Tuesday, November 11, 2014

Conference on Patent Remedies at American University, Session 3: Monetary Damages

Professor Jonas Anderson is moderating this session.  Speakers are Rob Lytle (Microsoft), David Cavanaugh (WilmerHale), and Matt Levy (Computer and Communications Industry Association).

Anderson:  Panel will address Virnetx case, and also attorney's fees.

Lytle:  At one time, practice was to focus on a large feature of the product as the royalty base to try to increase royalties; not always proportional to value of invention.  Federal Circuit took action to rationalize damages law based on economic theory.

Lucent case:  focus is on how the plaintiff was hurt, and how parties would have negotiated ex ante.  Entire market value rule (EMVR) inapplicable unless defendant can show its product was the cause of the demand.   
Uniloc:  further move away from EMVR; can't put those entire revenues before jury unless defendant caused them (even if the rate is very small).  

Laserdynamics:  Just because a feature is important or competitively necessary doesn't mean it caused the revenue.  You wouldn't buy a car without tires, but tires don't drive the demand for the car.

Cavanaugh:  Discusses Virnetx case.  Three matters.  First, Virnetx expert identified smallest saleable unit as the entire iPhone.  CAFC:  no; too large.  Small royalty doesn't cure problem.  Second, Nash Solution Theory.  Expert posited a 55/45 split.  CAFC:  Need to establish that underlying premises apply, otherwise can't use the theory.  Third, you need to present something that is based on the economic value of the patent.  Damages theories must be grounded.  [For more on Virnetx, see my post here.]

Levy:  Discusses fee shifting.  CAFC case law until recently:  pro-defendant fee shifting requires sanctionable conduct or objective/subjective baselessness.  Defendants almost never got fee awards.  But this gave PAEs  a lot of leverage.  In December 2013, House of Representatives passed Innovation Act, which would have presumed fee-shifting unless losing party's side was reasonably justified or it otherwise would be unjust.  Senate didn't find that like that and bill died.  But Supreme Court took the matter up in Octane Fitness and Highmark and overrules CAFC standard.  "Exceptional cases" don't have to be frivolous, though they must stand out; and judge has discretion to award fees.  [For more on these cases, see my post here.]  Some concerns that this would lead to a great deal of fee shifting, but only 4-5 cases since April where defendants got fees.  So still not a big shift.  Judges don't like to award fees or sanction parties.  With change in Senate, though, fee shifting may come up again in Congress.   

Anderson:  CAFC addressing damages issues like Supreme Court addresses CAFC cases.  First, did lower get it right?  Often no.  Second, what do we do now?  We don't exactly say . . .  So what things are we to do now?

Cavanaugh:  Damages theories need to be supported.  I've found the most rational approach to be to ensure that the damages theory is well supported.  Don't necessarily choose the one with the highest or lower number.  Reasoned approach.         

PAEs:  Different dynamic, because they don't sell products.  Companies that do sell products may approach damages theories differently when they are acting as plaintiffs.  

Lytle:  A bit of a quandary;  we know what we can't do, but necessarily what we can.  Experts:  maybe would be better to hire academic economists to do studies.  Most economists are baffled by the Georgia-Pacific factors, in terms of how it shows what a patent is worth.

Levy:  Damages theories sometimes have not been connected to reality.  Reality is that a lot of patents aren't worth very much individually, but rather as part of a portfolio.  But you sue on individual patents.

Question from Dina Kallay:  Question re Laserdynamics.  Court said that actual licenses are highly probative.  You're not saying that Laserdynamics mandates smallest saleable unit in every case, if actual licenses don't?

Lytle:  In Laserdynamics, they also knocked out some of the licenses.  How do you establish the licenses are comparable?  I think law will move toward stricter scrutiny.  Will be more case-by-case, patent-by-patent.    
My questions:  The Federal Circuit probably was right to discard the 25% rule in Uniloc, and to caution against inappropriate use of the Nash bargaining model in its place.  But if we are trying to estimate the bargain the parties would have made ex ante, don't we sometimes need to start out with some sort of presumption about how they would divide up the expected surplus?  Does the plaintiff get nothing if it can't introduce evidence how the parties would have divided it up?  Is the fact that, uniquely among the nations of the world, we have jury trials in patent cases, driving the legal principles in ways that could be at odds with economic principles? Should we rely more on court-appointed experts or to the extent it is permissible under our rules of civil procedure and evidence, "hot-tubbing"?  Need a paradigm shift?

Cavanaugh:  To extent we have principles we rely on, need to be applied with rigor.  Nash Bargaining Solution isn't necessarily discounted but properly applied.  Establish fundamental predicates. 

Question from Jorge Contreras:  At a recent conference, David Teece argued that smallest saleable unit is economically senseless.  That's true.  High base times small rate, get same number as with smaller base and higher rate.  In the FRAND cases, often tiny rates times unit.  Is this the direction we should be going?

Levy:  People will be thinking in terms of the number they are given.  Framing.  But in economic terms, it makes sense to think in terms of actual value of the patent.  Sometimes it's nothing, sometimes it's small.

Lytle:  You can't just take the smallest saleable unit; CAFC telling us that in Virnetx.  Maybe a lump sum would be better in some cases.   

Cavanaugh:  We need to open to a number of ways of articulating value.  As we move into new areas, it becomes a challenge determining how that should be compensated.

Question from the audience (Tim Simcoe):  Trend toward linking damages more to economic value.  What is the value of the hypothetical negotiation, relative to just asking what is the value of the patent in a given case?

Lytle:  I don't like Georgia-Pacific; hypothetical negotiation may not always be the best way of measuring harm.  Hard to explain to jury what would have happened eight years ago.  What we are really trying to get at is what is the feature worth?

Levy:  How much is this worth is a hard question.  Georgia-Pacific was intended to be a good proxy, but may be just as hard.  I don't think it's all that helpful. 

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