Gatekeeping Trends in Reasonable Royalty Cases
Author: Drew Amerson
Visiting Assistant Professor and Program Manager of the Startup Legal Garage at the Institute for Innovation Law, University of California Hastings College of the Law.
Five years ago, in Uniloc USA Inc. v. Microsoft Corporation, the Federal Circuit rejected the well-established “25-percent rule of thumb” used to calculate reasonable royalties in patent infringement cases. Viewing that rule of thumb as an arbitrary starting point untethered to the facts of the underlying infringement claim, the Uniloc court found it inconsistent with the standards of acceptable expert testimony established in Daubert v. Merrell Dow Pharmaceuticals, Inc. In a series of decisions since Uniloc, the Federal Circuit has addressed alternative reasonable royalty methodologies, endorsing some while criticizing others. Irrespective of methodology, the Federal Circuit has enforced its gatekeeping role by emphasizing that the data utilized in any reasonable royalty analysis must be sufficiently tied to the facts of the case.
This paper reviews the landscape of Federal Circuit decisions over the last five years and describes why they are unlikely to lead to the type of rational certainty that business markets crave and the legal system strives for. The paper also explores the possibility that perhaps there is a better way to incentivize the behavior we wish from the parties by using procedural rules, including the possibility of applying a baseball-style arbitration system to patent litigation to encourage parties to present more “realistic” damage calculations. In that system, the parties each enter a number, and the trier of fact may choose only one of the two numbers offered, not some number in between.
Buying Monopoly: Antitrust Limits on Damages for Externally Acquired Patents
Erik Hovenkamp and Herbert Hovenkamp
Erik Hovenkamp: Postdoctoral Fellow, Harvard Law School, Project on the Foundations of Private Law; Visiting Fellow, Yale Law School, Information Society Project. Erik’s work on this paper was supported by the Ewing Marion Kauffman Foundation.
Herbert Hovenkamp: James G. Dinan Professor, Penn Law and Wharton Business School, University of Pennsylvania
The “monopoly” authorized by the Patent Act refers to the exclusionary power of individual patents. That is not the same thing as the acquisition of individual patent rights into portfolios that dominate a market, something that the Patent Act never justifies and that the antitrust laws rightfully prohibit.Most patent assignments are procompetitive and serve to promote the efficient commercialization of patented inventions. However, patent acquisitions may also be used to combine substitute patents from external patentees, giving the acquirer an unearned monopoly position in the relevant technology market. A producer requires only one of the substitutes, but by acquiring the combination it can impede product market rivals by limiting their access to important technological inputs. Similarly, a patent assertion entity (PAE) may acquire substitute patents to eliminate inter-licensor competition, enabling it to charge supra-competitive license fees, much like a merger or cartel. For example, by acquiring two or more substitute patents that collectively dominate a market a PAE can effectively monopolize the technology for that market. Such anticompetitive practices are regularly condemned in conventional product contexts, but the courts have not yet applied the same antitrust logic to patent markets. And they passively encourage anticompetitive patent acquisitions by awarding large damages when such patents are infringed.
We propose that infringement damages for an externally acquired patent be denied if the acquisition served materially to expand or perpetuate the plaintiff’s dominant position in the relevant technology market. By weakening enforcement, this limits the patent holder’s ability to use such acquisitions to anticompetitive ends. We do not suggest that a dominant patent holder should be prohibited from securing external patent rights in the relevant technology market, but simply that its acquisition be limited to a nonexclusive license. This will permit the acquirer to practice the patent and keep its own technology up to date, but will not enable it to restrict third party access. This is as valuable to patent policy as it is to antitrust, for it will tend to increase innovation by discouraging systematic monopoly in technology markets.
Patent Damages Without Borders
Author: Sapna Kumar
Associate Professor and George Butler Research Professor, University of Houston Law Center.
Abstract: The presumption against extraterritoriality is a deceptively straightforward principle: that U.S. law applies only inside the United States. But there is confusion regarding whether the presumption applies when a court calculates patent damages. In WesternGeco L.L.C. v. Ion Geophysical Corp., the Federal Circuit held that patent holders who show infringement under § 271(f) of the Patent Act cannot recover foreign lost profits. The court maintained that allowing recovery of such damages would result in the Patent Act applying extraterritorially, which cannot be done without Congress’s clear intent. This interpretation severely limits the ability of district courts to make patent infringement victims whole. This Article maintains that the Federal Circuit’s reliance on the presumption is misplaced. The presumption was established to prevent U.S. law from applying to extraterritorial conduct; it was not intended to cover situations in which foreign damages flow directly from an act of domestic patent infringement. The presumption has been rebutted under the Supreme Court’s two-step extraterritoriality test. By creating this bright-line rule, the Federal Circuit has unduly restricted the ability of patent holders to recover damages, including in cases in which there is no other applicable law. This Article proposes that the Federal Circuit adopt a flexible test that balances prescriptive comity concerns with the United States’ interest in making victims of domestic patent infringement whole.
Final Report of the Berkeley Center for Law & Technology Patent Damages Workshop
Stuart Graham, Peter Menell, Carl Shapiro, and Tim Simcoe
Stuart Graham: Associate Professor, Scheller College of Business, Georgia Institute of Technology.
Peter Menell: Koret Professor of Law, University of California at Berkeley School of Law.
Carl Shapiro: Transamerica Professor of Business Strategy, Walter A. Haas School of Business, University of
California at Berkeley.
Tim Simcoe: Associate Professor of Strategy & Innovation, Boston University Questrom School of Business.
Cuozzo Speed Technologies and Halo Electronics: The U.S. Supreme Court Decides Two Patent Cases in 2016, Upholding a Section of the America Invents Act and Respecting Established Patent Principles
Author: Sue Ann Ganske
Clinical Professor of Business Law, School of Accounting, College of Business, Florida International University; J.D., University of Toledo College of Law, Order of the Coif, Business Editor, Law Review; M.A. and B.A., Bowling Green State University.
Patent Damages Heuristics
Author: Thomas F. Cotter
About: Briggs and Morgan Professor of Law, University of Minnesota Law School.
Abstract: In many domains, including law, decision makers often resort to heuristics, which others have aptly described as “shortcuts that simplify and speed up decision making” by, for example, “ignor[ing] some of the available information” to arrive at “adequate, though often imperfect, answers to difficult questions.” In this paper, I argue that a patent system that more readily accepts the use of damages heuristics may better serve public policy than one that requires patent owners to substantiate every aspect of their claimed damages with rigorous proof. More specifically, policymakers confronted with the choice between a proposed heuristic and an open-ended, nonheuristic standard (or an alternative heuristic) ideally should choose the proposed heuristic when the sum of the administrative and error costs associated with its use is lower than the sum of the administrative and error costs resulting from the use of the nonheuristic (or alternative heuristic). To be sure, there often may be no easy way to evaluate whether this condition is satisfied—due both to the paucity of the evidence and to the fact that the cost one attributes to error depends in part on the value one places on the importance of accurate damages calculations to patent policy. Nevertheless, I will argue that, at least in some recurring situations, policymakers can reach a reasoned conclusion whether or not use of a particular heuristic is likely to improve social welfare; and that, more generally, the patent system would benefit if courts were more mindful of both the necessary tradeoffs to be made in calculating damages and where the gaps in our knowledge lie.
Author: Colleen Chien and Eric Schulman
About: Colleen V. Chien is an Associate Professor of Law at Santa Clara University School of Law and from 2013–2015 was White House Senior Advisor, Intellectual Property and Innovation at the Office of Science and Technology Policy; Eric Schulman is a Principal at Fish & Richardson P.C. and was Legal Director of Patents at Google, Inc., and Head of Intellectual Property at Uber Technologies Inc.
Over the last decade, courts have applied increasingly stringent standards to the evidence used to determine patent damages. While this has reduced the risk of awards untethered to the facts, the current focus on strictly comparable licenses covering technology similar to the patent that resemble one-way, royalty-bearing “hypothetical licenses” specified by law has created its own problems, particularly in the valuation of component patents, many of which are incorporated into a single product. The rejection of what we refer to as “semi-comparables”—licenses that deviate in some significant way from the terms of the hypothetical license—has led to distorted incentives, unpredictability, and the exclusion of many of the ex ante transactions that best reflect the incremental value of the invention. We believe that the wholesale exclusion of such licenses is wrong—the problem is not that certain licenses are insufficiently comparable but that courts need better approaches to properly and flexibly interpret evidence of comparables and semi-comparable licenses. Framed in this way, the solution is not to exclude licenses but instead to apply an inclusive but disciplined approach to reasonable royalty determinations that prioritizes objective evidence of a patent’s incremental value even in the form of traditionally excluded “semi-comparable” transactions like technology (as opposed to “patent”) licenses and sales. Though courts have been reluctant to use semi-comparables because of a lack of objective information about their formation, we begin to address this void, drawing upon the collective wisdom of licensing lawyers we interviewed, the nearly two-decade-long career of one of us as a licensing lawyer, and studies of thousands of actual licenses. When a reasonable, evidence-based estimate or upper bound cannot be derived, we consider the expanded use of tailored injunctions, assuming the other eBay elements are met.
Allocating Patent Litigation Risk Across the Supply Chain
Author: Michael J. Meurer
About: Abraham and Lillian Benton Scholar and Professor of Law at Boston University School of Law
Innovation Factors for Reasonable Royalties
Author: Ted Sichelman
About: Professor, University of San Diego School of Law; Visiting Professor, Harvard Law School.
Patentees who are successful in litigation are entitled to no less than a “reasonable royalty” for the infringing use of the patent. Currently, reasonable royalties are assessed by the fact-finder using the cumbersome, difficult-to-apply fifteen-factor Georgia Pacific test. The Georgia Pacific test has been widely and roundly criticized, and there is general agreement that it too often hinders patent law’s central goal: promoting technological innovation. To improve the reasonable royalty analysis, this article proposes adding innovation-centric factors to the Georgia Pacific test, including the total amount spent on research and development (R & D) and commercialization of the invention, taking into account opportunity costs and project-specific risk. Additionally, the article suggests emphasizing a slightly modified version of one existing innovation-centric, Georgia Pacific factor: the technological benefits offered by the invention when compared to alternative approaches. Like the “objective” factors used to make determinations of whether a patent is obvious, these innovation factors will help fact-finders to make more accurate and more consistent reasonable royalty determinations while more ably advancing patent law’s goal of spurring innovation.