Some New Articles on Patent Damages, Part 2

1.  Bernard Chao has posted a paper on ssrn titled Lost Profits in a Multicomponent World.  Here is a link to the article, and here is the abstract:

Given our adversarial system, it is not surprising that plaintiffs advance creative damages theories that would help them maximize their recoveries. In patent law, one recurring tactic is for patentees to seek remedies based on the entire infringing product instead of just the specific feature covered by the patent. This distinction can significantly inflate remedies because modern multicomponent products contain thousands, sometimes hundreds of thousands of different features. Thus, entire products are orders of magnitude larger, more complex and more valuable than individual features.

In recent years, the Supreme Court has sensibly rejected attempts to base patent remedies on entire products in the context of permanent injunctions and design patents. Nonetheless, the Federal Circuit continues to allow patentees to recover all the lost profits associated with an entire infringing product even when the patent at issue only covers one aspect of a multicomponent product. Just this past spring, in Mentor Graphics v. Eve-USA, the Federal Circuit affirmed a $36,417,661 award giving the patentee all the lost profits caused by the sales of the defendant’s infringing semiconductor emulator systems even though the patent covered only one feature of the defendant’s whole product. The decision explicitly rejected attempts to apportion profits between those attributable to the patented feature and other significant factors.

This Essay argues that the failure to consider apportionment is wrong on both the law and policy. From a doctrinal perspective, the Federal Circuit has misinterpreted deeply rooted Supreme Court precedent to arrive at an overly simplistic “but for” test to assess damages. From a policy perspective awarding lost profits based on the entire infringing product – rather than just the feature – compensates the patentee for value she did not create and deters innovation in technologies that operate with or build upon other technology (“complementary technology”). Accordingly, this Essay argues that it is time to realign lost profits doctrine to make it consistent with other types of patent remedies. Patentees should only be compensated based on the value of the patent they hold. That means focusing the remedy on the infringing feature and not the infringing product.

I mentioned this paper here a couple of weeks in connection with the Federal Circuit's denial of a rehearing en banc in Mentor Graphics Corp. v. EVE-USA, Inc., but I didn't quote Professor Chao's abstract.

2.  Erik Hovenkamp and Herbert Hovenkamp have posted a paper on ssrn titled Buying Monopoly:  Antitrust Limits on Damages for Externally Acquired Patents, 25 Tex. Intell. Prop. L.J. __ (forthcoming).  Here is  alink to the paper, and here is the abstract:

The “monopoly” authorized by the Patent Act refers to the exclusionary power of individual patents. That is not the same thing as the acquisition of individual patent rights into portfolios that dominate a market, something that the Patent Act never justifies and that the antitrust laws rightfully prohibit.

Most patent assignments are procompetitive and serve to promote the efficient commercialization of patented inventions. However, patent acquisitions may also be used to combine substitute patents from external patentees, giving the acquirer an unearned monopoly position in the relevant technology market. A producer requires only one of the substitutes, but by acquiring the combination it can impede product market rivals by limiting their access to important technological inputs. Similarly, a patent assertion entity may acquire substitute patents to eliminate inter-licensor competition, enabling it to charge supra-competitive license fees, much like a merger or cartel. For example, by acquiring two or more substitute patents that collectively dominate a market a PAE can effectively monopolize the technology for that market. Such anticompetitive practices are regularly condemned in conventional product contexts, but the courts have not yet applied the same antitrust logic to patent markets. And they passively encourage anticompetitive patent acquisitions by awarding large damages when such patents are infringed.

We propose that infringement damages for an externally acquired patent be denied if the acquisition served materially to expand or perpetuate the plaintiff’s dominant position in the relevant technology market. By weakening enforcement, this limits the patent holder’s ability to use such acquisitions to anticompetitive ends. We do not suggest that a dominant patent holder should be prohibited from securing external patent rights in the relevant technology market, but simply that it should obtain them through nonexclusive licensing, not transactions that restrict third party access. This is as valuable to patent policy as it is to antitrust, for it will tend to increase innovation by discouraging systematic monopoly in technology markets.  

I previously mentioned an earlier draft of the paper here.

3.  Peter Lee has posted a paper on ssrn titled Distinguishing Damages Paid from Compensation Received:  A Thought Experiment.  Here is a link the article, and here is the abstract:

This symposium contribution argues that the shortcomings of patent damages doctrine arise in part from the conflicting normative aims of this body of law. On the one hand, patent damages should provide just enough compensation to induce invention and commercialization of a technology but nothing more, thus mitigating deadweight loss. On the other hand, damages should deter infringement and shunt would-be infringers into licensing negotiations with patentees. The current regime of “make-whole” damages largely effectuates the second aim by providing patentees with the full market value of their infringed technologies, even when such damages exceed inducement costs. To help resolve this divergence, this Article proposes distinguishing the amount of compensation that patentees receive from the amount of damages that infringers pay. Within this framework, infringers would pay damages based on the current regime of make-whole damages, thus deterring infringement and encouraging licensing. However, courts would compensate a patentee up to this amount based on the patentee’s inducement costs of invention and commercialization, including a reasonable profit. If make-whole damages paid by an infringer exceed inducement costs, courts would allocate any surplus to government agencies to fund research and development, thus advancing the goals of the patent system. This Article assesses the pros and cons of this proposal, observing that such a “decoupling” regime encourages patentees and infringers to settle, thus eliminating any patent surplus. This is a feature rather than a bug, however, as such settlement would promote more competitive market entry relative to the current status quo while guarding against overly diminishing incentives to invent. 

Some New Articles on Patent Damages, Part 1

1.  Colleen Chien and Eric Schulman have posted a paper titled The Responsible Use of Comparative Licenses, forthcoming in the Texas Intellectual Property Law Journal.  Here is a link to the paper, and here is the abstract:

Over the last decade, courts have applied increasingly stringent standards to the evidence used to determine patent damages. While this has reduced the risk of awards untethered to the facts, the current focus on strictly comparable licenses that conform most closely to the naked patent, one-way, royalty-bearing "hypothetical license" specified by law has created its own problems, particularly in the valuation of individual patents incorporated into products with numerous inventions. The rejection of "semi-comparables"—transactions that deviate in some significant way from the terms of the hypothetical license—has led to distorted incentives, unpredictability, and the exclusion of the very transactions that best reflect the incremental value of the invention; those that are formed ex ante, but do not make the cut. We suggest that many of these problems could be avoided by a more inclusive but disciplined approach to reasonable royalty determinations that prioritizes objective evidence of a patent‘s incremental value even when reflected in traditionally excluded "semi-comparable" transactions like technology licenses and sales. Though courts have been reluctant to use semi-comparables because of a lack of objective information about their formation, we begin to address this void, drawing upon the collective wisdom of licensing lawyers we interviewed, the nearly two-decade-long career of one of us as a licensing lawyer, and studies of thousands of actual licenses. When a reasonable, evidence-based estimate or upper bound cannot be derived, we consider the limited use of tailored injunctions, assuming the other eBay elements are met.

2.  R. Scott Hiller, Scott J. Savage, and Donald M. Waldman have posted a paper on ssrn titled Using Aggregate Market Data to Estimate Patent Value.  Here is a link to the paper, and here is the abstract:

Intellectual property and its protection is one of the most valuable assets for entrepreneurs and firms in the information economy. This article describes a relatively straightforward method for measuring patent value with aggregate market data and the BLP model. We apply the method to United States smartphones. The demand estimates and recovered marginal costs produce sensible simulations of equilibria prices and shares from several hypothetical patent infringements. In one simulation, the presence of near field communication on the dominant firm’s flagship smartphone results in a 26 percent increase in profits per phone. This estimate provides a starting point for establishing a reasonable royalty between the patent holder and the dominant firm in a hypothetical negotiation. 

3.  Lisa Larrimore Ouellette has posted a paper on ssrn titled Adjusting Patent Damages for Nonpatent Incentives, also forthcoming int he Texas Intellectual Property Law Journal.  Here is a link to the paper, and here is the abstract:

Nonpatent innovation policies—including direct spending on grants and procurement, innovation prizes, and R&D tax incentives—are a significant part of innovation policy in practice and are attracting growing attention from legal scholars. In some cases, innovation is most efficiently incentivized by using these policies as complements, but in others, allowing researchers to claim nonpatent incentives in addition to patent rewards results in overcompensation. There are a few potential solutions to this reward-stacking problem, including limiting the patentability of inventions that have received significant alternative rewards, or conditioning nonpatent transfers on some relinquishment of patent rights. This symposium contribution presents and evaluates an additional solution: reducing patent damages to account for the nonpatent rewards (including ex ante risk reduction) an invention has already received. Such an approach could improve not only the incentive side of innovation policy, but also the allocation side, by reducing deadweight loss while maintaining incentives to innovate. The ability of patent damages doctrine to help mediate between different bodies of innovation law is a benefit of recent proposals for patent damages reform that has thus far been overlooked.

Some Recent Commentary on Unjustified Threats, Cross-Border Injunctions, Arrow Declarations

1.  Perhaps next year will be the year in which I begin work on a projected book on the comparative law and economics of wrongful patent enforcement--a topic that raises all manner of interesting policy and legal questions (potentially involving IP, antitrust, unfair competition, and even freedom of speech and related constitutional rights).  Meanwhile I continue to fortify my research file on the subject, which now includes the newly amended U.K. statute on the subject (available here), which is usefully summarized in a recent IPKat post here.  (See also this IPKat post from last December, on a 2016 case involving the U.K.'s then-existing "groundless threats" law, Nvidia v. Hardware Labs.)  In addition, Norman Siebrasse published a couple of interesting posts on the Canadian law of unjustified threats last November (here and here), raising the questions of whether (as under common law, but not current Canadian statutory law) there should be a "malice" requirement (as there usually is, in a sense, in U.S. law) and whether it makes any sense to distinguish threatening letter from informative letters.  Finally, a more recent IPKat post and an EPLaw Patent Blog post both discuss a recent English case on the question of whether making allegedly deceitful representations to the EPO could give rise to a claim for "unlawful means" under English law (and holding that it could not).  The (unsuccessful) claim calls to mind various possible parallels under U.S. law, including the defense of inequitable conduct, Walker Process antitrust claims, and the common law tort of interference with prospective business advantage.  I really think this would be a fascinating area for comparative law and economics research, so I'm hoping that once a few other pending projects are finally put to bed I might be able to resume work on this topic.

2.  Occasionally I've also touched on cross-border injunctions and torpedo actions under E.U. law (see, e.g., here).  According to the EPLaw Blog, a Dutch court recently granted a provisional cross- border injunction in Carl Zeiss Meditec AG v. VSY Biotechnology B.V.  (I haven't read the decision itself, which is in Dutch.)  However, I did recently come across a very thorough article on the topic of cross-border injunctions by Paul England, titled Cross-border actions in the CJEU and English Patents Court--ten years on from GAT v. LuK, GRUR Int., March 2017 (pp. 293-300).  The article concludes with a handy table titled "The application of the Brussels Regulation and key cases to cross-border scenarios in the CJEU and English courts," and briefly discusses, among other matters, whether a court in the U.K. would grant an "Arrow" declaration in the U.K. under foreign national laws (see pp. 299, 300).  (For other recent discussions of Arrow declarations in the U.K., see, e.g., this post and this post from IPKat; Ralph Cox & Kate Donald's article in the June 2017 issue of Mitteilungen der deutschen Patentanwälten (pp. 260-61), titled Dealing with Divisionals:  "Arrow" type declarations and the "Humira" decisions; and Dr. Manuel Kunst and Dr. Janet Streth's article in the August issue of EIPR, titled Humira Patent Rights Shot by "Fujifilm" Declaration.)  

Some New Papers on Competition Law, FRAND, SEPs

In addition to the paper by FTC Commissioner Maureen Ohlhausen that I mentioned on Monday, the following articles also might be of interest to readers of this blog:

 

1.  Yee Wah Chin has posted a paper on ssrn titled Basic Antitrust Principles for Standard Essential Patents and Patent Assertion Entities.  Here is a link to the paper, and here is the abstract:

There have been significant calls recently for findings that infringement suits and licensing conduct by patent assertion entities (PAEs) labeled “patent trolls” and by holders of standard essential patents (SEPs) generally are monopolization or attempts to monopolize that violate Sherman Act §2, 15 U.S.C. §2. This paper argues that the basic principles of keeping in mind history and context, and general antitrust principles, apply equally to SEPs and PAEs as to other economic phenomena.  

2.  Erik Hovenkamp has posted a very interesting paper on ssrn titled Tying, Exclusivity, and Standard-Essential Patents.  Here is a link to the paper, and here is the abstract:

When a technological standard is adopted, implementers must pay to license all “standard-essential” patents (SEPs)—those covering core features of the standard—although the particular price terms usually cannot negotiated beforehand. To allay implementers’ fear of being “held up,” SEP owners usually make commitments to offer licenses on “fair, reasonable, and nondiscriminatory” (FRAND) terms. Among other things, this acts as a contractual price control for SEP licenses—albeit an imprecise one that is subject to judicial interpretation.

Aside from licenses, an SEP holder may further supply an important “collateral input”—one that is not subject to the FRAND pledge, but which implementers nevertheless require in order to market a viable product. For example, this might be a physical component of the final product. The SEP holder might tie its SEP rights to the collateral input. It might also engage exclusive dealing or related practices, such as a “loyalty discounting” arrangement that imposes larger royalties on implementers who buy the input from competing providers. Importantly, FRAND’s operation as a price control significantly alters the economic analysis: here the primary impetus for tying may be to circumvent the price control by shifting the desired overcharge to the tied good—a concern that does not arise when a seller has complete autonomy over its pricing (as is usually the case). The natural result may be to foreclose competitors’ input sales.

Such restraints have received little attention in the FRAND literature, but they are an emerging concern for innovation and competition policy. They have recently been attacked in two high-profile complaints filed against Qualcomm—one by the Federal Trade Commission, and the other by Apple. Against this backdrop, this article provides a legal and economic evaluation of tying and exclusive dealing arrangements in FRAND licensing. Such practices may act to undermine the FRAND price control, potentially violating the SEP holder’s commitment. The case for antitrust intervention is harder to make, but in principle the arrangement could act to exclude actual or potential competition in the collateral input market, bringing it within antitrust’s reach. I conclude by offering several policy recommendations for how courts and standard setting organizations might address these tying and exclusivity arrangements. 

3.  Hannibal Travis has published a paper titled Counter-IP Conspiracies:  Patent Alienability and the Sherman Antitrust Act, 71 Univ. Miami L. Rev. 758 (2017).  This is a long paper and I haven't read very much of it yet myself, so I might have more to say about it at another time.  For now, here is a link, and here is the abstract: 

Anticompetitive collusion by intellectual property owners frequently triggered antitrust enforcement during the twentieth century. An emerging area of litigation and scholarship, however, involves conspiracies by potential licensees of intellectual property to reduce or eliminate opportunities by a property’s holders to profit from it, or even to recoup their investments in creating and protecting it. The danger is that potential licensees will collude with one another to suppress royalties or sale prices. This Article traces the history of such litigation, provides an overview of the scholarly and theoretical arguments against monopsonistic or oligopsonistic collusion against licensors of intellectual property, and summarizes empirical evidence that the prime economic and business-related justification for such collusion, namely the need to reduce patent holdup, is relatively weak. It argues that some decisions not to license intellectual-property rights, or to license them at suppressed rates, may be anticompetitive, particularly if they are the result of a collusive process or serve to maintain or expand market power. Finally, it urges greater attention from a macroeconomic perspective to the plight of inventors and workers in the high-technology and patent-intensive industries. As a preliminary attempt to heighten awareness of the issue, it describes recent allegations that market power on the part of consumers of high-technology patent licenses, and reduced bargaining clout on the part of individual employees and inventors, may be contributing to unemployment and inequality.

Federal Circuit Affirms Dismissal of Complaint Seeking Declaratory Judgment

The opinion, authored by Judge Moore and joined by Judges Reyna and Stoll, is Allied Mineral Products, Inc. v. Osmi, Inc., Stellar Materials, Inc. and Stellar Materials, LLC  Allied, headquartered in Ohio, sells products to two Mexican companies that distribute those products in Mexico.  Stellar sent letters to the Mexican firms accusing them of infringing Stellar's Mexican patent; it later initiated patent litigation against those firms in Mexico.  Allied then filed an action in U.S. district court for a declaratory judgment that the corresponding U.S. patent is invalid, not infringed, and unenforceable.  The district court dismissed the complaint for lack of jurisdiction, and the Federal Circuit affirms:

The Declaratory Judgment Act requires “a case of actual controversy.” 28 U.S.C. § 2201(a). There is no bright-line rule for whether a dispute satisfies this requirement, Prasco LLC v. Medicis Pharm. Corp., 537 F.3d 1329, 1336 (Fed. Cir. 2008), although the Supreme Court has articulated a number of relevant factors: 

Our decisions have required that the dispute be definite and concrete, touching the legal relations of parties having adverse legal interests; and that it be real and substantial and admit of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts . . . . Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.

MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) (quotations and alterations omitted). . . .

The totality of the circumstances in this case does not rise to the level of a case of actual controversy. Declaratory judgment jurisdiction requires some affirmative act by the patentee. SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372, 1381 (Fed. Cir. 2007). Stellar has not directed any actions towards Allied, nor has it litigated or threatened litigation in the United States or on its ’974 patent. All of Stellar’s conduct has been directed towards Allied’s customers Ferro and Pyrotek, unrelated Mexican entities, and that contact was limited to Stellar’s Mexican Patent and potentially infringing acts in Mexico. Stellar sent notice letters to the customers alone, and although Allied responded on behalf of its customers, Stellar never responded to Allied’s letter. Stellar then sued only the customers, not the manufacturer. Stellar also limited its actions to Mexico. Stellar filed suit in Mexico, suing for infringement of a Mexican patent under Mexican laws. It has not threatened or alleged infringement of the ’974 patent in the United States, much less filed suit. Stellar took no actions directed at Allied, no actions with regard to its ’974 patent, and no actions under U.S. patent laws.

The court goes on to distinguish three other cases:  Innovative Therapies, Inc. v. Kinetic Concepts, Inc., 599 F.3d 1377 (Fed. Cir. 2013), in which the court had found no case or controversy despite some "veiled threats" of litigation and the patent owner's prior history of litigating its patents; Arkema Inc. v. Honeywell International, Inc., 706 F.3d 1351 (Fed. Cir. 2013), in which a combination of German litigation and U.S. litigation, directed against the same defendant and over a related patent, "'create[d] a sufficient affirmative act on the part of the patentee for declaratory judgment purposes'”; and Arris Group v. British Telecommunications PLC, 639 F.3d 1368 (Fed. Cir. 2011), in which the court held that "a manufacturer has standing to bring a declaratory action if: (1) the manufacturer is obligated to indemnify its customers in the event of an infringement suit; or (2) there is a controversy between the patentee and the manufacturer as to the manufacturer’s liability for induced or contributory infringement based on acts of direct infringement by the customers."  Neither condition, the court says, is present here.

Criterion Journal on Innovation Papers on Patent Remedies

Volume 2 of the Criterion Journal on Innovation, for which Greg Sidak serves as editor, includes several papers on damages and injunctions, including the following.  (Note that I haven't read all of them yet myself.  Of these, I'm guessing, based on the abstracts, that I will agree at least in part with some of them and disagree quite vigorously with others, but in the meanwhile I will withhold judgment.)

1.  J. Gregory Sidak, Irreparable Harm from Infringement.  Here is a link to the article, and here is the abstract:

The Patent Act empowers a court to issue an injunction “to prevent the violation of any right secured by patent.” Whether a court will permanently enjoin an infringer depends on whether (1) the patent holder would suffer irreparable harm otherwise, (2) its legal remedies are inadequate, (3) the balance of hardships favors the patent holder, and (4) the injunction would not disserve the public interest. Similar factors inform the grant of a preliminary injunction. The Federal Circuit often says that the harm from patent infringement is irreparable if it cannot be measured. I say that such harm is irreparable because it irreversibly destroys wealth.

Patent infringement irreversibly obliterates wealth when it impedes society’s technical progress. Patent infringement does more than transfer wealth involuntarily from the patent holder to the infringer; it also harms third parties by devastating the surplus that consumers would derive from using the product practicing the new technology. Damages are impotent to cure that harm to the public interest. A court’s order of damages can no more recreate the wealth that has been or will be destroyed by an act of patent infringement than it can restore an ancient redwood after the axeman has felled it.

2.  J. Gregory Sidak, Is Harm Ever Irreparable?  Here is a link to the article, and here is the abstract:

Economic analysis yields three insights on the meanings of irreparable harm. First, the interpretation of “irreparable” harm as immeasurable harm has diminishing plausibility. Quantitative and empirical methods are generally sufficient to estimate injury in business disputes with reasonable confidence. Second, harm can be irreparable because the infringer cannot afford to pay damages, but other vehicles exist to address that problem of undercapitalization—namely, bankruptcy law and the market for corporate control. Third, legitimate grounds remain for finding irreparable harm and issuing an injunction when the court’s failure to do so would reduce consumer or producer surplus by reducing static or dynamic efficiency. In this third category, the reliable quantification of the destruction of value may be challenging when assessing dynamic inefficiency.

In contrast to the existing jurisprudence on injunctions, my three interpretations of irreparable harm would focus the objective of injunctive relief on averting the destruction of value caused by patent infringement, not the transfer of wealth from the patent holder to the infringer. The same logic would apply more generally to any form of involuntary exchange, including compulsory licensing or the forced sharing of valuable assets with competitors under competition law.

Consider the following question: when would a court ever need to grant injunctive relief to remedy the invasion of the plaintiff’s property rights? I do not find any of my three economic interpretations of “irreparable harm” to have great explanatory power in answering this question. So I offer a new conjecture.

Although courts are comfortable with the counterfactual framework of the hypothetical, voluntary exchange, I hypothesize that they are uncomfortable with including large estimates of opportunity cost in the bargaining range of that model. Perhaps courts (and competition authorities, for that matter) do not fully understand the implications of Armen Alchian’s definition that cost in economics means opportunity cost. This unease increases if the would-be licensor’s opportunity costs exceed the would-be infringer’s maximum willingness to pay. (This condition is a standard fact pattern in any of the high-profile margin squeeze cases in Europe and the United States, in which the wholesale price of access to the essential input exceeds the retail price that the vertically integrated firm charges in the downstream market.)

Perhaps, too, courts care about appearances concerning their institutional competence. If no transaction occurs when the would-be licensor’s opportunity costs exceed the would-be infringer’s maximum willingness to pay, it may appear to outsiders to be the court’s fault in setting too high an access price. Consequently, when a court recognizes that the bargaining range is negative, it may prefer to grant a permanent injunction instead of awarding the patent holder damages that exceed what the infringer would have been willing to pay in a hypothetical, voluntary negotiation.

If my conjecture is correct, it may signal an innate appreciation by courts of the Coase Theorem. If the would-be licensee does not value the would-be licensor’s asset at the level of the would-be licensor’s opportunity cost, the court will have no comparative advantage over a bilateral negotiation in making a transaction occur that increases social welfare. Rather than state publicly that the correct price emerging from a hypothetical, voluntary transaction would exceed the would-be licensor’s willingness to pay, the court may prefer to say that it cannot measure the harm from the unauthorized use of the asset. In that case, the court would issue a permanent injunction, which would permit the parties’ own post-injunction negotiations to confirm, in private, the conclusion that no gains from trade exist.

3.  Paul R. Michel & Matthew Dowd, Understanding the Errors of eBay.  Here is a link to the article, and here is the abstract:

eBay has had a profoundly negative effect on the enforceability of U.S. patents, including patents whose validity is beyond doubt. With the likelihood of an injunction severely diminished, patent infringers appear less willing to cease infringing activity. In contrast to U.S. practice, injunctions are routine in Germany and other European countries and becoming so in Asian nations, particularly China, for all technologies and all types of owners. Investment money is mobile and flows toward the high-value assets. eBay has crimped patent rights and thereby diminished investment incentives in the United States. The result: reduced research and development, less job creation, lower economic growth, and diminished American global competitiveness. This cannot be what the Supreme Court intended, but it is how the Kennedy concurrence is being implemented by most district courts that ignore the less forceful Roberts concurrence. The time has come for the Court, or at least the Federal Circuit, to rescue America from this folly.

4.  Maureen K. Ohlhausen, The Federal Trade Commission's Path Ahead.  Here is a link to the article, and here is the abstract:

Given my extensive experience as a leader at the Federal Trade Commission (FTC), I have developed views about how the Commission should carry out its work. In the months ahead, I hope to realize my vision by continuing the agency’s good work to protect competition while advancing principles that the FTC overlooked or undervalued under the Obama Administration.

First, a word on my antitrust philosophy: I believe in the power of markets—when free of restraints and unnecessary regulations—to provide the best outcomes for consumers. Antitrust enforcers guard the competitive process. We intervene when firms injure competition, and we advocate for consumers when governments consider anticompetitive legislation. But equally important is knowing when not to intervene.

As you know, competitive markets tend toward static efficiency, as firms experience market pressures to price near a measure of their costs. But even periods of monopolistic pricing can be consistent with—if not indispensable to—dynamically efficient markets. That is especially so when dominance reflects a firm’s superior innovation. The continuing rise of technology-driven industries makes that consideration more fundamental than ever. The Arrow-Schumpeter debate remains live and nuanced.
Importantly, competition enforcers should not intervene simply because they dislike certain market outcomes. Antitrust is about protecting the process, not guaranteeing a particular result at a particular time. We trust that markets in which firms must endure competitive pressures will produce favorable outcomes in terms of price, output, quality, and innovation in the long run. But if prices seem excessive or output stagnant at a point in time, we do not use antitrust enforcement to require firms to charge less or to produce more. In short, antitrust is not regulation. As the Supreme Court observed in National Society of Professional Engineers, “competition is the best method of allocating resources in a free market,” and even “occasional exceptions to the presumed consequences of competition” are not grounds for antitrust enforcement.

My record shows that I favor meritorious intervention. But, I believe, it is critical to wield our competition laws with regard for the limits of our knowledge, the risk of getting it wrong, and the relative costs to society of over-enforcement and under-enforcement. Those considerations inform my lodestar of “regulatory humility,” which I will follow in the months ahead. Impressionistic assessments of harm should not drive major interventions in the market. Rather, empiricism should control. Moreover, a rigorous application of economic theory is crucial for understanding the likely effects of business conduct and for informing enforcement decisions.

In this essay, I discuss the basic principles that inform my perspective on antitrust law and outlined certain policy priorities for me going forward. My philosophy of regulatory humility, my belief in the power of competitive markets, and a devotion to empiricism inform my view of antitrust. An important question, however, is how my views translate into specific policy goals for the FTC. I would like to see the Commission pursue some new directions. I specifically mention grounding action in a strong empirical basis, challenging abuses of the government process, and better use of Part 3. But, as I articulated at the Heritage Foundation recently, I have other goals, too. Those include the promotion of economic liberty, trimming the costs that the FTC imposes on business without hindering the Commission’s enforcement abilities, and protecting U.S. firms’ intellectual-property rights. I will continue to pursue those aims energetically.

5.  J. Gregory Sidak, Fair and Unfair Discrimination in Royalties for Standard-Essential Patents Encumbered by a FRAND or RAND Commitment.  Here is a link to the article, and here is the abstract:

Legal disputes between SEP holders and implementers regarding FRAND or RAND royalties for SEPs have increasingly focused on the meaning of the nondiscrimination requirement contained in a FRAND or RAND commitment. However, as of August 2017, there is no agreement on the precise duties arising from such a requirement. The legal and economic literature has proposed divergent, and mainly normative, interpretations of the nondiscrimination requirement. Some commentators say that the nondiscrimination requirement prohibits the SEP holder from excluding individual implementers from using its SEPs, but that the requirement does not limit the terms and conditions that the SEP holder may offer to different licensees. Others say that the requirement imposes on the SEP holder a duty to offer similar terms to similarly situated implementers—although, even then, there is no agreement on how to implement the “similarly situated” construct in practice. The most misguided and unhelpful interpretation in that literature comes from economic scholars who contend that the nondiscrimination requirement imposes on the SEP holder the duty to create and maintain a “level playing field” among the SEP holder’s licensees. The majority of these proposed interpretations rest on normative expressions of what the nondiscrimination requirement should be, as opposed to positive principles of what that requirement is. Thus, they are limited in their ability to guide a court’s interpretation of the nondiscrimination requirement in the FRAND or RAND commitment at issue in a given dispute.

If American law controls the interpretation of the obligations arising from an SEP holder’s FRAND or RAND commitment, there exists a rich positive jurisprudence on nondiscrimination that provides common principles that can aid a court’s interpretation of an SSO’s nondiscrimination requirement. Those principles, which are consistently applied across various fields of law, suggest that evidence that the SEP holder has treated similarly situated implementers differently is necessary but insufficient to prove that the SEP holder has violated the nondiscrimination requirement of a FRAND or RAND commitment. The court must also examine whether the SEP holder had a valid justification for the differential treatment of similarly situated implementers. Economic analysis can help a court to determine whether (1) the claimant is situated similarly to other implementers, (2) the SEP holder has treated the claimant differently, and (3) a valid justification exists for any differential treatment. A finding of impermissible discrimination is supportable only when the SEP holder lacks a legitimate justification for the disparate treatment of similarly situated implementers.

6.  J. Gregory Sidak, Is a FRAND Royalty a Point or a Range?  Here is a link to the article, and here is the abstract:

Justice Birss said in Unwired Planet that there can be only a single FRAND royalty rate for a given set of circumstances between parties negotiating a license for an SEP. However, it would be untenable on both economic and legal grounds to infer from that opinion that FRAND or RAND can be only a single point in a voluntary negotiation between two parties, or that an SEP must command the same price across all licensees for a given SEP.

As an economic matter, an SEP holder’s commitment to license its SEPs on FRAND or RAND terms generates a range of reasonable royalties upon which the negotiating parties could voluntarily agree. The SEP holder’s minimum willingness to accept to license its SEPs and the licensee’s maximum willingness to pay to use those SEPs identify the bounds on the bargaining range. Any agreed-upon royalty within that prescribed range will make both the SEP holder and the licensee better off than they would be if they were not to execute the license. In a given negotiation, the royalty will converge on a point within that range according to the relative bargaining power of the specific negotiating parties. However, the ultimate point value of that royalty is not preordained by the supposed uniqueness of a FRAND or RAND rate; rather, the ultimate point value of the FRAND or RAND royalty in a given license depends on the circumstances surrounding the negotiation. Differences in the size of the bargaining range and differences in the relative bargaining power of the SEP holder and the implementer will surely exist across licenses for a given SEP, and those differences explain why the observed royalty rate for a given SEP routinely varies across licenses.

Legal interpretation of the FRAND or RAND commitment (under American law) independently confirms that a FRAND or RAND royalty may be situated anywhere along a range of possible outcomes. In both their interpretation of section 284 of the Patent Act and their application of the hypothetical-negotiation framework to determine damages for patent infringement under section 284, the federal courts recognize that a range of reasonable royalties exists for a given patent. Any contractual bargaining away by the patent holder of its rights arising from that statutory framework would need to be indisputably clear. However, such clarity is nonexistent. The patent policies of the major SSOs allow the SEP holder and the implementer to set licensing terms for an SEP, including the ultimate royalty rate, through voluntary, bilateral negotiation. Far from dictating a unique point value, that mechanism permits a range of FRAND or RAND royalties for a given SEP.

7.  J. Gregory Sidak, Using Regression Analysis of Observed Licenses to Calculate a Reasonable Royalty for Patent Infringement.  Here is a link to the paper, and here is the abstract:

Patent licenses reveal information about how the market values a patented technology and how the market values new information concerning the probability of a patent’s validity and infringement. One can use that information to determine the value of the patent in suit under the assumed conditions in the Georgia-Pacific hypothetical negotiation that the patent is absolutely valid and infringed. Using regression analysis, an expert economic witness can use the change in royalty rates that occurs after pretrial rulings (by district courts, by the PTAB, or by the ITC or its individual administrative law judges) to calculate the market value of the increasing probability that the patent in suit is valid and infringed, and to predict the outcome of the hypothetical negotiation on the eve of the defendant’s first infringement of the patent in suit. The line of best fit might predict a gradually increasing royalty over time, as uncertainty about the patent’s validity and scope decreases. If so, extending the line of best fit to the trial date would provide a conservative (lower-bound) calculation of a reasonable royalty under the assumptions of absolute validity and infringement that apply in Georgia-Pacific’s hypothetical negotiation. This methodology enables the calculation of a reasonable royalty for the patent in suit that incorporates both the underlying legal assumptions of the hypothetical-negotiation framework and the market-disciplined prices that one subsequently observes in actual patent licenses voluntarily negotiated at arm’s length between the licensor and willing third parties.

8.  J. Gregory Sidak and Jeremy O. Skog, Hedonic Prices and Patent Royalties.  Here is a link to the article, and here is the abstract:

 A hedonic model explains a good’s price in terms of its characteristics. In this article, we use hedonic prices to estimate the permissible range for a reasonable royalty for a standard-essential patent (SEP) subject to its owner’s commitment to offer to license the patent on reasonable and nondiscriminatory (RAND) terms. Our methodology is equally applicable to the calculation of fair, reasonable, and nondiscriminatory (FRAND) royalties for SEPs.

Hedonic price analysis provides a scientifically rigorous means to satisfy the Federal Circuit’s directive in Ericsson v. D-Link to disaggregate the value of having a standard of any sort from the incremental value of the chosen standard, and then to disaggregate further the incremental contribution that a given SEP or portfolio of SEPs makes to the overall value of the technologies that allow the chosen standard to operate. The common additive form of the hedonic regression model is the most appropriate econometric model to meet that directive.

When implemented in an appropriate and thoughtful way, hedonic price analysis provides an expert economic witness—and, ultimately, the finder of fact—with a reliable methodology to determine whether a given license offer satisfies the reasonableness requirement of a RAND or FRAND commitment. If asked or required to set a specific RAND or FRAND rate for a specific portfolio of SEPs, a court or arbitral panel could take our analysis one step further, by determining where within the RAND or FRAND bargaining range a bilaterally negotiated royalty between the parties would most likely fall. Hedonic price estimation can also inform the calculation of a reasonable royalty in conventional patent litigation that does not involve standard-essential patents. Consequently, the use of hedonic price estimation is a conceptual breakthrough in the calculation of reasonable royalties for patent infringement, both for SEPs subject to a RAND or FRAND commitment and for patents that are not declared essential to any standard.

This one I have read, so I can offer a few comments.  I thought this was an interesting paper, and while I can't claim a deep understanding of the statistical techniques the authors use their proposal appears to me to be an improved version of the "top-down" approach used in Innovatio and Unwired Planet.  The authors try to isolate the ex post value of a new standard over an old one using the concept of hedonic prices, and then apportion that value to account for differing values among patents.  They accomplish the latter by analysis of forward citations, which as they point are a standard metric for patent valuation among economists.  But see Allison, Lemley & Schwartz, Understanding the Realities of Modern Patent Litigation, 92 Tex. L. Rev. 1769, 1798-99 (2014) (calling into question economists' reliance on citation counts as evidence of patent quality). 

PTAB/TTAB Event at the University of Minnesota Law School, and Some Other Upcoming Events

This isn't directly related to patent remedies as such, but I suspect that many readers of this blog in the Twin Cities area may be interested.  The University of Minnesota's Corporate Institute is presenting a USPTO PTAB/TTAB event at the University of Minnesota Law School on Wednesday, September 27, from 12:30-5:00.  The event will feature live PTAB trial proceedings and live TTAB appeal and opposition proceedings, as well as educational sessions featuring judges who will share tips for successful advocacy and practitioners who will discuss litigation strategies.  Here is a link to the website, and here is a link to the Corporate Institute's flyer advertising the event.

Also of possible interest to local readers is the Midwest IP Institute, which takes place in Minneapolis September 28-29.  From the institute's webpage:

Headlining the 2017 Institute are CAFC Judge Jimmie Reyna, TTAB Chief Judge Gerard Rogers, USPTO Solicitor Nate Kelley, and Midwest Regional USPTO Director Dr. Christal Sheppard. With these headliners, IP experts from Asia, Europe, Canada, Australia, California, Texas, New Jersey, Massachusetts and across the Midwest will join a talented local faculty of experts to share real-world advice and practice tips for tackling complex legal and business issues.

There will be sessions on, among other things, managing patent infringement risk post-Halo and best practices relating to design patents after Apple v. Samsung.  Here is a link to the website.  

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I should also mention, for readers in the D.C. area, that the National Press Club will be hosting a panel titled "Next Up In Apple/Samsung Smartphone Wars: Design Patent Remedies Following The SCOTUS Decision,” on Wednesday, Sept. 13, from 9-10:30 a.m.  Details can be found on Professor Rebecca Tushnet's 43(B)log.