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.