(Un)Reasonable Royalties

For the small subgroup of people who read this blog, but don't read Patently-O, I thought I would point to a new article that I've posted called (Un)Reasonable Royalties. I won't write much about it here. Dennis Crouch did a nice review, for which I'm thankful. Here is the abstract:

Though reasonable royalty damages are ubiquitous in patent litigation, they are only one-hundred years old. But in that time they have become deeply misunderstood. This Article returns to the development and origins of reasonable royalties, exploring both why and how courts originally assessed them.

It then turns a harsh eye toward all that we think we know about reasonable royalties. No current belief is safe from criticism, from easy targets such as the 25% “rule of thumb” to fundamental dogma such as the hypothetical negotiation. In short, the Article concludes that we are doing it wrong, and have been for some time.

This Article is agnostic as to outcome; departure from traditional methods can and has led to both over- and under-compensation. But it challenges those who support departure from historic norms—all the while citing cases from the same time period—to justify new rules, many of which fail any economic justification.

Blockbuster IP Term for 8-Member SCOTUS

After the Senate's failure to move forward with Judge Garland's nomination to the Supreme Court, the conventional wisdom was that the Justices would shy away from politically sensitive cases that could lead to 4-4 splits, focusing instead on areas such as intellectual property in which cases tend to be unanimous. So far, that's spot on. The Court added a hot patent venue case to its docket this week, its seventh IP case for the Term so far. For those who have lost count, here's a quick round-up. You can also see my list of all Supreme Court patent cases back to 1952 here.

TC Heartland v. Kraft Food (cert granted Dec. 14): Does a change to the general federal venue statute affect the venue rule in patent cases? Most observers think this is the end of E.D. Tex.'s patent dominance—and perhaps the end of the incongruous Samsung ice-skating rink outside the Marshall, TX courthouse.

Samsung v. Apple: Drilling Down on Profit Calculations

The Supreme Court unanimously ruled in Samsung v. Apple today. The opinion was short and straightforward: an article of manufacture under 35 USC 289 (allowing all the profits for an infringing article of manufacture as damages) need not be the entire product. If the article is less than the entire product, then all the profits of that smaller part should be awarded per the statute. The court remanded the case for determination of what the proper article of manufacture should be.

I have three brief comments on the opinion:

1. This is not a surprising result given the oral argument. The only surprise here is that the "entire product" rule had been in place so long, essentially unchallenged, such that this is a new way to look at damages.

2. One reason why the old rule was in place a long time is that it is difficult to square this opinion with the historical context of section 289 (or rather, its predecessor). The carpet in the Dobson case (which had awarded only nominal damages) had a design on the front, but also had an unpatented backing, etc. Although there were at least two components, no one at the time Congress passed the law thought for a second that the profits for each component should be considered separately. Indeed, that's what the court had done in Dobson, finding that the design added nothing to the profits -- the whole reason Congress passed a statute in the first place. This context is why (as I've written before), I've always been torn about this case. As a matter of statutory interpretation, the Court is surely right. But if that's true, then the statute has been misapplied literally since day one - and that doesn't sit well with me.

3. This is a "live by the sword, die by the sword" opinion. If patentees want to claim articles of manufacture that are less than whole products, then they have to accept that articles of manufacture for damages are less than whole products. The court cites In re Zahn (an often maligned case) approvingly. In Zahn, the patentee claimed the shank of a drill bit but not the bit itself:







Now comes the difficult/fun (in the eye of the beholder) part: how do we calculate profits on an infringing drill bit? The patentee argues that drill bits are fungible, so that 100% of the profits must be assigned to the shank "article of manufacture." The infringer argues that people buy drill bits to drill, not to look at, so that 100% of the profits must be assigned to the bit "article of manufacture." If the infringer wins, even substantially, then we are back in the pre-289 world of Dobson. That can't be right. But if the patentee wins, it means that the Supreme Court's opinion means nothing.

I'm sure that some happy medium will be determined by experts, judges, and juries, but this is an area that is not going to be getting clarity any time soon.