Thursday, December 1, 2016

Enhanced Damages for the Infringement of Standard Essential Patents

On November 1, 2016, United States District Judge Rodney Gilstrap entered a final judgment in Core Wireless Licensing S.a.r.l. v. LG Elecs., Inc., awarding Core Wireless a 20% damages enhancement based on a jury finding that LG had willfully infringed two Core Wireless standard essential patents (copy of the judgment here).  Among the factors Judge Gilstrap cited for his decision were the following:  (1) "LG had detailed knowledge of the patents-in-suit long before the filing of this lawsuit"; (2) LG's ability "to muster a non-infringement position during negotiations and at trial does not necessarily insulate it from enhanced damages"; (3) its invalidity defense was "belied by the admission of LG’s corporate representative"; and (4) "the manner in which LG abruptly terminated licensing negotiations," including "making Core Wireless send representatives to Korea to be handed a one-page document" stating, among other things, that "LG would prefer to wait until another major cell phone manufacturer licensed the portfolio, at which point LG intended to be a 'a follower' in the established royalty scheme".  The judge concluded that a 20% enhancement (amounting to $456,000 on a $2,280,000) was appropriate.

I first learned about the judgment from David Long's November 22 post on the Essential Patent Blog.  Mr. Long states that"This appears to be the first case of a court enhancing damages based on willful infringement of a standard essential patent."  He also says that Judge Gilstrap awarded the enhancement sua sponte, following the jury's finding of willfulness, without further briefing from the parties, but that he stayed execution to permit the parties to file post-trial motions.

A few days later, I came upon Greg Sidak's article Enhanced Damages for Infringement of Standard-Essential Patents, 1 Criterion Journal on Innovation 1101 (2016). which also discusses Judge Gilstrap's final judgment (fast work, Greg!).  Here's the abstract of the article:
In Halo Electronics, Inc. v. Pulse Electronics, Inc., the Supreme Court overruled the Federal Circuit’s Seagate standard for enhancing patent damages for willful infringement, as provided by section 284 of the Patent Act. The Court said that egregious infringement alone could justify a court’s decision to enhance the damages award, regardless of the objective reasonableness of the infringement defense. However, some standards implementers have urged courts not to read Halo to permit enhanced damages for the infringement of SEPs, on the rationale that infringement is an expected part of standard setting. That argument, which implies that the infringement of SEPs is never so egregious as to justify the enhancement of a damages award, does not withstand scrutiny.
Enhanced damages for the infringement of SEPs are likely to be unavailable as long as the contract arising from the FRAND obligation governs the relationship between the SEP holder and the infringer. However, the SEP holder’s FRAND commitment becomes moot as a matter of contract law as soon as the infringer has exhausted its rights as a third-party beneficiary of the FRAND contract by rejecting the SEP holder’s FRAND offer, either expressly or by operation of law. Thereafter, the governing law reverts to the Patent Act and its interpretation by the federal courts, pursuant to which the SEP holder may seek enhancement of the damages award under section 284. As the Court emphasized in Halo, the decision to enhance the damages award rests in the court’s discretion, provided that the infringement is egregious. Factors such as the infringer’s knowledge of the SEPs’ existence and the infringer’s conduct in negotiating a license for SEPs inform whether the infringer has engaged in egregious misconduct justifying a punitive sanction.
According to Mr. Sidak, Judge Gilstrap had earlier rejected LG's argument that "enhanced damages are inappropriate for SEPs because 'infringement is an expected part of the standard setting model.'"  As suggested by the abstract, Mr. Sidak agrees with the judge that enhanced damages may be appropriate, because in his view (1) a FRAND commitment is an enforceable contract; (2) a SEP owner discharges its FRAND obligation by extending a FRAND offer; (3) the infringer extinguishes or exhausts its rights as a third-party beneficiary of the FRAND commitment by rejecting or failing to accept the offer within a reasonable time; and (4) once those rights are extinguished, the contractual constraint of the FRAND commitment is no longer applicable (pp. 1105-07).

For my part--and without having given the matter a huge amount of thought yet--I'm inclined to agree that enhanced damages should be available for the willful infringement of a SEP.  As readers of this blog may be aware, I'm not a big fan of enhanced damages generally,especially when they are conditioned on the infringer's state of mind rather than on objective criteria.  But as I've stated before, I do think they can be justified "when compensatory damages alone (1) would leave the plaintiff worse off than it would have been but for the infringement (perhaps because certain harms are not susceptible to quantification); or (2) would leave the defendant in a better position than a willing licensee (perhaps because the infringer avoids certain risks that a licensee normally would shoulder); or (3) would be necessary to achieve adequate deterrence (perhaps because the infringing act was of a type that often would go undetected, or the defendant has deliberately driven up litigation costs to discourage an impecunious patentee from filing suit)."  Moreover, as I've also stated before, in the context of SEPs I think that courts generally should deny injunctive relief in order to avoid holdup, but at the same time they should be careful to ensure that an award of past damages plus ongoing royalty is fully compensatory, and that the infringer isn't better off for having infringed.  It seems to me that, in order to ensure that infringers don't benefit from undue delay (whatever that means) in coming to terms, a modest damages enhancement might be appropriate.  After all, attorneys' fees, even when awarded, usually are not fully compensatory (in the U.S. and in some other countries as well); prejudgment interest, even when awarded (as it usually is, in the U.S.) and compounded (as it often is in the U.S., but not necessarily elsewhere), may not be fully compensatory if the patentee or the infringer has a higher internal rate of return than is reflected in the interest rate the court uses; and other costs of delay (opportunity costs, etc.) probably won't be compensated at all otherwise.  (I realize that this compensatory rationale is at odds with the Supreme Court's statement in Halo that enhanced damages are not intended to be compensatory, but I'm just speaking as a matter of policy here.)  

One other note:  it doesn't appear that Judge Gilstrap awarded Core Wireless its attorneys' fees, which may well be correct under U.S. law; the case probably wasn't "exceptional."  But again, as a matter of policy, it strikes me as odd that we're so hesitant to award fees (even when they aren't fully compensatory, as they usually aren't) but less so to award enhancements, at least after Halo.  That seems to get things backwards, in my view.

Monday, November 28, 2016

Comcast v. Sprint: Citation Analysis, Apportionment, and Other Issues in Calculating Royalties

A recent opinion by Judge DuBois in Comcast Cable Comm'ns, LLC v. Sprint Comm'ns Co., LP, Civil Action No. 12-859 (E.D. Pa. Nov. 21, 2016), denies each party's motion to exclude the other's expert witness on damages.  (According to the opinion, plaintiff Comcast's expert, Michele Riley, is prepared to testify that a reasonable royalty for the patent in suit is $123,253,162, while defendant Sprint's expert, Dr. Alan Cox, is of the opinion that an appropriate royalty would fall somewhere between $300,000 and $1,500,000.  I'll have a little more to say about this range at the end of the post.)  The opinion touches on a number of important issues relating to the  calculation of reasonable royalties.

The patent in suit, "titled 'Transferring of a Message,' claims a method 'for inquiring about information relating to a [wireless] terminal of a cellular network from the cellular network, from a messaging server external to the cellular network'” (p.4).  Comcast sought to exclude Dr. Cox's testimony for several reasons, including (1) his use of forward citation analysis--"a method of estimating the value of a particular patent based on the number of times the patent is cited by later patents"--to "'corroborate' his overall opinion on the value of reasonable royalty to the '870 Patent"; (2) his use of a license agreement between Comcast and Celltrace as a comparable; and (3) his use of three other Comcast licenses as support for the proposition that Comcast prefers lump-sum licenses.  On the first issue:
Dr. Cox compiled a pool of patents that are technologically similar to the ‘870 patent, based on International Patent Classification system labels, and published within six months before and after publication of the ‘870 patent. . . . Cox next determined how many times each patent in the resultant pool was cited by later patents. . . . Using this data, Dr. Cox determined the “percentile ranking” of the ‘870 patent—that is, “the percentage of categorically similar patents that had less forward citations” than the patent in question. . . . Dr. Cox performed the same analysis for each of the U.S. granted patents that were part of the Nokia-Comcast Agreement, under which Comcast purchased 36 patents from Nokia, including the ‘870 patent. . . .  Utilizing this process, Dr. Cox determined the percentile ranking of each patent in the Nokia-Comcast Agreement, based on which he approximated the value of each patent purchased under that Agreement relative to the other patents covered by the Agreement. . . . This process resulted in Dr. Cox’s opinion that the ‘870 patent “represent[ed] 2.5 percent of the total value of all patents in the Nokia-Comcast [Agreement.” . . .  Dr. Cox then multiplied that 2.5 percent by the total purchase price of the Nokia-Comcast Agreement ($600,000) to estimate the value of the ‘870 patent at $15,000 (pp. 8-9).
Sprint argued that forward citation analysis has been "discredited," but the court disagrees:
In advancing this argument, Comcast relies on a recent trial court decision which it claims rejected the forward citation method as unreliable under Daubert. Comcast Mot. to Exclude at 14; Finjan, Inc. v. Blue Coat Sys., Inc., No. 13-CV-03999-BLF, 2015 WL 4272870 (N.D. Cal. July 14, 2015). But Finjan does not reject forward citation analysis outright—rather, that case recognizes that “a qualitative analysis of asserted patents based upon forward citations may be probative of a reasonable royalty in some instances.” Finjan, 2015 WL 4272870 at *8. Comcast also points to a recent paper published by researchers at the University of Pennsylvania in support of its argument. Comcast Mot. to Exclude at 14, Ex. 21 (“Penn Paper”).7/
7/  David S. Abrams, Ufuk Akeigit, and Jillian Popadak, Patent Value and Citations: Creative Destruction or Strategic Disruption?, U. Penn. (2013), available at
The authors of the Penn Paper conclude some of the patents with the highest lifetime revenues have fewer citations than patents with median revenues. Penn Paper at 1. However, the forward citation method of analysis has been recognized in the academic literature as reliable since the 1990s. . . .  Indeed, one meta-analysis of published research on forward citation analysis, which included the Penn Paper, found “forward citation intensity is, in fact, correlated with economic value.” . . .  In short, courts have not rejected forward citation analysis outright. This Court determines that a single academic paper—the Penn Paper—is not sufficient to rebut decades of literature supporting forward citation analysis (pp. 9-10).
The court also rejects the argument that it Dr. Cox’s use of forward citation analysis was insufficiently reliable because he "only counted citations to the fully published patent," and not "citations to the patent application or the patent’s international counterparts," stating that this method "is supported by academic literature" and that two cases Comcast cited in its support were distinguishable:
. . . In Finjan, the expert was excluded because he failed to “tie the methodology to the facts of the case” and failed to consider “potential problems” with his method of forward-citation analysis. Finjan, 2015 WL 4272870 at *8. For example, “many of the [p]laintiff’s patents reference one another,” and the court observed that patent value should not be based on “the number of times an inventor cites himself in prosecuting related patents.” Id. In contrast, Dr. Cox tied his analysis to the facts in this case by adjusting the forward citation method to account for the age and category of the ‘870 patent and the other patents covered by the Nokia-Comcast Agreement. . . . And in Oracle, the District Court excluded expert testimony based on forward citation analysis because the expert failed to count citations to a patent’s two predecessor patents. Oracle at *2. But on this issue Comcast does not argue that Dr. Cox ignored any predecessors of the ‘870 patent. . .  (pp. 10-11).
Second, the court rejected Comcast's arguments regarding Dr. Cox's use of an agreement between Sprint and another company as a comparable:
To corroborate his damages opinion, Dr. Cox considered a 2010 agreement between Sprint and Celltrace (hereinafter “Sprint-Celltrace Agreement”), granting Sprint a perpetual license to use the technologies encompassed in three patents owned by Celltrace in exchange for a lump sum payment of $1.5 million. . . One of these patents, U.S Patent No. 6,011,976 (“the ‘976 patent”), shares an IPC code with the ‘870 patent, meaning it is technologically similar. . . .  According to Dr. Cox, that similar patent could therefore account for an equal portion of the total price, $500,000, or, though less likely, the full $1.5 million price. .  . . Dr. Cox conducted a forward citation analysis of these three patents, and using their comparative value, he approximated the portion of the Sprint-Celltrace Agreement purchase price attributable to the ‘976 patent at $1,000,000. . . . Dr. Cox states that this corroborates his overall opinion that a hypothetical negotiation for a license for the ‘870 patent would be in the range of $300,000 to $1,500,000. . . .
Comcast argues that Dr. Cox’s use of the Sprint-Celltrace Agreement is not reliable because the circumstances of the Sprint-Celltrace Agreement are not comparable to those of the ‘870 patent. . . . In support of this argument, Comcast states that the United States Court of Appeals for the Federal Circuit has held that experts may consider settlement agreements only when they constitute “the most reliable license in the record.” Id. (citing LaserDynamics, Inc. v. Quanta Comput. Inc., 694 F.3d 51, 77 (Fed. Cir. 2012)). But Comcast’s interpretation of LaserDynamics strains the Federal Circuit’s decision. In LaserDynamics, the Federal Circuit did not limit experts to consideration of “the most reliable license in the record.” LaserDynamics at 77–78. Rather, that Court reversed the trial court because it admitted into evidence “the least reliable license [in the record] by a wide margin” where there were twenty-nine other licenses involving the patent-in-suit, many of which were “far more reliable.” Id.
Most importantly, the decision in LaserDynamics concerned the admissibility at trial of the settlement agreement under Federal Rule of Evidence 403. . . . Thus, even if the Sprint-Celltrace Agreement were itself inadmissible under LaserDynamics, Federal Rule of Evidence 703 permits an expert such as Dr. Cox to rely on inadmissible evidence if experts in the field would reasonably rely on such evidence.
In contrast to the excluded license in LaserDynamics, the Sprint-Celltrace Agreement is not the “least reliable license” in the record, and the record is not replete with “far more reliable” licenses. LaserDynamics at 77–78. Rather, there are many similarities between the Sprint-Celltrace Agreement and the hypothetical negotiation—for example, the patents are technologically comparable; that Agreement involved a lump-sum payment, and Sprint has a preference for such payments; and both involve a non-exclusive license agreement. . . And although the comparison is not perfect, Dr. Cox acknowledges and “account[s] for” the differences. . . .
For example, Comcast notes that in negotiating the Sprint-Celltrace Agreement, Sprint argued invalidity and noninfringement, whereas the hypothetical negotiation requires Dr. Cox to assume the negotiating parties consider the patent at issue to be valid and infringed. . . . Comcast argues that the Sprint-Celltrace Agreement is therefore a “non-comparable agreement.” Comcast Mot. at 17. But by concluding that the hypothetical negotiation would result in “the upper range” of the Sprint-Celltrace Agreement, Dr. Cox has, in effect, accounted for this difference. . . . This conclusion is based on the fact that, because Sprint argued invalidity and noninfringement in negotiating the Sprint-Celltrace Agreement, Sprint was likely motivated to seek a lower license price than a reasonable licensee who, as in the hypothetical negotiation, admitted validity and infringement. Therefore, a reasonable licensee in the hypothetical negotiation would be less motivated to negotiate a lower price than Sprint was in the Sprint-Celltrace Agreement. Because a reasonable licensee would be less motivated to seek a lower license price, Dr. Cox concludes that such a licensee “would have negotiated a price in the upper range of the $500,000 - $1,500,000 spread” of the Sprint-Celltrace Agreement. . . .
Whether the Sprint-Celltrace Agreement is “sufficiently comparable such that [Dr. Cox’s] calculation is a reasonable royalty goes to the weight of the [expert testimony], not its admissibility” under Daubert and Federal Rule of Evidence 702. . . (pp. 12-14).
Third, the court accepts the use of three other Comcast licenses as evidence that Comcast prefers lump-sum licenses to running royalties (pp. 14-15).

Sprint's motion to exclude Ms. Riley's testimony centered on the issue of apportionment:
Because of the complexity of the ‘870 patent and Sprint’s alleged infringing process, Ms. Riley uses apportionment as part of her reasonable royalty determination. Comcast alleges that several of Sprint’s SMS and MMS systems infringe various claims of the ‘870 patent. Therefore, to calculate a reasonable royalty, Ms. Riley first calculated the profitability of Sprint’s SMS and MMS systems. . . . Ms. Riley then referred to [technical expert] Dr. Akl’s report in which he “separated the overall process of each specific messaging call flow into steps” based on infringing and non-infringing steps. Sprint Mot. to Exclude at 7–8. Finally, using Dr. Akl’s steps, Ms. Riley apportioned the share of Comcast’s SMS and MMS profitability that can be attributed to the alleged infringement of the ‘870 patent. . . .
Sprint argues that the Court should prohibit Ms. Riley from using apportionment based on counting steps as unreliable under Daubert because courts have rejected similar methods. . . . For example, Sprint notes that the Federal Circuit has observed that apportionment “cannot be reduced to a mere counting of lines of code.” Lucent Tech., Inc. v. Gateway, Inc., 580 F.3d 1301, 1333 (Fed. Cir. 2009). But that observation is taken out of context—the Lucent Tech. court goes on to observe that “the glaring imbalance between infringing and non-infringing features must impact the analysis of how much profit can properly be attributed” to the infringing technology. Id. The Lucent court does not state that counting lines of code is per se unreliable; rather, it recognizes that such simplistic apportionment alone is not probative of value.
Sprint cites three other cases for the proposition that an expert’s opinion is not reliable when the expert apportions damages based on the features in the patent at issue, as Ms. Riley did in this case. Sprint Mot. to Exclude at 12–13; Stragent, LLC v. Intel Corp., 2014 WL 1389304, at *3 (E.D. Tex. Mar. 6, 2014); Good Tech. Corp. v. MobileIron, Inc., 2015 WL 4090431 (N.D. Cal. July 5, 2015); Computer Assocs. Int’l, Inc. v. Altai, Inc., 775 F. Supp. 544, 571–72 (E.D.N.Y. 1991). These cases are no more persuasive than Lucent. In Stragent, the court focused on the fact that the expert’s apportionment relied on “arbitrary assumptions that have no basis in the facts of [the] case.” Stragent at *4. In Good Tech, the court excluded the expert’s opinion because the expert had conducted “no investigation into whether any of the criteria is more important than others, or how strongly each criterion is tied to the patents.” Good Tech at *7. And Computer Associates mentions the counting of lines of code only in passing. None of the cases support Sprint’s assertion that counting components or features is per se unreliable, and this Court declines to so hold (pp. 16-18).
The court also rejects the argument that Ms. Riley shouldn't have relied on Dr. Akl's opinion because (according to Sprint) Akl "'manipulated' Sprint’s call flow diagrams by combining certain steps into a single step and omitting certain steps so as to reduce the number of non-infringing steps; and simultaneously adding steps to increase the number of infringing steps," and because he "improperly . . .  gave equal weight, and therefore equal value, to each step that he identified" (p.18).  According to the court, Dr. Akl "adequately supported and explained in detail the reasoning behind each part of his step-counting process . . . " (p.19).

Four matters I'd like to note before concluding this post.  First, it's interesting to see that the purchase price for the portfolio of 36 patents of which the patent in suit was part was only $600,000.  As Ted Sichleman notes in the paper of his that I blogged about last week:  
. . . Some defendants have argued that the cost of acquiring a patent or portfolio should set an upper bound to the amount of damages collectible in litigation. For example, in a recent case an accused infringer argued to bar the request of a large patent aggregator, Intellectual Ventures, for over $300 million in licensing fees on the ground that it acquired the asserted patent for only $750,000. See Dan Levine & Tom Hals, Exclusive: Intellectual Ventures Faces Novel Attack on Patent Business, Reuters, Oct. 29, 2013, However, these arguments differ from the ones here in that the appropriate level of R & D, commercialization, and opportunity costs should be determined ex ante, from the perspective of an innovator deciding whether to make an investment, rather than ex post, once the fate of the investment is known. Otherwise, incentives will be misaligned. Relatedly, as Tom Cotter has aptly explained, Patent Assertion Entities (PAEs) are a “type of intermediary or broker, providing a service and the spread between the price they buy and the price they sell is their compensation for that service. Plus, there's always some risk they won't get anything.” Id. (p.46 n.277).
Second, regarding the second issue surrounding Dr. Cox's opinion, I'd note that whether courts should more readily consider settlements as comparables, and how if at all courts should adjust comparables given that the hypothetical negotiation assumes that the parties bargained assuming both infringement and validity, are among the issues discussed in Jonathan Masur's very interesting paper The Use and Misuse of Patent Licenses, 110 Nw. U. L. Rev. 115 (2015).  (His more recent paper with Erik Hovenkamp, noted here, argues that, given all of the potential problems with comparables, courts should stop using them altogether.) 

Third, go back and look at that range in valuation between the two experts:  $123 million versus (at most) $1.5 million.  Without casting aspersions at either expert's opinion, it's hard not to conclude that something has gone terribly wrong in the law of patent damages when two competent experts can reach such widely different opinions, differing by a factor of more than eighty.  As I note in my Patent Damages Heuristics paper, as the range of possible outcomes increases, so does the risk of disadvantaging the more risk-averse party and of rendering settlement marginally more difficult.  "The range of possible outcomes may be a very pressing problem in contemporary patent damages law. See, e.g., John C. Jarosz & Michael J. Chapman, The Hypothetical Negotiation and Reasonable Royalty Damages, 16 Stan. Tech. L. Rev. 769, 809 (2013) (stating that “for opinions issued since 1978 in which a suggested royalty rate was reported for both the patent holder and the infringer, the range has been as high as three hundred to one,” and that “[i]n many cases, the difference has been more than twenty to one. And the range has not declined over time.”) (p.10 & n.35).  I'm not sure what the solution to this problem is.  Perhaps predictability and simplicity should be more important  considerations that they currently are, though the question then arises whether efforts to improve predictability and reduce costs would risk more inaccuracy.

Fourth, here's a link to the "Penn paper" the court refers to, and here is the abstract to that paper (I haven't read the paper yet myself): 
Prior work suggests that more valuable patents are cited more and this view has become standard in the empirical innovation literature. Using an NPE-derived dataset with patent-specific revenues we find that the relationship of citations to value in fact forms an inverted-U, with fewer citations at the high end of value than in the middle. Since the value of patents is concentrated in those at the high end, this is a challenge to both the empirical literature and the intuition behind it. We attempt to explain this relationship with a simple model of innovation, allowing for both productive and strategic patents. We find evidence of greater use of strategic patents where it would be most expected: among corporations, in fields of rapid development, in more recent patents and where divisional and continuation applications are employed. These findings have important implications for our basic understanding of growth, innovation, and intellectual property policy.
Thanks to Nadia Soboleva of NERA (the firm with which Dr. Cox is affiliated) for bringing this very interesting opinion to my attention.

Wednesday, November 23, 2016

Hoppe on Recent German Patent Cases

Daniel Hoppe has published an article titled Die Rechtsprechung der deutschen Instanzgerichte zum Patent- und Gebrauchsmusterrecht seit dem Jahr 2015 ("The Patent and Utility Model Case Law of the Lower German Courts Since 2015") in the October 2016 issue of GRUR RR (pp. 385-96).  Much of the article deals with remedies, including case law on injunctions (pp. 388-89), damages (p.389), FRAND (pp. 390-93), stays (p.395), and preliminary injunctions (pp. 395-96). I'll talk about the FRAND cases in a subsequent post, but for now I'll just note one non-FRAND damages case that caught my attention, the Judgment of the Düsseldorf District Court of September 29, 2015.  The defendant was held to have indirectly infringed a patent for a water disposal process (useful for emptying toilets on boats and submarines) by supplying water disposal systems in each of which was installed a vacuum pump that would practice the claimed method.   The court assessed damages based on the infringer's profits from these sales, even though the amount of direct infringement occurring within the Republic of Germany (as opposed to at sea) may have been minimal.  The frequency of use on Germany was irrelevant.  As for the amount of profits, the court used as the royalty base both the revenue derived from the vacuum pump and the revenue derived from the entire device in which that pump was installed. The court concluded that the profit on each of these was 20%, and that 50% of the profit earned from the pump was attributable to the patented invention and 30% of the profit from the entire product, for a grand total award of  €865,599.23.  Mr. Hoppe also notes, however, a December 17, 2015, judgment of the Düsseldorf Appeals Court stating that for liability to attach for indirect infringement there must be a sufficient probability of direct infringement, and he believes that this principle may stand in contradiction to the more expansive liability theory employed in the vacuum pump case.

The question of how to assess damages for indirect infringement is a tough one; Dmitri Karshtedt has a paper on the issue titled Damages for Indirect Patent Infringement, 91 Wash. U. L. Rev. 911 (2014) (available hereAlso difficult is the question of what damages a court should award when a domestic act of infringement results in further uses of the patented invention outside the jurisdiction; for previous discussion, e.g., here.  My initial reaction to this particular decision is that it seems a bit harsh to require the defendant to disgorge its entire profit from sales of the equipment at issue, absent evidence of how often the direct infringers practiced the claimed process.

Monday, November 21, 2016

Sichelman on Reasonable Royalties

Ted Sichelman has posted a paper on ssrn titled Innovation Factors for Reasonable Royalties, which will be published along with several other papers from this past June's Patent Damages Conference at the University of Texas in a forthcoming issue of the Texas Intellectual Property Law Journal.  Here is a link to the paper, and here is the abstract: 
Patentees who are successful in litigation are entitled to no less than a “reasonable royalty” for the infringing use of the patent. Currently, reasonable royalties are assessed by the fact-finder using the cumbersome, difficult-to-apply fifteen-factor Georgia Pacific test. The Georgia Pacific test has been widely and roundly criticized, and there is general agreement that it too often hinders patent law’s central goal: promoting technological innovation. To improve the reasonable royalty analysis, this Article proposes adding innovation-centric factors to the Georgia Pacific test, including the total amount spent on research & development and commercialization of the invention, taking into account opportunity costs and project-specific risk. Additionally, the Article suggests emphasizing a slightly modified version of one existing innovation-centric, Georgia Pacific factor: the technological benefits offered by the invention when compared to alternative approaches. Like the “objective” factors used to make determinations of whether a patent is obvious, these innovation factors will help fact-finders to make more accurate and more consistent reasonable royalty determinations while more ably advancing patent law’s goal of spurring innovation.
This is a very interesting paper, and I commend it to readers' close attention, though I'm still mulling over the central idea that patent damages should be more like reliance than expectation damages in contract law.  For me, the article highlights three fundamental choices that a patent damages regime somehow must resolve.  

The first is whether patent damages should serve the ultimate goals of the patent system--encouraging invention, disclosure, commercialization, etc.--directly or indirectly.  That is, should courts award supracompensatory damages when there is reason to believe that doing so would be necessary to reimburse the patent owner for its investment in R&D, and subcompensatory damages when there is reason to believe that this is all that's necessary to reimburse that investment?  Or should we assume that restoring the patent owner to the position it would have occupied, but for the infringement, indirectly achieves the ultimate goals of the patent system, and thus is an adequate (or more feasible, or more consistent-with-the-rule-of-law) substitute for a more tailored approach?  

Second, should the rules for awarding patent damages be simpler than they currently are, to conserve on adjudicative costs and enhance predictability, or more complex still (or complex in different ways, perhaps), in order to improve accuracy (however defined)?  Of course, accuracy and complexity aren't always in sync; sometimes a simpler rule might also, on average, lead to more accurate results than a complex one. 

Third--and maybe this is just another way of thinking about the first point--ideally, should the law of patent damages reward effort or success?  Professor Sichelman's argument, which builds on his earlier paper Purging Patent Law of "Private Law" Remedies, 92 Tex. L. Rev. 517 (2014), seems to me to lean toward the former, though not exclusively, whereas my paper with Norman Siebrasse A New Framework for Determining Reasonable Royalties in Patent Litigation inclines toward the latter.  Tentatively, I'd say that seeking to ensure that the patent owner is compensated for its investment is appropriate if we're talking about a court or administrative agency determining an adequate return for a patent that is the subject of compulsory licensing--say, an essential medicine that clearly has enormous social value and that we want to ensure is sufficiently accessible to the people who need it.  In such a case, there's at least a reasonable theoretical case for treating the patent owner like a public utility that needs an adequate return on its investment, but not more than that because the deadweight loss is so high.  But these are, in my view at least, exceptional cases, and I'm still a bit skeptical that such considerations should be relevant across the board.   By contrast, a reward that is high when the invention confers substantial benefits on users, in comparison with other alternatives, and low when it doesn't, correlates to some degree with the invention's social value, and thus provides an incentive to invent things that turn out to have high social value.  On this view, the effort that goes into making these things has little if any direct relevance to the reward.  Or should both effort and success be important considerations--or, going back to point 2, does that make things too complicated?

Friday, November 18, 2016

A Couple of Commentaries on Genentech v. Hoechst

1. Last July I blogged on the CJEU's decision in Genentech v. Hoechst, in which the court held that a patent licensee is obligated to pay royalties prior to termination of the license, even if the patent is held to be invalid or not infringed.  (For an earlier blog post of mine on the case, see here.)  In other words, if the licensee stopped paying royalties prior to terminating the license, it's obligated to pay up until the point of termination.  The September 2016 issue of the German law journal GRUR (Gewerblicher Rechtsschutz und Urheberrecht) published the German text of the decision, along with a short commentary (also in German, at pp. 919-20) by Mary-Rose McGuire and Natalie Ackermann.  The authors discuss, among other things, Genentech's argument that it shouldn't have had to pay pre-termination royalties, because this would put licensees in a worse position than infringers.  The authors reject that argument, stating that the view (in Germany) that an adjudicated infringer has a claim for restitution of the damages it paid for use of an invalid patent should apply, if at all, only if the infringer itself was a party to the invalidation proceeding.  (For previous discussion of this view on this blog, see here.)  The authors also argue (and I agree, for reasons stated in the blog post linked to above) that the rule Genentech was advocating would be undesirable from an economic point of view

In addition, the authors also think it is interesting that the underlying case from which the question was referred to the CJEU was an arbitration proceeding.  They find it significant that the CJEU accepted the referral, and conclude that the rules of competition law belong to international compulsory business law, which in the public interest must be enforced.

2.   Jérôme Passa also has published an article on the case, titled Les redevances de licence dues après l'annulation du brevet en droit de la concurrence ("License royalties due after the cancellation of a patent in competition law", in the October 2016 issue of the French law journal Propriété Industrielle (pp. 8-12).  Here is the abstract (my translation):
Commentary on the Genentech judgment by which the Court of Justice, ruling on the interpretation of TFEU article 101, has adjudicated the important question of the impact of cancellation of the patent on a license that is still in effect and, more particularly, on the royalties due from the licensee.  The judgment sustains a certain number of critiques because, although rendered in terms of the rules of competition law, the analysis conducted under the law of intellectual property, though essential, appears insufficient in various respects.