Lee and Lemley on Damages for Patent Infringement

William Lee and Mark Lemley have posted a paper on ssrn titled The Broken Balance: How 'Built-In Apportionment' and the Failure to Apply Daubert Have Distorted Patent Infringement Damages.  Here is a link, and here is the abstract:

The patent system is “a carefully crafted bargain for encouraging the creation and disclosure of new, useful, and nonobvious advances in technology and design.” But if patentees are permitted to recover damages on the value of technology they did not invent, the balance is disrupted: patentees can obtain an unjustified windfall, product companies can be required to pay for technology not covered by the patents-in-suit, and the incentives for innovation can be diminished rather than enhanced. The “carefully crafted bargain” depends in no small part on the need to ensure that patent damages are not excessive and, instead, reflect the actual incremental value of the claimed invention.

The Supreme Court and the Federal Circuit have recognized this need to calibrate patent damages in several ways, the most important of which for present purposes is the principle of apportionment, under which damages must be limited to the value of the patented invention and must not capture the value of other features or technology of the accused products.

Apportionment has become even more critical in recent years. Modern products and methods, in the life sciences, computer sciences, and other fields, often consist of hundreds or thousands of features and components. Given the complexity of these products and technologies, patentees—inadvertently or intentionally—may seek to capture the value of features that they did not invent. A failure to properly apportion damages means that companies that make innovative products will pay two (or more) times for the right to use the same technology.

But therein lies the problem. Recently, the Federal Circuit and district courts have been backsliding from the principle of apportionment. Three related phenomena have led to excessive damage awards and, unless corrected, promise to undermine the “carefully crafted bargain” of patent damages.

First, some courts have allowed patentees to bypass apportionment entirely by relying on “built-in apportionment” that supposedly occurs in a comparable license. Second, patentees and their experts have figured out how to game the comparable license loophole to the apportionment requirement. An NPE in the business of litigation, not making products, will often structure its licensing and litigation campaign to generate spurious “comparable” licenses it can then point to in later litigation. Finally, compounding those problems, some courts have failed to properly apply Daubert and Federal Rule of Evidence 702 to exclude unreliable apportionment theories or gamesmanship.

All of this leaves the patent damages balance askew. Patentees have been permitted to seek billions of dollars in damages for patents whose value is nowhere near that in the real world. And operating product companies face the risk of being forced to pay excessive damages capturing the value of technology the patentee did not invent. This is not the “carefully crafted bargain” the Supreme Court envisioned.

In this article, we offer recommendations to address this dangerous trend and restore apportionment and the patent damages balance. These recommendations include: (i) recognizing that “built-in apportionment” is only the beginning of a careful, detailed damages analysis, not an exception that obviates the need for such an analysis; and (ii) more reliably enforcing Daubert when plaintiffs offer unreliable apportionment methodologies. 

I read and commented on an earlier draft of this.  It's a long paper, but thorough and worth reading.