Hovenkamp on Reasonable Royalties

Erik Hovenkamp has posted a paper on ssrn titled How Reasonable Royalties Suppress Patent Licensing.  Here is a link to the paper, and here is the abstract:

Patent remedies are essential to maintain a well-functioning patent system, but if not properly fashioned they may interfere with the dissemination of patented inventions and thereby foreclose many opportunities for mutually-beneficial licensing. This paper addresses two attributes of patent damages awards that engender such effects. The first is the monopoly fallacy: the tendency to overstate a patent holder’s market power in its licensing market by discounting or disregarding alternative options or potential workarounds, effectively allowing a plaintiff to recover a monopoly price for a license that would command only a competitive price if exchanged at arm’s length. As a result, settlements or judgments secured from unintentional infringers become a patent holder’s most lucrative means of licensing, and this substantially lessens its interest in actively disseminating its invention by seeking out potential licensees ex ante. In fact, if expected damages are sufficiently high in relation to the market value of a license, the patent holder’s most profitable strategy is to deliberately refrain from approaching known licensing candidates in the hope that some fraction of them will unintentionally infringe. Consequently many opportunities for efficient licensing are ultimately missed, and many of those deals that do occur could have been executed earlier and more efficiently.

A second problem is the courts’ reliance on precedential royalties, or reasonable royalty damages based on an established royalty for the infringed patent. While administratively convenient, the results of this approach will often be woefully imprecise, as there are many variables relating to the parties, the licensee’s intended licensing application, and the competitive landscape that collectively create a significant disparity in the licensing terms a patent holder would reach with different licensees or at different times in the patent term. Because a precedential royalty rule ignores these differences, the terms of a licensing contract may work against the licensor in its future dealings or disputes with other parties. Patent holders thus have a strong interest in not setting a bad precedent, and will reject many mutually-beneficial deals simply because the royalty rate would not appear particularly high. The result is that patent holders are induced to cut off a large segment of the market, even though they could have benefitted from these forgone transactions – an outcome that injures inventors, firms, and consumers.

I haven't read this yet myself, but it sounds like it should be interesting.  Erik and I coauthored this paper on anticompetitive patent injunctions last year.