Guest Post by Prof. Ted Sichelman, University of San Diego School of Law
The standard justification for patents is that they are necessary to allow inventors to recoup R & D costs in the presence of low-cost copying. As the Supreme Court stated in Kewanee Oil, “The patent laws . . . offer[] a right of exclusion . . . as an incentive to inventors to risk the often enormous costs in terms of time, research, and development.” Yet, if patent law is designed to provide a “reward” for R & D related to the invention—rather than the commercialization of the invention—then why do these rewards depend on whether the inventor is an operating company that makes and sells the invention or a non-practicing entity (NPE) that does not?
In a recent article in the Texas Law Review (here), I argue that if patent law is truly concerned about R & D, then remedies should generally be the same for operating companies and NPEs for a given patented invention, because the “reward” necessary to induce the R & D for that invention should generally be the same regardless of the business model of the underlying inventor.
One reason commonly offered for varying awards is that commercializing entities should be provided an additional reward for bringing inventions to market as commercial products (or, conversely, NPEs should be penalized for not doing so). Although I am quite sympathetic to this view—and have argued as much several years ago (here)—this is decidedly not the reason the courts have used to distinguish between operating companies and NPEs.
Rather, the distinction arises historically from patent law’s importation of traditional tort law principles into remedies law. Like traditional tort remedies, a patentee who wins in court is typically entitled to be returned to the status quo ante—in other words, the state of the world that existed prior to when the infringement occurred. For money damages, this means that operating companies are generally entitled to “lost profits” on sales forgone from the infringement of the patented invention and NPEs are entitled to “reasonable royalties” for forgone licensing revenue (which, typically, are less than lost profits awards). For injunctive relief, the historical practice was to assume that all patentees were entitled as a matter of course to choose who could (or couldn’t) practice their patents. Yet, relying on the status quo ante principle, scholars and policymakers argued that NPEs—at least ones that license non-exclusively—should not be entitled to injunctions as a matter of course, because such an equitable remedy is unnecessary to return an NPE patentee to the status quo (and additionally generates a host of social costs). Such views ultimately influenced Justice Kennedy’s prominent concurrence in eBay, which has since led to the routine denial of injunctive relief for NPEs.
In my article (here), I argue that these hoary tort law principles do not achieve optimal incentives for engaging in innovative activity, because they differentiate among patentholders in ways that are entirely unrelated to the value of the underlying invention. Indeed, as soon as a patent is assigned from an NPE to an operating company its value increases because of patent remedies doctrine—an odd result. Rather than aiming to restore the patentee to the status quo, remedies law should instead provide those incentives necessary to induce a sufficient level of R & D in order to generate the invention in the first instance—perhaps with some modification if the patent-in-suit is shown to be integral to undertaking post-R & D commercialization activity (such as FDA clearance or unpatentable market testing).
This innovation-centric approach would lead to some immediate changes in remedies law. As an initial matter, the baseline assumption should be that remedies should be the same for operating companies and NPEs alike. This would entail rejecting the current statutory scheme for injunctive relief—and, hence, much of the reasoning in the majority and concurring opinions in eBay. Under my proposal, in some situations—like those involving multi-component products and high switching-costs—I argue that injunctions should be routinely denied both to NPEs and operating companies. In other situations, such as those involving simple mechanical inventions or discrete pharmaceutical chemical compositions, courts should typically issue injunctions to any type of patentholder.
As for money damages, the lost profits-reasonable royalty framework should be discarded entirely in favor of an approach that assesses the incremental economic value of the patented invention in relation to R & D costs actually expended by the patentees (and potentially third parties), taking into account failure rates, technological and market risk, and in some cases, commercialization and testing costs and risks, for the invention and similar types of inventions. This alternative framework would better align rewards with the actual costs and risks undertaken by the inventor. In circumstances in which a patent played an important role in the commercialization process, the remedy could be adjusted to further reward operating companies (or penalize NPEs).
I realize that implementing such an approach to remedies is not an overnight fix and could take many years to implement in a feasible manner. In the meantime, rather than attempting to restore inventors to the status quo, remedies law should generally ensure that the same invention yields the same reward. Doing so would better promote the innovation-centric aims of the patent system.
[…] law professors have significant industry experience. For example, blog commenters on a recent Patently-O post of mine referred to me as “ivory tower” and as having “a lack of ‘real world’ experience.” In […]
>Ultimately, as I stated below, merely stating what occurs in “market” >transactions, such as licensing negotiations and product sales, is far from >determinative, because it is legal remedies doctrine that large determines the >nature and pricing of such transactions
This is not true. The legal framework is a cost of doing business. Innovation has a value in the marketplace independent of the legal framework. The law should strive to permit innovators to realize that value in the marketplace of their innovation.
The fact is that what you wrote is so wrong that I would put you in a category of person that needs remedial training.
NWPA,
It is just a sign that (yet another) academic has become disassociated from reality.
There is a reason why it is called the Ivory Tower – and not in a good way.
link to urbandictionary.com
You are correct in that the view being peddled is a poor fit. As I mentioned, the view being peddled is both under and over inclusive. It is trying too much (with inserting a different value system) and not trying enough (failing to recognize what the patent right is and the fact that a tool in remedy is already available that is nearly a perfect match to the right, and that only the hoary notion of the ‘severity’ of that tool – when compared to other tools that are traditionally used for other rights – keeps a direct, simple, elegant and common sense answer from being championed).
Let the market decide is indeed something that academics do not seem to grasp – take Reinier for example. He too stumbles on this notion, and is so in love with his own thinking that he believes that patents are for losers and does not realize the error at the very foundation of his thinking – that the Quid Pro Quo is not a “for the State” mechanism, but a balance. Yes, the State does get something on its half of the balance – but watch out for the other side of the balance – those that want that must be “ev1l grifting types.” It is just not understood that WHATEVER happens after that balance is exchanged is free of any sense of State control. That just because someone has EARNED a patent, does not mean that others MUST buy items covered by that patent. They simply do not.
They can choose to do without.
They can choose to pony up the commercial asking price if they decide NOT to do without and lastly – and importantly,
They can decide to invent around. This last notion of blocking the path is often confused as a ‘bad’thing but is actually a good thing – it is a driver to promote the sciences. It is the Ivory Tower effect that prevents academics – especially left-leaning academics from objectively recognizing this intellectual (and real world) truth.
The “namby-pamby injunctions are too harsh” view is infected the clear view of just what a patent right is.
I am struck with a picture in my head as to why so much dust-kicking happens with the fear of blocking. It is a fear that should be confronted.
Note my prior posts talking about ‘abstract’ as being a judicial exception related to the ladders of abstraction – that the judicial exception should only be applied to the very top rung of the ladder.
What I see happening is that those in fear are trying to apply the judicial exception lower down the ladder (the relativistic “really” or “how enough is enough?” views). But the problem is that once you go down a rung, you have landed in the slippery slope of relativism and are ‘stuck’ trying to define a(n artificial) difference that says “stop going down the ladder.” This is the warning in Prometheus: the entire patent system can be eviscerated.
What is happening is not the effort to stop going down rungs of the ladder. Instead, we can picture the situation as there being multiple different ladders of various heights. Those climbing the tallest ladder may have rungs not at the top of the ladder that are higher than any rungs on any other ladder. Those in fear are basically putting in an artificial cap on innovation by saying that “too abstract” is not the top rung (as would be fitting in a true analogy), but rather, “too abstract” is WHATEVER is the level above any other nearby ladder because no other option to climb higher is (at that moment) available.
But this fear-induced vision is the wrong way to go. This fear-induced vision is an artificial cap on innovation efforts and is ultimately defeatist. You want others to climb higher is not achieved by an artificial stopping of which rung you can climb to. No other ladders around that are higher? No problem.
Respect the Quid Pro Quo.
Choose to go without.
Choose to pony up the commercial asking price if you choose NOT to go without, or
Choose to invent a new ladder that reaches higher.
By falling prey to the scaremongers, we only cheat our own potential.
Again, Professor, you have not responded to the criticism that your proposed change would eviscerate the principles of a free market. We want capital to be allocated to innovation based on the free market. I am not going to explain a free market here, but your change is not a free market.
There are very basic economic reasons why the bulk of this post is incorrect. Some of it is deeply flawed. I suggest reading Tom Cotter’s book on comparative patent remedies to gain some understanding of the economic implications of different remedies.
The suggestion that damages should vary in relation to R&D expenditure is particularly bad. This plainly violates the sunk cost fallacy, which embodies the basic principle sunk cost don’t affect prices, market value or marginal costs, and consequently shouldn’t factor into subsequent decision making.
Suggesting that patentee should get larger damages if his R&D costs are high is akin to saying a landowner in a nuisance suit should get larger damages if he has an expensive house. It’s preposterous.
First, my suggestion doesn’t violate the “sunk cost fallacy,” because my proposal concerns a legal rule, which affects the future behavior of other inventors. Namely, future inventors will adjust their activities–including their R & D expenditures and level of risk undertaken–given the new remedies regime. This is exactly what we want in patent law–adjusting incentives so as to induce more optimal levels of inventive activity.
Second, your point that incorporating R & D into the equation is “akin to saying a landowner in a nuisance suit should get larger damages if he has an expensive house” is also inapt. The whole point of patent law is to induce R & D (and, in my view, commercialization), so tying damages directly to the activity it is designed to induce is not at all “preposterous.”
Last, I address and reject Cotter’s arguments in detail in my article. In general, Cotter’s work assumes the status quo approach of traditional tort law, which for the reasons stated in my post and article, do not provide optimal innovation incentives.
R&D costs would never influence the license fee that another firm would pay to license a patent. Nor do these costs affect the extent to which an infringement injures the patentee’s profitability.
To incentivize innovation, we want to tell prospective inventors that, if someone else generates value from your invention, you’e entitled to a piece of that value and, alternatively, if such uses would be too injurious to you, you’re entitled to exclude them entirely. From an economic standpoint, the relevant questions from the inventor’s perspective are: (i) will the courts give me damages that are commensurate to the value derived by the defendant; and (ii) will the courts compensate me for my economic injury. However, for reasons just mentioned, R&D costs simply don’t influence the variables at issue in those questions, and hence my claim that you’ve improperly made use of such costs in your determination of optimal damages.
More intuitively, your proposal treats R&D as if it is intrinsically valuable, when in fact it is only instrumentally valuable as a means of generating socially valuable innovations. Firms treat them as regular costs, which is precisely what we want them to do, because it forces them to instead focus exclusively on the value generated by the resulting innovations. This leads firms to efficiently seek out projects that have high value in relation to R&D costs which, again, is precisely what we want.
My point does not concern whether R&D costs are currently incorporated into licensing negotiations, but rather they should be incorporated into such negotiations. For the same reason, your statement is that I’ve “improperly made use of such costs” is misplaced. Of course, R&D costs are not (at least, directly) part of the current remedies framework–rather, I’m advocating for as much as a new approach.
As for a patentee’s profitability, it is the patentee’s R&D costs that are of direct concern, not the infringer’s R&D costs. Clearly, the patentee’s R&D costs affect its profitability. By directly considering those costs, patent remedies doctrine would provide better incentives to innovate.
Ultimately, as I stated below, merely stating what occurs in “market” transactions, such as licensing negotiations and product sales, is far from determinative, because it is legal remedies doctrine that large determines the nature and pricing of such transactions.
Thus, to argue that “firms … seek out projects that have value” in the marketplace overlooks the fact that patent law doctrine implicitly sets value in the marketplace. In other words, if we materially changed patent term, scope, validity doctrines–and, most importantly, remedies doctrine–the license fees and prices charged for patented products and services would change in turn.
Because the value of a patented invention in the marketplace is not independent of patent law doctrine–and because it is quite difficult to measure the full “social” value of an invention, which can often far exceed the private, market value of an invention–the argument that we should let “market” determine the appropriate measure of damages is misplaced.
Rather, patents are “precisely” government intervention in the market that provide for higher-than-normal returns for inventions that qualify for patenting, because we as a society want inventors to undertake certain R&D costs and risks they otherwise would not in a “free” market (putting aside commercialization concerns). We can determine what those returns shall be in a number of ways. Considering R&D costs helps directly align those returns with the types of costs and risks we want inventors to undertake. Merely looking at royalties and lost profits in the marketplace is a rather rough proxy for those underlying costs and risks and not “precisely what we want” when it comes to aligning incentives.
Granted, determining these costs and risks may be much more difficult than using these proxies–and I discuss as much in my paper at length–but there is no sound argument that we should ignore these costs and risks on principle.
“–but there is no sound argument that we should ignore these costs and risks on principle.”
And yet, something much more fundamental is being ignored.
There is nothing I can say in response to this that I haven’t already said. Your focus on R&D costs is economically unsound. It is never sensible to let already-sunk costs influence subsequent decisions, and it certainly doesn’t make sense to induce firms to attach value to costs. (The latter proposition is so obvious I can scarcely believe I’m writing it.)
In any event, you seem unable to accept these points, so I’ll stop trying to convince you of them. Thanks for sharing, and good luck in your future research.
Still absent: alignment with what the patent right actually is; that is, the right to exclude.
EE, you are aware that in order to get an exclusion order from the ITC that one must have a domestic industry that is affected, and one of the ways of proving domestic industry is to show investment in R&D in developing the patented product to be protected.
While it might not be important for licensing purposes, the consideration might be important for obtaining an injunction, especially under circumstances where the reason that the patentee is no longer selling a product is because the infringer took the market away from him. See, i4i.
Thanks EE for taking the time to articulate these points. I whole heartily agree with you.
This article reminds me of an English economist that said that the government should authorize only one auction site in the U.S.A. (like eBay) to stop all the companies from wasting money creating auction sites. He wrote a whole book about it like 15 years ago.
What continues to amaze me is that law professors seem to think they are experts on other fields like economics. I didn’t look at this professor’s background, but perhaps he could tell us what makes him an expert on economics?
“ I didn’t look at this professor’s background”
You should – it is not that difficult given that links are provided.
OK. I looked. I remember him now. He has posted on here before.
On the whole – and for an academic – the credentials are not that bad. Of course there is a lack of “real world” experience….
But notwithstanding that, and even (especially?) for an academic, the errors that I have pointed out really are inexcusable. If one wants to pontificate on something that will be initiated in real world circumstances, the ivory-tower type mistakes need to be corrected.
the stick (or rod) of necessity
What planet are y0u from again?
LOL – I see that you are infected with the liberal taint that (any) discipline must be ‘bad.’
Of course, that comes as no surprise, given your typical posting techniques of intellectual dishonesty and seeing nothing wrong with such techniques.
Prof. Sichelman,
I find your work, while interesting and detailed, to be both under and over inclusive and ultimately unworkable.
Asks for analysis that cannot possibly cover the value of the Quo. Innovation simply is not linear, and this model only looks at linear effects (and expects to be able to quantify those linear effects which is by itself is not a given to be able to do).
Ignores a fundamental aspect of remedy, which is to make the transgressed whole – through a variety of techniques. While noting ‘hoary’ concepts, falls into the same trap with an unexplained avoidance of injunction as the best and most natural form of remedy, given the nature of the right involved. While “injunction” is considered a severe form of remedy for most other legal transgressions, to ignore the nature of the patent right ( a negative right) in attempting to craft any ‘best remedy’ is astounding.
Just a couple of thoughts:
1. If someone willfully infringes, the relatively high cost of removing the infringing feature from their products should be ignored in determining balance of hardships.
2. Any infringer should not be entitled to the prevailing, ongoing RR that everyone else gets. There needs to be a significant markup. (The only way ’round this would be for the infringer to pay royalties pending the lawsuit.)
3. If the infringer engaged in vexatious litigation in the view of the court, they should be enjoined as they should have no equities in their favor as a penalty.
“2. Any infringer should not be entitled to the prevailing, ongoing RR that everyone else gets. There needs to be a significant markup. (The only way ’round this would be for the infringer to pay royalties pending the lawsuit.)”
Ah, so they should be penalized for seeking justice in the courts?
Or are you just talking about people that started infringing before they were notified they were infringing?
6, regarding only seeking justice, well that would depend upon the merits of their case and whether or not there litigation tactics were designed to impose costs on the plaintiff and to delay a judgment. If they had an extremely meritorious defense that nevertheless failed, and if they did everything in their power to expedite litigation, rather than to delay it, then I would agree that there should be no increase royalty.
But the way every infringement defendant behaves is not consistent with this model of “only seeking justice.”
“But the way every infringement defendant behaves is not consistent with this model of “only seeking justice.””
You guys really need to tighten up your ship over in lawlyer land then as that is the only purpose to even having a “justice” system in the first place.
>the incremental economic value of the patented invention in relation to R & D costs >actually expended by the patentees
What rubbish. So, in other words, it doesn’t matter how productive you were in how much of a genius you were, it only matters that you are compensated.
And, by the way, the first paragraph of your rubbish should have explained the other part of the bargain of the patent which is the disclosure. By not mentioning this up front you have signaled that you have an agenda and that you are unethical. Frankly, your lot sickens me. Please don’t pretend to be an academic. Put right in your title–“Unethical dirt dweller Wishes to Cripple Patent System.”
This rubbish is similar to Posner’s psychotic rendering of the world.
You know, another thing about this article is that it is completely against capitalism and market principles. Patents are acting as prizes for inventions. The market should allocate the capital looking for the prize and the market should reward the winners with what the prize is worth. What rubbish this article is.
Another thing that bothers me about this rubbish is that again we have a putz academic like we have seen so many times on here trying to bury the punch line. This article doesn’t make any real attempt to understand how patents are working in the market place.
“In my article (here), I argue that these hoary tort law principles do not achieve optimal incentives for engaging in innovative activity, because they differentiate among patentholders in ways that are entirely unrelated to the value of the underlying invention. ”
As much as I agree with you right there, I don’t think remedies are all that tied to the “value of the underlying invention”. They’re what is there to make the person wronged whole.
In other words, look up the word “remedy” then write a new article plz.
Remedies certainly don’t need to make plaintiff “whole.” Rather, “remedies” are simply the redress given the winning party at suit. See Black’s Law Dictionary (“Remedy is the means by which the violation of a right is prevented, redressed, or compensated.”). As such, remedies need not make the plaintiff whole, and there is nothing improper with my usage of the term.
““Remedy is the means by which the violation of a right is prevented, redressed, or compensated.””
That’s just making them whole (redress, compensation) and tacking on preventative measures as well.
I’m not saying that you’re necessarily using the term incorrectly, I’m saying that under the proper use of the term, even as you just laid out from Blacks, the remedies aren’t tied to the “value of the underlying invention”. And there’s no obligation for them to be. Simply because of the nature of what a remedy is, even as set forth in blacks.
And again, I do have to more or less agree with your overall thesis about what ought to be done in terms of damages. It’s just that what you’re proposing is less of a “remedy” and more of a “just reward”.
To think that remedies “don’t need” to make whole and to confuse that with the (baseline) desire of remedies to make whole is an egregious mistake.
The reason why money is so often a fall back is because the nature of the transgression is just too difficult to figure out what would make the transgressed whole. To rely on that difficulty (as seemingly done here) as an excuse not to aim to make whole is an error of fundamental proportions.
As noted, the nature of the patent right aligns nearly perfectly with the equitable tool of injunction. While that tool does not fit the nature of many rights for which remedy is sought, to ignore the fit for this particular right is also an error of fundamental proportions.
The hoary nature being preserved is thinking that ‘the severity’ somehow should make this choice of equitable tool a choice of last resort instead of an objective view of what tools are available and what tools are the best match for the reason of applying remedy (which is to make whole).
To respond to some of the comments:
First, my proposal regarding money damages does not solely focus on costs and risks. Rather, I stated: “As for money damages, the lost profits-reasonable royalty framework should be discarded entirely in favor of an approach that assesses the incremental economic value of the patented invention in relation to R & D costs … and risks ….”
So, for instance, Les’s remark–namely that “[b]y this logic, an invention arrived at via a flash of genius is less valuable than one where the inventor pondered the problem and tried various solutions for years”–is not a logical implication of my proposed framework. Specifically, if the invention arrived at via a “flash of genius” offers tremendous incremental economic benefit, then it would command more in money damages than one arrived at via trial-and-error that offers little benefit. The same reasoning applies to Les’s comment regarding “dim-witted” inventors–to the extent their inventions were not particularly valuable, then “no,” they wouldn’t command greater damages than a “logical, informed” inventor producing a valuable invention. And, finally, the same argument applies to MM’s and The Critic’s comments–if the invention is of no incremental economic value relative to other alternatives, then there would be no damages.
Moreover, my proposed test would take into account the work of third parties (as I stated in the post). Thus, if first inventor arrived at a solution by a “flash of genius” but other inventors (e.g., ones who filed later but independently) arrived at the same solution by trial-and-error over a long time period, the first inventor would be entitled to rely on the work by later inventors to command higher damage awards.
However, all things being equal, for inventions of the same incremental economic benefit and risk-level, those arrived at via a “flash of genius” relative to costly, risky work should generally command a lower level of damages, because less reward is typically required to incentivize invention via a “flash of genius” than long, hard work. Contrary to Les’s assertion, this would not “discourage” flashes of genius because those flashes arguably do not depend on large patent awards.
Second, as for matters of proof, yes, inventors would submit evidence on the costs and risks undertaken in the R & D process. Companies and inventors commonly maintain records on such costs, and some evidence regarding the riskiness of inventive activity is already a part of the Georgia Pacific and other determinations–so I do not believe proffering such evidence would be overly burdensome.
Last, it is important to recall that there is no independent value of an invention or patent that can be determined solely by market transactions, because the value arrived at by private parties contracting to a license will always depend on the remedies awarded for breach of that license (i.e. infringement). If the breach of the license is the death penalty, royalties would be quite high. If it is merely a $50 fine payable in a 180 days, royalties would be quite low. As such, any attempt to peg value on commercial transactions is generally circular. Rather, pegging value on incremental economic value (i.e., price increases or cost-of-goods-sold decreases) and overall R & D costs and risks (looking at the full gamut of available information on those factors) would provide a much more solid foundation that the traditional tort-law game courts are currently playing when assessing damages.
>Second, as for matters of proof, yes, inventors would submit evidence on the >costs and risks undertaken in the R & D process.
Could there be a more anti market statement written. You evince ignorance and arrogance beyond measure with just one sentence.
I recommend that you resign from your job in the face of this article.
Isn’t the patent in the hand of a practicing entity more valuable than the patent in the hand of a non-practicing entity more valuable because the patent in the NPE’s hands has serious transaction costs in the way of having its value realized? How do those transaction costs relate to the difference in litigation recovery?
I was with you up to here:
“As for money damages, the lost profits-reasonable royalty framework should be discarded entirely in favor of an approach that assesses the incremental economic value of the patented invention in relation to R & D costs actually expended by the patentees (and potentially third parties), taking into account failure rates, technological and market risk, and in some cases, commercialization and testing costs and risks, for the invention and similar types of inventions. ”
By this logic, an invention arrived at via a flash of genius is less valuable than one where the inventor pondered the problem and tried various solutions for years. Do we want to discourage flashes of genius or do we want to progress as quickly as possible?
Would inventors be required to prove how long they worked on an invention? Would we reward the ignorant and dim witted and punish logical and informed?
No thanks.
Even if there were actual supporting economic data for these economic assumptions as to whom [and to what extent] PAE patent acquisition payments and patent suit recoveries actually go to, it is not relevant to the real economic problem. The real economic problem is a judicial system that is so expensive and time consuming for defendants [including discovery burdens] that 97% of patent suit defendants settle just to avoid those burdens, often before the court even determines the actual scope of the patent in a Markman hearing much less any decision on either infringement or validity. I.e. before any decision on the real value of the patent.
if patent law is designed to provide a “reward” for R & D related to the invention—rather than the commercialization of the invention—then why do these rewards depend on whether the inventor is an operating company that makes and sells the invention or a non-practicing entity (NPE) that does not?
No “R&D” is needed for the typical computer-implemented and/or “biz method” junk claims that bottom-feeding patent attorneys and other grifters are writing and threatening other people with.
Anybody can “innovate” new functions and new business models. The only R&D is deciding who is the intended target of whatever junk you manage to get past the PTO.
remedies law should instead provide those incentives necessary to induce a sufficient level of R & D in order to generate the invention in the first instance
Again, for the typical computer-implemented junk and/or “biz method” patent, zero R&D is required. Just decide who you want to sue, get some information and make some guesses about their future activities, and draft the claims accordingly. I don’t believe that’s the kind of “research and development” that the patent system was intended to reward, do you?
Indeed, as soon as a patent is assigned from an NPE to an operating company its value increases because of patent remedies doctrine—an odd result.
The “value of a patent” changes all the time, based on a many, many factors, including inevitable constant changes in patent law. How exactly do you calculate the “value”? It’s entirely possible for the “value” of a patent to increase when assigned from an operating company to an NPE, depending on the identity of those entities and what their intentions are for the patent and how skilled the companies are at manipulating the patent system to achieve whatever benefit(s) they wish to seek from that system. It’s not “odd”, it’s just the nature of patents.
the lost profits-reasonable royalty framework should be discarded entirely in favor of an approach that assesses the incremental economic value of the patented invention in relation to R & D costs actually expended by the patentees (and potentially third parties), taking into account failure rates, technological and market risk, and in some cases, commercialization and testing costs and risks, for the invention and similar types of inventions. This alternative framework would better align rewards with the actual costs and risks undertaken by the inventor.
I absolutely agree. I also predict the same level of shrieking from the same folks who object most to the so-called “anti-troll” legislation presently being enacted.
Assuming patent claim infringement and no proof of invalidity or unenforceability, the actual value of a patent other than for cost-of-suit avoidance is the extent of its infringing commercial usage by those other than the patent owner. There is not a good correlation with R&D expenditures. Unobvious “invention” in the Constitutionally directed”useful arts” is not supposed to be mere routine engineering or lab work, or misguided research on commercially impractical ideas.
the actual value of a patent … is the extent of its infringing commercial usage by those other than the patent owner
Assuming that a patent owner could prevent an infringer from practicing the invention (I know, a stretch of an assumption these days), the value of the patent should be what two parties would negotiate, in an arm’s length transaction, to license the technology.
The buyer’s opinion of the technology and its value to the buyer’s business is paramount. No buyer = no value. If there are alternative technologies, this will weigh into the equation.
Also, if the seller is a NPE, then they don’t get any additional “bump.” However, if the seller is a practicing entity and there is a business reason for seller not wanting the buyer to be practicing the technology (e.g., as a competitor), then the buyer can argue for a higher royalty.
The amount of money you put into developing/improving/researching the technology should not directly impact its value. Some money is well spent, other money not so well spent.
This alternative framework would better align rewards with the actual costs and risks undertaken by the inventor.
Nobody gets rewarded on the “actual costs and risks undertaken.” They get rewarded for the value added. Because of this, some people who spent a lot don’t get rewarded commensurate with their investment and there are some people who spend a little and get greatly rewarded. We should be rewarding money well-spent — not money spent.
The standard evaluation test you have noted (an arms length licensing negotiation value arrived at prior to a product launch) unfortunately does not correspond to the actual situation of the issue of this blog. Namely, PAE or NPE patent suits, where the alleged infringement has already occurred for some time, the accused infringer has never even been aware that it might need to consider an alternative or modified product feature design to avoid an infringement accusation, and thus never had that or any other negotiating opportunity, and the accused infringer is already subject to disproportionate litigation costs because the patent owner need only prove infringement and its extent, not any other issues, and discovery response costs for PAEs are typically trivial in comparison to those of defendants.
But at least we are all in agreement that the proposal for damages based on R&D expenditures is not realistic.
It is impossible to ever determine a true “value added.”
This is plain given the nature of innovation. No one can know what will drive tomorrow’s innovation, whose shoulders will be stood upon, and what (even seemingly trivial) advance of today will serve as the lynchpin of the next step.
As the patent right necessarily reaches into the future, any attempt to reach a monetary value will be, must be, necessarily incomplete.
As I have mentioned, a review of the tools available for remedy should be objectively made. Injunction, while considered severe for most other cases of remedy is not severe given the nature of the right involved.
If we restore the judicial best choice and remove the hoary trepidation, we would restore to the parties involved a natural non-court impetus to figure out the best way forward. For a patent adjudged to be valid and infringed, the infringer should pay the asking price or stop the infringement and either a) use an alternative non-infringing item/method or b) design around and invent some other item/method.
In essence, the notion that “injunction is too severe” robs the patent system of one of its greatest ways to promote the useful arts: the stick (or rod) of necessity. This mirrors one of the greater faults in today’s liberal-minded, children need to be coddled society, as captured in the maxim: Spare the rod and spoil the child. In the patent world, the ‘child’ that is running the household is the large corporation intent on weakening patent law and the spare the rod of the full effect of the patent right by ignoring the best, easiest and most closely matching remedy (by mere thoughtless assumption of hoary principles) marches on.
Time to wake up people. Patents may not be “a law unto itself (per eBay). but ignoring what patents are cannot be the correct take-away.
Nostalgia for automatic injunctions for every patent infringement is just adding to unrealistic academic proposals. The Supreme Court has clearly rejected that, and Congress will not support it. Remember the bi-partisan Congressional reaction to the threatened Blackberry injunction? Does anyone realistically think that Congress would ever support legislation allowing PAE’s to shut down major Apple or Google products? PAE’s have no use for an injunction other than to increase fiscal settlements, and PAE’s can still obtain greatly increased royalties for willful post-judgment infringements. Injunctions are, of course, still available for companies with actual products hurt by infringing competitors.
The attempted distinction of how the law should work based on the owner of the property completely misses the point being made Paul.
You have fallen tool to the Infringers Rights movement.
Labeling as “nostalgic” and not attempting to grasp what I am saying will only lead to a self-fulfilling “unrealistic” result.
What you deem as clearly rejected by the Supreme Court is not so clear. The meaning of eBay is still very much debated to this day.
The actual holding of eBay was that the steps of analysis could not be skipped. It was not that the steps in rightfully recognizing what the patent right is – and objectively aligning the tools of remedy with the goal of remedy leads to a particular (and if so happens to be nearly universal – then such is as it is) result, then that is the just result.
Congress can of course do what it wants – within the constitutional constraints – and separate arguments can then be entertained as to what those constitutional constraints mean. Arguments such as that US law does not permit a “use” requirement, since the patent righ tis by design a negative, exclusionary right.
The notion that the actual right of exclusion leads to the power to set any given fiscal settlement does not attach to how the right itself is to be understood. Such is a confusion and conflation of remedy and right. Again (and as seems typical in patent law where ‘policy’ is sought to be injected over the actual law), clarity of what a patent is by design is actively obscured.
Therefor, your notion of “of course” is outright rejected as the result of (purposeful) lack of clarity in the law.
Paul, “PAE’s have no use for an injunction other than to increase fiscal settlements, and PAE’s can still obtain greatly increased royalties for willful post-judgment infringements.”
Once upon a time in America, we prided ourselves on being the only nation that did not recognize compulsory licensing. The most important right, indeed the constitutional right, granted the holder of a patent is the right to exclude.
An example may show the folly of “money well spent”:
Viagra.
By any objective measure of the drug’s actual development history, the money spent in development cannot be deemed well spent. If “well spent” metrics were in place, the development would have been stopped before completion. It was a purely accidental side effect, that on a hunch was allowed to continue the development process that resulted in a level of sales in excess of $2 Billion dollars (yes – that is a “B“).
To pretend that the ability exists to adequately determine a priori the value of any invention needs a serious assumption check.
Comments are closed.