Comments on Sidak Part 2: The Ex Ante Contingent Incremental Value Approach (Siebrasse)

Guest Post by Professor Norman Siebrasse, University of New Brunswick Faculty of Law

As I noted at the conclusion of Friday’s post, Professor Sidak’s article on The Meaning of Frand forces us to confront the question of whether SEPs are different from other patents in ways that are relevant to the FRAND royalty analysis. Sidak’s answer is that “[t]he value associated with a standard is joint and common among the SEPs,” (953) – which he refers to as “combinatorial value” – and consequently, “[o]nce a patent is essential to the standard, the hypothetical-negotiation framework used to determine the royalties for implementation patents does not apply” (953). The difficulty with this, as discussed in my last post, and as betrayed by the word “once,” is that this combinatorial value arises ex post; the hypothetical negotiation framework is still applicable ex ante. That SEPs have combinatorial value ex post, therefore does not warrant a difference in the royalty damages analysis.

There is a related point which, to my mind, is more salient to the royalty analysis: the combinatorial value of the standard may be much larger than the sum of the incremental value of the patents taken individually, outside of the standard. That is, the patents that end up being SEPs are more valuable as part of the standard than outside it. (This is of course not true for all patents, but when it is not, the patentee will not normally join the standard.) Suppose there are a number of patented technologies, A though Z, which are useful only if adopted as part of a standard, and which are substitutes in that if eg, X is adopted as the basis for the standard, none of the others would add any value to the standard. However, they are not perfect substitutes, in that some of the resulting standards are better than others. In that case, the ex ante non-SEP value of any of the patents is zero, as is the incremental non-SEP value, because their only value is as part of a standard; and the ex ante expected SEP value of any particular technology is very small, because each is individually unlikely to be adopted; but the ex post SEP value includes hold-up value. What we really want is to get at the incremental value of the technology as part of the standard. How much better will the standard be if A is chosen rather than B?

The solution to this problem, pointed out by Mario Mariniello, Fair, Reasonable and Non-Discriminatory (FRAND) Terms: A Challenge for Competition Authorities, 7 J. Competition L. & Econ. 523, 526 (2011), is that “the licensing terms offered after the adoption of the standard (ex-post) should not be worse than those which the patent holder would have committed to ex-ante in the context of a standard setting contest conditional on the information that is available ex-post” (my emphasis). For convenience, we may call this an “ex ante contingent incremental value approach,” which may be contrasted with an “ex ante expected incremental value approach.”

Mariniello’s approach is still an ex ante negotiation, in the sense that it is assumed to take place before the implementer has sunk costs, which means that the patentee cannot extract any holdup value. Exclusion of holdup value is the key implication of the ex ante negotiation, and it is the point which Sidak disputes. So Mariniello’s approach is at odds with Sidak’s approach in this respect.

Secondly, because the negotiation is conceived of as a contest, albeit between competing standards, the SSOs cannot demand more than the incremental value of their standard over the next best alternative. This means that the incremental value of any potential SEP is the incremental value of the standard which incorporates it, as compared with the next best alternative which is incorporated into a competing standard. This is broadly consistent with Sidak’s argument that “FRAND royalty terms are appropriately derived by viewing the SSO as a joint venture among its member firms that has as its objective the maximization of the joint surplus created by the standard” (953), but more specifically, it is an ex ante contest between a number of SSO / joint ventures, all seeking to maximize their joint surplus. Consequently, the result is still that the patentees cannot extract more than incremental value as compared with the next best standard, and they cannot capture any holdup value.

Finally, Mariniello points out that the contest must be conditional on the information that is available ex-post, and in particular, “conditional on the standard being adopted” (525), and also on knowing the value of the standard once adopted (generally at 525). This ensures that the SEP holder will get a share of the combinatorial value of the standard as a standard, which only emerges once the standard is actually adopted; the patentee is not confined to the ex ante non-SEP value, even though ex ante, the patent is not a SEP. This is perhaps the most controversial aspect of Mariniello’s analysis. Carlton & Shampine, An Economic Interpretation of Frand, 9 J Comp Law & Econ 531, 545 (2013) state that the approach generally accepted by economists defines a reasonable royalty in the FRAND context as “the royalty that would have been negotiated ex ante, before the patented technology at issue had been adopted into the standard and prior to the licensee incurring sunk costs,” and they state (fn 40) that Mariniello does not accept this approach (fn 40). I must say that I read Mariniello’s approach as being a refinement of, rather than a departure from, the standard approach, as the prior literature has generally not been explicit about the information available during the negotiations: see eg Swanson & Baumol, 72 Antitrust LJ 1 (2005); Layne-Farrar et al 74 Antitrust LJ 671(2007). In any event, Mariniello’s approach does seem to me to be correct on this point.

It might be said that it is not necessary to consider the information available ex post, because the best technology will be adopted, so the expected value of the SEP incorporating the best patent is equal to the contingent value. This strikes me as wrong, as it amounts to importing information which is not actually available ex ante into the expected value calculation. In any event, Mariniello’s contingent approach does not require any novel legal principle. Ex post information is routinely taken into account in determining damages. In the hypothetical negotiation, the patent is assumed to be valid and infringed, even though this is ex post information. More generally, after the rate is determined through the hypothetical negotiation, the sales base to which that rate is applied is the actual sales base, determined ex post, not the expected sales base.

The contingent approach also reflects a reasonable negotiation. If the parties actually did negotiate ex ante, why would they do so on the basis of expected value? Such an agreement would give the patentee next to nothing for a valuable contribution if the technology did because the standard, and would require the implementer to pay for a useless technology if it was not adopted. As Mariniello explains, a contingent contract is a straightforward way of dealing with that uncertainty. At the same time, damages assessed on the basis of expected value would under-compensate the patentee. In principle, an expected value contract and a contingent value contract would both give every patentee the same expected return, because in an expected value negotiation, patentees whose technology was not selected would be entitled to a royalty to compensate for the chance that their patent would become a SEP. However, because expected value contracts are not actually entered into, those patentees could never bring an action to recover those royalties.

No doubt there are cases in which two patents make a joint contribution, even ex ante. Suppose patents X and Y are held by different parties. There may be technologies such that if one party refuses to make a FRAND commitment in respect of X, the SSO will necessarily reject Y, because Y is useless without X and vice versa. In that case the technology is such that the value of the patents is “joint ex ante.” But this, it seems to me, is different from Sidak’s point that SEPs have combinatorial value because by definition SEPs are all necessary to implement the standard (932). That means only that the value of all SEPs in a given standard is what I would call “joint ex post”. That the value of SEPs in a standard is necessarily joint ex post does not imply that it is necessarily joint ex ante. In the case of patents which are in fact joint ex ante, it is not clear to me how to apportion the royalties between X and Y if the “XY” technology were adopted. But correct approach, in my view, would still be to determine the incremental value of the XY standard as compared with the next best alternative standard, and then (somehow) apportion that incremental value between X and Y.

Comments on Sidak, Part 1: The Ex Ante Incremental Approach (Siebrasse)

Guest Post by Professor Norman Siebrasse, University of New Brunswick Faculty of Law

Professor Sidak’s very long article, The Meaning of Frand, Part I: Royalties, (2013) 9 J of Competition Law & Econ 931, covers a great deal of territory, from a high level critique of the widely accepted ex ante incremental value approach to FRAND royalties, to his own “joint venture” conceptualization, to detailed heuristics and discussion of the leading cases on FRAND. In this post I will focus on the high level issues, and in particular his critique of the ex ante incremental value approach, which is found primarily at 972-73.

I must say that Professor Sidak’s article is not just very long, it is too long. It is written in a discursive, almost stream-of-consciousness style, that makes both his critique and his own views difficult to pin down precisely. With that said, he has a technical economic objection to the ex ante incremental value approach, and a consequent policy objection.

The technical objection is that because of the nature of standards, an ex ante incremental value approach is wrong in principle:

Standard-essential patents can be viewed only in terms of their combinatorial value – not their incremental value. The value associated with a standard is joint and common among the SEPs. Once a patent is essential to the standard, the hypothetical-negotiation framework used to determine the royalties for implementation patents does not apply.

Owing to the complementarity of SEPs, analysis of the incremental value of a patent is insufficient for SEPs because each SEP holds zero incremental value without all other SEPs. (953)

But as Sidak points out, this argument is open to the objection that it “elide[s] the critical distinction between ex ante and ex post valuation” (972). As he explains, “the invalidity of setting a FRAND royalty on the basis of the incremental value of the patent in suit for use in the standard only applies after the SSO has set the standard and all the other SEPs have by definition become essential. Before that point, the SSO usually has options” (972). In my view, this objection to Sidak’s approach is entirely correct, so his rebuttal is crucial to his argument.

To explain his objection, Sidak sets up a simple model in which an SSO faces a choice between two alternatives, A and B, where a standard including patent A is the most valuable, and patent B is the next-best alternative. The implementer’s maximum willingness to pay (MWP) is the incremental value of technology A versus B, the next best alternative. He points out that under the ex ante incremental value approach, the patentee’s minimum willingness to accept (MWA) will be its marginal cost, which is zero if all innovation costs are sunk. Thus, as Sidak says:

If so, then the minimum willingness to accept of the holder of patent A will approach zero, and the hypothetical ex ante bargain at the time of standard adoption might result in a price below the implementers’ maximum willingness to pay. (972)

Consequently,

proponents of the ex ante incremental value rule believe that no patent holder will share in the combinatorial value that is created by the standard except to the extent that the value is captured in the incremental value of the patent (for example, if patent A increases the value of the standard by M, M is the patent’s incremental value). (973)

Sidak asserts this is undesirable from a policy perspective because patentees require a share of the combinatorial value – and even a share of the holdup value (1022) – to provide an adequate incentive to participate in current standard setting (1022), and an adequate incentive to develop the next generation of breakthrough standards (989).

In my view Sidak accurately characterizes the ex ante incremental value approach, but I do not agree that this is problematic as a matter of policy.

While Sidak frames the point that the patentee’s MWA may be zero as a criticism of the ex ante incremental value approach to FRAND, it is pretty standard stuff outside the FRAND context. This does not imply that the royalty that would actually be negotiated by the patentee, or the reasonable royalty that will be awarded by the court, will be zero. In principle patentees might be haggled down to their incremental costs, and if that always happened the patent system would indeed provide inadequate incentives to invent, but this does not seem to be a problem in practice. If there were evidence that the standard royalty was equal to incremental cost, even in some industries, no doubt infringers would bring that evidence forward. I am not aware of any cases in which a royalty of zero was awarded on the basis that the patentee would have been driven down to its incremental cost. In the context of non-FRAND reasonable royalty damages, it is normal that the patentee and the licensee / infringer will split the surplus attributable to the patented invention, whether under the now-rejected 25% rule, or a 50-50 Nash equilibrium, or some other split tied more closely to the facts of the particular case.

Even if the royalty is above zero, it is also true that the royalty may be, and normally will be, below the implementers’ maximum willingness to pay. This just means that the surplus will be normally be split between the patentee and the implementer. This strikes me as sound as a matter of policy. A licensee – whether FRAND or otherwise – gets a share of the surplus, sometimes the majority, because it is required to put its capital at risk to develop the market. It is not only investment leading to patents that requires an incentive, but any kind of risky investment, including the investment in taking a patented invention to a commercialization, whether by implementing a standard or otherwise. I must admit that I do not know of any reason in principle why the precise split between patentees and implementers should be optimal in any broad sense. In the literature I am familiar with, that split is left to the black box of “bargaining power.” In principle it is possible that even though the patentee’s share of the surplus is rarely zero, the patentees’ inadequate bargaining power, either generally, or in some industries, results in sub-optimal incentives to invent. (Though, conversely, it is also possible that the split provides sub-optimal incentives to implementers.) Whether that is so is an interesting theoretical and empirical question, but it relates to the patent system generally. I see nothing in Sidak’s article to persuade me that the problem is any worse in respect of SEPs than for any other patent. (And of course, even if it could be shown that the split was sub-optimal, it is far from clear that judicial tinkering in litigated cases could rectify the problem.)

To recap, that the patentee’s MWA is zero, does not mean that its royalties will actually be zero, either in actual licensing negotiations, or as would be awarded as damages under the incremental ex ante value approach. Nor is there reason to believe that those royalties provide an inadequate incentive to invent.

Now, it is true that if the implementer’s MWP is zero, the patentee will get a zero royalty under the ex ante incremental value approach, and presumably in practice as well. This will be the case if the best non-infringing alternative is just as good as the patented invention. This does indeed mean that the patentee will not be able to recover its costs of invention. I don’t see anything wrong with this result. In the non-FRAND context, if a pharmaceutical company spends hundreds of millions of dollars developing and patenting a new drug, which turns out to be less effective than the existing market standard, it will not be able to sell enough of the drug to recover its costs. That is a good thing; indeed, it is the virtue of the patent system, as compared with other methods of encouraging innovation, that it provides very high-powered incentives for the inventor to work on products that will be better than what exists. If a patentee was guaranteed a positive return on their investment so long as it could get its invention incorporated in a standard, there would be an incentive for the patentee to pay less attention to the quality of its product and more attention to lobbying to get its product included in the standard. That would not promote innovation.

Sidak seems to miss this point, as is illustrated by the example of Airbus and Boeing in competition to supply Lufthansa (at 984) which he provides in the course of critiquing Judge Robart’s FRAND decision. He first makes an argument which wrongly ignores the manufacturer’s incremental costs, which are assuredly not zero in the case of airliners. He then goes on to say:

More generally, there is no assurance under Judge Robart’s approach to defining ex ante incremental value that Lufthansa’s incremental profit will be a large enough payment to Airbus for it to recover the quasi rents (on a per plane basis) of designing and manufacturing an A380.

Judge Robart’s approach provides no assurance that the licensee’s incremental profit from using the patent in suit rather than the next-best noninfringing substitute will translate into a high enough royalty to enable the patent holder to recover the sunk costs of developing the patented technology.

This is absolutely true about Judge Robart’s approach, but it is not a sound criticism. Every inventor takes the chance that it will be unable to charge enough to recover the sunk cost of developing the patented invention. Indeed, the great majority of patented inventions are not commercially exploited, and presumably the sunk costs are not recovered. If the availability of a non-infringing alternative means the most the patentee can charge will only allow it to recover half of its sunk costs, it will still take the deal, as half its costs is better than nothing. This is sound policy from an innovation perspective, as this is an invention that was in fact not worth developing, and the inventor will be encouraged to channels its future efforts in a more productive direction.

As part of his critique of the ex ante incremental value approach, Sidak also remarks that:

Proponents of the ex ante incremental value approach acknowledge that the holder of patent A will have a minimum willingness to accept that exceeds zero if the patent holder would incur an opportunity cost by allowing patent A to be used in the standard rather than outside the standard. . . . Proponents of the ex ante incremental value rule implicitly assume that this scenario is rare or nonexistent. (973)

He does not cite any specific authors who neglect the patentee’s opportunity cost when it is relevant (Robart J explicitly included it in his FRAND analysis (slip op fn 23)), but if opportunity cost has been wrongly ignored by some authors, this is an error on their part, and not a criticism of the ex ante incremental value approach.

To this point I have argued that Sidak’s article does not provide any good reason for treating SEPs differently from other patents. But SEPs clearly are different, in that they are part of a standard. Sidak’s combinatorial value theory does capture an aspect of that difference formally. However, the fact that SEPs have combinatorial value ex post, gives us no reason to abandon the ex ante framework. Combinatorial value is indeed a difference between SEPs and other patents, but it is not a difference that is relevant to the FRAND royalty. With that said, Sidak’s analysis does force us to confront the question of how SEPs are different, and whether any of those differences are relevant to the reasonable royalty analysis. My next post will address this question.

Finally, I’d like to thank Professor Cotter for his invitation to co-blog about this article. While he kindly suggested I write the first post in this series, we exchanged many stimulating emails which have shaped the thoughts I have set out above, and the credit for any insights must be shared.

Article by Meier-Beck on Infringement Damages Under German Law

Dr. Peter Meier-Beck is the presiding judge of the Xth Senate of the German Federal Supreme Court (Bundesgerichtshof, or BGH).  He also has authored several articles on patent law and remedies, including a few that I cite in my book.  A couple of days ago I came across a translation in French of a 2012 article he published in the German law journal Wettbewerb in Recht und Praxis (WRP), pages 503-08, titled Schadenskompensation bei der Verletzung gewerblicher Schutzrechte nach dem Durchsetzungsgesetz ("Damages for the Infringement of Industrial Property Rights after the Enforcement Directive").  The French translation is by the esteemed French patent litigation firm Véron et Associés and appears in the November 2013 issue of the French IP journal Propriété Industrielle, under the title Allemagne:  les dommages-intérêts pour contrefaçon des droits de propriétê industrielle après la loi sur l’amélioration du respect des droits de propriété intellectuelle.  (This morning my research assistant in Munich sent me a copy of the original German version; so far, however, I've read the French translation and only had time to take a quick look at the German original.  If I decide that anything herein needs to be further clarified or amplified after I'd read the German original more carefully, I'll add an update.)  Dr. Meier-Beck's thesis is that the traditional three methods for awarding damages under German law--lost profits, a reasonable royalty, and an accounting of the infringer's profits--should, at least after the 2004 E.C. Enforcement Directive, all be interpreted as intended to provide just compensation to the IP owner.  For this reason, all three should in principle converge.  The BGH's 2000 opinion in Gemeinkostenanteil, which held that in awarding the infringer's profits the court should deduct only variable costs and not a portion of fixed costs, is in Dr. Meier-Beck's view, consistent with this principle.

In September I blogged on article by Adrian Kleinheyer and Henning Hartwig, titled titled Kausalitätsabschlag und Kontrollüberlegung beim Verletzergewinn:  Zugleich Besprechung von BGH, Urt. v. 24.7.2012-X ZR 51/11-Flaschenträger, published in issue 7 of the 2013 volume of GRUR.  I noted there that these two authors took issue with the BGH's statement in the Flaschenträger case that "Since the various methods of estimating the damages payable serve to compensate one and the same damage sustained by the patent proprietor owing to the infringements committed, as a rule, based on their underlying principle, these methods should essentially have similar results even where divergences are inevitable owing to the different parameters underlying each individual calculation" (citing Klaus-J. Melullis, Zur Ermittlung und zum Ausgleich des Schadens bei Patentverletzungen, GRUR 2008, 679 (684)).  I side with Kleinmeyer and Hartwig; at least as an economic matter, the convergence principle doesn't make sense to me.  To be sure, if I understand him correctly, Dr. Meier-Beck recognizes that it is a fallacy to assume that the infringer's profit is the same as the amount the IP owner would have earned, but for the infringement.  He argues instead that economic considerations are not always paramount, and that damages are a matter of providing "just reparation"; it would be unjust, in his view, to allow the infringer to retain any of the benefits of infringement.  (He draws a distinction between the harm suffered by the rightholder, and the amount due for the reparation of this harm.)  Correctly applied, the three methods essentially should lead to consistent results.  (The French translation states that "Correctement appliquées, les différentes méthodes doivent donc également mener à des résultats concordants (pour l'essentiel)."  The German original reads "Sachgerecht angewandt müssen daher die unterschiedlichen Methoden auch zu (im Wesentlichen) übereinstimmenden Ergebnissen führen.")  With this perspective in mind, courts should restrain themselves from awarding excessive judgments based on the infringer's profits, but at the same time should recognize that an award of reasonable royalties may be twice the amount that would commonly be agreed upon in an arm's-length transaction.

I'm still not convinced that it is a good idea to depart from economic substance and award damages based on more nebulous concerns about "just reparation."  Moreover, I think that reasonable royalties, lost profits, and infringers' profits all serve somewhat different purposes that depend on the economic facts of a given case, as I explain in my book.   Lost profits are appropriate when the IP owner's interest lies in exclusion, rather than licensing; reasonable royalties make the most sense when the infringer is a more efficient user of the invention, such that exclusion wasn't in the IP owner's interest, but licensing would have been; and awards of profits, if justified at all, are best rationalized as a means for deterring infringement.  On the other hand, I recognize that parties who in theory might seem to deserve a lost profits award might not be able to satisfy proof standards, or might prefer to keep their financial information secret (as Dr. Meier-Beck notes); and that royalties can be thought of as either restitutionary or compensatory.  Finally, there is always going to be an element of uncertainty in awarding damages, particularly in systems in which discovery is more limited than in the U.S.  Nonetheless, I think that conceiving the three methods as converging is not the right perspective on what, in my view, should be principally an economic matter.

 

Empirical Data on Patent Litigation in Europe and China; ACTA & TPPA; New Book on Patent Misuse

1.  I thought that readers might be interested in a couple of new papers that take an empirical look at patent litigation in Europe.  While this may not seem directly related to the topic of patent remedies, these papers do include some discussion of remedies and enforcement.  

The first is Katrin Cremers, Max Ernicke, Fabian Gaessler, Dietmar Harhoff, Christian Helmers, Luke McDonagh, Paula Schliessler, and Nicolas van Zeebroeck, Patent Litigation in Europe, available here.  Here is the abstract:

We compare patent litigation cases across four European jurisdictions – Germany, France, the Netherlands, and the UK – covering cases filed during the period 2000-2008. For our analysis, we assemble a new dataset that contains detailed information at the case, litigant, and patent level for patent cases filed at the major courts in the four jurisdictions. We find substantial differences across jurisdictions in terms of case loads. Courts in Germany hear by far the largest number of cases in absolute terms, but also when taking country size into account. We also find important between-country differences in terms of outcomes, the share of cases that is appealed, as well as the characteristics of litigants and litigated patents. A considerable number of patents are litigated in multiple jurisdictions, but the majority of patents are subject to litigation only in one of the four jurisdictions. 

The other is Christian Helmers, Luke McDonagh, and Brian Love, Is There a Patent Troll Problem in the UK?, available here.  Here is the abstract:

This paper reports the findings of an empirical study of patent suits involving non-practicing entities (NPEs) in the U.K. between 2000 and 2010. Overall, we find that NPEs are responsible for 11% of all patent suits filed in the U.K. during this period. Though this is a small percentage by U.S. standards, our study suggests that patent trolling might not be as uniquely American as conventional wisdom suggests. We also find little support for many common explanations for Europe’s relative scarcity of NPE activity. For example, we find that NPEs litigating in the U.K. overwhelmingly assert high-tech patents – even more so, in fact, than their U.S. counterparts – despite higher barriers to software patentability in Europe. Our study does, however, tend to support fee-shifting as a key reason for the U.K.’s immunity to NPEs. We see evidence that the U.K.’s loser-pays legal regime deters NPEs from filing suit, while at the same time encouraging accused infringers to defend claims filed against them. U.K. NPE suits are initiated by potential infringers more often than by NPEs; rarely end in settlement; very rarely end in victory for NPEs; and, thus, result in an attorney’s fee award to the potential infringer more often than a damages award or settlement payment to the patentee. Together, these findings tend to support patent reform bills pending in the U.S. that would implement a fee-shifting regime for patent suits, and may also serve to quell concerns that Europe’s forthcoming Unified Patent Court will draw NPEs to Europe.

Two other related papers by a subset of the same authors are Christian Helmers & Luke McDonagh, Patent Litigation in the UK;  An Empirical Survey 2000-2008, J. Intell. Prop. L. & Prac.(2013) 8(11):  846-61, and Christian Helmers & Luke McDonagh, Trolls at the High Court?, available here.  Yet another paper on a related topic is Stefania Fusco's Markets and Patent Enforcement:  A Comparative Investigation of Non-Practicing Entities in the US and Europe, available here.

2. Also interesting is Kimberlee Weaterall's recently posted paper Ignoring the Science:  What We Know About Patents Suggests Dire Consequences from ACTA and the TPPA, available here.  The abstract reads:

This forthcoming chapter looks at what research into the operation of the IP system, and particularly IP enforcement, tells us about the issues facing research-based firms, focusing on the ‘science’ side of IP, particularly patents, and using research, and information about domestic developments, to critique the approach taken in the most recent IP negotiations to affect the Asia-Pacific Region – namely, the Anti-Counterfeiting Trade Agreement (ACTA), concluded in late 2010, and the Trans-Pacific Partnership Agreement (TPPA), which at the time of writing is under negotiation. While much of the literature on patents in ACTA and the TPPA has focused on the (very important) impact on access to medicines, this chapter is concerned with the likely impact on the patent system more generally. We have grown used to hearing that the latest efforts at international IP standard-setting, the ACTA and proposals for IP in the TPPA, will have a deleterious impact on digital copyright law and on access to essential medicines. We have heard much less about the potential impact on the patent system as a whole – a much less sexy topic, no doubt, but in the long term, equally important. The patent research explored in this article suggests that both ACTA and the US’ TPPA proposal are not likely to be helpful in addressing the most pressing issues in patent law today; they risk being positively counterproductive, and exporting to the world the US’ own ‘patent crisis.’ The thought of a flood of low quality patents issuing from patent offices throughout the Asia-Pacific, should give everyone – including the negotiators of these and future agreements – serious pause.

Professor Weatherall has this to say in particular with regard to remedies:

A second issue is that ACTA-style detailed enforcement provisions uncritically adopt US or EU domestic arrangements. This could have some unintended side effects. One, as I have noted elsewhere, is the foreseeable impact of empowering officials (for example customs officers) with significant powers of seizure, determination of infringement and destruction of imported goods in countries still battling significant levels of official corruption. Secondly and more subtly, ACTA (and equivalent text in the US TPPA proposal) embodies an ‘all services platinum standard’ model of courtroom enforcement proceedings, where IP owners can seek preliminary measures (such as injunctions and measures to preserve evidence such as Anton Piller orders); obtain information from an alleged infringer regarding the channels of distribution of the alleged infringing goods, and a full suite of remedies including injunctions (including against third parties), damages, accounts of profits, costs orders, and orders for the destruction of goods and implements. Such a ‘full service’ standard is expensive and may not be appropriate for all IP cases or all jurisdictions. More importantly, it could have the side effect of forestalling countries’ attempts to address the cost barrier, for example by experimenting with low cost alternatives for small claims (including low cost administrative alternatives).

She also notes that "allow for treble damages for infringement giving patent holders a further threat to convince challenges to settle (Article 12.4)," though so far the U.S. appears to be standing alone with regard to this proposal.

3.  For empirical data on patent infringement cases and administrative enforcement in China, Mark Cohen’s China IPR Blog is an excellent source.  You can download the Supreme People’s Court White Paper on Intellectual Property Protection in Chinese Courts 2012 from this April 2013 post, here.  More recently, Mr. Cohen has blogged on the number of administrative enforcement actions in China this year, here.  

4.  This also isn't exactly a remedies issue, but it's related.  My friend Professor Daryl Lim just sent me a copy of his new book, Patent Misuse and Antitrust Law:  Empirical, Doctrinal and Policy Perspectives (Edward Elgar 2013).  This is, I think, the first book-length treatment of a difficult topic and is a most welcome addition to the literature.

More on the Innovation Act's provisions on attorneys' fees; upcoming roundtable on U.S. Supreme Court cases on attorneys' fees

1.  The Innovation Act was approved by the U.S. House of Representatives last week, as I reported here.  It may or may not be enacted into law.  Among the most important provisions of the bill are the provisions on attorneys' fees (section 3(b)).  To better understand them also requires some understanding of section 3(c) on joinder of interested parties.  I quote both sections below, in their entirety:

(b) FEES AND OTHER EXPENSES.—

(1) AMENDMENT.—Section 285 of title 35, United States Code, is amended to read as follows:

"§ 285. Fees and other expenses

(a) AWARD.—The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust. 

(b) CERTIFICATION AND RECOVERY.—Upon motion of any party to the action, the court shall require another party to the action to certify whether or not the other party will be able to pay an award of fees and other expenses if such an award is made under subsection (a). If a nonprevailing party is unable to pay an award that is made against it under subsection (a), the court may make a party that has been joined under section 299(d) with respect to such party liable for the unsatisfied portion of the award.

(c) COVENANT NOT TO SUE.—A party to a civil action that asserts a claim for relief arising under any Act of Congress relating to patents against another party, and that subsequently unilaterally extends to such other party a covenant not to sue for infringement with respect to the patent or patents at issue, shall be deemed to be a nonprevailing party (and the other party the prevailing party) for purposes of this section, unless the party asserting such claim would have been entitled, at the time that such covenant was extended, to voluntarily dismiss the action or claim without a court order under Rule 41 of the Federal Rules of Civil Procedure."

(2) CONFORMING AMENDMENT AND AMENDMENT.—

(A) CONFORMING AMENDMENT.—The item relating to section 285 of the table of sections for chapter 29 of title 35, United States Code, is amended to read as follows:

‘‘285. Fees and other expenses.’’.

(B) AMENDMENT.—Section 273 of title 35, United States Code, is amended by striking subsections (f) and (g).

(3) EFFECTIVE DATE.—The amendments made by this subsection shall take effect on the date of the enactment of this Act and shall apply to any action for which a complaint is filed on or after the first day of the 6-month period ending on that effective date.

 (c) JOINDER OF INTERESTED PARTIES.—Section 299 of title 35, United States Code, is amended by adding at the end the following new subsection: 

'‘(d) JOINDER OF INTERESTED PARTIES.—

(1) JOINDER.—In a civil action arising under any Act of Congress relating to patents in which fees and other expenses have been awarded under section 285 to a prevailing party defending against an allegation of infringement of a patent claim, and in which the nonprevailing party alleging infringement is unable to pay the award of fees and other expenses, the court shall grant a motion by the prevailing party to join an interested party if such prevailing party shows that the nonprevailing party has no substantial interest in the subject matter at issue other than asserting such patent claim in litigation.

(2) LIMITATION ON JOINDER.—

(A) DISCRETIONARY DENIAL OF MOTION.—The court may deny a motion to join an interested party under paragraph (1) if—(i) the interested party is not subject to service of process; or (ii) joinder under paragraph (1) would deprive the court of subject matter jurisdiction or make venue improper.

(B) REQUIRED DENIAL OF MOTION.—The court shall deny a motion to join an interested party under paragraph (1) if—(i) the interested party did not timely receive the notice required by paragraph (3); or (ii) within 30 days after receiving the notice required by paragraph (3), the interested party renounces, in writing and with notice to the court and the parties to the action, any ownership, right, or direct financial interest (as described in paragraph (4)) that the interested party has in the patent or patents at issue.

(3) NOTICE REQUIREMENT.—An interested party may not be joined under paragraph (1) unless it has been provided actual notice, within 30 days after the date on which it has been identified in the initial disclosure provided under section 290(b), that it has been so identified and that such party may therefore be an interested party subject to joinder under this subsection. Such notice shall be provided by the party who subsequently moves to join the interested party under paragraph (1), and shall include language that—(A) identifies the action, the parties thereto, the patent or patents at issue, and the pleading or other paper that identified the party under section 290(b); and (B) informs the party that it may be joined in the action and made subject to paying an award of fees and other expenses under section 285(b) if—(i) fees and other expenses are awarded in the action against the party alleging infringement of the patent or patents at issue under section 285(a); (ii) the party alleging infringement is unable to pay the award of fees and other expenses; (iii) the party receiving notice under this paragraph is determined by the court to be an interested party; and (iv) the party receiving notice under this paragraph has not, within 30 days after receiving such notice, renounced in writing, and with notice to the court and the parties to the action, any ownership, right, or direct financial interest (as described in paragraph (4)) that the interested party has in the patent or patents at issue.

(4) INTERESTED PARTY DEFINED.—In this subsection, the term ‘interested party’ means a person, other than the party alleging infringement, that—(A) is an assignee of the patent or patents at issue; (B) has a right, including a contingent right, to enforce or sublicense the patent or patents at issue; or (C) has a direct financial interest in the patent or patents at issue, including the right to any part of an award of damages or any part of licensing revenue, except that a person with a direct financial interest does not include—(i) an attorney or law firm providing legal representation in the civil action described in paragraph (1) if the sole basis for the financial interest of the attorney or law firm in the patent or patents at issue arises from the attorney or law firm’s receipt of compensation reasonably related to the provision of the legal representation; or (ii) a person whose sole financial interest in the patent or patents at issue is ownership of an equity interest in the party alleging infringement, unless such person also has the right or ability to influence, direct, or control the civil action.’’

I believe the basic idea behind the provision on "interested parties" is to enable recovery of fees under some circumstances from someone who has an interest in a shell company patent assertion entity.  (See the bill's section 4 on transparency of ownership as well.)  A discussion on an IP law professors' listerv yesterday, however, prompts the following hypothetical.  Suppose that Inventor A assigns her rights to her Employer, B (a commonplace situation).  The assignee B at some point thereafter assigns the patent to patent assertion entity C.  C sues D.  If C loses but can't pay D's attorneys' fees, can D recover from B (assuming all the procedural hoops specified above have been satisfied)?  B, after all, was the original "assignee" of the patent and therefore under a literal interpretation of section 3(c) above is an "interested party."  But that really doesn't make sense if B has made a complete assignment of the patent to C, which is where the provision allowing B to renounce any interest in the patent could come into play.  (Or perhaps a court could just interpret the language to refer only to someone who is a current assignee, not a former assignee who has since assigned its interest to another assignee.)  But if B has merely licensed the patent to C or made something short of a full assignment, it looks like B could still qualify as an interested party (unless it renounces whatever interest it retained, I guess).  Perhaps one could say that as a licensor B has an obligation to supervise C's decision to litigate.  Of course, if C is a nonexclusive licensee, it can't sue anyway; if C is an exclusive licensee, B should be joined anyway.  See Roger D. Blair & Thomas F. Cotter, The Elusive Logic of Standing Doctrine in Intellectual Property Law, 74 Tulane Law Review 1323 (2000).

2.  On Tuesday, December 10, Erin Dungan and I will be leading an ABA Roundtable discussion on the pending U.S. Supreme Court cases on attorneys' fees in patent litigation.  The event will be held from noon to 1 p.m. at Briggs & Morgan, 2200 IDS Center, 80 South Eighth Street, Minneapolis, MN  55402.  For the discussion paper, see here.  For my previous blog post on these two cases, see here.

Friday miscellany: Sidak on the meaning of FRAND; Astrazeneca and Stryker damages awards

1.  J. Gregory Sidak has published an article titled The Meaning of FRAND, Part I:  Royalties, in 9(4) Journal of Competition Law & Economics 931-1055 (2013), available here.  Here's the abstract:

What does it mean for a patent holder to commit to a standard-setting organization (SSO) to license its standard-essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms? When is a royalty FRAND? Drawing from both legal theory and economic theory, I propose an interpretation of FRAND that distinguishes and reconciles the conflicting definitions of FRAND and provides courts a practical approach to identifying FRAND royalties. A proper understanding of a FRAND royalty requires recognizing the combinatorial value of standard-essential patents. That recognition reveals the fallacy in attempting to apply the “ex ante incremental value” rule to the determination of a FRAND royalty. FRAND royalties divide the aggregate royalties generated by the standard among the holders of patents essential to the standard. Such a division should maximize the surplus resulting from the standard's creation. It must also satisfy an individual-rationality constraint for the patent holder and the licensee, thereby encouraging continued participation in the setting and implementation of open standards, as opposed to greater reliance on proprietary standards.

At some point next week, this blog will feature commentary on the paper by me and by guest-blogger Professor Norman Siebrasse of the University of New Brunswick Faculty of Law.  

2.  The U.S. District Court for the Southern District of New York on Wednesday awarded Astrazeneca $76 million damages against generic drugmaker Apotex in a pharmaceutical patent infringement case.  Here is a link to the decision, a write-up on the decision from the PatLit blog, and an article from Reuters.  Professor Siebrasse and I probably will both be blogging on this matter as well in the near future; there's an interesting question regarding the meaning of non-infringing alternatives, among other things.

3.  Another very big U.S. damages award ($70 million in lost profits, which the judge trebled, plus attorneys' fees) that just came to my attention was Stryker Corp. Inc. v. Zimmer Inc., No. 1:10-CV-1223, 2013 WL 6231533 (W.D. Mich. Aug. 7, 2013).  Looks like it just recently became available on Westlaw.  Here is a link to a Reuters article about it, and another to a Law360 article.  I'll probably be blogging on this one too after I've had some time to read and digest it.

4.  The blog turns seven months old today.  So far we've had over 20,000 page views.  Thank you readers!