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January 22, 2008

Damages Apportionment Blowback

The presently proposed Senate revision to awarding patent infringement damages incorporates an old concept in new clothing: damages apportionment. Prior to the patent act of 1946, § 284 provided for such hair-splitting, and was referred to by the patent commissioner at the time as "one of the sorest spots in the enforcement of the law in the United States." What could it mean this time around?

Currently, 35 U.S.C. § 284 is relatively simple.

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d) of this title.

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

Hoary techniques for figuring damages, such as "lost profits," have not been obviated in the proposed legislation. What appears new in the current incarnation of S. 1145 is prescription for methods determining "reasonable royalty," particularly apportionment of damages if the value of infringement falls short of the whole infringing product.

Subsection (a) – § 284, the patent damage statute, is amended as follows:

The court shall award the claimant damages adequate to compensate for the infringement but not less than a reasonable royalty, together with interest and costs. The court may receive expert testimony to assist it in determining damages.

In determining a reasonable royalty, the court shall determine which of the following methods should be used, and should identify the factors that are relevant thereto:

(A) entire market value - the royalty may be based upon the entire market value of the larger apparatus / process, that incorporates the infringing product / process, if the claimed invention's specific contribution over the prior art is the predominant basis for the market demand of the larger apparatus / process;

(B) established royalty based on marketplace licensing - the royalty may be based on other nonexclusive licenses of the patented invention if the claimed invention has been the subject of a nonexclusive license to a number of persons sufficient to indicate a general marketplace recognition of the reasonableness of the licensing terms, if the license was secured prior to the filing of the case, and if the infringer's use is of substantially the same scope, volume and benefit of the rights granted under such license.

(C) If showings under (A) and (B) have not been made, the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly attributable to the claimed invention's specific contribution over the prior art. In the case of a combination invention whose elements are present individually in the prior art, the contribution over the prior art may include the value of the additional function resulting from the combination, as well as the enhanced value, if any, of some or all of the prior art elements as part of the combination, if the patentee demonstrates that value.

In determining a reasonable royalty, where appropriate, the court may also consider (or direct the jury to consider) any other relevant factors under applicable law.

The methods set forth in this subsection shall only apply to calculation of damages based on a reasonable royalty.

Accounting for the significance of the patented technology is no departure from current practice, in which courts give weight to the existence of non-infringing alternatives available to the infringer. This is the concept of the patent neighborhood: a patented technology lacking a market-acceptable alternative is a mansion, the finest property, and so justly prized, while a shanty of a patent is one that could have been avoided by making a comparably acceptable different (non-infringing) choice.

The theory with regard to royalty rate has been that a potential licensee would be less disposed to a high royalty rate for a shanty patent. There is a lack of consistency in court rulings regarding the standard of adequacy of an alternative, and on the time when an alternative must have been available.

Infringement may have collateral benefits, and the courts have enhanced rewards in such cases. There may be "convoyed" sales of associated products, such as parts, supplies, and accessories, which could be expected to flow from selling an infringing product.

To date, the significance of a patent to a product has been considered relevant in determining reasonable royalty. What constitutes a reasonable royalty rate has depended upon answering the question of how significant the patented feature was in the infringer's commercial success. This is the nut of the proposed apportionment prescription; currently accounted for, but, if S. 1145 becomes law, statutorily formalized.

Sometimes infringement of a single feature that is only a portion of a product can provide a competitive edge justifying an award based upon the entire product. In Bose v. JBL, 274 F.3d 1354, 61 USPQ 2d 1216 (Fed. Cir. 2001), the infringing product was a loudspeaker, and the infringement was of an improved "port tube" to enhance bass response; this infringing feature being only a portion of the product. The Federal Circuit held, against appeal by the defendant regarding damage calculation, that there was substantial evidence to award "based upon the entire value of the loudspeakers."

But the devil lurks in the details. Under the new law, on a case-by-case basis, the court must determine which of three methods applies: 1) entire market value; 2) established royalty rate; 3) apportionment.

The clause "the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly attributable to the claimed invention's specific contribution over the prior art" practically causes CAFC Chief Judge Michel to cough furballs (furball one; furball two):

[T]he provision on apportioning damages would require courts to adjudicate the economic value of the entire prior art, the asserted patent claims, and also all other features of the accused product or process whether or not patented. This is a massive undertaking for which courts are ill-equipped.

No two ways about it; economists will become stars of the show in patent liability determinations using apportionment, and the cost of creating such a firmament of stars may be astronomical. But the CAFC will be damned if it doesn't get a grip on apportionment methodology on the first damages appeal that comes down the pike if & after damages apportionment becomes law (again). The court is not going to wallow in a morass of cases lasting decades, as they did last episode. Just as Phillips v. AWH set a priority stack for evidentiary determination in claim construction, Small Inventor v. Microsoft will define how to figure the "portion of the economic value properly attributable to the claimed invention's specific contribution over the prior art."

And the method is as likely as not to blow back on the serial infringers, as exemplified by the large corporate members the Coalition for Patent Fairness, who thought damages apportionment such a wonderful idea. In the apportionment process, while the patent holder shoulders the burden to "demonstrate value," that value determination will necessarily involve cost, revenue, and profit figures from the infringer. Figuring that "portion of economic value" will quite likely involve the infringer opening accounting book details as part of liability discovery, revelation that the infringer would avoid like the plague, especially to a competitor. Which could mean that resorting to damages apportionment becomes a "damned if you do, damned if you don't" proposition for an infringer: increasing pressure to settle, agreeing on a reasonable royalty as if the law had never changed.

Posted by Patent Hawk at January 22, 2008 11:04 PM | Damages

Comments

note the propogandists that constantly beat the drum of "patent reform" preach:

a) "modernization of the patent system" - well here we are going back to a technique from the FOURTIES !!
b) "streamlining" - well this actually bloats the process of patent litigation.

They also preach "harmonization" despite the fact that the bill will require a search (not required outside of the US) with the possibility to muddy the file-wrapper (not an issue in the US) - of course, there is no provision that statements related to the search are inadmissable (as is the case outside of the US). NO HARMONIZATION HERE

I *HOPE* that hawkie is right here - there is nothing better than seeing liars and thieves by a price for their treachery.

Posted by: anonymousAgent at January 22, 2008 11:36 PM

Just when are we going to hear about some lobbyist scandal a.l.a Jack Abramoff, but this time with so-called "democrats" in Wash D.C.

The BSA and "Coalition for Patent Piracy" members have spent so much money on this "patent deform" over the last 3 years it's hard not to expect that some pockets have er... an unequal share of this distrubution...

Looking forward to read about some big jucy scandal !

Posted by: angry dude at January 23, 2008 6:52 AM