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

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licensor and willing licensee would have agreed to in a hypothetical negotiation, assuming thepatent is valid and infringed. In an actual negotiation and, therefore, a hypothetical negotiation,the maximum amount a licensee would pay depends upon the economic value of the patentedinvention, meaning the incremental value of the invention compared to alternatives.Concerns with the Hypothetical Negotiation FrameworkIts counterfactual nature. Courts have, in some instances, allowed reasonable royaltydamage awards that appear to be more than a hypothetical negotiation would have produced. Indoing so, they have implicitly or explicitly rejected the central premise that the award must beconsistent with what a willing licensee would pay for the patented technology. Many casessuggest unease with the hypothetical negotiation due to its counterfactual assumption that theinfringer never infringed and the parties reached agreement. Underlying this unease is often aconcern that the maximum royalty the infringer would have been willing to pay could notadequately compensate the patentee and would have been unacceptable to it. Some cases alsocontain overtones of punishing infringers.Both concerns are inappropriate. First, compensatory damages for the strict liabilityoffense of infringement are not meant to be punitive. Second, arguments that the patentee wouldhave rejected the maximum amount the infringer would have paid are based on assumptions thatthe patentee could have made more by not licensing. The patentee may have been better offselling the invention or a competing product exclusively. In that case, however, the patenteeshould be entitled to damages based on lost profits. The law must be flexible in allowing thepatentee to prove its lost profits in order to provide adequate compensation. But a patentee whohas failed or chosen not to do so should not be allowed to use unproven arguments of directlosses to inflate a reasonable royalty award beyond what a willing licensee would pay.Deterring infringement. Some cases that seem to reject the willing licensor/willinglicensee model have expressed concern that the prospect of paying reasonable royalty damagessupplies an insufficient deterrent to infringement and leads firms to choose to infringe bycharging only the “normal” royalty. This concern ignores several other deterrents toinfringement incorporated within the patent system. First, the argument incorrectly assumes thatdamages following trial will be the “normal” royalty. The law, however, requires that thehypothetical negotiation amount incorporate the assumption that the patent is valid and infringed,which will raise the royalty rate. In addition, enchanced damages penalize those who willfullyinfringe and deter copying. Finally, and perhaps most importantly, the threat of injunctive reliefprovides critical deterrence to infringement, as discussed more fully below.Recommendation. The Commission recommends that courts award reasonableroyalty damages consistent with the hypothetical negotiation analysis and willinglicensor/willing licensee model. Concerns about punishing infringement,deterring infringement, the counterfactual nature of the analysis, or unproven lostprofits that the patentee may have suffered, should not inflate the reasonableroyalty damage award beyond what a willing licensee would have paid for apatent known to be valid and infringed. Doing so risks awarding patentees more20
than the economic value of their inventions compared to alternatives and creatingproblems of overcompensation and market distortion.CHAPTER 7CALCULATING REASONABLE ROYALTY DAMAGESAccurately calculating reasonable royalty damages based on a hypothetical negotiationand the willing licensor/willing licensee model presents numerous challenges for litigants andcourts. An economically grounded approach to damages calculation that appreciates the role ofcompetition in establishing the economic value of an invention would increase the accuracy ofthat determination. Chapter 7 suggests several steps courts can take to increase the accuracy ofreasonable royalty damage awards.The Georgia-Pacific Factors and Their ImplementationCourts and juries often make reasonable royalty damage awards by considering some orall of the Georgia-Pacific factors, a list identified by a district court in 1970 as relevant to the16issue. This list has served as a touchstone for expert testimony, jury instructions, and judicialreview of damage awards. Clarifying the appropriate role of the Georgia-Pacific factors wouldhelp increase the accuracy of reasonable royalty damage awards. The factors do not provide aconceptual framework for calculating damages. Rather, they are properly understood as a nonexhaustivelist of evidence categories that may be, but are not necessarily, relevant to a specificcalculation.Recommendation. Courts should consistently adopt and apply the hypotheticalnegotiation and willing licensor/willing licensee model as the conceptualframework against which conduct of the damages trial is tested. In particular,courts should recognize that the Georgia-Pacific factors provide only a list ofevidence categories. Implementing this recommendation will have practicalconsequences regarding jury instructions, admissibility of evidence and decisionmaking,discussed below.The Role of Alternative TechnologiesManufacturers often choose among competing alternative technologies to incorporate intonew products. A manufacturer will not pay more to use patented technology than the increasedprofits it anticipates from using the patented invention compared to the next best alternative. Ifroyalties exceed this economic value of the invention, manufacturers can bargain for a lower rateor choose an alternative. Because alternative technologies play a crucial role in actual licensingnegotiations, they must play a commensurate role in the hypothetical negotiation that determines16Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970),modified and aff’d, 446 F.2d 295 (2d Cir. 1971).21
Page 3: THE EVOLVING IP MARKETPLACE:ALIGNIN
Page 7 and 8: THE EVOLVING IP MARKETPLACE:ALIGNIN
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 and 24: Recommendation. The Commission reco
Page 25: Two current legal rules fail to giv
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
Page 75 and 76: 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
Page 307 and 308:
MARKETS FOR INTELLECTUAL PROPERTY(A
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