JOHN W. SCHLICHER

PATENTS, PATENT LITIGATION, PATENT DISPUTE RESOLUTION AND

SETTLEMENT, LICENSING, ANTITRUST, LAW AND ECONOMICS

 

 

John W. Schlicher, “Measuring Patent Damages by the Market Value of Inventions Given Available Noninfringing Substitute Technology – The Grain Processing, Rite-Hite and Aro Rules,” 82 Journal of the Patent and Trademark Office Society 503 (2000) (Article)

 

Introduction

 

I. Introducution.  In late 1999, the Court of Appeals in Grain Processing affirmed a decision by a District Court applying an old but largely ignored standard for measuring damages for patent infringement.  The old principle is that patent damages should award patent owners the market values or economic benefits of the inventions that they were unable to capture due to infringement.  The principle applies to measuring damages by lost profits and by a reasonable royalty.

Grain Processing means that, for purposes of determining a patent owner’s lost profits, the market value of any patented invention is the difference between the profits that would be made by a patent owner from use of that invention in the manner determined by the patent owner in the absence of any infringement, and the profits that would be made by the patent owner if others (including the infringer) used the next most valuable available substitute technology that would not infringe any patents of that patent owner.  The rule applies if the substitute technology was available during the damage period.  The rule applies even if this infringer and others were not using the substitute technology during the infringement period.  When determined in that way, the market value of any particular invention may account for all, part or none of the patent owner’s lost profits.  For purposes of determining a reasonable royalty, the market value of any invention is the difference between the profits available from use of that invention by the patent owner or, if more efficient, by the infringer, and the profits available to the owner or infringer from use of the next best available substitute technology that would not infringe any patent of that patent owner.  This paper describes this development, its historical background, the issues it raises, and its economic significance.  My conclusion is that this rule brings patent damages more in line with sensible patent policy and economic reality.  Grain Processing is an application of Rite-Hite and Aro.  This paper also comments on what this decision reveals about the shortcomings of the Rite-Hite and Aro standards.

 

Table of Contents

 

 

I.    Introduction

II.   The Grain Processing Rule

III.  Patent Damages in the Past

IV.  The Facts and Language of the Grain Processing Decisions

V.   The Legal Issues Arising from Grain Processing

A.       The “But For” Causation Issue

B.        The “Could Have” Or “Would Have” Issue

C.        The “Demand for the Patented Product” Issue

D.       An Illustration of the Demand for a Product and the Demand for an Invention

E.        The Less Desirable Alternative Issue

F.        The Entire Market Value Rule Issue

G. The Patent Owner’s Alternatives Issue

H.       The Reasonable Royalty Issue

 

VI.      The Implications of Grain Processing for Rite-Hite

VII.     The Implications of Grain Processing for Aro

VIII.    The Economic Effects of the Grain Processing Rule