2007 Patent Reform: Proposed Amendments on Damages

By Professor Amy Landers

The proposed 2007 Patent Reform Act (the “Leahy-Berman bill”)[1] details modifications to 35 USC § 284 that will most certainly reduce many patent infringement damages awards. Three portions of the Leahy-Berman bill concern monetary compensation: First, the bill seeks to limit reasonable royalty damages to the inventive aspects of the claim. Second, the bill restricts the use of the entire market value rule. Third, the bill expressly confirms a fact finder’s ability to rely on certain types of evidence to measure compensatory harm.[2]

Reasonable Royalty: Relationship to Contribution over the Prior Art and Consideration of Relevant Factors.

Perhaps the most striking change in the Leahy-Berman bill is a proposed limitation to reasonable royalty recovery. Under current law, a reasonable royalty is calculated by envisioning the result of the parties’ hypothetical negotiation for a license to the claimed invention at the time infringement began.[3] This determination is made by a fact finder (whether judge or jury) and is guided by the application of the Georgia Pacific fifteen-factor test.[4]

Current patent law permits a reasonable royalty calculation for use made of “the invention”—that is, an infringed claim. Of course, few--if any--patent claims are entirely novel. Most claims are an improvement over the prior art. Further, combination claims aggregate prior art elements in a novel way, or else a combination of novel elements together with prior art elements.

The Leahy-Berman bill specifically requires a limit on reasonable royalty recovery to the “economic value properly attributable to patent’s specific contributions over the prior art,”—that is, the inventive portion of the claim. Such an aggressive limit on monetary relief for patent infringement has not been apparent in the case law for decades.[5] A statement by Sen. Leahy (link) explains that this limitation is intended to provide for compensation solely for “the truly new ‘thing’ that the patent reflects,” in response to a concern that “litigation has not reliably produced damages awards in infringement cases that correspond to the value of the infringed patent.” This reasonable royalty limitation, which is likely to affect patents in all technology sectors, promises to be controversial.

Additionally, the Leahy-Berman bill asks trial courts to exercise more control over the fact finder’s consideration of the reasonable royalty and to create a more defined record for appellate review. Under current law, a typical reasonable royalty jury instruction lists all fifteen Georgia Pacific factors although fewer than all factors may be relevant in any particular case.[6] Further, a verdict form asks a jury to set a royalty figure, but jurors are rarely asked to create a record as to how their result was reached.

Under the Leahy-Berman bill, the trial court must “identify all factors relevant to the determination of a reasonable royalty” and then the fact finders are limited to consider only the factors identified by the district court in awarding a reasonable royalty. As an example of this provision in operation, a trial court might make an initial determination as to whether derivative or convoyed sales exist, such that the sixth factor of the Georgia Pacific test is relevant. If no such sales are in evidence, under the Leahy-Berman bill a trial court must preclude a jury’s consideration of this sixth factor.

Significantly, the proposed legislation’s use of the word “factors” does not appear to be limited to the Georgia Pacific factors specifically and presumably would apply to any factor that might be considered, including those listed in proposed section 284(a)(4).

Apportionment: The Entire Market Value Rule

As a general rule, patent damages are linked to the subject matter of the invention.[7] In some cases, an infringed claim relates to only one part of an entire multi-functional infringing product or system. In those circumstances, apportionment is the general rule—that is, damages are based on either lost profits or reasonable royalty apportioned for the infringing part as distinct from the remainder of a device that is outside the infringed claim’s scope. For example, damages for a claim directed to an improved windshield wiper are calculated based on the value of the infringing wiper, and not the sales price of the entire car into which the wiper is installed.

This general rule is modified under the judicially created “entire market value rule.” Where the entire market value rule applies, a patentee may recover damages based on the value of an entire apparatus or system that contains both infringing and additional, unpatented features.[8]

In “Let the Games Begin, Incentives To Innovation In The New Economy Of Intellectual Property Law,” I examine how the entire market value rule has recently received expansive application. Historically, the entire market value rule allowed recovery based on the price of entire product only where the “entire value” of the product was attributable to the infringing feature.[9] However, more recently, Federal Circuit cases more broadly apply the entire market value rule so long as there is a “functional relationship” between the infringing and the non-infringing components.[10] Further, patentees can recover for sales of non-infringing components where the patentee demonstrates a “reasonable probability” of selling the non-infringing components with the infringing part.[11]

An example of this expansive application of the entire market value rule can be seen in Lucent v. Newbridge Networks[12], where the district court determined that the jury’s addition of two software programs were properly included in the royalty base even where those programs were non-infringing, were not physically part of the infringing device and were not necessary for the device to operate. More recently, the Alcatel-Lucent verdict against Microsoft concerning the Windows® Media Player was reportedly calculated based on the average cost of a personal computer, and not limited to Microsoft’s Media Player or even Windows®.[13]

The Leahy-Berman bill provides an explicit, definitional standard for the application of the entire market value rule by requiring the patentee to show that the claim’s contribution is “the predominant basis for market demand” of an entire product or process. This standard reigns in the current expansive articulations of the entire market value rule by requiring a patentee to demonstrate that an infringing feature is the single primary reason users select an infringing product or process. If enacted, this subsection will have the overall effect of limiting damages to a particular infringing piece of a multifunctional product or process for both lost profits and reasonable royalty awards.

An open question exists as to the interaction between the proposed subsection (a)(2) governing reasonable royalties and (a)(3) governing the entire market value rule. Specifically, proposed subsection (a)(2) precludes recovery for the value of unpatented features of an infringing product or process. On the other hand, proposed subsection (a)(3) arguably permits such compensation where the inventive element is the “predominant basis for market demand.”

Marketplace Licensing and “Other Factors”.

The Leahy-Berman bill proposes one additional change, which appears of minor importance. That is, the bill expressly states that a fact finder may consider “the terms of a non-exclusive marketplace licensing of the invention” and any “other relevant factors” under the law in the damages determination. This subsection appears to be a codification of the existing law, which permits district courts wide discretion in considering evidence relevant to the damages determination.

Conclusion

As a whole, the Leahy-Berman bill represents an effort to refine and narrow available damages for patent infringement by building on an existing body of case law. The proposed changes to patent damages will undoubtedly present some challenging questions if adopted into law.

Two of the proposed sections require apportionment of inventive claimed matter from that outside the claim scope. The difficulty presented is that apportionment determinations can be difficult to implement. Perhaps the best evidence of this is the pre-1948 law, which relied on apportionment for calculating lost profits and had been described as a “complete failure of justice in almost every case in which supposed profits are recovered or recoverable” due to the time and complexity involved.[14]

Further, the Leahy-Berman bill has the potential for significant consequences for the licensing value of patents more generally. That is, to the extent that licensing determinations may reflect of potential results at trial, one might be expect that licensing negotiations will account for lowered damages the bill is passed into law. 2001).

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Cite as: Amy Landers, 2007 Patent Reform: Proposed Amendments on Damages, PATENTLY-O, April 29, 2007, http://www.patentlyo.com/patent/2007/04/2007_patent_ref.html.

[1] The proposed amendments in both Senate (S. 1145) and the House (H.R. 1908) that relate to monetary relief are identically worded.
[2] Willfulness is not treated here.
[3] Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1550 (Fed. Cir. 1995).
[4] Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d Cir.), cert. denied, 404 U.S. 870 (1971).
[5] See, e.g., Stearns-Roger Mfg. Co. v. Ruth, 87 F.2d 35, 39 (10th Cir. 1936) (“If the case is such that it is practicable for the patentee to apportion the profits between what is new and what is old, he should do so or fail.”).
[6] State Contracting & Engineering Corp. v. Condotte America, Inc., 346 F.3d 1057, 1072 (Fed. Cir. 2003).
[7] Riles v. Shell Exploration and Production Co., 298 F.3d 1302, 1312 (Fed. Cir. 2002).
[8] See, e.g., Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995).
[9] Garretson v. Clark, 111 U.S. 120, 121-22 (1884) (emphasis added).
[10] Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1550 (Fed. Cir. 1995).
[11] Paper Converting Machine Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984).
[12] Lucent Technologies, Inc. v. Newbridge Networks, Corp.., 168 F. Supp. 2d 181 (D. Del. 2001).
[13] Saul Hansell, “MP3 Patents in Upheaval After Verdict,” The New York Times Online (2/23/07), available at http://www.nytimes.com/2007/02/23/technology/23patent.html?ex=1177819200&en=2212a19b8d0a207c&ei=5070.
[14] Recovery in Patent Infringement Suits: Hearing on 5231 Before the Comm. on Patents of the H. of Rep., 79th Cong. (1946) reprinted in Vincent Tassinari, Compiled Legislative History of 35 U.S.C. § 284: The Patent Compensation Statute, 31 UWLA L. REV. 45, 55-56 (2000) (Rep. Robert K. Henry, Member, Congress, describing apportionment proceedings and stating, “[t]he result is that there is a complete failure of justice in almost every case in which supposed profits are recovered or recoverable”).

Comments

[me]

OK - so we are going to get a higher obviousness standard meaning there will be fewer patents, and more baseless rejections. Who needs a publication, or motivation to combine?

Then - we are going to get fewer RCE's to deal with the rejections above.

Finally - if we survive and get a patent issued, we get a damage equation designed for the infringer.

Have I missed anything? Does it strike anyone that doing all these at the same time is a bit much for the primary driver of innovation in the country? Shouldn't we select one, try it out, and see how it works before we make patents worthless?

[anoynmousAgent]

Yeah - you have missed something.
The compulsory e-bay license which takes away your injunction, FORCING the patentee to accept the lousy license terms proposed in this bill.

[Richard Cauley]

I think, as Prof. Landers pointed out in her excellent article, that the Patent Reform Act will primarily require the courts and juries to follow the existing case law on damages, rather than actually changing the law itself. I doubt, however, that many judges will choose to include only a subset of the Georgia-Pacific factors in the jury instructions even if this bill passes in its present form, as that will be a fertile minefield for reversal. I think at most, there will be another jury instruction pulling the language right out of the statute.

Frankly, I don't think we can depend on the courts to fix the almost complete failure to pay attention to the economics of patent damages -- even with the Congress's whip on ther backs -- as long as the patent litigators continue to give the matter short shrift.

[me]

Outstanding analysis Professor, BTW.

[solo-inventor]

"Designed for the infringer...."

Exactly. This reform serves but to prioritize misappropriation over innovation.

The "compulsory license" comment is also right on. Without injunctive relief, the inventor will NEVER get full market value of the invention.

[clifford]

Nice work prof, finally someone raising footnote 14 - 'apportionment.' Been there done that - it don't and won't work. BTW, why is it that compulsory license is the alturnative in "equity" for refusing to grant the injunction? Unjust enrichment, constructive trust and the like - at least sound in traditional equity. That would appear to be the equitable view sans the injunction (decree economic relief sufficient to halt the bad act) not fashion an license for a reasonable royalty - which would apparently by opeartion leave the bad actor with sufficent profits to continue the infrining acts. In other words, force a license between two unwilling parties is equitable to whom? I guess all on the side of tech transfer will now provide a force major clause that the license is exclusive unless compelled by a court to license a third party and then we get x ?? The govn't already has march in rights and march in rights (see the radio patents) have been issued in the past. Now we have case by case march in rights by big business to all the small business ip for what end? To advance some overarching policy of industrialization and utlization (optimal?). Sounds like the ip policy of the third riech (not joking here).

[Inventor]

Issue previously posed but not resolved:

“• Limitation of damages to only the economic value of the improvement as“ compared to the prior-art”

Arguendo:
(A) A lone inventor patented an Improved Collision Avoidance, ICA, system for a car that could be incorporated into a car on a production line for $50.
(B) Patent Pirate CarMaker Co. ripped off the inventor and incorporated ICA into its new models and did not offer ICA as an add-on for older models.
(C) Car buyers flock to CarMaker’s showrooms and buy the new models in droves -- allegedly because of the new ICA safety feature, but not provable -- and the profit per new model to CarMaker is $5000.

Question:
If lone inventor sues CarMaker and prevails, what damages would he be entitled to under the Patent Reform Act of 2007?
Of course, after the eBay debacle, he’s not entitled to an injunction, so he’d be stuck (pun intended) with the limitation imposed under the Patent Reform Act of 2007.

A new question: Given the USSC's eBay and the just-down KSR ruling, what can the community do to regain any semblance of patent rights?

[Herb Glum]

In a case I was tracking a few years ago, infringing electronic ICs were sold by the infringer at cost ($5-7), if the buyer would agree to purchase all of their related ICs, including $3 ICs. Typically a dozen or more highly profitable $3 ICs were sold along with a single $5 IC. This was a classic razor blade loss leader marketing scenario. Overall the infringer made huge profits on the total sales contracts but argued that the profits attributed to the infringing ICs were minuscule. The jury however saw through the infringer's arguments and awarded significant damages. My point here is that given the opportunities, juries can sort out and award proper amount of damages if left to consider all of the relevant evidence. The latest round of patent (bashing) "reforms" appears to me to be designed to prevent juries from seeing all the pertinent evidence so they can do their job.

[Inventor]

Thank you Herb, Good answer, & Hear, hear

[solo-inventor]

The fundamental logical error in the proposed "reforms" is this: an infringer, once put on notice, can always CHOOSE not to infringe. He, she, or it can discontinue the offending practice or product.

But the infringee has NO CHOICE: thanks to the eBay ruling, and even more so under the "reforms", the infringee just gets to sit back and watch others profit from his or her work.

[Derrick and the Dominoes]

That's it. I can't take it any more. Now law professors are beautiful and smart. Man I got into this business too soon. Do they have an LLM program at UOP that Ms. Landers teaches?

[Augie Rakow]

Any thoughts why the Vermont senator cares so much about patent litigation?

[Derrick and the Dominoes]

I don't know maybe if you read his press release you will notice that he touts a Vermont resident as being issued the first patent and alleges that Vermont still counts in IP, because there is a huge IBM plant there. Note the concept of the Senator being aligned with IBM . . . hmmmm, could be why the little guy is getting tampled. As a side note, I believe it was IBM who assisted the Nazis in categorizing individuals based upon their religions by selling them punch card computers.

[Russell Parr]

Individual inventors are not the only ones that will be trampled by the Patent Reform Act of 2007. Since most patent infringment cases are between corporation, inventive corporations will also be greatly injured as there patented inventions are inexpensively misappropriated. Isn't it likely that coporations will lobby against this Bill to protect the proprietary advantages their patents provide?
I also wish the authors of this Bill would consider how apportionment will be implemented. Wouldn't it be nice to think before writing Bills?