The Evolving IP Marketplace: Aligning Patent Notice and Remedies ...

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market reward for the invention, meaning the amount the patentee would have earned in theabsence of infringement by either selling a patented product or by licensing the patentedtechnology.Courts have developed an extensive jurisprudence on how to calculate compensatorydamages. Current law identifies two categories of patent damages – lost profits and reasonableroyalties – and provides legal rules for determining which category applies and how damagesshould be calculated. Calculating accurate damages is a difficult task, however. The calculationis based on a hypothetical world of no infringement but continued competition from noninfringingalternatives. Undercompensation can harm consumers by decreasing incentives toinnovate. Overcompensation can also hinder innovation and deprive consumers of the benefitsof competition in multiple ways. To address these concerns, this report seeks to derive aneconomically grounded approach to calculating patent damages and to test the current legal rulesfor calculating damages against that approach.CHAPTER 5LOST PROFITS DAMAGESWhen a patentee commercializes the invention itself, its market reward is measured bythe profits it earns. In this context, infringement generally entails making and selling acompeting product containing the patented technology. Infringing competition can reduce apatentee’s profits in a number of ways, including by diverting sales from the patentee’s product,eroding the patentee’s sales price, and causing the patentee to lose collateral sales of nonpatentedproducts.Recommendation. In assessing how the market would have rewarded theinvention absent infringement, courts should allow a patentee flexibility increating the “but for” world to address different losses and avoidundercompensation. Patentees should not be denied an opportunity to establishlost profits through application of rigid rules that do not reflect sound economicprinciples or imposition of evidentiary requirements beyond what is required forthe court to make a reasonable approximation of the patentee’s loss.Non-infringing Alternatives in a Lost Profits CalculationIt is also important that the legal rules recognize how alternatives to the patentedinvention would have affected the patentee’s profits. In the world absent infringement, theinfringer might have sold an alternative to the patented technology. Accurately calculatingdamages in the face of that competition requires an examination of consumer preferences for thepatented invention over alternatives. The more consumers prefer the patented invention, thegreater the number of sales that infringement causes the patentee to lose. When consumers freelysubstitute alternatives for the patented product, infringement causes fewer lost sales. Economictools, including those frequently used in antitrust analysis, can help determine the number of lostsales.18
Two current legal rules fail to give proper consideration to the role of alternatives indetermining lost profits damages: the entire market value rule and the practice of making dualawards of lost profits and reasonable royalty damages.The entire market value rule. When a patented invention is only one component of alarger product, the “entire market value rule” awards lost profits damages based on the entirevalue of the patented product if (1) the patented feature is “the basis for customer demand” of theinfringing product and (2) the patented and unpatented components together “constitute a15functional unit.” The entire market value rule distracts litigants and factfinders from a carefulreconstruction of a market lacking infringement. Proper consideration of the “degrees ofsubstitutability” among products is eliminated under the all or nothing “basis for customerdemand” test. The “functional unit” prong introduces an irrelevant consideration into theanalysis. A more nuanced economic analysis would seek to determine the number of consumersthat would choose an alternative if the infringing product were not available. Under thiseconomic analysis, the infringer’s sales are effectively “apportioned” according to the value thatthe invention imparts to the entire product.Recommendation. Courts should reject the entire market value rule as a basis forawarding a patentee lost profits damages based on all infringing sales and insteadrequire proof of the degree of consumer preference for the patented invention overalternatives.Dual awards. Courts have awarded lost profits damages on a portion of the infringingsales while also awarding reasonable royalty damages on the remaining infringing sales. Suchdual awards can give more than required to put the patentee in the position it would have beenbut for the infringement. When an analysis of consumer preferences shows that, absentinfringement, some consumers would have purchased an alternative to the patented product,giving the patentee reasonable royalty damages on those sales overcompensates it.Recommendation. Courts should reject dual awards of lost profits and reasonableroyalty damages when competition from alternatives would have prevented thepatentee from making all the infringer’s sales in a world of no infringement.CHAPTER 6THE HYPOTHETICAL NEGOTIATION IN REASONABLE ROYALTY DAMAGESWhen a patentee does not market its invention, it can instead earn the market reward forthe patent through licensing. For this reason, when a patentee cannot or chooses not to prove lostprofits from infringement, the measure of damages is the amount that the patentee would havereceived in the market for licensing the patented technology. Patent law appropriatelyimplements this concept by awarding reasonable royalty damages based on what a willing15Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1550 (Fed. Cir. 1995) (en banc).19
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Page 9 and 10: innovation with significant benefit
Page 11: calculating patent damages and reco
Page 14 and 15: ecause they occur before the purcha
Page 16 and 17: • Language is inherently imprecis
Page 18 and 19: Improving the Ability to Understand
Page 20 and 21: enables all participants in the pat
Page 23: Recommendation. The Commission reco
Page 27 and 28: than the economic value of their in
Page 29 and 30: standard is chosen is necessary for
Page 31 and 32: Recommendation. Courts should elimi
Page 33 and 34: 21Irreparable harm/inadequacy of mo
Page 35 and 36: Remedies Following Denial of an Inj
Page 37 and 38: CHAPTER 1EVOLVING PATHWAYS OF INNOV
Page 39 and 40: 5and 2009 explored two: (1) notice,
Page 41 and 42: and costs have fallen. As a represe
Page 43 and 44: Only 4.4% was undertaken by compani
Page 45 and 46: expensive manufacturing facilities.
Page 47 and 48: commercialization, either by the or
Page 49 and 50: B. Patenting by Small Companies and
Page 51 and 52: attempt to win back customers. Pate
Page 53 and 54: delve into that issue. Patent quali
Page 55 and 56: CHAPTER 2THE EVOLVING PATENT MARKET
Page 57 and 58: competition. The business model of
Page 59 and 60: failure to transfer the technology
Page 61 and 62: 19advance of commercialization. Man
Page 63 and 64: explains that licensing fees for qu
Page 65 and 66: 35years ago. For several companies,
Page 67 and 68: the active development or practice
Page 69 and 70: 61business models, some of which ar
Page 71 and 72: interest in patent portfolios. For
Page 73 and 74: 86 87patents. Such defensive buying
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97technologies.” Representatives
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109commercialize viable technology.
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CHAPTER 3PATENT NOTICE: A COMPETITI
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4Yet, until recently, notice concer
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15investment in innovation.” If f
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29unclear patent claims that increa
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42met.” Indeed, panelists viewed
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panelist explained, continuing, “
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74making it difficult to predict th
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B. Difficulties in Foreseeing Evolv
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magnified when an applicant uses re
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[purchased] chip other than what it
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132their R&D strategies and before
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Circuit opinions framed the indefin
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Some of the panelists gave Miyazaki
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Miyazaki approaches indefiniteness
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Of course, claims may be functional
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186purposes, “unlikely to result
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198possession.” Another observed,
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This report does not attempt to mak
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219for assessment) as technologies
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Inclusion of such a glossary in a p
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Several steps could be taken. The p
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A further step would be to encourag
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problems that this may pose. This s
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272quite thin, however, and the ful
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specification to project the future
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filing date. So long as the origina
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third parties who (i) infringe pate
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1. Improving the Ability to Search
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320patents. In discussing ways to e
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is a problem, knowing the owner is
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346copyists to avoid liability. Mor
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that supports collaboration among f
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CHAPTER 4THE ECONOMIC AND LEGAL FOU
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2market mechanism. A patentee can o
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innovate, remedies must compensate
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Lost profits damages will not be ap
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Remedies that systematically underc
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unnecessarily increasing the number
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CHAPTER 5LOST PROFITS DAMAGESI. INT
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improvements, including rejection o
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undercompensation. Patentees should
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value of the patented product. The
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is entitled to “no less than a re
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CHAPTER 6THE HYPOTHETICAL NEGOTIATI
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This Chapter and Chapter 7 seek to
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13product. IT products, such as per
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medians “tell[s] you very little
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33would have guided the parties dur
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42 43agreed. In Golight, Inc. v. Wa
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Second, even if the parties had sim
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The court reached this result by ac
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lack of notice. That result could l
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CHAPTER 7CALCULATING REASONABLE ROY
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I. INTRODUCTIONCHAPTER 7CALCULATING
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This list has become “virtually c
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15would have informed the licensing
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courts should recognize that the fi
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importance of the value of the pate
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48sound economic data and with actu
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Recommendation. To prevent damage a
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68“reasonable.” More generally,
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methodologies to the facts of a par
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89more than damages.” For reasona
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Recommendation. In their gatekeeper
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110program.” The patentee offered
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121businesses to allow for use of t
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132total revenues for an infringing
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145 146“basis for customer demand
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ecause it can be purchased separate
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167revenue.” One panelist pointed
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CHAPTER 8PERMANENT INJUNCTIONS IN P
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I. INTRODUCTIONCHAPTER 8PERMANENT I
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Justice Kennedy’s concurring opin
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15they invest in research and devel
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Panelists identified several ways i
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The potential for hold-up caused by
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searches. We thoroughly analyze all
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understood to provide ex ante incen
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62start-ups, semiconductor design h
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that primarily engage in technology
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83public health and safety. Since e
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91 92of hardships may support denia
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ongoing royalty determinations impe
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VII.REMEDIES IN THE INTERNATIONAL T
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The 2009 Saxon case, in which a pat
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ut its language should allow consid
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APPENDIX ASTATISTICS DESCRIBING PAT
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Chart 2 9The PricewaterhouseCoopers
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Chart 4 17The authors of the Pricew
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II.Lemley and Shapiro StudyProfesso
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APPENDIX BOVERVIEW OF POST-eBAY PER
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defendant, a remedy in equity is wa
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To gain a better understanding of h
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Potentially RelevantFact PatternNum
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on whether the parties competed and
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One case has recognized that the re
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56funded additional projects and di
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stating that non-practicing patent
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effect of an injunction on the infr
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promoting innovation for public ben
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Boston Scientific Corp. v. Johnson
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Becton Dickinson & Co. v. Tyco Heal
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Power Integrations, Inc. v. Fairchi
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V. Questionnaire Used in Malin Stud
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ParticipantEarl (Eb) BrightGeneral
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ParticipantHoracio GutierrezCorpora
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ParticipantAron LevkoPrincipal, Pri
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ParticipantJeffrey MyersVice Presid
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ParticipantSteven D. SingerPartner,
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ParticipantRosemarie ZiedonisAssist
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APPENDIX DPUBLIC COMMENTS AND PRESE
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NameComment DateSchlicher, John May
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Steve Malin, Empirical Analysis of
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DAMAGES(February 11, 2009)Panel 1:S
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MARKETS FOR INTELLECTUAL PROPERTY(A
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