JOHN W. SCHLICHER

PATENTS, PATENT LITIGATION, PATENT DISPUTE RESOLUTION AND

SETTLEMENT, LICENSING, ANTITRUST, LAW AND ECONOMICS

 

 

 

John W. Schlicher, Patent Law: Legal and Economic Principles, Thomson West (1992, Second Edition 2003)

 

Damages, Injunctions, Exhaustion

 

Federal Circuit Adopts the Market Value and Marginal Value Approaches to Damages - Grain Processing 

 

In 1992, Schlicher said that the damage measures should be designed to determine the market value of an invention, and should measure market value by the difference between the profits available from exclusive use of that invention and the profits available from use of the next best, available noninfringing substitute invention.  In 1995, Judge Frank Easterbrook (sitting by designation in a district court) applied this approach.  Grain Processing Corp. v. American Maize-Products Co., 893 F.Supp. 1386 (N.D. Ind. 1995).  Schlicher highlighted this development in the 1996 supplement to his book.  In 1999, the Court of Appeals for the Federal Circuit relied on the author’s analysis and adopted these concepts as the controlling standard for determining lost profits in Grain Processing Corp. v. American Maize-Products Company, 185 F.3d 1341, 1351 (Fed. Cir. 1999)(Rader, J.) (“Moreover, only by comparing the patented invention to its next best available alternative(s) - regardless of whether the alternative(s) were actually produced and sold during the infringement - can the court discern the market value of the patent owner's exclusive right, and therefore his expected profit or reward, had the infringer's activities not prevented him from taking full economic advantage of this right. … John W. Schlicher, Patent Law: Legal and Economic Principles §.05[2][1] (1997).”).

 

Federal Circuit Corrects Defects in Evaluating the “But For” Market Conditions on Which Lost Profits Are Calculated – Mahurkar 

 

In 1992, Schlicher pointed out several other deficiencies in the way damages were determined.  Among others, he wrote that where infringement reduced price, the patent owner’s lost profits should be measured by the lower quantities that would have prevailed at the higher price, not the larger quantities that were sold (in the case of price erosion damages) or would have been sold (in the case of lost sales) at historical lower prices.  Judge Easterbrook applied this approach in Matter of Mahurkar Double Lumen Litigation, 831 F.Supp. 1354, 1383-94 (N.D.Ill. 1993)(“The correct way to compensate Firm #1 is to award it $3 times the number of units it would have sold had there been no infringement - or to put it differently, the monopoly output times the monopoly profit, a profit made lawful by the patent.  The patent holder does not receive the monopoly price times the competitive output. See generally John W. Schlicher, Patent Law: Legal and Economic Principles § 9.05 (1992).”).  The Court of Appeals affirmed.  71 F.3d 1573 (Fed. Cir. 1995).  In 2001, in Crystal Semiconductor Corp. v. TriTech Microelectronics Int’l, Inc., 246 F.3d 1336, 1360 (Fed. Cir. 2001), the Court of Appeals for the Federal Circuit held that the patent owner’s lost profits must be measured based on the higher prices and lower quantities that would have prevailed absent infringement.

 

Federal Circuit Refines the Approach to Identifying the Effect of Noninfringing Substitutes on Damages – Bic 

 

In 1992, he said lost profits damages may not be determined sensibly without considering the relative prices of the patented and noninfringing substitute products.  In 1993, the Federal Circuit said this was correct, and relative prices must be considered. Bic Leisure Prods. v. Windsurfing Int’l, 1 F.3d 1214, 1218-19 (Fed. Cir. 1993).

 

Courts have Noted Schlicher’s Explanation of Why Injunctions Are the Preferred Remedy in Patent Actions 

 

In 1992, Schlicher explained why injunctions are the preferred remedy in patent actions, and some courts have noted that explanation.  See Matter of Mahurkar Double Lumen Litigation, 831 F. Supp. 1354, 1384 (N.D.Ill. 1993)(Easterbrook, J.) ), aff’d, 71 F.3d 1573 (Fed. Cir. 1995)(“A patent conveys the right to exclude others from making, using, or selling the invention, and this right implies the propriety of an injunction enforcing exclusivity.   The injunction creates a property right and leads to negotiations between the parties.   A private outcome of these negotiations--whether they end in a license at a particular royalty or in the exclusion of an infringer from the market--is much preferable to a judicial guesstimate about what a royalty should be.   The actual market beats judicial attempts to mimic the market every time, making injunctions the normal and preferred remedy.   See Schlicher, Patent Law:  Legal and Economic Principles §§ 1.14, 9.03[1].”).

 

Federal Circuit Recognizes Limits to the Exhaustion Doctrine – Mallinckrodt 

 

In 1992, Schlicher author wrote (contrary to the generally accepted wisdom) that the sale of a patented product did not and should not always exhaust patent rights.  He said the issue should be governed by the approach described in the Supreme Court’s decision in General Talking Pictures.  Later that year, the Court of Appeals defined the exhaustion doctrine in this manner.  Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 701 (Fed. Cir. 1992).  See also Intel Corp. v. ULSI System Technology, Inc., 995F.2d 1566, 1571 (Fed. Cir. 1993) (Plager, J. dissenting)(“The principle of ‘first sale,’ simply stated, is that when a patent owner (or the owner's authorized licensee) sells to another a product which incorporates the patented invention, the other may convey the product to third parties free of any claim of patent infringement. See John W. Schlicher, Patent Law:  Legal and Economic Principles § 8.05[1] (1992).  We are not here concerned with the question of whether and to what extent a patent owner may impose conditions on the sale which bind future transferees.  See id.”).