A new draft paper by Professor Michael Risch (Un)Reasonable Royalties positions itself as a major reconsideration of the way that we calculate damages in patent cases. This revolution has been brewing in academic circles, but I expect the spillovers into case law will be coming soon. Over the past few years the Federal Circuit has pushed for more explicit discussion and explanation of damages. (See Lucent and Uniloc). However, Risch argues that the result has been a “piling” of “rigid rules” rather than economic rationality. (This rule versus rationality debate seems to keep coming up…)
Risch favors the economic and practical justification for the reasonable royalty floor for patent damages, but argues that courts have departed widely from the doctrine’s century-old origin — in ways that have “led to both over- and under-compensation.” Big targets for Risch are the hypothetical negotiation and the Georgia-Pacific factors. He writes:
The hypothetical negotiation is a staple of reasonable royalty analysis by parties and courts, but it is not—as currently applied, at least—consistent with the traditional reasonable royalty framework. . . .
The [traditional] willing buyer/seller analysis might sound the same, but it is not. The negotiation includes many extraneous elements that have no place in a damages calculation, like bargaining power and a guarantee of profit. Furthermore, a focus on negotiation implies that the value of a patent must be fixed before the infringement, and successful patents should go uncompensated if the success was a surprise. Neither of these was contemplated in early cases. . . .
[R]easonable royalties are supposed to be compensatory in nature. The question isn’t what the parties would have negotiated, it is what the appropriate amount of compensation should be. . . . And that is hard enough; trying to also speculate [particulars such as] whether the parties would have negotiated a lump sum or a running royalty adds a layer of complexity that is unnecessary.
I am drawn to Risch’s approach of discarding rules for the sake of rules – especially when the rules are piled in ways that are complex and contradictory. I like to keep in mind that a jury of non-experts will actually be deciding the damage values and so the approach also needs to be simple and logical enough for that body to rule upon. Although my justification is that the law needs to be simplified for the jury –simple and logical rules benefit us in myriad ways.
For litigators – Professor Risch also does a nice job of explaining contradictions between current practice and older case-law that may well be ripe for court challenge.
Read the article: (Un)Reasonable Royalties