Patent Baristas

The Department of Commerce sent a letter to Sen. Patrick J. Leahy Chairman, Committee on the Judiciary, on the views of the current Administration on S. 1145, the Patent Reform Act of 2007. The letter basically outlines the Administration’s big beef with the bill, that is, with Section 4, Right of the Inventor to Obtain Damages, in response to the committee’s report.

Section. 4 concerns the right of an inventor to obtain damages for infringement, including a reasonable royalty. The remedies for infringement include an injunction and damages. Damages are intended to compensate the patent holder for the infringement of patent rights; absent some egregious circumstances, damages are not meant to be punitive or excessive in nature.

The measure for damages for infringement can be either (i) profits lost by the patent holder because of the infringement (lost profits), or (ii) not less than a reasonable royalty. Patent holders typically opt for a lost profits award when the infringers are selling competing products.

In a reasonable royalty remedy, juries use the Georgia-Pacific factors to determine an appropriate award. The 15 Georgia-Pacific factors are:

1. Royalties received by patentee for the licensing of patent in suit, proving or tending to prove an established royalty;
2. Rates paid by licensee for use of other patents comparable to patent in suit;
3. Nature and scope of license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom manufactured product may be sold;
4. Licensor’s established policy and marketing program to maintain patent monopoly by not licensing others to use invention or by granting licenses under special conditions designed to preserve monopoly;
5. Commercial relationship between licensor and licensee, such as, whether they compete in same territory in same line of business; or whether they are inventor and promoter;
6. Effect of selling patented specialty in promoting sales of other products of licensee; existing value of invention to licensor as generator of sales of non-patented items; and extent of such derivative or convoyed sales;
7. Duration of patent and term of license;
8. Established profitability of product made under patent; its commercial success; and its current popularity;
9. Utility and advantages of patent property over old modes or devices, if any, that had been used for working out similar results;
10. Nature of patented invention; character of commercial embodiment of it as owned and produced by licensor; and benefits to those who have used invention;
11. Extent to which infringer has made use of invention; and any evidence probative of value of that use;
12. Portion of profit or of selling price that may be customary in particular business or in comparable businesses to allow for use of invention or analogous inventions;
13. Portion of realizable profit that should be credited to invention as distinguished from non-patented elements, manufacturing process, business risks, or significant features or improvements added by infringer;
14. Opinion testimony of qualified experts; and
15. Amount that a licensor (such as patentee) and a licensee (such as infringer) would have agreed upon (at time infringement began) if both had been reasonably and voluntarily trying to reach agreement.
Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

Because of some eye-popping jury awards of late, there has been a push on to limit damages — especially the reasonable royalty rate because this is the remedy necessarily sought by a party that is not producing a product, the so-called patent troll. Unfortunately, this will also punish universities and research institutions and small innovation companies that are not large enough to manufacture their own products.

As we reported earlier, the Senate’s Committee on the Judiciary, issued its draft report on the Patent Reform bill (S. 1145), took up the issue stating:

Long past is the day in which the typical invention is a sui generis creation; today’s patents are often combinations, and many products comprise dozens, if not hundreds or even thousands of patents, and the infringed patent may well be one smaller part of a much larger whole. Once infringement is proven, the patent holder is entitled to compensation for the use of the invention. But if juries award damages based on the value of the entire product, and not simply on the infringement – a danger exacerbated in some cases by overly expansive claim drafting – then damages awards will be disproportionate to the harm.

Apparently, the Senate doesn’t quite grasp the basic patent tenet that only God works from scratch. Everyone else has to create inventions made of of combinations of known elements. It’s note-worthy that the Senate thinks patent laws are wrong if they can’t easily be memorized saying, “[I]t is difficult for the Committee (let alone a lay juror) to recite all 15 of the factors without reading them in print.” I guess a jury can’t be trusted to read printed words.

The new section 4 in the reform bill codifies the analysis the judge and jury should perform in determining an appropriate reasonable royalty.

Sec. 4. Right of the inventor to obtain damages. 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.

Now, the Administration has stepped in with its opinion saying:

[W]e continue to oppose S. 1145 – in its entirety – unless Section 4 is significantly revised, as we believe the resulting harm to a reasonably well-functioning U.S. intellectual property system would outweigh all the bill’s useful reforms. While well-intentioned, we do not believe a convincing basis has been established to justify the significant changes to current law in the bill’s damages section. The Administration believes that it is important to provide greater certainty in patent litigation and remains interested in exploring options that do so. The requirements in Section 4 of the bill, as currently drafted, would likely lead to less than adequate compensation for many patent holders and could promote infringement.

The Administration believes that encouraging innovation within particular business models or technology sectors must not come at the expense of innovation in others. Innovation can and will he encouraged in all industries by giving Federal judges the flexibility to apply appropriate economic principles to the facts of each case, consistent with the business model or technology. To further ensure fairness in determining damages, judges should be given the explicit statutory authority and responsibility to identify all those factors the jury should consider in assessing damages and develop a sufficient evidentiary basis in the court record. The jury should likewise be required to apply all of those factors, and only those factors, in its assessment of damages.

The Administration does support many provisions of S. 1145, including the loathed Applicant Quality Submissions as well as the Fee-Setting Authority for the USPTO and Post-Grant Patent Review Procedures.

Stayed tuned for more tomorrow as the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office (USPTO) Jon Dudas will highlight by teleconference on Tuesday, February 5, the Bush Administration’s views letter provided to members of the Senate regarding the Patent Reform Act.

See more:

• Patent Reform Bill Inches Ahead (As Amended)
• Judge Michel Writes Letter on Damages in Patent Infringement Cases