Monday, November 23, 2015

Should Innocent Infringers Pay Lower Damages?

This is an issue I haven't really thought much about before, but I recently came across it in an op-ed by James Bessen and Michael Meurer about NPEs that was recently published in the Washington Post.  Most of the article presents the authors' views on the negative impact of NPEs on the economy, the need to improve the notice function of patents, and so on.  These are topics of great interest and importance, but I will skip over them here both because many readers of this blog are probably already familiar with the arguments and counterarguments relating to NPEs, and in any event these specific issues are not central to the matters normally discussed on this blog.  The very last sentence of the article, however, states: 
Finally, Congress should give courts discretion to reduce patent damages assessed against innocent infringers.
Maybe there has been some discussion of this proposal in the literature somewhere, but if so it hasn't caught my attention.  I'd like to think about it some more, but here are some initial thoughts:

1.  Whether innocent infringers should be liable for infringement at all is a subject that has been debated a good deal in the scholarly literature.  So far, I have always found the arguments in favor of the conventional strict liability approach more persuasive, but of course that doesn't necessarily mean that the same remedies should be applied to both knowing and innocent infringers.  In fact, I have argued that innocent infringement should be a factor (though not necessarily a dispositive one) weighing against awarding injunctive relief and against damages enhancements.  (There also may be a state of mind requirement regarding the liability of entities further down the chain of distribution from the initial infringing manufacturer, as in France, or for contributory or induced infringement, as in the U.S.)

2.  As for compensatory damages, in theory if a social planner knew how much of a reward would be necessary to induce the creation of the invention, and how much social value the invention generates, we could junk the idea of compensatory damages altogether and award damages that would be just enough to generate those benefits.  In reality, I strongly doubt that such a system could ever be implemented, and accordingly I have argued that as a practical matter damages law should (at least as a first approximation, and subject to some adjustments including the use of ex post information relevant to the value of the technology) restore the patent owner to the position it would have occupied, but for the infringement.

3.  But should we make an adjustment downward for innocent infringers?  I think the case for doing so is weak.  Perhaps it wouldn't affect patent incentives, but how would we know?  How much discretion should courts have, and to what extent would they be authorized to reduce damages?  Would such a rule discourage firms from obtaining knowledge of existing patents?  How would courts determine what level of knowledge (e.g., an employee having read a particular patent in the distant past) counts for purposes of determining innocence?  Of course, some of these issues come up in situations in which I do think it is appropriate to consider the infringer's innocence (i.e., injunctive relief and enhanced damages), though I suspect they might come up more often if innocence also could affect compensatory damages.

4.  The EC's Enforcement Directive, as well as law in Japan, Korea, and some other countries, formally require that the defendant have a requisite state of mind (intent, knowledge, negligence), as a precondition to the recovery of certain types of damages (see my book pp. 256-57, 307-09, 368-69); but as I understand it the requisite state of mind is usually presumed based on the fact that patents are public documents, and the presumption is hard to overcome. 

5.  In addition, patent marking laws in the U.S., the U.K., and some other countries also potentially reduce damages in cases in which the infringement was innocent (for example, there may be no damages liability for acts committed prior to date on which the defendant is on notice); but as I have written before, the U.S. system in particular is highly formalistic and deeply flawed.  Some innocent infringers pay full damages, while others who have knowledge but have not been put on actual or constructive notice do not.  As a result, I'm inclined to think that in practice patent marking laws provide few if any benefits--though perhaps something like the U.K. approach would make sense. The U.K. statute, if I understand it correctly, doesn't let any damages accrue until the defendant is aware of the patent or is put on actual or constructive notice of it.  It thus avoids some of the loopholes in the U.S. statute.  Still, a patent owner could produce some token goods, mark them, and even if no one ever saw them the defendant would be on constructive notice, so in the end the whole thing seems like something of a formality.  For further discussion, see my book pp. 94-95, 185-86, and here.

6.  Bessen and Meurer only mention in passing the issue of fee-shifting, describing as reasonable various reform proposals now before the U.S. Congress, including one that would "make it easier to recover costs for frivolous lawsuits."  As discussed in the recent paper by Love et al. that I have now blogged about twice (see here and here), routine fee-shifting may be the best deterrent to PAE suits--though it is potentially an imperfect solution as well, since it might discourage some meritorious suits or have other undesirable effects.         

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