State of Innovation

Patents and Innovation Economics

The History of Patent Damages

William W. Cochran and Christopher R. Benson & Michael C. Elmer have put together a superb paper on the history of patent damages.  If you want a copy, please contact Bill Cochran.

The paper discusses how the statutory language of awarding damages has changed over time and the evolution of injunction relief.  Below I will quote the historical statutes from the paper.  But before I do that I want to point out three problems with the presently available relief for patent infringement.

1. Injunctions Are Optional Upon a Finding of Infringement

2. No Enhanced Damages for Purposeful Negligence.

3. Reasonable Royalties are Never Adequate Compensation.

 

1. Injunctions Are Optional Upon a Finding of Infringement

The patent right is the right to exclude.  It is the height of absurdity to win a patent lawsuit and not obtain an injunction.  If I win a lawsuit then I should be able to enforce my right, which is the right to exclude.  You cannot exclude someone from trespassing on your property in the past.  Thus the right to exclude means the right to exclude in the future or an injunction.

Unfortunately, this bit of illogic is brought to you by the statute 35 USC 283, which states that injunction may be granted in accordance with the principles of equity.  This means in theory that you can win a patent lawsuit and still not be able to enforce your right to exclude.

The law should be changed so that an injunction should issue as part of any suit in which a patent is found to be infringed.

 

2. No Enhanced Damages for Purposeful Negligence.

The treble damages provision for patent infringement is only for ‘willful’ infringement.  This means that companies can practice purposeful negligence and the worst case outcome for this is to pay the patent holder the damages they caused.  See point 3 below.  In addition, the In re Seagate Techs., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc) overturned the longstanding principle that an infringer must exercise a duty of due care.  As a result, the enhanced damages provision has become meaningless.  An infringer has no duty of care to not infringe and can then defeat any charge of willfulness by purposeful negligence.  The threat of enhanced damages is now almost meaningless and provides no deterrent effect to keep people from infringing patents.

The law should be changed so that enhanced damages should be available in the case of negligent infringement.  This is the only way to protect our inventors for technology thieves.

 

3. Reasonable Royalties are Never Adequate Compensation.

In any lawsuit there is a non-zero chance that you will win even if you are guilty.  If the damages are found to be a reasonable royalty, then the logical choice is always to negligently infringe a patent.  In the worst case the infringer will only pay what they would have had to pay the patent holder if they had negotiated a license and there is a chance they may win the lawsuit incorrectly and pay nothing.  Now, you may object that if they are forced to pay lost profits as damages this is a real deterrent.  This is true, but the reality is that it is very hard to prove lost profit and the patent holder must show that ‘but for’ the infringing activity they would have made the sale.  In the case of a large company infringer and a small company patent holder, the patent holder is likely to end up with even less damages under the lost profits calculation.  As a result, many large companies pursue a policy of efficient infringement.  This policy is morally reprehensible, but it does make economic sense.

The law should be changed so that the minimum damages is reasonable royalty plus some percentage amount such as 20% to provide an adequate protection for America’s inventors.

 

Below are some of the interesting highlights from the excellent paper PATENT DAMAGES by Bill Cochran.

 

Act of 1790

The first patent act, the Patent Act of 1790 provided that an infringer must:

…forfeit and pay to the patentee such damages as should be assessed by a jury, and moreover, to forfeit to the person aggrieved the infringing machine.

 

Act of 1793

Three years later, this was changed in the new Act of 1793, §5.  It was a significant departure from the Act of 1790, and a significant departure from the common law of torts.  This new Act (§)5 provided:

That if any person shall make, devise, and use or sell a thing so invented, the exclusive right of which has been secured to any person by patent, without the consent of the patentee . . . the person so offended shall forfeit and pay to the patentee a sum that shall be at least equal to three times the price for which the patentee had usually sold or licensed to other persons the use of said invention.

 

Act of 1800

The Act of 1800 removed the requirement that the patentee had to be selling a product and recognized the value of maintaining exclusivity and not just liability.  Thus, the new Act of 1800 returned to the concept of damages, requiring the infringer to:

…forfeit and pay to the patentee a sum equal to three times the actual damages sustained  by such patentee.

 

The Act of 1819 §(c) read:

. . . that the Circuit Courts of the United States shall have original cognizance, as well in equity as at law, of all actions, suits, controversies, and cases arising under any law of the United States, granting or confirming to authors or inventors the exclusive right to their respective writings, inventions, and discoveries; and upon any bill in equity, filed by any party aggrieved in any such cases, shall have authority to grant injunctions, according to the course and principles of courts of equity, to prevent the violation of the rights of any authors or inventors secured to them by any law of the United States, on such terms and conditions as the said courts may deem fit and reasonable

This appears to be the first instance that an “injunction” could be obtained against an infringer.

 

The Act of 1836, §14, read as follows:

Whenever in an action for damages for making, using, selling the thing patented . . . a verdict shall be rendered for the plaintiff, it shall be in the power of the court to render judgment for any sum above the amount found by the verdict as the actual damages sustained by the plaintiff, not exceeding three times the amount thereof.

 

Act of 1870

 

. . . and the court shall have power, upon a bill in equity filed by any party aggrieved, to grant injunctions according to the course and principles of courts of equity, to prevent the violation of any rights secured by patent, on such terms as the court may deem reasonable; and upon a decree being rendered in any such case for an infringement, the claimant [complainant] shall be entitled to recover, in addition to the profits to be accounted for by the defendant, the damages the complainant has suffered thereby, and the court shall assess the same or cause the same to be assessed under its direction, and the court shall have the same powers to increase the same in its discretion that are given by this Act to increase the damages found by verdicts in actions upon the case…

 

The Patent Act of 1922 stated:

. . . and upon a decree being rendered in any such action for infringement the complainant shall be entitled to recover, in addition to the profits to be accounted for by the defendant, the damages the complainant has sustained thereby, and the court shall assess the same or cause the same to be assessed under its direction.

If on the proofs it shall appear that the claimant has suffered damage from the infringement or that the defendant has realized profits therefrom to which the complainant is justly entitled, but that such damages or profits are not susceptible of calculation and determination with reasonable certainty, the court may, on evidence tending to establish the same, in its discretion, receive opinion or expert testimony, which is hereby declared to be competent and admissible, subject to the general rules of evidence applicable to this character of testimony; and upon such evidence and all other evidence in the record the court may adjudge and decree the payment by the defendant to the complainant of a reasonable sum as profits or general damages for the infringement…

 

 

The Act of 1946 reads as follows, now being numbered as 35 USC §70:

[after authorizing injunctions, the first paragraph continues] …and upon a judgment being rendered in any case for an infringement the complainant shall be entitled to recover general damages which shall be due compensation for making, using or selling the invention, not less than a reasonable royalty therefor, together with such costs, and interest, as may be fixed by the court.  The court may in its discretion award reasonable attorney’s fees to the prevailing party upon the entry of judgment on any patent case.

The court is hereby authorized to receive expert or opinion evidence upon which to determine in conjunction with any other evidence in the record, due compensation for making, using, or selling the invention, and such expert or opinion evidence is hereby declared to be competent and admissible subject to the general rules of evidence applicable thereto.

The court shall assess said damages, or cause the same to be assessed, under its direction and shall have the same power to increase the assessed damages, in its discretion, as is given to increase the damages found by verdicts in actions in the nature of actions of trespass upon the case; but recovery shall not be had for any infringement committed more than six years prior to the filing of the complaint in the action.

This is the first statement about reasonable royalties.

Act of 1952

Section 284 states:

 

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

 

When the damages are not found by a jury the court shall assess them.  In either event the court may increase the damages up to 3 times the amount found or assessed.

 

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

 

However, the decision in In re Seagate overturned a longstanding principle that an infringer must exercise a duty of due care.

 

Present statute

§283.  Injunction

 

The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.

 

As stated by the Federal Circuit in Smith International, Inc. v. Hughes Tool Co., 718 F.2d 1573 (Fed. Cir.), cert. denied, 464 U.S. 996 (1983):

Without this injunctive power of the courts, the right to exclude granted by the patent would be diminished, and the express purpose of the Constitution and Congress, to promote the progress of the useful arts, would be serious undermined.  The patent owner would lack much of the “leverage,” afforded by the right to exclude, to enjoy the full value of his invention in the market place.  Without the right to obtain an injunction, the right to exclude granted to the patentee would have only a fraction of the value it was intended to have, and would no longer be as great an incentive to engage in the toils of scientific and technological research.

In eBay v. MercExchange, L.L.C., 547 U.S. 388 (2006) , the Supreme Court made it clear that obtaining injunctions in patents is no different from obtaining an injunction is any other civil matter relying upon equitable relief.  The plaintiff must prove four factors:

  1. The Plaintiff will suffer irreparable harm without an injunction.
  2. The remedies at law, which are money damages, are inadequate to compensate for the injury.
  3. Considering the balance of hardships between the plaintiff and the defendant, an injunction is warranted.
  4. The public interest would not be disserved by issuing an injunction.

 

 

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December 9, 2011 - Posted by | -Law, Patents | , , , ,

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