would convey rights in the patent application with the rights to the data. 3 On January 10, 1983, Standard modified its pricing scheme and purchase requirements for the production lot trailers. The revised prices were segregated according to quantity ordered and the presence or absence of a Position Monitor and Alignment Device (PM/AD). With the PM/AD, purchasing ten trailers would cost $ 405,000 per trailer, purchasing thirty trailers would cost $ 395,000 per trailer, and purchasing fifty trailers would cost $ 385,000 per trailer. Without the PM/AD, purchasing ten trailers would cost $ 370,000 per trailer, purchasing thirty trailers would cost $ 365,000 per trailer, and purchasing fifty trailers would cost $ 355,000 per trailer. [**10] 4 On October 14, 1982, Standard modified its proposal to delete this requirement. The price at which Standard offered to sell the two prototypes was below its expected [*754] cost of production, and the unit price Standard quoted for production units did not include Standard's normal profit. The development and procurement approach offered by Standard, and the relatively low prices that were reflected in the unsolicited proposal represented an effort by Standard to "get a foot in the door." The company was making a strategic effort to overcome its competitors and what Standard believed was the entrenched bureaucracy in the Air Force, as well as to obtain all future contracts for that type of trailer. As of July, 1982, when Standard submitted its unsolicited proposal, the Air Force thought it would need approximately 150 large capacity loaders for the modified B-52 program. The Air Force had already acquired forty-two MHU-173/E loaders from AAI for that purpose, and had contracted to purchase twenty-eight more at a cost of about $ 724,000 apiece. Standard has stated that it knew the Air Force was having [**11] serious problems operating and maintaining the delivered MHU-173/E trailers because of their complex and faulty design. The Air Force's future requirements also included about ninety loaders for B-1B bombers, and Standard also believed that the Air Force would need at least 100 loaders for its projected fleet of B-2 bombers. Standard's 60K Loader, unlike the MHU-173/E, was capable of loading the B-52, B-1B and B-2 bombers without the use of a costly "lift adapter" or any other additional mechanism. Standard believed, therefore, that its proposal, if accepted by the Air Force, would generate sales of more than 300 of its loaders to the Air Force. If the Air Force started using Standard's loaders, the company was convinced that the Air Force would stop purchasing the MHU-173/E trailers and would look to Standard to supply future loaders. After an initial review of Standard's unsolicited proposal, in August, 1982, an Air Force representative wrote to the plaintiff that "the proposed effort appears to offer significant improvement over existing development programs and equipment in this field. It is anticipated that funds sufficient to acquire this effort will be available in the near [**12] future. When this occurs, you will be contacted through contracting channels." Between August of 1982 and December of 1983, Standard employees proceeded to brief personnel throughout the United States Air Force on the proposed 60K Loader. In total, the company presented more than thirty briefings to more than 100 Air Force personnel. These briefings generated considerable interest and encouragement on the part of the Air Force. Page 8 42 Fed. Cl. 748, *754; 1999 U.S. Claims LEXIS 11, **12 Because the Initial Operational Capability date for the B-1B bomber was September 30, 1986, Standard concluded that if it were forced to wait another year or two before its unsolicited proposal were approved, it would be too late to meet the B-1B's fielding and support requirements. Accordingly, in an attempt to demonstrate the feasibility of the 60K Loader design to the Air Force, Standard committed eighteen members of its twenty-five person engineering department for a period of six or seven months to design an actual prototype. By September 30, 1983, Standard had constructed the prototype, and in November, 1983, the company conducted a demonstration of the 60K Loader for various Air Force organizations at Standard's facility. Designing and building this [**13] prototype cost Standard more than $ 1.9 million out of its own research and development funds. The Strategic Weapons Loader Competition-MHU-196/M In 1982, while Standard was promoting its 60K Loader concept throughout the Air Force, AAI was proposing that a powered lift adapter be mounted on top of the MHU-173/E to add the additional lift height required to load the B-1B bomber. In January, 1982, AAI submitted a study of alternative means for loading the B-1B bomber to International Rockwell, the prime contractor for the B-1B aircraft. Subsequent to AAI's submission, Rockwell issued a Request For Proposal (RFP) which included the powered lift adapter. Both AAI and Standard submitted bids, with Standard proposing to furnish packages consisting of a powered lift adapter and necessary modifications to the MHU-173/E trailer for approximately $ 106,000 per package. Standard states that, in [*755] the fall of 1983, it learned from Rockwell that it was the successful bidder. In the meantime, AAI had become aware of Standard's 60K Loader design and price when it obtained a copy of Standard's unsolicited proposal in a briefing room at Andrews Air Force Base on July 29, 1982. Soon after, AAl [**14] completely abandoned the powered lift adapter concept and instead redesigned the MHU-173/E trailer, eliminating more than two-thirds of the trailer's parts, significantly reducing the complexity of its design, and providing it with a new lift system which enabled it to load the B-1B without auxiliary equipment. The new lift system appropriated and copied the concept of Standard's patented invention by using a hydraulic lift system employing lift arms with offset portions. AAl submitted its new trailer design in draft form to the Aeronautical Systems Division at Wright-Patterson Air Force Base as a proposed Value Engineering Change Proposal (VECP). 5 Upon receipt of AAl's informal VECP, the Air Force canceled the powered lift adapter requirement. On December 23, 1983, AAl formally submitted its VECP, and it was approved by the Air Force on December 30, 1983. At that time, the Air Force expected that, because of the new trailer's simplified design, procurement and use of seventy-three VECP trailers would result in total savings of about $ 69.9 million. 5 A VECP is a proposal which is supposed to reduce the Air Force's overall cost for the subject of the proposal. Under the VECP, the savings are then shared between the contractor and the government, in this case the Air Force, usually on a fifty-fifty basis. A VECP is intended to give the Air Force the option of contracting for engineering changes which improve the overall design of a presently procured device. It is not intended to circumvent competition or to award contracts for entirely new equipment, nor is it intended to serve as a means of fixing problems in a basic design. [**15] AAI was subsequently awarded a sole source contract for the VECP trailer, which is now designated the MHU-196/M, and AAI manufactured and delivered all of the 136 infringing MHU-196/M trailers which the Air Force has purchased. After the negotiations for the contract, the Air Force reported that AAI's expected profit would be 10% of the contract cost excluding the cost of money, or approximately 8.7% of the total contract price. AAI's original contract with the Air Force for trailer production was modified to state that AAI's developmental implementation cost for the VECP was $ 2,791,358. Both Standard and the Air Force agree that this figure represents a reasonable approximation of the value of the prototype trailer for loading the B-52. The contract modification also stated that AAI's share of collateral savings due to lower operational and support costs was $ 270,000. Under other terms of the modification, AAI received $ 4,512,180 as its share of the anticipated production cost savings resulting from the acquisition of MHU-196/M trailers instead of MHU-173/E trailers. Thus, AAI eventually received VECP payments of more than $ 7.5 million from the Air Force. Page 9 42 Fed. Cl. 748, *755; 1999 U.S. Claims LEXIS 11, **15 Besides the B-52 prototype, [**16] the Air Force also requested and received a prototype trailer for loading the B-1B bomber. For this trailer, the Air Force paid $ 535,015. With respect to the other MHU-196/M trailers which the Air Force eventually purchased from AAI, the transfers were accomplished in four lots. For the twenty-five trailers in Lot VI, 6 the Air Force paid $ 454,779 per trailer. For the next forty-six trailers, Lot VII, the Air Force paid $ 440,000 per trailer. For Lot VIII, the Air Force paid $ 435,385 for each of nineteen trailers. The last forty-four MHU-196/M trailers were purchased in Lot IX for $ 412, 117 per trailer. Thus, the total cost, exclusive of VECP payments, for all 136 MHU-196/M trailers including the two prototypes was $ 61,341,311. Additionally, the Air Force purchased $ 3,348,201 worth of supplies and services from AAI to support those trailers. 6 Purchases of trailers in Lots prior to Lot VI were of non-infringing MHU-173/E weapons loaders. When minor modifications were later made to the MHU-196/M design [**17] for use with the B-2 bomber, the trailers were redesignated as MHU-204/M trailers. A principal difference between the MHU-196/M and MHU-204/M trailers is that the overall height of the former is greater than that of the latter, [*756] because the lift arms of the former are attached to the upper surfaces of the trailer frames, while the lift arms of the latter are attached to the lower surfaces of the frames. Because of its extra height, the MHU-196/M is unable to load the B-2 bomber. The MHU-204/M trailer is unable to achieve a lift height sufficient to load the B-1B bomber. The Air Force has procured thirty-six MHU-204/M trailers from Northrop Corporation and AAI through sole source contract with the Air Force. AAI and Northrop agreed to a final contract price for these sales which included an anticipated profit for AAI of 15%. The first seven MHU-204/M trailers were sold by AAI to Northrop for a total of $ 11,077,943, and Northrop then delivered the trailers to the Air Force for a total of $ 14,951,803. The remaining twenty-nine MHU-209/M trailers were purchased by the Air Force directly from AAI at a total cost of $ 19,492,409. AAI and the Air Force had agreed that this price would include [**18] a profit for AAI of 14.32% 7 7 The profit of 14.32% was for all work performed except certain repair services which were subject to a series of profit rates between 7.46% and 11.38%. In addition to acquiring the trailers themselves, the Air Force and Northrop purchased supplies and services from AAI to support those trailers. Northrop paid AAI $ 49,864 for the preparation of a proposal, $ 35,819 for the procurement of technical orders, and $ 873,055 for data. The Air Force paid AAI $ 1,831,833 for data and drawings, $ 42,000 for testing, and $ 500,000 for refurbishing MHU-173/E trailers before converting them to MHU-204/M trailers. Standard's assignment of its patent rights to DBP Ltd. While the Air Force's infringing procurements were still ongoing, Standard Manufacturing conveyed all of its interest and rights in the '548 patent to DBP, Ltd. (DBP) in an instrument effective April 22, 1993. DBP is a Texas limited partnership created in April of 1993 by the owners of Standard for the sole purpose of acquiring, [**19] by assignment, Standard's rights under the patent-in-suit, and financing and managing the litigation of its infringement suit against the Air Force. The individual limited partners of DBP are the same as the individual stockholders of Standard, and each has the same percentage interest in DBP as in Standard. The principal reasons for the transfer of rights were to relieve Standard of the continuing burden of litigation expenses associated with the maintenance of the infringement action, to eliminate the risk that economic hardship might compel Standard to settle the case prematurely and for a disadvantageous amount, and to avoid the possibility of unnecessarily exposing any recovery to potential claims by Standard's creditors. As of the date of the assignment, all of the MHU-196/M trailers had been delivered to the Air Force. Additionally, the Air Force had received six of the seven MHU-204/M trailers procured from AAI by Northrop. Subsequent to the assignment, the Air Force received one more MHU-204/M trailer from Northrop and twenty-nine MHU-204/M trailers from AAI. DISCUSSION [HN1] Use by the government of a patented invention without an express license from the patentee is properly [**20] viewed as a taking of property under the Fifth Amendment to the Constitution through the Page 10 42 Fed. Cl. 748, *756; 1999 U.S. Claims LEXIS 11, **20 government's exercise of its power of eminent domain. Hughes Aircraft Co. v. United States, 86 F.3d 1566, 1571 (Fed. Cir. 1996), vacated on other grounds and remanded, 117 S. Ct. 1466 (1997), reinstated, 140 F.3d 1470 (Fed. Cir. 1998); Leesona Corp. v. United States, 220 Ct. Cl. 234, 599 F.2d 958, 967 (Ct. Cl.), cert. denied, 444 U.S. 991, 62 L. Ed. 2d 420, 100 S. Ct. 522 (1979); Pitcairn v. United States, 212 Ct. Cl. 168, 547 F.2d 1106, 1114 (Ct. Cl. 1976), cert. denied, 434 U.S. 1051, 54 L. Ed. 2d 804, 98 S. Ct. 903 (1978); see Gargoyles, Inc. v. United States, 37 Fed. Cl. 95, 99, aff'd, 113 F.3d 1572 (Fed. Cir. 1997). The patent holder's remedy for this infringement is prescribed by 28 U.S.C. 1498(a) (1994): [HN2] Patent and copyright cases (a) Whenever an invention described in and covered by a patent of the [*757] United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner's remedy shall be by action against the United States in the United States Court [**21] of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture. For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States. See Hughes Aircraft Co. v. United States, 86 F.3d at 1571. [HN3] Under the statute, the United States is not an ordinary infringer, but rather a compulsory, nonexclusive licensee. Motorola, Inc. v. United States, 729 F.2d 765, 768 (Fed. Cir. 1984); Leesona Corp. v. United States, 599 F.2d at 968; Brunswick Corp. v. United States, 36 Fed. Cl. 204, 207 (1996), aff'd, 152 F.3d 946 (Fed. Cir. 1998). Thus, the patent owner cannot prevent the government from taking such a license, but the owner is entitled to its "reasonable and entire compensation for such use and manufacture." Hughes Aircraft Co. v. United States, 86 F.3d at 1571; Brunswick Corp. v. United States, 36 Fed. Cl. at 207. [HN4] When determining just compensation [**22] for any type of eminent domain action, including the unlicensed use of a patent, equitable principles of fairness control. Tektronix, Inc. v. United States, 213 Ct. Cl. 257, 552 F.2d 343, 351 (Ct. Cl.), modified, 557 F.2d 265 (Ct. Cl. 1977), after remand, 575 F.2d 832, cert. denied, 439 U.S. 1048 (1978) (citing Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 478, 35 L. Ed. 2d 1, 93 S. Ct. 791 (1973)); Dow Chem. Co. v. United States, 36 Fed. Cl. 15, 19 (1996). Because recovery is based on eminent domain, the proper measure of compensation is "what the owner has lost, not what the taker has gained." Leesona Corp. v. United States, 599 F.2d at 969 (citing United States v. Chandler-Dunbar Co., 229 U.S. 53, 76, 33 S. Ct. 667, 57 L. Ed. 1063 (1913)). This rule continues to be cited with approval. See, e.g., Hughes Aircraft Co. v. United States, 86 F.3d at 1571-72; ITT Corp. v. United States, 17 Cl. Ct. 199, 202 (1989). However, avoidance of excessive compensation to the patent owner is equally important as ensuring that the owner is not paid too little. Tektronix, Inc. v. United States, 552 F.2d at 351. While a section 1498 action resembles in several [**23] ways the right of action against a private infringer provided under the Patent Act, see 35 U.S.C. 271, 8 284, 9 the actions are only parallels and not identical. See Motorola v. United States, 729 F.2d [*758] at 768; Leesona Corp. v. United States, 599 F.2d at 969. Title 35 provides remedies which would grant recovery in excess of the just compensation required by the Fifth Amendment, and, thus, also in excess of the reasonable and entire compensation provided for in section 1498. Id. For example, injunctive relief, increased damages and attorneys fees available against private infringers under 35 U.S.C. 283, 284 and 285, respectively, are not permitted in eminent domain proceedings. Motorola v. United States, 729 F.2d at 768 n.3 (citing Leesona Corp. v. United States, 599 F.2d at 968-70). Furthermore, the government can only be sued for direct patent infringement, and not for inducing infringement by another or for contributory infringement (available against private infringers via 35 U.S.C. 271(b) and (c), respectively.) Id. (citing Decca Ltd. v. United States, 225 Ct. Cl. 326, 640 F.2d 1156, 1167 (Ct. Cl. 1980), cert. Page 11 42 Fed. Cl. 748, *758; 1999 U.S. Claims LEXIS 11, **23 denied, 454 U.S. 819, [**24] 70 L. Ed. 2d 89, 102 S. Ct. 99 (1981)). Punitive damages elements appropriate in a private patent dispute are not appropriate when claiming infringement by the government under section 1498. See Leesona Corp. v. United States, 599 F.2d at 968-70. The government, however, is not automatically entitled to infringe a patent "at a cheaper rate than a private infringer." Bendix Corp. v. United States, 230 Ct. Cl. 247, 676 F.2d 606, 607-08 (Ct. Cl. 1982) (per curiam). 8 35 U.S.C. 271 (1994) reads: Infringement of patent (a) Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent. (b) Whoever actively induces infringement of a patent shall be liable as an infringer. (c) Whoever offers to sell or sells within the United States or imports into the United States a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use, shall be liable as a contributory infringer. *** [**25] 9 35 U.S.C. 284 (1994) reads: Damages Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances. [HN5] Section 1498 does not instruct a court on what method to use when computing "reasonable and entire compensation" for the government's taking of a compulsory license. A trial court has discretion both in selecting the method and calculating the damages. See Hughes Aircraft Co. v. United States, 86 F.3d at 1572; Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 1579 (Fed. Cir. 1996), cert. denied, 142 L. Ed. 2d 775, 119 S. Ct. 874, 1999 U.S. LEXIS 628, 1999 WL 16084 (1999). Generally, [**26] the preferred manner is to require the government to pay a reasonable royalty for its license as well as damages for its delay in paying the royalty. 10 Hughes Aircraft Co. v. United States, 86 F.3d at 1572; Decca Ltd. v. United States, 640 F.2d at 1167; see Gargoyles, Inc. v. United States, 37 Fed. Cl. at 99. 10 The court in Decca Ltd. v. United States noted two other valuation methods which are used less frequently than the reasonable royalty method: (1) awarding a percentage of governmental cost savings arising from governmental use of the patented invention, and (2) awarding lost profits. Decca Ltd. v. United States, 640 F.2d at 1167. The court noted only three instances when the cost savings approach Page 12 42 Fed. Cl. 748, *758; 1999 U.S. Claims LEXIS 11, **26 had been used, all prior to 1950. See generally, id. at 1167 n.20. This approach continues to be in disfavor. See, e.g., Brunswick Corp. v. United States, 36 Fed. Cl. at 209 ("Such a comparison often involves excessive speculation as to the costs associated with using an unpatented alternative, the effects of competition, and market fluctuation. This renders the cost savings analysis inherently unreliable and unsound in many cases."). The lost profits approach is less frequently used because it places a heavy burden of proof on the plaintiff. To get lost profits under section 1498, the plaintiff must show by the "strictest proof" that it would have actually earned and retained such profits on sales to the government. Tektronix, Inc. v. United States, 552 F.2d at 349. The lost profits plaintiff must demonstrate an expectation of exclusivity for its invention such that, but for the infringement, the plaintiff would have had the benefit of the infringer's sales. Kearns v. Chrysler Corp., 32 F.3d 1541, 1551 (Fed. Cir. 1994), cert. denied, 514 U.S. 1032, 131 L. Ed. 2d 244, 115 S. Ct. 1392, 115 S. Ct. 1393 (1995). Proof of this causation requires (1) demand for the patented product, (2) absence of noninfringing alternatives, (3) manufacturing and marketing capacity to exploit the demand, and (4) the profit amount that would have been made. Id. (emphasis deleted). In addition to the difficulty of proving causation, the entire validity of the lost profits approach is in doubt because it assumes a right to exclusivity which conflicts with the government's power of eminent domain. See generally 7 Donald S. Chisum, Chisum on Patents 20.03[6], at 20-454 n.11 (1993 & Supp. 1997); Brunswick Corp. v. United States, 36 Fed. Cl. at 208. It is not necessary for the court to examine either of these approaches in greater depth because the parties in the present case agree that the reasonable royalty method should be used to calculate the infringement damages. However, when determining a reasonable royalty rate using the factors laid out in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d. Cir.), cert. denied, 404 U.S. 870, 30 L. Ed. 2d 114, 92 S. Ct. 105 (1971), both cost savings and lost profits might be relevant considerations. [**27] A. Reasonable royalty The parties are in agreement that the reasonable royalty approach is the most appropriate method for calculating infringement [*759] damages in the present case. [HN6] A reasonable royalty is the amount that a person who desires to manufacture, use, or sell a patented article would be willing to pay as a royalty and yet still be able to make a reasonable profit. Trans-World Mfg. Corp. v. Al Nyman & Sons, 750 F.2d 1552, 1568 (Fed. Cir. 1984). Calculation of a reasonable royalty necessarily depends on the particular facts of a case, Mahurkar v. C.R. Bard, Inc., 79 F.3d at 1579, and the patent owner bears the burden of proof on damages, Fromson v. Western Litho Plate and Supply Co., 853 F.2d 1568, 1574 (Fed. Cir. 1988). The royalty computation involves two steps: (1) determination of a reasonable compensation base, i.e., the total value of the infringing items on which the plaintiffs are entitled to royalty payments, and (2) determination of a reasonable royalty rate to apply to that compensation base. See Decca Ltd. v. United States, 640 F.2d at 1173. 1. Reasonable compensation base The parties are in agreement on much of what should constitute the compensation [**28] base in this case. They agree that the value of 136 infringing MHU-196/M trailers and 36 infringing MHU-204/M trailers must be included in the base as well as supplies and services relating to those trailers. However, with respect to the MHU-196/M trailers, the government contends that Value Engineering Change Proposal (VECP) payments which were made to AAI should not be included in the royalty base. With respect to the MHU-204/M trailers, the parties disagree as to whether the general contractor's price mark-up on particular trailers should be included in the value of those weapons loaders. In determining the proper components of the compensation base, the court is mindful of the guidance provided by the court in Leesona Corp. v. United States that "the proper measure [of damages] in eminent domain is what the owner has lost, not what the taker has gained." 599 F.2d at 969; accord Hughes Aircraft Co. v. United States, 86 F.3d at 1572. Therefore, the most appropriate way to constitute the royalty base in this case is to Page 13 42 Fed. Cl. 748, *759; 1999 U.S. Claims LEXIS 11, **28 examine what AAI received through the sale of the infringing trailers, and, hence, what Standard could have received. a. The MHU-196/M trailers The parties [**29] have stipulated to the various amounts which the government paid for the 136 infringing MHU-196/M trailers. The parties agree that a reasonable value approximation for the prototype which could load the B-52 bomber was AAI's cost of $ 2,791,358.00 for development and implementation of that prototype. Through other stipulations, the parties have also agreed to the prices which the Air Force paid for the rest of the MHU-196/M trailers, and these figures are set out below. Trailer grouping Quantity B-52 prototype 1 $ 2,791,358.00 $ 2,791,358.00 B-1B prototype 1 $ 535,015.00 $ 535,015.00 Lot VI 25 $ 454,779.00 $ 11,369,475.00 Lot VII 46 $ 440,000.00 $ 20,240,000.00 Lot VIII 19 $ 435,385.00 $ 8,272,315.00 Lot IX 44 $ 412,117.00 $ 18,133,148.00 *3*TOTAL COST OF ALL GROUPS $ 61,341,311.00 [*760] Including the stipulated development cost of the B-52 prototype, the total cost of all 136 MHU-196/M trailers was $ 61,341,311.00, which becomes the first component of the royalty compensation base in this case. The parties do not dispute that, in connection with the Air Force's purchase of the MHU-196/M [**30] trailers, the Air force paid AAI an additional amount of $ 4,782,180.00 as AAI's share of the cost savings expected to result from the purchase of the infringing trailers rather than the MHU-173/E trailers. Standard contends that these VECP payments should be included in the royalty base because they represent a portion of the total cost of the MHU-196/M trailers to the government. Plaintiff argues "the price that the government contracted to pay for each infringing trailer was not merely the line item unit price, but rather the unit price plus the portion of the Cost per trailer Group cost [Value Engineering Change Proposal] payment triggered by acquisition of that unit." The court disagrees with plaintiff. First and foremost, Standard never had the original contract with the Air Force for production of the MHU-173/E trailers. Therefore, unlike AAI, Standard could not have received VECP payments had it been manufacturing the cost-saving MHU-196/M trailers instead of AAI. The court cannot accept Standard's contention that "what the Air Force might have paid Standard to manufacture patented trailers has no bearing on [the] issue." The VECP payments are not included in "what the owner has lost," and their [**31] inclusion in the royalty base would overcompensate the plaintiff in violation of the principle quoted above from Leesona Corp. v. United States. See 599 F.2d at 969; accord Hughes Aircraft Co. Page 14 42 Fed. Cl. 748, *760; 1999 U.S. Claims LEXIS 11, **31 v. United States, 86 F.3d at 1572. components of value with the trailers. Furthermore, the structuring of the VECP payments to AAI demonstrates that they were distinct from the trailers' cost. The VECP payments were either separate line items in the government's contracts with AAI or they were separate lump sum payments. If Standard had been able to step in and manufacture the trailers, it would have only received the payments for the trailer production. Accordingly, the $ 4,782,180.00 in VECP payments to AAI should not be included in the royalty compensation base. 11 Moreover, as the defendant in this case notes, Rite-Hite involved a Title 35 infringement action between private parties. If extending liability to goods having no functional relationship to the patented item was excessive in that context, it would seem even more so under a section 1498 action in which the government had exercised its power of eminent domain. 11 Standard also claims that, when determining the value of items for the royalty compensation base, several cases demonstrate uniform use of the price which the government paid. Among the cases which plaintiff cites are Bendix Corp. v. United States, 230 Ct. Cl. 247, 676 F.2d 606; Decca Ltd. v. United States, 225 Ct. Cl. 326, 640 F.2d 1156; Leesona Corp. v. United States, 220 Ct. Cl. 234, 599 F.2d 958; Tektronix, Inc. v. United States, 213 Ct. Cl. 257, 552 F.2d 343; and ITT Corp. v. United States, 17 Cl. Ct. 199. Each of these cases involves the application of the entire market value rule which permits a patentee to seek both the value of patented components and the additional value of unpatented components sold with the patented components. See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir.) (en banc), cert. denied, 516 U.S. 867, 133 L. Ed. 2d 122, 116 S. Ct. 184 (1995). The patented components, however, have to be considered components of a single assembly or together form a functional unit. Id. at 1550. These cases do not support Standard in the present case. The VECP payments cannot be considered to be functional [**32] The parties also do not dispute that $ 2,853,906.00 in supplies and services furnished by AAI for the MHU-196/M trailers should be included in the compensation base. Adding to this the $ 61,341,311.00 cost of the MHU-196/M trailers purchased by the Air Force, the court holds that the portion of the royalty compensation base attributable to the 136 MHU-196/M trailers is $ 64,195,217.00. This figure divides to $ 472,023.65 per MHU-196/M trailer. b. The MHU-204/M trailers Northrop Corporation was the prime contractor for production of what is now known as the B-2 bomber, and it was required to develop all necessary support equipment for the aircraft, including munitions handling trailers. In order to fulfill its obligations, Northrop negotiated a series of purchase order subcontracts with AAI to develop [*761] trailers capable of loading weapons onto the B-2 and to provide services related to those trailers. The parties have stipulated to the various amounts which AAI received from Northrop for the purchase of these trailers, designated MHU-204/M trailers, and the amounts are set forth below. Item Quantity Cost per item Total cost Original trailers 3 $ 1,518,963.67 $ 4,556,891.00 Converted trailers 3 $ 1,101,010.00 $ 3,303,030.00 "New build" trailer 1 $ 1,277,921.00 $ 1,277,921.00 Non-recurring engineering N/A $ 619,225.00 $ 619,225.00 Page 15 42 Fed. Cl. 748, *761; 1999 U.S. Claims LEXIS 11, **32 charges Special tooling N/A $ 394,553.00 $ 394,553.00 Technical orders N/A $ 730,271.00 $ 730,271.00 Contract change -- N/A $ 142,784.00 $ 142,784.00 N/A $ 49,864.00 $ 49,864.00 N/A $ 3,404.00 $ 3,404.00 $ 672,152.02 $ 19,492,408.58 increased data costs Contract change -preparation proposal costs Contract change -- price increase for converted trailers Additional trailers 29 *3*TOTAL COST OF ALL ITEMS $ 30,570,351.58 [**33] As it did with respect to the MHU-196/M trailers, Standard again argues that the royalty compensation base should include more than just the procurement value of the MHU-204/M trailers. In particular, plaintiff asserts that the additional "mark-up" of $ 3,873,860.00, which Northrop charged to the government when acting as the middleman, should be included in the compensation base. According to Standard, adding the mark-up would allow the compensation base to reflect more accurately the true value of the MHU-204/M trailers, namely, the price which the Air Force paid. While Standard maintains that inclusion of the mark-up is supported by eminent domain principles, the case law on section 1498 actions counsels otherwise. As noted earlier, the court in Leesona Corp. v. United States declared that "the proper measure [of damages] in eminent domain is what the owner has lost, not what the taker has gained." 599 F.2d at 969; accord Hughes Aircraft Co. v. United States, 86 F.3d at 1572. Adding the Northrop mark-up to the royalty compensation base would give Standard something which it could never have lost in the first place. This logic also refutes plaintiff's additional argument [**34] that Northrop, serving as a middleman, was a "user" of its patented invention within the meaning of section 1498. The emphasis should not be on what the government paid for the invention or what contractors acting at the government's behest paid for the invention. Rather, recognition of what AAI received is the best measure of what Standard lost. As defendant points out, the mark-up was "due solely to the method by which the Government procured the trailers rather than the value of the invention." For [*762] the above reasons, the court will not include the mark-up charged by Northrup to the Air Force in the royalty compensation base. In connection with the MHU-204/M trailers, the Air Force purchased $ 2,769,652.00 worth of supplies and services for the trailers from Northrop and AAI. These supplies and services consisted of technical orders, data Page 16 42 Fed. Cl. 748, *762; 1999 U.S. Claims LEXIS 11, **34 and drawings, proposal preparation, testing, and refurbishment of MHU-173/E trailers before their conversion to MHU-204/M trailers. The parties agree that the compensation base should include all of these items except for the testing ($ 42,000.00) and the refurbishment of the MHU-173/E trailers ($ 500,000.00). The total cost of MHU-204/M trailer [**35] supplies and services included in the royalty compensation base is, thus, $ 2,227,652.00, and the portion of the base attributable to the thirty-six MHU-204/M trailers is $ 32,798,003.58. This number divides to $ 911,055.66 per MHU-204/M trailer. Combining this with the $ 64,195,217.00 attributable to the MHU-196/M trailers, the court holds that the overall royalty compensation base in this case shall be $ 96,993,220.58. 2. Reasonable royalty rate [HN7] When determining a reasonable royalty rate, a court first looks for an established royalty applicable to the patent at issue. See Trell v. Marlee Elecs. Corp., 912 F.2d 1443, 1445 (Fed. Cir. 1990) (citing Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078 (Fed. Cir. 1983)); Gargoyles, Inc. v. United States, 37 Fed. Cl. at 103. "Where an established royalty rate for patented inventions is shown to exist, that rate will usually be adopted as the best measure of reasonable and entire compensation." Tektronix, Inc. v. United States, 552 F.2d at 347; see Calhoun v. United States, 197 Ct. Cl. 41, 453 F.2d 1385, 1393 (Ct. Cl. 1972); Gargoyles, Inc. v. United States, 37 Fed. Cl. at 103. A court may, for example, [**36] adopt a royalty rate if a substantial number of licensees in a relevant market have considered it reasonable. See Rude v. Westcott, 130 U.S. 152, 165, 32 L. Ed. 888, 9 S. Ct. 463 (1889). [HN8] Without an established royalty rate, a court will retroactively construct a hypothetical "arms-length" negotiation between a willing licensor and a willing licensee to determine the royalty rate upon which the parties would have agreed. TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 898-901 (Fed. Cir.), cert. denied, 479 U.S. 852, 93 L. Ed. 2d 117, 107 S. Ct. 183 (1986); Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d at 1078; Brunswick Corp. v. United States, 36 Fed. Cl. at 209. [HN9] The hypothetical negotiation is considered to have taken place on the date of first infringement by the government, Minco, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109, 1119 (Fed. Cir. 1996), because "just compensation is the value of the property taken at the time of the taking." Brooks-Scanlon Corp. v. United States, 265 U.S. 106, 123, 68 L. Ed. 934, 44 S. Ct. 471 (1924). However, in order to ensure that a plaintiff receives full compensation, the Court of Appeals for the Federal Circuit has held [**37] that a court also properly may consider events which occurred, and facts which were known, after the original infringement: The [hypothetical negotiation] methodology encompasses fantasy and flexibility; fantasy because it requires a court to imagine what warring parties would have agreed to as willing negotiators; flexibility because it speaks of negotiations as of the time infringement began, yet permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators. Fromson v. Western Litho Plate and Supply Co., 853 F.2d at 1575 (footnote omitted); see Sinclair Ref. Co. v. Jenkins Petroleum Co., 289 U.S. 689, 698-99, 77 L. Ed. 1449, 53 S. Ct. 736 (1933) (referring to later experiences as a "book of wisdom" which can correct uncertainties present at the time of negotiation); Dow Chem. Co. v. United States, 36 Fed. Cl. at 20. [HN10] Consideration of