JOHN W. SCHLICHER

PATENTS, PATENT LITIGATION, PATENT DISPUTE RESOLUTION AND

SETTLEMENT, LICENSING, ANTITRUST, LAW AND ECONOMICS

 

 

 

John W. Schlicher,  “Patent Damages, the Patent Reform Act and Better Alternatives for the Courts and Congress,” 91 Journal of the Patent and Trademark Office Society 19 (2009)(Article) (Table of Contents)

Note: After this paper appeared, the Patent Reform Acts were changed to remove the amendments on damages discussed in the paper.

Introduction and Summary (excerpts)

 

This paper offers comments on the amendments to section 284 of the Patent Reform Act, Senate bill 1145, January 24, 2008 version.  …  For reasons discussed in this paper, Congress should not enact these amendments in this form.

Section 284 provides damages for patent infringement.  There are many problems with the law of patent damages.  The bill addresses four problems.  I discuss three of them.  I ignore the fourth, patent marking under section 287.

The Problems with Reasonable Royalty Damages.  The main premise of these amendments is that reasonable royalty damage awards frequently exceed the economic value of patented inventions.  (sections II and III)  The amendments address two problems with reasonable royalty damage awards.  One is that juries are not given useful guidance on how to apply the so-called Georgia-Pacific factors and the entire market value rule.  The other problem is that damages are too large in many cases because damages are determined by multiplying an infringer’s total revenue from sales of some product by some rate (such as X percent) and the infringed patent did not make available an entirely new product.  The invention merely provided some addition or modification to an existing product. ...

The Proposed Solution.  In response, the proposed amendments require that a judge pick one of three “methods” or theories by which reasonable royalty damages may be determined.  (section IV.A.)

Entire Market Value Method.  One “method” is the entire market value rule.  S. 1145, section 284(c)(1)(A).  The entire market value rule is not and should not be a separate theory of reasonable royalty damages.  (section IV.B.) … Rather than correcting that error, the amendments may be understood to require it. … There are also several versions of the entire market value rule.  … The version of the rule the amendments would require contributes to this problem and would likely prevent the courts from employing a better approach.

The Valuation Calculation Method.  Another optional theory is what the bill calls the “valuation calculation” rule.  S. 1145, section 284(c)(1)(C).  This rule may be applied if a judge decides the entire market value theory does not.  (section IV.C.)  When applicable, the amendments require that “…the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of economic value of the infringing product or process properly attributable to the claimed invention’s specific contribution over the prior art.”  If this language means damages are the portion of the economic value of the infringing product properly attributable to the patented invention, the amendment is sensible in most situations, assuming the courts identify that portion of economic value in the proper way.  The bill and the report do not identify the proper way to do so.  There is a way well known to the law that I describe in a moment.  For reasons I will discuss later, the courts are likely to understand this language to have a different meaning  …. Given these issues, the ultimate effect of this feature of the amendments on total damages is unclear and, like the entire market value amendment, poses an obstacle to a better approach.

A Better Approach.  The perceived problems may be solved by using a principle the courts have recognized and applied in the context of lost profits, and have applied and perhaps not always recognized in the context of reasonable royalty damages.  (section IV.F.)  With some refinements discussed later, reasonable royalty damages should be the difference between the net profits the infringer earned from sales of the infringing product and net profits it could have earned using the next best non-infringing substitute available to it during the period of infringement.  The economic value of the invention is this difference in profits. …   This approach is entirely consistent with the origins and purpose of reasonable royalty damages.  This approach is one feature of the existing law on reasonable royalty damages and fails to lead to sensible damages awards in all cases because other features of the law obfuscate its significance.

Established Royalty.  The third optional damages theory is the established royalty rule.  S. 1145, section 284(c)(1)(B).  The law now permits damages to be measured in that way.  (section IV.E.)  The amendments change the law by requiring that this theory take precedence over the valuation calculation rule.  Damage awards should seldom be based on an established royalty.  Damages measured in that way are usually too low.  As importantly, if an established royalty is a preferred method for determining damages (as the amendments would require), there will be less licensing and more litigation in the future. …

The Problem of Increased Damages.  The amendments also address the problem of increased damages.  (section V.)

Other Problems with Patent Damages.  The law has several other features that make it difficult for damage awards to approximate the economic value of patented inventions consistently.  Some of them tend to make awards too large and others too small.  The net effect is that damages may approximate the economic value of patented inventions in some instances and not come close in others.  The amendments do not address these other problems.  (section VI.)

The Desirability and Substance of Legislation.  Having criticized this bill, I should offer a better alternative.  It is difficult to write an amendment to section 284 having clear concise language that would correct the major defects and leave alone the sensible features of current law.  I have attempted to write such an amendment and a brief explanation of what that amendment is intended to do.  (section VII.)  However, at present, I would leave the problems to the federal courts.  The courts have the power to correct the problems within the spacious charter of section 284.  If the courts prove unable to do so after Congress has indicated its concern, Congress should then act.