Patent Reform 2009: Damages

The most contentious portion of the Patent Reform Act of 2009 is the damages provision. The current damages statute gives little guidance to a court. Damages must be "adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer." 35 U.S.C. §284. The Court may "increase the damages up to three times the amount found or assessed." Id. The courts have given some flesh to the rough skeleton created by these statutes. One construct is the hypothetical negotiation – asking the counterfactual question of what licensing scheme would these dueling foes have agreed to if they had actually come to a licensing agreement. The Georgia Pacific factors guide the process of deternining a reasonable royalty. In some cases, courts allow a patentee to recover lost profits.

As it turns out, the damages actually awarded in patent cases are generally thought to be much higher than negotiated license agreements.  Part of the difference stems from the reality that patent damages are awarded only on patents that are known to be valid, infringed, and enforceable, and after the risk and expense of litigation have already been taken. In ordinary license negotiations, these risks lower the potential royalty rate and – in contrast – should increased the level of compensation in post-trial damages.  There is some evidence that juries simply tend toward large damage awards.

Stacking Problem: In some technology areas – such as electronics – this creates a potential problem known as royalty stacking. Most electronics products are covered by multiple patents – often dozens of patents. CDMA2000 communication standard, for instance, reportedly invringes at least 924 patents. [LINK] When each patentee is awarded a 5% royalty, it does not take long before the entire revenue is taken just to pay for intellectual property rights. If everyone has blocking rights then no business can get done, and we see the tragedy of the anti-commons. Of course, stacking is only a problem in theory. CDMA2000 is a standard actually used around the world. Producers are making (some) money. Multiple patents covering products have causes prices to be raised, but it is not clear than any market has been destroyed or even that the royalty payments outway the benefit of the innovation.

Uncertainty Problem: Jury verdicts are quite unpredictable, and because the royalty rules are so loose, damages appeals are rarely successful.

The new legislation appears to take on these problems in a way to (1) reduce the average damage award; (2) make damage awards more rational and predictable; and (3) make damages judgment more subject to appellate review.

The practical approach of the legislation is to create a “standard for calculating reasonable royalty” which require a determination of the “specific contribution over the prior art” to determine damages. Some courts already follow the rules set out in the proposed legislation. Thus, legislation advocates may refer to the damages reforms as simply a clarification that limits the actions of rogue courts.

The proposed text reads as follows:

35 USC 284(c)(1) IN GENERAL.-The court shall determine, based on the facts of the case and after adducing any further evidence the court deems necessary, which of the following methods shall be used by the court or the jury in calculating a reasonable royalty pursuant to subsection (a). The court shall also identify the factors that are relevant to the determination of a reasonable royalty, and the court or jury, as the case may be, shall consider only those factors in making such determination.

''(A) ENTIRE MARKET VALUE.-Upon a showing to the satisfaction of the court that the claimed invention's specific contribution over the prior art is the predominant basis for market demand for an infringing product or process, damages may be based upon the entire market value of that infringing product or process.

''(B) ESTABLISHED ROYALTY BASED ON MARKETPLACE LICENSING.-Upon a showing to the satisfaction of the court that the claimed invention has been the subject of a nonexclusive license for the use made of the invention by the infringer, to a number of persons sufficient to indicate a general marketplace recognition of the reasonableness of the licensing terms, if the license was secured prior to the filing of the case before the court, and the court determines that the infringer's use is of substantially the same scope, volume, and benefit of the rights granted under such license, damages may be determined on the basis of the terms of such license. Upon a showing to the satisfaction of the court that the claimed invention has sufficiently similar noninfringing substitutes in the relevant market, which have themselves been the subject of such nonexclusive licenses, and the court de termines that the infringer's use is of substan tially the same scope, volume, and benefit of the rights granted under such licenses, damages may be determined on the basis of the terms of such licenses. ''

(C) VALUATION CALCULATION.-Upon a determination by the court that the showings required under subparagraphs (A) and (B) have not been made, the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly at tributable to the claimed invention's specific contribution over the prior art. In the case of a combination invention whose elements are present individually in the prior art, the contribution over the prior art may include the value of the additional function resulting from the combination, as well as the enhanced value, if any, of some or all of the prior art elements as part of the combination, if the patentee demonstrates that value.

''(2) ADDITIONAL FACTORS.-Where the court determines it to be appropriate in determining a reasonable royalty under paragraph (1), the court may also consider, or direct the jury to consider, any other relevant factors under applicable law.

Notes:

• I’ll use this opportunity to plug a new book by Richard Cauley: Winning the Patent Damages Case (Oxford 2009). Great book, the only problem is the $185 price tag.
• The Bills have received numbers: H.R. 1260 is sponsored by Rep. Conyers (MI) and co-sponsored by Reps. Berman (CA), Goodlatte (VA), Jackson-Lee (TX), and Smith (TX). S. 515 is sponsored by Sen. Leahy and co-sponsored by Sens. Crapo (ID), Gillibrand (NY), Hatch (UT), Risch (ID), Schumer (NY), and Whitehouse (RI). Both Bills have been referred to their respective Judiciary Committee which are headed by the Bill sponsors.

Back Reading

• Dennis Crouch, Patent Reform Act of 2009, Patently-O (March 3, 2008).
• William Rooklidge, “Reform” of Patent Damages.
• Dennis Crouch, Patent Reform 2007: Apportionment of Damages, Patently-O (May 25, 2007).
• Amy Landers, 2007 Patent Reform: Proposed Amendments on Damages, Patently-O (April 29, 2007).

Comments

[DowCow]

"As it turns out, the damages actually awarded in patent cases are generally thought to be much higher than negotiated license agreements."

Negotiated license agreements are almost always less than the fair market value of the license. Not the other way around as Dennis claims ( that the valid, enforcable patent causes an higher licensing fee). The valid enforcable patent causes the MARKET RATE license during damage calculation NOT the other way around.

"Jury verdicts are quite unpredictable"

Yes, so lets dilute damages to prevent risk that should be present to prevent copying. OR lets make sure asserted patents are valid and fix the system. Another shot at reducing the value of ALL patents, not just those that are inappropriately asserted.

So...
1. Real Market rate is realized after litigation AND 2. Unpredictability is INCORRECTly used as justification for reducing the value of ALL patents too often.

[big hairy rat]

"it is not clear than any market has been destroyed"

The problem is not just the destruction of identifiable markets. The problem is the chilling effect that the patent system has on new developments. No rational new entrant would design a new product when they face the need to negotiate hundreds of licensing agreements before they can ever find out if there is a market for their product.

I was looking at the Innocentive page the other day. No one in their right mind would agree to the intellectual property covenants that are being demanded.

[Patent Rights Supporter]

"The new legislation appears to take on these problems in a way to (1) reduce the average damage award; (2) make damage awards more rational and predictable..." You're kidding me, right? I'm pretty darn sure that this proposed "reform" act would have the opposite effect and make damages awards completely unpredictable (other than to substantially decrease the amounts that adjudged infringers would have to pay). But don't take my word/opinion for it. Just ask Chief Judge Michel.

[BigGuy]

"Negotiated license agreements are almost always less than the fair market value of the license."

Only if you completely redefine the meaning of "fair market value," which is usually defined as what a willing buyer would pay to a willing seller, both in a free market. Your statement that a jury verdict reflects a "real" market rate is absurd. With all due respect, that is.

[BigGuy]

"The problem is not just the destruction of identifiable markets. The problem is the chilling effect that the patent system has on new developments. No rational new entrant would design a new product when they face the need to negotiate hundreds of licensing agreements before they can ever find out if there is a market for their product."

That sounds good, bhr. However, Apple and RIM are both relatively new entrants into the mobile phone space. I don't think either is irrational. All of the mobile phone standards are covered by at least dozens, and probably hundreds, of patents. Of course, they don't need "hundreds" of licensing agreements, as a majority of those patents are held by a few players, who are relatively reasonable in their licensing demands. The onesy-twosy patent owners, on the other hand...

[James Daily]

"No rational new entrant would design a new product when they face the need to negotiate hundreds of licensing agreements before they can ever find out if there is a market for their product."

Actually, individuals and corporations rarely negotiate licensing agreements. Instead, they simply purchase goods and services that include an implied license.

For example, if I want to develop a new electronic widget, I don't have to negotiate a patent license from Intel. Instead, I just buy CPUs and other chips off the shelf. If my widget needs to run Windows, I don't negotiate a license with Microsoft, I just buy a copy of Windows. If I need online storage services, I don't negotiate a license with Amazon, I just sign up for Amazon S3.

Complex license negotiations do come up (e.g., in standards setting organizations), but it's usually not necessary. Most products and services have lots of alternatives, and so competition has driven out the transaction cost of license negotiation. Instead of negotiating ad hoc licenses for every sale, the implied license has become the de facto standard license agreement.

Here's an example: Blu-ray licensing used to be a giant pain, with many licenses from many organizations required. Now you can get a license from a single entity that covers everything for about 40% less, and that doesn't even include savings on attorney's fees. And of course, that's only if you want to make Blu-ray equipment or software. Everyone else just buys drives and software off the shelf, no license negotiation required.

[Malcolm Mooney]

"Multiple patents covering products have causes prices to be raised, but it is not clear than any market has been destroyed "

Of course, why does a market have to be "destroyed" for a problem to be recognized and addressed? According to the "little guys" and their supporters who comment here, **any** change that affects that their ability to accomplish their business goals (i.e., quickly securing a patent to rub in the noses of entities with deeper pockets) is The Worst Thing Ever.

People simply need to stop smoking the patent bubble crack. More patents do not equal more innovation. More patents simply equal more patents, which equals more attorneys fighting about crap which equals less growth, not more. Businesses can do better things with their money, like hiring more people instead of firing them.

[me]

The damages section got worse over the winter. The license argument (that we give an infringer the same rate as we give a another market participant who played by the rules) is insane. It would lead to not only to less powerful patents, but fewer licenses being given which would greatly impede innovation - and screw up electronics who are the idiots arguing for this!

Talk about unintended consequences. Who did Google hire to write this for them? It must have been the guys from Dumb and Dumber - this would be terrible for them they are just so unsophisticated in the patent world that they do not it.

THIS MUST BE DEFEATED! EVEN JUDGE MICHEL SAYS SO!

[Malcolm Mooney]

Daily "For example, if I want to develop a new electronic widget, I don't have to negotiate a patent license from Intel. Instead, I just buy CPUs and other chips off the shelf. If my widget needs to run Windows, I don't negotiate a license with Microsoft, I just buy a copy of Windows. If I need online storage services, I don't negotiate a license with Amazon, I just sign up for Amazon S3."

Ah, yes, except you forgot that now many abstract "things that happen" when you use those products are covered by **method** claims that you can't buy.

But as soon as you start making some money, you or maybe your floating point processor or your analysis window or your monitoring device will be infringing those methods.

After all, why do you think those method claims were filed?

[The sky isn't falling]

"The problem is the chilling effect that the patent system has on new developments. No rational new entrant would design a new product when they face the need to negotiate hundreds of licensing agreements before they can ever find out if there is a market for their product."

You are exaggerating the problem.

Nobody is going to need to negotiate hundreds of licensing agreements, even if there a thousand patents involved. Instead, a new entrant into the market is going to negotiate with a handful of consortiums, which have aggregated the rights to these patents. Also, it is in the consortium's best interest not to make the licensing fees too outrageous, otherwise the new entrant won't enter the market, which means that the consortium will lose the revenue.

Also, most new entrants aren't going to be innovating. They are going to be buying "off-the-shelf" components and creating their version of a product. Take, for example, a manufacturer of new Blu-Ray DVD player. They aren't reinventing the technology. Instead, they are just manufacturing the product will little innovation.

Now if you are LG and you have a very patents in the technology space, which would likely be infringed, you could become part of the consortium and perhaps cross-license your patents. Regardless, there are market solutions for handling technologies with even a large number of patents involved. Remember, if nobody is making product, nobody is making money, so there is a strong incentive not to be onerous in setting the licensing rates.

Can it be a PITA? Sure. However, it won't stop manufacturers from bringing product to market.

[me]

Malcolm - you are wrong. Patents mean jobs in this country. Without patents noone will pay for the large research departments to develop new items, and noone will manufacture here as the only real reason to do so is protect your intellectual property and trade secrets (which flow like water from plants in China).

[Malcolm Mooney]

"Patents mean jobs in this country. Without patents noone will pay for the large research departments to develop new items"

Nobody is talking about banning patents so put your hysterics in a can and bury it your backyard next to your bomb shelter and ammunition stockpile.

[me]

Malcolm, this damage language devalues patents greatly and we both know it. The Fed Cir is coming to the party, a little late, but it is coming. They have addressed inunctions, biz method BS patents, etc. They will address damages soon. Lets tweak a few things in the current system, there is no need for wholesale change.

Remember the response to the recession in the ealry 80's? Ya, they strengthened patents, they did not weaken them. This bill is so bad it has brought too disparate groups together - labor and manufacturing.

[Fixed Your Claim]

"The Fed Cir is coming to the party, a little late, but it is coming. They have addressed inunctions, biz method BS patents, etc. They will address damages soon. Lets tweak a few things in the current system, there is no need for wholesale change."

The unspoken premise in your statement is that there is something wrong in the statutory scheme that the Federal Circuit needs to address. If a statutory scheme is broken, you should not be looking to the judiciary to fix it, nor should the judiciary be in the business of doing so.

[Malcolm Mooney]

"Remember the response to the recession in the ealry 80's? Ya, they strengthened patents, they did not weaken them."

And look at where we are now.

[me]

Fixed-

I guess the whole common law system and the changes it makes in response to public pressure are wrong for you? Has the interpretation of the Constitution changed over time? Of course it has, but the words have not. Go figure out how the court system works before you post such a patently incorrect comment.

[Paul F. Morgan]

Legislation to clarify infringement damages is in such dispute, and subject to so much opposing lobbying, that it has been holding hostage other, much less controversial, patent reforms. The real problem is that the Federal Circuit has not provided adequate guidance or control on disputed damages issues, other than [finally] willful infringement for enhanced damages. But with the threat of legislation it may not like, the Court may well take an alleged excess damage award en banc, and render a decision that many of the legislation disputants will not like.

Furthermore, by far the most needed reexamination reform would not need new legislation. It is simply for the PTO to stop violating its statutory "special dispatch" requirement for reexaminations by delaying them for years, until way too late to reduce litigation.

[me]

Paul-

Go read the willfulness section of the Senate bill - it goes so far beyond Seagate that it is scary even without the rest of the damages section. This bill is just absolutely terrible on damages.

The rest of the bill is largely terrible too, just read it!

[moe]

so if someone enters your house while you're away and doesn't want to leave, you would be happy to let a court decide how much they should pay you to stay rather than just be able to kick them out??

[Fixed Your Claim]

"I guess the whole common law system and the changes it makes in response to public pressure are wrong for you?" Yes. Change should not be in response to public pressure, which is why, at least at the federal level, we attempt to insulate judges from political pressure with life tenure. "Common law" operating in the manner you appear to espouse, would be de facto "common legislation." In the presence of a statutory framework, the judiciary's interpretation of the statutory scheme should never contradict it, even if it has unintended consequences that the legislature did not fully comprehend. What makes me most proud of our system is when I see an opinion by a judge that implores the legislature to revisit a particular statute, but warns that until such time the courts will apply the law as it *is* written, not as it *should be* written.

"Has the interpretation of the Constitution changed over time? Of course it has, but the words have not." Yes, and such change should occur if it becomes clear that a prior interpretation was incorrect, not merely because the prior interpretation became unpopular. But the topic at hand is what role, if any, the judiciary should take in remolding the effects of damages provisions of Title 35 of the United States Code. Unless I missed the part of your statement which you argued that 35 U.S.C. 284 as it is currently written or as it has been proposed to be amended is unconstitutional, I submit that purpose your invoking the Constitution was merely to establish a false analogy.

"Go figure out how the court system works before you post such a patently incorrect comment." Every day I strive to understand better how the court system works so that I may leverage that knowledge to my clients' advantage. I was under the impression that I would have pursue this endeavor diligently until I retire. But the fact that you have it all figured out I gives me hope that I too may one day be able to cease the process of lifelong learning and simply rest on my assumptions.

[Michael R. Thomas]

Under my patent reform bill damage provisions wont be nessary because of improved inventorship determination methods will determine conception by the true and actual inventor and no r+d startups before filing intellectual materials are allowed.Also no discussion of the invention before filing is allowed.No patent pending startups are allowed either.Also a 90 day deprivement period before patent issuance with publishing assures needed patent certanty and high value

[6]

Mike R up in da house! When we can we vote to get you into the house of rep/senate, and from which state do you hail?

[6]

Mike R up in da house! When we can we vote to get you into the house of rep/senate, and from which state do you hail?

[6]

Mike R up in da house! When we can we vote to get you into the house of rep/senate, and from which state do you ha il?

[6]

Mike R woot woot! When we can we vote to get you into the house of rep/senate, and from which state do you hail?

[6]

lol delayed posting ftl :(

[Michael R. Thomas]

To 6 Originally from michigan now live in florida. My grandfather invented congress.The present legislation needs to be dumped in the trash.Its inventor cival rights violating and makes it impossible for the inventor to get any justice. We need quick inexpensive simple patents without the need for court entanglements this way we can stimulate inventors creativty instead of attempting to enslave them to big business.

[Malcolm Mooney]

"florida"

Nobody could have predicted this.

[Michael R. Thomas]

The attempted elimination of inventor investor lawsuit partnershipping (trolls and NPEs) is another attempt by big business to obstruct justice in the court system and deny compensation to inventors. The necessity of these lawsuits is due to the fact that the vast majority, if not all, of big business refuse to deal fairly, if at all, with independent inventors and form a monetary monopoly excluding them from being able to monitorize thier inventions in any other manner. The court system may be handing out excessive awards in many instances although these rewards are actually not excessive when considering that the companies are usually attempting to evaid from paying anything and defrauding inventors and independent developers.

[Just an ordinary inventor(TM) (©¿®)™]

Dear Michael R. Thomas,

I loved your comment -- is one of the best I've ever seen on patently oh.
My sentiments exactly. It is perplexing to me that many readers of patently oh are completely clueless of business realities independent inventors face when international businesses routinely rip off our patents.

By the way, the link under your comment does not go to your website. This link does:

www.inventingconsultantcreator.net

My favorite comment from your website is this:
“My scope of expertise extends to all known categories of invention and beyond.”

Me too.