JOHN W. SCHLICHER

PATENTS, PATENT LITIGATION, PATENT DISPUTE RESOLUTION AND

SETTLEMENT, LICENSING, ANTITRUST, LAW AND ECONOMICS

 

 

Comments for FTC Hearings on Damages, Injunctions and the IP Marketplace

 

In May, 2009, the Federal Trade Commission held hearings on a number of patent issues.  Mr. Schlicher testified at those hearings and submitted written comments on patent damages, permanent injunctions, the Supreme Court’s decisions MedImmune v. Genentech and Quanta v. LG, the effects of uncertainty, and “transparency.”   This is parts of the summary to his comments.

I.  Summary

B.  Permanent Injunctions

The notice mentions the Supreme Court’s decision eBay and asks for comments about when it makes economic sense for a court to issue a permanent injunction and what a court should do when it does not make sense.  The eBay decision has caused confusion about how judges are to decide whether to issue permanent injunctions, particularly in cases involving a patent owner which exploits an invention entirely or in part by licensing. ...  Subject to a special class of situations, the answer is that a patent owner’s willingness to license some infringer is not a reason to deny an injunction.  It is the reason to grant an injunction. ***

The law should be that an injunction is the preferred remedy against patent infringement.  There are five reasons.  I mentioned one, to enable inventions to be used in ways and at prices that reflect private decisions and market transactions.  The others are that injunctions provide patent owners with control over use of inventions (so that inventions have greater value than they otherwise would), reduce the resources wasted due to infringement, reduce litigation costs, and limit the effect of deficiencies in current damages law.  ***

The difficult issue is whether an injunction should be denied where it is clear that it is in the patent owner’s interest to grant the infringer a license and in the infringer’s interest to operate under a license and there is good reason to believe an injunction would distort the amount of the royalty in an undesirable way.  The potential distortion is that an injunction would permit a patent owner to negotiate a higher royalty due to an infringer’s product-specific investments and this would adversely impact the incentives of patent owners and producers in the future.  I do not believe there is an easy answer to this problem.  At present, I suggest the following rule.

An injunction should be granted unless: (1) it is without doubt in the patent owner’s business interest to grant the infringer a license and in the infringer’s interest to accept a license at a payment rate equal the economic value of the invention when used by the infringer and there is no way the patent owner could make more money if it or someone else used the invention and the infringer did not; (2) the infringer made large investments because it was necessary to do so to produce any product and not merely to produce the patented product, those investments are so large that they must be recovered (with an adequate return on investment) from sales revenue over a significant period of time, and those investments are large relative to the value of the patented invention; (3) it is clear that the payments made to the patent owner during the period no injunction is in place will be equal to the full economic value of the invention at the time of sales (and not based on the damages award rate); (4) there is no evidence or reason to believe the infringer made the investments to prevent an injunction; and (5) the period of denial is no longer than absolutely necessary.  The same general approach could apply to the related problem of products subject to large demand side scale economies.

C.  Damages

Damages are an issue due to the patent reform bills in the Congress.  In my view, the proposed legislation on damages in the Patent Reform Act is undesirable.  … While there are occasionally cases in which it seems plain that the damage awards are larger than the economic value of some invention, it is not possible say that is happening in a significant percentage of cases.  That said, much of the law on patent damages obscures the effort to match damage awards to the economic values of inventions.  Much of the law governing compensation not less than a reasonable royalty is almost useless in arriving at an award in a particular case that approximates the true economic value of an invention that a patent infringer captured or the patent owner lost as a consequence of the infringement. ***

D.  Supreme Court - MedImmune v. Genentech and Quanta v. LG

The Supreme Court has rendered two decisions in recent years that directly affect the value of patents.  The ultimate effects of the first of those decisions, MedImmune v. Genentech, are unclear because the reach of that decision is unclear. … The Supreme Court decision’s is simply the latest in a rather sad saga that began in 1969.  I believe legislation should be introduced to deal with the legal rules that constrain the ability of patent owners and their licensees to agree to and enforce terms regarding royalty payments and the litigation regarding the validity of patents that would reduce uncertainty about whether licensees will pay those royalties and reduce the litigation costs that the parties must bear under licenses.

The Supreme Court’s other decision is Quanta v. LG.  The Supreme Court did not affirm the exhaustion doctrine.  The Court changed the exhaustion doctrine and the relationship between the exhaustion doctrine and implied license doctrine.  The Supreme Court did not find that exhaustion applied where a patent license purported to limit the rights transferred to purchasers of a patented product.  The Supreme Court found that exhaustion applied in that case because the provision of the license that said something about the rights of a purchaser also said that the provision did not operate to limit the operation of the exhaustion doctrine.  …  One novel and unfortunate feature of this decision is that the Court found that exhaustion applied to the sale of certain unpatented products and therefore effectively eliminated the implied licensed doctrine.  Another novel and unfortunate feature of this decision is the Court’s pronouncement that all post-sale restrictions were invalid.  ...