Ted Sichelman has posted a paper on ssrn titled Innovation Factors for Reasonable Royalties, which will be published along with several other papers from this past June's Patent Damages Conference at the University of Texas in a forthcoming issue of the Texas Intellectual Property Law Journal. Here is a link to the paper, and here is the abstract:
Patentees who are successful in litigation are entitled to no less than a “reasonable royalty” for the infringing use of the patent. Currently, reasonable royalties are assessed by the fact-finder using the cumbersome, difficult-to-apply fifteen-factor Georgia Pacific test. The Georgia Pacific test has been widely and roundly criticized, and there is general agreement that it too often hinders patent law’s central goal: promoting technological innovation. To improve the reasonable royalty analysis, this Article proposes adding innovation-centric factors to the Georgia Pacific test, including the total amount spent on research & development and commercialization of the invention, taking into account opportunity costs and project-specific risk. Additionally, the Article suggests emphasizing a slightly modified version of one existing innovation-centric, Georgia Pacific factor: the technological benefits offered by the invention when compared to alternative approaches. Like the “objective” factors used to make determinations of whether a patent is obvious, these innovation factors will help fact-finders to make more accurate and more consistent reasonable royalty determinations while more ably advancing patent law’s goal of spurring innovation.
This is a very interesting paper, and I commend it to readers' close attention, though I'm still mulling over the central idea that patent damages should be more like reliance than expectation damages in contract law. For me, the article highlights three fundamental choices that a patent damages regime somehow must resolve.
The first is whether patent damages should serve the ultimate goals of the patent system--encouraging invention, disclosure, commercialization, etc.--directly or indirectly. That is, should courts award supracompensatory damages when there is reason to believe that doing so would be necessary to reimburse the patent owner for its investment in R&D, and subcompensatory damages when there is reason to believe that this is all that's necessary to reimburse that investment? Or should we assume that restoring the patent owner to the position it would have occupied, but for the infringement, indirectly achieves the ultimate goals of the patent system, and thus is an adequate (or more feasible, or more consistent-with-the-rule-of-law) substitute for a more tailored approach?
Second, should the rules for awarding patent damages be simpler than they currently are, to conserve on adjudicative costs and enhance predictability, or more complex still (or complex in different ways, perhaps), in order to improve accuracy (however defined)? Of course, accuracy and complexity aren't always in sync; sometimes a simpler rule might also, on average, lead to more accurate results than a complex one.
Third--and maybe this is just another way of thinking about the first point--ideally, should the law of patent damages reward effort or success? Professor Sichelman's argument, which builds on his earlier paper Purging Patent Law of "Private Law" Remedies, 92 Tex. L. Rev. 517 (2014), seems to me to lean toward the former, though not exclusively, whereas my paper with Norman Siebrasse A New Framework for Determining Reasonable Royalties in Patent Litigation inclines toward the latter. Tentatively, I'd say that seeking to ensure that the patent owner is compensated for its investment is appropriate if we're talking about a court or administrative agency determining an adequate return for a patent that is the subject of compulsory licensing--say, an essential medicine that clearly has enormous social value and that we want to ensure is sufficiently accessible to the people who need it. In such a case, there's at least a reasonable theoretical case for treating the patent owner like a public utility that needs an adequate return on its investment, but not more than that because the deadweight loss is so high. But these are, in my view at least, exceptional cases, and I'm still a bit skeptical that such considerations should be relevant across the board. By contrast, a reward that is high when the invention confers substantial benefits on users, in comparison with other alternatives, and low when it doesn't, correlates to some degree with the invention's social value, and thus provides an incentive to invent things that turn out to have high social value. On this view, the effort that goes into making these things has little if any direct relevance to the reward. Or should both effort and success be important considerations--or, going back to point 2, does that make things too complicated?
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