Patent Damages Conference at Texas Law

Numerous patent academics, practitioners, and judges gathered in Austin at the University of Texas School of Law yesterday and today for a conference on patent damages, organized by Prof. John Golden and supported by a gift from Intel. Here's a quick overview of the 12 papers that were presented, the suggestions from the paper commenters, and some notes from the Q&A. (We're following a modified Chatham House Rules in which only statements from academics can be attributed, but it was great having others in the room.)

Jason Bartlett & Jorge Contreras, Interpleader and FRAND Royalties – There is no reason to believe the sum of the bottom-up royalty determinations from FRAND proceedings will be reasonable in terms of the overall value the patents contribute to the standard. To fix this, statutory interpleader should be used to join all patent owners for a particular standard into a single proceeding that starts with a top-down approach. Arti Rai asks whether the bottom-up approach really creates such significant problems. Why can’t courts doing the bottom-up approach look at what prior courts have done? And doesn’t this vary depending on what product you’re talking about? But ultimately, this is a voluntary proposal that individual clients could test out. Doug Melamed notes that even if royalties in individual cases are excessive, standard implementers won't have an incentive to interplead unless their aggregate burden is excessive—and given the large number of "sleeping dog" patents, it's not clear that's true.

Ted Sichelman, Innovation Factors for Reasonable Royalties – Instead of calculating royalties based on the infringer's revenues, let's use the patentee's R&D costs (including related failures and commercialization costs) and award reasonable rate of return. Better aligned with innovation-focused goals of patent law. Becky Eisenberg notes that it is stunning that patentee costs aren't in the kitchen-sink Georgia-Pacific list, and she thinks idea of moving toward a cost-based approach more broadly has significant normative appeal, but she doesn't think it's easier to apply (see, e.g., criticisms of DiMasi estimates of pharmaceutical R&D costs). I think this paper is tapping into the benefits of R&D tax credits as an innovation reward. Daniel Hemel and I have compared the cost-based reward of R&D tax credits with the typical patent reward (in a paper Ted has generously reviewed), and it seems worth thinking more about whether and when it makes sense to move this cost-based reward into the patent system.

Drew Amerson & Robin Feldman, Gatekeeping Trends in Reasonable Royalty Cases – This paper surveys Daubert decisions involving reasonable royalty determinations from Jan. 1, 2008 to May 31, 2016, and concludes that there has been little change in grant rates for these motions, despite significant changes from the Federal Circuit. (Of course, there are selection effect issues here.) They suggest that baseball-style arbitration rules might encourage more realistic damages calculations. Peter Lee questions whether arbitration would solve anything. He also observed that in damages, the Federal Circuit has taken a different approach from its general preference for bright-line rules over flexible, multi-factor standards (which he has written about).

John Golden & Karen Sandrik, A Restitution Perspective on Reasonable Royalties – Reasonable royalty damages are similar to damages based on restitution: they provide relief when proof is lacking with respect to other damage measures. The Third Restatement of Restitution and Unjust Enrichment provides liability for infringement (§42), discusses different classes of responsibility (innocent recipients (§50), unwitting infringers (§51(2)), conscious wrongdoers (§51(3)), and negligent defendants (§52)), and discusses measures of enrichment (§49(3)-(5), with the choice based on blameworthiness). Tying back to Ted Sichelman's paper, those measures can include the cost to the claimant of conferring the benefit. Keith Robinson likes the idea of introducing consideration of fault and wonders to what degree courts do this already. Herb Hovenkamp says that consideration of some of these factors in copyright cases make him pessimistic about how well this will work. Jonathan Masur notes two potential problems: that consideration of fault would lead to increased reliance on opinion letters, and looking to infringers' profits may under-compensate because they are competitive rather than supracompetitive profits.

Erik Hovenkamp & Herbert Hovenkamp, Buying Monopoly: Antitrust Limits on Damages for Externally Acquired Patents – Patent acquisitions violate antitrust laws when they give the acquiror an unearned monopoly in the technology space, the the proper enforcement mechanism is to withhold damages. Doug Melamed poses three questions about the details: (1) Why limit to the acquired patent? The problem is not the provenance of a patent—it's the amalgamation. (2) Why not classify under patent misuse rather than a whole new doctrinal apparatus? (3) Why doesn't disaggregating complementary patents create the same problem, since for them it is their aggregation that creates efficiency benefits?

Keith Hylton, Enhanced Damages for Patent Infringement: A Normative Approach – At enhancement stage, courts should apply a multi-factor approach as in tort law. And there's no reason to believe that three is the optimal multiplier. Neel Sukhatme likes how this article operationalizes a more technical model into law and thinks this paper should rely more on that prior model rather than analogizing from tort law. Herb Hovenkamp: Shouldn't the probability of detection factor into this, so that infringement of method-of-production patents have a higher multiplier? Ted Sichelman: You can't make the same assumptions as in torts because it's all a proxy for promoting innovation. "I've written on this, Tom Cotter's written on this, and we have completely different views, but you have to engage with the issue."

Sapna Kumar, Patent Damages Without Borders – The Federal Circuit is misusing the presumption against extraterritoriality, which wasn't intended to cover foreign harm that flows from an act of domestic patent infringement. Amy Landers: There are substantial political ramifications to extraterritorial application of U.S. law, so we should be careful before extending it. Glynn Lunney: Is there a natural experiment related to differential rates of innovation in off-shore and near-shore technology?

Michael Meurer, Shared Patent Damages – If ex ante contracting between potential patent defendants occurs, whether damages can be apportioned between a buyer and seller doesn't affect innovation incentives. And control over litigation can affect the bargaining power of the transacting parties relative to the patent owner. Oskar Liivak: Does it matter who plaintiff is? How does it affect the model if we consider complications like varying probabilities of suing the different parties? What about willfulness? Bernard Chao: Model assumes damages from suing buyer and seller are going to be the same, and that isn't generally true. Erik Hovenkamp: Argument is related to strategic delegation literature, which was criticized based on failure to account for renegotiation. (Mike notes that he had an article in this earlier literature, and that there are barriers to renegotiation.)

Colleen Chien, Reconceptualizing Patent "Comparables" – Courts should favor licenses that are about the transfer of technology rather than just the transfer of rights to avoid litigation. When damages are too difficult to calculate, appropriate injunctions can both encourage more data sharing and limit hold-up problems. Chris Cotropia worries that this approach doesn't solve the circularity problem and might be subject to more gaming, and he wonders about the differential impact on fields with lots of technology-transfer licenses, and thinks it might not be so workable in practice to separate the value of the patent out of these licenses. Doug Melamed notes that a delayed injunction doesn't solve the problem of lock-in costs.

Erik Hovenkamp & Jonathan Masur, Reliable Problems from Unreliable Patent Damages – Basing damages on past licenses creates perverse incentives to avoid licensing at anything less than a low rate, thereby cutting off the bottom of the licensing market and creating substantial deadweight loss. Past licenses are also unreliable because they are negotiated under uncertainty regarding whether the patent is valid and infringed. And reliance on past licenses in litigation creates incentives to keep licenses secret, which undermines licensing efficiency. Erik and Jonathan think courts should pretty much never rely on past licenses: it's better that damages be random but unbiased than systematically problematic. Glynn Lunney doesn't think there is any unbiased measure, and he isn't sure that this proposal breaks the circularity problem because legal resolutions will still inform market transactions. Oskar Liivak: Does the same circularity problem affect lost profits? Becky Eisenberg: It is right as an empirical matter that concern about litigation evidence really is discouraging patent licensing? (Jonathan responds: based on the in-house counsel he has talked with, yes.)

Thomas Cotter, Patent Damages Heuristics – Tom was unfortunately not able to make it to Austin, but Saurabh Vishnubhakat and Greg Vetter did a great job presenting his paper, which argues that courts should more readily accept the use of heuristics—shortcuts that speed up decisionmaking—in determining patent damages. I was the paper commenter, and I focused on three points: (1) all legal rules are heuristics and the tradeoffs here have been thoroughly canvased in the vast rules-vs-standards literature which would be worth drawing in; (2) most of the doctrinal fights throughout patent law can be characterized as fights over the extent to which courts should simplify decisionmaking through heuristics, and it's interesting that the Federal Circuit hasn't made the same push toward bright-line rules in general damages calculations that it has in other areas of law; and (3) if we don't know which damages heuristics are most worthwhile, we should at least be thinking more about the second-order question of how to make empirical progress on these questions.

Peter Menell, Preliminary Report of the BCLT Patent Damages Workshop – Peter discussed work with Stuart Graham, Tim Simcoe, and Carl Shapiro in which they brought patent damages professionals together for a workshop at Berkeley under Chatham House Rules to try to get better descriptive evidence on patent damages issues. Since the report still needs to be circulated to participants before being publicly released, I won't discuss the preliminary results here, but I think this is a valuable effort at surfacing some of the concerns that exist among practitioners.