Different Views on Comparable Licenses in Recent Patent Remedies Scholarship

I mentioned a few weeks back that Erik Hovenkamp had posted an interesting paper expressing a skeptical view of the use of comparable licenses to determine reasonable royalties in patent infringement litigation (see post here).  Since then, a few additional papers on the use of comparable licenses have come out:

1.  Jonathan Masur has posted a paper on ssrn titled The Use and Misuse of Patent Licenses.  Here is a link to the paper, and here is the abstract:

As the number of nine- and ten-figure verdicts continues to increase it is impossible not to take notice: patents are becoming an ever bigger business with more and more wealth at stake. At the center of that business lie the damages that courts award at trial, and the ways in which courts go about calculating those damages. Yet the legal standards meant to govern patent damages are notoriously ambiguous and unhelpful. In the face of these difficulties, courts have sought a market mechanism that would aid them in calculating patent damages. The solution they have seized upon is to use existing licenses, typically granted by the plaintiff to third parties, as evidence of the proper measure of damages. But the use of existing licenses to measure reasonable royalty damages creates three significant and distinct problems: first, it relies upon private information available only to the parties to the pre-existing licensing agreement; second, it is ineluctably circular; and third, it creates incentives for the patent holder to distort the value of the licenses it negotiates in order to mislead the court. The Article describes and analyzes these three problems, and then turns to potential solutions. It analyzes a variety of possible reforms, including selection of particular licenses for comparison or the application of a multiplier to the value of existing licenses. Though several of these solutions show promise, none come close to being a complete answer. It may well be that courts have no choice but to largely ignore existing licenses when calculating patent damages, leaving them more at sea than ever.

2. Expressing a different view on the use of comparable licenses, J. Gregory Sidak has published an article titled Bargaining Power and Patent Damages, 19 Stan. Tech. L. Rev. 1 (2015).  Here is a link to the paper, and here is the abstract:

In patent-infringement litigation, if no established royalty for the patent in suit has emerged from multiple market transactions at a readily observable price, then the finder of fact needs to infer a reasonable royalty from the many factors identified in the Georgia-Pacific framework. The well-recognized problem with the Georgia-Pacific framework is that it poses many potentially relevant questions but does not say how the finder of fact should weight the answers. The case law offers no algorithm or decision tree for the finder of fact to follow. Courts find expert testimony inadmissible if it does not apply intellectually rigorous economic methods and principles to the facts and data of the case to produce results that are replicable and falsifiable. With modest effort, and without repudiating existing precedent, the courts can make the Georgia-Pacific framework far more coherent, predictable, and intellectually rigorous. From an economic perspective, that framework ultimately leads the finder of fact, first, to determine the gains from trade—which economists call “surplus”—arising from a hypothetical, voluntary negotiation between a willing licensor and a willing licensee just before the moment of first infringement and, second, to divide that surplus between the licensor and licensee according to their relative bargaining power. For brevity and clarity, I call these two culminating steps the surplus-division principle. This principle is more reliable than purporting to set a reasonable royalty on the basis of a mathematical theory (such as the Nash bargaining solution) that is too abstract to fit the facts and data of the case. It is also more reliable than an expert’s idiosyncratic and nonfalsifiable claim to have balanced the totality of the circumstances in light of his professional experience. In contrast to both a theoretical black box and an expert’s ipse dixit, the surplus-division principle uses elementary principles of microeconomics to give coherence to the Georgia-Pacific factors that courts have already defined and applied. The result enables the finder of fact to determine a licensor’s minimum willingness to accept and a licensee’s maximum willingness to pay for the patented technology, and thereby to define the bargaining range for a hypothetical  negotiation. This method is robust across different factual scenarios and multiple defendants.

3. Mr. Sidak also has posted a paper titled Apportionment, FRAND Royalies, and Comparable Licenses After Ericsson v. D-Link (forthcoming 2015 University of Illinois Law Review).  Here is a link to the paper, and here is the abstract:

Standard-setting organizations (SSOs) usually require that their members clarify whether they are willing to provide access to their technology essential to a  standard under development on fair, reasonable, and nondiscriminatory (FRAND) terms and conditions—or, in American parlance, reasonable and nondiscriminatory (RAND) terms and conditions. After the patent holder has agreed to license its standard-essential patents (SEPs) on FRAND terms, a licensor and a licensee negotiate the exact licensing terms for the use of the SEP portfolio. In the few cases in which parties cannot agree on the exact terms, they might ask a court or an arbitration tribunal to determine a FRAND royalty. The decision of the U.S. Court of Appeals for the Federal Circuit in Ericsson, Inc. v. DLink Systems, Inc. identifies important economic principles for determining a FRAND royalty for the use of SEPs. Ericsson is the owner of several patents essential to the 802.11(n) standard—the standard promulgated by the Institute of Electrical and Electronics Engineers (IEEE) that is commonly known as Wi-Fi—and committed to license those patents on RAND terms. When negotiations between Ericsson and several manufacturers of multicomponent devices that incorporated the Wi-Fi standard failed to result in a license, Ericsson sued in the U.S. District Court for the Eastern District of Texas and demanded a jury trial to determine the RAND royalty that the manufacturers should pay to use Ericsson’s SEPs. Relying on evidence from comparable licenses—that is, licenses that Ericsson had signed with third parties similarly situated to the defendants to use Ericsson’s patents essential to the Wi-Fi standard—the jury awarded damages of roughly $10 million to Ericsson. In reviewing the case on appeal, the Federal Circuit confirmed that royalties specified in comparable licenses provide accurate and reliable evidence of the value of a patented technology for calculating a FRAND royalty. The Federal Circuit rejected the defendants’ argument that a chipset (rather than the mobile device) should represent the royalty base to calculate a FRAND royalty. (In simple terms, one typically calculates total damages by multiplying a royalty rate by a royalty base). The Federal Circuit also reiterated the fundamental principle that a party should support allegations about abstract conjectures, such as patent holdup and royalty stacking, with relevant evidence. Unsupported allegations about the SEP holder’s supposedly opportunistic licensing practices should not influence the determination of a FRAND royalty. Finally, the Federal Circuit said that a FRAND royalty should not include the value that a technology acquires by virtue of its inclusion in a standard. Although the Federal Circuit was correct in reiterating that a FRAND royalty, like any other royalty for the use of a patented technology, should compensate the SEP holder for the incremental value of its patented technology, the Federal Circuit’s decision should not be interpreted as excluding any of the standard’s value from a FRAND royalty. To the contrary, when a patented technology creates part of the standard’s value, only a FRAND royalty that includes part of that value will adequately compensate the SEP holder for its contribution.