Monday, June 27, 2022

Barnett and Kappos on Enhanced Damages in Lieu of Injunctive Relief

Jonathan Barnett and David Kappos have posted a paper on ssrn titled Restoring Deterrence: The Case for Enhanced Damages in a No-Injunction Patent System, forthcoming in 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things (eds. Jonathan M. Barnett and Sean M. O'Connor, Cambridge University Press 2022).  Here is a link to the paper, and here is the abstract:


Since the Supreme Court’s 2006 decision in eBay, Inc. v. MercExchange, LLC, increasingly large portions of the patentee population have no realistic expectation of securing injunctive relief against adjudicated infringers. This judicially imposed quasi-compulsory licensing regime induces well-resourced infringers to decline a license, appropriate patented technology, and negotiate the terms of use through litigation. Costly and protracted litigation is unlikely to adequately remunerate the patent owner whenever infringers have greater litigation resources, lower opportunity costs, and limited expectations of enhanced damages, which can induce the patent owner to settle for an amount that undervalues its technology. These litigation and settlement dynamics are illustrated through case studies of “holdout” tactics employed by well-resourced infringers in recent litigations involving standard-essential patents. To correct for the underdeterrence and undercompensation effects inherent to a no-injunction regime, it is proposed that courts enhance damages by an appropriately calibrated multiplier in all infringement litigations in which injunctive relief is not a practically available remedy.

Though I certainly don't agree with everything in this paper, it's an interesting read and makes a plausible argument that, in cases in which courts are unlikely to award injunctive relief, some form of monetary enhancement may be necessary to prevent opportunistic behavior by potential infringers.  I’m a little surprised, though, that the authors didn’t cite some of the existing literature that might be relevant to their argument.  For example, the "hypothetical bargain" construct that U.S. courts use to determine reasonable royalties, regardless of whether an injunction is granted or not, is supposed to "recreate the ex ante licensing negotiation scenario and to describe the resulting agreement,” based on the counterfactual assumption that the parties bargained knowing “that the asserted patent claims are valid and infringed.”  Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009).  The counterfactual assumption is necessary to avoid a double discounting problem, as David Taylor and others have previously noted, and in principle might seem to require courts to enhance the rate charged in comparable licenses negotiated under some uncertainty as to validity and infringement—though to be fair, how one would carry this out in the real world is not so clear, as my coauthors and I discuss in the Reasonable Royalties chapter of Patent Remedies and Complex Products: Toward a Global Consensus 6, 37-39 (C. Bradford Biddle, Jorge L. Contreras, Brian J. Love & Norman V. Siebrasse eds.  Cambridge Univ. Press 2019) (citing, among others, works by David Taylor and Jonathan Masur).  In addition, courts often do award ongoing, postjudgment royalties at a higher royalty rate than that which applies to the prejudgment royalty award.  See Christopher B. Seaman, Ongoing Royalties in Patent Cases After eBay: An Empirical Assessment and Proposed Framework, 23 Tex. Intell. Prop. L.J. 203, 239 (2015); cf. Mark A. Lemley, The Ongoing Confusion Over Ongoing Royalties, 76 Mo. L. Rev. 695 (2011).  Similarly, courts in Germany and France sometimes enhance damages by some extent to compensate for the fact that an infringer avoids some of the risk that a willing licensor incurs, see id. at 9, though the Federal Circuit has given somewhat mixed signals on the availability under U.S. law of such damages “kickers,” see id. at 48, and sources cited therein.  Moreover, the narrower point that courts could use enhanced damages as a substitute for injunctive relief, in SEP cases in particular, to deter unwilling licensees has been noted by Dan Burk in his article Punitive Patent Liability:  A Comparative Examination, 37 Rev. Litig. 327 (2018).  All that said, the authors’ proposal goes farther than these others in recommending that “in any infringement litigation in which the injunction remedy is unlikely to be granted as a matter of law or practice, courts should apply a multiplier to enhance the monetary damages owing to the patentee under the reasonable royalty standard,” and in proposing legislation to this effect.

A few other points I would suggest considering are as follows.  First, at least in relatively small-stakes patent litigation, I would think that the defendant’s prospect of incurring just its own attorneys’ fees—which, according to the annual surveys AIPLA publishes, can be in the hundreds of thousands of dollars even in small-stakes cases—can provide a substantial incentive to negotiate rather than to litigate.  (I don’t think the authors would disagree, and much of their analysis is focused on deep-pocket defendants such as Apple, but the point might be worth noting.)  Relatedly, while eight-, nine-, and even ten-figure damages awards are not everyday occurrences—and usually wind up being trimmed on appeal—I do have some worries that making enhancements more common could exacerbate the risk of what already may be some overcompensatory awards.  Second, I’d recommend that the authors cite Karen Sandrik’s recentempirical study of enhanced damages awards, in addition to the other sources they cite on this topic.  Third, the authors may be stating a bit too strongly the effect of a recent amendment to the German Patent Act, which authorizes courts to stay (or deny altogether) injunctions in some cases.  They write:


. . . the shift in the German patent injunction regime is paired—as this paper proposes—with an increased ability to obtain enhanced damages. In the same amendment making injunctive relief more difficult to obtain, the German Patent Act was amended to provide “[i]n th[e] case [where injunctive relief is denied], the injured party shall be granted appropriate financial compensation [that] shall not affect the claim for damages pursuant to Paragraph 2 [traditional patent remedies of actual damages, unjust enrichment and reasonable royalties].” . . . Thus, as the German system transitions away from an “automatic” injunction regime, legislators had the foresight to implement an enhanced damages regime to deter infringers from engaging in hold-out tactics. Hopefully, Congress can look to Germany as an example of our proposal in action (p.16).

By most accounts, however, such stays or denials are likely to rare--and so far, at least, the German courts haven't exercised their authority to grant any, much less award any compensation for the relevant time period.  If and when they do so, however, it is possible they will provide some measure of enhancement, though the amounts by which damages will be enhanced, if any, are for now unclear.  For a variety of views, see the articles published in the 5/2022 issue of GRUR (previously noted on this blog here), including Fabian Hoffmann, Der Ausgleichsanspruch im Patentrecht:  Die leistungsgerechte Monetasierung eines Drohpotenzials, 2022 GRUR 286, 290-93 (suggesting that courts consider enhancements of double or triple damages to encourage implementers to investigate existing patents, to negotiate voluntary licenses, and to avoid holdout); Gerhard Wagner, Die Aufopferung des patentrechtlichten Unterlassungsanspruchs, 2022 GRUR 294, 297-99 (suggesting more modest enhancements); Christian Osterrieth, Kritirien der Angemessenheit des Ausgleichs nach § 139 I 4 PatG, 2022 GRUR 299, 302 (recommending a case-by-case approach); and Ansgar Ohly, Der Ausgleichsanspruch gemäß § 139 I 4 PatG als Rechtsfortwirkungsanspruch, 2022 GRUR 303 (recommending, if I understand correctly, no enhancement).  See also Ansgar Ohly & Martin Stierle, Unverhältnismäßigkeit, Injunction Gap and Geheimnisschutz im Prozess: Das Zweite Patentrechtsmodernisierungsgesetz im Überblick, 2021 GRUR 1229, 1233-36.


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