Kanav Hasija, a fellow Forum officer and MIP student at UNH Law, and I are returning from the Samsung-Stanford Patent Damage Conference, hosted at the Stanford Law School on Friday on February 18, 2011. I am very grateful for Samsung, Stanford Law and Stanford Program in Law, Science & Technology to have hosted such a wonderful conference on patent damages, and the faculty at UNHLaw for their contribution to our research, in particular Professor Jeffrey Hawley, Professor Ann McCrackin, Professor William Murphy, and Professor Gordon Smith. I am also appreciative of the feedback and comments received from valuation experts and practitioners, including Russell Parr and Phil Green.
Our paper proposes the application and method to apply concepts from game theory to the determination of reasonable royalties in patent damage.
Here’s a quick summary of our paper and some key points made by the other winning papers.
According to 35 U.S.C. §284, a court may award “damages adequate for the infringement, but in no event less than a reasonable royalty.” However, reasonable royalty determinations pose major difficulties for litigants and courts in that they are evaluated based on hypothetical negotiations that never took place. Courts addressed this issue when utilizing the Georgia Pacific Factors. Our assertion is that lack of a framework in the application of the factors presents more issues as parties select criteria that favor their best position. Game theory provides a framework to allow for the holistic and flexible manner to frame a more equitable and effective approach in the determination of reasonable royalty.
The premise of Game theory is based upon the Nash Bargaining Solution, which is used to model the competition and scenario where parties bargain for a deal. One of the main contributions of the paper is to translate the economics framework underlying game theory to the legal framework in the determination of reasonable royalties. The motivation of such an endeavor is to enable the application of new developments in economic theory within existing structure of Patent law.
Although the Georgia Pacific (GP) factors are not perfect, in our paper, it is a starting point. The 15 GP factors are categorized into two categories, under which a framework can be analyzed. The two categories are then directly mapped to total profits and reasonable royalty rate determination. We assert the framework is consistent with such cases, as KSR and the recent Uniloc case, where the Supreme Court rejected rigid approaches for flexible and tailored approaches. The full paper can be found here: http://www.law.stanford.edu/display/images/dynamic/events_media/T.%20Paul%20Tanpitukpongse%20&%20Kanav%20Hasija%20-%20Game%20Theory%20A%20Zooming%20and%20Sliding%20Method.pdf
The conference brought out many of the great minds and scholars in patent law. The full papers presented at the conference, for which the presentations are based, may be found here: http://www.law.stanford.edu/calendar/details/4910/The%20Inaugural%20Samsung-Stanford%20Conference%20on%20Patent%20Remedies/#related_media
Although each of the other 15 winning papers warrants and fully deserves a full discussion of their contents, a brief summary of some of the main points of some of the papers are presented below for the reader’s convenience.
Some of the key ideas that arose from the conference include:
Professor Mark Lemley (Stanford Law School) explored the pragmatic question of what should happen subsequent to a district court denial of an injunction upon finding in lieu of Ebay v. MercExchange. Specifically, Professor Lemley addressed the issue of whether courts have such authority to award on-going royalties, who should decide what the royalty should be, and how the royalty should be calculated. Professor Lemley posits that courts do have the authority to award on-going royalties under section 284 and general power in equity; that on-going royalties should be set by the bench as part of the court’s equity powers rather than through section 284 and that on-going royalty determination should be based upon a finding of past damages. The argument is very pro-defendant/infringer, but does provide many compelling arguments based on logic and pragmatism.
Professor Thomas Cotter (University of Minnesota Law School) presents four principles for calculating reasonable royalties. First, the court should take the substantive law as a given. Second, courts should strive to award damages that would restore the status quo ante between the parties. Third, the courts should depart from the status quo baseline only when necessary to attain optimal deterrence. Fourth, in reconstructing the terms of the hypothetical license, court should apply realistic measures of patent value by assessing the value of the patent in comparison with the next-best alternative.
Professor Amy L. Launders (University of the Pacific McGeorge School of Law) presented a comprehensive historical overview of patent damages from the first enactment of the patent legislation of 1920’s to the recent patent reform of 2011. One interesting concept she advocates is that patent damages should be based upon patentee’s harm corresponding to the inventive aspect of the infringing claim. Additionally, she postulates the doctrine of proximate cause (a tort principle) “as an alternative route to tailor the reasonable royalty recovery to a patentee’s contribution.”
There were several other winning papers that propose the application of doctrine from other areas of law to patent law, such as tort law and property law.
• Professor Bernard Chao presents his analysis that reasonable royalty awards are excessive and postulates that the tort law’s theory of contribution to implead component supplier and also lower royalties award in component patent cases.
• Janet Freilich (JD candidate from Harvard Law School) presents her thoughts on the application of real property law’s doctrine of nuisance in dealing with patent holdouts in lieu of Ebay v. MercExchange.
• Professor Peter Lee (UC Davis School of Law) presented his thoughts on the application of property law’s doctrine of accession, particularly on “mistaken improvement” to determine the value of an improver’s contribution to the original patent.
• Ravi Mohan (JD candidate from Santa Clara University of School of Law) presents a very compelling argument against the entire market value rule and provided alternative to measure consumer demand.
• Rhonda Sadler (JD candidate from Mercer University School of Law) paper reminds us of the importance of the role of the jury in the patent damage determination and the nuance of jury instructions in affecting such determination.
Several interesting empirical studies were presented; including Professor Christopher Seaman (Chicago-Kent College of Law) presentation on his empirical research on willful infringement and enhanced damages. He analyzed six years of decisions in district courts, three of which are prior to and three subsequent to Seagate. His finding surprisingly indicates that willful infringement is found about 10% in fewer cases after Seagate and juries find willful infringement at substantially higher rates than judges. He further discussed many factors affecting willful infringement, such as opinions of counsel, copying, and design arounds, among numerous others. Professor Christopher Cotropia (University of Richmond School of Law) presented his empirical research of the ITC practices after Kyocera. The findings of his research indicate that the number of named respondents did not increase after Kyocera, as first feared, nor did granting of general exclusionary orders. There also are not less ITC filings as a result thereof. Although the research has yet to be normalized to global trends, which may show other tertiary effects, from such factors as the expansion of trade and imports to the United States, it is a well written piece on the remedies available at the ITC.
Dmitry Karshtedt posited that efforts by the Federal Circuit, such as in Lucent v. Gateway and Pacemaker v. St. Jude Medical have produced inconsistent approaches for trial court in determining reasonable royalty damage awards for indirect infringement by combining their relationship to proven acts of direct infringement.
There are many numerous papers that warrant further discussion. I would encourage the reader to visit them all.
By Paul Tanpitukpongse