Saturday, March 07, 2009

2009 law review article on patent damages

David W. Opderbeck writes on patent law damages in the article PATENT DAMAGES REFORM AND THE SHAPE OF PATENT LAW, 89 B.U.L. Rev. 127 (2009), the same review that brought us the horror of "Ending Abuse...".

The conclusion states:

The debate over patent damages reform is in reality a fight over the fundamental nature of the patent grant. The princi-pal architects of reform are established computer technology companies for which patents are not a significant form of protection. They wish to squeeze patents further into the shape of a narrow contract-like right subject to a liability rule. The principal opponents of reform are patent-rich industries, such as pharmaceuticals and biotechnology, which wish to retain a broad patent franchise subject to a property rule.

Empirical studies of damages in patent cases do not reveal a systemic problem of the sort trumpeted by reform advocates. There are, to be sure, occasional enormous outlier verdicts, but there is no indication that these result from inflated royalty calculations, as the reformers suggest. Moreover, the reform proposals, which would require courts to apportion the economic value of a patented invention against the prior art, impinge too heavily on the utility, novelty, and non-obviousness requirements for patent validity. These proposals should be rejected.

The reformers are correct, however, in their intuition that patent damages are not properly tied to economic function of patents. In particular, current patent damages law ignores the crucial factor of price elasticity of demand. Attention to this demonstrates that the optimal patent damages regime is one in which the usual award is restitutionary.

Bessen is not mentioned, but Lemley is-->

Mark Lemley and Carl Shapiro analyzed cases reported by Westlaw from 1982 through mid-2005 in which courts awarded a reasonable royalty to the patentee. n93 They identified only fifty-eight such cases over that twenty-three year period. n94 Curiously, they noted that cases in which courts award lost profits are more prevalent than reasonable royalty cases, while the PWC Study concluded the opposite. n95

The core empirical finding of the Lemley-Shapiro study is that the mean reasonable royalty rate for their sample was just over 13% of the price of the infringing product. n96 As the authors note, "this number will strike many patent lawyers as surprisingly high" because market royalty rates, and even rates negotiated as part of settlement agreements, are typically much lower. n97

[p. 143] One important reason Lemley and Shapiro offer for this disparity in royalty rates is the "probabilistic nature of patent rights." n98 The boundaries of a patent right are fuzzy prior to a court's determination of issues such as claim construction, non-obviousness, and the range of equivalents. n99 The parties to a license negotiation must take this uncertainty into account when valuing the royalty rate. Furthermore, cases litigated to verdict likely involve a greater monetary stake than a garden-variety license. n100

Lemley and Shapiro suggest the most significant contributions to the disparity in royalty rates are the problems of holdup and royalty stacking. n101 The holdup problem results from the threat of injunctive relief when a complex product requires rights to many different upstream patents. n102 Under these circumstances, a single upstream patent owner can hold up the process of clearing all the necessary rights by demanding an unreasonably high royalty. n103 The downstream firm is faced with a dilemma: either pay the extortionate royalty, undertake the expense of redesigning the product to eliminate the holdout's component, or run the risk of an injunction barring the sale of the entire product that incorporates the patented component. n104 In addition to a game theoretic model of this dynamic, the authors provide some anecdotal examples of how this happens in practice, particularly "in the industries in which so-called patent trolls predominate" such as computers and telecommunications. n105

See also

It's about damages stupid


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