Sidak on Royalties, SEPs, China

J. Gregory Sidak has some new papers on patent remedies and related issues, including the following:

 

1.  Ongoing Royalties for Patent Infringement, forthcoming in 24 Texas Intellectual Property Law Journal (2016).  Here is a link to the paper, and here is the abstract:

Section 283 of the Patent Act provides that, to prevent the ongoing infringement of a patent, courts “may grant injunctions in accordance with the principles of equity.” If the court decides that the issuance of an injunction is not appropriate, it may direct the parties to negotiate a royalty for the infringer’s future use of the patented technology. When such a negotiation fails, the court will impose an ongoing royalty that the infringer must pay. The U.S. Court of Appeals for the Federal Circuit has clarified that the calculus for an ongoing royalty differs from the calculus for a reasonable royalty typically awarded for past infringement, but it has not prescribed any particular methodology for a court to apply when determining an ongoing royalty. I conduct an empirical analysis of the courts’ decisions on ongoing royalties, which shows that a court-awarded ongoing royalty typically exceeds the jury-determined reasonable royalty imposed for past infringement. However, my analysis does not identify any single variable that affects the court’s determination of an ongoing royalty, which suggests that the courts have not yet developed a consistent methodology for determining an ongoing royalty. This article aims to fill that gap in the existing legal guidance by providing a simple yet rigorous economic methodology that courts can apply when determining an ongoing royalty. Because an ongoing royalty is an equitable remedy, awarded in lieu of a permanent injunction, no jury needs to be involved in determining the ongoing royalty. Consequently, Daubert and its progeny are not implicated (or, at the very least, the role of Daubert differs from its role in cases in which a jury acts as the finder of fact). In addition, the rationale for the entire market value rule (EMVR)—namely, avoiding jury confusion because of a large damage base—is inapplicable when calculating an ongoing royalty. When determining an ongoing royalty for the prospective use of a patented technology, courts can apply a methodology similar to that used to calculate a reasonable royalty. Courts need to consider the changes in economic circumstances from the time of first infringement to the time of the jury’s verdict and then determine how those changes affect the hypothetical negotiation for an ongoing royalty. In economic terms, courts should examine how the information that became available after the first infringement affects the bargaining range for the use of the patent or patent portfolio. That is, courts need to identify any changes in the patent holder’s minimum willingness to accept and the infringer’s maximum wiliness to pay. Next, courts need to examine whether the parties’ relative bargaining positions have changed (compared to their bargaining positions at the time of first infringement) to determine a point royalty within the bargaining range. I show that, although the court’s determination of an ongoing royalty will be fact-specific and will vary on the basis of the specific circumstances of each case, the changes in the economic conditions between the time of first infringement and the time of the hypothetical negotiation for an ongoing royalty will typically support the award of an ongoing royalty that exceeds the reasonable royalty for past infringement. An ongoing royalty that exceeds the reasonable royalty for past infringement should not be confused with an award of enhanced damages for willful infringement, which courts rarely award.

2. The Value of a Standard Versus the Value of Standardization, forthcoming in 68 Baylor Law Review (2016).  Here is a link, and here is the abstract:

The Federal Circuit said in Ericsson, Inc. v. D-Link Systems, Inc. that a jury instructed to determine a fair, reasonable, and nondiscriminatory (FRAND) royalty for standard-essential patents (SEPs) “must be told to consider the difference between the added value of the technological invention and the added value of that invention’s standardization.” The court emphasized that a FRAND royalty “must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” The Federal Circuit reasoned that “those steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product” and is not based on any value that the standardization of that technology adds to the product. 

The Federal Circuit’s phrase “the value of standardization” is abstract and ambiguous. Restated in more direct and more intuitive terms, the phrase appears to denote the value from making a collective decision to conform to a standard—that is, the value that arises when inventors and potential implementers agree that they will comply with a standard to solve a particular technological challenge. That agreement to create a standard does not imply that a feasible technology already exists to become the standard, nor does it indicate that the required technology (if it does not yet exist) will be straightforward to develop. The standard-setting organization (SSO) cannot simply hypothesize that an available and acceptable technology exists for the standard because the SSO would like to have a standard. 

Consequently, in patent litigation after Ericsson v. D-Link it is essential to disaggregate “the value of standardization” from the value of the technologies incorporated into the standard. “The value of standardization”—that is, the value of the agreement to implement a unified standard—can arise from (1) a reduction in transactions costs for implementers of the standard and for SEP holders and (2) the network effects generated by interoperability between standard-compliant products. The value of the technologies incorporated into the standard comprises the rest of the total value of the standard.

3. Evading Portfolio Royalties for Standard-Essential Patents Through Validity Challenges.  Here is a link to the paper, and here is the abstract:

A no-challenge clause prevents a patent licensee from challenging the validity of a licensed patent. In the 2014 Guidelines on Technology Transfer Block Exemption Regulation, the European Commission discouraged parties from including a no-challenge clause in a settlement and license agreement concerning standard-essential patents (SEPs). The Commission said that eliminating invalid patents serves the public interest because it promotes competition. For similar reasons, in 2014, the Advocate General of the Court of Justice of the European Union opined in Huawei Technologies Co. v. ZTE Corp. that EU competition law should allow a licensee to retain the right to challenge a licensed SEP’s validity notwithstanding that the licensee has entered into a settlement and license agreement with the SEP holder. I analyze the Commission’s and the Advocate General’s assumption that a licensee’s challenging the validity of SEPs unambiguously benefits consumers. I assess the merits of that legal proposition within the well-established economic framework of cost-benefit analysis. I particularly focus on the marginal benefits and the marginal costs that eliminating no-challenge provisions would generate for consumers. I explain that the Commission and the Advocate General exaggerated the marginal benefits and understated the marginal costs of validity challenges to licensed SEPs, particularly when the typical SEP holder repeatedly licenses its SEPs in a large portfolio to a sophisticated licensee. The discovery that several SEPs in a licensed portfolio of hundreds are invalid would neither surprise the parties nor justify reducing the portfolio royalty. The Commission and the Advocate General ignored that encouraging a licensee to challenge the validity of individual licensed SEPs invites opportunistic litigation by the licensee so as to delay paying the SEP holder the agreed-upon royalty for the use of the many more valid patents in its licensed portfolio. Thwarting the SEP holder’s ability to receive prompt compensation for its innovative contribution lessens the SEP holder’s incentive to invest in innovation and thus decreases quality of collective standard setting. Those effects in turn impose significant marginal harm on consumers. Consequently, the Commission and Advocate General erred to assume that consumers derive a net marginal benefit from the announced policy encouraging a licensee to challenge to the validity of licensed SEPs.

4. Comments on the Revised Draft Amendments to the Patent Law, available here, and Comments on the Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights, available here.