(Note: Due to my failure carefully to proofread the first paragraph of this post, the version originally published yesterday contained an inadvertent ambiguity concerning whether the royalty awarded for past infringement should be the same as or higher than the royalty awarded for past infringement. I have now corrected that ambiguity.)
Both of these were recently highlighted on the Patently-O Blog, but I thought I should add my two cents' worth to the mix. The first case, Virnetx Inc. v. Apple Inc., Case No. 6:13-CV-211 (E.D. Tex. Feb. 25, 2014), available here, involves the question of whether, in a case in which a court (applying the eBay factors) denies a permanent injunction and awards an ongoing royalty, the ongoing royalty should be based on a rate that is the same as or higher than the royalty awarded for past infringement. From an economic perspective, the answer is pretty clear: it should not be higher than the royalty awarded for past infringement. If the point of awarding an ongoing royalty is to avoid patent holdup (i.e., the defendant is unable to cease infringing immediately without pulling its product off the market, and therefore if an injunction is issued the patentee can demand an extortionate postjudgment royalty) it doesn't make much sense to award a higher royalty that effectively replicates the impact of an injunction. In addition, given that the trier of fact has already determined the amount of a reasonable royalty based upon the assumption that the patent is valid and infringed, we really don't have any changed conditions postjudgment that require an alteration of that amount. Finally, to award enhanced damages with respect to the ongoing royalty on the premise that the postjudgment infrigement is willful, as Judge Davis did here, simply compounds the error.
Both of these were recently highlighted on the Patently-O Blog, but I thought I should add my two cents' worth to the mix. The first case, Virnetx Inc. v. Apple Inc., Case No. 6:13-CV-211 (E.D. Tex. Feb. 25, 2014), available here, involves the question of whether, in a case in which a court (applying the eBay factors) denies a permanent injunction and awards an ongoing royalty, the ongoing royalty should be based on a rate that is the same as or higher than the royalty awarded for past infringement. From an economic perspective, the answer is pretty clear: it should not be higher than the royalty awarded for past infringement. If the point of awarding an ongoing royalty is to avoid patent holdup (i.e., the defendant is unable to cease infringing immediately without pulling its product off the market, and therefore if an injunction is issued the patentee can demand an extortionate postjudgment royalty) it doesn't make much sense to award a higher royalty that effectively replicates the impact of an injunction. In addition, given that the trier of fact has already determined the amount of a reasonable royalty based upon the assumption that the patent is valid and infringed, we really don't have any changed conditions postjudgment that require an alteration of that amount. Finally, to award enhanced damages with respect to the ongoing royalty on the premise that the postjudgment infrigement is willful, as Judge Davis did here, simply compounds the error.
Both Mark Lemley (in his paper Ongoing Confusion over Ongoing Royalties, available here) and I (in various places, including at page 13 of this paper) have made these points before, so there's really nothing theoretically new here. The distressing part is that, in deciding patent matters, U.S. courts sometimes seem completely oblivious to anything more than the crudest form of economic reasoning (patents increase incentives to invent, therefore stronger patent rights are better!) in a manner that is completely at odds with the high level of economic sophistication that courts often bring to bear in antitrust matters. Given that I.P. law, particularly patents, are just another form of economic regulation, properly viewed as complementary to antitrust law, this disconnect between legal doctrine and economic reasoning has never made any sense to me; yet despite some improvements in certain areas of patent law it never quite seems to go away.
The other case is Suprema, Inc. v. ITC, __ F.3d __, 2013 WL6510929 (Fed. Cir. Dec. 13, 2013), in which the Federal Circuit held that the International Trade Commission lacks the power to enter an exclusion order against the importation of a good that itself does not infringe but that is intended to induce infringement within the United States. The ITC and the patentee are seeking a rehearing en banc. I don't have a strong feeling one way or the other one this particular issue at present, other than my background premise that the ITC--a separate investigatory and adjudicative body that enforces border measures against infringing goods' entry into the United States, and that to my knowledge has no parallel in any other country except South Korea--is an unnecessary adjunct to the normal U.S. district court system for litigating patent disputes. For further discussion of what I view as the ITC's unjustifiable exceptionalism, see here and here.
It seems to me that antitrust is the outlier in its economic sophistication. There are plenty of other areas besides patent law that could use a strong dose of economic reasoning. I would speculatie that there is a chicken and the egg problem. Sophisticated economic reasoning is hard, so litigants won’t engage in it unless they have to (it is the law), but judges won’t make it the law until it is persuasively argued before them on a regular basis. Before an economic analysis is established law, a litigant who argues it faces a substantial persuasive hurdle, and there is a large litigation cost in developing the argument, convincing the judge on a policy basis, and then finding a hook into existing non-economic law. This means there is a significant positive externality to shaping the law towards economic rationality. What is different about antitrust is that there is a single repeat player, namely the FTC, which can largely internalize that externality. Once the FTC was on board with economic reasoning, the defendants had to acquire the same expertise, and it was regularly argued before the courts, who turned it into law, so that now everyone has to use it.
ReplyDeleteThat's an interesting point. Of course, there are other administrative agencies that are repeat players in certain types of cases and that could develop similar expertise. (And maybe they do; I'm not very well versed in fields such as securities or environmental law.) In the U.S., the USPTO argues a fair number of cases in court, though mostly in cases in which it has rejected an application, not in any cases involving damages calculations.
ReplyDeleteGood point re other fields. There are also repeat players in commercial law, namely banks and other lending institutions. My sense is that commercial law is relatively sophisticated, though not to the same degree as antitrust, perhaps because a lot of the concerns relate to certainty rather than more subtle economic concepts. It would be interesting to know whether the law is systematically more economically sophisticated in areas with repeat players.
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