Two New Papers by Bernard Chao and Coauthors

Professor Bernard Chao has published two new papers, one solely and one with several coauthors, on damages-related topics: 

1.  First, appearing at 2016 Wisconsin Law Review 287 is Professor Chao's article Horizontal Innovation and Interface Patents.  The paper is available on ssrn and Westlaw.  Here is a link to the ssrn page, and here is the abstract:

Scholars understandably devote a great deal of effort to studying how well patent law works to incentive the most important inventions. After all, these inventions form the foundation of our new technological age. But very little time is spent focusing on the other end of the spectrum, inventions that are no better than what the public already has. At first blush, studying such “horizontal” innovation seems pointless. But this inquiry actually reveals much about how patents can be used in unintended, and arguably, anticompetitive ways.

This issue has roots in one unintuitive aspect of patent law. Despite the law’s goal of promoting innovation, patents can be obtained on inventions that are no better than existing technology. Such patents might appear worthless, but companies regularly obtain these patents to cover interfaces. That is because interface patents actually derive value from two distinct characteristics. First, they can have “innovation value” that is based on how much better the patented interface is than existing technology. Second, interface patents can also have “compatibility value.” In other words, the patented technology is often essential to make products operate (i.e. compatible) with a particular interface. In practical terms, this means that an interface patent that covers little or no meaningful advance can give a company the ability to extract rents and foreclose competition.

This undesirable result is a consequence of how patent law has structured its remedies. For years, patent law has implicitly awarded both innovation and compatibility values. Recently, the courts have taken a sensible first step and excluded compatibility value from reasonable royalty recoveries for standard essential patents. This Article argues that the law needs to go further and do the same for all essential interface patents. Additionally, patent law should discard the use of injunctions and lost profits in these contexts because both of these remedies inevitably award compatibility value. The sole remedy should be an innovation-value-based reasonable royalty. This proposal has two benefits. First, it would eliminate the incentives for wasteful patents on horizontal technology. Second, and more importantly, the value of all interface patents would be better aligned with the goals of the patent system.

Interesting paper, though I disagree with Professor Chao's premise that patent owners shouldn't get any of what he refers to as "compatibility value."  It seems to me that the value to the user of the use of an article that incorporates a patented feature is higher if the article is compatible with other products, and that there is no reason in principle why patent infringement damages shouldn't compensate for that higher value.  Moreover, any argument that patent owners shouldn't benefit from network effects (if that is Professor Chao's position, though I don't want to misattribute it to him if it isn't) seems misguided, since running royalties are always calculated based on volume of use, which network effects may exacerbate.  In addition, Professor Chao's discussion of The Value of the Standard (an article I coauthored with Norman Siebrasse) at p.304 seems slightly off, since the specific example in which Professor Chao embeds this discussion is premised on the patented technology having no ex ante benefit over other alternatives--which would mean that Siebrasse and I agree that its value would be zero, if those other alternatives were in the public domain, notwithstanding its widespread use. 

2.  Second, appearing at 101 Iowa Law Review 543 (2016) is a paper by Professors John E. Campbell, Bernard Chao, Christopher T. Roberson, and David V. Yokum titled Countering the Plaintiff's Anchor: Jury Simulations to Evaluate Damages Arguments. As with the above paper, I don't see this one yet on the law review's website but it is on ssrn and Westlaw.  The paper doesn't discuss patent damages in particular but is an interesting study of experimental evidence on how the anchoring effect may affect damages awards; I cite it in my Patent Damages Heuristics paper.  Here is a link to the ssrn page, and here is the abstract:

Numerous studies have shown that anchoring strongly effects juries. For scholars and policymakers, this evidence is worrisome for the legitimacy and accuracy of jury decisions, especially in the domain of non-economic damages (e.g., pain and suffering). For litigators, this evidence had led some to believe that “the more you ask for, the more you get.” Others believe that the damage demand must pass the “straight-face” test. But little scholarly literature exist to determine whether an outrageously high request really does undermine the plaintiff’s credibility, and whether this “credibility” effect outweighs the anchoring effect.

Likewise, little scholarly attention considers whether a defendant can effectively respond to the plaintiff’s high anchor. One obvious strategy would be a “counter-anchor” – the defendant suggesting a much lower damages award. However, defense attorneys worry that juries may interpret such a strategy as an admission of liability. Thus, in fact, defendants often allow the plaintiff’s anchor to go unrebutted, but this strategy has also not been rigorously tested.

To answer these questions, we conducted a randomized controlled experiment in which we exposed mock jurors to a shortened medical malpractice trial, manipulated with six different sets of damages arguments in factorial design. The plaintiff demanded either $250,000 or $5,000,000 non-economic damages. The defendant responded in one of three ways: (1) offering the counter-anchor that, if any damages are awarded, they should only be $50,000; (2) ignoring the plaintiff’s damage demand; or (3) attacking the plaintiff’s demand as outrageous and using this characterization to argue that the plaintiff’s entire case was not credible. Mock jurors were then asked to render a decision on both liability and damages. We then ran these individuals decisions through a computer simulation to create mock jury decisions.

Our study confirmed that anchoring has a powerful effect on the amount of damages mock juries award. However, a large damages demand also had a small negative effect on liability determinations. When looking at the expected value of the case – the average award when both liability and damage award are considered – these “credibility effects” were overwhelmed by anchoring effects. Different defendant responses also resulted in different outcomes when plaintiff anchored low, but none of these defense strategies are an effective antidote to the plaintiffs’ high anchor. We discuss implications for litigation strategy and policy.