86. ‘Knock-Off’ Royalty Payments

Makers of ‘knock-off’ products (products that look or function too much like patent-protected products) could be taken to a government product pricing court. Such a court would determine that the ‘knock-off’ product is a certain percentage like the patent-protected product. Generally, cases in which a ‘knock-off’ product’s similarity is less than 40% would be considered too unrelated and should not require payment to a patent holder. However, in cases where the courts determine that a ‘knock-off’ product is sufficiently similar to a patent protected product, a special formula should be used to determine the actual amount of compensation to the patent holder. The ‘knock-off’ product’s ‘similarity percentage’ would be multiplied with the current year’s percentage rate that the original product’s patent entitles to the patent holder. (Please see previous point, “Patent Protection Limitations and Compensation Schedules” for details.)

For example, let’s assume a ‘knock-off’ product is considered by the courts to be 75% similar to an original product protected by a 20-year patent which specifies simple yearly decreases of 5 percentage points. Let’s assume that the ‘knock-off’ product appeared on the market within the same year that the patent was issued for the original product. In such a scenario, 100% of total revenues generated by a patent protected product would naturally go to the patent holder during the first year, but only 75% of the revenues generated by this ‘knock-off’ product would go to the patent holder during the first year. If the patent were in its 5th year, the patent holder would normally be entitled to 80% of all the revenues generated by the patent protected product, but because this ‘knock-off’ product is only 75% similar to the patent protected product, only 60% (75% of the 80% compensation rate) of revenues is due to the patent holder as royalties. Sufficiently similar ‘knock-off’ products that enter into the market in any year during the life of the relevant patent, would be required to follow these same rules and the schedule stated in the original product’s patent.

If a ‘knock-off’ product dramatically increases the marketability of the product compared to the original patent protected product, the courts could perhaps reward the ‘knock-off’ maker by requiring lower payments (to the tune of several percentage points) to the original product’s patent holder.


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