In a precedential decision handed down yesterday, 4DD Holdings, LLC v. United States, opinion by Judge Hughes joined by Judges Prost and Stark, the court reaffirmed its understanding that so-called “book of wisdom” evidence can be used in estimating the hypothetical bargain the parties would have negotiated as of the date of infringement, but not to alter the terms of the bargain they would have struck in view of ex post evidence. The distinction is subtle, but this holding is consistent with the view the Federal Circuit has expressed in other cases (though it is inconsistent with a proposal Norman Siebrasse and I made in a 2016 article, as discussed below).
The present case is actually a copyright dispute, filed against the federal government under 28 U.S.C. § 1498. As I stated in my recent book Remedies in Intellectual Property Law, § 1498 is a federal statute that “authorizes the U.S. government to take a nonexclusive compulsory license for the use of any such invention or work, subject to the obligation to pay “reasonable and entire compensation. The U.S. Court of Federal Claims, in which actions are litigated, typically will award a reasonable royalty calculated largely in accordance with the methodology that would be applied in awarding a reasonable royalty for infringement.” In the present case, the plaintiff 4DD negotiated a license with the government in 2013 for the use of its TETRA software. The government, however, “regularly exceeded the scope of the government’s license by making ‘thousands’ of unauthorized copies” (p.4). 4DD found out about this, and the parties negotiated a “true-up” agreement in 2015. That agreement was based on the assumption that the government had made 168 additional “core” copies—but as it turned out, the government had made many more copies, which were deleted. The government thereafter terminated its license with 4DD. 4DD filed suit, and while that litigation was pending it discovered the government’s destruction of TETRA copies and sought sanctions (which were awarded, in the amount of $1.1 million). The Court of Federal Claims also awarded over $12 million in compensation.
Without going into more detail than necessary, the issues on appeal all relate to damages, and the Federal Circuit cites a good deal of patent damages law along the way. The court rejects 4DD’s argument that its licenses with the government created an established rate that the Court of Claims was obligated, as a matter of law, to apply, and affirms the lower court’s decision instead to apply the “hypothetical bargain” framework using the Georgia-Pacific factors. (Under 4DD's rule, the alleged damages would have been over $5 billion.) Nevertheless, the court agrees that the trial court misapplied the “book of wisdom” and remands for a redetermination of damages:
4DD contends that the trial court adopted an overexpansive view of the book of wisdom. That is, the trial court constructed the hypothetical negotiation with the knowledge that the government would later cancel its work with TETRA before it could be successfully implemented. 4DD suggests this amounts to legal error.
The Supreme Court has made clear that factual developments that occur after the date of the hypothetical negotiation may nonetheless still inform a court’s damages analysis. Sinclair Refin. Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 698 (1933) (“Here is a book of wisdom that courts may not neglect. We find no rule of law that sets a clasp upon its pages, and forbids us to look within.”). Thus, this so-called book of wisdom allows courts to consider later-occurring events when appraising the value of a patent or copyright at an earlier point in time. . . .
Further, this court has specifically incorporated the book of wisdom into the hypothetical negotiation framework. . . . As already explained, the hypothetical negotiation seeks to ascertain “what a willing licensor and licensee would bargain for at hypothetical negotiations on the date infringement started,” which is then used to assess damages owed for infringement. . . . And while the date of the hypothetical negotiation is the date that the infringement began, LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51, 75 (Fed. Cir. 2012), some later-arising information, including “evidence of usage after infringement started,” can be helpful in assessing the royalty’s reasonableness, because “[u]sage (or similar) data may provide information that the parties would frequently have estimated during the negotiation,” Lucent, 580 F.3d at 1333–34. Therefore, as the government suggests, the trial court’s decision to conduct the hypothetical negotiation with knowledge of the details of SMS’s process for adapting TETRA to the government’s networks, which resulted in the infringing copies, was not legal error. Nor was its consideration of the number and type of copies created in that process. . . .
But the book of wisdom is not without limits. Its use in correcting uncertainties in the hypothetical negotiation “is not to charge the offender with elements of value nonexistent at the time of his offense.” Sinclair, 289 U.S. at 698. Rather, it is meant “to bring out and expose of light the elements of value that were there from the beginning.” Id. (emphasis added). This accords with the key element in setting a reasonable royalty via hypothetical negotiation: the need to conduct the negotiation from the date the infringement began to avoid an after-the-fact assessment of the hypothetical license’s value. See Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d 512, 518 (Fed. Cir. 1995).
The purpose of the book of wisdom is to provide insight and reduce uncertainty as to the elements of a license the parties are hypothetically negotiating. See Lucent, 580 F.3d at 1333–34. It may not, therefore, be used to impute knowledge of later-occurring events affecting the value of the license that were unforeseeable at the time of negotiating, such as the government’s change in leadership and resulting decision to end its work with TETRA before implementation. Cf. Sinclair, 289 U.S. at 698. Such facts are wholly inconsistent with determining the “reasonable needs and expectations” of the parties at the time of licensing and are improper for consideration in a hypothetical negotiation. . . . Thus, the trial court’s construction of the hypothetical negotiation with knowledge of TETRA’s future cancellation amounts to legal error in its application of the book of wisdom. See, e.g., 4DD Holdings, 169 Fed. Cl. at 187.
Because we cannot say with confidence that this error is harmless, we must vacate the trial court’s judgment. When assessing the relative strength of the parties’ bargaining positions in the hypothetical negotiation, the trial court relied on its knowledge of TETRA’s future cancellation (which was neither known nor knowable by the parties at the time) to emphasize that the project “never made it beyond the development stage and, as a result, never solved the government’s interoperability problem.” Id. The trial court considered this fact “most damaging to 4DD’s bargaining position.” Id. (emphasis added). The trial court then found that this fact, alongside two others, resulted in the conclusion that the government possessed a “substantially superior bargaining position.” Id. Because we cannot separate the court’s error in applying the book of wisdom from its assessment of the parties’ respective bargaining positions, which has implications for the outcome of the hypothetical negotiation, we must vacate and remand for further proceedings.
. . (pp. 12-15).
The court also holds that the Court of Claims was wrong to consider the maximum statutory damages award, under the Copyright Act, for willful copyright infringement ($150,000 for each infringing work) as a constraint on the bargain the parties would have reached:
As a threshold matter, the trial court’s grant of increased statutory damages for willful infringement is legal error. Section 1498(b) makes clear that recovery is available in the amount of the copyright owner’s “reasonable and entire compensation,” which includes “the minimum statutory damages as set forth in section 504(c) of title 17.” 28 U.S.C. § 1498(b) (emphasis added). And given section 1498’s roots in eminent domain, punitive damages available in a private suit under title 17, including the increased statutory damages for willful infringement, are not available in a suit against the government under section 1498. See Gaylord II, 678 F.3d at 1343 (noting copyright owner is entitled to “compensatory damages, including the minimum statutory damages, but not to noncompensatory damages”)
The court rejects the plaintiff’s other arguments, and remands for a new trial on damages. The lower court might reach the same figure, but it will be constrained by the above considerations.
I mentioned at the beginning that Norman Siebrasse and I have argued that the optimal rule is not the “orthodox” hypothetical bargain contract that the Federal Circuit applied here (and has applied in other cases, such as Aqua Shield v. Inter Pool Cover Team, 774 F.3d 766 (Fed. Cir. 2014), see previous posts here and here), but rather what we referred to as the “contingent ex ante” approach. Under this approach, a court see its task as estimating the hypothetical bargain the parties would have reached ex ante, with full knowledge of all relevant events ex post. In our view, this rule would avoid patent holdup (because it’s an ex ante construct) while better aligning patent (and copyright) damages with the plaintiff’s contribution to the state of the art (by authorizing a higher reward where the invention or work turns out, ex post, to be more successful than anticipated, and a lower one where it is less successful). See Norman V. Siebrasse & Thomas F. Cotter, A New Framework for Determining Reasonable Royalties in Patent Litigation, 68 Fla. L. Rev. 929 (2016); see also Thomas F. Cotter, Thomas F. Cotter, John M. Golden, Oskar Liivak, Brian J. Love, Norman Siebrasse, Masabumi Suzuki, & David O. Taylor, Reasonable Royalties, in Patent Remedies and Complex Products: Toward a Global Consensus 6, 31-33 (Brad Biddle, Jorge L. Contreras, Brian J. Love & Norman V. Siebrasse eds., Cambridge Univ. Press 2019)). Of course, in this case, the hypothetical bargain the parties would have negotiated ex ante knowing that (ex post) the government would terminate the project might be very low, reflecting only the value of whatever knowledge the interim use of the software enabled the government to obtain.
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