.
THE EVOLVING IP MARKETPLACE: 

ALIGNING PATENT NOTICE AND REMEDIES 

WITH COMPETITION

A REPORT OF THE

FEDERAL TRADE COMMISSION

JON LEIBOWITZ Chairman

WILLIAM E. KOVACIC Commissioner

J. THOMAS ROSCH Commissioner

EDITH RAMIREZ Commissioner

JULIE BRILL Commissioner

Joni Lupovitz Chief of Staff

Eileen Harrington Executive Director

Richard Feinstein Director, Bureau of Competition

David Vladeck Director, Bureau of Consumer Protection

Joseph Farrell Director, Bureau of Economics

Willard K. Tom General Counsel

Randolph W. Tritell Director, Office of International Affairs

Jeanne Bumpus Director, Office of Congressional Relations

Susan S. DeSanti Director, Office of Policy Planning

Cecelia Prewett Director, Office of Public Affairs

Donald S. Clark Secretary of the Commission

Report Drafters and Contributors

Suzanne Michel, Deputy Director, Office of Policy Planning

William Cohen, Deputy General Counsel for Policy Studies

William Adkinson, Office of the General Counsel

Erika Meyers, Bureau of Competition

Suzanne Drennon Munck, Office of Policy Planning

Joel Schrag, Bureau of Economics

Karen Goldman, Office of General Counsel

Christopher Bryan, Office of the General Counsel

Christopher Falcone, Office of the General Counsel

Inquiries concerning this report should be directed to:

Suzanne Michel (202) 326-3094 or smichel@ftc.gov
Acknowledgments:

The Commission thanks the Hearings participants for the contribution of their expertise and time

to this project.

The Commission thanks the Berkeley Center for Law and Technology and the Competition

Policy Center at the University of California at Berkeley for hosting Hearings in Berkeley,

California.
i

THE EVOLVING IP MARKETPLACE: 

ALIGNING PATENT NOTICE AND REMEDIES 

WITH COMPETITION

Introduction ................................................................. 1

Executive Summary . .......................................................... 7

Technology Markets and Patent Markets

Chapter 1: Evolving Pathways of Innovation: Open Innovation, Technology Transfer 

 and Ex Ante Patent Transactions . ................................... 31

Chapter 2: The Evolving Patent Marketplace: Ex Post Patent Transactions . . . . . . . . . . . 49

Patent Notice

Chapter 3: Patent Notice: A Competition Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Patent Remedies

Chapter 4: The Economic and Legal Foundations of Patent Remedies . . . . . . . . . . . . . . . 137

Chapter 5: Lost Profits Damages . ............................................. 149

Chapter 6: The Hypothetical Negotiation in Reasonable Royalty Damages . . . . . . . . . . . 159

Chapter 7: Calculating Reasonable Royalty Damages .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

Chapter 8: Permanent Injunctions in Patent Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Appendices

Appendix A: Statistics Describing Patent Damage Awards. . . . . . . . . . . . . . . . . . . . . . . . . 245

Appendix B: Overview of Post-eBay Permanent Injunction Case Law. . . . . . . . . . . . . . . . 253

Appendix C: Hearing Participants . ........................................... 280

Appendix D: Public Comments and Hearing Submissions . ........................ 293

Appendix E: Hearing Agendas . ............................................... 298
ii
FED. TRADE COMM’N & DEPT. OF JUSTICE ANTITRUST DIV., ANTITRUST ENFORCEMENT AND 1

INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (April 2007), available

at http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf

FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT 2

LAW AND POLICY, Exec. Summ., at 1 (Oct. 2003), (“2003 FTC IP Report”), available at

http://ftc.gov/os/2003/10/innovationrpt.pdf.

1

THE EVOLVING IP MARKETPLACE: 

ALIGNING PATENT NOTICE AND REMEDIES 

WITH COMPETITION

INTRODUCTION

Innovation benefits consumers through the development of new products, processes and

services that improve lives and address unmet needs. It is key to meeting society’s greatest

challenges in areas as diverse as energy production, communications and health care, and it is

essential to sustained economic growth and global competitiveness. But innovation is a complex

process. It involves a series of steps from idea to invention through development to

commercialization, each of which can be expensive, risky and unpredictable. 

The goal of the patent system is to promote innovation in the face of that expense and

risk. It does so by giving patent owners the right to exclude others from making, using or selling

a patented invention for 20 years. By preventing copying that might otherwise drive down

prices, the patent system allows innovators to recoup their investment in research and

development (R&D). The patent system plays a critical role in promoting innovation across

industries from biotechnology to nanotechnology, and by entities from large corporations to

independent inventors.

The patent system’s exclusive right promotes innovation, but so too does competition,

which drives firms to produce new products and services in the hope of obtaining an advantage

in the market. The patent system and the antitrust laws share the fundamental goals of enhancing

consumer welfare and promoting innovation. The legal doctrines that most successfully

accomplish those goals align the patent system and competition policy so that one does not

undermine the effectiveness of the other. One important aspect of that alignment is antitrust

enforcement that recognizes the incentives to innovate created by the patent system. 

Condemning efficient, legitimate uses of patent rights can undermine those incentives and harm

consumers. For that reason, the guidance of the 2007 FTC/DOJ Report on IP and Antitrust

focused on incorporating careful consideration of the benefits of patent rights into antitrust

analysis. Another aspect of that alignment is a proper balance between exclusivity and 1

competition. Invalid or overbroad patents disrupt that balance by discouraging follow-on

innovation, preventing competition, and raising prices through unnecessary licensing and

litigation. For that reason, many of the recommendations in the 2003 FTC IP Report focused on

improving patent quality as a means of balancing exclusivity and competition.2
Appendices C-E list participants, comments received and topics examined at the hearings and workshop. 

3

Transcripts and written submissions are available at http://www.ftc.gov/bc/workshops/ipmarketplace/.

2

Two areas of patent law beyond patent quality impact how well the patent system and

competition policy work together to further their common goal of enhancing consumer welfare. 

The first is notice – how well a patent informs the public of what technology is protected. The

second is remedies – judicially awarded damages and injunctions following a court finding of

patent infringement. The impact of notice and remedies on the alignment of the patent system

with competition policy results from the operation of relevant legal rules and practices on

competition among patented technologies.

A patent does not necessarily confer market power because patented inventions often

compete with alternative technologies. Patentees can earn rewards in the market by selling a

patented product themselves or by licensing the patent for others to practice. In either case, the

market reward earned by the patentee, and the economic value of the invention, will depend upon

the extent to which consumers prefer the patented technology over alternatives. A patent

covering a highly valued, disruptive technology can confer market power and generate significant

market rewards. More often, competition from acceptable alternatives will limit the market

reward that a patent owner receives. 

Competition among patented technologies at every stage of the innovation process helps

generate lower prices, more choices and higher quality products for consumers. Products

compete to be purchased by consumers. Developed technologies compete in technology markets

to be chosen for incorporation into products. Early-stage technologies compete for development

funding. By aligning the patentee’s market reward with consumer preferences, competition in

product and technology markets encourages investment in those inventions that are more likely

to be valued by consumers. When patent law facilitates and does not distort this competition, it

aligns with competition policy to the benefit of consumers.

FTC Hearings on the Evolving IP Marketplace

To explore the interplay of notice, remedies, innovation and competition, the FTC held

eight days of hearings beginning December 2008. In addition, the FTC cosponsored a workshop

with the Patent and Trademark Office (PTO) and the Department of Justice in May 2010, on the

intersection of patent policy and competition policy. The hearings and workshop involved more

than 140 participants, including business representatives from large and small firms, start-ups

and the independent inventor community, leading patent practitioners, economists, and patent

law scholars. The FTC also received over 50 written submissions. This report is based on 3

testimony, written submissions and independent research.

The report begins by examining the role of technology markets and patent markets in

innovation today. Those roles have evolved in recent years in ways that heighten the importance

of patent notice and remedies to competition among technologies. As Chapter 1 discusses,

collaboration and technology transfer have become increasingly important pathways to
3

innovation with significant benefits for consumers. Patents play an important role in supporting

these technology markets, and undermining that role would harm innovation. At the same time,

as described in Chapter 2, we see increasing activity and complexity of business models in

markets for patents that do not involve technology transfer. In these markets, patents are bought,

sold and licensed as assets whose value is based on their ability to extract rents from

manufacturers already using the patented technology. This activity risks distorting competition

among technologies and deterring innovation, especially when driven by poor patent notice and

remedies that do not align with the economic value of the patented invention. Chapters 3

through 8 make recommendations for adjustments to the legal rules and practices governing

notice and remedies to better align them with competition policy without undermining patent

law’s support for innovation.

How Patent Notice Affects Innovation and Competition

Clear notice of what a patent covers can increase innovation by encouraging

collaboration, technology transfer and design-around. Clearly defined patent rights can help

companies identify and license technology they wish to develop or adopt. Poor patent notice can

undermine the patent system’s ability to fulfill this role, however. Potential collaborators or

licensees may not find relevant patents, or they may hesitate to invest in technology when the

scope of patent protection is unclear. 

Notice affects competition among technologies at every stage of the R&D process. The

ability to identify and assess the scope of relevant patents at an early stage can be critical for

firms considering making investments in developing and commercializing an innovative product. 

They may unnecessarily elect not to pursue a R&D effort when the scope of coverage is unclear

if they fear that another firm has blocking patents. Such decisions deter and lessen innovation

and competition among technologies that might otherwise have been created. Poor patent notice

also hinders competition by forcing firms to design products with incomplete knowledge of the

cost and availability of different technologies. Technologies compete to be incorporated into

products. But that competition is distorted if designers cannot discern in advance which

technologies carry the cost of patent royalties and negotiate those royalties before they incur sunk

costs based on the patented technology. 

When firms choose technologies and market products despite an uncertain patent

landscape, they risk post-launch patent assertions and litigation. As described in Chapters 2 and

3, resolving these claims often involves expensive litigation, which diverts resources and disrupts

business operations. If the firm pays royalties, costs may increase and consumers may be

deprived of the full benefit of competition among technologies.

Firms can invest in patent clearance activities – attempts to identify patents that might

read on their planned activities – to reduce uncertainty and avoid later infringement allegations. 

Such efforts are often expensive. In the information technology (IT) industries, where products

consist of many components covered by numerous patents, firms may not reliably identify all

relevant patents. When they do identify patent risks, firms may unnecessarily design around
4

those risks or take a license due to unclear patent scope. To the extent that patent clearance and

product design are made more expensive by poor notice, they impose unnecessary costs. 

As discussed in Chapter 3, a firm attempting patent clearance must undertake three

activities. One is claim interpretation. To fulfill their notice function, patent claims must clearly

delineate the scope of patent rights. A second is predicting what claims might emerge from

pending patent applications. A third is identifying potentially relevant patents or applications. 

Effective patent notice supporting each one of these activities implicates multiple legal rules and

practices, including claim interpretation, specification requirements and application examination. 

Chapter 3 examines those rules and practices and makes recommendations for improving patent

notice. Doing so would better align patent law and competition policy by allowing competition

among technologies to function more effectively.

How Patent Remedies Affect Innovation and Competition

Effective patent remedies are critical to the patent system’s incentives to innovate. Patent

infringement interferes with a patentee’s ability to realize its patent’s value in the marketplace. 

Remedies protect the ability of patentees to earn returns in the market by stopping and deterring

infringement in the case of injunctions, and by making patentees whole through damage awards

when infringement has occurred. As explained in Chapter 4, to perform that role, patent

remedies should seek to replicate the market reward that the patent holder would have earned

absent infringement. 

Compensatory damage awards that either under or overcompensate patentees for

infringement compared to the market can have detrimental effects on innovation and

competition. Undercompensation can undermine the patent system’s incentives to innovate. 

This could impair investment in R&D and result in fewer new, innovative products and services. 

Damage awards that exceed what the invention could have earned absent infringement when

competing with alternatives can lead to higher prices. Consumers are effectively deprived of the

benefit of competition among technologies. Overcompensation can also encourage speculation

in patent rights and litigation. As discussed in Chapter 2, this can deter innovation by raising the

costs and increasing the risks of investment. Moreover, damages law that systematically

overcompensates certain types of inventions can over-incentivize invention and patenting in that

field. This outcome can disrupt the market’s ability to allocate R&D resources to those areas

most likely to generate the products most valued by consumers.

Calculating patent damages that replicate the market reward for the invention by

constructing the world but for infringement can be a very difficult task for litigants and

factfinders. Over the years, courts have developed an extensive jurisprudence surrounding the

calculation of patent damages. While the fundamental principles of damages law are sound,

some legal rules and practices are not well-grounded in economic analysis. For instance, some

rules do not reflect a full appreciation of the appropriate role of competition from non-infringing

alternatives in determining patent damages. Trial practice has allowed ill-supported damages

testimony into evidence. Chapters 4 through 7 develop an economically grounded approach to
eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 4

5

calculating patent damages and recommend changes to better align patent law and competition

policy by producing damage awards that more closely replicate the market value of the invention.

Permanent injunctions prohibiting future infringement play a critical role in protecting the

exclusivity that allows a patentee to reap the market reward for its invention. Following a

finding of infringement, an injunction preserves the patentee’s exclusivity going forward. Just as

importantly, the threat of an injunction creates a significant deterrent to infringement, which

allows patentees to obtain the full market reward for the invention, supported by an exclusive

market position, without costly litigation. 

Under some circumstances, however, the threat of an injunction can lead an infringer to

pay higher royalties than the patentee could have obtained in a competitive technology market. 

At the time a manufacturer faces an infringement allegation, switching to an alternative

technology may be very expensive if it has sunk costs in production using the patented

technology. That may be true even if choosing the alternative earlier would have entailed little

additional cost. If so, the patentee can use the threat of an injunction to obtain royalties covering

not only the market value of the patented invention, but also a portion of the costs that the

infringer would incur if it were enjoined and had to switch. This higher royalty based on

switching costs is called the “hold-up” value of the patent. Patent hold-up can overcompensate

patentees, raise prices to consumers who lose the benefits of competition among technologies,

and deter innovation by manufacturers facing the risk of hold-up.

One challenge for injunction analysis is to protect the critical importance of patent

exclusivity for innovation while recognizing that, in some instances, patent hold-up can

undermine innovation and harm consumers. Chapter 8 proposes an approach that balances these

concerns within the equitable analysis required by eBay v. MercExchange. The proposed

4

approach aligns patent law and competition policy by preventing hold-up based on sunk costs

when innovation would not be harmed.
6
7

EXECUTIVE SUMMARY

CHAPTER 1

EVOLVING PATHWAYS OF INNOVATION: OPEN INNOVATION, 

TECHNOLOGY TRANSFER AND EX ANTE PATENT TRANSACTIONS

Understanding what changes to the law of patent notice and remedies would increase

innovation and better align the patent system and competition policy requires that we first

examine how the pathways to innovation and the role of patents in promoting innovation have

evolved. In one significant change, many firms have increasingly embraced “open innovation.” 

In a traditional or closed model of innovation, a firm relies on its own research and development

(R&D) to create the products it markets. But a firm that pursues an open innovation strategy

recognizes that valuable ideas can originate with others and seeks to acquire those inventions that

fit its business model. Many of the inventions acquired and commercialized by large firms

originated with start-ups and small companies, which have accounted for a steadily increasing

percentage of R&D spending over the past 30 years. 

Consumers benefit from open innovation strategies. The growth of technology transfer

has permitted a division of labor to emerge between those who invent and those who

manufacture most efficiently. This division of labor speeds up the rate of innovation and results

in broader, faster distribution of new products to consumers. By providing a pathway for

invention without commercialization, technology transfer also lowers barriers to entry for

inventors who do not have access to the capital required to build manufacturing facilities and

establish distribution channels. Easier entry supports additional sources of invention, which

increases competition among technologies to be further developed and incorporated into

products. That competition benefits consumers by generating better, cheaper products. 

Moreover, competition among early-stage technologies for development funding is an important

mechanism for allocating scarce resources to those inventions having the greatest chance of

generating the products most valued by consumers.

The patent system facilitates open innovation and technology transfer in ways that

implicate patent quality, patent remedies and the notice function. The exclusive patent right

creates incentives for sellers of technology to invent, and for buyers of technology to purchase

and invest in further development. But the nature and effectiveness of the exclusive patent right

depend in part on the remedies available for its infringement. Damages must make a patent

owner whole or infringement will undermine the patent system’s incentives to innovate. 

Permanent injunctions must deter infringement and protect the exclusivity. Good notice of

patent rights encourages investment in new technologies. But poor quality patents can

discourage innovation by creating uncertainty and raising costs.

Patents also facilitate open innovation and technology transfer by creating rights based on

intangible concepts, which makes contracting easier and helps create a market for ideas. In a

technology transfer agreement, patents often define the rights to be transferred. Thus, patent

transactions (licensing or sales) form the basis of many technology transfer agreements. Patent

transactions that occur as part of a technology transfer agreement can be considered ex ante
This report uses the term “patent assertion entity” rather than the more common “non-practicing entity” 5

(NPE) to refer to firms whose business model primarily focuses on purchasing and asserting patents. 

Taken literally, the term NPE encompasses patent owners that primarily seek to develop and transfer

technology, such as universities and semiconductor design houses. Patent assertion entities do not

include this latter group.

8

because they occur before the purchaser has obtained the technology through other means. Such

ex ante patent transactions accompanied by technology transfer are an important means for

advancing innovation, creating wealth, and increasing competition among technologies.

CHAPTER 2

THE EVOLVING PATENT MARKETPLACE: EX POST PATENT TRANSACTIONS

While the open innovation model and technology transfer are important pathways to

innovation, not all patent licensing and sales occur ex ante as part of a technology transfer

agreement. In many cases, the licensee or purchaser already uses the patented technology when

approached by the patent owner, but it lacks a license to use the technology. These patent

transactions occur ex post, after the firm accused of infringement has invested in creating,

developing or commercializing the technology. The firm needs the ex post license to avoid

liability, even if it invented or obtained the technology independent of the patentee, because

patent infringement is a strict liability offense. 

The ability of patentees to assert their patents against infringers is important to the patent

system’s role in promoting innovation and facilitating technology transfer. The threat of a patent

infringement suit deters infringement and safeguards the exclusivity that is the heart of the patent

system. A business model based on invention followed by technology transfer will only succeed

if a firm can prevent copying and recoup its investment in R&D.

But ex post licensing to manufacturers that sell products developed or obtained

independently of the patentee can distort competition in technology markets and deter

innovation. The failure of the patentee and manufacturer to license ex ante with technology

transfer results in duplicated R&D effort. When a manufacturer chooses technology for a

product design without knowledge of a later-asserted patent, it makes that choice without

important cost information, which deprives consumers of the benefits of competition in the

technology market. If the manufacturer has sunk costs into using the technology, the patentee

can use that investment as negotiating leverage for a higher royalty than the patented technology

could have commanded ex ante, when competing with alternatives. The increased uncertainty

and higher costs associated with ex post licensing can deter innovation by manufacturers. 

Increasing activity by patent assertion entities (PAEs) in the information technology (IT) 5

industry has amplified concerns about the effects of ex post patent transactions on innovation and

competition. The business model of PAEs focuses on purchasing and asserting patents against

manufacturers already using the technology, rather than developing and transferring technology. 
9

Some argue that PAEs encourage innovation by compensating inventors, but this argument

ignores the fact that invention is only the first step in a long process of innovation. Even if PAEs

arguably encourage invention, they can deter innovation by raising costs and risks without

making a technological contribution. 

The clear benefits for innovation and competition stemming from ex ante patent

transactions contrast with the detrimental and ambiguous effects of ex post transactions. An

important goal in aligning the patent system and competition policy is to facilitate ex ante

transactions while making ex post transactions less necessary or frequent. 

Improving the notice function of patents would help with both. Manufacturers often

license ex post because they were not aware of the patent ex ante. Multiple factors can contribute

to notice failure, including overbroad, vague claims, the large number of patents potentially

relevant to IT products, and the pendency of patent applications in the Patent and Trademark

Office (PTO). More clearly defined patent rights could help companies better find and license

technology they wish to develop ex ante, which would support technology transfer. Better notice

could also help companies obtain licenses or design around patents in advance of marketing a

product, thereby decreasing the amount of ex post licensing. 

Remedies law requires a careful balance to accomplish the goal of facilitating ex ante

transactions while reducing the frequency of ex post transactions. On the one hand, any

adjustments to remedies law must be careful not to undermine the patent system’s incentives to

innovate. On the other hand, if remedies overcompensate patent owners compared to the market

reward absent infringement, they can distort competition and encourage patent speculation. 

Improvements in both notice and remedies law, as discussed in the following sections, can better

align the patent system with competition policy and balance these concerns.

CHAPTER 3

PATENT NOTICE: A COMPETITION PERSPECTIVE

The Nature and Sources of Notice Problems

The hearings examined three principal notice challenges, listed below. Numerous IT

panelists indicated that notice problems were substantial, often leading firms to abandon patent

“clearance” efforts. In contrast, panelists from the pharmaceutical and biotech sectors generally

found patent notice sufficient for effective, albeit sometimes costly, clearance searches. 

Difficulty interpreting the boundaries of issued claims. To fulfill their notice function,

patent claims must delineate the scope of patent rights with sufficient clarity that a person skilled

in the relevant art can reliably determine whether planned activities would infringe. The hearings

explored several interrelated sources of ambiguity or uncertainty: 
10

• Language is inherently imprecise. 

• Some art areas, such as software, lack clear nomenclature and common

vocabularies for claiming. 

• Claiming using functional language, which describes what the invention does

rather than what it is, can produce abstract, ambiguous claims. 

• Some applicants may have incentives to draft ambiguous claims that might be

viewed narrowly by the PTO and then construed broadly in litigation. 

• PTO examination often focuses on issues of novelty and nonobviousness and may

result in deferring clarification of claim boundaries until litigation.

Claims that may issue from pending applications. Because products can infringe

subsequently issued patents, an effective clearance search should include pending applications. 

A requirement that most applications be published 18 months after filing provides a partial

solution. However, applications can be amended during examination, provided that there is

sufficient support in the specification. Adequacy of notice depends on whether the application is

published and the extent to which the specification enables third parties to foresee the claims that

may emerge. 

Difficulty of identifying and reviewing published patents. IT panelists described the

difficulty in performing patent clearance that results from the sheer number of relevant patents,

potentially numbering in the thousands. They explained that IT products typically contain many

different components, each of which may be covered by numerous patents. They also reported

that reliably identifying all patents that might be asserted was undermined by the lack of

predictable vocabulary and frustrated by short product cycles. Panelists from other industries

generally found clearance searches manageable. 

Guideposts and Trade-offs

We examine possible notice enhancements with several guideposts in mind. Cost is

obviously important. Often, patent applicants are best positioned to supply low-cost, but very

valuable, information. Timing is another key consideration. Notice is more beneficial to third

parties when they are still planning their R&D strategies and before they make sunk investments

that may expose them to hold-up. Accordingly, many of the suggested improvements look to the

examination process, rather than to litigation.

Trade-offs between notice and scope pose particularly thorny issues, and it is vital that

they be approached with a full understanding of the notice implications. Divergence in the extent

and nature of notice problems among industries also poses challenges. We look for ways to

improve notice in problem areas without impairing the patent system elsewhere and without

sacrificing the benefits of a unitary patent system, with doctrines applicable across technologies. 

Improving the Ability to Understand Existing Claims: Indefiniteness

Under Section 112, second paragraph of the Patent Act, 35 U.S.C. § 112, claims must

“particularly point[] out and distinctly claim[] the subject matter which the applicant regards as
Exxon Research & Eng’g Co. v. United States, 265 F.3d 1371, 1375 (Fed. Cir. 2001).

6

Ex Parte Miyazaki, 89 U.S.P.Q. 2d 1207, 2008 WL 5105055, at *5-6 (Bd. Pat. App. & Interf. Nov. 19, 7

2008). 

Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323, 1340 (Fed. Cir. 2008); Aristocrat Techs. Australia 8

Pty, Ltd., v. Int’l Game Tech., 521 F.3d 1328, 1338 (Fed. Cir. 2008).

11

his invention.” Otherwise, the claims are invalid on grounds of “indefiniteness.” An

indefiniteness standard that weeds out claims reasonably susceptible to multiple interpretations

could reduce ambiguity and improve notice in a broad range of settings. 

PTO review. The Federal Circuit requires that claims be “insolubly ambiguous” to be

invalid as indefinite. The PTO Board of Patent Appeals and Interferences has adopted a lower

6

threshold of ambiguity, however, by ruling that a claim may be indefinite if it is “amenable to

two or more plausible claim constructions.” Miyazaki approaches indefiniteness with a focus on 7

notice. In contrast, the “insolubly ambiguous” standard accepts substantial ambiguity. It

preserves claims that require a court to make hard choices among varying interpretations, thereby

overstating what marketplace participants are likely to understand. The Miyazaki approach is

preferable when implemented during PTO review. In the PTO, indefiniteness rulings promptly

add clarity and require only a claim amendment from the applicant. 

Recommendation. In assessing indefiniteness, the PTO should adhere to the

principle articulated in Miyazaki.

Functional claims. The Federal Circuit has also recognized notice concerns in recent

rulings finding computer-implemented means-plus-function claims indefinite. In each case, the 8

invalidated claims covered a function implemented by means of a computer or microprocessor,

but the specification provided no details regarding the relevant program. The court ruled that

without disclosing in the specification some form of algorithm for performing the claimed

function – not necessarily anything highly detailed – the applicant had not satisfied definiteness

requirements. This presents a helpful opportunity to enhance notice regarding software patents,

but the reach of the “algorithm” requirement is still uncertain. The rulings also point the way

toward steps that would add clarity to functional claims that fall outside the means-plus-function

format. 

Recommendation. The Commission recommends that courts give weight to

notice objectives as they further explicate the circumstances in which a patent’s

specification sufficiently supports a means-plus-function claim. Those objectives

require sufficiently detailed structure to inform the public of the means that fall

within and outside of the claim’s scope. Similar concerns apply more broadly,

and the Commission urges that courts extend their recent focus on indefiniteness

to address functional claiming in general.
The specification must (1) describe the invention sufficiently to convey to a person having skill in the art

9

that the patentee/applicant was in possession of the claimed invention at the time the application was

filed, and (2) enable third parties to make or use the invention without undue experimentation. 

12

Improving the Ability to Understand Existing Claims: Enhancing the Value of the

Specification for Claim Construction

Claim construction raises a set of issues with profound notice implications. Claims are

interpreted “in light of the patent specification,” but this principle often leaves significant

ambiguity regarding claim coverage. Hearing testimony focused on enhancing the value of the

specification for claim construction through more stringent enforcement of Section 112, at least

in the IT industry, and by defining claim terms. 

Enforcement of 35 U.S.C. § 112, ¶ 1. Panelists stressed the importance of calibrating

claim scope to the specification for predictable claim construction and effective public notice. 

As claims extend farther beyond the invention expressly described in the specification, their

boundaries become more ambiguous. Patent law achieves that calibration through two

requirements recited in 35 U.S.C. § 112, the written description requirement and the enablement

requirement. There was considerable testimony, however, that the written description and 9

enablement requirements have been much less stringently enforced in IT industries than

elsewhere, leading to concerns over ambiguous scope. The hearings suggested several ways to

address this issue.

Whether a specification sufficiently supports a patent’s claims under Section 112 is

assessed through the eyes of the hypothetical “person having ordinary skill in the art,” or

PHOSITA. What the PHOSITA is likely to understand or find demonstrated is a reasonable

proxy for what third parties are likely to perceive. Some analysts have argued that, at least for

Section 112 purposes, the level of skill attributable to the PHOSITA has been set too high in IT

contexts and too low in biotech settings. Attributing too high a skill level to the IT PHOSITA

could unduly reduce disclosure requirements for the specification, allow broad, ambiguous

claims, and raise serious notice concerns. To ensure adequate notice, the level of skill ascribed to

the PHOSITA must reflect facts and avoid inappropriate rules of thumb. 

Recommendation. The Commission urges courts to direct heightened attention

and provide additional guidance regarding assessment of PHOSITA skill levels

relative to the problems posed by the art. To serve notice goals, application of the

PHOSITA standard should be fact-based, up-to-date, and appropriately tailored to

the specific technology at hand. 

A second problem derives from the requirement that the specification enable third parties

to make or use the invention without “undue” experimentation. From the perspective of

competitive impact, time-consuming experimentation is more likely to be undue in settings

where product life-cycles are measured in months than where they are measured by decades. 
13

However, the factors traditionally considered in evaluating “undue experimentation” omit this

commercial perspective. 

Recommendation. Determinations regarding whether a disclosure requires undue

experimentation should give recognition to the competitive significance of the

time required for experimentation; when product life-cycles are short, greater

disclosures may be needed in order to be competitively meaningful. 

Defining claim terms. One concern raised repeatedly during the hearings was that claims

frequently use terms with no apparent definition in the specification. Litigants disputing claim

interpretation may turn to different dictionaries to find a favorable definition. The problem is

exacerbated for fast-moving technologies lacking widely-accepted terminology. Notice would be

improved through undisputed claim term definitions.

Recommendation. The Commission recommends that patent applicants be

required either (i) to designate a dictionary for use in assigning meaning to terms

not defined in the application or (ii) to acknowledge acceptance of a PTOdesignated default dictionary for that purpose. The PTO-designated default

dictionary could vary by art unit. 

Recommendation. The Commission urges the PTO to continue to look for ways

to press patent applicants to include definitions or contextual explanations of key

terms. Mechanisms that could accomplish this include (i) requiring applicants to

provide a glossary defining any key terms that are not covered by a designated or

default dictionary or that the applicant chooses to define differently than in such a

dictionary or (ii) requiring that applicants include key claim terms in the

specification and provide a ready means for identifying where they appear. 

Recommendation. The Commission urges that the PTO convene a

government/industry task force or hold a workshop to explore ways of fostering

greater uniformity in the methodology or language used for describing and

claiming software inventions.

Improving the Ability to Understand Existing Claims: Enhancing the Value of the

Prosecution History for Claim Construction

In addition to the language of the patent itself, important evidence relevant to a claim’s

meaning may appear in the prosecution history. Panelists registered considerable support for

increasing and recording exchanges between examiners and applicants pertinent to patent scope. 

They explained that engaging the applicant in ways that build a prosecution history record
See USPTO, Supplementary Examination Guidelines for Determining Compliance with 35 U.S.C. 112,

10

76 Fed. Reg. 7,162 (Feb. 9, 2011).

2003 FTC IP Report, ch. 5, at 13-14. 11

14

enables all participants in the patent system to better understand claim boundaries. The PTO

very recently has exhorted its examiners to take steps in these directions.

10

Recommendation. The Commission urges that examiners be further encouraged

to build a record that improves claim scope clarity. In part, this may be achieved

through greater focus on Section 112 standards. Additional notice may be derived

via indefiniteness rejections or interviews tailored to elicit information from

applicants regarding the meaning of their claims. Beyond this, the Commission

reiterates the recommendation in its 2003 IP Report for “a concentrated effort to 11

use examiner inquiries [under PTO Rule 105] more often and more extensively,”

as a means, for present purposes, of increasing and recording examiner/applicant

exchanges pertinent to patent scope. 

Recommendation. The Commission recommends that the PTO continue to

encourage examiners to make greater and more informative use of statements of

reasons for allowance and for withdrawing indefiniteness rejections and that

courts accord such statements due weight as prosecution history relevant to claim

interpretation. 

Improving the Ability to Foresee Evolving Claims

Adequate notice requires both knowledge of those patent applications pending in the PTO

that might issue with relevant claims and an ability to foresee the evolving claims that could issue

as a result of prosecution. Knowledge of the applications comes through their publication. The

ability to foresee claims depends on enforcement of the Section 112 requirements. The amount of

time an application remains pending in the PTO also affects notice.

Publication of applications. Until a patent application is available to public view, third

parties have no opportunity to determine whether they have freedom to operate. Under current

law, most U.S. patent applications are published 18 months after filing. For applications filed

only domestically, however, the applicant may keep the application secret until the patent issues. 

Hearing testimony described unpublished applications as a threat to expensive R&D, although

independent inventors feared publication would allow large companies to appropriate their

inventions.

Recommendation. The Commission recommends legislation requiring

publication of patent applications 18 months after filing, whether or not the

applicant also has sought patent protection abroad (subject to possible adjustments

to provide any necessary protection to independent inventors). This
Id. at 15. 12

Kingsdown Med. Consultants, Ltd. v. Hollister, Inc., 863 F.2d 867, 874 (Fed. Cir. 1988).

13

15

recommendation is consistent with that made in the 2003 FTC IP Report, which

noted the “benefits of publication to business certainty and the potential

competitive harms and hold-up opportunities that flow from unanticipated

‘submarine’ patents.”12

Section 112 requirements. Once an application is published, third parties have notice of

the specification and pending claims. However, a patent applicant can amend and add new

claims during prosecution. The ability of third parties to foresee evolving claims depends on the

extent to which the specification provides effective notice of the range of claims that ultimately

might issue. The disclosure requirements of Section 112 (written description and enablement)

provide protection against undue broadening of claims through additions and amendments. 

Panelists from the IT industry expressed concern about how well these protections allow

them to foresee claims that might issue. One reason is the perceived lax enforcement of the

Section 112 requirements for IT patents. Another reason is the nature of the written description

requirement, which, traditionally, has not focused on precisely the right question for notice

purposes. Thus, it uses an already written claim to evaluate the sufficiency of the specification. 

But it does not ask whether the specification allows the PHOSITA to predict what might be

claimed as within the scope of the invention. Enablement analysis presents a similar problem. 

Unless a manufacturer can predict when making R&D investments that patent claims covering its

product could emerge, the broadened claims reach beyond the application’s effective notice. 

A breakdown of notice regarding evolving claims can have important competitive

consequences. In its 1988 Kingsdown decision, the Federal Circuit declared that it is not “in any

manner improper to amend or insert claims intended to cover a competitor’s product the

applicant’s attorney has learned about during the prosecution of a patent application,” provided

the claims are adequately supported by the original disclosure. If the competitor could not have 13

predicted those claims, application of the Kingsdown doctrine subjects its innovation to

unexpected infringement liability. That result impairs the competitive efforts of rivals and

undermines the patent system’s goal of fostering innovation.

Recommendation. The Commission recommends that consideration of the

PHOSITA’s ability to foresee future evolution of the claims be more fully

incorporated into application of the written description requirement; the applicant

should not be understood to have been in possession of the subject matter of a

new or amended claim of scope broader than what the PHOSITA, on the filing

date, could reasonably be expected to foresee from the specification. 

Continuation practices. Another way of addressing some of these issues would be to

limit infringement exposure when claims have been broadened using continuations. 
The Commission first made this recommendation at 2003 FTC IP Report, ch. 4, at 31. 14

16

Continuation applications enable an applicant to extend the prosecution period, potentially for

many years, while maintaining the benefit of the initial filing date. So long as the original

application’s specification contains adequate support for any claim additions or amendments,

continuation practice provides a means to broaden coverage of the application’s claims. 

Continuations are not the source of the notice problem regarding evolving claims, and

they often serve important, entirely legitimate needs. They do, however, extend the period of

new-claim gestation and thereby raise third-party exposure to opportunistic conduct that takes

advantage of intervening market commitments, such as the conduct sanctioned in Kingsdown. A

targeted limitation on enforcement of broadened continuation claims could limit the potential

competitive harm.

Recommendation. The Commission recommends enactment of legislation to

protect from infringement actions third parties who (i) infringe properly described

claims only because of claim amendments (or new claims) following a

continuation and (ii) developed, used, or made substantial preparation for using,

the relevant product or process before the amended (or newly added) claims were

published.14

PTO funding. Finally, a crucial predicate for this discussion is an ongoing examination

process. Unfortunately, the PTO currently suffers under a huge application backlog. Delay in

commencing the examination procedures that begin to add clarity and in issuing patents only

adds to the period of uncertainty. 

Recommendation. The Commission recommends that the PTO receive the

funding and information systems needed to promptly and properly examine the

many applications that it faces.

Improving the Ability to Sift Through a Multitude of Patents

Identifying and reviewing the patents and applications that might conceivably apply to a

new product often present daunting challenges in IT industries. In addition to the sheer number

of patents, testimony emphasized that unclear claim language and the diverse ways in which

claims might be expressed make search less effective. The hearings considered three ways to

address these issues.

Improving clearance search. The PTO provides public access to paper and electronic

files of patents, but organizes them under a system that differs from industry-based

classifications. Moreover, particularly in software contexts, researchers and applicants may

describe the same invention using different words, undermining reliable search. 
17

Recommendation. The Commission recommends that the PTO instruct

examiners to classify patents using an industry-based classification system, as

well as the PTO classification system, in art units where the additional

classifications would significantly improve public notice. The Commission

further recommends that the PTO explore mechanisms for encouraging examiners

to compile search-friendly lists of descriptive terms for applications under review

and patents ready for issuance. 

Recommendation. The Commission urges that the PTO explore with the

software industry whether ways might be devised to foster greater uniformity in

the methodology or language used for describing and claiming inventions, as a

means of enhancing search capabilities. 

Identifying patent assignees. Potential users of a technology need a ready means of

identifying the current owner of a patent. One strategy for navigating an environment with many

potentially relevant patents is to concentrate clearance efforts on patents held by competitors or

others who are likely to sue. This strategy falters if the public cannot identify current owners. 

Panelists reported that under current law parties often fail to record assignments or list “shell

companies” as assignees. A patent confers a right to exclude, and it is important to clearance

efforts that the public faced with that right have a ready means of identifying the owner. 

Recommendation. The Commission recommends the enactment of legislation

requiring the public recordation of assignments of patents and published patent

applications. To ensure that such listings provide maximum benefit to public

notice, they should identify both the formal assignee and the real party in interest. 

Modifying liability for inadvertent infringement. The consequences of notice failures

are particularly harsh because infringers are held liable even if they have no knowledge of the

patent. Recent studies show that patent infringement litigation often seeks recovery from such

“inadvertent infringers.” If efforts to improve notice do not succeed, consideration of

modifications to strict liability – such as prior user rights or an “independent invention” defense –

may be appropriate. But a substantial change along these lines could result in a dramatically

different patent system, and knowledge in this area is limited. Under these circumstances,

research designed to better understand how modifications to strict liability for patent

infringement would affect incentives to invent and innovate would be desirable.

CHAPTER 4

THE ECONOMIC AND LEGAL FOUNDATIONS OF PATENT REMEDIES

The Patent Act incorporates the fundamental goal of fully compensating patentees for

infringement by requiring that a court award a successful patentee damages “adequate to

compensate for the infringement.” Courts have defined damages “adequate to compensate” as

those that make the patent owner whole by placing it in the position it would have been but for

the infringement. This standard aligns patent law and competition policy by replicating the
18

market reward for the invention, meaning the amount the patentee would have earned in the

absence of infringement by either selling a patented product or by licensing the patented

technology.

Courts have developed an extensive jurisprudence on how to calculate compensatory

damages. Current law identifies two categories of patent damages – lost profits and reasonable

royalties – and provides legal rules for determining which category applies and how damages

should be calculated. Calculating accurate damages is a difficult task, however. The calculation

is based on a hypothetical world of no infringement but continued competition from noninfringing alternatives. Undercompensation can harm consumers by decreasing incentives to

innovate. Overcompensation can also hinder innovation and deprive consumers of the benefits

of competition in multiple ways. To address these concerns, this report seeks to derive an

economically grounded approach to calculating patent damages and to test the current legal rules

for calculating damages against that approach. 

CHAPTER 5

LOST PROFITS DAMAGES

When a patentee commercializes the invention itself, its market reward is measured by

the profits it earns. In this context, infringement generally entails making and selling a

competing product containing the patented technology. Infringing competition can reduce a

patentee’s profits in a number of ways, including by diverting sales from the patentee’s product,

eroding the patentee’s sales price, and causing the patentee to lose collateral sales of nonpatented

products. 

Recommendation. In assessing how the market would have rewarded the

invention absent infringement, courts should allow a patentee flexibility in

creating the “but for” world to address different losses and avoid

undercompensation. Patentees should not be denied an opportunity to establish

lost profits through application of rigid rules that do not reflect sound economic

principles or imposition of evidentiary requirements beyond what is required for

the court to make a reasonable approximation of the patentee’s loss.

Non-infringing Alternatives in a Lost Profits Calculation

It is also important that the legal rules recognize how alternatives to the patented

invention would have affected the patentee’s profits. In the world absent infringement, the

infringer might have sold an alternative to the patented technology. Accurately calculating

damages in the face of that competition requires an examination of consumer preferences for the

patented invention over alternatives. The more consumers prefer the patented invention, the

greater the number of sales that infringement causes the patentee to lose. When consumers freely

substitute alternatives for the patented product, infringement causes fewer lost sales. Economic

tools, including those frequently used in antitrust analysis, can help determine the number of lost

sales. 
Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1550 (Fed. Cir. 1995) (en banc).

15

19

Two current legal rules fail to give proper consideration to the role of alternatives in

determining lost profits damages: the entire market value rule and the practice of making dual

awards of lost profits and reasonable royalty damages.

The entire market value rule. When a patented invention is only one component of a

larger product, the “entire market value rule” awards lost profits damages based on the entire

value of the patented product if (1) the patented feature is “the basis for customer demand” of the

infringing product and (2) the patented and unpatented components together “constitute a

functional unit.” The entire market value rule distracts litigants and factfinders from a careful 15

reconstruction of a market lacking infringement. Proper consideration of the “degrees of

substitutability” among products is eliminated under the all or nothing “basis for customer

demand” test. The “functional unit” prong introduces an irrelevant consideration into the

analysis. A more nuanced economic analysis would seek to determine the number of consumers

that would choose an alternative if the infringing product were not available. Under this

economic analysis, the infringer’s sales are effectively “apportioned” according to the value that

the invention imparts to the entire product.

Recommendation. Courts should reject the entire market value rule as a basis for

awarding a patentee lost profits damages based on all infringing sales and instead

require proof of the degree of consumer preference for the patented invention over

alternatives.

Dual awards. Courts have awarded lost profits damages on a portion of the infringing

sales while also awarding reasonable royalty damages on the remaining infringing sales. Such

dual awards can give more than required to put the patentee in the position it would have been

but for the infringement. When an analysis of consumer preferences shows that, absent

infringement, some consumers would have purchased an alternative to the patented product,

giving the patentee reasonable royalty damages on those sales overcompensates it.

Recommendation. Courts should reject dual awards of lost profits and reasonable

royalty damages when competition from alternatives would have prevented the

patentee from making all the infringer’s sales in a world of no infringement.

CHAPTER 6

THE HYPOTHETICAL NEGOTIATION IN REASONABLE ROYALTY DAMAGES

When a patentee does not market its invention, it can instead earn the market reward for

the patent through licensing. For this reason, when a patentee cannot or chooses not to prove lost

profits from infringement, the measure of damages is the amount that the patentee would have

received in the market for licensing the patented technology. Patent law appropriately

implements this concept by awarding reasonable royalty damages based on what a willing
20

licensor and willing licensee would have agreed to in a hypothetical negotiation, assuming the

patent is valid and infringed. In an actual negotiation and, therefore, a hypothetical negotiation,

the maximum amount a licensee would pay depends upon the economic value of the patented

invention, meaning the incremental value of the invention compared to alternatives. 

Concerns with the Hypothetical Negotiation Framework

Its counterfactual nature. Courts have, in some instances, allowed reasonable royalty

damage awards that appear to be more than a hypothetical negotiation would have produced. In

doing so, they have implicitly or explicitly rejected the central premise that the award must be

consistent with what a willing licensee would pay for the patented technology. Many cases

suggest unease with the hypothetical negotiation due to its counterfactual assumption that the

infringer never infringed and the parties reached agreement. Underlying this unease is often a

concern that the maximum royalty the infringer would have been willing to pay could not

adequately compensate the patentee and would have been unacceptable to it. Some cases also

contain overtones of punishing infringers.

Both concerns are inappropriate. First, compensatory damages for the strict liability

offense of infringement are not meant to be punitive. Second, arguments that the patentee would

have rejected the maximum amount the infringer would have paid are based on assumptions that

the patentee could have made more by not licensing. The patentee may have been better off

selling the invention or a competing product exclusively. In that case, however, the patentee

should be entitled to damages based on lost profits. The law must be flexible in allowing the

patentee to prove its lost profits in order to provide adequate compensation. But a patentee who

has failed or chosen not to do so should not be allowed to use unproven arguments of direct

losses to inflate a reasonable royalty award beyond what a willing licensee would pay. 

Deterring infringement. Some cases that seem to reject the willing licensor/willing

licensee model have expressed concern that the prospect of paying reasonable royalty damages

supplies an insufficient deterrent to infringement and leads firms to choose to infringe by

charging only the “normal” royalty. This concern ignores several other deterrents to

infringement incorporated within the patent system. First, the argument incorrectly assumes that

damages following trial will be the “normal” royalty. The law, however, requires that the

hypothetical negotiation amount incorporate the assumption that the patent is valid and infringed,

which will raise the royalty rate. In addition, enchanced damages penalize those who willfully

infringe and deter copying. Finally, and perhaps most importantly, the threat of injunctive relief

provides critical deterrence to infringement, as discussed more fully below.

Recommendation. The Commission recommends that courts award reasonable

royalty damages consistent with the hypothetical negotiation analysis and willing

licensor/willing licensee model. Concerns about punishing infringement,

deterring infringement, the counterfactual nature of the analysis, or unproven lost

profits that the patentee may have suffered, should not inflate the reasonable

royalty damage award beyond what a willing licensee would have paid for a

patent known to be valid and infringed. Doing so risks awarding patentees more
Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970),

16

modified and aff’d, 446 F.2d 295 (2d Cir. 1971).

21

than the economic value of their inventions compared to alternatives and creating

problems of overcompensation and market distortion.

CHAPTER 7

CALCULATING REASONABLE ROYALTY DAMAGES

Accurately calculating reasonable royalty damages based on a hypothetical negotiation

and the willing licensor/willing licensee model presents numerous challenges for litigants and

courts. An economically grounded approach to damages calculation that appreciates the role of

competition in establishing the economic value of an invention would increase the accuracy of

that determination. Chapter 7 suggests several steps courts can take to increase the accuracy of

reasonable royalty damage awards. 

The Georgia-Pacific Factors and Their Implementation

Courts and juries often make reasonable royalty damage awards by considering some or

all of the Georgia-Pacific factors, a list identified by a district court in 1970 as relevant to the

issue. This list has served as a touchstone for expert testimony, jury instructions, and judicial 16

review of damage awards. Clarifying the appropriate role of the Georgia-Pacific factors would

help increase the accuracy of reasonable royalty damage awards. The factors do not provide a

conceptual framework for calculating damages. Rather, they are properly understood as a nonexhaustive list of evidence categories that may be, but are not necessarily, relevant to a specific

calculation.

Recommendation. Courts should consistently adopt and apply the hypothetical

negotiation and willing licensor/willing licensee model as the conceptual

framework against which conduct of the damages trial is tested. In particular,

courts should recognize that the Georgia-Pacific factors provide only a list of

evidence categories. Implementing this recommendation will have practical

consequences regarding jury instructions, admissibility of evidence and decisionmaking, discussed below.

The Role of Alternative Technologies

Manufacturers often choose among competing alternative technologies to incorporate into

new products. A manufacturer will not pay more to use patented technology than the increased

profits it anticipates from using the patented invention compared to the next best alternative. If

royalties exceed this economic value of the invention, manufacturers can bargain for a lower rate

or choose an alternative. Because alternative technologies play a crucial role in actual licensing

negotiations, they must play a commensurate role in the hypothetical negotiation that determines
22

reasonable royalty damages. Recent case law has suggested, however, that the availability of

non-infringing alternatives does not necessarily cap reasonable royalty damage awards.

Recommendation. Courts should recognize that when it can be determined, the

incremental value of the patented invention over the next-best alternative

establishes the maximum amount that a willing licensee would pay in a

hypothetical negotiation. Courts should not award reasonable royalty damages

higher than this amount.

Timing of the hypothetical negotiation. A manufacturer’s costs in choosing an

alternative to the patented technology and the ability of alternatives to cap a reasonable royalty

can depend on the timing of the hypothetical negotiation. As it chooses technologies to

incorporate into a new product, a manufacturer will often make investments (e.g., building

manufacturing facilities) based on that choice that make it more costly to switch to an alternative. 

If the hypothetical negotiation is deemed to take place after investments have increased switching

costs, the reasonable royalty may be higher than it would have been at the time of the design

choice. This result overcompensates patentees compared to the economic value of the invention

because of investments by the infringer. The ability of patentees to demand and obtain royalty

payments based on the infringer’s switching costs is commonly called “hold-up.” The case law

places the hypothetical negotiation at the time infringement began, but it does not precisely

define that point in time. 

Recommendation. To prevent damage awards based on switching costs, courts

should set the hypothetical negotiation at an early stage of product development,

when the infringer is making design decisions and before it has sunk costs into

using the patented technology.

Reasonable royalties applied to standards. Hold-up may have especially severe

consequences for innovation and competition in the context of standardized technology. IT firms

often achieve interoperability among products by working together in standard setting

organizations (SSOs) to jointly adopt industry-wide technical standards. Alternative

technologies compete for inclusion in the standard. Once a technology is incorporated into a

standard, a firm with a patent reading on the technology can demand a royalty that reflects not

only the value of the technology compared to alternatives, but also the value associated with

investments made to implement the standard. Switching costs may be prohibitively high when

an industry becomes locked into using standardized technology. Were patentees able to obtain

the hold-up value, this overcompensation could raise prices for consumers while undermining

efficient choices made among technologies competing for inclusion in a standard.

One way that many SSOs attempt to address this problem is through licensing rules that

require participants to agree to license patents on RAND (Reasonable and Non-Discriminatory)

terms. But panelists complained that RAND was not defined and provided little guidance in

licensing negotiations. More clarity in the damages case law on the role of alternatives and

timing in the hypothetical negotiation would support a definition of RAND that limits hold-up. 

A definition of RAND based on the ex ante value of the patented technology at the time the
Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). 17

Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055, 2011 WL 9738 (Fed. Cir. Jan. 4, 18

2011). 

23

standard is chosen is necessary for consumers to benefit from competition among technologies to

be incorporated into the standard.

Recommendation. Courts should apply the hypothetical negotiation framework

to determine reasonable royalty damages for a patent subject to a RAND

commitment. Courts should cap the royalty at the incremental value of the

patented technology over alternatives available at the time the standard was

chosen.

Courts’ Gatekeeping Role in Reasonable Royalty Damages Cases

Litigants frequently present damages evidence in patent cases to the jury through an

expert witness who offers opinion on the appropriate damage award. The judge acts as a

gatekeeper in determining whether that opinion testimony is sufficiently reliable to be admissible

under Federal Rule of Evidence (FRE) 702. To be reliable, expert testimony must be: (1) based

on sufficient facts or data; (2) the product of reliable principles and methods; and (3) result from

reliable application of those principles and methods to the facts of the case. 

Calls for more vigorous judicial gatekeeping excluding unreliable testimony on damages

have received heightened attention in the patent community and generated broad agreement at the

hearings. Such gatekeeping is especially important for achieving accurate awards in the context

of the hypothetical negotiation, which can be difficult for jurors to apply. Panelists maintained,

however, that courts rarely exercise their gatekeeping authority in patent damages matters. 

Decisions under Daubert that examine only the reliability of an expert’s methodology, without 17

fully considering whether he reliably applied that methodology to the facts of the case, can result

in admission of improper testimony. The recent Federal Circuit opinion, Uniloc v. Microsoft,

18

emphasizes the need for damages experts to tie accepted methodologies to the facts of the

particular case. 

Recommendation. In their gatekeeper role of enforcing FRE 702, courts should

test the admissibility of expert testimony on damages by assessing whether it will

reliably assist the trier of fact in determining the amount a willing licensor and

willing licensee would have agreed to as compensation for use of the patented

invention in the infringing product. Courts should not deem evidence as relevant,

reliable and admissible solely because it falls within one of the Georgia-Pacific

factors. 
Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009).

19

24

Recommendation. Consistent with FRE 702, courts should require a showing

that a damages expert’s methodology is reliable, that he reliably applies the

methodology to the facts of the case, and that the testimony is based on sufficient

data. Demonstration of a reliable methodology without satisfaction of the other

two prongs should not establish admissibility.

Comparable licenses and averages. The issues surrounding the admissibility of royalty

rates on licenses claimed to be comparable to the hypothetically negotiated license illustrate the

importance of active gatekeeping. Basing reasonable royalty awards on royalty rates in patent

licenses that are “comparable” to the license that would result from the hypothetical negotiation

(or averages of such royalty rates) is a common methodology for setting reasonable royalty

damages. Such evidence can reliably assist the trier of fact in setting the hypothetical negotiation

license only if the patented invention and its infringing use are sufficiently similar to those of the

comparable license. Key attributes in assessing comparability include the technology that is

licensed, the rights licensed (e.g., whether a license covers one patent or several), and the type

and terms of the license (e.g., running royalty or lump sum). In Lucent v. Gateway and other 19

cases, the Federal Circuit has recently applied a more rigorous review of damage awards that

considers whether licenses offered as “comparable” are sufficiently similar to support a jury

verdict.

Recommendation. Courts should admit expert testimony based on comparable

licenses as reliable only upon a satisfactory showing of similarity between the

licensed patent and the infringed patent, and between the non-price terms of the

comparable license and hypothetical license. That showing should be sufficient to

support an inference that the royalty rate for the comparable license provides a

reliable indicator of the royalty that would be reached in the hypothetical

negotiation.

Choosing the Royalty Base: The Entire Market Value Rule

The entire market value rule arose in the context of calculating lost profits damages for a

patent covering a component of a product. The law allows the patentee to recover lost profits

damages based on the entire market value of the product when the patented component is the

“basis for customer demand.” Otherwise lost profits damages will be based only on the value of

the patented component or “apportioned.”

The entire market value rule as developed for lost profits has no corollary in the context

of calculating a royalty by multiplying a royalty base times a royalty rate. There is no amount of

potential damage funds, such as the profits lost on a product, to be entirely awarded or

apportioned. Moreover, the base and rate are closely interrelated. Altering the base in response

to a legal test should result in recalibrating the rate. Nonetheless, courts have imported this rule

into reasonable royalty determinations as a technique for identifying the royalty base. 
eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006). 

20

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Recommendation. Courts should eliminate the entire market value rule and the

question of whether the patented feature was the “basis for customer demand”

from the determination of the appropriate base in a reasonable royalty damages

calculation. It is irrelevant and it risks injecting significant confusion that

threatens to produce inaccurate awards.

Identifying the base. Multiple considerations apart from the entire market value rule

influence parties’ choice of a royalty base in actual licensing negotiations, including convenience

of the parties and the practice in the industry. Where the patented invention is only one

component of a larger product, the product may be the only item that is priced and can be

monitored. However, the practical difficulty of identifying a royalty rate that accurately reflects

the invention’s contribution to a much larger, complex product counsels toward choosing the

smallest priceable component that incorporates the invention. Because the choice of a base in an

actual licensing negotiation is not driven by whether the patented feature is the “basis for

customer demand,” that question should not drive the choice of base in a hypothetical

negotiation. (The rule’s concern with the extent to which a patented invention drives customer

demand is relevant for identifying an appropriate royalty rate.)

Recommendation. Courts should identify as the appropriate base that which the

parties would have chosen in the hypothetical negotiation as best suited for

accurately valuing the invention. This may often be the smallest priceable

component containing the invention.

CHAPTER 8

PERMANENT INJUNCTIONS IN PATENT CASES

In addition to awarding damages for past patent infringement, courts may also grant

permanent injunctions prohibiting future infringement. In 2006, in eBay v. MercExchange, a

unanimous Supreme Court held that the grant of permanent injunctive relief in a patent case is

governed by “traditional equitable principles.” The Court listed four factors that a patentee must

satisfy to obtain an injunction:

(1) that it has suffered an irreparable injury; (2) that remedies available at

law, such as monetary damages, are inadequate to compensate for that

injury; (3) that, considering the balance of hardships between the plaintiff

and defendant, a remedy in equity is warranted; and (4) that the public

interest would not be disserved by a permanent injunction.20
26

How Permanent Injunctions Affect Innovation and Competition

Although the injunction analysis is equitable, to most benefit consumers, it should be

conducted in a manner that furthers the patent system’s goal of promoting innovation and

recognizes consumer interest in aligning the patent system and competition policy. Three

characteristics of injunctions that affect innovation support generally granting an injunction. The

first and most fundamental is an injunction’s ability to preserve the exclusivity that provides the

foundation of the patent system’s incentives to innovate. Second, the credible threat of an

injunction deters infringement in the first place. This results from the serious consequences of an

injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction

threat will promote licensing by the parties. Private contracting is generally preferable to a

compulsory licensing regime because the parties will have better information about the

appropriate terms of a license than would a court, and more flexibility in fashioning efficient

agreements.

A fourth characteristic of injunctions affects the alignment of the patent system and

competition policy. An injunction’s ability to cause patent hold-up can support withholding

injunctive relief in some situations. A manufacturer’s high switching costs combined with the

threat of an injunction can allow a patent owner to obtain payments unrelated to the economic

value of its invention. Hold-up and the threat of hold-up can deter innovation by increasing costs

and uncertainty for manufacturers. It can also raise prices to consumers by depriving them of the

benefit of competition among technologies. In such circumstances, injunction law threatens to

disrupt the alignment of the patent system and competition policy.

A challenge for injunction analysis is to integrate and balance awareness of these issues. 

Hold-up can harm innovation and competition. But denying an injunction every time an

infringer’s switching costs exceed the economic value of the invention would dramatically

undermine the ability of a patent to deter infringement and encourage innovation. For this

reason, courts should grant injunctions in the majority of cases, but criteria are needed to help

identify those instances in which the harm to the patentee from ongoing infringement is small

compared to the costs from hold-up. These criteria include: (1) whether the patented technology

is a minor component of a complex product that would have been easy to design around ex ante;

(2) whether the infringement affects the patentee’s ability to compete in a product or technology

market; and (3) whether the infringer copied the patented technology. 

Analyzing eBay’s Four Factors

To be implemented by courts, these concerns about innovation and aligning the patent

system and competition policy must be translated into the eBay framework. In fact, these

concerns fit well within the equitable nature of the injunction remedy and eBay’s four factor

analysis. 
Courts and commentators often analyze these two factors as one. Appendix B, Section III.A. 21

27

Irreparable harm/inadequacy of money damages. Much discussion concerning 21

injunction law post-eBay has focused on whether the patentee and infringer compete in a product

market. Conventional wisdom assumes that patentees that do not compete in a product market

cannot obtain injunctions because money damages will adequately compensate any harm they

may suffer from infringement. Conventional wisdom also assumes that a patent owner practicing

the patent can and should be granted an injunction. 

The class of non-practicing patent owners is too diverse to be subject to a simple rule. 

Patentees that license as part of a technology transfer program can suffer harm from infringement

akin to that suffered by manufacturing patentees. These patentees compete in a technology

market to have their technology purchased for incorporation into new products. The availability

of an injunction is important to such patentees, who rely on the threat to deter infringement and

encourage ex ante licensing. The harm suffered by these patentees as a result of infringement can

be analogous to that suffered by manufacturing patentees, including loss of a customer base and

harm to reputation as an innovator. However, denial of an injunction may not prevent a patent

assertion entity (PAE) from receiving the full value of the invention. That patentee will not have

the same concerns about deterring future infringement and protecting its reputation as an

innovator that other patentees may have.

This is not to say, however, that courts should assume all manufacturing patentees will

suffer irreparable harm from infringement. While that might often be the case, the analysis must

consider other facts. The patent may cover a minor component of the infringing product. 

Competing products may include non-infringing alternatives that are acceptable to customers,

making it less likely that the infringement (as opposed to competition generally) is harming the

patentee. The variety and complexity of different factual scenarios caution against creating any

assumptions of irreparable harm based on a finding of infringement, a patentee’s use of the

patent, or its willingness to license. 

Recommendation. Courts should not presume irreparable harm based on a

finding of infringement or the patentee’s use of the patent. Conversely, courts

should recognize that infringement can irreparably harm the ability of patentees

that primarily engage in technology transfer through licensing to compete in a

technology market.

Balance of the equities and hardships between the parties. Under this factor, courts

must consider the effect of an injunction on an infringer and balance it against the harm that

infringement imposes on the patentee. This factor allows courts to weigh the expense and harm

to an infringer facing hold-up against the harm to the patentee by considering whether the

invention is a minor component for which acceptable alternatives are available, and how

infringement affects the patentee’s ability to compete in a goods or technology market. Courts

can also consider whether the infringer copied the technology.
E.g., 3M Innovative Properties Co. v. Avery Dennison Corp., No. 01-1781, 2006 WL 2735499, at *2

22

(D. Minn. Sept. 25, 2006).

28

Recommendation. Courts should consider the hardship of an infringer facing

hold-up under this prong. Courts should reject the statement that an infringer

“cannot be heard to complain if an injunction against continuing infringement

destroys the business” except in those instances where an infringer “elects” to 22

infringe by copying a patented invention with knowledge of the patent.

Public interest. Under the public interest factor, courts must examine the effect an

injunction would have on third parties, including the public at large. Courts often cite the

public’s interest in the patent system’s ability to promote innovation as supporting an injunction. 

While this is important, in some circumstances, such as those involving hold-up based on a

patent for a minor component, an injunction could unduly raise prices to consumers and deter

rather than promote innovation. 

Recommendation. When warranted by the facts, courts should consider the

public’s interest in avoiding patent hold-up, which can increase costs and deter

innovation. 

Injunction Analysis in the Standard Setting Context

Hold-up in the standard setting context can be particularly acute. Standards are often

adopted to make products compatible and interoperable with other products in the industry. 

“Lock-in” can make an entire industry susceptible to hold-up. In addition to higher prices and

other economic harms, hold-up in standards-based industries may discourage standard setting

activities and collaboration, which can harm innovation.

eBay provides a framework for evaluating whether to issue an injunction in the standard

setting context. A prior RAND commitment by the patentee or its successor-in-interest can

provide evidence that denial of an injunction in favor of ongoing royalties will not irreparably

harm the patentee. The infringer’s inability to participate effectively in the market without

complying with the standard is relevant to the balance of hardships. The public interest factor

may consider whether grant of an injunction would deprive consumers of interoperable products;

raise costs above the incremental value of the invention compared to alternatives at the time the

standard was set; or threaten to undermine the collaborative innovation that can result from the

standard setting process.

Recommendation. Courts should give careful consideration under each of eBay’s

four factors to the consequences of issuing an injunction prohibiting use of a

patented invention incorporated into an industry standard. Whether the patent

owner made a RAND commitment will also be relevant to the injunction analysis.
29

Remedies Following Denial of an Injunction

When the analysis leads a court to deny an injunction, the question naturally arises of

what remedy to apply. The court opinions that address the question most commonly require

ongoing royalties that allow the manufacturer to continue making the infringing product. The

Federal Circuit has held that this remedy can be appropriate in lieu of an injunction. No

consensus on how to set the royalty rate has emerged from the case law, however. The Federal

Circuit has stated only that district courts must articulate a reasonable basis for determining the

amount, and that the award should account for the changed relationship of the parties resulting

from an adjudicated finding of infringement of a valid patent.

Ongoing royalties. To form a coherent remedies system, the legal rules for ongoing

royalties following denial of an injunction must be consistent with the rationale for denying the

injunction in the first place. When a court denies an injunction to prevent hold-up, the

alternative remedy should not perpetuate the hold-up. The ongoing royalty should be based on a

willing licensor/willing licensee model with the assumption that the patent is valid and infringed

in order to account for the changed relationship of the parties following litigation. Concerns

about preserving the deterrent value of injunctions and patentees’ incentives to innovate are best

addressed by carefully defining and limiting the circumstances under which injunctions are

denied.

Recommendation. The Commission recommends that to fully compensate

patentees but avoid creating hold-up, courts base awards of ongoing royalties

following denial of an injunction on the willing licensor/willing licensee model,

assuming the patent is valid and infringed.

Delaying the injunction. In several instances, courts have granted a permanent

injunction but delayed the time for it to commence in order to give the infringer time to design

around the patent or the parties time to reach a licensing agreement. Where a design around

option is feasible and the infringer is afforded sufficient time to implement it, a delayed

injunction can be a useful tool to prevent hold-up while avoiding the concerns associated with

denying an injunction for the life of the patent. In addition, allowing the parties time to negotiate

a license can conserve judicial resources.

Remedies in the International Trade Commission

Patent holders who believe that imported products infringe their patents may file a

complaint with the International Trade Commission (ITC) under Section 337 of the Tariff Act of

1930. Panelists expressed concern that patentees that are unlikely to obtain an injunction in

district court under eBay may instead pursue a case in the ITC. Such patentees might include

patent assertion entities (PAEs) and those whose patent is subject to a RAND commitment for

use in a standard. The Federal Circuit has held that eBay’s equitable test does not apply to ITC

decisions to grant an exclusion order barring importation of infringing products. Thus, unlike the

situation in district court, a finding of infringement in the ITC has led to a nearly automatic
19 U.S.C. § 1337(a)(3). 23

19 U.S.C. § 1337(d)(1). 24

30

exclusion order, which is sometimes tantamount to an injunction. In some circumstances, this

outcome could generate hold-up and harm innovation and competition.

Section 337 provides two mechanisms through which the ITC can limit the potential

harm from hold-up. The first is through the domestic industry requirement. To file suit in the

ITC, a patent owner must meet the domestic industry requirement, which can be satisfied by

showing “substantial investment in [the patent’s] exploitation, including engineering, research

and development or licensing.” The ITC should interpret the domestic industry requirement as 23

not satisfied by ex post licensing activity solely focused on extracting rents from manufacturers

based on marketed products. Consistent with the legislative history’s concern with innovation

and the language of the statute, relevant licensing activity can be that which “exploits” the patent

through technology transfer that can result in the commercialization of new products and

services. This interpretation would limit access to the ITC for PAEs, who are least likely to

obtain an injunction under eBay, but not other non-practicing patent owners who compete in

technology markets.

Second, Section 337 requires the ITC to consider “the public health and welfare,

competitive conditions in the United States economy, the production of like or directly

competitive articles in the United States, and United States consumers” in deciding whether to

grant an exclusion order. The ITC has rarely used this public interest provision to deny a 24

remedy. But its language should allow consideration of whether an exclusion order based on a

minor patented component of a complex product can unduly harm consumers by causing holdup, distorting competition, raising prices and deterring innovation. These concerns can be

especially powerful when a patentee asserts a patent in the ITC that is subject to a RAND

commitment against standardized technology.

Recommendation The FTC recommends that the ITC consider whether only

those licensing activities that promote technology transfer “exploit” patented

technology within the meaning of Section 337, and therefore satisfy the domestic

industry requirement. The FTC also recommends that the ITC incorporate

concerns about patent hold-up, especially of standards, into the decision of

whether to grant an exclusion order in accordance with the public interest

elements of Section 337.
31

CHAPTER 1

EVOLVING PATHWAYS OF INNOVATION: OPEN INNOVATION, TECHNOLOGY

TRANSFER AND EX ANTE PATENT TRANSACTIONS

I. INTRODUCTION .................................................... 32

II. THE INCREASING IMPORTANCE OF OPEN INNOVATION . . . . . . . . . . . . . 34

A. Open Innovation Embraces Technology Transfer . . . . . . . . . . . . . . . . . . . . 34

B. The Role of Small Companies and Start-ups in Open Innovation . . . . . . . 36

III. PATENTS FACILITATE OPEN INNOVATION AND TECHNOLOGY

TRANSFER .......................................................... 39

A. Patent Exclusivity Encourages Invention, Development and Disclosure . . 40

B. Patenting by Small Companies and Start-ups . . . . . . . . . . . . . . . . . . . . . . . . . 43

IV. AREAS OF PATENT POLICY THAT AFFECT OPEN INNOVATION AND

TECHNOLOGY TRANSFER . ......................................... 46

V. CONCLUSION . ...................................................... 48
OFFICE OF SCI. AND TECH. POLICY, NAT’L ECON. COUNCIL, EXECUTIVE OFFICE OF THE PRESIDENT, A 1

STRATEGY FOR AMERICAN INNOVATION: DRIVING TOWARDS SUSTAINABLE GROWTH AND QUALITY JOBS

4 (2009).

LEWIS M. BRANSCOMB & PHILLIP E. AUERSWALD, DEPT. OF COMMERCE, BETWEEN INVENTION AND 2

INNOVATION: AN ANALYSIS OF FUNDING FOR EARLY-STAGE TECHNOLOGY DEVELOPMENT 32-41 (2002).

FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT 3

LAW AND POLICY, Exec. Summ., at 1 (Oct. 2003) (“2003 FTC IP Report”), available at

http://ftc.gov/os/2003/10/innovationrpt.pdf.

A second report, issued jointly by the Federal Trade Commission and the Department of Justice 4

Antitrust Division in 2007, considers how antitrust law and competition policy can maintain an alignment

with the patent system that best promotes innovation. FED. TRADE COMM’N & DEPT. OF JUSTICE

ANTITRUST DIV., ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING

INNOVATION AND COMPETITION (April 2007).

32

CHAPTER 1

EVOLVING PATHWAYS OF INNOVATION: OPEN INNOVATION, TECHNOLOGY

TRANSFER AND EX ANTE PATENT TRANSACTIONS 

I. INTRODUCTION

Innovation benefits consumers through the development of new products, processes and

services that can improve lives and address unmet needs. It is key to meeting society’s greatest

challenges in areas as diverse as energy production, communications and health care, and it is

essential to sustained economic growth and global competitiveness. But innovation is a 1

complex process. It involves a series of steps from idea to invention through development to

commercialization. Both the invention process and the development process can be expensive,

risky and unpredictable.2

The goal of the patent system is to promote innovation in the face of that expense and

risk. By preventing copying that might otherwise drive down prices, the patent system allows

innovators to recoup their investment in research and development (R&D). The patent system’s

exclusive right promotes innovation, but so too does competition, which drives firms to produce

new products and services in the hope of obtaining an advantage in the market. As discussed in

the FTC’s 2003 Report on the patent system, To Promote Innovation: The Proper Balance of

Competition and Patent Law and Policy, the policies that most successfully promote innovation

and enhance consumer welfare are those that align the patent system and competition policy by

balancing exclusivity and competition. Many of the recommendations in the 2003 FTC IP 3

Report focus on improving patent quality a means of achieving that balance.4

Areas of patent law beyond those affecting patent quality can have a significant impact on

how the patent system aligns with competition policy. Hearings held by the FTC during 2008
Transcripts and agendas for the hearings and written submissions are available at

5

http://www.ftc.gov/bc/workshops/ipmarketplace/. Appendices C, D and E provide lists of hearings

participants, agendas and written submissions.

ASHISH ARORA, ANDREA FOSFURI & ALFONSO GAMBARDELLA, MARKETS FOR TECHNOLOGY:

6

THE ECONOMICS OF INNOVATION AND CORPORATE STRATEGY 12-13 (2001). 

33

and 2009 explored two: (1) notice, meaning how well a patent informs the public of what

5

technology is protected; and (2) remedies, meaning damages and injunctions following a finding

of patent infringement. Understanding how patent notice and remedies affect innovation and

competition requires that we first examine how the pathways of innovation and the role of

patents have evolved. That is the goal of this chapter.

In one important aspect of that evolution, many firms are increasingly embracing “open

innovation.” In a traditional or closed model of innovation, a firm relies on its own R&D to

create the products it markets. But a firm that pursues an open innovation strategy recognizes

that valuable ideas can originate with others and seeks to acquire those inventions that fit its

business model. Many of the inventions acquired and commercialized by large firms originate

with start-ups and small companies, which account for a steadily increasing percentage of R&D

spending. 

Consumers benefit from open innovation strategies. Technology transfer permits a

division of labor between those who invent and those who manufacture most efficiently. This

can speed up the rate of innovation and result in broader, faster distribution of new products to

consumers. By providing a pathway for invention without commercialization, technology

transfer also lowers barriers to entry for inventors who do not have access to the capital required

to build manufacturing facilities and establish distribution channels. Easier entry supports 6

additional sources of invention, which increases competition among technologies to be further

developed or incorporated into products. That competition benefits consumers by resulting in

better, cheaper products. Moreover, competition among technologies for development funding is

an important mechanism for allocating scarce resources to those inventions having the greatest

chance of generating the products most valued by consumers.

The patent system facilitates open innovation and technology transfer in ways that

implicate patent remedies and the notice function. The exclusive patent right creates incentives

for sellers of technology to invent and buyers of technology to make the purchase and invest in

further development. But the nature of the exclusive right depends in part on the remedies

available for its infringement. Patents also define rights based on intangible ideas, which helps

create a market for technology and makes contracting easier. But a patent’s success in doing so

depends upon how well it provides notice of what technology it protects. Chapters 3-8 of this

report draw on the insights and information of this chapter in analyzing the law of patent notice

and remedies and making recommendations to improve them.
Chesbrough at 214-15 (5/4/09); OPEN INNOVATION: RESEARCHING A NEW PARADIGM 2-3 (Henry 7

Chesbrough, Wim Vanhaverbeke & Joel West eds., 2006) (contrasting closed innovation models like

AT&T’s Bell Laboratories with open innovation models). Even in a closed innovation model,

knowledge transfer from one firm to another that stimulates further innovation can occur through reverse

engineering and review of patent documents.

See, e.g., Yen at 47 (12/5/08) (“Cisco invests more than $5 billion annually in R&D.”); Krall at 73

8

(3/18/09) (“Sun reinvests between 15 and 20 percent of its annual revenues back into R&D annually.”);

Miller at 148 (3/18/09) (“[Procter and Gamble] invests over $2.2 billion per year in research and

development and we employ over 8,900 scientist[s] in 29 research centers in 13 countries.”); Watt at 12

(5/4/09) (Amgen spent $3 billion on R&D in 2008); Myers at 220-21 (3/18/09) (Pfizer spends 20% of its

revenue on R&D).

OPEN INNOVATION: RESEARCHING A NEW PARADIGM, supra note 7, at 2-3. The model of “open 9

innovation” discussed here involves technology transfer in and out of firms. It is not limited to

innovation strategies based on open source software, as the term “open innovation” is sometimes used.

See id. at 82-84 (discussing open innovation based on open source software).

Id. 10

34

II. THE INCREASING IMPORTANCE OF OPEN INNOVATION

In a traditional or “closed” model of innovation, a company’s R&D activities lead to

internally developed products that the company then markets. The company transfers little

technology either into or out of the firm as part of the R&D process, and it forms few

collaborations. This was the predominant model of innovation for many companies in the past,

especially those having large research arms, like AT&T’s Bell Labs. Certainly, large companies 7

continue to invent and develop new technologies that they then market, but many are 8

increasingly receptive to a model of “open innovation.”9

A. Open Innovation Embraces Technology Transfer

An open innovation strategy allows invention to flow both into and out of the firm. It

recognizes that valuable inventions can come from outside the firm and seeks those that fit well

with a firm’s business model. Open innovation can involve collaboration or technology transfer

from a company that has invented an idea to another that further develops, uses or markets it. 

Such technology transfer allows the acquiring firm to leverage external sources of knowledge to

support its own innovation. 

10

For example, a panelist from Procter & Gamble (P&G) described how that company is

pursuing an open innovation approach. Traditionally, P&G’s new products came from internal

R&D efforts. But in 2000, the company adopted a goal of acquiring 50% of its innovation from

R&D conducted outside of the company. It exceeded that goal in 2008. As a result, the company

reports that its R&D productivity has increased by 60%, the rate of its innovation has doubled,
Miller at 148-50, 154 (3/18/09).

11

Myers at 220-21 (3/18/09).

12

Graham at 137 (4/17/09); see, e.g., Shafmaster at 214 (3/18/09) (of seven therapies produced by 13

Genzyme in the last six years, five are protected, in part, by intellectual property in-licensed from

universities, and two are based on intellectual property acquired by Genzyme). 

Cockburn at 188-89 (4/17/09); Rogers at 103 (3/18/09) (in the past four years, Qualcomm has acquired 14

over a dozen companies); Yen at 47 (12/5/08) (Cisco has acquired 130 companies, mostly start-ups, to

bring in new technology); Valz at 236 (12/5/09) (“small entities that are actually producing great

technology along side IP will get noticed and will do really well” in acquisition in the IT sector); Thomas

at 73 (4/17/09) (reporting that “some [of] our most valuable intellectual property has come from smaller

companies”).

Phelps at 244 (5/4/09); Bergelt at 81-82 (4/17/09) (In IT industries, “we’re not doing siloed parlayed 15

invention of fundamental technologies the way we did 10 or 15 years ago. We’re now inventing higher

up in the stack collaboratively.”); see also BRANSCOMB & AUERSWALD, supra note 2, at 43 (“By the

1990s, firms began to out-source more of their needs for component innovation to small and medium

sized enterprises.”).

Valz at 235-36 (12/5/09).

16

Crean at 103 (5/4/09) (listing legal tools for importing technology into a large company). 17

35

and costs have fallen. As a representative of the company explained, by combining P&G’s

internal innovation with outside sources, “one plus one makes three or five instead of two.”11

Similarly, to create new products, large pharmaceutical and biotechnology companies

often depend upon external sources of technology, including universities, start-ups and

collaborations with other companies. Start-ups typically develop early-stage technology, 12

perhaps obtained from a university, and move it closer to a viable product. If successful, they

may partner with or become acquired by a pharmaceutical company, which tests and

commercializes the product. For many large pharmaceutical and biotech companies, a majority

of their approved drug products begin with externally developed technology.13

Companies in the information technology (IT) sector also acquire new, externally

developed technology. As one commentator explained, technologies have become so complex 14

that it is not feasible for any one company to be the source of all the innovative aspects of a

product. Companies must look outside. One panelist reports that open technology 15

development has “thrived” in the software and internet industries. IT companies use a variety 16

of mechanisms to bring in new technology, including acquisition of start-ups, collaborative

arrangements, and IP licenses. For instance, a manufacturing company may take a license

17
Comment of Innovation Alliance at 2 (2/5/09); Millien at 22 (12/5/08) (noting companies, including 18

AmberWave and Rambus, that have similar business models).

Ziedonis at 260 (5/4/09); Bronwyn H. Hall & Rosemarie Ham Ziedonis, The Patent Paradox Revisited: 19

An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995, 32 RAND J. ECON. 101-

28 (2001); Arora at 31-32 (3/19/09).

OPEN INNOVATION: RESEARCHING A NEW PARADIGM, supra note 7, at 1-3; BRANSCOMB &

20

AUERSWALD, supra note 2, at 44; Chesbrough at 215-16 (5/4/09); Phelps at 247-48 (5/4/09) (describing

the IP Ventures unit of Microsoft that licenses-out technology for development); id. at 245 (IBM license

to Motorola and Intel of technology it did not use).

Horton at 168-69 (3/18/09) (GE experience); Miller at 165 (3/18/09) (explaining that P&G invented 21

enzymes useful for detergent that another company licenses for contact lenses).

Griswold at 163 (3/18/09) (3M obtains revenue and develops relationships through out-licensing); 22

Miller at 150 (3/18/09) (P&G); Stec at 166 (3/18/09) (Ford); Philips at 167 (3/18/09) (Exxon-Mobil).

National Science Foundation, Science and Engineering Indicators 2006, available at 23

http://www.nsf.gov/statistics/seind06/c4/c4s1.htm; Samuel Kortum & Josh Lerner, Assessing the

Contribution of Venture Capital to Innovation, 31 RAND J. ECON. 674 (2000) (estimating that by 1998,

venture funding accounted for about 14% of U.S. innovative activity). See also Miller at 150 (3/18/09)

(acknowledging that “innovation was increasingly done at small and mid-sized entrepreneurial

companies, universities, government labs and by individuals”); Bright at 21 (5/4/09) (companies look to

start-ups and universities to create new ideas and new solutions that the company can develop).

36

from a design house that develops technology solely in the hopes of licensing it. This model 18

has become increasingly prevalent in the semiconductor industry since the late 1980s with the

emergence of companies that patent their designs and then license them to chip manufacturers.

19

In addition to acquiring technology from external sources, a manufacturing company that

pursues an open innovation strategy may also supply its internally developed technology to other

firms. If a company makes a promising invention that does not fit well with its business plan, it

may seek to sell or license that technology to another firm rather than leave it on the shelf. That 20

might occur when a company pursues multiple solutions through R&D but chooses only one to

implement. The other solutions may still show promise for different applications. Looking 21

outside the company for partners to develop and commercialize the otherwise unused technology

provides a return on R&D investment, but it also establishes collaborative relationships that can

lead to more technology development.22

B. The Role of Small Companies and Start-ups in Open Innovation

Small companies play an important role in an open innovation paradigm. Data collected 23

by the National Science Foundation indicates that from 1981 to 2005, most of the growth in U.S.

industrial R&D spending came from small companies rather than large. In 1981, 70% of R&D

spending in the United States was undertaken by companies with more than 25,000 employees. 
Chesbrough at 212-17 (5/4/09). For a more complete breakdown of R&D spending by company size 24

and year, see Henry Chesbrough, Specialization and Markets for IP, presented at FTC Hearing: The

Evolving IP Marketplace (May 4, 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/may4/docs/bchesbrough.pdf. 

In the early 1970s, only 70 large, industrial R&D firms accounted for the majority of private R&D 25

being performed. By 2000, those firms accounted for less than one third of R&D. Hunt at 54-56

(3/19/09); see Robert M. Hunt, The Federal Trade Commission’s Hearing on “The Evolving IP

Marketplace”, presented at FTC Hearing: The Evolving IP Marketplace (March 19, 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/mar18/docs/rhunt.pdf.

Ashish Arora, Marc Ceccagnoli & Wesley M. Cohen, Trading Knowledge: An Exploration of Patent 26

Protection and Other Determinants of Market Transactions in Technology and R&D, in FINANCING

INNOVATION IN THE UNITED STATES, 1870 TO THE PRESENT 366, 367 (Naomi R. Lamoreaux & Kenneth

L. Sokoloff eds., 2007) (“the available evidence points to a renewal of market exchange of technology”);

Hunt at 57 (3/19/09) (“efficient markets for technology are more important than ever”); Meyer at 68-69

(2/12/09) (observing that “oftentimes [commercialization] doesn’t happen within the context of one

entity”). 

Phelps at 247-48 (5/4/09) (describing how Microsoft creates spin-out companies). 27

Universities are able to license technology developed with government funding through the Bayh-Dole

28

Act. University and Small Business Patent Procedures Act, 35 U.S.C. §§ 200-212 (2006). See

Soderstrom at 7-9 (3/18/09) (discussing Bayh-Dole Act). Universities may also receive direct funding

from corporate sponsors and enter licensing agreements based on that funding. Mimura at 19-20, 50-55

(5/4/09) (describing $500 million award by British Petroleum to the University of California’s Lawrence

Berkeley Laboratory and the University of Illinois at Urbana-Champaign made in exchange for licensing

options).

37

Only 4.4% was undertaken by companies with fewer than 1,000 employees. By 2005 those

numbers had changed dramatically. Companies with more than 25,000 employees accounted for

only 37.6% of R&D spending while the R&D share of companies with fewer than 1,000

employees had grown to 24.1%. Since 1980, small and younger firms have accounted for most

24

of the rise in research spending.25

With the growing amount of research and invention located in small companies,

technology transfer from small, specialized firms to larger manufacturing firms has become an

increasingly important pathway of open innovation. Technology can be transferred, or “spun- 26

out” in the other direction too, from a large company to a start-up. Universities provide another 27

important source of early-stage technology that can be transferred to start-ups or large

companies. In 2007, over 500 new companies formed based on technology invented in 28
Soderstrom at 8-9 (3/18/09); see also WARF Comment at 1-2 (5/19/09); NATIONAL ACADEMY OF 29

SCIENCES, COMPUTER SCIENCE AND TELECOMMUNICATIONS BOARD, INNOVATION IN INFORMATION

TECHNOLOGY 5-8 (2003), available at http://www.nap.edu/html/innovation_in_IT/reportbrief.pdf

(university research in information technology led to new product categories with billion-dollar markets).

U.S. PATENT AND TRADEMARK OFFICE, U.S. COLLEGES AND UNIVERSITIES: UTILITY PATENT GRANTS 30

1969-2008, available at http://www.uspto.gov/web/offices/ac/ido/oeip/taf/univ/asgn/table_1_2008.htm.

ADAM SMITH, THE WEALTH OF NATIONS (5th ed. 1905) (providing the fountainhead of economic 31

thought about the substantial benefits flowing from division of labor and specialization).

ANTHONY BREITZMAN & DIANA HICKS, OFFICE OF ADVOCACY, SMALL BUS. ADMIN., AN ANALYSIS OF 32

SMALL BUSINESS PATENTS BY INDUSTRY AND FIRM SIZE, at v (Nov. 2008) (asserting that small

companies are more likely to develop an emerging technology and attempt to build a business around it

than are large companies).

Edmund W. Kitch, Elementary and Persistent Errors in the Economic Analysis of Intellectual Property,

33

53 VAND. L. REV. 1727, 1740 (2000); Arora et al., supra note 26, at 366-67; Arora at 33-34 (3/19/09);

Stern at 39 (3/19/09); Bessen at 45 (3/19/09); Bright at 21-22 (5/4/09); Miller at 155 (3/18/09).

This funding can come from venture capitalists, angel investors and family and friends. Stuart J.H. 34

Graham, Robert P. Merges, Pam Samuelson & Ted M. Sichelman, High Technology Entrepreneurs and

the Patent System: Results of the 2008 Berkeley Patent Survey, 24 BERKELEY TECH. L.J. 1255, 1306-07

(2010).

James Young Comment (2/5/09); Arora et al., supra note 26, at 367; BRANSCOMB & AUERSWALD,

35

supra note 2, at 44 (small companies use joint ventures with large companies for access to manufacturing

and marketing resources).

38

universities, leading to over 700 new products. In that same year, colleges and universities 29

were awarded over 3,000 U.S. patents.

30

Open innovation based on technology transfer provides significant benefits to consumers. 

It allows a division of labor between the creation of new technology and the manufacture and

marketing of new products, with the efficiencies of specialization. Commentators report that 31

small companies are often more creative and agile than large companies when inventing new

technology. But a large company may be better able to develop the technology into a 32

marketable product and deliver it to consumers. This is especially true when the small company

lacks the resources needed for commercialization. Thus, the goal of many start-ups is to attract

33

the investment needed for initial development, demonstrate the soundness of its technology, 34

and become an attractive target for acquisition or collaboration with a larger company.35

Open innovation based on technology transfer also benefits consumers by increasing

sources of new technology and competition among technologies. By removing the need for an

inventor to commercialize his invention himself, technology transfer lowers barriers to entry. 

For instance, the ability of semiconductor design houses to license their technology has allowed

them to specialize in one aspect of the semiconductor industry without the need to own
Chesbrough at 216-22 (5/4/09). See also Maghame at 169-70 (2/11/09) (stating that Tessera, a $1.2

36

billion company, has signed up over 50 major companies as licensees); Lord at 174 (2/11/09)

(“[Amberware] decided from the outset that the flexibility of the licensing business model made a lot of

sense for the company.”); Ryan at 51 (4/17/09) (predicting an increasing number of pure invention and

innovation companies that license their technologies).

A STRATEGY FOR AMERICAN INNOVATION, supra note 1, at ii, 6-7; BRANSCOMB & AUERSWALD, supra 37

note 2, at 35 (arguing that inventions compete for development funding in a “Darwinian Sea” with “big

fish and little fish contending, with survival going to the creative, the agile, the persistent”).

Chesbrough at 216 (5/4/09) (“[I]ntellectual property can enable this division of the innovation labor.”);

38

Arora at 29-31 (3/19/09) (a market for technology is necessary to establish a division of labor in

innovation); Bessen at 45 (3/19/09).

Stern at 37-41 (3/19/09) (discussing the hypothesis that “effective intellectual property promotes trade

39

in the market for ideas, and, therefore, enhances the efficient cooperative commercialization of new

technology”); id. at 42 (licensing by entrepreneurs increases dramatically immediately following patent

grant); Meyer at 69 (2/12/09) (patents encourage “the dissemination of knowledge that’s developed by

one set of individuals and then can be used throughout the economy”).

Horton at 147 (3/19/09). See also Kieff at 60-61 (3/19/09) (patents and strong patent rights facilitate 40

coordination among owners of complementary assets).

39

expensive manufacturing facilities. Lower barriers to entry into the creation of technology can

increase sources of R&D. This in turn can increase competition among technologies for 36

funding to be developed and commercialized. That competitive process allocates resources to

the most promising ideas having the greatest chance of generating products most valued by

consumers.

37

III. PATENTS FACILITATE OPEN INNOVATION AND TECHNOLOGY

TRANSFER

Patent rights facilitate an open innovation strategy, including collaboration and

technology transfer, in multiple ways. This can be especially true when start-ups and small 38

companies are involved. This section examines how patents facilitate open innovation in order

to identify areas of patent law that impact this dynamic and the alignment of patent law and

competition policy.

Patents facilitate open innovation and technology transfer by creating rights based on

intangible concepts, which makes contracting easier and helps create a market for ideas. As 39

one panelist explained, “the IP serves a very valuable function in being a facilitating force in

collaboration with third parties, joint ventures, joint developments. It’s a tool that enables us to

do more business with more players in a more open and collaborative fashion.” In a 40

collaboration, patents can help identify what each party brings to the relationship and how
Miller at 154 (3/18/09); Griswold at 159 (3/18/09); OPEN INNOVATION: RESEARCHING A NEW 41

PARADIGM, supra note 7, at 10; Chesbrough at 227-28 (5/4/09); Biotechnology Industry Organization

(BIO) Comment at 2 (5/15/09).

Phelps at 250 (5/4/09) (intellectual property rights are the necessary “scaffolding” to build a bridge 42

between two parties).

Ex ante patent transactions contrast with ex post patent transactions, which occur after the user of the 43

technology has invested in its independent invention and development, without input from the patentee. 

In this case, the licensee/purchaser already practices the patented technology when approached by the

patent owner, so the patent transaction transfers only a legal right, not technology. Chapter 2 discusses

the effects of ex post patent transactions on innovation and competition among technologies.

See Miller at 154 (3/18/09) (P&G’s open innovation model depends on strong patent protection).

44

35 U.S.C. § 154(a)(2). 45

FREDERIC M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC 46

PERFORMANCE (3d ed. 1990); Kenneth Arrow, Economic Welfare and the Allocation of Resources for

Innovation, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL FACTORS 609

(1962). See also Thomson at 88-89 (5/4/09) (patent licensing provides revenues to cover R&D expense

while preventing competitors from copying, “under sell[ing] your price and driv[ing] you out of

business”).

40

products of the collaboration will be managed. In a technology transfer agreement, patents can

41

define the rights to be transferred.

Thus, patent transactions (licensing and sales) form the basis of many technology transfer

agreements. Patent transactions that occur as part of a technology transfer agreement can be 42

considered ex ante because they occur before the purchaser has obtained the technology through

other means. Such ex ante patent transactions accompanied by technology transfer have great

potential for advancing innovation, creating wealth and increasing competition among

technologies.43

A. Patent Exclusivity Encourages Invention, Development and Disclosure 

Patents play additional roles in facilitating open innovation and technology transfer that

go beyond defining rights and supporting ex ante patent transactions. They can encourage sellers

of technology to invent in the first place and buyers of technology to make the purchase and

invest in further development. By giving a patent owner the right to exclude others from 44

making, using or selling the invention for 20 years, a patent enables him to capture returns from 45

R&D investment by preventing others from appropriating the invention and driving down prices

through infringing competition.46

For the patent system to promote innovation effectively, it must do more than encourage

invention. It must also encourage the development of inventions to the point of
Kieff at 60 (3/19/09). 47

The period between the basic research generating an invention and the innovation resulting in a

48

commercializable product has been called the “Valley of Death” to dramatize the practical, technological

and financial difficulties of early-stage development. See BRANSCOMB & AUERSWALD, supra note 2, at

35-41 (detailing those difficulties).

SCHERER & ROSS, supra note 46, at 440. 49

McCurdy at 43 (12/05/08) (IBM’s development budget was 20 times greater than its research budget). 50

SCHERER & ROSS, supra note 46, at 444; Edmund W. Kitch, The Nature and Function of the Patent 51

System, 20 J.L. & ECON., 265, 271-72, 276 (1977); Katznelson at 22-23 (3/18/09) (describing how

development process evolves and the need to file continuation applications to protect potential products);

Horton at 146-47 (3/18/09) (patent rights are needed to support “a return on the successful investments

sufficient to make up for the unsuccessful investments”).

Shema at 15-16, 25 (5/4/09) (“ZymoGenetics and its products would not exist but for patents and but 52

for confidence in a strong U.S. patent system.”); Soderstrom at 9-10 (3/18/09) (initial biotech inventions

are “a long way from the marketplace and . . . require a substantial investment over a period of time”);

FED. TRADE COMM’N, EMERGING HEALTH CARE ISSUES: FOLLOW-ON BIOLOGIC DRUG COMPETITION 28-

30 (June 2009) (describing the innovation cycle for biopharmaceuticals); Pharmaceutical Research and

Manufacturers of American (PhRMA) Comment at 5-6 (2/10/09).

Myers at 221 (3/18/09) (“[I]nnovation by our R&D operations and strong patent protection for that

53

innovation is critical to [Pfizer’s] success.”); Jensen at 218 (3/18/09) (medical device).

41

commercialization, either by the original inventor or through technology transfer by another

firm. An invention may require extensive development before any commercial application is 47

possible. In a modern economy, development accounts for more than three-fourths of industrial 48

R&D expenditures. One panelist explained, “[t]he creation of an idea is frequently the least 49

costly and least time consuming aspect of product success. Development budgets vastly exceed

research budgets in R&D intensive companies. Much more time and substantially more

investment is required to commercialize a product or service embodying an invention than to

create the invention in the first place.”50

Through the patent, an inventor or purchaser of technology can carve out an exclusive

area for development and commercialization in the hope of recouping development costs. For 51

instance, the ability of the patent system to protect early-stage invention and allow investors to

recoup development costs is critical to the biopharmaceutical industry, where product

development is lengthy, costly and unpredictable. Panelists from a wide range of other

52

industries, including the pharmaceutical and medical device industries, diverse manufacturing 53
Griswold at 142-43 (3/18/09) (importance of patent system to 3M); Horton at 147 (3/18/09) (at GE, 54

“we see IP as a very strong motivating force to drive innovation and investment in R&D”); Stec at 152

(3/18/09) (“patents are very important to Ford”); Phillips at 152 (3/18/09) (“But for a strong patent

system in the United States, much of [Exxon’s] technology would not be developed or if developed

would not be licensed.”).

Rodgers at 136 (3/18/2009) (“Qualcomm’s “R&D is dependent on a strong patent system.”); Lutton at 55

90 (5/4/09) (“Patents do allow [Apple] to quantify, capture, protect, and in some cases license the value

of our innovations.”); Harris at 72 (3/18/09) (AOL holds 500 patents and uses patents to encourage

innovation); Guitierrez at 93, 129-30 (5/4/09) (IP, including patents, is important for protecting

innovation in the software industry where barriers to copying are low).

As documented and discussed at length elsewhere, however, the role that patents play in protecting a 56

company’s technology and how that role compares to other means of recouping R&D costs varies by

industry and by the particular circumstances of the company and technology involved. For instance, first

mover advantage and trade secrets are often important methods of recouping R&D investments,

especially in the IT sector and software industry. See 2003 FTC IP Report, ch. 3, at 1-3; JAMES BESSEN

& MICHAEL J. MEURER, PATENT FAILURE: HOW JUDGES, BUREAUCRATS, AND LAWYERS PUT

INNOVATORS AT RISK (2008); DAN L. BURK & MARK A. LEMLEY, THE PATENT CRISIS AND HOW THE

COURTS CAN SOLVE IT (2009); W.M. Cohen, R. R. Nelson, & J.P. Walsh, Protecting Their Intellectual

Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not), (Nat’l Bureau of

Econ. Research, Working Paper No. 7552, 2000).

SCHERER & ROSS, supra note 46, at 444. See Katznelson at 40-42 (3/19/09) (reviewing patents 57

provides technical information and leads to design-around); F. Scott Kieff, Coordination, Property, and

Intellectual Property: An Unconventional Approach to Anticompetitive Effects and Downstream Access,

56 EMORY L.J. 327 (2006) (patents encourage collaboration).

Katznelson at 27, 34 (3/18/09); Van Pelt at 119-20 (5/4/09) (start-ups in the IT sector may also seek 58

patents to provide protection against a large firm adopting its technology); Arora et al., supra note 26, at

18-19; Hall at 204 (5/4/09).

42

industries, and the IT sector emphasized the importance of patents to a robust innovation 54 55

strategy.56

Patents can also facilitate open innovation and technology transfer by disclosing available

technology. The disclosure of scientific and technical information is part of the consideration

that the inventor gives the public in exchange for the exclusive patent right. By offering

protection from appropriation even after the invention becomes public, patents encourage

inventors to make public what they might otherwise keep secret. That disclosure provides

information to potential buyers and helps identify opportunities for collaboration. Having 57

patents and patent applications can also protect start-ups from copying when they must disclose

their inventions to potential investors and collaborators.58
Among those that had received venture capital funding, for every $10 million invested, medical device 59

start-ups filed an average of nine patents, semiconductor firms an average of 6.5 patents, and software

firms an average of about three patents per $10 million invested. Ziedonis 188-93 (12/4/09); Rosemarie

Ziedonis, Startups as Sources of New Technologies . . . and Patents, presented at FTC Hearing: The

Evolving IP Marketpace (May 4 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/may4/docs/rziedonis.pdf. In each of the three sectors,

larger, publicly traded firms have similar patenting rates per R&D spending dollar as do the start-ups of

this study. Hall at 200-01 (5/4/09); see Bronwyn Hall, FTC Panel on Markets for IP and Technology,

presented at FTC Hearing: The Evolving Marketplace (May 4, 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/may4/docs/bhall.pdf.

Graham et al., supra note 34, at 1277 tbl.1 (2010) (97% of responding, venture capital backed 60

biotechnology start-ups sought patents; 94% for medical device; 91% of IT hardware; 67% of software).

Start-ups without venture-backing were less likely to hold patents. Id.; see also BREITZMAN & HICKS,

supra note 32 (reporting on patenting rates by small companies).

Graham et al., supra note 34, at 1287-90. 61

Sousa at 89, 116-17 (5/4/09) (explaining that investors in solar cell technology company wanted to see 62

that a start-up has patents, but not all are sophisticated about the content and quality of individual

patents); but see Devore at 43 (5/4/09) (“Most venture capitalists use attorneys who are trained . . . to

actually look through the portfolios . . . freedom-to-operate analysis is getting more and more savvy.”).

Singer at 228-29 (3/18/09) (“[W]ithout that patent estate, there’s really nothing for the venture firm to 63

make an investment in.”); Devore at 31 (5/4/09) (venture capitalists seek “the ability to claim the ongoing

43

B. Patenting by Small Companies and Start-ups

The ability of patents to play several roles in facilitating open innovation can be

particularly important to small companies and start-ups because they often transfer their

technology to larger companies for commercialization. That dynamic, coupled with the dramatic

growth in the amount of R&D conducted by small companies, warrants a closer examination of

how small companies pursue and use patents to further innovation. That information can help

identify the issues that should inform any attempts to align patent and competition policy.

In some sectors, patenting by start-ups appears to be common. One study of start-ups

founded between 1987 and 1999 revealed that patenting by start-ups was common in the medical

device and semiconductor sectors. A 2008 survey of high-technology entrepreneurs also found 59

that patent ownership was widespread among responding venture capital-backed start-ups in the

biotechnology, medical device and IT hardware industries, although less common in the software

industry. Patenting may be common because start-ups view it as an important means of 60

securing competitive advantage from their technologies.61

Panelists representing start-ups explained that having patents was important to their

ability to attract investment capital. Without a product, one of a start-up’s most valuable assets 62

may be its patent estate, and investors may view patents as important for recouping their

investment, according to panelists. Investors may also view patents as a signal of technical 63
rights to any of the IP that comes from the future research”); Bellon at 227-28 (3/18/09).

See Graham et al., supra note 34, at 1306-07; Graham at 217 (4/17/09); Cockburn at 218 (4/17/09); Van 64

Pelt at 87 (5/4/09) (IT start-ups see patents as a risk factor as well); Lutton at 123 (5/4/09) ( “The patent

value and its necessity to an enterprise is judged really in relation to the business options that it

creates.”).

Kiani at 13 (3/18/09); Bright at 30-31 (5/4/09) (At a medical device start-up, “the amount of time that I 65

spend answering questions on the IP is significant.”). 

Woolston at 33 (3/18/09) (“the world definitely changes when a patent issues”); Soderstrom at 35

66

(3/18/09) (in the IT sector, you “don’t even have a conversation” with potential licensors and investors

until a patent issues).

Van Pelt at 118-19 (5/4/09) (explaining the role of patents in different business models).

67

Graham et al., supra note 34, at 1306-07. See also PhRMA Comment at 6-7 (2/10/09); BIO Comment 68

at 1-2 (5/15/09); American Intellectual Property Law Association Comment at 1-2 (5/15/09); Lasersohn

at 185 (2/11/09). Patents appear less important but not irrelevant for attracting investment in software

start-ups. Graham et al., supra note 34, at 1308-1309.

Patents appear more important for attracting investment to biotechnology and medical device start-ups 69

compared to software and Internet start-ups. Graham et al., supra note 34, at 1282-83; Lemley at 194

(4/17/09) (patents may help attract venture capital for software, but investors place less emphasis on

validity and scope of the patents). See also Ronald J. Mann & Thomas W. Sager, Patents, Venture

Capital, and Software Start-ups, Research Paper No. 057 (2006), available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=802806; R. J. Mann, Do Patents Facilitate Financing

in the Software Industry?, 83 TEX. L. REV. 961 (2005).

44

merit and promise, or as a defensive measure supporting freedom to operate where the patents of

competitors present a risk. The founder of a medical device company elaborated, “the patent 64

was very important because significant investment was necessary. . . . Every time we got serious

with a venture capitalist, they wanted to understand if our patents had teeth, if we could really

protect our innovation, and fortunately we did.” Panelists representing IT start-ups stated that

65

those companies often needed patents to attract investment, although the importance of having 66

patents depended on the business model of the start-up. A survey of start-up companies 67

confirms that patents play an important role in attracting all types of investment, but in particular

venture capital, although the degree of importance appears to vary by industry. 68 69

For some start-ups, one important feature of the patent system’s exclusive right is that it

can allow a new entrant to obtain and maintain a competitive advantage in the market. In some

cases, when a new entrant challenges an entrenched incumbent with market power, the new

entrant’s patents may be critical to its ability to survive and inject competition into a product

market. For instance, one panelist described how patent protection allowed him, as an

independent inventor, to develop a medical device invention into a start-up and ultimately a

NASDAQ-traded company. His product quickly took market share from the market leader

because of its significant advantages. But that market leader began infringing his patent in an
Kiani at 12 (3/18/09); see also id. at 11-16; Masimo Home Page, 70 http://www.masimo.com.

Graham et al., supra note 34, at 49-51. 71

Watt at 48 (5/4/09) (noting that Amgen will not invest in a start-up if the patents are not viable, if they 72

do not afford freedom to operate, or if they cannot create sufficient exclusivity to reward the investment).

Bright at 21-22 (5/4/09) (utilizing start-ups’ intellectual property is efficient). 73

Thompson at 107 (5/4/09); Lutton at 124 (5/4/09) (start-ups want to obtain patents because they

74

preserve options that a later-acquiring entity may want to exploit).

Van Pelt at 105, 118-19 (5/4/09); Rogers at 103-04 (3/18/09) (start-up’s patent position is “absolutely 75

critical” to acquisition decision); Sarboraria at 104 (3/18/09) (agrees); Krall at 106-07 (3/18/09)

(acquisition strategy of adding complimentary technology requires an examination of the target’s patent

position).

Rogers at 103 (3/18/09).

76

Guitierrez at 102-03 (5/4/09). 77

Lutton at 102 (5/4/09). 78

45

attempt to win back customers. Patent litigation, although long and arduous, was successful. He

explains, “we had many obstacles, and despite the frustrations we had with the patent system,

without it, we wouldn’t be here today.”70

Many start-ups seek patents with less focus on entering the market alone and more to

improving their chances of entering a successful acquisition or collaboration agreement with a

larger firm. For instance, panelists report that a biotech start-up’s patent position is critical to 71

the acquisition decision. Before making the acquisition, the larger company will evaluate

whether the start-up’s patents provide sufficient protection for an exclusive market position and

whether it will have freedom to operate. Panelists report that a start-up’s patent position is 72

important to acquisition decisions in the medical device industry also.73

Several factors may motivate the acquisition of a start-up in the IT industry, but panelists

report that patents can sometimes be a significant element of the acquisition decision. The 74

more an acquisition focuses on obtaining and developing new technology, the more important a

start-up’s patent position will be. One IT panelist described attractive acquisition targets as 75

forward looking, with good technology, and a good patent position. Patents can establish the 76

“bona fides” of the acquisition target, especially when the acquiring company seeks to use the

new technology to differentiate its product. Another panelist explained the patent protection 77

also gives the acquiring company “the opportunity to determine the future course of that

technology beyond just what’s inherent in trade secret and knowhow protection.”78
See e.g., Phelps at 250 (5/4/09); Crean at 96-97 (5/4/09); Stern at 42-43 (3/19/09) (clear and timely

79

patent rights are needed to facilitate a market for ideas); Horton at 164-65 (3/18/09) (clear patent rights

are needed to define technology to be transferred and facilitate collaborative relationships); Bessen at 74-

75 (3/19/09) (same).

Wagner at 192 (4/17/09); Cockburn at 192-93 (4/17/09); Graham at 142-43 (4/17/09) (uncertainty over 80

the scope and validity of patents adds transaction costs to technology transfer and injects inefficiencies

into developing markets for IP).

Id.; Chesbrough at 228 (5/4/09); Stern at 40-41 (3/19/09).

81

See DeVore at 31 (5/4/09); Shema at 32 (5/4/09).

82

2003 FTC IP Report, Exec. Summ., at 5-7. 83

For instance, the report recommends that Congress establish a post-grant review procedure for

84

challenging patent validity and change the standard of proof for invalidating patents from clear and

convincing to preponderance of the evidence. 2003 FTC IP Report, Exec. Summ., at 5-7. Some panelists

suggested a post-grant review procedure for patents as one way to address the problem of patent quality.

Graham at 143 (4/17/09). Other panelists argue that a validity challenge to a start-up’s patent can “shut

down” its ability to raise the capital needed to develop an invention. Woolston at 57-60 (3/18/09)

(discussing the problems of a start-up whose patent is undergoing re-examination in the patent office);

Soderstrom at 60 (3/18/09).

46

IV. AREAS OF PATENT POLICY THAT AFFECT OPEN INNOVATION AND

TECHNOLOGY TRANSFER

The patent system contains multiple areas of law and policy that affect the ability of

patents to facilitate open innovation, technology transfer and ex ante patent transactions. Chief

among the attributes of a well-functioning patent system in this regard are appropriately granted,

valid rights with well-defined boundaries that provide clear notice of what technology is

protected and what is not. Panelists were clear about the importance of these attributes, but 79

they expressed concern about the uncertainty that pervades throughout the patent system and its

effect on innovation and competition. 

80

Panelists identified the uncertain validity of issued patents as an important problem.81

Purchasers of technology often want dependable patent coverage before investing the funds

necessary for development and commercialization. They may decide against an investment if not

sufficiently confident of the protection provided by key patents, according to some panelists.82

Moreover, patents of questionable validity can distort competition and inhibit innovation by

discouraging firms from conducting R&D in areas that the patent improperly covers and raising

costs through litigation or unnecessary licensing. The FTC’s 2003 IP Report discusses the 83

importance of patent quality for achieving a proper balance between exclusivity and competition. 

Because that report makes recommendations for improving patent quality, this report will not 84
Chesbrough at 228 (5/4/09); Stern at 40-41 (3/19/09).

85

Lemley at 147-48 (4/17/09) (observing that notice problems contribute to “leav[ing] a lot of 86

transactional money on the table in the sense that transactions that should have occurred, that would

benefit both the buyer and seller, don’t occur”); Bessen at 50 (3/19/09) (“deals don’t happen that could

happen”); Wagner at 192 (4/17/09) (“every bit of uncertainty . . . undermines” the ability to engage in

technology transfer).

Phelps at 250 (5/4/09). 87

There is a trade-off between clear notice and the scope of patent protection, however. Changes that

88

might significantly increase notice might not fully protect an invention and decrease incentives to

innovate. Chapter 3, Section IV.B.1, infra, discusses this trade-off.

Rhodes at 196 (2/11/09) (if you “decrease damages, you do lose part of the deterrent [e]ffect against 89

infringement”); Lasersohn at 183 (2/11/09) (“If you do not allow inventors to capture the full economic

value of their invention . . . . the amount of [projects] that will qualify for venture capital financing will

decrease.”); NanoBusiness Alliance Comment (2/15/09) (“Changes which reduce our ability to receive

adequate compensation for infringement of those patents will make it difficult to protect our intellectual

property, and therefore will discourage investment in our field.”).

47

delve into that issue. Patent quality remains vitally important for achieving the balance of

exclusivity and competition that best enhances consumer welfare, however. 

Panelists also identified ill-defined patent boundaries as an important issue for the patent

system’s ability to facilitate technology transfer and ex ante patent transactions. Patents that do 85

not clearly identify and define the protected technology undermine attempts at contracting and

prevent potential licensors from finding available technologies through a patent search, according

to panelists. One panelist explained, “if you don’t have IP rights that are understood by the 86

purveyor of them and the receiver of them, you don’t have the necessary scaffolding to build a

good . . . bridge there between the two sides.” These concerns directly implicate the patent 87

system’s notice function, meaning the ability of a patent to inform the public of what technology

it protects. Thus, improvements in the notice function, proposed in Chapter 3, can enhance the

ability of the patent system to promote innovation through technology transfer.88

Remedies (damages and permanent injunctions) awarded following a finding of patent

infringement presented another area of concern for panelists who represent small companies,

start-ups and others that frequently engage in technology transfer. These panelists worried that

recent proposals, described in Chapter 6, concerning damages could lead to systematically lower

damage awards. They argued that reducing the value of patents or injecting additional

uncertainty and complexity into damages calculations would undermine the patent system’s

incentives to invest in risky R&D. Lower damages would also encourage infringement rather

than licensing, they argued. Chapter 2 presents the competing concerns of other panelists that 89

inflated damage awards distort competition among technologies and encourage unproductive

litigation. Chapters 4 through 7 attempt to align patent damages law with competition policy by
547 U.S. 388 (2006). 90

Cassidy at 165-67 (2/12/09); Lord at 174-75 (12/11/09); Rhodes at 165 (2/11/09) (effective remedies 91

for infringement needed to prevent free-riding on others’ R&D).

Ware at 148 (2/12/09) (expressing concern that “venture capitalists will take their funds elsewhere, and 92

small biotech companies will shrink and die rather than grow”); Ware at 456 (2/12/09) (eBay could have

an adverse effect on university licensing); Katznelson at 53-54 (3/18/09) (describing the effect of eBay

on start-up licensing and business models); Lasersohn at 184 (2/11/09) (injunctions are critical to

promoting investment in new technology). 

Chapter 8, Section III.C. 93

48

balancing these concerns and recommending principles that courts should apply when calculating

damage awards.

Similarly, some panelists worried that under the Supreme Court’s 2006 decision in eBay,

Inc. v. MercExchange, LLC, firms engaged in patent licensing might not be able to obtain a 90

permanent injunction following a finding of infringement. In that case, the Court rejected a

“general rule” supporting a permanent injunction and instead announced four equitable factors

that a patentee must satisfy to obtain an injunction. Without the ability to obtain a permanent

injunction, some panelists argued, their technology might be taken by manufacturing companies

without a license. This possibility could decrease the ability of start-ups and technology 91

transfer companies to attract investment and enter into ex ante patent transactions, according to

some panelists. Others welcome eBay’s flexibility because it decreases the ability of “non- 92

practicing entities” to extract inflated royalties that distort competition among technologies based

on the threat of preventing all sales of an infringing product. Chapter 8 presents an analysis that 93

balances these concerns and aligns injunction law with competition concerns.

V. CONCLUSION

The growth of open innovation, especially as evidenced by the dramatic rise in R&D by

small companies, involves technology transfer. This trend benefits consumers in multiple ways,

including increased levels of innovation and more competition in markets for technology. The

patent system supports open innovation and technology transfer by encouraging investment in

invention and development, by providing protected disclosure of technology and by defining

rights that facilitate contracting. 

The notice function of patents and remedies following infringement both implicate how

well the patent system can fulfill these roles and promote innovation. Both areas of law also

have a significant impact on how the patent system affects competition. The following chapters

describe that impact. They also make recommendations for balancing concerns about the

importance of patent exclusivity with competition and achieving the proper alignment of patent

law and competition policy.
49

CHAPTER 2

THE EVOLVING PATENT MARKETPLACE: 

EX POST PATENT TRANSACTIONS

I. INTRODUCTION .................................................... 50

II. CONCERNS WITH EX POST PATENT TRANSACTIONS . . . . . . . . . . . . . . . . . . 51

A. Beneficial Effects . .............................................. 52

B. Detrimental Effects . ............................................. 52

III. CAUSES OF EX POST TRANSACTIONS . ............................... 54

A. Patent Notice Problems and Patent Quality . . . . . . . . . . . . . . . . . . . . . . . . . . 54

B. Patent Remedies . ............................................... 57

IV. DEVELOPMENTS IN SECONDARY PATENT MARKETS BASED ON 

EX POST PATENT TRANSACTIONS ................................... 58

A. Increasing Litigation and Patent Sales in the IT Industry . . . . . . . . . . . . . . 58

B. Evolving Patent Assertion Business Models . . . . . . . . . . . . . . . . . . . . . . . . . 62

V. EFFECT OF SECONDARY PATENT MARKETS AND PAE ACTIVITY ON

INNOVATION AND COMPETITION . .................................. 67

VI. CONCLUSION . ...................................................... 71
See, e.g., In re Seagate Techs., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc). See also infra 1

Chapter 3, at 77.

This report uses the term “patent assertion entity” (PAE) rather than the more common “non-practicing 2

entity” (NPE) to refer to firms whose business model focuses on purchasing and asserting patents that

they typically purchase. Taken literally, the term NPE encompasses patent owners that primarily seek to

develop and transfer technology, such as universities and semiconductor design houses. Patent assertion

entities do not include this latter group. See infra Section IV.A of this chapter.

50

CHAPTER 2

THE EVOLVING PATENT MARKETPLACE: 

EX POST PATENT TRANSACTIONS

I. INTRODUCTION

While open innovation and technology transfer are important pathways of innovation, not

all patent licensing and sales occur ex ante as part of a technology transfer agreement. In many

cases, the licensee or purchaser already uses the patented technology when approached by the

patent owner. What it lacks is a patent license to use the technology. These patent transactions

occur ex post, after a firm has invested in creating, developing or commercializing the patented

technology. It needs the ex post license to avoid liability even if it invented the technology

independent of the patentee because patent infringement is a strict liability offense. A firm that

makes, uses or sells patented technology is liable as an infringer, regardless of how it obtained

the technology and whether it knew about the patent.1

The ability of patentees to assert their patents against infringers is important to the patent

system’s role in promoting innovation and facilitating technology transfer. The threat of a patent

infringement suit deters infringement and safeguards the exclusivity that is the heart of the patent

system. A business model based on invention followed by technology transfer can only succeed

if a firm can prevent copying and recoup its investment in research and development (R&D).

But ex post licensing to manufacturers that sell products developed or obtained

independently of the patentee can distort competition in technology markets and deter

innovation. The failure of the patentee and manufacturer to license ex ante with technology

transfer results in duplicated R&D effort. When a manufacturer chooses technology for a

product design without knowledge of a later-asserted patent, it makes that choice without

important cost information, which deprives consumers of the benefits of competition in the

technology market. If the manufacturer has sunk costs into using the technology, the patentee

can use that investment as negotiating leverage for a higher royalty than the patented technology

could have commanded ex ante, when competing with alternatives. The increased uncertainty

and higher costs associated with ex post licensing can deter innovation by manufacturers. 

Increasing activity by patent assertion entities (PAEs) in the information technology (IT) 2

industry has amplified concerns about the effects of ex post patent transactions on innovation and
FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT 3

LAW AND POLICY, Exec. Summ., at 1 (Oct. 2003) (“2003 FTC IP Report”), available at

http://ftc.gov/os/2003/10/innovationrpt.pdf.

51

competition. The business model of PAEs focuses on purchasing and asserting patents against

manufacturers already using the technology, rather than developing and transferring technology. 

Some argue that PAEs encourage innovation by compensating inventors, but this argument fails

to account for the fact that invention is only the first step in a long process of innovation. Even if

PAEs arguably encourage invention, they can deter innovation by raising costs without making a

technological contribution. 

This chapter examines the causes and effects of ex post patent transactions, including the

evolution of the PAE business model. The goal is to identify areas of patent law where

improvements could lessen their detrimental effects without undermining the power of the

exclusive patent right to promote innovation. Improving patent quality is of paramount

importance, as discussed in the 2003 FTC IP Report, To Promote Innovation: The Proper

Balance of Competition and Patent Law and Policy. Assertion of invalid patents raises costs 3

and deters innovation through licensing and litigation.

Problems with the patent system’s notice function are also important. Manufacturers

often license ex post because they were not aware of the patent ex ante. Multiple factors can

contribute to notice failure, including overbroad, vague claims, the large number of patents

potentially relevant to information technology (IT) products, and the pendency of patent

applications in the Patent and Trademark Office (PTO). Improvements to the notice function,

discussed in Chapter 3, could help decrease the need for ex post transactions while supporting ex

ante technology transfer agreements and innovation. 

Patent remedies law can unduly encourage ex post transactions when it results in patentee

compensation that exceeds the economic value of the invention. If remedies law awards more

after a finding of infringement than the patented technology could have commanded when

competing with alternatives ex ante, it creates incentives for patentees to wait and seek ex post

licensing. Any adjustments in remedies law must be careful not to undermine the patent system’s

incentives to innovate, however. Chapters 4-8 of this report draw on the insights and information

of this chapter and Chapter 1 in analyzing the operation of patent remedies and making

recommendations to improve the alignment of those areas of law with competition policy.

II. CONCERNS WITH EX POST PATENT TRANSACTIONS

Ex post patent transactions can have both beneficial and detrimental effects on innovation

where the licensee obtained the technology independent of the patent owner. They can also

distort competition in markets for technology.
See Chapter 4 (discussing the role of remedies in safeguarding the patent system’s incentives to innovate

4

and deterring infringement); Chapter 8, Section IV.A (discussing the role of injunctions in deterring

infringement). See also Epstein at 108-09 (5/4/09) (emphasizing the importance of patent protection

where a technology can be easily copied once it is seen in the marketplace).

See Chapter 1, Section II.A. 5

Maghame at 169-70 (2/11/09).

6

Lord at 174-75 (2/11/09) (explaining that potential licensors might say “thank you for teaching us about

7

your technology, we’re going to go ahead to use it and don’t call us, we’ll call you”).

This analysis of the detrimental effects of ex post patent transactions does not apply when an infringer 8

copied the patentee’s technology directly (e.g., by reading the patent) or indirectly (e.g., by copying it

from products or services that resulted from the patentee’s discovery).

52

A. Beneficial Effects

The ability of patentees to allege patent infringement and enter ex post patent transactions

is a necessary feature supporting the patent system’s incentives to innovate. The patent right

cannot be exclusive without it. A patent suit can stop infringement and restore an exclusive

market position. The threat of suit can deter infringement and enable a patent owner to market

its product free of copycat competitors. Alternatively, threat of suit can lead an infringer to pay

4

royalties to use the invention. Either royalty payments or an exclusive market position can allow

a patentee to capture returns from its investment in making and developing an invention, which

creates incentives for innovation. 

5

Ex post patent assertions and transactions also provide essential support to business

models based on ex ante licensing and technology transfer. A panelist from a specialized R&D

firm that licenses its technology to manufacturing firms explained that “there isn’t another choice

other than to litigate” if it “cannot negotiate licenses with people” who use its technology.6

Another panelist argued that the ability to sue for patent damages was necessary to effectively

negotiate technology transfer agreements, since otherwise large firms might simply copy the

technology and refuse to pay. 

7

B. Detrimental Effects

When a company commercializes technology that it invented independently and later

faces a patent assertion, the resulting ex post license provides no direct benefit to consumers,

however. The patentee’s act of invention did not contribute to the success of the manufacturer’s 8

new product. A manufacturer’s royalty payment may raise costs to consumers, but it obtains only

the avoidance of infringement litigation, not the benefit of the technology itself. Moreover, the
Stern at 43 (3/19/09) (“But if everything is being done ex-post, what you essentially have is inefficient 9

commercialization followed – because the technology is not being transferred

effectively ex-ante – followed by costly litigation.”). 

See generally infra Chapter 3, Section II (discussing how poor notice can inhibit innovation and 10

competition).

See, e.g., Yen at 51 (12/5/08) (estimating average defense costs for large IT companies of “between $5

11

to 10 million” and stating that “every assertion we receive distracts our engineers from innovation and

productive efforts” that could “otherwise be spent on developing new products”); Quatela at 74 (4/17/09)

(describing how litigation diverts engineering resources away from innovation); Kappos at 122 (3/19/09).

See Kappos at 132 (3/19/09) (uncertainty regarding patent scope can make firms “steer clear of 12

innovations that [they would] otherwise want to invest in”); Menell at 127-28 (5/5/09) (the inability to

know the potential damages that might result from projects under development “just chills . . . innovation

unnecessarily”).

See Daniel P. McCurdy, Patent Trolls Erode the Foundation of the U.S. Patent System, Sci. Progress, 13

Fall & Winter 2008/2009 at 82 (the patent system’s treatment of NPEs “can actually serve to diminish

competition, and increase prices to consumers, by rewarding entities to not put products and services in

the market but rather taxing those that do”), available at http://www.scienceprogress.org/wpcontent/uploads/2009/01/issue2/mccurdy.pdf; Brian Kahin, Written Submission, The Patent Ecosystem

in IT: Business Practice and Arbitrage, at 10-12 (Dec. 5, 2008), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/dec5/docs/bkahin2.pdf.

See Merges at 254 (5/4/09); Ziedonis at 259 (5/4/09) (contrasting a “collaborative model” using patents 14

as “scaffolding” with “pure rent-seeking” designed simply to enforce patents); Software & Information

Industry Association Comment at 2, 3 (2/5/09) (NPEs “typically do not innovate,” but rather “simply

wait for their targets to be successful”); Valz at 239 (12/5/08) (“NPE litigation does suppress

value-added licensing activity and drains resources from marketplaces”); Kahin at 63 (12/5/08)

(“[t]here’s an incentive to hold back your patents until the technology represented by the patent is

embedded in a product or a standard or the marketplace”); Agisim at 211 (2/11/09). 

53

failure to transfer the technology ex ante and the corresponding duplication of inventive effort by

the infringer and patentee can reflect a social loss and “inefficient commercialization.”9

In this circumstance, patent litigation or royalty payments increase the manufacturer’s

costs and risk, deterring innovation. Those costs reduce the manufacturer’s returns on its 10

innovative effort, which could lower its incentive or ability to make future investments in R&D.11

The potential for later patent assertions creates a risk that a manufacturer’s costs will increase

and its return on investment will decrease after it has developed and commercialized a product. 

That uncertainty can also deter the investment in the research, development and

commercialization necessary to develop innovative products. Panelists and commentators 12

argued that such patent transactions deter rather than promote innovation by raising costs through

a “tax.” Some have characterized patent assertion against independently created technology as 13

pure rent-seeking. 

14
See infra Chapter 3, at 6-7. 15

See infra Chapter 3, Section II (discussing costs of disputes after product launch); Chapter 8, Section 16

IV.B (discussing patent hold-up).

See McNelis at 24-27 (5/5/09) (describing the differences in freedom to operate searches in the IT and 17

life sciences sectors); Durie at 17-19 (5/5/09) (describing freedom to operate searches in the

pharmaceutical, biotechnology and IT sectors). See also infra Chapter 3, Section III.C.

See Chapter 7, Section III.A; Gregory K. Leonard & Lauren J. Stiroh, A Practical Guide to Damages, in 18

ECONOMIC APPROACH TO INTELLECTUAL PROPERTY POLICY, LITIGATION AND MANAGEMENT 27, 52-58

(Gregory K. Leonard & Lauren J. Stiroh eds., 2005).

54

Ex post patent transactions can also distort competition in technology markets and

deprive consumers of the benefits of that competition. A manufacturing company may not learn

the true cost of its choice among competing technologies when designing its product until the ex

post transaction is complete. If the company had been aware that a particular technology was 15

subject to patent licensing fees, it might have adopted a lower-cost technology. Or it could have

negotiated lower fees based on the availability of alternatives. Redesign of the product may be

costly following commercialization, leading the company to pay the licensing fee rather than alter

its product. Thus, the product may be more costly to produce with the patented technology than 16

it would have been if there had been full and effective competition in the technology market.

III. CAUSES OF EX POST TRANSACTIONS

A better alignment of the patent system with competition policy could help address

concerns about the detrimental effects of ex post patent transactions on innovation and

competition while preserving the benefits of these transactions. Identifying the adjustments to

patent law and policy that might accomplish this goal requires that we first explore the causes of

ex post transactions. 

A. Patent Notice Problems and Patent Quality

In some industries, manufacturers routinely search for patents they must license prior to

developing or launching a new product to ensure their freedom to operate. These steps minimize

the risk of later patent assertions and ex post transactions. A potential licensee that has found 17

relevant patents can then negotiate a license with the patent holder, adopt alternative,

noninfringing technology or abandon the project. The competition between the patented

technology and alternatives constrains the royalties that a prospective licensee would pay to

license the patent. Consumers can benefit from competition through lower prices or better 18

products.

Ex post patent transactions that can distort competition arise in part from the failure of

manufacturing firms to identify patents that cover their products and clear patent rights in
See Christopher A. Cotropia & Mark A. Lemley, Copying in Patent Law, 87 N.C. L. REV. 1421, 1445 19

tbl.1 (2009) (reporting findings from a study indicating that in the vast majority of cases, defendants do

not have information about the patent prior to the patent holder asserting a claim of infringement).

Harris at 123 (3/18/09) (reporting that searches are unlikely to identify patents that might be asserted, 20

since claim scope is often stretched unpredictably); Luftman at 220-21 (2/12/09) (describing NPE

assertion of patents covering smart cards against smart phones).

See, e.g., Durie at 18 (5/5/09) (“In my experience on the IT side, it is virtually impossible to conduct a 21

meaningful patent clearance” for complex, multicomponent products.); Krall at 114-15 (3/18/09) (“[i]n

the tech industry doing [patent clearance] searches is almost cost-prohibitive”); Sarboraria at 120

(3/18/09); Phelps at 262-63 (5/4/09) (doing a patent clearance “on the front end” is “pretty ineffective”

due to the number of patents and many different entities who might have relevant patents). See also

Chapter 3, Section II.C.

In 2009, IT companies held all of the first ten positions in the list of top patent owners, and nearly all of

22

the top 25. See Intellectual Property Owners Ass’n, Top 300 Organizations Granted U.S. Patents in 2009

(May 24, 2010), available at

http://www.ipo.org/AM/Template.cfm?Section=Top_300_Patent_Owners&CONTENTID=25899&TEM

PLATE=/CM/ContentDisplay.cfm&bcsi_scan_1238f9a5e0c9665c=VpkygkCf8Ar0tgDOiVjpyltE0VQB

AAAAY1ADAA==&bcsi_scan_filename=Template.cfm. See also Gideon Parchomovsky & R. Polk

Wagner, Patent Portfolios, 154 U. PA. L. REV. 1, 46 (2005) (IBM, the world leader, “has amassed over

25,000 U.S. patents” since 1994).

55

advance of commercialization. Manufacturers can fail to identify relevant patents for numerous 19

reasons. For instance, panelists argued that ambiguous claim scope and patent assertions that

unreasonably stretched the reach of claims to cover seemingly unrelated products make it

impossible to identify all patents that they might eventually face in litigation. In some cases, a 20

patent application may be pending in the Patent Office when the manufacturer searches. 

These concerns directly implicate the patent system’s notice function. Thus,

improvements to the notice function, proposed in Chapter 3, could help decrease the extent of ex

post patent transactions and better align the patent system with competition. At the same time,

improvements to the patent notice function can facilitate ex ante patent transactions and

technology transfer, as discussed in Chapter 1. This result could benefit both innovation and

competition.

Panelists from the IT industry explained that manufacturers face an additional challenge

in trying to identify and clear patent rights due to the large number of patents that cover most IT

products. They maintained that an enormous number of potentially relevant, overlapping patents

make identifying the applicable rights prior to product launch prohibitively costly. The IT 21

patent landscape involves products containing a multitude of components, each covered by

numerous patents. The high level of patenting in the IT industry is in part attributable to the 22

incremental nature of innovation in IT products, where small changes can be patentable. This

contrasts with the relationship between products and patents in the pharmaceutical and biotech
See DAN L. BURK & MARK A. LEMLEY, THE PATENT CRISIS AND HOW THE COURTS CAN SOLVE IT 53-

23

54 (2009). For a broader discussion of the differences between industries with repect to innovation and

the patent system, see id., Chapters 4-5. 

See, e.g., 2003 FTC IP Report, ch. 3, at 35; Krall at 86 (3/18/09) (one reason “to have a portfolio [is] 24

that you can use [it] to defend yourself or defend your customers or your technology communities if they

are approached or if they have patent assertions against them by your competitors”); Gutierrez at 128

(5/4/09) (portfolio size “absolutely matter[s]”). 

Parchomovsky & Wagner, supra note 22, at 69 (describing “the problem of patent portfolios, where 25

large numbers of low-quality patents are obtained with little regard to their validity or actual value,” due

to their value as an element in a portfolio).

Carl Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting, in 26

INNOVATION POLICY AND THE ECONOMY 119 (Adam B. Jaffe et al. eds., 2000); 2003 FTC IP Report, ch.

3, at 34, 52; Thorne at 117 (3/18/09) (“In the high tech business a simple product can have a thousand or

more patents [read] on it . . . .”); see also Cockburn at 232-33 (4/17/09) (defining a patent thicket as “a

large number of patents, . . . potentially overlapping, held by numerous people”).

See, e.g., Durie at 69 (5/5/09) (estimating normal patent litigation costs of $4 to $5 million). The 27

American Intellectual Property Law Association’s most recent economic survey found that for patent

litigations in which over $25 million was at stake, the cost of litigating a case to completion averaged

$6.25 million. AM. INTELL. PROP. LAW ASS’N., REPORT OF THE ECONOMIC SURVEY I-131 (2009). 

See, e.g., Yen at 51-53 (12/5/08) (the difficulty of challenging “patents of questionable validity and 28

weak arguments of infringement” together with “uncertainty in the calculation of damages” lead IT

defendants to settle “unmeritorious” infringement claims and plaintiffs to “request royalties of a

magnitude far beyond the . . . fair value of the alleged use”); Slifer at 131-32 (3/18/09) (“uncertainty of

56

industries where innovation is generally directed at producing a discrete product covered by a

small number of patents.

23

The high level of patenting in the IT industry also results from the IT operating

companies’ strategy of protecting their freedom to operate by developing large defensive patent

portfolios that they can assert against a competitor that brings an infringement action. One 24

commentator explains that this strategy usually involves acquiring a large quantity of often low

quality patents, meaning those that are vague, likely invalid, or that provide narrow coverage of a

feature having little commercial value. Indeed, IT products are often surrounded by “patent 25

thickets” – densely overlapping patent rights held by multiple patent owners.

26

While improving the notice function of patents would help address this problem, raising

patent quality will also be central to any solution. Doing so would decrease the number of

overbroad or invalid patents that can be asserted against products on the market. IT panelists

complained that they frequently faced suits with little merit based on questionable patents,

seeking high settlements that reflect the high cost of defending these actions and uncertainty

27

regarding litigation outcomes and potential damage awards. The FTC’s 2003 IP Report 28
how the patent is going to be interpreted [and] the uncertainty of how a jury is going to view damages”

makes NPE litigation a “good business model”); Simon at 161-62, 202 (2/11/09); Massaroni at 192-93

(2/12/10) (suggesting that hold-up in the IT industry generally involves the assertion of “a patent of

dubious quality and prominence” which is “not infrequently the product of a contorted history of

continuations”). But cf. C.J. Michel at 104-05 (12/5/08) (suggesting that it is unhelpful to speak of

patents that are “‘lacking quality’” or “‘questionable’”).

2003 FTC IP Report, Exec. Summ., at 5. 29

Underweiser at 159-60 (2/11/09); Marian Underweiser, Towards an Efficient Market for Innovation 1, 30

presented at FTC Hearing: The Evolving IP Marketplace (Feb. 11, 2009) (“Court awarded reasonable

royalty determinations provide the backdrop against which all patent settlements and patent licensing

activities are measured . . . .”), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/feb11/docs/munderweiser.pdf.

Reines at 33 (2/11/09) (“many of the cases never get to complaint and never get to trial, so that . . . 

31

anomalous outcomes at trial or fear of anomalous outcomes at trial can drive a whole range of

decision-making that’s all the way upstream”).

Lutton at 91 (5/4/09). See also Amster at 144 (5/4/09); Gutierrez at 143 (5/4/09) (explosion in 32

litigation is causing inflation in the market for patents to some extent); Crean at 135 (5/4/09) (“if your

plan is not to go out and license and litigate or have an offensive licensing program, it at times can be

challenging to justify the purchase price that is currently in the marketplace”).

57

explains that licensing fees for questionable patents can deter innovation and makes

recommendations for improving patent quality.29

B. Patent Remedies

Panelists from the IT industry and commentators assert that patent damages law plays an

important role in motivating ex post patent transactions. Ex ante licensing negotiations are

largely driven by the parties’ views on the likely commercial value of the technology in light of

available alternatives. Ex post licensing negotiations, on the other hand, are largely driven by

how the parties believe they will fare in infringement litigation, including the size of any

potential damages award. Although most patent assertions conclude with license agreements or

settlements, court awarded damages and injunctive relief “provid[e] a benchmark” for these

negotiations. IT panelists suggested that patent owners’ expectations for recovery in their 30

industry may be unduly affected by very large, well-publicized damage awards that they called

“outlier” jury verdicts. They argued the increase in patent assertions, patent litigation, and ex 31

post patent transactions in their industry is “driven largely by the litigation process and the

promise of recovery,” the hope for a large damage award.32

Damage awards that exceed the economic value of the patent, i.e., the amount a patent

license could have commanded in an ex ante patent transaction when the patented technology

competed with alternatives, can distort competition among technologies. Such damage awards
See Chapter 8, Sections III & IV (describing the problem of hold-up effectuated by the threat or award

33

of a permanent injunction).

547 U.S. 388 (2006). 34

58

can also encourage ex post transactions over ex ante transactions accompanied by technology

transfer. As explained in Chapter 4, for these reasons, it is important that damage awards match

the ex ante economic value of the patent. On the other hand, it is important that patent damages

preserve the patent system’s ability to create incentives for invention and innovation, as

discussed in Chapter 1. Chapters 4 through 7 provide principles and recommendations on how

patent damages law can balance these competing concerns.

Under some circumstances, the grant or threat of a permanent injunction can lead an

infringer to pay higher royalties than it would pay in a competitive market for a patented

invention. This outcome also can encourage patentees to pursue ex post transactions. At the

time a manufacturer faces an infringement allegation, switching to an alternative technology may

be very expensive if it has sunk costs in product design and production using the patented

technology. That may be true even if choosing the alternative earlier would have entailed little

additional cost. If so, the patentee can use the threat of an injunction to obtain royalties covering

not only the economic value of the patented invention compared to alternatives, but also a

portion of the costs that the infringer would incur if it were enjoined and had to switch, called the

hold-up value. As discussed in Chapter 8, one challenge for injunction analysis under eBay,

33

Inc. v. MercExchange, LLC is to protect the critical importance of patent exclusivity for 34

innovation while recognizing that, in some instances, patent hold-up through injunctions can

undermine innovation and harm consumers. 

IV. DEVELOPMENTS IN SECONDARY PATENT MARKETS BASED ON EX POST

PATENT TRANSACTIONS

Concerns about ex post patent transactions have increased in recent years because the

extent and nature of these transactions have changed, at least in the IT industry. Patents in the IT

industry are often bought, sold and licensed as assets whose value depends on the amount of rent

that can be extracted from manufacturers already using the technology. Such ex post transactions

form a secondary market for patents that has a very different impact on innovation and

competition than does the market for technology discussed in Chapter 1. Examining the

operation of this secondary market and the players in it helps shed light on the extent of the

problems associated with ex post patent transactions and the need to examine patent law in light

of these problems.

A. Increasing Litigation and Patent Sales in the IT Industry

Panelists from IT manufacturing companies uniformly reported a dramatic increase in the

number of patent infringement lawsuits filed against their companies compared to seven to ten
Yen at 49 (12/5/08) (reporting a “quadrupling in the past five years” of patent litigation at Cisco where 35

“virtually all of these cases have been with non-practicing entities”); Lutton at 91 (5/4/09) (reporting that

Apple faced seven IP suits in 2006 compared to 30 in 2009); Sarboraria at 75 (3/18/09) (Oracle had no IP

litigations prior to 2000 and had over 20 in 2009, nearly all NPE); Luftman at 154 (2/12/09) (Palm facing

six infringement suits in 2004 compared to 15 in 2009, all but one involving NPEs); Harris at 130

(3/18/09) (AOL faces 30% increases in patent litigation each year for last two years). While overall

patent litigation has not risen during this period, one researcher reports that the number of defendants

named in patent litigation has increased by approximately 50% since 2004. See Kyle Jensen, Counting

Defendants in Patent Litigation (Oct. 27, 2010), available at

http://www.patentlyo.com/patent/2010/10/guest-post-counting-defendants-in-patent-litigation.html.

Sarboraria at 93 (3/18/09) (reporting a “tremendous increase in the offers to sell patents”); Slifer at 88 36

(3/18/09) (reporting offers of portfolios “at least weekly”); Krall at 91 (3/18/09); Thorne at 90 (3/18/09)

(estimating that there were between 10,000 and 20,000 patents potentially relevant to Verizon’s business

for sale in 2008). 

Krall at 91-92 (3/18/09); see also Yen at 49-50 (12/5/08).

37

Lutton at 147 (5/4/09). 38

Slifer at 98-99 (3/18/09) (“have to see if there are [patents] in there that would be critical to what we’re 39

doing and what might fall into the wrong hands”); Thorne at 97-98 (3/18/09) (“We’re only buying things

that we think might be asserted against us.”); Krall at 99-100 (3/18/09); Bergelt at 36 (4/17/09) (patents

acquired by open source affiliate because IP “could potentially represent a threat”).

Krall at 91 (3/18/09) (time devoted to review has doubled); Thorne at 95-96 (“very hard with the 40

volume of patents to make a realistic decision” since evaluating each patent costs “at least the small

number of thousands of dollars per patent”). See also supra at notes 11, 27-28.

Sarboraria at 129 (3/18/09) (reporting that in the “vast majority” of cases “the first notice of the patent

41

was the filing of the lawsuit”); see also Yen at 50-51 (12/5/08); Krall at 127-28 (3/18/09); Thorne at 129

(3/18/09).

59

years ago. For several companies, the number of lawsuits at least quadrupled in that period. IT 35

companies also report that the number of patents offered to them for purchase or license has

significantly increased. Panelists noted that some of the offerings are “barely disguised 36

assertions” threatening that “if you don’t buy these patents somebody else will who will sue

you.” Some offers include claim charts showing how the company’s products infringe or draft 37

patent infringement complaints. An IT company’s primary interest in purchasing such patents 38

is usually to avoid suit. Panelists complained that evaluating this deluge of patent offers and 39

fighting patent litigation diverts resources from R&D efforts. Moreover, the patent licenses and 40

purchases resulting from these assertions are primarily ex post transactions in which the

manufacturer pays for technology that it is already using without any knowledge of the patent,

according to panelists. 

41

 Recent scholarship suggests that these patent assertions are unlikely to stem from

copying. According to one study, patentees rarely allege that defendants in patent litigation have
Cotropia & Lemley, supra note 19, at 1445 tbl.1. 42

Id. Concerns about the detrimental effects of ex post patent transactions do not apply when accused

43

infringer has copied technology from a patent directly or indirectly. See supra note 8.

Thorne at 81 (3/18/09) (reporting that all but one of two dozen patent suits pending against Verizon 44

were brought by NPEs who purchase patents to assert them); Sarboraria at 75 (3/18/09) (“virtually all”

patent assertions against Oracle were brought by NPEs); Krall at 127 (3/18/09) (NPEs account for a

“majority” of the patent litigation against Sun); Harris at 72 (3/18/09) (NPEs “primarily” responsible for

patent assertions faced by AOL).

Some describe NPEs (or PAEs) as employing a “form of arbitrage [that] involves buying patents from 45

those poorly positioned to exploit them, and licensing them to or asserting them against primarily large

enterprises, which are in fact making use of the patented technology.” Robert P. Merges, The Trouble

with Trolls: Innovation, Rent-Seeking, and Patent Law Reform, 24 BERKELEY TECH. L.J. 1583, 1588

(2009) (summarizing the views of other commentators and criticizing their suggestions that such an

explanation justifies such transactions as socially desirable).

See Merges at 247 (5/4/09) (“[I]n a lot of patent troll situations [] what’s bothersome about them is that,

46

in fact, there is no information changing hands; it’s strictly a legal relationship. It’s strictly an agreement

to make a lawsuit go away.”).

Colleen V. Chien, From Arms Race to Marketplace: The New Complex Patent Ecosystem and Its 47

Implications for the Patent System, 62 HASTINGS L.J. 297, 328 (2010) (defining patent assertion entities

as entities that “are focused on the enforcement, rather than the active development or commercialization

of their patents”). 

See Hoffman at 119 (4/17/09) (“[I]t’s the size of the market that potentially applies to the patent . . . .

48

[I]t has to do with essentially how effective will [the claims] be in an assertion strategy? How likely am I

60

copied the patented technology, as might be expected if infringement had occurred after

technology transfer negotiations. Based on examination of complaints and other court

documents, the study found indications of potential copying claims in only 10.9% of all actions,

and only 3.2% of IT sector actions. Moreover, only 4.2% of IT sector cases included 42

allegations indicating that there had been any prior business dealing between the parties.43

According to panelists, the increase in IT litigation and patents offered for sale can be

almost entirely attributed to assertions made by patent assertion entities – typically called nonpracticing entities – rather than competitors. The literal definition of non-practicing entity is 44

broad enough to encompass the start-ups, universities, and design houses discussed in Chapter 1. 

But the term NPE also commonly refers to firms that obtain nearly all of their patents through

acquisition or purchase in order to assert them against manufacturers. Such firms are 45

sometimes called “trolls” by detractors. For clarity, this report refers to these firms as patent 46

assertion entities (PAEs). For the most part, PAEs purchase patents, and then sell or license

47

them as assets whose values are based on the amount of licensing fees that can be extracted from

operating companies already using and marketing the technology, or they facilitate others who

make the assertions. PAEs can also include patentees that “have turned their focus away from 48
to generate either damages or royalties if I assert these patents and how big is the market?”); Valz at 236

(12/5/08) (NPEs “have fueled a secondary market for patents which has really intensified this whole idea

of licensing without true technology transfer which helps to support innovation”).

Chien, supra note 47, at 329. 

49

Brian Kahin, Patents and Diversity in Innovation, 13 MICH. TELECOMM. TECH. L. REV. 389 (2007)

50

(“‘Being infringed’ has become a profitable business model for entities with no products on the market.

Variations on this model include attacking deep-pocketed companies with large sunk investments in

products, ambushing widely implemented industry standards . . . , and pursuing licensing fees from small

users that lack the resources to litigate.”) (quoting Markus G. Reitzig, Joachim Henkel & Christopher

Heath, On Sharks, Trolls, and Other Patent Animals – ‘Being Infringed’ as a Normatively Induced

Innovation Exploitation Strategy, available at http://ssrn.com/abstract=885914).

Merges, supra note 45, at 1599. 51

See, e.g., Joe Mullin, The Prior Art, Patent-Litigation Weekly: The Photo-Sharing Files (May 29, 2009) 52

(reporting on litigation brought by an NPE on image-sharing patents against 60 companies, mainly

“small, family-run start-ups”), available at

http://thepriorart.typepad.com/the_prior_art/2009/05/patentlitigation-weekly-the-photosharing-files.html.

Chien, supra note 47, at 312, 315, 341-44 (explaining forces that have led to increase in PAE activity

53

and their role in the secondary patent market); see Coalition for Patent Fairness and the Business

Software Alliance Comment (2/5/09) at 3 (“The growth of NPEs represents by far the most significant

change in the patent marketplace.”). Patent Freedom classifies over 90% of the NPE actions it has

identified as involved the IT sector. Patent Freedom, Key Information By Product Category, available at

https://www.patentfreedom.com/research-pc.html.

Iain M. Cockburn, Licensing: A View from the Trenches 7, presented at FTC Hearing: The Evolving IP 54

Marketplace (April 17, 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/apr17/docs/icockburn.pdf. See also Cockburn at 158-59

(4/17/09).

Chien, supra note 47, at 314-15. 55

61

the active development or practice of their patents and have moved towards patent

enforcement.” Some commentators describe business strategies built around “being 49

infringed,” while others identify businesses that operate as “opportunistic litigation mills” and 50

do not innovate. Although most PAEs suits are against large companies, they have asserted 51

patents against small companies and start-ups as well.52

PAEs have become pivotal players in the market for patents, especially in the IT sector. 

53

A recent survey showed that nearly one-third of IT licensing executives reported that “trolls” had

had a significant impact on their organization; the corresponding figure did not exceed five

percent for any other industry. One commentator estimates that PAEs have accounted for about 54

90% of patents purchased at auction in the past few years. Although data tracking the PAEs in 55
See Malackowski at 49 (4/17/09) (“aggregators who brought capital [] attracted the attention of

56

sellers”); Chien, supra note 47, at 312 (“IV [Intellectual Ventures] has had a tremendous influence in

developing the market”); Hoffman at 46 (4/17/09); Harris at 95 (3/18/09) (reporting that “the actual

purchasing market is really drying up” because “patent aggregators aren’t buying as many”).

Patent Freedom, Patent Lawsuits Involving NPEs Over Time, available at 57

https://www.patentfreedom.com/research-lot.html (cautioning that the data can include duplicates due,

e.g., to related cases and transfers, and fail to include some actions). 

Id.

58

Colleen V. Chien, Of Trolls, Davids, Goliaths, and Kings: Narratives and Evidence in the Litigation of

59

High-Tech Patents, 87 N.C. L. REV. 1571, 1601 tbl. 4 (2009). This review found that NPEs (defined

consistently with PAEs) accounted for a smaller portion – 17% – of all computer-related patent actions

over that period, reflecting the tendency of NPEs to sue multiple defendants in a single action. Id. at

1600, tbl. 3. 

John R. Allison, Mark A. Lemley & Joshua Walker, Extreme Value or Trolls on Top? The 60

Characteristics of the Most-Litigated Patents, 158 U. PA. L. REV. 1, 26, 32 (2009). In a subsequent

study, these authors found that NPEs, who mainly assert patents against IT products, win only about 10%

of their litigated patent cases, which is significantly lower than the win rate of other patentees. John R.

Allison, Mark A. Lemley & Joshua Walker, Patent Quality and Settlement among Repeat Patent

Litigants (Stanford Law and Economics Olin Working Paper, No. 398, at 10 tbl. 3, Jan. 29, 2011),

available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677785.

62

the patent marketplace are not available, panelists and commentators have emphasized the central

role they have played in expanding the demand for patents in the marketplace.56

Researchers have compiled data on the litigation activity of PAEs and the somewhat more

broadly-defined group covering all NPEs. Patent Freedom, an IT industry group, reports that the

number of patent infringement cases filed by NPEs more than doubled from about 200 during the

2002-2004 period to over 500 in 2008. While the total number of litigations decreased by about 57

20% to above 400 between 2008 and 2010, the number of operating companies litigating with

NPEs increased by over 25% during the same two-year period. One study found that PAE- 58

initiated lawsuits accounted for 26% of the defendants sued on computer-related patent actions

brought between January 2000 and March 2008, including 30% for software and 40% for

financial services. Another found that NPEs together represent over 80% of the suits filed 59

involving the most-litigated patents (measured as the 106 patents found to have been litigated

eight or more times between 2000 and 2007), concluding that “[n]onpracticing entities are clearly

an important phenomenon in the modern patent system.”60

B. Evolving Patent Assertion Business Models

The purchases, patent assertions, ex post patent transactions, and litigation activities of

PAEs take place in a secondary market for patents that includes many types of actors. New
See generally Chien, supra note 47, at 312, 315, 326-31, 341-44; Peter N. Detkin, Leveling the Patent 61

Playing Field, 6 J. MARSHALL REV. INTELL. PROP. L. 636 (2007); Raymond Millien & Ron Laurie, Meet

the Middlemen, 28 INTELL. ASSET MANAGEMENT MAGAZINE 53, 53-54 (Feb./March 2008), available at

http://www.iam-magazine.com/issues/article.ashx?g=449a0f0e-630b-4c51-8fb4-2a4fe550f03c.

Millien at 21 (12/5/08). See also Raymond Millien, PCT Capital, LLC, The IP Marketplace Players,

62

slides 9-10, presented at FTC Hearing: The Evolving IP Marketplace (Dec. 5, 2008), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/dec5/docs/rmillien.pdf (listing and briefly describing the

17 business models).

Panelists from IT companies reported that NPEs are more frequently filing an infringement suit before

63

approaching operating companies about licensing in order to preempt a declaratory judgment suit by the

operating companies. Krall at 128 (3/18/09) (explaining that “it was rare we saw any demand letters”

after the MedImmune decision); Sarboraria at 129 (03/18/09) (stating that Oracle has “seen a decrease in

numbers of assertion letters post-MedImmune”). See also Miller at 227-28 (12/5/08) (describing how the

MedImmune decision has lowered the showing needed for potential infringers to bring a declaratory

judgment action). See MedImmune, Inc. v. Genentech, Inc. 549 U.S. 118 (2007) (patent licensee may

bring declaratory judgment action challenging patent validity).

Millien & Laurie, supra note 61, at 53-54. 64

Joe Mullin, Patent Litigation Weekly: Spangenberg Speaks, Says Sue First, Ask Questions Later,

65

LAW.COM, May 21, 2010, available at

http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202458625096; Martha Neil, Ex-Kirkland Partner

Buys 4,500 Patents, Forms New Firm to Sue Infringers, ABA Journal (June 1, 2010), available at

http://www.abajournal.com/news/article/ex-kirkland_partner_buys_4500_patents_forms_new_firm_to_s

ue_infringers.

63

business models, some of which are increasingly sophisticated and complex, have emerged over 61

the past ten years to capitalize on that market. One panelist described 17 business models

designed to promote the sale and/or licensing of patent assets. These business models fall into 62

several broad categories, described below, although an individual firm’s activities may place it in

more than one category. Knowledge of this fast-changing area can help inform policy responses

to the detrimental effects of ex post patent transactions.

Patent enforcement and licensing companies. These firms acquire an interest in patents

and assert them against operating companies that they claim are infringing. When operating

companies refuse to license, the patent enforcement firms assemble the legal and financial

resources required to pursue patent litigation. Patent enforcement firms may also file an

infringement lawsuit before opening licensing negotiations. Typically, their primary activities 63

are buying, selling, licensing and litigating patents. They do not conduct research, 64

development, technology transfer or commercialization activities. Some patent enforcement

firms have been formed by patent litigation attorneys.65
 Ryan at 32-33 (4/17/2009); id. at 69-70 (“the patent [can be] rendered moot by the [high] cost[s] of 66

enforcement”). Acacia cited testimonials from small-inventor clients on the benefits of this intermediary

relationship. Id. at 33-34 (4/17/09). See also Acacia Technologies, Testimonials

http://acaciatechnologies.com/testimonials.htm (compiling testimonials by patentees that worked with

Acacia).

Ryan at 63-64 (4/17/09).

67

Ryan at 43 (4/17/09) (“I think the markets kind of started with small companies and individual 68

inventors who had no way to monetize”); Delgado at 44 (4/17/09) (noting the “progression from

smaller independent inventors to very sophisticated companies” auctioning their patents); Malakowski at

44 (4/17/09) (agreeing with Delgado); Ziedonis at 197-99 (5/4/09) (describing the recent increase in the

number of patents held by failed IT start-ups at the time of liquidation and the implication for the supply

of patents to the secondary market).

See, e.g., Chien, supra note 47, at 314 (observing that half of all patents offered for sale on Ocean 69

Tomo came from practicing entities, and one-quarter from major IT companies such as Sun, IBM,

AT&T, 3Com, and Motorola). A number of panelists noted this trend. See Thorne at 126 (3/18/09)

(remarking that “patents that were originally prosecuted . . . [by] [F]ortune 50 companies” are now the

“[m]ain source of what we see” in the secondary market); Hoffman at 42-43 (4/17/09) (observing that

patent sales by large corporations have “dramatically increased in the last couple of years”); Ryan at 44

(4/17/09); Epstein at 95 (5/4/09) (sales of patents were “considered anathema or unforgivable sin for

large corporations” a few years ago, but he has sold patents for “some of the very largest corporations in

America”).

Hoffman at 42 (4/17/09). Id. at 45 (“[T]he market has transformed pretty dramatically in the last six, 70

maybe eight months” in terms of increased offerings by large companies and decreased demand.).

See, e.g., Millien & Laurie, supra note 61, at 55; Tomoya Yanagisawa & Dominique Guellec, The 71

Emerging Patent Marketplace 35 (OECD STI Working Paper 2009/9, Dec. 22, 2009) (describing firms

that provide “financial support and expertise” to firms who wish to engage in “IP exploitation

activities”), available at

http://www.oecd.org/dataoecd/62/55/44335523.pdf?bcsi_scan_DA3493EE5FC9D524=QoTyUHsEURXc

64

One panelist described his firm, Acacia, as an intermediary between small patent holders,

who otherwise would lack the resources to enforce their patents, and large alleged infringers.

66

He explained that Acacia facilitates licensing by screening out many patents and “giving

inventors realistic expectations” regarding the value of their inventions. While initially, failed 67

start-ups and independent inventors supplied many of the patents purchased by PAEs, a large

68

portion now originate with practicing entities, including large corporations. As one panelist

69

explained, companies that had been accumulating patents for defensive purposes have recently

decided that “they have adequate defenses” and now want “to start generating some return on that

portfolio, either through licensing or through sales.”70

Litigation finance firms. Litigation finance firms raise money from institutional

investors and others to provide capital and other resources to support the patent enforcement

efforts of small companies and independent inventors. In exchange, they take a financial

71
jNxwO6gSwQoAAACA+jsE&bcsi_scan_filename=44335523.pdf.

Altitude Capital Partners, Home Page, 72 http://www.altitudecp.com/criteria.html.

Malackowski at 77-78 (4/17/09). 73

Millien & Laurie, supra note 61, at 54. 74

Nathan Myhrvold, The Big Idea, Funding Eureka!, HARV. BUS. REV., Mar. 2010, at 8; Nigel Page, IV 75

Shifts Gear, 36 IAM MAGAZINE 3, 7 (July/Aug. 2009).

Hoffman at 45-46 (4/17/09).

76

Myhrvold, supra note 75, at 9. 77

Page, supra note 75, at 5; Amol Sharma & Don Clark, Tech Guru Riles the Industry By Seeking Huge 78

Patent Fees, WALL ST. J., Sept. 17, 2008 (reporting payments for licenses and investment stakes “in the

range of $200 million to $400 million” from Verizon and Cisco), available at

http://www.signallake.com/innovation/IntellectualVentures091708.pdf.

Sharma & Clark, supra note 78 (quoting Nathan Myhrvold as explaining if he gave such an assurance,

79

the alleged infringers “will rip me off totally”).

65

interest in patent portfolios. For example, Altitude Capital Partners makes strategic investments

in patent owners who are seeking to enforce patents. It also evaluates patent portfolios and

designs enforcement approaches. One panelist reported that contingent fee arrangements are

72

becoming less common for small companies, but that institutional investment funds will now

partner with small companies and independent inventors to support patent enforcement.73

Patent aggregators. Patent aggregators build very large portfolios of purchased patents

and implement a licensing strategy to earn returns for investors. The most prominent 74

aggregator is Intellectual Ventures (IV), which was founded in 2000 and began operations in

2003. IV has reportedly amassed more than 30,000 patents. One panelist estimated that IV 75

accounted for half of all patent purchases over the past few years, and that its recent reduction in

purchases had significantly diminished demand in the market for patents. 

76

Intellectual Ventures makes patent acquisitions through funds, which have reportedly

raised $5 billion, and returned $1 billion to investors to date. The main revenue stream for the 77

funds reportedly comes from partnership or licensing fees paid by large IT companies. While

78

not ruling out legal actions, IV emphasized through much of its history that it always reached

voluntary licensing agreements. However, in 2009, it began transferring patents to third parties 79
See Zusha Elinson, Intellectual Ventures Takes Indirect Route to Court, LAW.COM (Sept. 1, 2009)

80

(reporting that in at least one case, IV reportedly retained a share in any licensing of litigation revenues

obtained by the firm that acquired the patent), available at

http://www.law.com/jsp/article.jsp?id=1202433490140. IV has also transferred patents to a member to

use in a counterclaim in patent litigation. See Zusha Elinson, Verizon Patent Case Marks a First For

Intellectual Ventures, LAW.COM, Feb. 26, 2010, available at

http://www.law.com/jsp/article.jsp?id=1202444656758.

See Don Clark & Dionne Searcey, Big Patent Firm Sues Nine Tech Firms, WALL ST. J., Dec. 9 2010,

81

available at

http://online.wsj.com/article/SB10001424052748703493504576007444122372926.html?mod=PatentlyO

Hoffman at 121-22 (4/17/09). Myhrvold himself emphasizes the challenges posed by the volume of 82

Intellectual Venture’s holdings, telling potential licensees “I can’t afford to sue you on all these, and you

can’t afford to defend on all these.” Sharma & Clark, supra note 78.

Delgado at 122-23 (4/17/09) (opining that not licensing would be “an expensive endeavor and []

83

probably not an incredibly practical one”); Quatela at 123 (4/17/09) (emphasizing the high cost of

analyzing a significant number of patents).

Millien and Laurie, supra note 61, at 57. 84

Hoffman at 53 (4/17/09); Bergelt at 53-54 (4/17/09); Amster at 97-99 (5/4/09). 85

66

to bring litigation. And at the end of 2010, IV began enforcing patents directly, bringing 80

several high-profile actions against major segments of the high tech industry.81

Some industry participants have expressed concerns that IV’s ability to assert a virtual

armada of patents gives it an unusually strong bargaining position. One panelist described IV as

betting on a “volume strategy,” based on approaching potential licensees with a large portfolio

and asking them “how much do you want to bet that at least one of them is really good.”82

Panelists suggested that it would not be pragmatic to refuse to license similar offers.

83

Defensive buying funds. Responding to the rise of IV and other PAEs, “defensive

aggregators” acquire patents on behalf of a group of potential PAE targets. Participating firms

pay a fee to support patent purchases and the fund licenses back the patents to them. The

purchases take patents “off the street” by preventing a PAE from acquiring and asserting the

patents against members. The defensive buying funds generally resell the patents into the 84

marketplace, subject to the licenses, to reduce members’ costs and prevent non-members from

free-riding on their activities. One panelist explained that this business model can help IT firms 85

manage their potential liability and take advantage of arbitrage opportunities in the market for
Bergelt at 41 (4/17/09). 86

Allied Security Trust is a nonprofit purchaser and seller of patents, whose members are large high-tech 87

operating companies. See Scott Moritz, Big Tech Gets Legal Aid in the Patent Wars, FORTUNE (June 30,

2008), available at http://money.cnn.com/2008/06/30/technology/patents.fortune; Allied Security Trust,

Home Page, http://www.alliedsecuritytrust.com/AcquiredPortfolios.aspx.

Amster at 97-98 (5/4/09). Open Innovation Network, designed to protect the Linux community, uses a 88

somewhat different approach – acquiring patents and making them available royalty-free to those who

agree not to assert their patents against the Linux system.

http://www.openinventionnetwork.com/patents.php.

Krall at 92 (3/18/09). 89

Press Release, RPX Corp., RPX Membership Jumps to 35 Companies (Feb. 16, 2010), available at 90

http://www.rpxcorp.com/index.cfm?pageid=32&itemid=6.

See Hoffman at 35 (4/17/09) (broker and strategic advisor describing his “role as helping the market be 91

as efficient as possible in valuation and transferring of patents”); Millien & Laurie, supra note 61, at 54-

55. Cf. Cockburn at 213 (4/17/09) (suggesting that one of the main situations in which deals fail is where

the parties “don’t have an informed intermediary or a broker”).

Ocean Tomo ICAP has pioneered live auctions for selling patents, and has plans to develop additional 92

platforms, including online mechanisms, for selling IP rights. See Malackowski at 14-21 (4/17/09)

(discussing the OceanTomo live auctions and related platforms under development). Actual transactions

have been very limited to date, however. Lemley at 146-47 (4/17/09) (there are “a relatively small

number of patents being sold for a relatively small amount of money” at auctions). Other firms are

actively pursuing innovative platforms for IP transactions. See, e.g., Yanagisawa & Guellec, supra note

71, at 15-22 (reviewing a variety of such endeavors).

67

patents. Such defensive buying funds include Allied Security Trust, and RPX (Rational 86 87

Patent Exchange). One panelist reports that Allied Security Trust has been “successful” in 88

helping to address the volume of patents on the market. RPX reported in 2010 that it had 35 89

members and had spent “$200 million to acquire more than 1,300 patents and patent rights”

covering IT technology. 

90

Intermediaries. Licensing agents, brokers and other consultants have emerged to help

clients navigate the complex patent landscape and make deals. They help patent owners find 91

licensees and buyers. Other mechanisms, such as patent auction houses and online technology

exchanges, also attempt to connect patent owners and potential customers with varying levels of

success.92

V. EFFECT OF SECONDARY PATENT MARKETS AND PAE ACTIVITY ON

INNOVATION AND COMPETITION

Over the past several years, the patent community has debated the effect of increasing

PAE activity and patent market complexity on innovation and competition and how patent policy
James F. McDonough III, The Myth of the Patent Troll: An Alternative View of the Function of Patent 93

Dealers in an Idea Economy, 56 EMORY L.J. 189, 190 (2006) (“Patent trolls provide liquidity, market

clearing, and increased efficiency to patent markets . . . .”).

 Quatela at 43 (4/17/09) (reporting that Kodak has recently begun targeted selling of patents largely to 94

“fund the transformation that the company is experiencing from an analog manufacturing space to a

digital space”).

Gutierrez at 115 (5/4/09) (“when you’re entering into a new area and you feel that you’re exposed, one

95

of the tools that companies will use is the acquisition of patent portfolios in the market”); Lutton at 136

(5/4/09) (praising “the emergence of an efficient marketplace” enabling firms “to align the portfolio with

business needs”).

Ryan at 32-34 (4/17/09); Detkin, supra note 61, at 636 (“Small companies and individuals have few 96

good options for licensing their patents or developing their inventions without interference from

infringers.”); Yuichi Watanabe, Patent Licensing and the Emergence of a New Patent Market, 9 HOUS.

BUS. & TAX L. J. 445, 451 (2009) (“smaller patentees cannot set up an effective licensing operation using

conventional business models that are used by the bigger corporations”); John Johnson, Gregory K.

Leonard, Christine Meyer & Ken Serwin, Don’t Feed The Trolls?, 42 LES NOUVELLES 487, 489 (Sept.

2007) (“The argument espoused by the patent trolls and individual inventors is that patent troll activity

helps even the playing field between the individual inventor and the large corporation.”).

68

should respond. The effect of these developments, like the effect of ex post transactions

generally, can be detrimental to innovation. Moreover, some of the asserted benefits of PAE

activity appear, on closer inspection, ambiguous at best. Understanding those effects helps patent

policy to respond in ways that better align the patent system with competition policy, support the

beneficial effects, and lessen the detrimental ones. 

The active secondary market for patents facilitated by patent intermediaries has increased

the liquidity of patents and provided corresponding benefits to patent owners, according to

panelists. Both large and small companies are better able to find buyers for patent portfolios 93

that they no longer need or wish to maintain. Selling those portfolios allows companies to

recoup some return on the associated R&D investment and raise funds that can be used to

support other innovative efforts. Manufacturing companies can also benefit from an active 94

patent marketplace when they seek to purchase patents that will give them the patent portfolio

and freedom to operate needed to move into a new product area.95

Supporters of the PAE business model argue that when PAEs purchase patents from

independent inventors and small companies in order to assert them, the PAEs provide needed

compensation and funding that inventors could not receive otherwise. Panelists from PAEs 96

explained that independent inventors have great difficulty negotiating royalty payments from

large operating companies because they cannot credibly threaten expensive infringement suits. A

PAE may serve as “an intermediary between large companies, who use new patented

technologies on their products, and the small companies who invented and patented these
Ryan at 33 (4/17/09). See also Detkin, supra note 61, at 644 (describing NPEs as “play[ing] a role in 97

matching patent owners with patent users”).

Detkin at 36 (12/5/08) (“Folks come to us and say, I have invented something cool, I want to go back to 98

inventing, will you help me monetize this. We have capital for that.”); Myhrvold, supra note 75, at 8

(describing how Intellectual Ventures buys patents from inventors who “prefer to just hand off their

invention to a licensee and move on to the next great idea”).

Chapter 1, Section III.A. 99

Economist Martin Weitzman notes, “the ultimate limits to growth may lie not as much in our ability to 100

generate new ideas, so much as in our ability to process an abundance of potentially new seed ideas into

usable forms.” LEWIS M. BRANSCOMB & PHILLIP E. AUERSWALD, DEPT. OF COMMERCE, BETWEEN

INVENTION AND INNOVATION: AN ANALYSIS OF FUNDING FOR EARLY-STAGE TECHNOLOGY

DEVELOPMENT 1-2 (2002).

Johnson et al., supra note 96, at 490 (“Patent troll activity may tend to an increase in the amount of 101

inventive activity through its positive effect on patent value. At the same time, patent troll activity may

inhibit development and commercialization of new inventions by adding unwarranted costs to the

commercialization process.”).

Detkin at 30-32 (12/5/08); Ryan at 32-33 (4/17/09).

102

McCurdy at 74 (12/5/08); Delgado at 61-62 (4/17/09). Panelists from large companies also explained

103

a reluctance to speak with independent inventors for fear that the information exchanged might be used

69

technologies.” Representatives of PAEs maintain that their patent purchases and assertions 97

against operating companies promote innovation by compensating inventors who can then direct

their energies toward making more inventions.98

Even if it is correct that PAEs incentivize and fund the work of inventors, the effect of

this activity on innovation can be detrimental if efforts focus only on ex post licensing and not ex

ante technology transfer. Paying inventors only to invent and patent may generate more

invention and patents, but it may not generate more innovation. Invention is only the first step in

an often lengthy and expensive development process to bring an innovation to market. More 99

invention creates the potential for more innovation but does not guarantee it. To the extent that 100

patenting and ex post licensing increase the risk and expense of the development and

commercialization process of others without providing new technology ex ante, that activity

deters innovation.101

Representatives of PAEs also argue that the inventors of the patents they assert would

prefer to license their inventions ex ante as part of a technology transfer agreement rather than ex

post, but the large companies that could develop those inventions largely ignore them.102

Representatives of large companies explained that they generally viewed early-stage invention of

the type offered in a bare patent license as insufficiently developed to present a good opportunity

for bringing new technology into the company. Large companies seeking to acquire 103
to support a later allegation of willful patent infringement against them. Quatela at 56 (4/17/09);

Delgado at 57 (4/17/09).

BRANSCOMB & AUERSWALD, supra note 100, at 37-38 (describing lack of funding for early-stage 104

technology development). A panelist representing a large biotech company noted that he is less likely to

license in basic research and is more concerned with bringing in product opportunities. Watt at 27

(5/4/09). See also Lutton at 101 (5/4/09) (licensing a “patent right alone” is the least common vehicle for

bringing new technology into the company).

 “We put 50 technologies on our website, and we said come and get them. And nothing happened. We

105

learned a very powerful lesson. And that is you just can’t throw technology out there and expect it to

succeed. If you really want it to succeed you had to build an infrastructure around it.” As a result,

Microsoft has made venture capital, managers, and complementary technologies available to aid potential

licensees. Phelps at 247-48 (5/4/09).

Massaroni at 151 (2/12/09) (explaining that in the IT industry many patents “of suspect value” come 106

on the market when a firm exits the market and its assets are sold to satisfy creditors).

Katznelson at 61 (3/18/09) (“the value of the assets . . . [in the] secondary market valuation is an 107

incredibly important gate for investors to make an investment in your company”); Bergelt at 66 (4/17/09)

(observing that in the past dozen years “several billion dollars has been” invested in intellectual property

and that the IP is all one has “[i]n the event of a default and foreclosure”); cf. Sonderstrom at 62

(3/18/09) (agreeing with Katznelson that this is true in some areas, but not in life sciences).

Daniel P. McCurdy, Patent Trolls Erode the Foundation of the U.S. Patent System, SCI. PROGRESS 78, 108

82 (Fall & Winter 2008/2009), available at

http://www.scienceprogress.org/wp-content/uploads/2009/01/issue2/mccurdy.pdf (NPEs offer “trivial

rewards to the inventor”).

70

technology from start-ups often prefer those that have already proceeded successfully to later

stages of development and proven viable. This is consistent with the experience of large 104

companies seeking to sell their own internally-developed technology. Microsoft found that

simply offering a bare license was insufficient to generate interest in potential buyers. More

development and infrastructure was needed.105

Another argument that PAE activity supports innovation looks to the “salvage value” of

patents. Some patents purchased and asserted by PAEs originate with failed start-up

companies. Some panelists and commentators assert that the ease with which start-ups can sell 106

their patents into the secondary patent market if the company fails helps them attract muchneeded investment. The increased liquidity generated by an active patent market arguably makes

it easier for patentees to obtain financing by using their patents as collateral.107

Other panelists and commentators challenged this contention, however. One noted that

the amounts PAEs paid to inventors was too small to provide a significant incentive to invent or

funding for future work. Another explained that the salvage value of patents from a failed 108

start-up was too small to encourage the significant investment most start-ups need to develop and
Kiani at 63-64 (3/18/09). Academic research has not yet resolved the extent to which the salvage value 109

of patents provides ex ante incentives to invest in R&D. Ziedonis at 199 (5/4/09) (citing this as an

unresolved research question while noting that “if these patents are basically sold in bankruptcy

proceedings for fire-sale prices, then it’s unclear to me how these markets for patents are actually

stimulating the financing of these entrepreneurial firm activities”).

Merges at 240-41 (5/4/09). 110

See Cotropia & Lemley, supra note 19, at 1466 (reporting that the patent litigation system “gives 111

patent owners control primarily over independent invention by third parties” and observing that this may

“give inventors extra incentives or perhaps to create more certain rights that more easily can be

licensed”).

Maghame at 169-70 (2/11/09) (explaining that “there isn’t another choice other than to litigate” if an 112

R&D firm “cannot negotiate licenses with people” who use its technology); Lord at 174-75 (2/11/09)

(explaining that the ability to sue for patent damages was necessary to effectively negotiate technology

transfer agreements to prevent copying). 

Ryan at 43 (4/17/09) (explaining that “small companies and individual inventors who had no way to 113

monetize” sell their patents to PAEs).

71

commercialize viable technology. To the extent that the sale occurs only after a firm or project

109

has failed, it is unlikely that payments for patents provide a significant added incentive to

innovators beyond the incentive provided by the hope of a successful, patented product.110

In contrast to these uncertain benefits, the harms associated with PAE activity are the

harms associated with all ex post patent assertions against manufacturers that have independently

created or obtained the technology, as described in Section II.B. above. Such transactions can

distort competition in technology markets, raise prices and decrease incentives to innovate. The

extent of PAE activity in the IT sector amplifies the potential harm there.

VI. CONCLUSION

Attempts to address concerns about the detrimental effects of PAE activity on innovation

and competition must be undertaken with sensitivity to the roles played by a patentee’s ability to

enforce and transfer its rights. The patentee’s ability to allege patent infringement even against

independent creators of the patented technology and enter ex post patent transactions is an

important feature of the patent system’s incentives to innovate. Patent licensing, including ex

111

post licensing, provides support to the business models based on technology transfer described in

Chapter 1. Other times, a patentee’s most efficient way to monetize his patent is to sell it, 112

making the right to transfer a patent an important component of its value and the patent system’s

incentives to innovate. Moreover, it is not clear how principles of patent law could be varied

113

depending on the business model of the patent owner. It is difficult to distinguish patent
C. J. Michel at 119 (12/5/08) (declaring that “the essential element of property is it is alienable” and 114

asking “[w]hy should I be prohibited from buying patents if that’s what I want to do”).

72

transactions that harm innovation from those that promote it, and errors that undermine beneficial

transactions can harm consumers. 

114

For these reasons, this report explores the conditions of patent law and policy that have

created conditions where a patent market based on ex post transactions has flourished and

addresses those conditions directly. Those conditions, discussed above, are those that lead to or

create incentives for patentees to pursue ex post patent transactions rather than technology

transfer: poor patent quality, problems of patent notice, and remedies that do not reflect the

economic value of the patented technology. The remaining chapters of this report describe how

to align these latter two areas of patent law with competition policy to increase innovation and

enhance consumer welfare.
73

CHAPTER 3

PATENT NOTICE: A COMPETITION PERSPECTIVE

I. INTRODUCTION .................................................... 74

II. PATENT NOTICE AS AN AID TO COMPETITION AND INNOVATION . . . . . 75

III THE NATURE AND SOURCES OF NOTICE PROBLEMS . . . . . . . . . . . . . . . . . 80

A. Difficulties in Interpreting the Boundaries of Issued Claims . . . . . . . . . . . . 81

B. Difficulties in Foreseeing Evolving Claims .. . . . . . . . . . . . . . . . . . . . . . . . . . 87

C. Difficulties in Sifting Through a Multitude of Patents . . . . . . . . . . . . . . . . . 90

IV. POSSIBLE NOTICE ENHANCEMENTS ................................. 92

A. Improving the Ability to Understand Existing Claims: Indefiniteness . . . . 94

1. Background and Hearing Record

2. Analysis

B. Improving the Ability to Understand Existing Claims: 

Claim Construction . ........................................... 102

1. Enhancing the Value of the Specification for Notice Purposes

a. Background and Hearing Record

b. Analysis

2. Enhancing the Prosecution History for Notice Purposes

C. Improving the Ability to Foresee Evolving Claims . . . . . . . . . . . . . . . . . . . 116

1. Publication of Applications

2. Written Description and the Problem of Expanding Claims

a. Background and Hearing Record

b Analysis 

3. Continuation Practice and the Broadening of Claims

D. Improving the Ability to Sift Through a Multitude of Patents . . . . . . . . . 126

1. Improving the Ability to Search for Relevant Patents

a. Background

b. Analysis

2. Identifying Patent Assignees 

a. Background 

b. Analysis

3. Modifying Liability for Inadvertent Infringement

V. CONCLUSION . ..................................................... 134
FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT 1

LAW AND POLICY, Exec. Summ., at 1 (Oct. 2003) (“2003 FTC IP Report”), available at

http://ftc.gov/os/2003/10/innovationrpt.pdf.

See id., Exec. Summ., at 5 (“A poor quality or questionable patent is one that is likely invalid or contains 2

claims that are likely overly broad.”).

See Bessen at 46-47 (3/19/09) (explaining that “[f]or a property system to function well, it has to have 3

transparent public boundaries” that can be “predictably interpreted” as well as “clear rules for

possession” and “low-cost clearance search”).

74

CHAPTER 3

PATENT NOTICE: A COMPETITION PERSPECTIVE

I. INTRODUCTION

Starting from an understanding that “[b]oth competition and patent policy can foster

innovation, but each requires a proper balance with the other to do so,” the FTC’s 2003 IP 1

Report examined from a competition perspective the problems posed by questionable patents. It

found that poor-quality patents were a significant competitive concern and a potential

impediment to innovation, and it offered a number of recommendations for improvement. 

Although it examined a broad array of issues, its primary focus was on patent validity and overbreadth.2

The 2008/2009 hearings extended this foundation by examining an associated set of

issues raised by the patent system’s notice function. Here the focus is on the extent to which

patents and patent applications apprise the public – particularly third-party competitors and

potential users of patented technology – concerning the metes and bounds of a patent’s right to

exclude or the potential reach of claims that might emerge from an application. Under its strict

liability regime, the patent system confers patent rights and assigns the burden of avoiding

infringement to users; as a corollary, the system also needs to facilitate users’ ability to identify

and understand the patent rights at hand. Otherwise, rivalry may be constrained, and innovation

hindered, by misperceptions or uncertainty regarding infringement liability. 

As highlighted by Chapters 1 and 2, notice plays a critical role in enabling patents to

promote innovation. The technology transfers described in Chapter 1 are most effective when

patents provide clear notice of their boundaries. This enables parties to contract efficiently, with

confidence as to the technology rights that are conveyed, facilitating both collaboration among

firms with complementary expertise and competition among inventions in technology markets. 

Conversely, the failure of notice in some sectors lies at the heart of problems from ex post patent

assertion that may retard rather than promote innovation, as described in Chapter 2. 

Fundamentally, an effective notice system, in which prospective technology users can ascertain

applicable patent rights at reasonable cost and with reasonable certainty, is essential for patents to

operate as a property system.3
Shortly before issuance of this report the Patent and Trademark Office issued examination guidelines 4

that give considerable emphasis to notice concerns. See USPTO, Supplementary Examination Guidelines

for Determining Compliance with 35 U.S.C. 112, 76 Fed. Reg. 7,162 (Feb. 9, 2011) (“Supplementary

Examination Guidelines”). For discussion of other promising recent signs of increased recognition of

notice concerns, see infra section IV.A.

35 U.S.C. § 112. 5

Univ. of Rochester v. G.D. Searle & Co., 358 F.3d 916, 922 n.5 (Fed. Cir. 2004).

6

McClain v. Ortmayer, 141 U.S. 419, 424 (1891). 7

Indeed, innovative products may “create competition” that transforms a market, challenges entrenched 8

market power, and gives rise to a new industry. JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM, AND

DEMOCRACY, ch. 7 (1976).

Gen. Elec. Co. v. Wabash Appliance Corp., 304 U.S. 364, 369 (1938). 9

75

Yet, until recently, notice concerns have not necessarily been at the forefront of the 4

patent community’s attention. By and large, the patent system has focused on prosecuting

applications for patent issuance and then litigating issues of validity and infringement. Courts

have formulated patent doctrines with these core needs in mind. Notice considerations – largely

distinct from these primary objectives – have tended to take a back seat. Sometimes the

substantive inquiry has been framed in terms that serve notice objectives as well, such as when

the written description in an application is analyzed in terms of what a hypothetical person

having ordinary skill in the art would understand. But notice concerns implicate, and become

intertwined with the objectives of, multiple other patent law doctrines and procedures, including

claim construction, written description, and enablement.

This chapter seeks to highlight public notice as an objective in its own right, one worthy

of heightened attention in view of its implications for competition and innovation. It first

examines the competitive significance of the notice function in greater detail. Next it reviews the

hearing evidence to identify specific notice problems that have emerged. A final section then

proposes steps that might significantly enhance public notice, bringing the patent system and

competition into better alignment. 

II. PATENT NOTICE AS AN AID TO COMPETITION AND INNOVATION

Patent law requires the patentee to distinctly claim his or her invention, thereby “giv[ing] 5

public notice of the subject matter that is protected” and “appris[ing] the public of what is still 6

open to them.” Notice promotes the invention, development, and commercialization of 7

innovative products, one of the most important forms of competition, by helping third parties 8

and patentees avoid “uncertainty as to their rights.”9
See Ted M. Sichelman, Commercializing Patents, 62 STAN L. REV. 341, 361 (2010). 10

In re Seagate Techs., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007); see also David J. Kappos, Building

11

Bridges and Making Connections Across the IP System, 20 FED. CIRCUIT B.J. 273, 275 (2010) (“patent

infringement is, by definition, a strict liability tort”).

The patent marking requirement, 35 U.S.C. § 287(a), provides that patentees that make, use, sell, or 12

offer to sell a patented article must either mark the article or packaging with the patent number, or be

entitled to damages only for infringement that occurs after they provide actual notice to the infringer. 

See Roger D. Blair & Thomas F. Cotter, Strict Liability and its Alternatives in Patent Law, 17 BERKELEY

TECH. L. J. 799, 800, 801 (2002) (suggesting that the patent system does not impose strict liability “in the

purest sense” because, due to the marking requirement, an infringer “is often not liable for damages until

the plaintiff puts her on notice”). However, the marking requirement is sharply circumscribed – it does

not affect liability for infringement of method or process patents or of idle patents (which do not give rise

to products), and it does not place any limits on injunctive relief. See id. at 804-07 (also noting that there

is no requirement that marking provide actual notice to the defendant); see generally JOHN M. SKENYON,

CHRISTOPHER S. MARCHESE & JOHN LAND, PATENT DAMAGES LAW AND PRACTICE § 1:24 (2008)

(describing § 287(a) and its limitations).

Blair & Cotter, supra note 12, at 800-01 (“a defendant may be liable without having had any notice, 13

prior to the filing of an infringement action, that her conduct was infringing”); Mark A. Lemley, Should

Patent Infringement Require Proof of Copying?, 105 MICH. L. REV. 1525, 1525 (2007) (“those who

independently develop a technology with no knowledge of the patent or the patentee” may be held liable

for infringement).

Menell at 29 (5/5/09); see also John H. Johnson, Gregory K. Leonard, Christine Meyer & Ken Serwin,

14

Please Don't Feed the Trolls?, 42 LES NOUVELLES 487, 489 (Sept. 2007) (the risk of unforeseen patent

claims “adds significant cost to the product development project”); Graham at 142-43 (4/17/09)

(“uncertainty . . . over the final boundaries . . . or over the validity of the property right” may “add

transaction costs to commercialization, technology transfer and developing markets for intellectual

property”); IBM Comment at 2 (2/12/09) (“If the boundary created by the patent claims is ambiguous, the

public has inadequate notice of the invention and it is more likely that people will inadvertently

infringe.”); Am. Intell. Property Law Ass’n Comment at 7 (May 15, 2009).

76

Such uncertainty can greatly inhibit innovation and competition. “[P]atent infringement 10

is a strict liability offense.” Infringers are subject to injunctive relief and, with some 11

limitations, damages, regardless of whether they were aware of the existence of the patent or 12

that it covered their activity. As a result, a firm commercializing a new product and seeking to 13

avoid later infringement allegations is responsible for identifying and licensing patents that read

on the product. Inability to effectively “clear” patents can result in burdensome litigation and

expensive remedies, even for unintended infringement. Poor patent notice undermines

innovation and competition by raising the risk of such infringement and imposing “a very high

overhead” on innovation.14

Notice and efficient investment in innovation. As the Supreme Court has explained,

“[C]larity [regarding patent rights] is essential to promote progress, because it enables efficient
Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 730-31 (2002). 15

See generally JAMES BESSEN & MICHAEL J. MEURER, PATENT FAILURE 9 (2008) (“Poor notice causes 16

harm because it subjects technology investors to an unavoidable risk of disputes and litigation. The

expected cost of inadvertent infringement imposes a disincentive on technology investors.”). 

Phillips at 202 (3/18/09) (“To the extent that there’s uncertainty, unpredictability, risk[, firms are] going 17

to spend less money on R&D.”); Menell at 127-28 (5/5/09) (the inability to know the potential damages

that might result from projects under development “just chills . . . innovation unnecessarily”).

Kappos at 132 (3/19/09).

18

2003 FTC IP Report, ch.2, at 28.

19

See infra Section III.C.; see also Shafmaster at 216 (3/18/09) (Genzyme “make[s] sure before 20

embarking on development pathways that we will have all the rights we need”).

See, e.g., Shafmaster at 238 (3/18/09) (“[t]here’s always some uncertainty” in assessing a patent);

21

Myers at 238 (3/18/09) (“it’s never a matter of having zero risk”).

See, e.g., Bright at 38 (5/4/09) (firms “spend a tremendous amount of time studying the specifications, 22

applying the law ourselves”); BESSEN & MEURER, supra note 16, at 55 (noting the $20,000 to $100,000

cost of legal opinion letters) and 70 (observing that the cost of clearance “ratchets up” when patents have

77

investment in innovation.” If firms can identify and assess the scope of relevant patents in 15

advance of launching a product, they can select technologies based on a knowledge of the

applicable patent rights. Conversely, when the notice function fails, firms must make key

competitive decisions on product design and R&D directions in the face of uncertainty as to

potential patent liability, inhibiting their efforts to innovate and compete. 

16

Poor patent notice may cause firms to cut back on procompetitive innovation, reducing

competitive vigor and depriving consumers of new technologies. Firms reduce their R&D

expenditures in the face of increased uncertainty. In addition, when there is a “lack of clarity 17

around patent rights,” firms “routinely . . . move away from technology areas, move into different

technology areas, steer clear of innovations that [they would] otherwise want to invest in.”18

Finally, when firms are unable to identify and assess patent risks before selecting inputs for new

products, services, or features, poor patent notice may force them to “choose between the risk of

being sued for infringement after they sink costs into invention or production, or dropping

innovative or productive efforts altogether.”19

Coping with poor patent notice. Firms can reduce uncertainty regarding infringement

liability by investing time and resources to identify and review patents that might cover a

technology used in their new product. Such patent clearance efforts are generally effective in

certain industries, such as chemicals, pharmaceuticals, and biotechnology, even if some 20

uncertainty remains. However, when the notice function is poorly served, the costs of 21

identifying and analyzing relevant patents can be onerous. Moreover, in some fields such as IT 22
“fuzzy boundaries”).

See infra Section III.C. 23

See, e.g., Harris at 124 (3/18/09) (reporting that AOL goes forward if it is a good business decision to 24

get in the market, despite uncertainty); Rogers at 125 (3/18/09) (explaining that Qualcomm comes to “the

best understanding that we can and we make decisions based on it”); Slifer at 125 (3/18/09) (explaining

that Micron invests based on “competition and consumers” without expending “much time” on “futile”

efforts to achieve certainty).

See Simon at 202-03 (2/11/09) (explaining that Intel “almost invariably ha[s] another option” that it 25

would take if its patent exposure were known at the time of the design decision); Horton at 191 (3/18/09)

(designing around is “[t]he best avenue” and “almost always the cheapest”).

Horton at 173 (3/18/09) (“the most cost efficient way to deal with other[s’] patents is up-front, identify 26

them early, license them in where you can’t design around them”); Bellon at 229-30 (3/18/09); Phillips at

202 (3/18/09) (Exxon/Mobil sometimes licenses pending patents to address the risk they pose).

See, e.g., Sprigman at 77 (2/12/09) (indicating that parties enter into licenses based on “interpretations 27

of the claim terms that probably wouldn’t have passed muster before the PTO and may not pass muster

before a court, but because they are problematic”); Software & Information Industry Association

Comment at 5-6 (2/5/09) (describing the pressures on firms to take licenses even when arguments

regarding infringement are weak); but cf. Horton at 192 (3/18/09) (suggesting that licenses can partly

address this problem by making the amount of payments contingent on subsequent determinations of the

patent’s scope).

See Princo Corp. v. Int’l Trade Comm’n, 563 F.3d 1301, 1309-12 (Fed. Cir.) (avoiding resolution of a 28

claim construction dispute by holding that a patent was properly included in a pool as “essential” when it

“reasonably might be necessary” to manufacture the relevant standardized products), vacated for en banc

review, 583 F.3d 1380 (Fed. Cir. 2009), reinstated in relevant part, 616 F.3d 1318, 1326 n.1 (Fed. Cir.

2010) (en banc).

78

and telecommunications, patent notice functions so poorly that even massive efforts might not

reliably clear all relevant patents, although businesses frequently choose to go forward despite 23

this uncertainty.24

When risks of patent liability are identified, firms may be able to design around patented

technology or to license potentially applicable patents. However, in doing so they incur costs 25 26

– developing and implementing an alternative (and perhaps inferior) technology or paying

royalties. When patents provide poor notice of their scope, the resulting uncertainty may force a

firm to incur these costs unnecessarily for patents that would not be held to cover their product,

burdening innovative activities and raising prices. Similarly, poor notice regarding patent scope 27

can lead patent pools to include patents that are not really essential to implementing a standard.28

When poor patent notice leads innovative firms to launch products despite uncertainty

regarding potential infringement, they risk facing patent assertions post launch. Resolving these

claims often involves expensive and disruptive litigation, including disputes over the scope of
See Durie at 71 (5/5/09) (patents that are “imprecise” or “susceptible to many different interpretations” 29

are more difficult to litigate against); Kappos at 122 (3/19/09) (“unclear” or “ambiguous” claims

“force[] all participants, at least in the information technology industry, to spend undue amounts of effort

on dealing with conflict”); IBM Comment at 2 (2/12/09) (When patents “lack [] clear boundaries . . . .

[t]he result is often expensive lawsuits to determine the meaning of the claims, and a costly judgment if

those parties are ultimately found to have interpreted the claims, in good faith, incorrectly – or costly

settlement in advance of litigation”).

See supra Chapter 2, Section II; Verizon Comment at 3 (3/20/09) (“[H]igh switching costs can drive 30

high royalty demands, well in excess of the economic value of the patent.”); Software & Information

Industry Association Comment at 5-6 (2/5/09) (similar); Mark A. Lemley & Carl Shapiro, Patent Holdup

and Royalty Stacking, 85 TEX. L. REV. 1991 (2007).

See, e.g., BESSEN & MEURER, supra note 16, at 131 (“an innovator will look at this risk [that patent 31

litigation may arise] as a cost to weigh against the expected profits from the new technology”); Carl

Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting, in 1

INNOVATION POLICY AND THE ECONOMY 119, 126 (2001) (indicating that some companies will “refrain

from introducing certain products for fear of holdup”).

See Yen at 89 (12/5/08) (patent litigation “takes money away from innovation and . . . being able to hire

32

the engineers and have the resources to develop product”); Kappos at 122 (3/19/09).

See DeVore at 31 (5/4/09); Shema at 32 (5/4/09); BESSEN & MEURER, supra note 16, at 130. The 33

significance of this concern may vary by industry. See Lemley at 194 (4/17/09) (observing that while

“pharmaceutical companies will not enter into new drug investigations unless they’re confident up-front

that they have a patent portfolio that will cover those drugs,” software industry venture capitalists “don’t

care . . . what the claim construction is going to end up being”).

See Kappos at 131 (3/19/09) (explaining that when notice is inadequate “we’re either getting or paying 34

the wrong amount for these things because they can’t be valued accurately”); Lemley at 147-48 (4/17/09)

(identifying poor notice as contributing to markets that “don’t drive you to the right price”).

79

unclear patent claims that increase these costs. Furthermore, if the alleged infringer would face

29

large switching costs due to sunk investments based on the patented technology, it may be forced

to pay higher royalties than it would have negotiated prior to launch. These risks increase 30

expected costs, reducing firms’ incentives to pursue innovative projects, while the associated 31

expenses cause firms to reduce spending on R&D.32

Notice and efficient development of patented technology. Poor notice as to a patent’s

scope undermines the patentee’s ability to exploit the patented technology, either by practicing it

or transferring it to another firm for commercial development. When the scope of the patent is

unclear, a patentee’s financial backers ultimately may conclude that the patent does not provide

sufficient protection from imitation to justify investing in commercialization. Similarly, 33

uncertainty regarding patent scope may lead potential licensees to misvalue a patent or to decide 34
See Lemley at 147-48 (4/17/09) (observing that notice problems contribute to “leav[ing] a lot of 35

transactional money on the table in the sense that transactions that should have occurred, that would

benefit both the buyer and seller, don’t occur”); Bessen at 50 (3/19/09) (“deals don’t happen that could

happen”); Wagner at 192 (4/17/09) (“every bit of uncertainty . . . undermines” the ability to engage in

technology transfer). See supra Chapter 1.

Phelps at 250 (5/4/09). 36

Kappos at 131 (3/19/09); see also Lemley at 148 (4/17/09) (describing the patent market as a “market 37

for lemons” in which patents are undervalued because “people are afraid of being taken”).

See Bessen at 49 (3/19/09) (explaining that in the presence of notice problems, buyers must account for 38

dispute risk).

Lee at 7 (5/5/09). 39

Durie at 18 (5/5/09).

40

Kahin at 61 (12/5/08); see also Mark A. Lemley, Ignoring Patents, 2008 MICH. ST. L. REV. 19, 21 41

(2008) (“[B]oth researchers and companies in component industries simply ignore patents. Virtually

everyone does it.”).

80

not to acquire and commercialize a technology: “if you don’t have IP rights that are understood 35

by the purveyor of them and the receiver of them, you don’t have the necessary scaffolding to

build a good . . . bridge there between the two sides.” Purchasers may undervalue good patents 36

due to the difficulty of “tell[ing] the difference between the good stuff and the bad stuff” and 37

may discount the value of patents whose scope is unclear. An inability to accurately price 38

patented technologies thus disrupts the efficient functioning of technology markets and may

result in reduced technology transfer and less innovation.

III. THE NATURE AND SOURCES OF NOTICE PROBLEMS

While panelists at the hearings generally agreed that notice is an issue of broad

importance to the patent system, participants from different industries reported varying degrees

of difficulty in securing adequate notice and split in their overall conclusions regarding the

manageability of current problems. 

By far the most serious concerns were identified in the IT sector, where some panelists

asserted that the notice function “is not well served at all” or declared that “it is virtually 39

impossible to conduct a meaningful patent clearance.” As a result, others noted, IT firms 40

frequently do not perform clearance searches when introducing products, instead essentially

“ignor[ing] patents.” In contrast, panelists who addressed other industries, most notably the 41

pharmaceutical and biotech sectors, indicated that the notice function “by and large” is “very well
Armitage at 120 (3/19/09) (arguing that this holds once claims that would be held invalid are set aside); 42

see also Meurer at 210-11 (12/5/08).

Singer at 244 (3/18/09); see also Jensen at 244 (3/18/09) (noting that venture capitalists require such 43

searches for funding).

See BESSEN & MEURER, supra note 16, at 10 (“While surveyors can plainly map the words in a deed to 44

a physical boundary, it is much harder to map the words in a patent to technologies . . . .”). 

See e.g., Kappos at 122-23 (3/19/09) (expressing concern about issued claims “that are unclear, that are 45

ambiguous”); Luftman at 220-21 (2/12/09) (expressing concern about patents that are “vague enough”

that Palm is “sucked into” an infringement lawsuit).

See, e.g., Lemley at 148 (4/17/09) (“It is virtually impossible for anybody to know in most industries 46

most of the time whether a patent that they’re looking at is valid or invalid, what that patent covers and

therefore whether or not it’s likely to be infringed”); Wagner at 184 (4/17/09) (terming the “fact that we

cannot figure out claim construction . . . deeply harmful to the patent system”); Sprigman at 34 (2/12/09)

(“the boundaries of patent[s] are very indistinct . . . [and] require interpretation, interpretation that is

costly and subject often to error”); Menell at 32 (5/5/09) (claim construction is “highly indeterminate –

it’s really risk management”); Meurer at 211 (12/5/09) (“fuzzy boundaries” are a problem); see also

BESSEN & MEURER, supra note 16, at 54-62.

81

met.” Indeed, panelists viewed patent clearance as “mandatory” in those sectors, explaining 42

that firms “very carefully [review] the patent landscape” when launching a product to ensure that

their ability to commercialize the invention will not be compromised by other parties’ patent

rights. While they indicated that clearance tasks were sometimes difficult and resource- 43

intensive, they found them manageable. 

To explore these issues more deeply, this section examines three challenges confronted

by firms seeking to clear patents that might read on their planned activities. The first is

interpreting claims in issued patents to obtain a clear understanding of their scope and whether

they cover the firm’s product or process. Perfection here is likely and practicably unobtainable;

some ambiguity may remain despite best efforts to encapsulate an invention in words. The 44

second challenge is predicting what claims might emerge from pending patent applications. The

third is finding mechanisms for identifying potentially relevant patents or applications that must

be carefully reviewed for clearance purposes. We examine the hearing record for each topic in

turn.

A. Difficulties in Interpreting the Boundaries of Issued Claims 

To fulfill their notice function, patent claims must delineate the scope of patent rights

with sufficient clarity that a person skilled in the relevant art can reliably determine whether

planned activities would infringe. Many panelists declared that patents often provide little

guidance as to their coverage because they lack “clarity,” i.e., they are “vague,” “ambiguous,” or

otherwise difficult to interpret. Some of this testimony addressed patents across the board. 45 46
See, e.g., Crean at 97 (5/4/09) (“vague and amorphous patent claim and claim boundaries”); Gutierrez 47

at 143 (5/4/09) (“lack of specificity”); Lee at 9 (5/5/09) (“lack of clarity and boundaries in software

patents”); Verizon Communications Inc. Comment at 6 (3/20/09) (“the boundaries of patents are

sometimes fuzzy”).

Kappos at 132 (3/19/09).

48

Harris at 123 (3/18/09); see also Yen at 54 (12/5/08) (alleged infringers “would often never recognize 49

most of the patents that ultimately are asserted”).

Luftman at 220-21 (2/12/09).

50

Kushan at 248-50 (12/5/08).

51

Myers at 237-38 (3/18/09).

52

Shema at 71 (5/4/09). Similarly, a panelist from the oil and petrochemical industries noted that while 53

“patents that cover a pure chemical are relatively easy to analyze,” challenges arise with products

composed of “many, many, many dozens of molecules.” Phillips at 176 (3/18/09).

Shafmaster at 238 (3/18/09).

54

82

Most of it, however, addressed the specific context of IT and telecommunications industries.47

One IT panelist explained that the “lack of clarity around patent rights” adversely affects R&D

investment in that sector. Others described how claims asserted in litigation are “stretch[ed]” 48 49

or “re-crafted” in ways that could never have been anticipated. 50

Testimony revealed substantially less concern in chemical, pharmaceutical and biotech

contexts. One panelist, in discussing chemical compounds and biotech products, asserted that

with a “modest amount of effort and cost, you can look at a patent and know where you stand.”51

According to another, “[U]ncertainty around the scope of issued patent claims . . . [is] probably

overblown” in biotech, because “there’s enough case law out there to give us sufficient

guidance.” Even so, a third panelist reported that interpreting biotech patent claims can be a 52

“struggle,” adding that at times “I can’t even tell from the specification what they mean.” And 53

a fourth acknowledged that even in biotech, “There’s always some uncertainty that the court

might not come to the same interpretation that you’ve come to, and that plays into risk . . . and

how much am I willing to invest given this level of risk.”54

Those who found claim construction manageable emphasized the importance of looking

beyond the claims themselves and relying heavily on review of the patent’s description of the

invention to sort out claim meaning. “[E]ssentially you go back to the specification,” one
Kushan at 249 (12/5/08).

55

See, e.g., Shema at 60 (5/4/09) (“[T]he [Section]112 [disclosure] standards that have developed in our 56

industry help us to analyze our competitor’s patents.”).

Durie at 45-46 (5/5/09); see also Messinger at 184-85 (3/19/09).

57

Menell at 29 (5/5/09); see also BESSEN & MEURER, supra note 16, at 200 (describing how software

58

patents can “map onto an uncertain set of technologies” when not limited to distinct embodiments, and

“might be particularly prone to strategic use of vague language.” But cf. Wagner at 221-22 (4/17/09)

(resisting excessive pessimism regarding software claiming and arguing that software can be discussed

“in a very structured format”).

Sarboraria at 120 (3/18/09) (observing that “it is often unclear whether a given claim reads on software

59

at all”).

Michael F. Martin Comment at 13 (5/15/09). 60

Wagner at 222 (4/17/09); Valz at 239 (12/5/08).

61

Kappos at 150 (3/19/09).

62

83

panelist explained, continuing, “[I]n terms of notice . . . we look through the claims and we see

what is actually supported by the specification.” Others testified similarly. 55 56

For contexts where problems did emerge, panelists suggested several sources of

ambiguity. These include the inherent imprecision of language, varying nomenclature, functional

claiming, and faulty incentives. They also emphasized various institutional issues that may delay

resolution of ambiguity.

Inherent imprecision of language. A central obstacle to clear patent claims identified by

panelists is the “imprecision” inherent in using the English language to describe an invention,

i.e., the “fundamentally poor fit between language . . . and what it is that we’re trying to

describe.” Sometimes the problem may be industry-specific. For example, software patents 57

often cover “very abstract conceptual innovations” that can’t be simply described given our

current understanding of the area, and can be claimed in “unique ways.” Moreover, the 58 59

hearing record indicated, the convention of writing “one-sentence English-language claims” may

fit poorly with “the symbolic rules and procedures adopted by the field of software engineers.”60

Although some panelists suggested that these clarity problems will improve as the software

industry’s experience with patents increases, others noted that there had been little

61

improvement over several decades of software patenting. 

62

Other language problems are general in nature. Thus, one panelist pointed out that 

“indeterminacy” resulting in litigation often arises even from “very common terms,” such a
Burk at 10 (5/5/09).

63

Clarke at 203 (3/19/09) (suggesting that such limited use of the doctrine of equivalents appropriately 64

accommodates notice goals but that more expansive and frequent use would pose problems). But see

Petherbridge at 43 (5/5/09) (suggesting eliminating the doctrine of equivalents).

Kappos at 149 (3/19/09) (i.e., “where there is a dictionary of some form”); see also Wagner at 198 65

(4/17/09) (claim construction works “where we have a fairly well understood set of nomenclature”). 

Durie at 18 (5/5/09); see also Lemley at 195 (4/17/09) (describing the boundaries of the patent “doesn’t

66

work outside of a few industries like pharmaceuticals and DNA where we have a clear nomenclature that

everybody understands”).

Menell at 29 (5/5/09); see also Horton at 174 (3/18/09); Hall at 264 (5/4/09); Vermont at 221 (4/17/09).

67

Shema at 70-71 (5/4/09) (also noting the PTO’s publication of Sequence Listing Rules to govern

68

structural aspects of DNA inventions).

Lemley at 195 (4/17/09).

69

Kushan at 269 (5/5/09). Similarly, one panelist observed that IT terminology frequently uses words 70

that are generic, such as “processing” or “storing,” that can be construed broadly even if the context

suggests a narrow meaning. Lutton at 162-63 (5/4/09).

Lee at 7 (5/5/09). 71

Kunin at 114 (3/19/09) (stating that when claims are “written in fairly abstract form, both as to pure

72

functionality and . . . from the standpoint of what the invention does as opposed to what the invention is,”

it is “very difficult to know what the claims cover and what you may have to do to avoid infringement”);

see also Kappos at 174 (3/19/09) (discussing claims that cover “the effect of what was done rather than

84

“‘through,’ . . . ‘to’, [or] ‘beside.’” Another panelist stressed the importance of the doctrine of 63

equivalents – which may extend a claim’s coverage beyond its literal terms – for “those relatively

rare situations” where “there just wasn’t plain a word or collection of words that was going to

work” and denying infringement would be “manifestly unfair.”64

Varying nomenclature. A major contributor to clarity is the existence of “a good, solid,

consistent lexicon” for claiming in a technology area. Thus, in biotech and chemistry there is a 65

“relatively predictable set of terminology” or nomenclature for describing inventions – most 66

prominently chemistry’s use of the periodic table and molecular structures. Beyond this, the 67

biotech community has invested considerable effort in developing a common nomenclature. In 68

contrast, panelists described how the IT industries, especially software, lack “clear” and 69

“uniform” nomenclatures and “common vocabular[ies].” 

70 71

Functional claiming. Reliance on functional language (explaining “what the invention

does”) rather than structural language (explaining “what the invention is”) was another source of

vagueness identified by panelists. Functional claims can be “abstract [or] conceptual,” 72 73
what was actually created”).

Menell at 29 (5/5/09).

73

See Meurer at 210 (12/5/08) (“The more functional the claiming is, the harder it is for anyone to 74

understand what the property rights are.”). But cf. Duffy at 263-64 (12/5/08) (suggesting that the true

source of construction problems may be “excessive literalism,” including failure to adequately draw upon

the specification, rather than functional language in itself).

Kappos at 174 (3/19/09); see also Lee at 8-9 (5/5/09) (functional claiming is leading to “a failure of 75

notice” regarding the boundaries of software patents).

Meurer at 209 (12/5/08).

76

See, e.g., Shema at 59-60 (5/4/09) (citing a need to “claim things structurally” and reference 77

“representative samples”); Kushan at 249 (12/5/08) (“I don’t think there’s any major impediment about

translating and interpreting functional language” in biotech “because essentially you go back to the

specification.”).

Kappos at 123 (3/19/09); see also Petherbridge at 15 (5/5/09). 78

Wagner at 181 (4/17/09).

79

Wagner at 200-201 (4/17/09). 80

See Messinger at 117 (3/19/09) (observing that clarity enables the patentee to rely on the resulting 81

patent); Menell at 53 (5/5/09) (arguing that in biomedical fields applicants want a “strong[] claim . . . so

that they can justify all of the clinical testing” and other expense).

McNelis at 86 (5/5/09) (noting the “natural tension as a patent practitioner of trying to have a clear, 82

concise patent, but also trying to have the broadest scope”).

85

making it difficult to predict the various ways in which the claim might be construed. Panelists 74

found “results-based claiming” a “big problem in the IT arts,” particularly software. Some

75

panelists warned that functional claiming also impacts biotech patenting, but others explained 76

that it raises fewer concerns in that industry because patentees in biotech must provide

considerable information regarding the invention’s structure in the specification or the claim.77

Faulty incentives. Some panelists argued that the system generally creates “an incentive

to be as vague and ambiguous as you can with your claims” and to “defer clarity at all costs.” 78 79

According to one panelist, applicants try to be “as vague as possible, avoid any expression of

meaning with the hope that when they get to litigation, they can broaden the meaning beyond

what the Patent Office assumed it was.” The view was not unanimous, however, and other

80

panelists asserted reasons why patentees would want their patents to be clear. Indeed, one 81

panelist explicitly acknowledged that incentives are in “tension.” 

82
Messinger at 170 (3/19/09).

83

Phillips at 177 (3/18/09) (describing this as “a fundamental failing . . . of the U.S. patent system”); see 84

also Verizon Communications, Inc. Comment at 6 (3/20/09) (“Counsel’s opinion as to the boundaries of

the patent is both expensive and often unavoidably ‘unreliable,’ leaving commercializers with ‘no

reliable way of determining patent boundaries short of litigation.’”) (quoting BESSEN & MEURER, supra

note 16, at 10). 

See 35 U.S.C. § 303 (providing for reexamination “upon a finding that prior art cited under 35 U.S.C. § 85

302 presents “a substantial new question of patentability”); Van Pelt at 155 (5/4/09); see also IBM

Comment at 8 (2/12/09) (arguing that permitting challengers to raise indefiniteness in any post-grant

procedures would permit “timely clarification or invalidation of claims as necessary”).

See, e.g., Durie at 69 (5/5/09) (“the cost of litigation is simply prohibitive” for “relatively small start-up 86

companies”); IBM Comment at 2 (2/12/2009).

Harris at 121 (3/18/09) (“the Markman [claim-construction] or any other dispositive motions are heard 87

right before trial”).

Meurer at 211 (12/5/08) (citing work by Judge Kimberly Moore); see Kimberly A. Moore, Markman

88

Eight Years Later: Is Claim Construction More Predictable?, 9 LEWIS & CLARK L. REV. 231, 233, 239

(2005) (reporting that the Federal Circuit, in reviewing district court claim construction decisions, found

that 34.5% of the terms were wrongly construed, and reversed, vacated and/or remanded the judgment

due to claim construction errors in 29.7% of cases); David L. Schwartz, Practice Makes Perfect? An

Empirical Study of Claim Construction Reversal Rates in Patent Cases, 107 MICH. L. REV. 223, 248-49

(2008) (reporting similar results).

Watt at 69 (5/4/09) (“[I]n too many cases we don’t know what the claims mean until the Federal Circuit 89

speaks.”); see also Bessen at 47 (3/19/09) (“effectively, the boundaries of a patent are not clear and

predictable until essentially the Federal Circuit decides what they are”); Menell at 31-32 (5/5/09)

(describing a study in which panels of district court judges in simulated Markman hearings split evenly in

their claim-construction decisions, even when reporting high confidence in their results).

86

Institutional concerns/deferred resolution. Panelists further described how the patent

system generally defers resolution of ambiguities. One noted that examination at the PTO

typically focuses on issues of novelty and nonobviousness rather than clarity. Moreover, as 83

another panelist argued, there is “no good mechanism short of litigation, the courthouse door, for

testing just what a patent really covers”; the PTO reexamination system is confined to questions 84

of novelty and nonobviousness, and cannot be used directly for testing the scope of a claim.85

 

Finally, panelists pointed to the delay, expense, and uncertainty imposed by litigation

over claim scope. District court judges, they note, often hold claim-construction hearings after 86

much litigation expense has been incurred. Moreover, district court claim constructions are 87

overturned by the Federal Circuit in approximately one-third of appeals, leading panelists and 88

commentators to argue that claim meaning is not known until the Federal Circuit has ruled.89
Yen at 87 (12/5/08). 90

USPTO, Performance and Accountability Report Fiscal Year 2010, 18 (2010) (“2010 PTO Annual

91

Report”), available at http://www.uspto.gov/about/stratplan/ar/2010/USPTOFY2010PAR.pdf; Schwartz

at 15 (3/19/09) (“pendency . . . is a serious problem”). 

37 C.F.R. §1.121 (2008) (explaining the manner in which amendments must be filed); Kingsdown Med.

92

Consultants, Ltd. v. Hollister, Inc., 863 F.2d 867, 874 (Fed. Cir. 1988) (declaring that it is not “in any

manner improper to amend or insert claims intended to cover a competitor’s product the applicant’s

attorney has learned about during the prosecution of a patent application,” provided that the amendment

or insertion otherwise complies with all statutes and regulations).

USPTO, Patent Public Advisory Committee, Annual Report 11 (2008) (explaining that “an increased 93

number of applications are being re-filed, after a final office action or during appeal,” and the continuing

application “becomes assigned to an examiner and [is] re-examined again”); USPTO, Changes to

Practice for Continued Examination Filings, 72 Fed. Reg. 46,716, 46,718 (Aug. 21, 2007) (reporting that

continued examination filings (other than divisional applications) accounted for 29.4% of all filings in

fiscal year 2006).

See, e.g., PIN/NIP, Inc. v. Platte Chemical Co., 304 F.3d 1235, 1247-48 (Fed. Cir. 2002) (“While it is 94

legitimate to amend claims or add claims to a patent application purposefully to encompass devices or

processes of others, there must be support for such amendments or additions in the originally filed

application.”); TurboCare Div. of Demag Delaval Turbomachinery Corp. v. General Elec. Co., 264 F.3d

1111, 1118 (Fed. Cir. 2001) (“When the applicant adds a claim or otherwise amends his specification

after the original filing date . . . the new claims or other added material must find support in the original

specification.”).

87

B. Difficulties in Foreseeing Evolving Claims

A second aspect of obtaining notice is acquiring information about claims that might

issue after the search. As one panelist explained, due to pending applications, “your search is

necessarily out of date as of the date you searched it.” Efforts to obtain notice can fail due to (i) 90

unpublished patent applications and (ii) subsequent amendments to claims in published

applications. 

Patent examination takes an average of nearly three years from filing until the patent

issues or the application is abandoned. Applicants are able to add or amend claims during the 91

examination process, and they may do so to better cover rival products that they see in the

marketplace. Moreover, applicants can, and frequently do, extend the examination process by 92

filing for multiple, continued examinations, thereby increasing the time for amendments by

years. The sole constraint on the amendment process is that any new or amended claim must be 93

sufficiently supported by the original specification.94

Partial, but very valuable, notice is afforded by PTO publication of patent applications 18

months after filing, excluding those for which no foreign filing entailing such publication has
See 35 U.S.C. § 122(b) (2000). For other exceptions to publication, see 37 C.F.R. §§ 1.211(a) and 95

1.211(b).

McNelis at 120 (5/5/09); see also Watt at 61 (5/4/09) (due to the ability to “track applications in the 96

Patent Office . . . . [T]here’s very little surprise anymore . . . .”); Miller at 201 (3/18/09); Kappos at 259

(3/19/09) (PAIR works well for following a single application); Messinger at 259 (3/19/09) (“when

[PAIR’s] up, it works great”).

See Phillips at 202 (3/18/09) (“I do worry about those applications filed in the U.S. only . . . .”); Harris

97

at 123-24 (3/18/09) (unpublished claims pose a problem); Yen at 87 (12/5/08).

See Messinger at 234 (3/19/09) (noting difficulty when “all of a sudden . . . for some surprise turn of

98

events, they go in a very different direction that is very broad compared to the original filing”). 

Laryngeal Mask Co. v. Ambu A/S, 618 F.3d 1367 (Fed. Cir. 2010), provides a recent example. The

Federal Circuit reversed a finding that the patentee’s competitor did not infringe because its laryngeal

mask airway device lacked a “tube joint.” Until “[j]ust prior to issuance,” the claims had contained

language requiring a tube joint, but the applicant deleted that language “during the final phase of

prosecution.” Id. at 1371-72. Although the specification was “replete with discussion of a tube joint,”

id. at 1371, the Federal Circuit found that the specification merely described a preferred embodiment and

did not limit the claim. 

See, e.g., Meurer at 211 (12/5/08) (“Hidden boundary information caused by continuation practice is a

99

big problem.”); Merges at 265-66 (5/4/009); cf. Kushan at 268 (12/5/08) (noting that many people

outside biotech have experienced the problem that “claims morph over time, and eventually have no tie to

what is actually invented”). 

Bessen at 47 (3/19/09). 100

Merges at 266 (5/4/09); see also Lee at 121 (5/5/09) (noting that non-practicing entities may acquire an 101

application and then “file continuations and mine them” by amending claims to read on others’ products);

Schwartz at 13 (3/19/09) (describing this as the most “pernicious form” of continuation practice).

88

been made. Third parties can track patent applications, including amendments to claims,

95

through the Patent Application Information Retrieval (PAIR) system. Panelists indicated that

PAIR makes tracking the evolution of claims “very manageable” in some areas. Even so, a 96

number of panelists emphasized that notice is lacking as to applications without foreign filings

or less than 18 months old, and that surprises still occur when late amendments significantly

97

shift the coverage of claims.

98

Panelists warned that claims can be amended in ways that cannot readily be predicted by

reading the specification. Such “redraft[ed] claims . . . are in effect hidden from the public.” 99 100

One panelist pointed to the “liberal amendment practice” that enables applicants to

“misappropriat[e] by amendment,” i.e., to wait until “somebody does something, and then you

amend your claims to cover it.” IT industry panelists in particular reported that the problem is 101
See, e.g., Slifer at 118-19 (3/18/09); Lee at 114 (5/5/09) (after repeated continuations, the issued claims 102

may “look nothing like” the original claims); Massaroni at 192-93 (2/12/09).

Shafmaster at 235 (3/18/09).

103

See Shema at 26, 60-61 (5/4/09) (enforcement of the disclosure requirements “really helps us to 104

analyze the scope of the claims that [other applications will] get out of the Patent Office and that will

survive in a court challenge”); Kushan at 249 (12/5/08) (stating that there is “decent law now on written

description [and] on enablement that we can draw upon to determine whether . . . there’s actually a risk”

from an application). 

Myers at 234 (3/18/09).

105

Watt at 61-62 (5/4/09) (stating that “there’s very little surprise anymore” but noting the “contrary

106

example” where a competitor, “changed direction” after prosecuting more limited claims for “many

years” and ultimately was able to obtain claims that arguably covered Amgen’s product; Amgen, after

previously investing a billion dollars, monitored the process through PAIR, saw the broader patent

coming, and “fortunately . . . a license was available”).

Bright at 67 (5/4/09).

107

Horton at 200 (3/18/09) (GE’s ability to predict the claims that will evolve from an application is 108

“decent,” despite “some degree of uncertainty”).

Phillips at 202 (3/18/09); see also Miller at 201 (3/18/09) (“[W]e kind of know how things are

109

happening . . . .”).

Stec at 200 (3/18/09).

110

89

magnified when an applicant uses repeated continuations to greatly extend the examination

process. 

102

On the other hand, panelists from the life sciences indicated that they are “very capable of

reading a specification [in an application] and being able to tell what kind of claims might come

out.” They attribute this in part to strict application of the written description and enablement 103

requirements in that sector. While acknowledging that there is no “risk-free path” and 104 105

noting the presence of the occasional “contrary example,” they conveyed the overall message 106

that “there really are no secrets out there anymore with everything being published.”107

Panelists from other industries affirmed their ability to make “decent” predictions

regarding the claims that would result from published patent applications. In general, their 108

message was that the task, while not necessarily easy, was manageable. One panelist explained

that predicting the claims that will result from applications is “a very important part of our job,”

albeit “not real fun.” Another added the caveat that “you’re being your own examiner” when 109

predicting the course an application will take; “you have to figure it out,” she continued, without

“getting any predictability out of the Patent Office.”110
Searches can be performed using the PTO’s free full-text database, other free search services, or fee- 111

based search services. See Pharmaceutical Research and Manufacturers of America Comment at 35

(2/10/09).

Krall at 114 (3/18/09).

112

See, e.g., Doyle at 162 (5/5/09) (stating that a Palm product incorporates 800-1,000 components);

113

Simon at 201-02 (2/11/09) (noting that at least 1,500 patents cover a single Intel microprocessor);

Software & Information Industry Association Comment at 4 (2/5/09) (speaking in terms of “hundreds or

even thousands of components” in a product). 

Thorne at 117 (3/18/09) (terming “sheer numbers” the “number one” problem); see also Sarboraria at 114

120 (3/18/09) (same); Phelps at 263 (5/4/09) (same); Luftman at 143, 213 (2/12/09); Yen at 53-54

(12/5/08) (noting that the “sheer quantity” of issued patents in IT contributes to making it “impossible to

achieve any degree of certainty by . . . clearance searches”); Slifer at 118 (3/18/09) (stating that Micron

has “literally thousands of potential patents to read”); Doyle 162 (5/5/09) (stating that Palm’s product

arguably implicates “hundreds if not thousands of patents, most of which would be very hard for us to

identify from the start”); Computer and Communications Industry Association Comment at 12 (2/5/09);

Software & Information Industry Association Comment at 5 (2/5/09) (“With this myriad of

often-overlapping patents, no technology business can review every potentially relevant patent before

designing and commercializing a new product.”).

90

C. Difficulties in Sifting Through a Multitude of Patents

Effective notice also requires that a firm be able to identify and review the patents and

patent applications that might cover its products. A variety of online databases of patents and

published applications can be searched for this purpose, e.g., using text terms or the PTO

classification system. Even with these automated mechanisms, however, efficient and 111

effective searches in some industries are hampered by the sheer number of potentially relevant

patents/applications, the inability of search criteria to reliably identify relevant patents, and the

limited time available for search. Again, in other industries, clearance search may be quite

manageable.

Hearing testimony described how, in the IT and telecommunications industries, it is

“almost cost prohibitive” to perform clearance searches, and explained that searches are likely to

produce “false positives and false negatives.” Panelists identified a virtual perfect storm of 112

difficulties. IT and telecommunications products typically contain many different components or

features that are themselves covered by patents. Many representatives of firms from these 113

industries viewed the “sheer numbers” of potentially applicable patents as a primary obstacle to

reliable clearance. 

114

Adding to the challenge, many features are embodied in components supplied by other

manufacturers. One panelist posed the issue starkly: “Nobody at Palm knows anything about the
See Doyle at 225 (5/5/09). Testimony from other industries indicated that, for purchased components, 115

firms often must rely on clearance performed by their suppliers. See Stec at 178 (3/18/09) (adding “it’s

almost impossible for [Ford] to go out and understand what the patent landscape is for all of the various

intricate parts that end up in a vehicle”).

McNelis at 26 (5/5/09); see also Horton at 175 (3/18/09) (noting that in software, “[e]ach of us could 116

describe it in almost a different way,” complicating automated searching).

Yen at 53-54 (12/5/08). One panelist opined that only “rough tools” are available to perform searches. 117

Menell at 30 (5/5/09).

Luftman at 221 (2/12/09); see also Sarboraria at 120 (3/18/09) (Oracle finds that “patents are asserted 118

against us . . . that never came up through [a] very diligent [search] process”).

See Lee at 111 (5/5/09); cf. Horton at 196 (3/18/09) (noting the impact of variation in product cycles 119

on patent search).

Michael F. Martin Comment at 13 (5/15/09). 120

Armitage at 120 (3/19/09) (stating that “the notice requirement, by and large, is very well met in the 121

current system”); Phillips at 176 (3/18/09).

Myers at 241-42 (3/18/09); see also Armitage at 210 (2/12/09) (indicating that there are vastly more

122

patents in high tech than in pharmaceuticals, where some multi-billion dollar products are covered by just

one or two patents).

See Menell at 29 (5/5/09); Horton at 174 (3/18/09); Hall at 264 (5/4/09); Vermont at 221 (4/17/09);

123

Durie at 17-18 (5/5/09).

91

[purchased] chip other than what it ultimately will do . . . . We are not qualified to say whether

or not Palm infringes or the supplier of that chip infringes.”115

The lack of predictable vocabularies in IT arts also complicates efforts to efficiently sift

through large numbers of patents. In areas such as software, a panelist lamented, “there’s so

many different ways to describe similar features.” Panelists explained that “it is impossible to 116

achieve any degree of certainty by clearance searches with today’s systems.” Vague or 117

stretched claims might “never [be] found doing any type of searching.” 

118

Finally, panelists observed that high tech product cycles are very short, leaving minimal

time for conducting a search. Indeed, one commenter pointed out that software innovations 119

“evolve over a period of months,” much more quickly than patent applications can be examined

even in the best of circumstances.120

In stark contrast, patent clearance seemingly poses few problems in the chemical and

pharmaceutical industries. The number of relevant patents is much smaller, perhaps only “a 121

couple dozen.” The ability to focus on so few patents is largely attributable to the clarity with 122

which inventions involving small molecule chemicals can be described. And, in 123
See Myers at 221 (3/18/09) (it can take “ten years from discovery to approval” for a new drug, due 124

largely to FDA safety and efficacy review).

See, e.g., Singer at 244 (3/18/09); Norviel at 13 (5/5/09) (“we can go through thousands of patents and 125

we can figure out if there’s a problem or not”).

Shafmaster at 241 (3/18/09).

126

Durie at 17 (5/5/09).

127

Cockburn at 219 (4/17/09).

128

Shafmaster at 244-45 (3/18/09).

129

See Jensen at 243-44 (3/18/09) (describing medical devices as “stickier” products, with longer life 130

cycles that “give[] you the runway to do the clearance search” despite large numbers of potentially

relevant patents).

Many of the panelists emphasized the importance of receiving notice at an early date. See, e.g., Lee at 131

43 (5/5/09) (“the earlier the better”); Kunin at 137 (3/19/09) (“a front-end solution makes the most

92

pharmaceuticals, there is a very long product development period over which search can be

staged, due mainly to the lengthy FDA testing process.124

In biotechnology, panelists reported that, although they face significant challenges,

effective clearance searches are the norm. While “potentially thousands of patents come up on 125

our searches,” testimony suggested that “it is generally reasonably easy to ascertain at least 126

[what the] universe of potentially blocking patents for a particular technology might be.”127

Moreover, in “biotech . . . [there’s] a very standardized vocabulary” that is “very easily

searchable.” As in the case of pharmaceuticals, there is substantial development time, during 128

which the search process can be staged. Testimony regarding medical device industries 129

portrayed a similar picture – effective clearance searches despite large numbers of potentially

relevant patents where long life cycles afforded the opportunity for extensive clearance efforts.130

IV. POSSIBLE NOTICE ENHANCEMENTS

Notice is affected by a variety of patent doctrines and practices. This section looks in a

number of directions for possible notice improvements while recognizing the trade-offs inherent

in the analysis. 

Cost is obviously important. Resource constraints compel a search for ways to elicit

necessary information without imposing undue costs. Often, patent applicants are bestpositioned to supply low-cost, but very valuable, enhancements. 

Timing is another key consideration. To the extent feasible, earlier is better for notice

purposes. In particular, notice is more beneficial to third parties when they are still planning 131
sense”); Rea at 141 (3/19/09) (“as early as possible”); id. at 223 (3/19/09); Durie at 44-45 (5/5/09);

Schultz at 70-71 (5/5/09); Schwartz at 15 (3/19/09) (“the longer you don’t know what the claim is going

to cover, the more trouble you are in”). But cf. Armitage at 186 (3/19/09) (cautioning that “you

understand a claim in context”); Messinger at 222 (3/19/09) (“courts have recognized that it’s very hard

to do claim construction without an accused product”).

See, e.g., Cotropia at 136 (3/19/09) (arguing that front-end solutions are needed if the concern is 132

impact on R&D investment decisions); Lee at 44 (5/5/09) (contending that dealing with inadvertent

infringement after businesses have invested a lot of money and a product has launched is “tremendously

costly” and “a disservice to the public and to subsequent [independent] inventors”).

See, e.g., Cotropia at 125-26 (3/19/09) (early resolution of ambiguity helps everyone, not just the 133

litigants); Phillips at 177 (3/18/09) (terming absence of a mechanism short of litigation for testing “what

a patent really covers” a “fundamental failing . . . of the U.S. patent system”). 

A few panelists reasoned that because most patents never become economically significant, an 134

efficient process would first sort out those that do. The few that prove significant could then receive

special attention, ensuring their validity and clarifying their scope. See Burk at 41 (5/5/09) (“there needs

to be some sorting process to figure which ones you want to fight about”); Badenoch at 112-13 (2/12/09);

see generally Mark A. Lemley, Rational Ignorance at the Patent Office, 95 NW. L. REV. 1495, 1497

(2001) (arguing that it is much cheaper to make detailed validity determinations in the few cases in which

patents are asserted against competitors than to expend resources examining patents “that will never be

heard from again”). The argument’s strength may vary with the relevant costs: for notice improvements

that require relatively little expense, it likely is less telling.

93

their R&D strategies and before they make sunk investments that may expose them to hold-up.132

Several panelists emphasized the desirability of eliminating ambiguity during, or promptly after,

examination. Accordingly, many of the suggested improvements look to the examination 133

process and the handling of applications within the PTO, rather than to litigation.134

Trade-offs between notice and scope pose particularly thorny issues. Insisting on very

specific, explicit written descriptions, requiring great precision when evaluating claim

definiteness, even confining applicants to original, published claims all might give third parties

better notice but may not fully protect all that applicants have invented. This section highlights

these trade-offs to afford a better understanding of their notice implications. 

Divergence in the extent and nature of notice problems among industries also poses

challenges. This section looks for ways to improve notice in problem areas without impairing

the patent system elsewhere and without sacrificing the benefits of a unitary patent system, with

doctrines applicable across all technologies and industries. 

With these guideposts in mind, this section considers in sequence (1) possible steps for

improving the ability of the public – in particular, third party competitors and potential users of

the technology – to understand existing claims; (2) possible steps for improving the public’s

ability to foresee evolving claims; and (3) possible steps for improving the public’s ability to sift

through a multitude of patents and patent applications.
Although the statute refers to claims as part of the specification, common, informal usage applies the

135

term “specification” to the application’s written description of the invention, as distinguished from the

claims. See In re Dossel, 115 F.3d 942, 945 (Fed. Cir. 1997). This chapter adopts that convention.

General Elec. Co. v. Wabash Appliance Corp., 304 U.S. 364, 369 (1938) (discussing a predecessor to 136

the current indefiniteness statute) (footnotes and internal citation omitted).

United Carbon Co. v. Binney & Smith Co., 317 U.S. 228, 236 (1942). 137

In re Venezia, 530 F.2d 956, 958-59 (C.C.P.A. 1976).

138

94

A. Improving the Ability to Understand Existing Claims: Indefiniteness

1. Background and Hearing Record

Section 112, second paragraph of the Patent Act, 35 U.S.C. § 112, states the role of patent

claims: 

The specification shall conclude with one or more claims particularly pointing out

and distinctly claiming the subject matter which the applicant regards as his

invention.135

Claims that do not conform to this statutory requirement are invalid on grounds of

“indefiniteness.”

The Supreme Court has long recognized that prohibiting indefinite claims serves a vital

notice function:

The statute seeks to guard against unreasonable advantages to the patentee and

disadvantages to others arising from uncertainty as to their rights. The inventor

must inform the public during the life of the patent of the limits of the monopoly

asserted, so that it may be known which features may be safely used or

manufactured without a license and which may not.136

The Court subsequently elaborated, “A zone of uncertainty which enterprise and experimentation

may enter only at the risk of infringement claims would discourage invention only a little less

than unequivocal foreclosure of the field.”137

The Court of Customs and Patent Appeals and the Federal Circuit, in its early decisions,

frequently spoke in similar terms. Thus, a CCPA opinion found claims definite because they “do

define the metes and bounds of the claimed invention with a reasonable degree of precision and

particularity,” so that “[o]ne skilled in the art would have no difficulty determining whether or

not a particular collection of components infringed . . . .” Likewise, many of the early Federal

138
In re Warmerdam, 33 F.3d 1354, 1361 (Fed. Cir. 1994); see, e.g., Morton Int’l, Inc. v. Cardinal Chem. 139

Co., 5 F.3d 1464, 1470 (Fed. Cir. 1993) (finding claims indefinite because they were “not sufficiently

precise to permit a potential competitor to determine whether or not he is infringing”); Amgen v. Chugai

Pharm. Co., 927 F.2d 1200, 1217 (Fed. Cir. 1991); Shatterproof Glass Corp. v. Libbey-Owens Ford Co.,

758 F.2d 613, 624 (Fed. Cir. 1985).

See Exxon Research & Eng’g Co. v. United States, 265 F.3d 1371, 1375 (Fed. Cir. 2001) (stating, “If 140

one skilled in the art would understand the bounds of the claim when read in light of the specification,

then the claim satisfies section 112, paragraph 2.”).

Id.

141

Id.

142

Id. (citation omitted).

143

See, e.g., Hearing Components, Inc. v. Shure, Inc., 600 F.3d 1357 (Fed. Cir. 2010); Ultimax Cement 144

Mfg. Corp. v. CTS Cement Mfg. Corp., 587 F.3d 1339, 1350-53 (Fed. Cir. 2009); Praxair, Inc., v. ATMI,

Inc., 543 F.3d 1306, 1319-21 (Fed. Cir. 2008); Xerox Corp. v. 3Com Corp., 458 F.3d 1310, 1323 (Fed.

Cir. 2006); Energizer Holdings, Inc. v. Int’l Trade Comm’n, 435 F.3d 1366 (Fed. Cir. 2006); Bancorp

Servs., LLC v. Hartford Life Ins. Co., 359 F.3d 1367 (Fed. Cir. 2004) (all finding that claims were not

indefinite). The court’s recent decision in Enzo Biochem, Inc. v. Applera Corp., 599 F.3d 1325 (Fed. Cir.

2010) (finding that claims were not indefinite), petition for cert. filed, 79 U.S.L.W. 3228 (U.S. Sept. 23,

95

Circuit opinions framed the indefiniteness discussion in terms of, or similar to, “whether a claim

reasonably apprises those of skill in the art of its scope.”139

While continuing to describe the ultimate issue using notice-oriented language regarding

what those with skill in the art would understand, the Federal Circuit shifted focus with its 140

2001 Exxon Research opinion. Observing that courts frequently deal with “close questions of

claim construction,” the Federal Circuit reasoned that a claim should not be indefinite merely

because it poses such an issue. The test for indefiniteness, the court concluded, should not be

whether claims are “plain on their face” but rather whether they are “amenable to construction,

however difficult that task may be.” The Federal Circuit continued, 141

If a claim is insolubly ambiguous, and no narrowing construction can properly be

adopted, we have held the claim indefinite. If the meaning of the claim is

discernible, even though the task may be formidable and the conclusion may be

one over which reasonable persons will disagree, we have held the claim

sufficiently clear to avoid invalidity on indefiniteness grounds. 

142

“By finding claims indefinite only if reasonable efforts at claim construction prove futile,” the

court explained, “we accord respect to the statutory presumption of patent validity, and we

protect the inventive contribution of patentees, even when the drafting of their patents has been

less than ideal.” Numerous subsequent Federal Circuit opinions have repeated the “insolubly 143

ambiguous” language, applying it with varying degrees of rigor. 

144
2010) (No. 10-426), favorably referenced “insolubly ambiguous” principles in an aside, 599 F.3d at 1332

(“if a claim is indefinite, the claim by definition cannot be construed”), but analyzed the claims under a

more exacting inquiry – “whether those skilled in the art would understand what is claimed.” Id. Cases

finding indefiniteness under the “insolubly ambiguous” standard include Halliburton Energy Servs., Inc.

v. M-I, LLC, 514 F.3d 1244, 1256 (Fed. Cir. 2008) (finding the limitation “fragile gel” indefinite because,

while the specification identified qualities necessary for fragility, a person of ordinary skill in the art

would not be able to determine the degree to which those qualities would have to be present); Datamize,

LLC v. Plumtree Software, Inc., 417 F.3d 1342, 1348-56 (Fed. Cir. 2005) (finding the phrase

“aesthetically pleasing” indefinite); and Honeywell Int’l, Inc. v. Int’l Trade Comm’n, 341 F.3d 1332 (Fed.

Cir. 2003). 

Meurer at 262 (12/5/08).

145

Vermont at 201 (4/17/09).

146

See, e.g., Shema at 71-72 (5/4/09); Wagner at 200 (4/17/09); Rea at 172-73 (3/19/09); Kappos at 173 147

(3/19/09) (suggesting that current doctrine is adequate, but we need to “apply it more”). 

89 U.S.P.Q. 2d 1207, 2008 WL 5105055 (Bd. Pat. App. & Interf. 2008).

148

2008 WL 5105055, at *5-6. 149

Id. at *5. The Board’s ruling followed shortly after the PTO’s Deputy Commissioner for Patent 150

Examination Policy had rendered similar advice to the PTO’s examining corps. See Memorandum from

John Love, Deputy Commissioner for Patent Examination Policy, USPTO, to Technology Center

96

Several of the panelists suggested that a more rigorous standard is needed in order to

fulfill notice goals. One urged, “[An] easy thing for us to do is take the definiteness requirement

seriously . . . ‘insolubly ambiguous’ is a disaster.” For another, tightening the indefiniteness 145

standard was a “no-brainer.” A number of others concurred, at least with regard to 146

consideration of claim definiteness by the PTO.147

In fact, both the PTO and the Federal Circuit recently have added teeth to enforcement of

the indefiniteness standard. The PTO’s Board of Patent Appeals and Interferences cut broadly in

its decision in Ex Parte Miyazaki. Stressing that the PTO had a “duty to guard the public

148

against patents of ambiguous and vague scope,” the Board determined that the PTO was justified

in employing a “lower threshold of ambiguity when reviewing a pending claim for indefiniteness

than those used by post-issuance reviewing courts.” During prosecution, the Board explained, 149

applicants still had an opportunity to amend their claims to overcome concerns with

indefiniteness. Consequently, the Board ruled, 

[R]ather than requiring that the claims are insolubly ambiguous, we hold that if a

claim is amenable to two or more plausible claim constructions, the USPTO is

justified in requiring the applicant to more precisely define the metes and bounds

of the claimed invention by holding the claim unpatentable under 35 U.S.C.

§ 112, second paragraph, as indefinite.150
Directors and Patent Examining Corps, Indefiniteness Rejections Under 35 U.S.C. § 112, Second

Paragraph, at 2 (Sept. 2, 2008), available at http://www.uspto.gov/patents/law/exam/memoranda.jsp.

Rea at 173, 183 (3/19/09).

151

Kappos at 182 (3/19/09); see also IBM Comment at 6 (2/12/09) (terming the Miyazaki standard

152

“appropriate”).

See, e.g., Rai at 181 ((3/19/09) (indefiniteness rulings a useful backstop in case the give and take 153

during examination does not produce the necessary information); Menell at 53-54 (5/5/09) (arguing that

the PTO is the place to inculcate definiteness values). But see Messinger at 172 (3/19/09) (arguing that

the PTO should only find indefiniteness “in extreme situations”).

Cotropia at 177-80, 181-82 (3/19/09).

154

Means-plus-function claims – “expressed as a means or step for performing a specified function 155

without the recital of structure, material, or acts in support thereof” – are specifically governed by

Section 112, sixth paragraph, of the Patent Act. 35 U.S.C. § 112. Under that provision, means-plusfunction claiming involving a combination of elements is allowed, and the claims are construed “to cover

the corresponding structure, material, or acts described in the specification and equivalents thereof.” Id. 

Thus, the specification must describe at least one means of performing the claimed function.

See Blackboard, Inc. v. Desire2Learn, Inc., 574 F.3d 1371, 1382-86 (Fed. Cir. 2009); Net Moneyin, 156

Inc. v. Verisign, Inc., 545 F.3d 1359, 1365-68, 1382-86 (Fed. Cir. 2008); Finisar Corp. v. DirectTV

Group, 523 F.3d 1323, 1339-41 (Fed. Cir. 2008); Aristocrat Techs. Austl. PTY, Ltd. v. Int’l Game Tech.,

521 F.3d 1328 (Fed. Cir. 2008). A very recent Federal Circuit opinion distinguished between meansplus-function claims that involve “specific function[s] performed by a special purpose computer” and

those that “simply recite[] . . . claimed functions . . . [that] can be achieved by any general purpose

computer without special programming”; the court required that the specification disclose some form of

algorithm only for the former. See In re Katz, Nos. 2009-1450-52, 2009-1468-69, & 2010-1017, 2011

WL 607381 at *5-8 (Fed. Cir. Feb. 18, 2011).

97

Some of the panelists gave Miyazaki considerable praise. “I do like the Miyazaki case,”

one stated, adding, “[I]t actually was very, very good . . . .” “[T]hat case, in my view, is 151

exactly pointed in the right direction,” added another. Others spoke more generally in favor of 152

enhanced indefiniteness enforcement at the PTO level. One panelist voiced concern that

153

indefiniteness rejections should not substitute for developing a record that shows what a claim

means, but agreed, nonetheless, that indefiniteness rulings could be a useful backstop.154

The Federal Circuit’s recent steps against indefiniteness have tended to focus more

narrowly, via a series of rulings finding computer-implemented means-plus-function claims

indefinite. In each case the invalidated claims covered a function implemented by means of a 155

computer or microprocessor, but the specification provided no details regarding the structure of

the relevant program. The court ruled that because the specification failed to provide some 156

form of algorithm for performing the claimed function – not necessarily anything highly detailed
In keeping with these rulings, the PTO recently highlighted to its examiners the requirement that the 157

specification provide adequate structure to support such claims under both the indefiniteness and

enablement requirements. See Memorandum from John Love, Deputy Commissioner for Patent

Examination Policy, USPTO, to Technology Center Directors and Patent Examining Corps, Rejections

under 35 U.S.C. 112, Second Paragraph, When Examining Means (or Step) Plus Function Claim

Limitations under 35 U.S.C. 112, Sixth Paragraph, at 2-4 (Sept. 2, 2008), available at

http://www.uspto.gov/patents/law/exam/memoranda.jsp.

One commentator, after surveying these developments, as well as the Datamize and Halliburton cases

158

in which the Federal Circuit found claims indefinite under the “insolubly ambiguous” standard,

concludes that indefiniteness “has, in the course of the past few years, become both the courts’ and the

PTO’s weapon of choice in the battle to guard the public against patents of ambiguous or vague scope.” 

David A. Kelly, Indefiniteness Invalidations Continue to Rise Sharply in 2008, 77 PAT. TRADEMARK &

COPYRIGHT J. 576 (2009) (finding that district court indefiniteness rejections rose 350% in the 42 months

following the August 2005 Datamize opinion, compared to the preceding 42 months).

See Rea at 172 (3/19/09) (urging that indefiniteness analysis “should apply to all forms of ambiguity 159

affecting the breadth”); Halliburton, 514 F.3d at 1249 (noting application of the indefiniteness doctrine

to settings involving means-plus-function elements lacking corresponding structure in the specification;

numeric limitations that fail to disclose which of multiple methods of measurement should be used; terms

wholly dependent on subjective opinion; and terms that lack a proper antecedent basis); Bancorp

Services, 359 F.3d at 1371-76 (applying indefiniteness doctrine to undefined terms); Seattle Box Co. v.

Indus. Crating & Packing, Inc., 731 F.2d 818 (Fed. Cir. 1984) (applying indefiniteness doctrine to words

of degree).

See Kappos at 163 (3/19/09) (describing the applicant as “the lowest cost-avoider of confusion and 160

ambiguity”).

98

– the applicant had not disclosed sufficient structure to satisfy Section 112, paragraph 6, thereby

rendering the claims indefinite under Section 112, paragraph 2.157

2. Analysis

Both the PTO’s Miyazaki analysis and the Federal Circuit’s recent handling of computerimplemented means-plus-function claims are important steps toward enhanced public notice.

158

We address each in turn.

Problems posed by multiple reasonable interpretations. Claims that clearly delineate a

patent’s scope are essential for meaningful third-party notice. An indefiniteness standard that

weeds out claims reasonably susceptible to multiple interpretations could reduce ambiguity in a

broad range of settings. Allowing multiple potential constructions to persist adds a penumbra 159

to a patent’s scope, discouraging rivals from entering where, with clearer notice, they could

safely operate. When implemented during PTO review, indefiniteness rulings promptly remove

that penumbra, releasing business planning from being held hostage and requiring only a claim

amendment from the party best able to add clarity. When implemented in court, however, the 160

costs may be higher and the benefits later and more attenuated. 
Some panelists portrayed such hard choices as the rule in litigated cases: “[I]t is the very rare case 161

where there is not a potentially dispositive claim construction issue that absolutely could go either way 

. . . .” Durie at 45 (5/5/09).

Exxon Research, 265 F.3d at 1375. 

162

Datamize, 417 F.3d at 1347. 

163

See generally Exxon Research, 265 F.3d at 1375 (refusing to find a claim indefinite “merely because it 164

poses a difficult issue of claim construction” and noting that cases “frequently present close questions of

claim construction on which expert witnesses, trial courts, and even the judges of this court may

disagree”). 

See Enzo Biochem, Inc. v. Applera Corp., 603 F.3d 1347, 1348 (Fed. Cir. 2010) (Plager, J., dissenting

165

from denial of a petition for rehearing) (explaining that “it is not until three court of appeals judges . . .

pick the ‘right’ interpretation that the public, not to mention the patentee and its competitors, know what

the patent actually claims”), petition for cert. filed, 79 U.S.L.W. 3228 (U.S. Sept. 23, 2010) (No. 10-426).

General Electric, 304 U.S. at 369. 166

Exxon Research, 265 F.3d at 1375.

167

Id.

168

99

Miyazaki approaches indefiniteness with a focus on notice: when multiple meanings are

reasonably possible, the claim may be rejected as indefinite. In contrast, the “insolubly

ambiguous” standard accepts substantial ambiguity and preserves claims that require a court to

make hard choices among varying interpretations. As variously elaborated by the Federal

161

Circuit, definiteness depends on whether “reasonable efforts at claim construction prove futile”162

or “[claim] terms can be given any reasonable meaning.” The first formulation tends to ascribe 163

to the PHOSITA the full ability of the court of appeals to resolve issues of claim construction,164

overstating what third parties making marketplace decisions are likely to understand; the second

formulation provides little notice of scope when multiple “reasonable meaning[s]” are present.165

To the extent our measure is the public’s ability to plan rationally based on an understanding of

the claims – to know “the limits of the monopoly asserted” and “which features may be safely

used or manufactured without a license and which may not” – the Miyazaki approach is 166

preferable.

The fact that Miyazaki’s more stringent standard applies only for purposes of patent

prosecution and PTO review pays heed to the Federal Circuit’s Exxon Research rationale. 

Requiring “insoluble ambiguity,” the court explained, “accord[s] respect to the statutory

presumption of patent validity.” That presumption, however, applies only to issued patents;

167

the PTO’s more stringent standard for patents still subject to agency review adds assurance that

issued patents are indeed worthy of the presumption. Moreover, the Federal Circuit designed its

standard to “protect the inventive contribution of patentees, even when the drafting of their

patents has been less than ideal.” The court spoke in a litigation setting, where a finding of 168
See supra Section III.

169

The impact of this line of cases also will depend on the frequency with which claims continue to be 170

framed in means-plus-function formats under Section 112, paragraph 6. See BESSEN & MEURER, supra

note 16, at 211-12 (terming the recent line of cases requiring disclosure of an algorithm a “step in the

right direction” but noting that “the broad and uncertain range of mathematical equivalents to

algorithms” and the ability to avoid use of means-plus-function language may limit its practical value).

Finisar, 523 F.3d at 1340 (internal citation omitted). 171

Aristocrat, 521 F.3d at 1338.

172

United Carbon, 317 U.S. at 236. 173

See Halliburton Oil Well Cementing Co. v. Walker, 329 U.S. 1, 12 (1946) (warning about the potential 174

ambiguity of functional claims).

100

indefiniteness invalidates the patent. But while an application is still under PTO review,

indefiniteness can be rectified by a claim amendment. In other words, drafting can be perfected,

and third parties notified, while still protecting “the inventive contribution of patentees.”

 

Problems posed by functional claiming. The Federal Circuit’s recent tightening of

indefiniteness standards for computer-implemented means-plus-function claims begins to deal

with one aspect of functional claiming and presents a much-needed opportunity to enhance notice

regarding software patents, a goal consistently urged by panelists. The degree to which the 169

recent rulings will promote useful notice, however, will depend on still-unsettled details

regarding the nature and extent of the necessary disclosure. To this point, the Federal Circuit 170

has required that a patent’s specification contain an “algorithm” – some explanation of how the

computer performs the claimed function – to support a means-plus-function element in a claim. 

But the court has indicated that that algorithm may be expressed “in any understandable terms

including as a mathematical formula, in prose, or as a flow chart, or in any other manner that

provides sufficient structure” when viewed from the perspective of “one of ordinary skill in the

art.” No source code or “highly detailed description” has been required. 

171 172

Notice objectives counsel that as the courts elaborate the law regarding required

descriptions of means to perform a stated function, they seek ways to reduce the “zone of

uncertainty which enterprise and experimentation may enter only at the risk of infringement.”173

General statements that fail to explain how the computer performs the claimed functions may

leave the outer boundaries of the claim difficult to decipher. Adequate notice, in contrast, 174

requires particular and distinct claiming of the subject matter that the applicant regards as the

invention. To provide that notice, any “algorithm” relied upon as structure supporting a meansplus-function claim must identify the sequence of steps that the computer will perform in

sufficient detail to disclose what is within and what is outside of the patent.
See, e.g., ROBERT P. MERGES & JOHN F. DUFFY, PATENT LAW AND POLICY: CASES AND MATERIALS 175

334 (3d ed. 2002) (discussing “functional language” that is “outside § 112, ¶ 6); MPEP § 2181.

See supra notes 72-77 and accompanying text.

176

Kappos at 174 (3/19/09) (terming such claiming “a big problem in the IT arts”). 177

See DAN L. BURK & MARK A. LEMLEY, THE PATENT CRISIS AND HOW THE COURTS CAN SOLVE IT 61-

178

62 (2009).

See Shema at 60-61 (5/4/09) (the fact that in biotech “you can’t just claim things functionally, you’ve 179

got to claim things structurally . . . really helps us to analyze the scope of the claims that [competitors]

will get”).

Cf. Mark D. Janis, Who’s Afraid of Functional Claims? Reforming the Patent Law’s § 112, ¶ 6

180

Jurisprudence, 15 SANTA CLARA COMPUTER & HIGH TECH. L. J. 231, 297 (1999) (urging that a “fine

tuned” application of the general (viz., Section 112, Paragraph 2) indefiniteness doctrine, coupled with

adequate disclosure, could deal with any clarity concerns by requiring linkages between functional

claims and corresponding disclosure in the specification, without need for special treatment of meansplus-function claims). The detailed discussion of functional claims in the PTO’s newly issued

Supplementary Examination Guidelines, 76 Fed. Reg. at 7164-65, 7170-72, may already herald increased

attention to such claims at the administrative level.

101

Of course, claims may be functionally stated without invoking the special means-plusfunction rules. By addressing means-plus-function claims, the Federal Circuit has confronted 175

just a subset of the issues raised by functional claiming. As discussed above, hearing testimony

repeatedly suggested that functional claiming generates uncertainty and impairs notice.176

Problems may be especially severe with “results-based claiming,” i.e., “claiming the effect of

what was done rather than what was actually created.” Particularly in software contexts, the 177

Federal Circuit has been criticized for allowing patents that “claim the function itself” with “little

or no description of how to achieve this function,” often covering later-developed technologies

that “seem to bear only a passing resemblance to what the inventor originally built or

described.” In contrast, panel testimony suggested that where functional claiming has been

178

adequately supplemented with structural information, in the claim or the specification, notice is

substantially improved. The same concern for affording notice of claim boundaries that has

179

encouraged the Federal Circuit to begin addressing computer-implemented means-plus-function

claims, should similarly impel greater attention and lend greater weight to the patent system’s

notice function when evaluating the definiteness of other functional claims.

180

Recommendations. The Commission applauds the recent use of the indefiniteness

standard by the PTO and Federal Circuit to enhance patent notice. In assessing indefiniteness,

the PTO should adhere to the principle articulated in Miyazaki, that “if a claim is amenable to

two or more plausible claim constructions, the USPTO is justified in requiring the applicant to

more precisely define the metes and bounds of the claimed invention by holding the claim

unpatentable under 35 U.S.C. § 112, second paragraph, as indefinite.” The Commission further

recommends that courts pay close heed to notice objectives as they further explicate the
As one panelist put it, “if you start to look at external records, even in biotech, there you can probably

181

find five different people to say five different things.” Norviel at 64 (5/5/09). “It’s very important,” he

added, “for it to be all right there [in the prosecution history].” Id.

Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005) (en banc).

182

Id. at 1315 (internal quotation omitted).

183

Id. at 1317. 184

Id.

185

102

circumstances in which a patent’s specification sufficiently supports means-plus-function claims. 

Notice objectives require sufficiently detailed structure to inform the public of the specific means

that are and are not encompassed in the applicant’s invention. Similar concerns apply more

broadly, and the Commission urges that courts extend their recent focus on indefiniteness to

address functional claiming in general, in order to ensure disclosure of what is within and what is

outside of the patent. 

B. Improving the Ability to Understand Existing Claims: Claim Construction

Claim construction raises a second, closely related set of issues with profound notice

implications. Even with more vigorous application of definiteness principles, claims often will

not be undebatably clear on their face. To resolve such issues and assign meaning to a patent’s

claims, courts have looked to two broad sources of evidence. Intrinsic evidence relies on the

claim language, the written description in the specification, and the prosecution history. 

Extrinsic evidence takes account of external information, such as testimony of expert witnesses

and information in external, written texts. 

From a notice perspective, intrinsic evidence works best. A third party seeking to

understand a claim’s meaning can view the intrinsic evidence by reading the patent and

consulting the file wrapper (containing the prosecution history). The material is easily

identifiable by, and accessible to, third parties. In contrast, litigation and a Markman hearing

(where expert testimony is taken and external documents are presented for the record) may be

required to conclusively identify the most relevant extrinsic evidence. A third party therefore

cannot know in advance what external evidence will be utilized.181

The Federal Circuit’s 2005 en banc Phillips decision, which confirmed the primary role 182

of intrinsic evidence, marks a beneficial step from the perspective of public notice. Identifying

the specification as “the single best guide to the meaning of a disputed term,” the court found it 183

“entirely appropriate” to “rely heavily on the written description for guidance as to the meaning

of the claims.” Moreover, the court explained, “[P]rosecution history can often inform the 184

meaning of the claim language by demonstrating how the inventor understood the invention and

whether the inventor limited the invention in the course of prosecution . . . .” Finally, although 185

extrinsic evidence is “less significant than the intrinsic record” for claim construction
Id. (quoting C.R. Bard, Inc. v. U.S. Surgical Corp., 388 F.3d 858, 862 (Fed. Cir. 2004)). 186

Id. at 1319. 187

Id.

188

Id.; see also id. at 1317-19. 189

35 U.S.C. § 112. The paragraph concludes with an additional requirement – the specification must “set 190

forth the best mode contemplated by the inventor of carrying out his invention.” While identification of

this “best mode” sometimes may help to distinguish the claimed invention from what is not

contemplated, the requirement generally is of secondary importance for present purposes.

See, e.g., Lizard Tech., Inc. v. Earth Res. Mapping, Inc., 424 F.3d 1336 (Fed. Cir. 2005); Vas-Cath,

191

Inc., v. Mahurkar, 935 F.2d 1555, 1563-64 (Fed. Cir. 1991).

103

purposes, “unlikely to result in a reliable interpretation of patent claim scope unless considered 186

in the context of the intrinsic evidence,” and poses a risk of “undermining the public notice 187

function of patents,” the Federal Circuit found it “permissible for the district court in its sound 188

discretion to admit the use of such evidence” for appropriate purposes.189

The hearings explored possibilities for enhancing the value of intrinsic evidence for claim

construction purposes. Much of the discussion focused on written description and enablement

issues, with the thought that more rigorous enforcement of these doctrines could add to the

specification’s value as a claim-construction tool. Other discussion looked at the examination

process, seeking ways to raise the likelihood that the prosecution history would answer claim

construction questions. Because these intrinsic sources are accessible to third parties, increasing

their utility would simultaneously improve public notice. 

1. Enhancing the Value of the Specification for Notice Purposes

a. Background and Hearing Record

Two principal legal requirements govern the patent specification for notice purposes. 

Section 112, first paragraph, provides: 

The specification shall contain a written description of the invention, and of the manner

and process of making and using it, in such full, clear, concise, and exact terms as to

enable any person skilled in the art to which it pertains, or with which it is most nearly

connected, to make and use the same . . . .

190

This requires that the specification (i) describe the invention sufficiently to convey to a person

having skill in the art that the patentee/applicant was in possession of the claimed invention at

the time the application was filed and (ii) enable third parties to make or use the invention

without undue experimentation. The first of these formulations is referred to as the written 191
See Ariad Pharms., Inc. v. Eli Lilly & Co., 598 F.3d 1336 (Fed. Cir. 2010) (en banc) (holding that, for 192

both original and amended claims, Section 112, first paragraph, states a written description requirement

separate from the enablement requirement).

Durie at 77 (5/5/09); see also Lee at 43 (5/5/09) (stressing the importance of “enough support in the 193

specification to describe it in enough detail so that people reading it know what it covers”).

See Cotropia at 190-91 (3/19/09); see also Christopher A. Cotropia, Patent Claim Interpretation and 194

Information Costs, 9 LEWIS & CLARK L. REV. 57, 83 (2005) (explaining that information in the

specification is “tailored to the invention at issue, thereby providing contextual information for use

during claim interpretation,” and arguing that reliance on the specification “can help lower the costs

associated with understanding the invention defined in the claims”).

Kieff at 73 (3/19/09); see also Menell at 65 (5/5/09) (“[W]e want people filing applications to really

195

put as much effort as they can into writing a spec that will provide the answer down the road.”).

Shema at 72 (5/4/09); see also Kiani at 49 (3/18/09) (explaining how in doing clearance “[W]e have to 196

do our homework . . . . We look at the specification” and stay away from areas that are covered by the

specification and not within the prior art).

See, e.g., Lutton at 165-66 (5/4/09) (terming “disconnectedness” between written description and scope 197

a “big problem”); Guttierez at 164-65 (5/4/09); Lee at 114 (5/5/09) (stating that Google is “routinely

104

description requirement; the second, as the enablement requirement. Some have questioned

whether the first paragraph of Section 112 actually contains a written-description requirement

separate from the enablement requirement. The Federal Circuit, sitting en banc, recently ruled

that it does.192

Panelists stressed the importance of calibrating claim scope to the specification through

enforcement of Section 112 for predictable claim construction and hence, for public notice. 

Thus, one panelist suggested that seeking “a meaningful fit between the claim’s scope and what

actually was described as being the invention, would go a long way towards reconciling what I

do think is otherwise just an inherent ambiguity in the English language.” Another emphasized 193

that orienting claim construction to link the claims with the specification through the enablement

and written description requirements gives both better substantive determinations and better

notice. Still another advocated strict enforcement of Section 112 as a means for interpreting 194

and cabining claims because the patent applicant, as “the low-cost avoider of ambiguity” should

be held responsible for providing the necessary information. And a representative from the 195

biotechnology field offered a blunt, business-based perspective: “[W]ritten description helped us

in order to interpret our competitors’ patents . . . .”196

There was considerable testimony, however, that the written description and enablement

requirements have been much less stringently enforced in IT industries than in other sectors,

leading to claims of ambiguous scope. Several panelists found present application of these

doctrines inadequate for notice purposes in IT fields and called for more rigorous enforcement in

those industries. One found that “property rights in areas like software are untethered to 197
surprised with what we read in the written description and what the patent owner claims the coverage

is”); Cotropia at 159-60 (3/19/09); see also BURK & LEMLEY, supra note 178, at 59 (“The Federal Circuit

has essentially excused software inventions from compliance with the enablement and best mode

requirements . . . .”); Dan. L. Burk and Mark A. Lemley, Is Patent Law Technology-Specific?, 17

BERKELEY TECH. L.J. 1155, 1160-66, 1185 (2002) (discussing enablement, best mode, and written

description requirements in software cases, and concluding that “little specific detail is needed to satisfy

the requirements of disclosure”).

Meurer at 211-12 (12/5/08) (adding, “We really need to get serious about disclosure requirements 198

when it comes to software patents . . . .”).

Merges at 266 (5/4/09). 199

Kunin at 153 (3/19/09).

200

See, e.g., Durie at 116-17 (5/5/09) (suggesting that in the biological arts, there is too much focus on 201

specific examples and insufficient willingness to find support for a broader genus); Cotropia 157-58

(3/19/09); BURK & LEMLEY, supra note 178, at 149 (“By requiring disclosure of the particular structure

or sequence in order to claim biological macromolecules, the Federal Circuit effectively limits the scope

of a patent on those molecules to the structure or sequence disclosed . . . . Under this standard, no one is

likely to receive a patent broad enough to support the further costs of development.”).

See, e.g., Ariad, 598 F.3d at 1345 (describing the written description requirement as “a separate

202

requirement to describe one’s invention”).

See id. (recognizing that a description of the claimed invention in the specification “allows . . . the

203

public to understand and improve upon the invention and to avoid the claimed boundaries of the

patentee’s exclusive rights”).

Phillips, 415 F.3d at 1313-17. 204

105

possession.” Another observed, “[W]e’ve gotten a long way away from a very kind of rigorous 198

requirement that the claims be really proportionate to or commensurate with what you’ve

disclosed.” A third concluded, “[W]e still have a ways to go with respect to written 199

description . . . in terms of the notice function in the IT field.” In contrast, there was

200

essentially no indication of need for enhanced Section 112 enforcement in the pharmaceutical

and biological arts; indeed, several panelists suggested (or have written) that current enforcement

practices are too stringent.201

b. Analysis

The written description requirement is an important notice tool. Its focus – describing the

actual invention at issue – is precisely that needed for enhancing the public’s ability to identify 202

the boundaries of a patent’s claims, which are interpreted in light of that description. It 203 204

tethers the claim to what the applicant possessed and what others need to license or avoid; as

claims extend farther beyond the invention expressly described, their boundaries become more
This is not to denigrate enablement’s contribution to notice. Clearly it notifies the public as to how to 205

make and use the claimed invention. See Kunin at 151 (3/19/09) (explaining that enablement is

“intended to put the public on notice on how to make and use the claimed invention so that when it

becomes publicly available, they’ll have the notice of how to practice the invention”). The concern,

however, is that that information may not be precisely the type of information needed for effective

clearance.

One of the panelists framed this contrast lucidly. Enablement, he explained, asks, “[F]rom what you 206

gave me, can you get to what you claimed,” whereas written description asks, “What did you actually

make and do and describe, and how does that relate to your claims[?]” Kushan at 270 (12/5/08). “That

second variable,” he added, “I see as being very powerful in addressing some of the claim scope and

transparency issues you see with the software claiming issue.” Id. See also Durie at 46 (5/5/09) (urging

that patent law “focus much more on the written description as a guide to claim construction” because “to

the extent that the scope of the claims is truly constrained by the invention that’s described, you have a

lot more predictability”); Cotropia at 142 (3/19/09) (explaining how written description has an impact on

notice through the claim construction process). But cf. Kunin at 151 (3/19/09) (arguing that under “the

narrow view of written description,” the doctrine has “basically nothing to do with putting the public on

notice”).

See Rai at 145 (3/19/09) (“a lot of the doctrines we have actually in the context of claim construction 207

are intended to perhaps detract a little bit from notice, but give adequate scope”); Cotropia at 124-25

(3/19/09) (finding “a real linkage between substantive rights and notice solutions”).

See Rai at 143-44 (3/19/09) (observing that written description requirements – as some Federal Circuit 208

opinions have interpreted them – play a notice function but end up creating a much narrower patent and

urging that we balance notice objectives with adequate patent protection); Cotropia at 157 (3/19/09)

(noting the notice and substantive implications of written description requirements); BURK & LEMLEY,

supra note 178, at 62 (“[A] claim that covers only the thing invented is a weak claim indeed.”).

See Rai at 144 (3/19/09) (noting this “substantive impact [on patent scope] of using written 209

description”). 

106

ambiguous. Enablement provides less direct information. It looks to what others have been 205

enabled to do, not what the applicant/patentee has invented. Moreover, disclosing enough to

enable others to make and use the invention after it is known may not disclose enough for others

to understand the scope of the invention before it has been clearly delineated.206

While the importance of the written description and enablement doctrines to public notice

and the widely held concern that their current application has not provided sufficient notice in IT

fields suggest an area for legal development, we note an important trade-off and need for

balance: claim construction rules and disclosure doctrines that maximize notice might limit claim

scope. Confining claim scope to the explicit description of the invention would give clear

207

notice but may not fully protect all that applicants have invented. If the enablement doctrine 208

yields appropriate scope, applying written description as a second screen on validity may unduly

narrow the patent. Yet, if enablement is insufficient to yield clear notice, written description 209

may serve a valuable notice function.
See Meurer at 261 (12/5/08) (acknowledging that there are trade-offs between notice and scope in 210

many cases but arguing that there are also “many opportunities to avoid that trade-off completely”).

See 35 U.S.C. § 112 (requiring that the specification “enable any person skilled in the art to which [the 211

invention] pertains, or with which it is most nearly connected, to make and use the same”).

See Ariad, 598 F.3d at 1351 (“the [written description] test requires an objective inquiry into the four 212

corners of the specification from the perspective of a person of ordinary skill in the art. . . . [T]he

specification must describe an invention understandable to that skilled artisan and show that the inventor

actually invented the invention claimed”); Vas-Cath, Inc., v. Mahurkar, 935 F.2d 1555, 1563-64 (Fed.

Cir. 1991) (explaining that under the written description requirement an applicant must “convey with

reasonable clarity to those skilled in the art that, as of the filing date sought, he or she was in possession

of the invention”) (emphasis deleted).

See supra notes 138-40 and accompanying text.

213

See Kappos at 243 (3/19/09) (defending doctrine premised on demonstrating that applicant was in 214

possession of the invention as ensuring adequate notice to protect the public “[b]ecause if the standard

really is the skilled artisan, right, the person having ordinary skill in the art . . . you inherently wind up

with enough disclosure that it winds up not being a problem for third parties to read and understand and

be able to make the invention”).

See, e.g., IBM Comment at 3 (2/12/09) (observing that while examiners frequently allow claims 215

containing undefined terms so long as their meaning is discernible to a PHOSITA, “exactly what level of

skill constitutes ‘ordinary’ is itself open to interpretation and inconsistently applied, so the discernability

requirement is neither clear nor as predictable as it should be”).

107

This report does not attempt to make these trade-offs. Judgments regarding the

appropriate scope of patent rights generally would go beyond the range of the Commission’s

hearings. Rather, the report stresses the notice implications of these choices, so that

administrative, judicial, and legislative decision makers will be better able to achieve the

appropriate balance. Moreover, it looks for ways to enhance notice without invoking significant

trade-offs with scope. With these considerations in mind, specific suggestions follow. 210

Level of skill attributable to the PHOSITA. The hypothetical person having ordinary

skill in the art – the PHOSITA – is a key element in the enablement, written description, and 211 212

indefiniteness inquiries. Because what the PHOSITA is able to make, use, find demonstrated, 213

or understand is a reasonable proxy for what third parties are likely to be able to do, the

PHOSITA construct serves as a bridge between substantive patentability standards and public

notice. 

214

For that bridge to be effective, however, the PHOSITA’s abilities must be clearly and

accurately defined. This may not always be the case. Despite the importance of the PHOSITA 215

to proper application of Section 112, the Federal Circuit has provided surprisingly little guidance
See Burk & Lemley, supra note 197, at 1202 (noting that many opinions deal with the PHOSITA “only 216

perfunctorily”). The Federal Circuit repeatedly has listed six factors to consider. See, e.g.,

Environmental Designs, Ltd. v. Union Oil Co. of Cal., 713 F.2d 693, 696 (Fed. Cir. 1983) (“Factors that

may be considered in determining level of ordinary skill in the art include: (1) the educational level of the

inventor; (2) type of problems encountered in the art; (3) prior art solutions to those problems;

(4) rapidity with which innovations are made; (5) sophistication of the technology; and (6) educational

level of active workers in the field.”); Daiichi Sankyo v. Apotex, 501 F.3d 1254, 1256 (Fed. Cir. 2007)

(same); Bausch & Lomb, Inc. v. Barnes-Hind/Hydrocurve, Inc., 796 F.2d 443, 449-50 (Fed. Cir. 1986)

(same). The court, however, has provided little accompanying discussion. See Joseph P. Meara, Just

Who is the Person Having Ordinary Skill in the Art? Patent Law’s Mysterious Personage, 77 WASH. L.

REV. 267, 277-78 (2002) (noting that “the Federal Circuit has had little to say about how to use” the

factors it has identified).

See Burk & Lemley, supra note 197, at 1191-94 (suggesting that the courts have attributed too high a 217

level of skill to the PHOSITA (while ascribing too low a level of difficulty to the art) in software and too

low a level of skill in biotech); BURK & LEMLEY, supra note 178, at 149, 163 (urging, for Section 112

purposes, attributing a lower level of skill to the PHOSITA in semiconductors and a higher level of skill

in biotechnology); Marian Underweiser, Time to Reconsider the PHOSITA, in 184 MANAGING

INTELLECTUAL PROPERTY 28 (Nov. 2008) (discussing the PHOSITA’s skill level in software, business

methods, and biotechnology); cf. Cotropia at 245 (3/19/09) (citing the need for examining Section 112

issues on a case-by-case basis rather than merely assuming that issues in electrical industries are

predictable and issues in biotech industries are unpredictable). For a summary of previous testimony

focused on this topic see 2003 FTC IP Report, ch. 4, at 24-26.

The PHOSITA’s skill level and the difficulty of the relevant art in many respects are flip sides of the 218

same inquiry. For example, the ability to write software programs could be overstated either by ascribing

too much skill to the PHOSITA or too little difficulty to the task.

108

regarding applicable skill levels. Some analysts have argued that, at least for Section 112 216

purposes, the level of skill attributable to the PHOSITA has been set too high in IT and businessmethod contexts and too low in biotech settings, respectively understating or overstating the

amount of description needed to enable the PHOSITA to practice the invention or to convey to

the PHOSITA that the applicant possessed the full breadth of the invention. 

217

Attributing too high a skill level to the IT PHOSITA could unduly reduce disclosure

requirements and raise serious notice concerns. Judicial attention and guidance focused on

honing the assessment of PHOSITA skill levels relative to the problems posed by the art are

needed. In particular, to ensure adequate notice, the PHOSITA standard must be applied in 218

ways that reflect facts and avoid inappropriate rules of thumb. While full-scale inquiry in every

individual case may be unnecessarily burdensome, courts should ensure that application of the

PHOSITA standard (i) remains current (that is, up-to-date as of the appropriate reference point
The Federal Circuit in principle has recognized the need for updating the companion inquiry into the 219

predictability of relevant technologies, see Enzo Biochem, Inc. v. Calgene, Inc., 188 F.3d 1362, 1375

n.10 (Fed. Cir. 1999) (“[i]n view of the rapid advances in science . . . what may be unpredictable at one

point in time may become predictable at a later time”). But it has been criticized for failing to apply

similar thinking when assessing the PHOSITA’s skill level relative to the problems posed by the art. See

BURK & LEMLEY, supra note 178, at 116 (arguing that in applying the PHOSITA standard, courts are

“substituting constructs for detailed analysis” and “failing to update those constructs as knowledge in the

industry changes”). 

See R. Polk Wagner, Of Patents and Path Dependency: A Comment on Burk & Lemley, 18 BERKELEY 220

TECH. L. J. 1341, 1347 (2003) (urging that the PHOSITA’s level of skill be examined through a factspecific, innovation-by-innovation lens grounded in “the technological facts in any given case”). 

See In re Wands, 858 F.2d 731, 737 (Fed. Cir. 1988).

221

See Underweiser, supra note 217 (arguing that when product life cycles are brief “a sparse disclosure

222

does not have the teaching needed to reflect the rapid pace of advancement in the field”). A lag from

lengthy experimentation may not often affect use of the patented invention itself – the patent life may

well be much longer. A need for lengthy experimentation, however, may delay use of the disclosed

information for unprotected purposes, and if that delay renders the information stale, it may undermine

the public benefit of the disclosure.

See Wands, 858 F.2d at 737 (listing as factors “(1) the quantity of experimentation necessary, (2) the 223

amount of direction or guidance presented, (3) the presence or absence of working examples, (4) the

nature of the invention, (5) the state of the prior art, (6) the relative skill of those in the art, (7) the

predictability or unpredictability of the art, and (8) the breadth of the claims”).

See Underweiser, supra note 217 (“Where development is accelerated relative to other technical fields, 224

as is frequently the case in software, it is not appropriate to omit detailed information which is needed to

teach the PHOSITA how to practise the invention in a practical time frame.”).

109

for assessment) as technologies evolve and (ii) accurately reflects the facts pertinent to the 219

particular technology at hand, which may differ among technologies within an industry. 

220

Enablement and product life cycles. Application of the PHOSITA construct to the

enablement inquiry compels attention to timing. Section 112 has been understood to require a

disclosure that enables a PHOSITA to make and use the invention without “undue

experimentation.” From the perspective of competitive impact, time-consuming 221

experimentation is more likely to be undue in a setting where product life-cycles are measured in

months than in a context where they are measured by decades. However, the factors 222

traditionally considered in evaluating the “undue experimentation” issue omit this commercial

perspective on timing. Recognition of this timing element would tend to increase the amount 223

or detail of written description needed for enablement purposes in an industry such as software,

where product life cycles are notoriously short.224

Designated/default dictionaries. Other changes could sharpen both the specification and

claims as notice devices. One step would be a PTO requirement that applicants either designate a
The PTO-designated default dictionary could vary by art unit. 225

The continued ability to define terms in the application would preserve the applicant’s traditional 226

entitlement to act as his or her own lexicographer, as reflected, e.g., in MPEP § 2173.01. Moreover, the

identification of a dictionary is not intended to change relative reliance on dictionaries as opposed to

intrinsic evidence, see Phillips, 415 F.3d at 1313-24, but rather to specify which dictionary is to be used

when dictionaries are consulted.

Kappos at 193-94 (3/19/09); see also Wagner at 200-01 (4/17/09) (explaining that designating a default 227

dictionary would force patentees “to either accept the default meaning or say something that would

indicate to the public that they’re not using the default meaning”); IBM Comment at 5, 8 (2/12/09); cf.

BESSEN & MEURER, supra note 16, at 239-40 (suggesting that when applicants have not provided their

own definitions, “The Patent Office, or the various art units within the Patent Office, could establish

glossaries of commonly used claim terms, or specify certain references as authoritative sources of

definitions.”). Others noted complexities that might have to be resolved. See Kunin at 194 (3/19/09)

(noting the problem of foreign-language applications); Armitage at 196 (3/19/09) (noting that dictionary

definitions sometimes change from year to year). 

See Rai at 195-96 (3/19/09).

228

See Van Pelt at 154-55 (5/4/09) (discussing “ink blot claims,” where words are used only in the claim); 229

Krall at 114 (3/18/09); IBM Comment at 2-3 (2/12/09); cf. Kappos at 148 (3/19/09) (flagging the problem

of claim terms added during prosecution that do not appear in the written description); Norviel at 63

(5/5/09) (contrasting IT patents, where there are no definition sections “in most or any of them,” with

biotech patents, where definition sections are “almost routine”).

Indeed, the PTO’s just-issued Supplementary Examination Guidelines take a substantial step in this 230

direction. See 76 Fed. Reg. at 7,166 (stating, “[A]pplicants are encouraged to use glossaries as a best

practice in patent application preparation.”).

See Rivette at 54 (5/5/09) (suggesting that a definitional page be required in applications); Wagner at

231

199 (4/17/09); IBM Comment at 5 (2/12/09) (urging that an applicant who wants to apply a specific

meaning should be required to provide a glossary defining the relevant term); cf. Vermont at 202

110

dictionary or accept the use of a PTO-designated default dictionary for assigning meaning to 225

terms not defined in the patent application. Identifying a particular dictionary would avoid 226

disputes over which dictionary applies, providing significant “clarity up front.” And it would 227

do so in a way that third parties could apply to reach the same results. In essence, the fact that

the designation would appear in the patent application would convert the dictionary definition

into intrinsic evidence. 

228

Definitions or contextual references. One concern raised repeatedly during the hearings

was that claims frequently use terms with no apparent definition or explanation in the

specification. Clarity would be added, and notice improved, if applicants were pressed to 229

include definitions or contextual explanations of key terms. One possibility would be 230

requiring a glossary defining any key terms that are not covered by a designated or default

dictionary or that the applicant chooses to define differently than in such a dictionary.231
(4/17/09) (urging that an applicant who adopts “an idiosyncratic meaning” be required “to say so

explicitly [in the] specification”); Lee at 57 (5/5/09) (stating that a definitional page “in some sense

would help tremendously”).

Cf. Lee at 58 (5/5/09) (asking whether requiring a glossary would make examiners and applicants 232

“really define the terms . . . being used” and supporting the requirement “if the answer is yes”).

See IBM Comment at 3-4 (2/12/09); Lee at 90 (5/5/09); Schultz at 88 (5/5/09) (suggesting that charts

233

linking claims to the specification would be low-cost means of enhancing notice). 

See supra notes 69-71 and accompanying text.

234

See Shema at 70-71 (5/4/09) (referring to rules at 37 C.F.R. §§ 1.821-1.825). 235

Testimony indicated that considerable effort had been made by the biotechnology community to 236

develop common nomenclature. See Shema at 70-71 (5/4/09). The Sequence Listing Rules also were

able to incorporate by reference a pre-existing World Intellectual Property Organization standard that

established codes for nucleotide sequence bases and amino acids and nomenclature for nucleotide

sequence features. See MPEP § 2422.

111

Inclusion of such a glossary in a patent application (i) would facilitate the public’s understanding

of a patent by placing any internal definitions in a central, readily located place and (ii) could

force the applicant to think about and articulate the meaning that he or she intends for key patent

terms. Another possibility would be a requirement that key claim terms appear in the 232

specification “in order to provide context and meaning,” coupled with a ready means for

identifying where in the specification the terms appear.233

Nomenclature or methods of description. A further step would be for the PTO to

convene a government/industry task force or hold a workshop to explore ways of moving toward

a common nomenclature or otherwise improving the description of software inventions. The

hearings received substantial testimony that varying usages and nomenclature were impediments

to effective notice in areas like software. In contrast, other testimony praised PTO’s Sequence 234

Listing Rules for certain biotech disclosures for bringing uniformity to descriptions of the

structural aspect of inventions. Although opportunities for uniformity comparable to rules

235

specifying the order and grouping of nucleotide and amino acids are unlikely to be common,

helpful steps toward uniformity might still be identified with a concentrated effort and substantial

industry assistance. Consequently, the PTO may wish to consider holding a workshop or 236

designating a task force to discuss with software industry representatives whether guidelines

might be devised to achieve greater uniformity of methodology or language used for describing

and claiming inventions, with the objective of enhancing public understanding of software

patents. 

Recommendations: enhancing the specification. (1) The Commission urges the courts

to direct heightened attention and provide additional guidance regarding the assessment of

PHOSITA skill levels relative to the problems posed by the art. To serve notice goals application

of the PHOSITA standard should be fact-based, up-to-date, and appropriately tailored to the
See, e.g., Markman v. Westview Instruments, Inc., 52 F.3d 967, 979 (Fed. Cir. 1995) (en banc) (stating 237

that “[t]o ascertain the meaning of claims, we consider three sources: The claims, the specification, and

the prosecution history,” while noting that extrinsic evidence may also be used) (internal quotation

omitted), aff’d, 517 U.S. 370 (1996).

Norviel at 64 (5/5/09).

238

Kunin at 138 (3/19/09) (highlighting the possibility of disclaimers of claim scope). 239

Lee Petherbridge, Positive Examination, 46 IDEA 173, 219 (2006). 240

112

specific technology at hand. (2) Determinations regarding whether a disclosure requires undue

experimentation should give recognition to the competitive significance of the time required for

experimentation; when product life-cycles are short, greater disclosures may be needed in order

to be competitively meaningful. (3) The Commission recommends that patent applicants be

required either (i) to designate a dictionary for use in assigning meaning to terms not defined in

the application or (ii) to acknowledge acceptance of a PTO-designated default dictionary for that

purpose. The PTO-designated default dictionary could vary by art unit. (4) The Commission

urges the PTO to continue to look for ways to press patent applicants to include definitions or

contextual explanations of key terms. Mechanisms that could accomplish this include (i)

requiring applicants to provide a glossary defining any key terms that are not covered by a

designated or default dictionary or that the applicant chooses to define differently than in such a

dictionary or (ii) requiring that applicants include key claim terms in the specification and

provide a ready means for identifying where they appear. (5) The Commission urges that the

PTO convene a government/industry task force or hold a workshop to explore ways of fostering

greater uniformity in the methodology or language used for describing and claiming software

inventions.

2. Enhancing the Prosecution History for Notice Purposes

In addition to the language of the patent itself, intrinsic evidence relevant to a claim’s

meaning may appear in the prosecution history. Information exchanged between applicants and

examiners is potentially a fertile source of information regarding the intended scope of the

claims. A simple statement on the record may cut through considerable ambiguity. 237

Panelists testified to the potential power of the prosecution history. One panelist

explained how “you can look at the file history” and “figure out where things are,” even if the

claim itself is ambiguous. Another described the file history as “an opportunity to help define,

238

essentially through what was said during the course of the prosecution.” A third panelist has 239

written that a core “measure of [PTO] success should be how effectively the Office creates a

record that permits the Office as well as ex post actors to better understand the boundaries of

patented property.”240
See, e.g., Armitage at 121-22 (3/19/09) (projecting “enormous downstream benefit in analyzing . . .

241

valid claims” from having patentees explain why their invention is patentable); Kappos at 162-63, 174

(3/19/09) (suggesting that examiners request removal of parts of claims that are not intended to be

limitations, thereby encouraging applicants to respond on the record); Cotropia at 178 (3/19/09)

(suggesting that examiners should be “forcing the applicant to engage in [a] discussion” of claim

interpretation questions and explaining that this would “basically [be] making explicit what is implicitly

happening”); Lee at 89 (5/5/09) (stating that “anything in terms of a conversation between the applicant

and the examiner that gets to the issue of what is old and what is new” is “critical” and “getting that on

the record is even more critical”); McNelis at 92 (5/5/09) (if an examiner “forced the issue,” useful

information could be obtained regarding the purposes of amendments). But cf. Messinger at 222-23

(3/19/09) (expressing doubt that statements of purpose of claim amendments in the absence of an accused

product would be useful). 

See generally Petherbridge, supra note 240, at 173 (explaining that engaging the patent applicant –

242

“the party best positioned to most cheaply provide” information about the patent’s intended boundaries –

in ways that building a prosecution history record enables all participants in the patent system “to form a

more certain understanding of the boundaries of the property at issue and more usefully compare it to

prior art and commercial goods and services”).

See Kunin at 215-16 (3/19/09); Cotropia at 217 (3/19/09).

243

See, e.g., Schultz at 71 (5/5/09); Menell at 91 (5/5/09).

244

Cotropia at 179 (3/19/09); see MPEP § 713.04 (requiring records of interviews). 245

Compare id. (warning that “we don’t want to sidestep interpretation during examination”) with MPEP

246

§ 2111 (“During patent examination, the pending claims must be given their broadest reasonable

interpretation consistent with the specification.”) (internal quotation omitted).

113

Several steps could be taken. The panelists registered considerable support for increasing

and recording examiner/applicant exchanges pertinent to patent scope. Exchanges discussing 241

what a claim means, why a term is or is not clear, or how a claim might be amended to remove

ambiguity are all especially useful. New wording introduced by claim amendments may prove 242

particularly fertile ground for such examiner/applicant discussions. The examiner may proceed

formally – through indefiniteness rejections that pinpoint the source of uncertainty in ways that

invite clarification from the applicant – or informally, through interviews. Meaningful 243 244

recording of the exchanges regarding patent scope is essential: as one panelist emphasized,

“[P]utting it down on paper produces an information product that then feeds into claim

interpretation later down the road.”245

Fully developing this approach, however, may require a continued shift in focus within

the PTO, particularly at the examiner level. Many of the PTO’s core validity inquiries – such as

determining the obviousness of an invention – can be pursued using an ambiguous claim’s

broadest reasonable interpretation. Consequently, examiners may need to be reminded of the 246

patent system’s notice function and encouraged to build a record that improves claim scope
See, e.g., Cotropia at 217 (3/19/09). Of course, increased emphasis during prosecution on the Section 247

112 patentability standards, including indefiniteness and the written description requirement, as urged

above, likely will carry with it an enhancement of prosecution history, as applicants are forced to add

clarity in order to avoid rejection of claims. See Kappos at 163 (3/19/09).

See, e.g., 76 Fed. Reg. at 7,169 (flagging the fashioning of clear and unambiguous claims as “[a]n 248

essential purpose of patent examination”) (internal quotation omitted). Indeed, the new guidelines

encourage examiners to make greater use of rejections and interviews to pinpoint and record

indefiniteness concerns, as discussed above, as well as to provide, in appropriate cases, reasons for

allowance and for withdrawing rejections, as discussed below. Id. at 7,169-70.

FTC 2003 IP Report, ch. 5, at 13-14. Rule 105 permits examiners to request “such information as may 249

be reasonably necessary to properly examine or treat the matter . . . .” 37 C.F.R. § 1.105.

See 37 C.F.R. § 1.105(a)(1)(viii) (including among examples of information that might be sought under 250

Rule 105, “Technical information known to the applicant concerning . . . the disclosure, the claimed

subject matter . . . or concerning the accuracy of the examiner’s stated interpretation of such items.”);

Kappos at 162-63 (3/19/09) (stating that Rule 105, though “very much unused,” is a “great way . . . to

reach out to applicants” and urging that examiners “use inquiry techniques . . . without necessarily

interposing an objection or rejection” to build “better file histories” on topics such as the location of term

definitions, whether means-plus-function claiming was intended, and the location in the specification of

structure corresponding to a claim).

Menell at 91 (5/5/09) (explaining that this “tends to be the critical issue when you get to claim 251

construction”); id. at 66 (5/5/09) (identifying uncertainty regarding this issue as a frequent problem in IT

and explaining that applicants sometimes “play . . . game[s]” by trying “to have it both ways”); cf. Rai at

191 (3/19/09) (agreeing that determining whether a claim is limited to specific embodiments is a

recurring issue requiring further thought); Burk at 11-12 (5/5/09) (identifying issues raised by multiple

embodiments, some of which may not even have been thought of when the claims were drafted, as posing

inherent notice problems). See generally Schultz at 71-72 (5/5/09) (asserting that “people change their

story when they get into litigation” and describing the value of achieving greater consistency by inducing

the applicant to commit to certain positions).

114

clarity. With its just-issued Supplementary Examination Guidelines, the PTO has provided 247

just such a reminder; if vigorously implemented in examination practices, this could 248

substantially elevate attention to notice objectives.

The Commission’s 2003 IP Report recommended “a concentrated effort to use examiner

inquiries [under PTO Rule 105] more often and more extensively.” We here reiterate that 249

recommendation as a means for enhancing the prosecution history regarding claim scope. Such

inquiries can be used to gather a broad range of information regarding the meaning of claims.

250

For example, a topic that drew attention at the hearings was the recurring issue of whether

embodiments in the specification are meant to be “illustrative or limitative.” Examiner 251

inquiries and applicants’ responses on that and other topics could improve the public’s ability to

understand the meaning and scope of many patent claims. 
37 C.F.R. § 1.104(e). 252

Durie at 100-01 (5/5/09). 253

See Rea at 141 (3/19/09); Kappos at 224-25 (3/19/09); Lee at 89-90 (5/5/09); Schultz at 95-96 (5/5/09); 254

Rivette at 103 (5/5/09). 

See MPEP § 1302.14 (cautioning that “care must be taken to ensure that statements of reasons for

255

allowance . . . are accurate, precise, and do not place unwarranted interpretations, whether broad or

narrow, upon the claims” and that an examiner “should keep in mind the possible misinterpretations of

his or her statement that may be made and its possible effects”); see also Petherbridge at 97 (5/5/09)

(warning that reasons for allowance currently are “not well thought out” and explaining the need for

quality control if the practice is expanded). The applicant’s right to respond to the examiner would likely

be a significant safeguard. See 37 C.F.R. § 1.104(e).

See Durie at 101 (5/5/09) (noting that many courts “view the prosecution history through the lens of 256

[applicant] disclaimer” and consequently “consider statements by the examiner to be much less

relevant”); cf. Salazar v. Procter & Gamble Co., 414 F.3d 1342, 1345, 1347 (Fed. Cir. 2005) (refusing to

apply prosecution history estoppel based on “the unilateral statements of an examiner in stating reasons

for allowance,” while recognizing that an examiner’s statements about a claim term “may be evidence of

how one of skill in the art understood the term at the time the application was filed”).

Durie at 101 (5/5/09) (observing that the examiner’s rulings are a foundation of the presumption of 257

validity accorded the issued patent); see also Menell at 103 (5/5/09) (urging that courts give “some

degree of consideration” to examiners’ commentary, although “maybe not deference in a Chevron

sense”); Lutton at 163 (5/4/09) (arguing that “doing more examination on the record and documenting

the assumptions of where there is support for the claim elements” would enable courts to determine what

the PTO thought was the support for the claim and “tether” the application “back to the assumptions that

115

A further step would be to encourage examiners to make greater, and more informative,

use of statements of reasons for allowance. Under current practice, “If the examiner believes that

the record of the prosecution as a whole does not make clear his or her reasons for allowing a

claim or claims, the examiner may set forth such reasoning.” Several hearing participants 252

indicated that expanded use of reasons for allowance that go beyond pro forma recitations and

“actually delineate[] what the basis for allowance was” would contribute to better public 253

notice. The PTO has highlighted the need for care in formulating these statements, but 254 255

judicious application of this procedure when needed to make clear the claim interpretation

applied by the examiner could yield substantial benefit from a notice perspective. Similarly,

examiners could contribute to better notice by providing specific statements of reasons for

withdrawing indefiniteness rejections. 

To make these last measures effective, examiners’ statements must receive due weight as

interpretive guides to the meaning of claims. Examiner views, however, have not always

received much traction in court. Panelists urged that greater weight be accorded examiner 256

views, one arguing that “what the examiner thought and the reason that the examiner allowed the

claims” should be “the touchstone of what we care about.” Such statements are properly

257
gave rise to its grant”). 

See Rai at 223 (3/19/09) (predicting that courts would look at examiner statements about the meaning 258

of claim terms as prosecution history, rather than as findings entitled to deference). 

35 U.S.C. §§ 120, 132. 259

116

considered part of the prosecution history, and, particularly in light of the applicant’s right to

258

respond when in disagreement, should be more broadly recognized as a source of interpretive

information. 

Recommendations: enhancing the prosecution history. (1) The Commission urges that

examiners be further encouraged to build a record that improves claim scope clarity. In part, this

may be achieved through greater focus on Section 112 standards, including the prohibition of

indefiniteness and the requirement for written description. Additional notice may be derived via

indefiniteness rejections or interviews tailored to elicit information from applicants regarding the

meaning of their claims. Beyond this, the Commission reiterates the recommendation in its 2003

IP Report for “a concentrated effort to use examiner inquiries [under PTO Rule 105] more often

and more extensively,” as a means, for present purposes, of increasing and recording

examiner/applicant exchanges pertinent to patent scope. (2) The Commission recommends that

the PTO continue to encourage examiners to make greater, and more informative, use of

statements of reasons for allowance and for withdrawing indefiniteness rejections and that the

courts accord such statements due weight as prosecution history relevant to interpreting the

meaning of claims. 

C. Improving the Ability to Foresee Evolving Claims

To this point the discussion has focused on improving the ability to understand existing

claims. A different notice issue involves the ability to foresee evolving claims. Claims may be

amended during the prosecution process. Existing claims may be broadened and new claims may

be added. As long as the original specification adequately supports the amended or new claims

under Section 112, the patentee retains the advantage of the original application filing date. In 259

essence, the original specification and the requirements of Section 112 set the limits on claim

evolution. The ability of third parties to foresee evolving claims is shaped by whether and when

the specification is published and by the extent to which the specification provides effective

notice of the range of claims that ultimately might issue.

As discussed in Section III.B above, numerous panelists, particularly in the IT industries,

voiced concern that they were unable to adequately predict what claims might emerge from an

initial application. They worried about exposure to unpublished applications and to

unanticipated claim amendments. They stressed that third parties must make research, design,

and production decisions while waiting for patent applications to be published and for claims to

take their final, issued form, and face exposure if their products ultimately infringe a previously

unpublished or amended patent application. Section II explained some of the competitive
2010 PTO Annual Report, supra note 91, at 18. The PTO received approximately 509,000 patent 260

applications in fiscal year 2010, including 479,000 for utility patents. Id. at 126, tbl. 2.

Id. at 18. 261

See Arti Rai, Stuart Graham, & Mark Doms, Patent Reform: Unleashing Innovation, Promoting 262

Economic Growth & Producing High-Paying Jobs – A White Paper from the U.S. Department of

Commerce at 5 (Apr. 13, 2010) (describing the impact on R&D efforts of patent applicants’ competitors

posed by uncertainty associated with patent delay). 

FTC 2003 IP Report, ch. 6, at 18-19 (calling on Congress to allocate “sufficient funds to allow the PTO 263

to ensure quality patent review”).

The PTO has affirmed that reducing pendency periods and providing timely examination of patent 264

applications are among its highest priorities. USPTO, FY 2010-2015 Strategic Plan, 6-7 (2010),

available at http://www.uspto.gov/about/stratplan/USPTO_2010-15_Strategic_Plan.pdf (“PTO Strategic

Plan”).

35 U.S.C. § 122(b)(1)(A). See Issues Relating to the Patenting of Tax Advice: Hearing Before the

265

Subcomm. on Select Revenue Measures of the H. Comm. on Ways & Means, 109th Cong. (2006)

(statement of James A. Toupin) (estimating that approximately 90% of applications are published).

See 35 U.S.C. § 122(b)(2)(B). 266

117

problems that this may pose. This section explores possibilities for limiting or avoiding those

problems by increasing the foreseeability of evolving claims.

A predicate for this discussion is an ongoing examination process. Unfortunately, the

PTO currently suffers under a huge application backlog, which delays even the onset of

examination. At the end of fiscal year 2010, the PTO had a backlog of more than 726,000

applications awaiting action by examiners. On average, 25.7 months passed between filing 260

and the first office action, and total pendency averaged 35.3 months. To the extent that notice 261

problems are otherwise present, delay in commencing the examination procedures that begin to

add clarity only adds to the period of uncertainty. Updating a recommendation in the 2003 262

FTC IP Report, we urge that the PTO receive the funding and information systems needed to 263

promptly and properly examine the flood of applications that it faces.264

1. Publication of Applications

Publication of patent applications is a prerequisite for foreseeing evolving claims. Until

the application is available to public view, third parties have no opportunity to determine 

whether they have freedom to operate in an area. Under current laws, most U.S. patent

applications must be published 18 months after filing. If an application is filed only 265

domestically, however, the applicant may “opt out” of the publication requirements, keeping the

application secret until the patent issues. 

266
2003 FTC IP Report, ch. 5, at 15. Prestigious study groups over several decades have made similar 267

recommendations. See, e.g., NAT’L RESEARCH COUNCIL OF THE NAT’L ACADS., A PATENT SYSTEM FOR

THE 21ST CENTURY 128 (Stephen A. Merrill, Richard C. Levin & Mark B. Myers eds., 2004) (“NAS

REPORT”) (recommending publication of all applications after 18 months); REPORT OF THE PRESIDENT’S

COMMISSION ON THE PATENT SYSTEM at 16 (1966), reprinted in TO PROMOTE THE PROGRESS OF THE

USEFUL ARTS, SUBCOMM. ON PATENTS, TRADEMARKS AND COPYRIGHTS OF THE SENATE COMM. ON THE

JUDICIARY, 90 CONG., 1 SESS. (1967) (“Early publication could prevent needless duplication of the TH ST

disclosed work, promote additional technological advances based on the information disclosed, and

apprise entrepreneurs of their potential liability.”).

Phillips at 201-02 (3/18/09) (terming 18-month publication “truly critical”); see also Harris at 123 268

(3/18/09) (describing unpublished applications as undermining effective search); Brian Kahin, The

Patent Ecosystem in IT: Business Practice and Arbitrage, slide 8, presented at FTC Hearing: The

Evolving IP Marketplace (Dec. 5, 2008), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/dec5/docs/bkahin.pdf (identifying “secrecy about

contemplated and filed applications before publication” as a “source[] of information failure/opacity”).

See Schwartz at 10-11 (3/19/09); Rea at 256-57 (3/19/09); Kunin at 257-58 (3/19/09); Cotropia at 258

269

(3/19/09); Rivette at 112 (5/5/09); AIPLA Comment at 8 (5/15/09) (“AIPLA endorses efforts that would

require the PTO to publish all pending patent applications at 18 months after initial filing”).

As in 2003, the one possible qualification might be a mechanism for according “any necessary 270

protection to independent inventors.” 2003 FTC Report, ch. 5, at 15. See McNelis at 113 (5/5/09)

(urging that all applications should be published at 18 months, apart from “potentially . . . a carveout” for

“solo inventors,” who fear that publication would allow infringers to “steal” their inventions because

they would find it too expensive to sue); cf. Katznelson at 34-35 (3/18/09) (expressing concern that

disclosing claims allows others to copy them and invoke interference procedures). Moreover, our

recommendation is confined to applications exempt from publication because of the absence of filing and

required publication abroad; it is not meant to disturb other exceptions to the publication requirement

(such as the exception for applications subject to a secrecy order), referenced supra at note 95.

See Menell at 34-35 (5/5/09); Lee at 110-11 (5/5/09) (noting that software products may move from 271

concept to launch in three months, so that an 18-month delay can render clearance searches “out of

date”); Martin Comment at 13 (5/15/09); cf. Horton at 196 (3/18/09) (stressing the importance of prompt

publication when business cycles are compressed).

118

Noting the “benefits of publication to business certainty and the potential competitive

harms and hold-up opportunities that flow from unanticipated ‘submarine’ patents,” the 2003

FTC IP Report recommended legislation “requiring publication of patent applications 18 months

after filing, whether or not the applicant also has sought patent protection abroad.” Prompt 267

publication won almost universal praise at the 2008-09 hearings, with testimony describing

unpublished applications as “a real threat to expensive R&D.” Several panelists urged that the 268

publication requirement be extended to all applications. We agree and consequently reiterate 269

our 2003 recommendation.270

A few panelists would go farther. They urged that, particularly in short-cycle industries,

notice might be improved with publication immediately upon filing. The record on this was 271
See Norviel at 48 (5/5/09) (stating that he is not opposed to immediate publication but expressing the 272

need to protect “small inventors”); Lee at 110-11 (5/5/09) (noting possibilities for gamesmanship with

immediate publication); Rearden, LLC Comment at 6 (2/5/09) (arguing that immediate publication could

leave inventors unprotected).

See, e.g., PIN/NIP, Inc. v. Platte Chem. Co., 304 F.3d 1235, 1247-48 (Fed. Cir. 2002) (invalidating an 273

added claim that lacked support in the application as originally filed).

Liebel-Flarsheim Co. v. Medrad, Inc., 358 F.3d 898, 909 n.2 (Fed. Cir. 2004); Reiffen v. Microsoft

274

Corp., 214 F.3d 1342, 1346 (Fed. Cir. 2000). See infra Section IV.C.3 (discussing continuation practice).

See Van Pelt at 159 (5/4/09); see also Rai at 237-38 (3/19/09) (arguing that the claim-amendment 275

context – rather than that of originally-filed claims – was where the written description requirement “was

supposed to really play a role”).

See Vas-Cath, 935 F.2d at 1560; MERGES & DUFFY, supra note 175, at 262. 276

See supra Section III.B; Kappos at 243 (3/19/09) (suggesting that the written description requirement 277

isn’t “being policed well enough” and that “112 enablement in the IT area is, most certainly, not being

tightly examined”); cf. Rai at 238 (3/19/09) (suggesting that written description may be inadequately

enforced with regard to later-filed claims and too strictly enforced with regard to original claims). 

119

quite thin, however, and the full implications have not been explored. The idea warrants 272

additional study but is not the subject of a recommendation.

2. Written Description and the Problem of Expanding Claims

a. Background and Hearing Record

The disclosure requirements in Section 112, first paragraph – enablement and written

description – provide important protections against undue broadening of a patent application’s

scope through claim additions or amendments. If the original disclosure does not provide

adequate support, the added or broadened claims are invalid. Moreover, when an applicant 273

extends the prosecution process through a series of related applications, new or broadened claims

in a subsequent application must be supported by the original application’s disclosure if they are

to receive priority based on the parent application. Panelists described the written description 274

requirement in particular as “the bulwark” against claims that “evolve and morph”

inappropriately, a context where that doctrine has been long, and widely, applied. 275 276

Reviews are mixed as to how well these protections actually work in practice, with

particular concerns expressed in IT contexts. Hearing testimony suggested that one problem is 277

that the law of written description is not particularly well-developed. “[U]ntil there is a coherent

set of factors for making [the written description] determination,” one panelist explained, “it is
Kunin at 239, 241-42 (3/19/09) (explaining that the lack of a coherent body of case law on written 278

description impairs the utility of the doctrine for informing the public about the potential for evolving

claims).

Kingsdown Med. Consultants, Ltd. v. Hollister, Inc., 863 F.2d 867 (Fed. Cir. 1988). 279

Id. at 874.

280

See Liebel-Flarsheim, 358 F.3d at 909 n.2 (finding no impropriety in amending claims to encompass a

281

competitor’s product “as long as the disclosure supports the broadened claims”); PIN/NIP, 304 F.3d at

1247 (“there must be support for such amendments or additions in the originally filed application”).

See Kappos at 242-43 (3/19/09) (finding no “necessary tension between the doctrine that is keyed to 282

the applicant demonstrating that she or he was in possession of the invention, and that requirement then

being what we depend on to protect the public,” so long as the requirement is adequately policed). “[I]f

the standard really is the [PHOSITA,] you inherently wind up with enough disclosure that it winds up not

being a problem for third parties to read and understand and be able to make the invention.” Id. at 243. 

120

going to be difficult to have the public have adequate notice on the written description

requirement.”278

The potential competitive consequences of any breakdown of notice of evolving claims

are highlighted by a Federal Circuit doctrine. In its 1988 Kingsdown decision, the court

279

overturned a holding of inequitable conduct based in part on an amendment of claims to cover a

competitor’s product. The Federal Circuit declared that it is not 

in any manner improper to amend or insert claims intended to cover a

competitor’s product the applicant’s attorney has learned about during the

prosecution of a patent application. Any such amendment or insertion must

comply with all statutes and regulations, of course, but, if it does, its genesis in the

marketplace is simply irrelevant and cannot of itself evidence deceitful intent.280

Kingsdown’s progeny make it clear that priority or validity of such amendments depends on

support in the specification of the originally filed application.281

b Analysis

The traditional answer to these concerns is that so long as a patent application’s

specification presents sufficient information to convey to a PHOSITA that the applicant was in

possession of the claimed invention at the time the application was filed and to enable the

PHOSITA to make and use that invention, the public receives adequate notice of potential

evolving claims. Certainly, those requirements provide some notice. But, they do not focus on 282

precisely the right question. There is potentially a subtle, but extremely important, distinction

between possession and predictability. Possession uses the claim to define an inquiry about the

past – what the inventor had achieved at the time of the application. Predictability relies on the
Vas-Cath, 935 F.2d at 1560.

283

This point recalls the courts’ frequent caution against declaring inventions obvious on the basis of

284

hindsight. See, e.g., KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398, 421 (2007); Graham v. John Deere

Co., 383 U.S. 1, 36 (1966). A hindsight-dominated evaluation of public notice of evolving claims is

infected with similar infirmities as a hindsight-driven assessment of obviousness.

For commentary suggesting that current disclosure doctrines do not provide that assurance, see, e.g.,

285

Herbert Hovenkamp, Patents, Property, and Competition Policy, 34 J. CORP. L. 1243, 1252-53 (2009)

(explaining how claim amendments might cover the subsequent invention of a rival who would have “no

reasonable way of knowing that its patent invention was subject to an ‘earlier’ patent”), 1253 n.56

(concluding that the Section 112 disclosure requirements would not prevent an applicant from later

“obtain[ing] legal rights over ideas that (at least in that form) never occurred to her until she saw what

others were already doing”); Robert P. Merges, Software and Patent Scope: A Report from the Middle

Innings, 85 TEX. L. REV. 1627, 1654 (2007) (“Traditional enablement law thus presents a deficiency: it

cannot deal with cases . . . where a general set of teachings enables a host of embodiments but does not

specifically mention or suggest particular variants that later come to light through the efforts of others.”);

Mark A. Lemley & Kimberly A. Moore, Ending Abuse of Patent Continuations, 84 B.U. L. REV. 63, 92

(2004) (stating that the Federal Circuit has “cut back on the broad reading of the written description

requirement as applied to claim changes”); Tun-Jen Chiang, Fixing Patent Boundaries, 108 MICH. L.

REV. 523, 544 (2010) (asserting that “the written description requirement allows this initial disclosure to

be vague, cursory, and buried within a laundry list”).

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specification to project the future – what the applicant could later think to claim through

amendments. Similarly, traditional enablement inquiries ask whether the disclosure enables a

PHOSITA to make and use a given, claimed invention, not whether it enables the PHOSITA to

predict what might be claimed in the future. Demonstrating possession and enablement, as those

disclosure obligations are currently understood, may not ensure predictability.

Indeed, the traditional formulation for the inquiry – “most often phrased as whether the

application provides ‘adequate support’ for the claim(s) at issue” – highlights the distinction. 283

The test is directional in nature. Starting from the claims, it works back to ask whether the

PHOSITA would understand from the specification that the applicant was in possession of the

claimed invention at the time of filing or whether the PHOSITA could make and use the claimed

invention based on the information disclosed. But a true predictability inquiry would move in

the opposite direction – starting with the specification, it would look forward to ask whether a

PHOSITA would predict that these claims would emerge. To the extent that current 284

application of disclosure doctrines does not adequately ensure a third party’s ability to foresee the

claims that may evolve, the public is exposed to unnecessary risk of unexpected infringement. 285

Current doctrine does not acknowledge this gap in notice – it assumes that when Section

112 disclosure requirements are met, there is no problem with broadening claims to cover the

fruits of a rival’s subsequent R&D. But unless the rival – endowed with the skill of the

PHOSITA – could have predicted at the time of investing in R&D that the outcome would be a

product that the patentee would later claim and demonstrate, after-the-fact, to be supported by the

specification – the broadened claims reach beyond the application’s effective notice. When that
See Merges, supra note 285, at 1653-54 (arguing that these amendments cover embodiments that “are

286

more properly attributed to the labor of others” and terming the applicant’s conduct “misappropriation by

amendment”); Lemley & Moore, supra note 285, at 111 (terming use of continuations “to obtain claims

to read on a competitor’s product where the patentee had not contemplated the embodiment prior to

seeing the competitor’s device” a “particularly offensive practice”); Chiang, supra note 285, at 526, 545,

and 561 (arguing that allowing patent amendments to capture unforeseen developments merely confers a

windfall, contributing little to the patentee’s innovation incentives while “creat[ing] monopoly cost”).

See Hovenkamp, supra note 285, at 1253 (asserting that to the extent that patentees can amend claims 287

to cover “the existing inventions of other inventors who did not have adequate prior notice of them, the

policy reduces rather than increases the incentive to innovate”); Lemley & Moore, supra note 285, at 78-

79 (“Strategic claim changes may hold-up legitimate improvers or independent inventors, reducing their

ability and incentive to innovate.”).

Indeed, in one context, the Federal Circuit already has taken a step in this direction. In In re Curtis,

288

354 F.3d 1347 (Fed. Cir. 2004), the court refused to find adequate support in a description of dental floss

coated with microcrystalline wax for subsequent claims covering dental floss using “friction enhancing

coatings.” The court asked whether “the later-claimed genus” would “‘naturally occur’ to a person of

ordinary skill upon reading the disclosure.” Id. at 1356. It reasoned that “unpredictability in

performance” of friction-enhancing coatings made it inappropriate to conclude that the written

description would put a PHOSITA in possession of the full range of later-claimed coatings. Id. at 1355,

1358. The focus on what a PHOSITA could reasonably predict from the written description represents

the kind of analysis we are urging.

Other suggestions for addressing these issues have included reforming the traditional enablement 289

inquiry or barring the applicant from amending claims to cover features copied from a rival’s product.

See Merges, supra note 285, at 1654-56; see also infra Section IV.C.3. (discussing possible intervening

or prior-use protections from claims broadened through continuations).

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happens, enforcement of such claims takes the benefits of a rivals’ subsequent innovation from

the public domain, confers them on the patentee, and subjects the later innovator to unexpected

infringement liability. That result impairs the competitive efforts of rivals and undermines the 286

patent system’s goal of fostering innovation.287

One way to address the problem would be to more fully incorporate into the written

description requirement consideration of the PHOSITA’s ability to foresee future evolution of the

claims. Stated simply, the applicant would not be understood to have been in possession of the

subject matter of a new or amended claim of scope broader than what the PHOSITA, on the

filing date, could reasonably be expected to foresee from the specification. A step of this 288

nature would more firmly and effectively plant in the written description requirement the

protection necessary to ensure adequate public notice of the likely scope of evolving claims.

289

3. Continuation Practice and the Broadening of Claims

Examination procedures include several mechanisms for an applicant to extend the

prosecution period – potentially for many years – while maintaining the benefit of the initial
The procedure may take various forms. It may involve a new application, which might be a 290

“continuation application,” retaining the original written description and the original filing date; a

“continuation-in-part,” which adds some new matter to the disclosures and loses the original filing date

insofar as its claims rely on the new matter; or a “divisional,” which separates independent and distinct

inventions covered by the initial application while retaining the original filing date. See 35 U.S.C.

§§ 120-21; 37 C.F.R. § 1.53(b). Alternatively the applicant may file a “request for continued

examination” (“RCE”), which works to extend the examination of the original application. See 35 U.S.C.

§ 132(b); 37 C.F.R. § 1.114. For ease of exposition, this discussion refers to all of these variants,

including those portions of continuations-in-part that maintain the original filing date, as “continuations,”

“continuing applications,” or “continuation practice.” 

2003 FTC IP Report, ch. 4, at 27-28. 291

See Rea at 228 (3/19/09) (“[I]n the area of biotechnology, in particular, it takes a number of continuing 292

applications typically to arrive at allowable subject matter with the examiner.”); Shema at 59 (5/4/09)

(“[I]t takes a while to educate the examiner. . . . [F]rankly, the examiner often doesn’t read the whole

application the first time through.”); Norviel at 119 (5/5/09); cf. Kunin at 240-41 (3/19/09) (stating that

RCEs in the electrical arts have largely been a result of examiners “not really understanding”).

See Watt at 61 (5/4/09) (arguing that rather than an effort to enlarge claim scope, continuations are 293

“more an effort to come to an agreement with the patent examiners, what’s the right language, what are

the right words to use to describe your invention in the claims”).

See Katznelson at 46-47 (3/18/09) (suggesting that to limit expense, applicants may focus first on

294

claims that they know they will need within two or three years, while putting aside the others); Watt at 66

(5/4/09) (explaining that “you can’t appeal everything, so you need other avenues in order to continue to

123

filing date. So long as the original application’s specification contains adequate support for any

claim additions or amendments, these “continuation practices” provide a means for broadening 290

the coverage of its claims. But late-claiming through continuations can be used opportunistically

and “[t]he potential for anticompetitive hold-up increases the longer it takes for the broader

claims to emerge.” This section addresses steps to alleviate these concerns through limitations 291

on the consequences of continuation practice. 

Continuations are not the source of the notice problem regarding evolving claims, but

they serve to extend the period of new-claim gestation and thereby raise third-party exposure

based on intervening market commitments. None of the panelists at the March 19, 2009 notice

panel disagreed with the proposition that there is tension between continuation practice and

notice.

Continuations, of course, may serve legitimate needs. Hearing testimony provided ample

evidence that in fields like biotechnology, the prolonged conversation between applicant and

examiner that continuations facilitate is sometimes necessary to adequately educate, and come to

an understanding with, the examiner. Testimony also indicated that continuations may be 292

useful for refining the language of claims to provide coverage that the applicant had sought from

the start or for efficiently allocating scarce prosecution resources. Other justifications for 293 294
pursue your rights in the Patent Office”).

See Katznelson at 47-48 (3/18/09) (justifying continuations on the basis that “there comes a time when 295

you find other features of the invention that turn out to be important and worthy of protection, and then at

that point, you want to file additional claims”); Shema at 59-60 (5/4/09) (citing “situations where you

learn more about the particular variations of your invention as data are developed” and wish to claim one

of the disclosed structures more “specifically”); Watt at 66 (5/4/09) (describing continuations as “a very

useful tool in order to pursue [the] full scope of inventions that you disclose in your patent application”);

cf. Kiani at 49 (3/18/09) (“[T]here’s no way the initial patent you filed with the claims you filed will end

up protecting the invention disclosed.”).

See Hovenkamp, supra note 285, at 1253 (“The possibility of such abuses reveals one of the more

296

deficient aspects of the patent system’s failure to provide adequate notice to inventors.”); see also supra

Section IV.C.2.b. 

See Shafmaster at 234-35 (3/18/09) (explaining that applications are filed based on “work that’s being 297

done at the bench” and that as clinical trials progress, “all that time you’re learning more about the drug

and how it works and how to formulate it and how to dose it, and the continuation practice allows us to

ultimately come out with stronger patents that are more specifically directed toward the final product”).

See Cotropia at 246 (3/19/09) (urging that in considering notice, we also consider the substantive 298

effects on situations where “people are filing continuations not to try to capture other people, but to

change as their development changes, as they go along”). Of course a key question is whether an

applicant who was still developing an invention was truly in possession of the later developments at the

time the application was filed. See supra Section IV.C.2.b.

2003 FTC IP Report, ch. 4, at 26-31. In 2006 the FTC filed comments supporting a proposed PTO rule

299

that would have allowed one continuation as of right and subsequent continuations when the amendment,

argument, or evidence contained in the filing could not have been submitted earlier. The proposed rule

was the subject of litigation, see Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009), vacatur denied, 586 F.3d

1369 (Fed. Cir. 2009), and the PTO has now dropped its proposal. The Commission’s current

recommendations would not limit the number of allowable continuations or the circumstances under

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prolonged continuation practice – contentions that an applicant acquires a better understanding of

his or her own product over time or that the product for which coverage is sought changes over

time – seem more debatable. Such contentions could be used to justify a wide range of 295

conduct, from narrowing the claim to more clearly cover the applicant’s ultimate product niche to

strategically broadening claim language to cover rivals’ subsequent development of products that

the applicant never envisioned when filing the initial application. A “better understanding” of

the latter type is contrary to notice goals and hardly a justification for continuations. However, 296

an important middle ground – ensuring protection of an early-filing inventor’s eventual,

commercial product – invokes difficult trade-offs between providing desirable public notice 297

and offering patent protection of appropriate scope. 

298

Given the benefits of continuations, the FTC has not urged their prohibition. Rather, the

2003 FTC IP Report focused on ways to limit the potential competitive harm from continuation

practice. It recommended the enactment of legislation to protect from infringement actions 299
which continuations may be filed.

2003 FTC IP Report, ch. 4, at 31. 300

Id., ch. 4, at 29-30. 301

See infra Section IV.D.3. 302

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third parties who (i) infringe patents only because of claim amendments (or new claims)

following a continuation and (ii) developed, used, or made substantial preparation for using, the

relevant product or process before the amended (or newly added) claims were published. As 300

the Commission explained:

Creating intervening or prior user rights would most directly cure potential

competitive problems without interfering with legitimate needs for continuations,

reducing business uncertainty without increasing costs of error. . . . This would

protect third parties from hold-ups derived from any extended period of secrecy

made possible by continuations, while allowing the patent to be enforced against

those who would have infringed a properly described pre-continuation claim or

who had timely opportunity to gain knowledge of the amendments. 

301

We reiterate the 2003 recommendation here.

Some panelists urged going beyond this by providing broader protection for prior users or

independent invention. Typically, their proposals reflected a concern that the sheer number of 302

patents sometimes makes clearance extraordinarily difficult. These proposals are discussed in

the next section.

Recommendations: evolving and pending claims. (1) The Commission recommends

legislation requiring publication of patent applications 18 months after filing, whether or not the

applicant also has sought patent protection abroad (subject to possible adjustments to provide any

necessary protection to independent inventors). (2) The Commission recommends that

consideration of the PHOSITA’s ability to foresee future evolution of the claims be more fully

incorporated into application of the written description requirement; the applicant should not be

understood to have been in possession of the subject matter of a new or amended claim of scope

broader than what the PHOSITA, on the filing date, could reasonably be expected to foresee from

the specification. (3) The Commission recommends enactment of legislation to protect from

infringement actions third parties who (i) infringe properly described claims only because of

claim amendments (or new claims) following a continuation and (ii) developed, used, or made

substantial preparation for using, the relevant product or process before the amended (or newly

added) claims were published. (4) The Commission recommends that the PTO receive the

funding and information systems needed to promptly and properly examine the many

applications that it faces.
See, e.g., McNelis at 24-26 (5/5/09) (explaining that in life sciences you can be “confident that you’re

303

finding those patents that are right on top of what you are doing”).

See, e.g., Yen at 53-54 (12/05/08) (“It is impossible to achieve any degree of certainty by such

304

clearance searches with today’s systems.”); Bessen at 47 (3/19/09) (opining that it has become very

difficult or impossible to perform an efficient clearance search in these industries); see also supra

Section III.C.

See, e.g., Sprigman at 34 (2/12/09); Vermont at 164 (4/17/09); Horton at 175 (3/18/09); McNelis at 26- 305

27 (5/5/09).

By improving the efficiency of patent review, earlier recommendations to promote clearer boundaries 306

can also expedite the search process. 

126

D. Improving the Ability to Sift Through a Multitude of Patents

Searching through a mass of patents and applications to identify and review those that are

potentially relevant to a new product can be a daunting undertaking. Although in some industries

reliable searches apparently are regularly performed, panelists reported that in IT and related 303

industries a thorough clearance search is often infeasible or cost prohibitive. In addition to the 304

sheer number of patents, testimony emphasized that unclear claim language and the diverse ways

in which claims might be expressed make search less effective. 

305

This section addresses policies that could improve the efficiency of clearance searches,

concentrating on areas in which the PTO might improve the data available to searchers. These 306

include augmenting and/or modifying the PTO’s classification system, improving the likelihood

that text-based searches will identify relevant patents, and taking steps to ensure that patent

assignments are promptly recorded with the Patent Office. The section concludes by reviewing

certain suggestions for departing from strict liability norms due to concerns arising from lack of

notice or related considerations.
See generally DAVID HUNT, LONG NGUYEN & MATTHEW RODGERS, PATENT SEARCHING: TOOLS &

307

TECHNIQUES (2007).

See Bronwyn H. Hall, Adam B. Jaffe & Manuel Trajtenberg, The NBER Patent Citations Data File: 308

Lessons, Insights and Methodological Tools (Nat’l Bureau of Econ. Research, Working Paper No. 8498,

2001), available at http://www.nber.org/papers/w8498.

See USPTO, Examiner Handbook to the U.S. Patent Classification System, ch.1, § B (“A fundamental 309

principle of the USPC system is that each class, or part thereof, was created by: 1. analyzing the claimed

disclosures of the U.S. patents [and] 2. creating various divisions and subdivisions on the basis of that

analysis rather than by making a theoretical arrangement or ordering . . . .”), available at

http://www.uspto.gov/patents/resources/classification/handbook/index.jsp.

Id. at ch.1, § A.2. 310

Id. at ch.1, § B. 311

See USPTO, Press Release, 11-09, USPTO and EPO Reach Agreement on Principles of Cooperative 312

Patent Classification System (Feb. 4, 2011), available at http://www.uspto.gov/news/pr/2011/11_09.jsp.;

USPTO, Press Release, 10-51, USPTO and EPO Work Toward Joint Patent Classification System (Oct.

25, 2010), available at http://www.uspto.gov/news/pr/2010/10_51.jsp. Their efforts will seek alignment

with the International Patent Classification system while achieving a greater level of detail. Id. 

See, e.g., Andrew Chin, Search for Tomorrow: Some Side Effects of Patent Office Automation, 87 N.C. 313

L. REV. 1617 (2009) (discussing the impact of electronic search methods on patent searches). 

127

1. Improving the Ability to Search for Relevant Patents

a. Background

Firms conducting a clearance search can avail themselves of a wide variety of

resources. Of principal importance are issued patents and documents created during the 307

prosecution. These documents are publicly accessible and generally are organized using the

PTO’s Patent Classification System of about 400 classes and 120,000 subclasses. The classes 308

are based on analyses of patent disclosures, and the system groups inventions based on their 309

“proximate function,” i.e., use of “similar processes or structures that achieve similar results.”310

Examiners employ this system to identify prior art and also to assign primary and secondary

classifications to each patent granted (and each published application). The PTO and the 311

European Patent Office (EPO) recently have begun to work toward development of a cooperative

patent classification system.312

 

Due to the advent of computerized databases, patent searching is now generally

performed electronically. The PTO offers full text search of a database, including the full text 313

of all patents and some associated information, such as classification and issue date. The system

permits search using simple Boolean operators, but does not rank the results, merely reporting
See Shigeyuki Sakurai & Alfonso F. Cardenas, An Analysis of Patent Search Systems, 90 J. PAT. &

314

TRADEMARK OFF. SOC’Y 448, 449 & tbl. 1 (2008). The PTO also makes the file history available online

through PAIR. See supra Section III.B.

See id. at 449 & tbl. 1 (describing search capabilities of the USPTO, Google Patent Search, Delphion,

315

PatentCafe and LexisNexis, among others). 

See Kunin at 262 (3/19/09).

316

Id. (maintaining that such a step would be “a great addition for industry”); Rai at 262 (3/19/09) 317

(concurring “very strongly” and reporting “that examiners have been wanting a change in th[e]

classification system for a while”). 

See Horton at 174-75 (03/18/09) (explaining that a software invention may be described in different 318

ways, making “the automated portion of finding the right prior art [] a little more . . . challenging”); cf.

Martin Comment at 13 (5/15/2009) (explaining that patent claims “do not follow the symbolic rules and

procedures adopted by the field of software engineers as their domain”).

Menell at 30-31 (5/5/09). 319

128

them in reverse chronological order. Commercial services also permit searches of patent 314

documents. They frequently permit enhanced searches (e.g., complex algorithms and search

operators), while scoring results so that the potentially more relevant results can be presented

first.315

b. Analysis

U.S. patent classification system. The current classification system, derived from the

PTO’s experience with patents, often differs from industry-based classifications. Testimony 316

suggested that it could significantly aid search if the PTO added industry-based classifications to

its system. To implement this proposal, the PTO could instruct examiners to classify patents 317

not only using the U.S. Patent Classification System, but also under industry classification

systems, so that a search could be conducted using either or both. In addition, the PTO and EPO

might consult industry classification systems in developing their new, cooperative system.

Predictable terminology for searching. The lack of a common, predictable terminology,

already identified as a concern affecting patent clarity, particularly in IT, also undermines

effective patent searching. Panelists noted that variation in the terms used to describe inventions

can limit the effectiveness of electronic database searches and called for “taxonomical 318

advances” to better represent the “intellectual space” to be searched, “ideally . . . the equivalent

of periodic tables in the IT fields.”319

Improvement might come from the applicants. If vocabularies for claiming were more

standardized, researchers could use search terms with greater confidence of finding relevant
Similarly, requiring that terms be defined might also improve the reliability of using electronic search 320

mechanisms because definitions might include terms used in a search query.

Supra Section IV.B.1.b. 

321

See Kunin at 260 (3/19/09); Private PAIR Quick Start Guide, available at 322

http://www.uspto.gov/patents/process/status/private_pair/PrivPairOverview_Oct09.pdf.

See Kunin at 260 (3/19/09) (urging that “having a full text searchable file history will provide a much 323

better notice function”); NAS REPORT, supra note 267, at 105 (recommending that an electronic version

of the prosecution history be made available upon publication of the patent application).

See Westlaw Database Directory, US-PAT-HISTORY summary, available at 324

http://directory.westlaw.com/scope/default.asp?db=US-PAT-HISTORY&RS=W...&VR=2.0. 

Making PTO data easily accessible to industry and the public and expanding access through the 325

worldwide web are objectives cited in the PTO Strategic Plan, supra note 264, at 40.

See MPEP §§ 301-24. 326

129

patents. In discussing ways to enhance patent clarity, a prior recommendation urged the PTO 320

to “convene a government/industry task force or hold a workshop to explore ways of fostering

greater uniformity in the methodology or language used for describing and claiming software

inventions.” The same inquiry could simultaneously explore ways to develop and promote 321

greater uniformity for purposes of enhancing search capabilities. 

Improvement might also come from the examiners. In addition to implementing the

industry-based classification system, discussed above, examiners could also provide searchfriendly lists of descriptive terms for applications under review and patents ready for issuance. 

Full-text searching on PAIR. As discussed above in Section III.B., the PTO makes file

history information available through PAIR. While PAIR is an effective tool for following a

particular application, it does not provide full-text search capabilities. Ability to quickly 322

search the prosecution history would likely enhance clearance efforts in the face of large numbers

of potentially relevant patents. Recently, one subscription service has announced the 323

availability of full-text search of file histories. Developments of this type could prove very

324

helpful for notice purposes. 

325

2. Identifying Patent Assignees 

a. Background

A patentee is free to assign (i.e., sell) his or her patent to another party, thereby

transferring the right to exclude conferred by the patent. At their option, parties can record

assignments with the PTO by paying a fee and filing a form that lists for public review the

assignee’s name, a contact person, and an address. Neither the Patent Act nor PTO regulations 326
 35 U.S.C. § 261. The PTO does require proof of assignment to permit an assignee to take certain

327

actions as owner of the patent or application in PTO proceedings. See 37 C.F.R. § 3.73.

See 37 C.F.R. 1.12. 328

See, e.g., Graham at 236 (4/17/09) (describing the PTO’s patent reassignment data as “notoriously just 329

not good”); McNelis at 27 (5/5/09) (“[T]he assignments are not always in order.”); Slifer at 112 (3/18/09)

(indicating that patent ownership is “difficult to ascertain”).

See Wagner at 236 (4/17/09) (explaining that “the vast majority of people just don’t” file reports, or if 330

they do “it’s late”); Rai at 263 (3/19/09) (noting concerns that reporting of assignments “doesn’t happen

very often”); Harris at 113 (3/18/09).

Kappos at 265 (3/19/09); see also Slifer at 113 (3/18/09) (reporting evidence that companies list “shell

331

corporations” as part of “some intentional hiding of . . . who’s the true party in interest”); McNelis at 27

(5/5/09) (asserting that search is more difficult and costly because “some companies like to play games

with the assignments”).

Hall at 287 (5/4/09). 332

See McNelis at 27 (5/5/09) (“one of the strategies we employed” when there are many potentially 333

relevant patents, “was to take a look at their major competitors”); Phelps at 262 (5/4/09) (describing

search efforts focused on the portfolios of specific companies); Durie at 18 (5/5/09) (discussing a

clearance search focused on the portfolio of a single company); DeVore at 43 (5/4/09) (explaining that

freedom to operate analyses have grown “more savvy” by distinguishing between patents held by parties

likely to grant nonexclusive licenses and patents held by close competitors); cf. Durie at 19 (5/5/09)

(litigation risk is “a function . . . [of] underlying business considerations” that depend on knowing:

“Who’s holding the patent?”).

130

require such recordation, although an assignment not recorded with the PTO is “void as against

any subsequent purchaser” who lacks notice of the assignment. As a result, while the records 327

are open to the public, they do not include all assignments.

328

Panelists reported that under this voluntary system, PTO records provide poor notice

regarding current ownership of patents. Testimony suggested that parties often fail to report 329

assignments to the PTO or list “shell companies” as assignees, “making it as difficult as 330

possible, apparently, to trace back to the true assignee of the patent.” Moreover, testimony 331

indicated, the information is difficult to locate: it is “buried somewhere on the website” rather

than included with the patent record.332

b. Analysis

Assignment records play an important role in clearing patent rights. One strategy for

navigating an environment with many potentially relevant patents is to concentrate clearance

efforts on patents held by competitors or others who are likely to sue. This strategy falters if 333

the public lacks notice of assignments. Moreover, if the clearance search determines that a patent
See Kappos at 265 (3/19/09).

334

See Kappos at 265 (3/19/09) (urging identification of assignees of published applications); Rivette, at 335

37-38 (5/5/09) (“the assignment database . . . has to be something that we fix”); Rai at 263 (3/19/09)

(suggesting that it would aid freedom to operate assessments to know who the “actual assignees” of the

patent are). 

See Hoffman at 103 (4/17/09) (explaining that such information can indicate the technology areas that 336

a firm is pursuing or abandoning); Malackowski at 102 (4/17/09) (arguing that firms ought to be able to

keep their strategies secret).

See, e.g., Christopher A. Cotropia & Mark A. Lemley, Copying in Patent Law, 87 N.C. L. REV. 1421, 337

1462 (2009) (“The overwhelming majority of defendants are independent developers who were unaware

of the existence of the patent when they made their product design decisions.”); BESSEN & MEURER,

supra note 16, at ch. 3 (describing the extent and causes of inadvertent infringement); see also Meurer at

207 (12/5/09) (stating that only “in about 4 percent of the cases is the defendant ever shown to be a

copyist”); Durie at 124-25 (5/5/09) (describing how many infringers “did not and could not plausibly

have received actual notice of the patent at the time they [were] making design choices relating to their

products”).

Menell at 29 (5/5/09); see also Clarisa Long, Information Costs in Patent and Copyright, 90 VA. L. 338

REV. 465 (2004); cf. Blair & Cotter, supra note 12, at 800-08 (observing that in light of marking

requirements, 35 U.S.C. § 287, patent law is not a pure strict liability system).

131

is a problem, knowing the owner is essential to seeking a license. Indeed, information on the

owner can be essential for a firm to determine if it already has rights to the patent via a crosslicense. Recordation of assignments would help with these notice problems. 334 335

In light of these considerations, the filing and public recordation of assignments of

patents and published patent applications, including identification of the real party in interest,

should be required by a statutory change. A patent confers a right to exclude, and it is important

to clearance efforts that the public faced with that right have a ready means of identifying the

owner. Arguably, public notice of a transfer may reveal some information about the parties’

business efforts and strategies, but similar information must be provided when filing any patent 336

application, and the inventor and any assignees are identified when a patent issues. In each case,

the public benefits from knowing the identity of current applicants/patent holders. Recording

assignments of government-conferred rights to exclude is necessary to ensure public notice and

will not unduly burden patent transfers.

3. Modifying Liability for Inadvertent Infringement

Consistent with the notice problems described in this chapter, recent studies show that

patent infringement litigation very often seeks to recover from inadvertent infringers, i.e., those

who used a patented technology not knowing that it was covered by a patent. Scholars have 337

recognized that the current system imposes information costs on technology users, a form of

“notice externality,” and have addressed the possibility of modifying the rule of strict liability 338
See, e.g., Blair & Cotter, supra note 12, at 840-41 (suggesting adoption of an “‘actual knowledge’ 339

standard” in “a few discrete situations”); BESSEN & MEURER, supra note 16, at 249 (2008) (suggesting

that “[i]t might be desirable to reform patent law by simply excusing good-faith infringe[ment]”); Henry

E. Smith, Intellectual Property as Property: Delineating Entitlements in Information, 116 YALE L.J.

1742, 1818 (2007) (recognizing concerns about “inadvertent infringement” and noting the possibility that

limiting remedies to damages rather than injunctive relief may be appropriate in some circumstances);

John M. Golden, Principles for Patent Remedies, 88 TEX. L. REV. 505, 554 (2010) (“[I]f lack of timely

and effective notice of patent rights helps to cause much infringement, a patentee might be the cheapest

cost avoider for the social costs of poor notice. Under such circumstances, reduced remedies for

inadvertent infringement might optimally spur patentees to improve patent notice.”). 

See, e.g., Menell at 36 (5/5/09) (suggesting that an independent invention defense or limitation of

340

remedies could reduce notice problems); McCurdy at 69-70 (12/5/08) (arguing that an independent

invention defense works well for technologies like software, where invention is ubiquitous and the

information costs of determining who invented what are high); Schultz at 131-32 (5/5/09) (suggesting

that damages might be reduced when patents are relatively ambiguous or notice is poor); Durie at 124-25

(5/5/09) (arguing that damages paid by inadvertent infringers should reflect the fact that lack of notice

undermined their opportunity to evaluate alternative technology); cf. Squires at 192 (12/5/08) (“Where

there are fuzzy boundaries and non-existent or imperfect notice,” strict liability is “a big weight to bring

down.”). But cf. Cotter at 193 (12/5/08) (“I don’t think anybody wants to abandon strict liability for

patent infringement as a general principle.”).

See, e.g., Cotropia & Lemley, supra note 337, at 1463 (criticizing damage awards based on deterrence

341

goals because deterrence has “no place in a patent regime where virtually all infringement is

unintentional”).

See, e.g., Stewart E. Sterk, Property Rules, Liability Rules, and Uncertainty about Property Rights,

342

106 MICH. L. REV. 1285, 1308-11 (2008).

See supra Section II. 343

See, e.g., Dickinson at 191 (12/5/08) (suggesting that independent inventors may be “willful infringers 344

. . . that haven’t studied the art”); Rhodes at 217-18 (2/12/09).

See, e.g., Rhodes at 218 (2/12/09) (“[W]e would be encouraging firms not to read patents so they can 345

try to avail themselves of the inadvertent defense.”); Golden at 95 (2/12/09) (noting the importance of

considering whether an infringer used “proper diligence”).

132

or the allocation of burdens for supplying and seeking information to accommodate concerns

regarding inadvertent infringement. Several panelists expressed similar ideas. 

339 340

Arguments supporting such proposals include the fact that strict liability may have little

deterrent effect on inadvertent infringement and may promote inefficiently high levels of 341

search effort, while burdening beneficial innovative activities. On the other hand, some 342 343

question whether inadvertent infringement is really innocent in many cases. Other testimony 344

argued that such a defense would create strong incentives to remain ignorant of patents and 345

scholars have warned that the difficulty of proving intentional infringement may enable actual
See Blair & Cotter, supra note 12, at 814.

346

See Rhodes at 216-17 (2/12/09).

347

See Samson Vermont, Independent Invention as a Defense to Patent Infringement, 105 MICH. L. REV.

348

475, 484-89 (2006) (proposing a defense limited to situations in which a firm independently invented

after the patentee invented, but before the firm was on constructive notice through publication of the

patent (or application)); Vermont at 163-64 (4/17/09); Carl Shapiro, Prior User Rights, 96 AM. ECON.

REV. 92 (2006) (analyzing the effects of a similar system and finding that it has “very attractive

properties,” specifically, “competition is enhanced, innovation is rewarded”).

See Lemley, supra note 13; Wagner 228 (4/17/09); Verizon Communications Inc. Comment at 6 349

(5/5/09). Some analysts have agreed that the circumstance of near-simultaneous invention is significant,

but suggest that it be applied mainly in assessing whether the invention was obvious. See Lemley, supra

note 13, at 1534-35; Hall at 210-11 (5/4/09); see generally Vermont at 171-72 (4/17/09) (discussing the

role of independent invention as an objective indicator of obviousness).

See Stephen M. Maurer & Suzanne Scotchmer, The Independent Invention Defense in Intellectual 350

Property, 69 ECONOMICA 535 (2002) (arguing in favor of such a defense).

See Vermont, supra note 348, at 475. 351

P. Van Eecke, J. Kelly, P. Bolger & M. Truyens, Monitoring and analysis of technology transfer and 352

intellectual property regimes and their use, Results of a study carried out on behalf of the European

Commission (DG Research), ch. 2 (August 2009) (describing the contours of the defense in various EU

jurisdictions), available at http://www.eutechnologytransfer.eu/files3/report.pdf.

35 U.S.C. 273; see also Cockburn at 227-28 (4/17/09) (observing that prior user rights have had little 353

impact in the business method patent area).

133

copyists to avoid liability. Moreover, some argue that notice problems are concentrated in 346

certain industries, so that it would be an error to tamper with remedies across the board. 

347

Recently, attention has focused on a defense protecting inadvertent infringement resulting

from “independent invention.” While this defense can be defined broadly to cover most

inadvertent infringement, leading proponents have concentrated on modifying liability in

situations involving nearly simultaneous invention. Even this narrow defense has drawn 348

considerable criticism. Broader formulations, more consistent with the inadvertent 349

infringement concept, would permit the defense to be raised even if the patent has been

published, but raise serious problems proving that the inventor invented independently. 350 351

An alternative would be “prior user rights,” which protect those who use the patented

technology (e.g., as a trade secret) before the patentee seeks or obtains the patent, enabling the

prior users to continue practicing the technology without a licence. Virtually all EU jurisdictions

recognize this defense, although it is seldom invoked in courts. U.S. law currently recognizes 352

a very narrow prior user defense in the business methods context. Some scholars have 353
See, e.g., BESSEN & MEURER, supra note 16, at 249-51. 354

See Patent Reform Act of 2011, S. 23, 112th Cong., 1st Sess. § 2(n) (2011).

355

See supra Section III.

356

See Cotropia & Lemley, supra note 337, at 1460. 357

See Blair & Cotter, supra note 12, at 840 (noting the absence of relevant empirical evidence). 358

134

proposed broadening the existing provision, and pending legislation calls for the PTO to study 354

the impact of such rights in other countries.355

In sum, considerable evidence suggests that notice problems have contributed to

widespread inadvertent infringement in some industries. If efforts to improve notice do not 356

succeed, consideration of modifications to strict liability may be appropriate. But a substantial

change along these lines could result in a “dramatically different” patent system, and legal and 357

economic knowledge in this area is too limited to adequately assess specific reform proposals.358

Under these circumstances, research designed to better understand how modifications to strict

liability for patent infringement would affect incentives to invent and innovate would be

desirable. 

Recommendations: sifting through a multiplicity of patents. (1) The Commission

recommends that the PTO instruct examiners to classify patents using an industry-based

classification system, as well as the PTO classification system, in art units where the additional

classifications would significantly improve public notice. The Commission further recommends

that the PTO explore mechanisms for encouraging examiners to compile search-friendly lists of

descriptive terms for applications under review and patents ready for issuance. (2) The

Commission urges that the PTO explore with the software industry whether ways might be

devised to foster greater uniformity in the methodology or language used for describing and

claiming inventions, as a means of enhancing search capabilities. (3) The Commission

recommends the enactment of legislation requiring the public recordation of assignments of

patents and published patent applications. To ensure that such listings provide maximum benefit

to public notice, they should identify both the formal assignee and the real party in interest.

V. CONCLUSION

Patent notice is a vital aid to competition and innovation. Effective notice fosters

efficient innovation investment by enabling firms to select technologies with knowledge of

applicable patent rights. It removes uncertainty, which causes some firms to shy away from

procompetitive innovation for fear of the penumbra that surrounds a patent’s actual reach, and

which induces others to engage unnecessarily in costly design-around efforts. It shelters firms

that move ahead with product introduction from the risk of expensive and disruptive litigation

over unexpected patent assertions and the need to pay higher royalties than they would have

negotiated before launch. It fosters the shared understanding and accurate valuation of IP rights
135

that supports collaboration among firms with complementary expertise and promotes competition

among inventions in efficient technology markets. 

Patent notice concerns derive from a variety of sources, including difficulties in

interpreting the boundaries of issued claims, difficulties in foreseeing evolving claims, and

difficulties in sifting though a multitude of patents. The presence and severity of these

challenges vary greatly among industries. At the Commission’s hearings, by far the most serious

concerns were identified in the IT sector, where some panelists declared it “virtually impossible”

to conduct meaningful patent clearance. In contrast, panelists from the pharmaceutical and

biotech sectors generally found the patent system’s notice function well, or at least adequately,

served.

Solutions require care and balance. We have looked for mechanisms that provide notice

early, avoid unnecessary burdens, and assign responsibilities to the least-cost providers. We have

tried to avoid recommendations that might unnecessarily burden industries where notice

problems are manageable. We recognize that some mechanisms for enhancing notice raise tradeoffs between notice objectives and patent scope. In most instances, we have highlighted the need

for notice considerations to weigh heavily, while leaving it to the patent system to balance those

considerations against any impact on the scope of patent protection. And we have looked for

solutions that enhance notice without significantly affecting scope. 

With these considerations in mind, this chapter seeks ways to improve notice by

addressing each of the basic sources of potential problems. With regard to the boundaries of

existing claims, it stresses vigorous PTO application of the indefiniteness standard as a way of

removing ambiguity and suggests ways to improve the utility of the specification and prosecution

history to make claim construction more predictable for third parties. With regard to evolving

claims, after stressing the need for adequate PTO funding, it urges broader publication of

applications, application of the written description requirement with notice concerns in mind, and

some protection for prior users first covered by claims broadened through continuations. To

address the difficulties posed in some industries by the sheer number of claims, it suggests ways

to improve the search for relevant patents and to identify patent assignees. 

Plainly, notice problems are substantial, varied in source, and often highly challenging. 

Yet with the challenges comes an opportunity to remove impediments to, and strengthen the

infrastructure for, competition and innovation. Because the potential benefits are large, the

concerns raised by this chapter require prompt attention, and the suggested improvements

warrant thorough consideration. 
136
137

CHAPTER 4

THE ECONOMIC AND LEGAL FOUNDATIONS OF PATENT REMEDIES

I. INTRODUCTION ................................................... 138

II. THE MARKET ALIGNS REWARD AND CONTRIBUTION THROUGH

COMPETITION . .................................................... 138

III. PATENT REMEDIES SEEK TO REPLICATE AND PROTECT THE MARKET

REWARD FOR INVENTIONS ......................................... 140

A. Compensatory Damages ......................................... 141

B. Permanent Injunctions . ......................................... 143

C. The Problems of Under and Overcompensation .. . . . . . . . . . . . . . . . . . . . 144

IV. CONCLUSION . ..................................................... 148
Schlicher Comment at 4, 38 (5/15/09). 1

138

CHAPTER 4

THE ECONOMIC AND LEGAL FOUNDATIONS OF PATENT REMEDIES

I. INTRODUCTION

Patent owners can offer their patented inventions in the marketplace. They can sell a

patented product or transfer their technology for development and commercialization by others. 

In either case, the market reward earned by a patentee will depend upon the invention’s

contribution – the extent to which consumers prefer it over alternatives and prior technology. 

Patent remedies play an important role in protecting the ability of patent holders to earn returns in

the marketplace by deterring infringement and compensating patentees when infringement

occurs. Patent remedies also play a central role in ex post patent transactions by establishing the

legal shadow in which negotiations occur.

For remedies to protect the patent system’s incentives to innovate and avoid distorting

competition among technologies, they must replicate the reward the patentee would have earned

in the market absent infringement. The Patent Act incorporates this fundamental goal of fully

compensating patentees for infringement by requiring that a court award a successful patentee

damages “adequate to compensate for the infringement.” Courts have defined damages

“adequate to compensate” as those that make the patent owner whole by placing it in the position

it would have been but for the infringement. This standard, when accurately implemented, aligns

patent law and competition policy by supporting the patent system’s incentives to innovate while

allowing consumers to benefit from competition among technologies.

The ability of current patent remedies law to carry out this role successfully is unclear.

The patent community vigorously debates whether reasonable royalty damages law appropriately

compensates patentees. It also struggles to understand the full implications of the Supreme

Court’s eBay decision, which overturned assumptions that every patentee who proved

infringement in court would receive a permanent injunction. Gauging the accuracy of remedies

rules in replicating the market reward that patentees would have earned absent infringement may

not be possible. But as one commentator explains, “much of the law on patent damages obscures

the effort to match damage awards to the economic values of inventions.” To address this 1

criticism, this report seeks to derive an economically grounded approach for analyzing patent

remedies and to test the current legal rules for calculating damages and awarding injunctions

against that approach.

II. THE MARKET ALIGNS REWARD AND CONTRIBUTION THROUGH

COMPETITION

An important benefit of the patent system, in contrast to other methods of encouraging

innovation, like direct prizes, is that it allows each invention to be valued directly through a
Kenneth W. Dam, The Economic Underpinnings of Patent Law, 23 J. LEGAL STUD. 247, 2

248-49 (1994); Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard

Setting, Patents and Hold-Up, 74 ANTITRUST L. J. 603 (2007).

The “market reward” defined here is the amount the patentee could have earned by either selling a 3

patented product or licensing the patented technology in the absence of infringement.

JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM, AND DEMOCRACY 1942 (1976). 4

The principle that patents do not necessarily confer market power for these reasons is widely 5

accepted. Ill. Tool Works, Inc. v. Indep. Ink, Inc., 547 U.S. 28, 45-46 (2006) (“Congress, the

antitrust enforcement agencies, and most economists have all reached the conclusion that a

patent does not necessarily confer market power upon the patentee. Today, we reach the same

conclusion . . . .”); U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST

ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND

COMPETITION (2007), ch. 1, at 22 (“Although a patent gives the patent owner the right to

exclude others from making, using, or selling a particular product or process, the existence of

close substitutes for the product or process may prevent the patent owner from exercising

market power.”).

139

market mechanism. A patentee can obtain a financial reward for its patent by producing a 2

product that incorporates the invention or by transferring the technology through a patent license

or sale to a manufacturer who develops and produces a product. The market reward earned by 3

the patentee in either case will depend upon the extent to which consumers prefer the patented

invention over alternatives and prior technology, which helps determine the invention’s

economic value.

A patented invention may present a small improvement over known technology or a

radical departure that displaces what came before. In some cases, patents will protect a

“disruptive” technology – a technology that creates “competition which commands a decisive

cost or quality advantage and which strikes not at the margins of the profits and the outputs of the

existing firms but at their foundations and their very lives.” A patent covering such a 4

technology can confer market power on the patentee and generate the possibility of monopoly

profits and significant market rewards. 

Many patented inventions, however, compete with a range of acceptable alternatives,

which limit the patent owner’s ability to obtain a monopoly profit. A patent can protect a new

5

product from competition with other products incorporating the same invention, but it cannot

protect a new product from those similar products that adopt alternative, noninfringing

technologies. Products incorporating patented technology often compete in product markets.

Patented technologies can also compete in technology markets to be chosen for development and

incorporation into new products. Through this competition, product developers can reject

technologies whose cost is more or whose value is less than that of available alternatives. 
See FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND 6

PATENT LAW AND POLICY, ch. 2, at 8-16 (Oct. 2003) (“2003 FTC IP Report”), available at

http://ftc.gov/os/2003/10/innovationrpt.pdf (discussing how competition promotes innovation); see also

Slifer at 77 (3/18/09) (“As detailed in the Commission’s 2003 report, Micron continues to believe that

the primary drive for innovation at least in our industry is competition.”).

ROGER D. BLAIR & THOMAS F. COTTER, INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL 7

DIMENSIONS OF RIGHTS AND REMEDIES 17-19 (2005).

In re Kirk, 376 F.2d 936, 964 (C.C.P.A. 1967). 

8

BLAIR & COTTER, supra note 7, at 16-17. 9

140

Consumers benefit from the competition among patented products and technologies, which

lowers prices, increases quality and encourages innovation.6

In a well-functioning market, the more advantageous the patented invention compared to

alternatives, the more consumers will prefer it , the greater its economic value, and the greater the

market reward to the patent owner. “These exclusive [patent] rights are worthless if the

invention turns out to be a dud, but ultimately the market decides what is valuable and what is

not.” Judge Giles Rich captured this important aspect of the patent system in an often quoted 7

statement: “[I]t is one of the legal beauties of the system that what is given by the people through

their government – the patent right – is valued automatically by what is given by the patentee. 

His patent has value directly related to the value of his invention, as determined by the

marketplace.” Competition aligns the economic value of the invention and the value of the 8

patent. To support this alignment, the patent legal rules must not distort that competition.

The alignment of the patent system and competition affects not only the operation of

product and technology markets. It also can affect the allocation of research and development

resources. Under the patent system, society “funds” the often expensive process of invention,

research, development and innovation by conferring exclusive rights on patentees. By aligning

the patentee’s reward with the invention’s value compared to alternatives and prior technology, a

well-functioning market incentivizes inventors to pursue those inventions that are more likely to

be valued by consumers. In this way, market forces help to allocate research and development 9

resources to those areas most valued by consumers. Distortions in how the market rewards

patented inventions can have consequences for R&D decisions.

III. PATENT REMEDIES SEEK TO REPLICATE AND PROTECT THE MARKET

REWARD FOR INVENTIONS 

Remedies for patent infringement are crucial to the ability of the patent system to promote

innovation by protecting innovators’ ability to reap benefits from their investments in research,

development and commercialization of new products. The market can fully reward a patentee,

and align that reward with the invention’s economic value over alternatives, only where there is

no infringement to dilute the reward. To successfully support the patent system’s incentives to
Following a finding of infringement, a court shall award damages “adequate to compensate for the 10

infringement.” 35 U.S.C. § 284.

Establishing willful infringement requires clear and convincing evidence that “the infringer acted 11

despite an objectively high likelihood that its actions constituted infringement of a valid patent” and that

“this objectively-defined risk . . . was either known or so obvious that it should have been known to the

accused infringer.” In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed Cir. 2007). See also Roderick

R. McKelvie, Simon J. Frankel & Deanna L. Kwong, Nine Unanswered Questions After In re Seagate

Technology LLC, 20 INTELL. PROP. TECH. L. J. 1, 1 (2008). 

Section 283 of the Patent Act grants district courts the discretion to issue injunctions in patent 12

infringement cases following the principles of equity. 35 U.S.C. § 283. In its decision in eBay, the

Supreme Court set out four factors that courts must consider in exercising that discretion. eBay, Inc. v.

MercExchange, LLC, 547 U.S. 388, 391 (2006).

141

innovate, remedies must compensate for past infringement, prohibit future infringement, and

deter infringement in the first instance.

Patent remedies provide three types of redress to accomplish these tasks: compensatory

damages, enhanced damages, and injunctive relief. Each plays a different but overlapping role.

Compensatory damages preserve the patentee’s incentive to innovate by making it whole in spite

of infringement. Enhanced damages deter willful infringement. Permanent injunctions 10 11

preserve the patentee’s exclusivity going forward and deter infringement in the first instance.12

Enhanced damages are unique among the three remedies because they are meant to punish the

infringer and so they award the patentee more than the market would have. Compensatory

damages and permanent injunctions, on the other hand, are meant to serve the utilitarian goals of

the patent system by allowing the patentee to reap the reward the market would have conferred,

absent infringement. 

To align the patent system and competition policy, it is important that compensatory

damages and injunctions be assessed in a manner that aligns the patentee’s compensation with

the invention’s economic value. Remedies do so when they either replicate the market reward in

the case of compensatory damages, or protect the exclusive market position that allows the

patentee to earn that reward directly, in the case of injunctions. Assessing damages or

injunctions in a manner that undercompensates patentees compared to the market reward will

undermine the patent systems’s power to promote innovation. Overcompensation compared to

the market reward can distort competition among technologies, which raises multiple problems

discussed in Section C of this chapter.

A. Compensatory Damages

To compensate a patentee as the market would have, damages should be designed to

return the patentee to the financial condition it would have been in but for the infringement. 
Cotter at 138 (12/5/09); Squires at 168 (12/5/09); NERA Economic Consulting Comment at 11 13

(3/9/09); BLAIR & COTTER, supra note 7, at 47.

Riles v. Shell Exploration and Prod. Co., 298 F.3d 1302, 1311-12 (Fed. Cir. 2002) (“Compensatory

14

damages, by definition, make the patentee whole, as opposed to punishing the infringer. ”).

See, e.g., Brooktree Corp. v. Advanced Micro-Devices, Inc., 977 F.2d 1555, 1579 (Fed. Cir. 1992).

15

Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507 (1964) (quoting Livesay 16

Window Co. v. Livesay Indust., Inc., 251 F.2d 469, 471 (5th Cir. 1958)).

JOHN M. SKENYON, CHRISTOPHER S. MARCHESE & JOHN LAND, PATENT DAMAGES LAW AND PRACTICE 17

§§ 1.1, 1-3, 1-4 (2008). The treatise continues, “it is probably the failure to recognize this basic premise

that has resulted in many of the large damages awards for the patentee – awards that otherwise might

have been substantially limited.” Id.

See, e.g., Ericsson, Inc. v. Harris Corp., 352 F.3d 1369, 1377-79 (Fed. Cir. 2003) (upholding a lost 18

profits award that included compensation for sales lost to the infringer and price erosion attributable to

the infringing activity).

142

Patent damage awards should reflect the economic realities of the market by rendering the

patentee no worse off, but also no better off, than it would have been absent the infringement. 

13

The law of patent damages incorporates this fundamental economic principle. The Patent

Act requires that a court award a successful patentee damages “adequate to compensate for the

infringement.” Damages are meant to be compensatory and not punitive. Courts have defined 14

damages “adequate to compensate” as damages that make the patent owner whole by placing it in

the position it would have been but for the infringement. The Supreme Court frames the 15

question as “had the Infringer not infringed, what would the Patent Holder-Licensee have

made?” As explained by a leading treatise, “[t]his is the critical starting point for any review of 16

the various patent damages theories or even for a damages analysis in an actual case, regardless

of how the damages award is computed or what that damages award is called.”17

Over the years, courts have developed an extensive jurisprudence on how to calculate

compensatory damages. Current law identifies two categories, lost profits and reasonable

royalties, and provides legal rules for determining which category applies and how damages

should be calculated. One important method for placing the patentee in the position it would

have been but for the infringement is to award it the profits that it lost due to the infringement. 

This approach most readily applies when the patent holder seeks to earn its return by selling a

product in the marketplace. Infringing competition can reduce a patentee’s profits in a number of

ways, including by diverting sales from the patentee’s product, eroding the patentee’s sales price,

and causing the patentee to lose collateral sales of nonpatented products. As discussed in 18

Chapter 5, in measuring lost profits damages, it is important that the legal rules allow the

patentee flexibility in creating the world but for infringement. But the legal rules must also

recognize how alternatives to the patented invention would have affected profits in order to align

patent law and competition policy.
Many panelists and commentators agreed that the hypothetical negotiation construct is the correct 19

approach for determining reasonable royalty damages. E.g., Cotter at 138 (12/5/09); NERA Economic

Consulting Comment at 11 (3/9/09).

Unisplay, S.A. v. American Elec. Sign Co., 69 F.3d 512, 517 (Fed. Cir. 1995) (“The statute

20

contemplates that when a patentee is unable to prove entitlement to lost profits or an established royalty

rate, it is entitled to “reasonable royalty” damages based upon a hypothetical negotiation between the

patentee and the infringer when the infringement began.”).

35 U.S.C. § 283. 21

eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006). 22

143

Lost profits damages will not be appropriate when the patentee does not manufacture a

product. Rather, the patentee would likely seek to license its patent for the maximum amount

that it could extract from the infringer in the technology licensing market. In that situation,

putting a patentee in the position it would have been but for the infringement and compensating

the patentee as the market would have requires replicating the bargain the parties themselves

would have struck prior to infringement. This requires calculating reasonable royalty damages

based on a hypothetical negotiation between a willing licensor (the patentee) and a willing

licensee (the infringer). Properly implemented, the hypothetical negotiation can align patent 19

damages law and competition policy. The law adopts the hypothetical negotiation approach,20

but sometimes gives the willing licensor/willing licensee model short shrift, as discussed in

Chapter 6. Moreover, implementing that model raises many difficult conceptual and evidentiary

issues, as discussed in Chapter 7.

B. Permanent Injunctions

The Patent Act requires that following a finding of infringement a district court consider

the “principles of equity” in deciding whether to grant a permanent injunction against

infringement. In eBay v. MercExchange, the Supreme Court rejected a “general rule” favoring 21

the grant of injunctions and listed four equitable factors that a patentee must satisfy to obtain an

injunction:

1) that it has suffered an irreparable injury; 2) that remedies at law[, such as monetary

damages,] are inadequate to compensate for that injury; 3) that, considering the balance of

hardships between the [parties], a remedy in equity is warranted; and 4) that the public

interest would not be disserved by a permanent injunction.22

Permanent injunctions play a critical role in protecting the exclusivity that allows a

patentee to reap the market reward for its invention following a finding of infringement. By

maintaining control of the invention, a patentee can maximize its returns. For example, a

manufacturing patentee can maximize profits by controlling the quantity of its innovative product

offered in the marketplace. Similarly, a research firm patentee might obtain the highest royalty

by negotiating an exclusive license with the company best-suited to commercialize the invention. 
See, e.g., Mark A. Lemley & Carl Shapiro, Patent Hold-Up and Royalty Stacking, 85 TEX. L. REV. 1991 23

(2007); Vincenzo Denicolò, Damien Geradin, Anne Layne-Farrar, and A. Jorge Padilla, Revisiting

Injunctive Relief: Interpreting eBay in High-Tech Industries with Non-Practicing Patent Holders, 4 J.

COMPETITION L. & ECON. 571, 573-4 (2008); Vincent E. O’Brien, Economics and Key Patent Damages

Cases, 9 U. BALT. INTELL. PROP. L.J. 1, 19 (2000); BLAIR & COTTER, supra note 7, at 231. The deterrent

effect of injunctions following the eBay decision is discussed in Chapter 8, Section IV.A, infra.

See Chapter 8, Section IV.A; Chapter 3, Section II. 24

Marian Underweiser, Towards an Efficient Market for Innovation 1, presented at FTC Hearing: The 25

Evolving IP Marketplace (Feb. 11, 2009) (“Court awarded reasonable royalty determinations provide the

backdrop against which all patent settlements and patent licensing activities are measured.”). The size of

damage awards will have less influence over ex ante patent transactions, where the cost and value of

144

The threat of an injunction also creates a significant deterrent to infringement that allows

patentees to earn the full market reward supported by an exclusive position without litigation. 

An injunction has consequences reaching beyond a possible damages award. If an adjudged

infringer has sunk costs into research and development or a plant and equipment to produce the

infringing product, it risks losing that investment if it cannot obtain a license. The injunction 23

may render the infringer’s inventory valueless, making it impossible to recoup those sunk costs. 

For that reason, many firms attempt to ensure freedom to operate or “patent clearance” before

embarking on a research and development track, either to avoid an area already covered by

patents or to seek a license to the patented technology.24

Under some circumstances, however, the threat of an injunction can lead an infringer to

pay higher royalties than a competitive market would award for a minor invention having several

alternatives. Where a patentee asserts a patent seeking an ex post licensing agreement, and the

infringer has sunk costs in product design and production using the patented technology,

switching to an alternative technology may be very costly. In that case, the patentee can use the

threat of an injunction to obtain royalties covering not only the value of its invention compared to

alternatives, but also a portion of the costs that the infringer would incur if it were enjoined and

had to switch. This higher royalty based on switching costs is called the “hold-up” value of the

patent. In this situation, the patentee’s compensation is no longer aligned with the value of its

technology compared to alternatives. In some situations, this outcome can lead to the problems

of overcompensation described below. Chapter 8 discusses how injunction analysis can balance

the competing concerns of protecting incentives to innovate while avoiding overcompensation.

C. The Problems of Under and Overcompensation

Patent remedies that either under or overcompensate patentees compared to the market

reward absent infringement harm consumers in multiple ways. The size of damage awards

determines the amount that the infringer must pay the patent holder as compensation for past

infringement. The effects of damages, however, extend beyond cases in which they are awarded. 

Damage awards have a “ripple effect” on the far larger number of cases in which royalties are

negotiated to avert or settle litigation as part of an ex post patent transaction. 

25
alternative technologies will likely have a bigger effect on royalty rates.

NERA Economic Consulting Comment at 2 (3/9/09); OSKR Comment at 1, n.1 (5/5/09); O’Brien, 26

supra note 23, at 3.

Lasersohn at 183 (2/11/09) (“If you do not allow inventors to capture the full economic value of their

27

invention . . . . the amount of [projects] that will qualify for venture capital financing will decrease.”); id.

at 184 (patent “damages, injunctive relief and other things are simply absolutely critical” to promoting

investment in new technologies); Maghame at 172-73 (2/11/09) (explaining that where infringers force

them to litigate to obtain appropriate compensation, “having the flexibility to determine the amount of

damages is absolutely necessary”); Rhodes at 165 (2/11/09) (describing how, in other jurisdictions,

“where there aren’t effective remedies for infringement . . . . infringement becomes a cost of doing

business. It’s cheaper to free ride on someone else’s R&D and pay the slap on the wrist penalty than it is

to do your own R&D.”).

Some have recognized a degree of circularity in the effect of damages on licensing rates. Because 28

parties negotiate a license in the shadow of litigation, the potential damage award will influence the

negotiated rate. However, the law looks to the royalty the market would award to establish damages. See

SUZANNE SCOTCHMER, INNOVATION AND INCENTIVES 211-12 (2004). This circularity is attenuated in an

ex ante licensing negotiation by the licensee’s ability to use an alternative technology and his

unwillingness to pay more than the incremental value the invention adds to the infringing product,

regardless of the size of any potential damage award.

145

Remedies that systematically undercompensate patentees reduce incentives to innovate

below levels intended by the patent laws. Denials of injunctions can undermine the ability of

patentees to obtain the full market reward by commercializing their inventions. Damage awards

that do not make the patentee whole make investment in the creation and development of new

technologies less likely. Under these circumstances, inventors would also be more likely to rely

on trade secrets rather than patents to protect intellectual property, thus undermining the patent

system’s benefit of public disclosure. 

26

Panelists warned that reducing available remedies, by either lowering damages or

restricting injunctions, would impair investment in innovation. Without a credible threat of

injunction and damages, start-up companies could not attract the capital they need to develop an

invention into an innovative product. Design firms that create new technology and license it to

others for manufacture could not adequately protect that technology from misappropriation. 

Large companies could not deter copying of the features that differentiate their products.27

On the other hand, remedies that overcompensate patentees beyond the market reward are

not benign. When market conditions allow excessive royalties from damages or the threat of

high damages to be passed on to consumers, prices increase. Consumers are deprived of the 28

benefits of competition among technologies if the size of damage awards and royalties do not

reflect that competition. Moreover, it is a false logic to argue that higher damage awards will

simply create greater incentives to innovate, lead to more innovation, and increase consumer

welfare. Inflated awards, just like inadequate awards, can have the perverse effect of retarding
Carl Shapiro, Patent Reform: Aligning Reward and Contribution, 8 NAT’L BUREAU OF ECONOMIC RES.

29

111, 113, in INNOVATION AND THE ECONOMY (2007) ; see also Business Software Alliance Comment at 6

(2/5/09).

This scenario assumes that manufacturers cannot identify all relevant patents and arrange licenses prior 30

to commercialization, as is the case when the notice function of patents fails. See Chapter 3, Section II.

Software & Information Industry Association Comment at 4 (2/5/09); OSKR Comment at 1 (5/5/09); 31

Marian Underweiser, Towards an Efficient Market for Innovation 3, presented at FTC Hearing: The

Evolving IP Marketplace (Feb. 11, 2009), available at

http://ftc.gov/bc/workshops/ipmarketplace/feb11/docs/munderweiser.pdf.

Chapter 2, Section III.B. 32

O’Brien, supra note 23, at 20, Thomas at 145 (12/5/08).

33

Shapiro, supra note 29, at 112 34 ; BLAIR & COTTER, supra note 7, at 60.

146

innovation. When infringers are also innovators, the inflated damage awards they pay will 29

reduce returns from their own R&D efforts, which can decrease innovation. Inflated awards can

also drive higher licensing fees that increase costs and decrease innovation.

Patent damages that overcompensate patentees compared to the market reward

incentivize speculation through the purchase and assertion of patents in litigation. If patent

holders can obtain more in patent damages through litigation than they could by ex ante licensing

in the marketplace where their inventions compete with alternatives, the result will be excessive

litigation that diverts funds from innovative and productive activities. Overcompensation 30 31

through damages encourages ex post transactions at the expense of ex ante transactions with

technology transfer.32

Overcompensation can deter socially beneficial challenges to invalid or narrow patents,

which also raises the cost of innovation. As the risk of paying an inflated award increases,

would-be innovators will tend to enter into licenses rather than challenge claims that may be

weak, perhaps paying unnecessary royalties. Alternatively, manufacturers may incur higher 33

costs by using a different technology to avoid even a weak threat of infringement. Inflated

damage awards also discourage innovative activity when companies minimize their exposure by

stopping research and development in technology for which patent coverage is uncertain. As

patent awards increase relative to harm from infringement, innovation that is distinct from, but at

the fringes of, patented technology may be abandoned.34

Inflated damage awards can also have broader effects on an industry. Overcompensating

a category of patents disrupts the ability of the market to allocate R&D resources to those areas

most likely to generate the products most valued by consumers. Overcompensation of certain

patented technologies over-incentivizes invention in that area, to the detriment of more

productive innovative activity. It also over-incentivizes the pursuit of patents for their own sake,
2003 FTC IP Report, ch. 3, at 34-35. Defensive patenting also contributes to patent thickets, especially

35

in the IT industries. Id.; Chapter 2, Section III.A.

BLAIR & COTTER, supra note 7, at 17-19. 36

Rhodes at 195-96 (2/11/09); Johnson at 188 (2/11/09); Maghame at 203 (2/11/09); Cassidy at 183-84 37

(2/12/09).

Ryan at 32-33 (4/17/09); see also Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1574 38

(Fed. Cir. 1988) (suggesting that under the hypothetical negotiation approach to damages, “a cold,

‘bottom line’ logic would dictate to some a total disregard of the individual inventor's patent”).

IBM Comment at 2 (2/12/09) (citing “costly settlement in advance of litigation” as one consequence of 39

patents “lack[ing] clear boundaries”); Yen at 52-53 (12/5/10) (describing how high litigation costs even

for “baseless assertions,” difficulty in establishing invalidity and uncertainty regarding damage

determinations can lead to “unmeritorious settlements”).

NAT’L RES. COUNCIL, A PATENT SYSTEM FOR THE 21 CENTURY 38 (Stephen A. Merrill, Richard C. 40 ST

Levin & Mark B. Myers eds., 2004) (discussing potential negative effect of high cost of patent litigation

on innovation).

147

unnecessarily increasing the number of patents in a given field beyond what is necessary to

encourage productive innovation. Large numbers of patents can create “patent thickets” and 35

increase transaction costs for manufacturers that seek to clear the rights needed to produce a

product.36

Some panelists asserted that concerns about overcompensation of patentees through

damages were exaggerated because damages are unable to put a patentee in the position it would

have been but for the infringement, given the high cost of litigation and consumption of company

resources. Panelists representing independent inventors described large manufacturers that 37

would use inventions with impunity, knowing that the high cost of patent enforcement meant

they would rarely be stopped. On the other hand, panelists representing manufacturing 38

companies that were defendants in patent litigation described settling weak infringement suits to

avoid litigation costs and settlement negotiations that focused more on the cost of litigation than

the value of the invention.39

The high cost of patent litigation is undoubtedly a significant issue for both producers and

users of technology, but it does not justify unmooring damages calculations from an economic

40

foundation rooted in the creation of a world but for infringement. Doing so makes damages

unpredictable and risks distorting market-based incentives in the ways described above. The

problem of high litigation costs should be addressed directly, although that issue is outside the

scope of this report.
148

IV. CONCLUSION

Patent damages that either under or overcompensate patentees for infringement compared

to the market can have detrimental effects on innovation and competition. Undercompensation

undermines the patent system’s incentives to innovate. Overcompensation raises costs to other

innovators through multiple mechanisms and can deter innovation. As discussed in Chapter 2,

overcompensation through damages also risks encouraging patent speculation, ex post licensing

and “being infringed” as a business model rather than more productive efforts at technology

transfer. Damage awards that do not track the value of a patented invention compared to

alternatives can deprive consumers of the benefits of competition among technologies. 

To align patent damages law and competition policy, it is, therefore, important that

damage awards attempt to accurately replicate the market reward an invention could have earned

absent infringement. Calculating accurate damages is a difficult task, however. The following

chapters attempt to provide insights on how to structure an economically grounded damages

analysis to help accomplish this task.
149

CHAPTER 5

LOST PROFITS DAMAGES

I. INTRODUCTION ................................................... 150

II. NONINFRINGING ALTERNATIVES IN A LOST 

PROFITS CALCULATION . .......................................... 151

A. The Panduit Test . .............................................. 151

B. The Entire Market Value Rule . .................................. 154

C. Dual Awards of Lost Profits and Reasonable Royalties . . . . . . . . . . . . . . . . 156

III. CONCLUSION . ..................................................... 157
Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978) (requiring an 1

absence of suitable noninfringing alternatives).

See Chapter 4, Section III.

2

For a comprehensive discussion applying economic analysis to the calculation of patent damages, see 3

ROGER D. BLAIR & THOMAS F. COTTER, INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL DIMENSIONS

OF RIGHTS AND REMEDIES 214–228 (2005); Roger D. Blair & Thomas F. Cotter, Rethinking Patent

Damages, 10 TEX. INTELL. PROP. L.J. 1 (2001).

150

CHAPTER 5

LOST PROFITS DAMAGES

I. INTRODUCTION

To promote the patent system’s incentives to innovate, patent law sets the goal of

calibrating compensatory damages to replicate the market reward that would have been earned

absent infringement. As Chapter 4 discusses, damages that undercompensate patentees

according to that standard undermine the patent system’s incentives to innovate. Damages that

overcompensate patentees can distort competition and decrease innovation. 

One way a patentee can innovate is to develop and commercialize the invention itself. 

For a patentee producing a patented product, the primary importance of the patent is often the

right it confers to exclude competitors from making and selling a competing product

incorporating the patented technology. Often the most effective way to remedy infringement in

this context is by awarding the patentee its profits on sales of the patented product that it lost due

to the infringement.

To accurately replicate the market reward that the patentee would have earned by

practicing its invention, the lost profits damages calculation must account for competition that

the patentee’s product would have faced if the infringer had sold a noninfringing alternative that

did not incorporate the patented technology. Denying a patentee lost profits damages based on

the availability of any acceptable alternative, as the seminal Panduit case seems to suggest, can

undercompensate the patent holder. But ignoring competition from alternatives that would have 1

occurred in the absence of infringement, and awarding lost profits based on all infringing sales,

can overcompensate it. Both outcomes can harm innovation and consumers.

2

Determining how the market would have rewarded the invention absent infringement can

be done by assessing consumer preference for the patented technology and the degree of

substitutability between the patented technology and noninfringing alternatives. That 3

assessment can identify the number of consumers that would have purchased the patented

product in the face of competition and the price they would have paid. The analysis and

economic tools are similar to those used in antitrust cases to reconstruct a market and measure

the effects of a proposed merger. The case law governing lost profits damages has moved toward

this more economically grounded analysis since the Panduit case in 1978. However, additional
See Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1546 (Fed. Cir. 1995); TWM Mfg. Co. v. Dura Corp.,

4

789 F.2d 895, 902 (Fed. Cir. 1986) (price erosion).

Panduit Corp., 575 F.2d at 1156.

5

Id. 6

883 F.2d 1573, 1578 (Fed. Cir. 1989); see also Micro Motion, Inc. v. Kane Steel Co.. 894 F.2d 1318 7

(Fed. Cir. 1990).

151

improvements, including rejection of rigid rules such as the “entire market value rule” and the

requirement for dual awards of lost profits and reasonable royalty damages, would increase the

accuracy of damage awards. Such a result would better align patent damages law and competition

policy, to the benefit of consumers.

II. NONINFRINGING ALTERNATIVES IN A LOST PROFITS CALCULATION

A. The Panduit Test

To receive lost profits damages, a patentee must prove that, but for the infringement, it

would have earned the lost profits it seeks, and that this loss was a foreseeable consequence of

infringement. Infringing competition can reduce the patentee’s profits in several ways, including

by diverting sales from the patentee’s product, eroding the patentee’s sales price, and causing the

patentee to lose sales of related, non-patented products. The “Panduit test” provides a 4

commonly-used framework with which patentees can establish entitlement to lost profits

damages. It requires the patentee to prove:

(1) there was demand for the patented product in the relevant market during

the period at issue;

(2) there were no suitable noninfringing alternatives to the patented product; 

(3) the patentee had the manufacturing and marketing capacity to meet the

demand claimed; and 

(4) the amount of profit it would have made.5

Panduit appears to create an all-or-nothing test: in the absence of noninfringing

alternatives, and assuming the patentee satisfies the other criteria, the patentee receives lost

profits on all the infringer’s sales. When noninfringing alternatives are available, the patentee

receives no lost profits. Later cases, however, have adopted a more flexible approach that 6

allows a patentee to recover lost profits on some, but not all, of the infringer’s sales. For

instance, in State Industries v. Mor-Flo Industries, the court awarded lost profits damages on the

portion of infringing sales that corresponded to the patentee’s market share. The analysis 7
Bic Leisure Prods., Inc. v. Windsurfing Int’l, Inc., 1 F.3d 1214, 1219 (Fed. Cir. 1993) (allowing “a 8

patentee to recover lost profits, despite the presence of acceptable, noninfringing substitutes, because it

nevertheless can prove with reasonable probability sales it would have made ‘but for’ the infringement”);

see also Grain Processing Corp. v. American Maize-Prods., 185 F.3d 1341, 1349-50 (Fed. Cir. 1999)

(recognizing that but for infringement, the defendant would have participated in the market by using an

available, noninfringing alternative); In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig.,

831 F. Supp. 1354, 1390 (N.D. Ill. 1993) (Easterbrook, J., sitting by designation) (recognizing that absent

infringement, the patentee may have made additional sales at a higher prices).

Leonard at 48 (2/11/09); Comment of John W. Schlicher at 53 (5/15/09) (“efforts to apply [the Panduit 9

test] have largely been unfruitful”).

Mark A. Lemley, Distinguishing Lost Profits from Reasonable Royalties, 51 WM. & MARY L. REV. 655, 10

657-61 (2009). The same article argues that courts have inflated reasonable royalty damages in an

attempt to compensate patentees for denied lost profit claims. Id. at 661-69. Chapter 6 discusses the

detrimental effects of inflating reasonable royalty damages for this reason.

Comment of Greg Leonard at 7-8 (3/9/09); Blair & Cotter supra, note 3 at 15; Vincent E. O’Brien, 11

Economics and Key Patent Damages Cases, 9 U. BALT. INTELL. PROP. L.J. 1, 6 (2000); see also Levko at

59 (2/11/09) (noting that the “but for” world should broadly look at market definition).

King Instrument Corp. v. Otari Corp., 767 F.2d 853, 863 (Fed. Cir. 1985).

12

Del Mar Avionics, Inc. v. Quinton Instrument Co., 836 F.2d 1320, 1327 (Fed. Cir. 1987).

13

152

assumed that the remainder of the infringer’s customers likely would have chosen alternative

products. The court described this market share calculation as an alternative to the Panduit test.8

Panelists and commentators have criticized the Panduit test because the “factors [are]

stated as . . . necessary conditions” for a lost profits award, when in fact “you can have lost

profits, even if one or more of them aren’t satisfied.” One commentator argues that courts have 9

at times imposed unrealistic evidentiary burdens on patentees to establish the precise extent of

their lost profits, thereby relegating them to reasonable royalty recoveries that are not designed to

remedy their losses. Panelists proposed an approach for calculating lost profits focused on 10

“[i]dentify[ing] the defendant’s next best alternative to infringing” and then determining “the

market outcome in the ‘but for’ world where it pursued [that] alternative instead of infringing.”11

Further development in the case law along these lines, toward an economically grounded

calculation of lost profits and away from rigid rules like the Panduit test, would increase the

accuracy of lost profit damage awards and help fully compensate patentees. Moreover, courts

should recognize that a lost profits determination is “not an exact science” and permit plaintiffs 12

to “approximate, if necessary, the amount to which the patent owner is entitled.”13

Recommendation. In assessing how the market would have rewarded the

invention absent infringement, courts should allow a patentee flexibility in

creating the “but for” world to address different losses and avoid
See, e.g., Gregory J. Werden, Luke M. Froeb & Lucian Wayne Beavers, Economic Analysis Lost Profits 14

from Patent Infringement With and Without Noninfringing Substitutes, 27 AIPLA Q.J. 305, 307-08

(1999); Gregory K. Leonard, Applying Merger Simulation Techniques to Estimate Lost Profit Damages

in Intellectual Property Litigation, in ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY, POLICY,

LITIGATION, AND MANAGEMENT 112-13 (Gregory K. Leonard & Lauren J. Stiroh eds., 2005). The

analysis should also recognize that at lower prices, the patentee may sell more products, which will affect

the amount of profits lost by infringement. Gregory J. Werden, Lucian Wayne Beavers & Luke M.

Froeb, Quantity Accretion: Mirror Image of Price Erosion from Patent Infringement, 81 J. PAT. &

TRADEMARK OFF. SOC’Y 479 (1999); see also Comment of John W. Schlicher at 54 (5/1/09).

In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 831 F. Supp. at 1390 15

(“Competition is not an all-or-nothing proposition. There are degrees of substituability.”); Werden et al.,

supra note 14, at 310 (noting that “[i]n some sense, there are always substitutes for the patented

product”). 

See Grain Processing Corp. v. American Maize-Prods. Co., 893 F. Supp. 1386, 1392 (N.D. Ind. 1995) 16

(Easterbrook, J., sitting by designation), aff’d in part, vacated in part, 108 F.3d 1392 (Fed. Cir. 1997)

(awarding no lost profits damages due to availability of alternative); but see Jerry A. Hausman, Gregory

K. Leonard & J. Gregory Sidak, Patent Damages and Real Options: How Judicial Characterization of

Noninfringing Alternatives Reduces Incentives to Innovate, 22 BERKELEY TECH. L.J. 825, 852-53 (2007)

(arguing that “the district court’s conclusion in Grain Processing that no lost profits existed if the

infringer were assumed to have adopted the noninfringing technology is at odds with standard economic

theory”).

153

undercompensation. Patentees should not be denied an opportunity to establish

lost profits through application of rigid rules that do not reflect sound economic

principles or imposition of evidentiary requirements beyond what is required for

the court to make a reasonable approximation of the patentee’s loss.

An economically grounded approach to calculating lost profits damages focuses on the

market for the patentee’s product. It generally requires considering the sales and prices that the

patentee actually made and comparing them to the sales it would have made in the “but for”

world where the infringer sold a noninfringing alternative, if one is available. That comparison

involves quantifying the number of sales the patentee lost due to infringement and estimating the

extent of any price erosion. This analysis must consider the extent of consumer preferences for 14

the patented feature over alternatives, and not simply treat alternatives as falling on either side of

a bright line dividing the acceptable from the unacceptable. Instead, the analysis recognizes that

the “degree of substitutability” between the patented product and the noninfringing substitute

will affect the extent of the loss caused by infringement, as opposed to competition generally.15

At one end of the spectrum, consumers freely substitute alternatives for the patented

product. The infringer could have made nearly as many sales by offering the alternative. In such

a case, the patentee lost few sales due to infringement and should receive little lost profits

damages. The patentee’s recovery is limited because its invention contributes relatively little 16

value over alternatives, and the damages should reflect this fact. At the other end of the

spectrum, consumers strongly prefer the patented product over alternatives and will pay higher
See O’Brien, supra note 11, at 6. C.f., Lemley, supra note 10, at 671-72 (arguing that a patentee’s

17

difficulty in proving precise amount of lost profits damages, as opposed to entitlement to them, should

not disqualify it from receiving them).

Blair & Cotter, supra note 3, at 15-16 (“modern economic analysis does provide some techniques for 18

estimating losses” based on construction of a market absent infringement); see also Marion B. Stewart,

Calculating Economic Damages in Inellectual Property Disputes: The Role of Market Definition, 77 J.

PAT. & TRADEMARK OFF. SOC’Y 321 (1995).

Blair & Cotter, supra note 3, at 13-14, n.34 (explaining relationship of cross-elasticity of demand to lost

19

profits).

Werden et al., supra note 14, at 307-08. 20

Seymour v. McCormick, 57 U.S. 480, 489-91 (1853) (explaining that damages based on an entire

21

machine when the patent covers only a component could subject the infringer to duplicative and

excessive damages); see also Garretson v. Clark, 111 U.S. 120, 121 (1884) (requiring apportionment of

damages from sales of a mop based on infringement of patent covering improved mop head).

154

prices for it. In the world without infringement, the patentee likely would have made most of the

infringer’s sales at a higher price, earning a large return on its invention. It should receive

substantial lost profits damages adequate to compensate for the market reward it would have

earned absent infringement. In both cases, the remedy reflects the value of the invention,

providing proper incentives for invention and innovation. Many patented products and their

alternatives fall between these two extremes, but these also are entitled to lost profits damages

when proven.17

Economic analysis of the type used in antitrust merger review can help determine where

alternatives fall along this spectrum, the number of sales lost to the infringing product, and the

price erosion caused by infringement. Measuring the cross-elasticity of demand between an 18

infringing product and noninfringing alternatives can determine their “degrees of

substitutability.” Economists have explained that “[s]imulating damages from patent 19

infringement is quite similar to simulating the effects of a merger. Rather than extrapolating

from the lower-price, pre-merger equilibrium to the higher-price, post-merger equilibrium, one

extrapolates from the lower-price, with infringement equilibrium to the higher-price, but-forinfringement equilibrium.” 

20

B. The Entire Market Value Rule

The law of lost profits damages recognizes that a patented invention may be only one

component of a complex product. In that case, not all of the infringer’s profit, or the patentee’s

lost profits, is necessarily attributable to the patented invention. The case law traditionally

addresses this issue by “apportioning” the potential damages according to the value the invention,

such as a mop head, contributes to the product, such as a mop. Modern case law applies the 21

“entire market value rule” to determine when to award lost profits damages based on the entire
State Indus., Inc., 883 F.2d at 1580. This “basis of customer demand” standard as sometimes applied is 22

arguably more lenient than statements of earlier cases requiring that “the entire value of the whole

machine, as a marketable article, is properly and legally attributable to the patented feature” for damages

to be based on the whole product. Garretson, 111 U.S. at 121 (quoting Garretson v. Clark, 10 F. Cas. 40,

44 (C.C.N.Y. 1878). Compare State Indus., Inc., 883 F.2d at 1580 (allowing lost profits damages based

on entire water heater where invention related to foam insulation) with Marconi Wireless Tele. Co. v.

United States, 99 Ct. Cl. 1, 21 (Ct. Cl. 1942), aff'd in part, vacated in part, 320 U.S. 1 (1943) (holding

that patentee can recover damages based on an entire product if patented feature “was of such paramount

importance that it substantially created the value of the component parts”).

Rite-Hite Corp., 56 F.3d at 1550 (lost profits damages may be based on the entire market value of a

23

product only where “the patented and unpatented components were analogous to a single functioning

unit” and may not be extended to include unpatented items “that have essentially no functional

relationship to the patented invention and that may have been sold with an infringing device only as a

matter of convenience or business advantage.”).

438 F.3d 1354, 1371-72 (Fed. Cir. 2006). See also Tec Air, Inc. v. Denso Mfg. Michigan, Inc., 192

24

F.3d 1353, 1361 (Fed. Cir. 1999) (damages based on entire assembly where infringing fans were sold

with noninfringing radiator and condenser).

The “basis for consumer demand” standard is not a good proxy for those instances in which no

25

alternatives for the patented invention exist such that the patentee would have made all infringing sales.

The standard has been liberally applied in some cases, and it fails to focus on the operative economic

question of noninfringing competition. See Golden Blount, Inc., 438 F.3d at 1371 (allowing damages

based on entire artificial fireplace when only gas burner was patented, without examining noninfringing

competition in artificial fireplace market); Tec Air, Inc., 192 F.3d at 1361 (damages based on entire

assembly where infringing fans were sold with noninfringing radiator and condenser because consumer

demand was based on performance of entire assembly).

155

value of the patented product. The entire market value rule applies when (1) the patented feature

is “the basis for customer demand” of the infringing product and (2) the patented and 22

unpatented components together “constitute a functional unit.” For instance, in Golden Blount, 23

Inc. v. Robert H. Peterson Co., the Federal Circuit allowed lost profits damages based on the

entire market value of an artificial fireplace where only the gas burner was patented. The court

upheld a finding that the burner, logs and grate worked together as a functional unit and that the

ember burner was the basis for customer demand.24

The entire market value rule is not needed in an economic assessment of lost profits. 

Indeed, it distracts fact-finders from a careful reconstruction of a market lacking infringement. 

Courts should reject it. The rule’s focus on whether a feature is the “basis for customer demand,”

and allowing only a “yes” or “no” answer to that question, prevents courts and juries from giving

adequate consideration to the “degrees of substitutability” that may exist with respect to

noninfringing alternatives. In doing so, it inhibits an appreciation of the differences among 25

consumers and their preferences for different alternatives. The “functional unit” prong of the
See Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1371-73 (Fed. Cir. 2004) (remanding for 26

consideration of whether patentee was entitled to damages based on sales of unpatented syrup and

because syrup and patented juice dispenser functioned together “to produce the visual appearance that

was central to Juicy Whip’s ’405 patent”). If a patentee can prove that it would have made sales of an

unpatented product along with a patented product but for the infringement, examining whether they

function as a unit may be useful in determining whether lost sales of the unpatented product were

“foreseeable” and compensable. See Blair & Cotter, supra note 3, at 89 (proposing this limited use of the

functional unit test); Rite-Hite Corp., 56 F.3d at 1546 (requiring that lost profits be foreseeable to be

compensable).

See Blair & Cotter, supra note 3, at 17, 26-28; Leonard Comment at 8-9 (3/9/09).

27

State Indus., Inc., 883 F.2d at 1580; Rite-Hite Corp., 56 F.3d at 1554-55 (awarding lost profits damages 28

on all but 502 sales and awarding reasonable royalties on those).

156

rule makes the determination of damages hinge on a distinction that is irrelevant to

reconstruction of a market lacking infringement.26

The all or nothing aspect of the entire market value rule detracts from the ability of patent

damages to provide compensation to patentees that reflects the value of their inventions, and

thereby align with competition policy. A more nuanced economic analysis can help identify the

extent to which infringement causes a patentee to lose profits whether the patent at issue claims

the entire infringing product or one component of that product. When consumers view a

patented component as a valuable feature of a larger product, they are less likely to be satisfied

with similar products containing noninfringing alternative components. The more valuable the

patented feature is to consumers, the larger the portion of the infringer’s sales that can be

attributed to infringement. However, when consumers view a patented component as a minor

feature that they would forgo at higher prices or substitute with noninfringing alternatives,

infringement causes the patentee to lose fewer sales.27

Under this economic analysis, the infringer’s sales are effectively “apportioned”

according to the value of the invention. This approach provides a more direct and accurate

measure of a patentee’s harm from infringement when one component of a product is patented

than does an attempt to measure that component’s relative contribution to a product or to apply

the entire market value rule. 

Recommendation. Courts should reject the entire market value rule as a basis for

awarding a patentee lost profits damages based on all infringing sales, and instead require

proof of the degree of consumer preference for the patented invention over alternatives.

C. Dual Awards of Lost Profits and Reasonable Royalties

When courts have awarded lost profits damages based on a portion of the infringing sales,

they also have sometimes awarded reasonable royalty damages on the remaining portion of

infringing sales. Those cases refer to Section 284 of the Patent Act in reasoning that a patentee 28
Rite-Hite Corp., 56 F.3d at 1554. 29

One situation in which dual awards might be appropriate is when markets for the patented 30

product are separated by geography or type of use. A patentee may seek to earn royalties in one

market (making reasonable royalty damages appropriate) but sell its invention exclusively in

another (making lost profits appropriate). O’Brien, supra note 11, at 21 n.74.

See O’Brien, supra note 11, at 21-22; Comment of John W. Schlicher at 54 (5/1/09) (when law insists

31

that patentee recover damages on every infringing unit sold, the patentee is better off financially than it

would have been absent infringement).

SmithKline Diagnostics, Inc. v. Helena Lab. Corp., 926 F.2d 1161, 1166 (Fed. Cir. 1991) (considering 32

whether “others would likely have captured sales made by the infringer, despite a difference in the

products”).

157

is entitled to “no less than a reasonable royalty” on all of an infringer’s sales, even when it has

received its profits lost due to infringement. In many instances, dual awards of lost profits and 29

reasonable royalty damages are inappropriate and courts should not award them.30

When a patentee receives lost profits damages on lost sales amounting to only a portion

of the infringer’s sales, the award recognizes that, but for infringement, the infringer would have

sold an alternative to the patented invention. Putting the patentee in the position it would have

been but for the infringement does not require compensating it for sales the infringer would have

made of noninfringing alternatives. Awarding the patentee reasonable royalty damages on those

sales in addition to lost profits overcompensates it compared to the market reward for the

invention, because it ignores competition that the patented invention faced from noninfringing

alternatives. Awarding lost profits damages based on a portion of the infringer’s sales can fully

31

compensate the patentee for infringement, as required by Section 284.

Recommendation. Courts should reject dual awards of lost profits and reasonable royalty

damages when competition from alternatives would have prevented the patentee from

making all the infringer’s sales in a world but for infringement.

III. CONCLUSION

The guiding principle in the calculation of lost profits damages is the construction of the

hypothetical market but for infringement. In that market, the patented invention may sometimes

compete with noninfringing alternatives. Accurately calculating damages in the face of that

competition requires an examination of consumer preferences for the patented invention over

alternatives. Economic tools, including those frequently used in antitrust analysis, can support

that calculation.

The case law has evolved to recognize the importance of “the realities of the market.”32

But further flexibility in the legal rules that apply to lost profits damages would allow a more

economically grounded calculation, leading to more accurate awards and full compensation of
158

patentees. Patentees that have proven entitlement to lost profits damages should not be denied

that compensation and limited to reasonable royalties based on overly-rigorous requirements to

show the precise amount of damages. 

To achieve accurate awards, calculation of lost profits damages must also take account of

competition the patented product would have faced but for infringement. Courts should reject as

not based on sound economics the entire market value rule and dual awards of lost profits and

reasonable royalty damages in most situations. Additional focus on creating the world but for

infringement, including a full appreciation of the role of noninfringing alternatives in that world,

will help compensate patentees through damages as the market would have done, avoiding the

under and overcompensation that can harm innovation, competition and consumers.
159

CHAPTER 6

THE HYPOTHETICAL NEGOTIATION IN REASONABLE ROYALTY DAMAGES 

I. INTRODUCTION ................................................... 160

II. RECENT CONTROVERSIES SURROUNDING REASONABLE 

ROYALTY DAMAGE AWARDS. ...................................... 161

A. Support for Damages Reform . ................................... 161

B. Opposition to Damages Reform . ................................. 163

C. The Need to Review Damages Law . ............................... 164

III. OVERVIEW OF REASONABLE ROYALTY DAMAGES LAW . . . . . . . . . . . . 165

IV. CONCERNS WITH THE HYPOTHETICAL

NEGOTIATION FRAMEWORK . ..................................... 167

A. The Counterfactual Nature of the Hypothetical Negotiation . . . . . . . . . . . 170

B. Deterrents to Infringement . ..................................... 173

V. CONCLUSION AND RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
S. REP. No. 111-18, at 3 (2009). 1

See Chapter 1. 2

See Chapter 2. 3

160

CHAPTER 6

THE HYPOTHETICAL NEGOTIATION IN REASONABLE ROYALTY DAMAGES 

I. INTRODUCTION

Much of the controversy in the patent community concerning damage awards has focused

on whether the law governing reasonable royalty damages appropriately compensates patentees. 

Different perspectives on this question have fueled a debate on the wisdom of legislative changes

to reasonable royalty damages law as part of a broader patent law reform effort. Companies fall 1

on opposite sides of this question depending on a number of factors, including whether they view

themselves as more likely defendants or plaintiffs in patent litigation, whether they use patents

primarily defensively or offensively, how likely it is that a patent in their industry might confer

market power, and how many patents typically cover a single product.

Different sides of the debate have at times looked to median damage awards as evidence

of both the presence and the absence of a problem. But medians cannot answer the question of

whether patent damages law appropriately compensates patentees. They supply no information

about the accuracy of individual awards or the effect of very large awards that arguably motivate

some litigation. That said, several factors suggest that a careful study of the economic

underpinnings of reasonable royalty damages law would be beneficial. On the one hand, full

compensation is important to incentivize invention and support licensing in a growing open

technology paradigm. On the other hand, dramatic increases in litigation in the information 2

technology (IT) industries and the rise in business models that use patents only to extract rents, if

driven by awards that overcompensate patentees, could deter innovation and disrupt competition

in technology markets.3

As discussed in Chapter 4, damages law appropriately compensates patentees for

infringement when it aligns damage awards with the economic value of the invention by

replicating the market reward. When a patentee cannot or chooses not to prove lost profits or

other direct harm, the market reward is the royalty to which a willing licensor and willing

licensee would agree in a hypothetical negotiation. But courts sometimes reject, either implicitly

or explicitly, a limitation based on the maximum amount a willing licensee would pay. In doing

so, they often seem motivated by concerns about compensating patentees for unproven direct

harm and deterring infringement. Those concerns are better addressed through other areas of

remedies law, including lost profits damages, enhanced damages and injunctions. Allowing

those concerns to distort the reasonable royalty damages calculation risks overcompensating

patentees in litigation as compared to the market and creating problems such as higher prices,

increased patent speculation, and decreased innovation.
See, e.g., Yen at 47 (12/5/08) (“Increasingly, activity in the marketplace is driven not by increased 4

innovation but by efforts to exploit imbalances in a patent system that overvalues patents, particularly

weak ones, and thereby actually suppresses marketplace innovation.”); CCIA Comment at 6-7 (2/5/09);

Doyle at 143 (5/5/09) (the current damages system “encourages what I would consider opportunistic

litigation that has little relation to the value of a patent, its patent-worthiness, its validity, let alone

whether or not it’s infringed”).

Paul Janicke, Patent Damages, Patent Verdicts from 1-1-05 to 1-6-09, presented at FTC Hearing: The 5

Evolving IP Marketplace (Feb. 11, 2009), available at

http://ftc.gov/bc/workshops/ipmarketplace/feb11/docs/janicke-medianverdits.pdf; Janicke at 9 (2/11/09)

(explaining that these numbers are “only what the jury foreman announced” and do not reflect

enhancements (e.g., for willfulness or interest) or subsequent judicial actions reducing or vacating the

award). See also Levko at 21 (2/11/09) (reporting that there had been “something like 22 cases” with

awards over $100 million (in 2008 dollars) in 14 years, including six in 2008 alone);

PricewaterhouseCoopers, 2010 Patent Litigation Study, The Continued Evolution of Patent Damages

Law: Patent Litigation Trends and the Impact of Recent Court Decisions on Damages, at 8, Chart 2c

(Sept. 2010), (listing eight cases in which the initially adjudicated damage award exceeded $200 million

since 2007 (and noting that some had subsequently been vacated or otherwise modified)), available at

http://www.pwc.com/us/en/forensic-services/publications/2010-patent-litigation-study.jhtml.

See, e.g., Innovation Alliance Comment at 10 (2/6/09) (“With few exceptions, the largest jury verdicts

6

awarded each year are typically reduced or overturned upon appeal, as in the Alcatel-Lucent case.”)

(citing Innovation Alliance, Moving Beyond the Rhetoric: Jury Damage Verdicts in Patent Infringement

Cases 2005 – 2007 (2008), available at

http://www.innovationalliance.net/files/JURY%20DAMAGE%20VERDICTS%20IN%20PATENT%20I

NFRINGEMENT%20CASES%5B1%5D.pdf). 

161

This Chapter and Chapter 7 seek to derive an economically grounded approach to

calculating reasonable royalty damages and to compare that approach to the rules developed

through case law. Ensuring that the legal rules reflect an understanding of the economics

underlying the market in which technology competes will help align a patentee’s compensation

with the economic value of the patented invention, and align patent law with competition policy.

II. RECENT CONTROVERSIES SURROUNDING REASONABLE ROYALTY

DAMAGE AWARDS

A. Support for Damages Reform

Those who complain about the current state of damages law come mainly from the IT

industries. They argue that patent value has become increasingly divorced from the economic

value of the underlying technology in recent years because of excessive damages awards. From 4

2002-2009, there were at least eleven damage awards over $100 million and one that was over $1

billion, representing a marked increase in landmark damage awards compared to 20 years ago.5

While some very large awards have been overturned, “outlier” cases still raise concerns because

6

they inform and influence the licensing and settlement negotiations that resolve the vast majority
See Squires at 195 (12/5/08); Reines at 33 (2/11/09) (emphasizing that settlements are affected by trial 7

outcomes through “a magnification process where the anomalous outcomes at trial or fear of anomalous

outcomes at trial can drive a whole range of decision-making”); NERA Economic Consulting Comment

at 4-5 (3/9/09) (reasoning that a company will take into account even a relatively low probability of an

excess damage award in its decision making and market behavior).

Coalition for Patent Fairness and Business Software Alliance Comment at 9 (2/5/09); 8

PricewaterhouseCoopers, A Closer Look: 2008 Patent Litigation Study, Damages Awards, Success Rates

and Time-to-Trial, at 3, Chart 2C (2008), available at

http://www.pwc.com/en_US/us/forensic-services/assets/2008_patent_litigation_study.pdf.

Squires at 166 (12/5/08); see also Janicke at 10 (2/11/09) (“these [very large verdicts] are the [ones] that 9

spur the filing of patent litigation, hundreds of millions of dollars”).

This report uses the term “patent assertion entity” rather than the more common “non-practicing entity” 10

(NPE) to refer to firms whose business model focuses on purchasing and asserting patents. See Chapter

2 for a discussion of the different types of non-practicing entities and their impact on innovation and

competition.

See infra Chapter 2, Section IV.A. 11

Yen at 54 (12/5/08) (stating that “[t]he money to pay unjustified settlements is taken away from R&D 12

and promising technologies, and the added costs ultimately are passed on to the consumer, and more

troubling perhaps is the lost opportunity for new products and services”); Underweiser at 159 (2/11/09)

(explaining that “transaction costs” from litigation mean “your products are going to cost more” and that

“you won’t have the innovations making their way into products”); McCurdy at 42 (12/5/08); Software &

Information Industry Association Comment at 2-3 (2/5/09); Coalition for Patent Fairness and Business

Software Alliance Comment at 3, 7-8 (2/5/09).

162

of patent disputes. (Appendix A reviews available statistics on patent litigation outcomes and 7

damages awards.) Supporters of reform also point to the ten-fold disparity between damage

awards made by juries compared to judges and the high median award of $31 million in the

telecommunications sector as evidence of a problem.8

Panelists assert that these awards have generated a “lottery-ticket mentality” that 9

encourages patent assertion entities (PAEs) to purchase patents solely for the purpose of 10

asserting them against products that were developed without any input from the inventors, i.e.,

the ex post licensing described in Chapter 2. Indeed, all panelists for high-tech companies

reported steep increases in patent litigation almost entirely attributable to suits brought by

PAEs. They argue that this increased ex post litigation imposes a substantial burden on 11

manufacturing companies and deters innovation by diverting resources and increasing the risk

associated with introducing new products.12

The cases presenting the greatest risk for excessive damage awards, according to

panelists, are those in which the patented invention is one component of many in a complex
Cotter at 134, 198 (12/5/08) (describing how hold-up can occur in the context of “a patent on a

13

component”); Lemley at 253 (5/5/09) (“Most of the discussion here has been . . . pointing in the direction

that the problem with reasonable royalty damages is that they are too high in many-component industry

cases for a variety of reasons.”); NERA Economic Consulting Comment at 19-23 (3/9/09).

See Chapter 2, Section III.A; Chapter 3, Section III.

14

Doyle at 210 (5/5/09) (“it seems to me that apportionment, just by itself, as a rule standing alone is the 15

only thing that anyone’s come up with that has half a chance of focusing the discussion”); Schlicher at

210 (5/5/09) (agreeing with Doyle, explaining that the award should be an “approximation of the value of

the invention given its advantages”); Squires at 167-68 (12/5/08) (“where the inventive contribution is

one of many components in a complex product or service, . . . then valuation should be correlated to the

component”); Software & Information Industry Association Comment at 7 (2/5/09); Coalition for Patent

Fairness and Business Software Alliance Comment at 6 (2/5/09). Cf. Lemley at 215 (5/5/09) (“courts

always already do apportionment in a reasonable-royalty case, they just don’t do it very well”); Thomas

at 149 (12/5/08) (“Apportionment is part of our law . . . . Many of us believe that it’s been unevenly

applied . . . .”).

Rhodes at 196 (2/11/09) (if you “decrease damages, you do lose part of the deterrent [e]ffect against 16

infringement”); Layne-Farrar at 51 (2/11/09) (observing that we “don’t want to . . . encourage

under-the-radar infringement”); PhRMA Comment at 14, 18-20 (2/10/09); BIO Comment at 2 (5/15/09);

NanoBusiness Alliance Comment (2/5/09) (“Changes which reduce our ability to receive adequate

compensation for infringement of those patents will make it difficult to protect our intellectual property,

and therefore will discourage investment in our field.”); National Venture Capital Association Comment

at 2 (2/10/09); Epstein at 169 (5/4/09) (“I think passing significant changes to damages law is the fastest

way to shut down the overall licensing and secondary patent marketplace.”).

163

product. IT products, such as personal computers and cell phones, are covered by thousands of 13

patents. As discussed in Chapters 2 and 3, the notice function is poorly served in these

circumstances, making it unfeasible for manufacturers to identify all patents that might read on a

product. Proponents of reform explain that patentees often seek damages based on a percentage 14

of the whole product even though the patent’s inventive contribution relates to a very small

aspect of the product. One proposed solution calls for damages rules that “apportion” the

award.15

B. Opposition to Damages Reform

Panelists and commentators representing a variety of industries and business models

strongly warned against adopting any change in damages law intended to systematically lower

awards. They argued that reducing the value of patents or injecting additional uncertainty and

complexity into damages calculations would undermine the patent system’s incentives to invest

in risky research and development in promising industries. Lower patent values would also

encourage infringement rather than licensing, they worried, reducing incentives to invent and the

opportunity to engage in technology transfer licensing.16
PricewaterhouseCoopers, supra note 8, at 2, Chart 2a (reporting that the “median annual damages 17

award has remained fairly stable over the last 13 years,” and that “[t]he median was $3.9 million from

1995 through 2000, and $3.8 million from 2001 through 2007” in 2007 dollars). See also

PricewaterhouseCoopers, supra note 5, at 2, Chart 2a (reporting that between 1995 and 2009 annual

median awards averaged $5.2 million and ranged from $2.2 million to $10.5 million (in 2009 dollars),

but showed “no discernable trend” over that period); Janicke at 10 (2/11/09) (reporting a median jury

verdict of $5.3 million for the period January 2005 through January 2009); PhRMA Comment at 17

(2/10/09); Innovation Alliance Comment at 10 (2/6/09).

Innovation Alliance Comment at 10 (2/6/09); Innovation Alliance, Moving Beyond the Rhetoric, Jury

18

Damage Verdicts in Patent Infringement Cases 2005-2007 (2008), available at

http://www.innovationalliance.net/files/JURY%20DAMAGE%20VERDICTS%20IN%20PATENT%20I

NFRINGEMENT%20CASES%5B1%5D.pdf (reporting that from 2005 to 2007, there were 47 patent

cases where the jury found damages of $2 million or more, and in 12 cases, the damage verdict was set

aside or the trial judge found the damages were not supported by the evidence); PhRMA Comment at 13,

17 (2/10/09); Chief Judge Paul R. Michel of the Court of Appeals for the Federal Circuit argued that

judicial review of excessive jury awards shows that the system is working, not that it is broken. C.J.

Michel at 116-17 (12/05/08); but see Daralyn J. Durie & Mark A. Lemley, A Structured Approach to

Calculating Reasonable Royalties, 14 LEWIS & CLARK L. REV. 627, 634 (2010) (surveying 267 cases in

which damages were awarded, and finding only three in which the district court granted JMOL on the

issue of damages).

Rhodes at 237-38 (2/11/09) (the Georgia-Pacific factors “mirror a lot of the considerations that take 19

place in actual licensing negotiations” and “are trying to replicate what type of dynamic” would exist in

the hypothetical negotiation); Johnson at 243-44 (2/11/09) (pharmaceutical company representative

explaining that when his company “sit[s] down to negotiate [licences], we use methodologies that are

very much like the Georgia-Pacific factors”).

Johnson at 268 (2/11/09) (pharmaceutical company representative suggesting that the award should be 20

based on “compar[ing the invention] with its closest non-infringing alternat[ive]”); PhRMA Comment at

20 (2/10/09) (when the patented invention is a small component of a product, “a reasonable royalty

would be determined by assessing the value to the infringer of using the patented invention over the

closest non-infringing substitute”).

164

Panelists opposed to changes in damages law dispute the argument that recent awards

indicate any problem. They point out that median damage awards (adjusted for inflation) have

remained stable since 1995 at approximately $5 million, an amount that is modest compared to

litigation costs. They also explain that where a jury’s damage award is excessive, courts can 17

and have corrected it. The current legal rules are effective and flexible for addressing the wide 18

variety of fact scenarios that arise in damages calculation, they maintain. In particular, those

factors track the considerations that influence real-world licensing negotiations and allow 19

consideration of the value added by a patented component in an infringing product. 

20

C. The Need to Review Damages Law

Aggregated statistics alone cannot answer the question of whether patent damages law

appropriately compensates patentees. As one commentator cautioned, relying too much on
John Schlicher Comment at 39 (5/15/09). 21

Douglas G. Kidder & Vincent E. O’Brien Comment at 1 (5/5/09). 22

Schlicher Comment at 4, 38 (5/15/09); see also NERA Economic Consulting Comment at 19-20 23

(3/9/09) (discussing specific unreliable approaches to determining reasonable royalty damages).

35 U.S.C. § 284. 24

Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 (Fed. Cir. 1995) (“A patentee is entitled to no less 25

than a reasonable royalty on an infringer’s sales for which the patentee has not established entitlement to

lost profits.”) (en banc); JOHN M. SKENYON, CHRISTOPHER S. MARCHESE & JOHN LAND, PATENT

DAMAGES LAW AND PRACTICE § 1:3 (2008).

SKENYON et al., supra note 25, § 3:2, at 3-3. 26

165

medians “tell[s] you very little about the awards that matter most, those for the very few, very

valuable inventions.” Moreover, it is an impossible and unproductive task to attempt to 21

determine whether a sampling of awards is incorrect in the sense that they made a patent holder

better or worse off in court than it would have been in the marketplace.22

That said, a review of the available statistics on reasonable royalty awards, combined

with the recent controversy in the patent community, suggests that a study of the relationship

between the legal rules governing damages and the economic principles that should guide

damages calculations would be beneficial. On the one hand, it is essential to ensure that the laws

governing patent damage awards protect incentives to invent and innovate by affording

compensation equal to the loss caused by infringement. On the other hand, recent very large

damage awards for minor components of complex products and dramatic, industry-specific

increases in patent litigation do raise questions of whether damages law is sufficiently

economically grounded. The question seems most pressing in that subset of cases where the

invention is one component of a complex product. Some panelists asserted that excessive

reasonable royalty awards result from a failure to use economically correct approaches to

calculation and legal rules that “obscure[] the effort to match damage awards to the economic

values of inventions.” 

23

III. OVERVIEW OF REASONABLE ROYALTY DAMAGES LAW

Section 284 of the patent statute mandates that patentees recover “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 . . . .” A reasonable royalty is available as a remedy in all cases

24

where the patentee has not proven entitlement to lost profits caused by the infringement.25

Reasonable royalties may be awarded to a patent owner that was injured and competed but was

unable to establish lost sales, one that licensed exclusively, or one that licensed broadly, leading

one author to call them a “catch-all category of patent damages.”26
Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970),

27

modified and aff’d, 446 F.2d 295 (2d Cir. 1971). Chapter 7, Section II lists the Georgia-Pacific factors.

See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009) (“The hypothetical

28

negotiation tries, as best as possible, to recreate the ex ante licensing negotiation scenario and to describe

the resulting agreement.”).

Applied Med. Res. Corp. v. U.S. Surgical Corp., 435 F.3d 1356, 1361 (Fed. Cir. 2006) (“A reasonable

29

royalty is the amount that ‘a person, desiring to manufacture [, use, or] sell a patented article, as a

business proposition, would be willing to pay as a royalty and yet be able to make [, use, or] sell the

patented article, in the market, at a reasonable profit.’”) (quoting Trans-World Mfg. Corp. v. Al Nyman

& Sons, Inc., 750 F.2d 1552, 1568 (Fed. Cir.1984)).

See Section IV, infra. Monsanto Co. v. Ralph, 382 F.3d 1374, 1383 (Fed. Cir. 2004) (rejecting 30

infringer’s argument that a “reasonable royalty deduced through a hypothetical negotiation process can

never be set so high that no rational self-interested wealth-maximizing infringer acting ex ante would

have ever agreed to it”).

Riles v. Shell Exploration and Prod. Co., 298 F.3d 1302, 1313 (Fed. Cir. 2002) (reasonable royalty 31

determination “must relate to the time infringement occurred, and not be an after-the-fact assessment.”);

Unisplay S.A. v. American Elec. Sign Co., 69 F.3d 512, 518 (Fed. Cir. 1995) (rejecting a royalty based

on evidence of likely value at time of trial). 

Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1081 (Fed. Cir. 1983).

32

166

Courts invoke the hypothetical negotiation framework when calculating reasonable royalty

damages. The seminal case, Georgia-Pacific Corp. v. United States Plywood Corp., described the

proper measure of such damages: “The amount that a licensor (such as the patentee) and a

licensee (such as the infringer) would have agreed upon (at the time the infringement began) if

both had been reasonably and voluntarily trying to reach an agreement.” The case law

27

recognizes that the central tenet of this framework is the willing licensor/willing licensee model,

under which the awarded amount must be acceptable to both parties. The royalty must

28

adequately compensate the patentee for permitting the use and still leave the infringer an

appropriate level of anticipated profits from using the invention. As discussed below, however,

29

some recent cases seem to reject or ignore that the requirement of a willing licensee places an

upper bound on reasonable royalty damages.30

Courts apply two assumptions when implementing the hypothetical negotiation. First, the

finder of fact must assume that the hypothetical negotiation takes place at the time the

infringement began. This timing determines the information available to the parties during the

negotiation. Thus, in setting a reasonable royalty rate, considerations such as the infringer’s

31

expected profit and available alternatives are “to be determined not on the basis of a hindsight

evaluation of what actually happened, but on the basis of what the parties to the hypothetical

license negotiations would have considered at the time of the negotiations.” Subsequent events 32

may be considered as evidence (a “book of wisdom”) shedding light on the expectations that
Sinclair Refining Co. v. Jenkins Petroleum Co., 289 U.S. 689, 698 (1933) (post-infringement evidence 33

represents a “book of wisdom” providing “[e]xperience [that] is then available to correct uncertain

prophecy”).

See, e.g., Lucent Techs., 580 F.3d at 1325 (“The hypothetical negotiation also assumes that the asserted 34

patent claims are valid and infringed.”).

See Rite-Hite Corp. v. Kelley Co., 774 F. Supp. 1514, 1535 (E.D. Wis. 1991) (“In negotiating a 35

settlement, the typical patentee is constrained by the risk and expense of litigating a patent suit. Risk and

expense are not factors in the hypothetical royalty negotiation, because the patentee is presumed to know

that the patent is valid and infringed.”), aff’d in part, vacated in part on other grounds, 56 F.3d 1538,

1554 (Fed. Cir. 1995) (en banc).

Cotter at 85 (2/11/09). See also id. at 83-85; Thomas F. Cotter, Patent Holdup, Patent Remedies, and

36

Antitrust Responses, 34 J. CORP. L. 1151, 1182-83 & n.156 (2009).

167

would have guided the parties during negotiation, but the focus remains on the value at the time

33

infringement began.

Second, courts require the finder of fact to assume that at the time of the negotiation the

parties know with certainty that the patent is valid and infringed by the defendant’s product or

process. This assumption ensures that the patentee, having incurred the risk and burden of trial

34

and prevailed, is fully compensated. As one panelist explained, if the hypothetical negotiation 35

incorporated the risk that the patentee might lose on liability, the damages award would

effectively “discount[] twice for the legal risk.” The patentee would have run the legal risk once

by going through trial to a judgment, and then had its recovery discounted by the legal risk in the

determination of the reasonable royalty.36

IV. CONCERNS WITH THE HYPOTHETICAL NEGOTIATION FRAMEWORK

As discussed in Chapter 4, the goal of compensatory damages is to put the patentee in the

position it would have been but for the infringement by providing the market reward for the

invention. The case law rightly equates this goal with the statutory mandate that the patentee

receive “damages adequate to compensate for the infringement.” The law allows a patentee to

show lost profits caused by the infringement. And, as discussed in Chapter 5, the law should

allow patentees flexibility in creating the “but for” world so that they can be fully compensated. 

However, when a patentee fails to prove lost profits caused by infringement, his legal

redress is limited to compensation for the lost opportunity to license the infringer. It is the return

available from the right to license the patent that is injured in this case, not the return from the

exclusive opportunity to sell a product incorporating the patented invention. A patentee who

would not have lost sales or suffered other direct damages from infringement would rationally
The negotiated royalty between the patentee and licensee (hypothetical or otherwise) may be less than

37

the maximum amount the licensee is willing to pay, depending on the bargaining power of the parties.

See SUZANNE SCOTCHMER, INNOVATION AND INCENTIVES 137 (2004).

See Chapter 7, Section III.A. 38

H. M. Stickle v. Heublein, Inc., 716 F.2d 1550, 1563 (Fed. Cir. 1983); see also, King Instruments Corp. 39

v. Perego, 65 F.3d 941, 951 n.6 (Fed. Cir. 1995) (listing “discretionary awards of greater than a

reasonable royalty” as one response to the problem of inadequate reasonable royalty awards); but see

Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 1579-80 (Fed. Cir. 1996) (rejecting augmentation of a

reasonable royalty damage award to cover litigation expenses). 

Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1109-10 (Fed. Cir. 1996). The court also described the jury 40

verdict as consistent with a reasonable royalty. Id. at 1110.

Mark A. Lemley, Distinguishing Lost Profits from Reasonable Royalties, 51 WM. & MARY L. REV. 655, 41

666-67 (2009) (identifying the damages calculation in the H.M. Stickle and Maxwell cases as

“problematic”); Brian J. Love, The Misuse of Reasonable Royalty Damages as a Patent Infringement

Deterrent, 74 MO. L. REV. 909, 920 (2009) (criticizing Maxwell decision for allowing damage award that

was double what a jury identified as a reasonable royalty).

168

want to license the patent at the maximum rate the infringer would pay. That rate will not be 37

more than the incremental value of the invention compared to available alternatives because, at

higher rates, the infringer would choose an alternative. A patentee would be unwilling to 38

license at this rate only if it expected greater returns from marketing the invention itself. But in

that case, the patentee would have a claim to lost profits. Thus, absent proof of lost profits

caused by infringement, the appropriate measure of compensatory damages is the hypothetical

negotiation amount between a willing licensor and willing licensee.

Despite this reasoning, two lines of cases allow or comment favorably on damage awards

that arguably added to or exceeded a reasonable royalty determined using the hypothetical

negotiation framework. In the first line of cases, the Federal Circuit affirmed awards adding to

the hypothetical negotiation amount. In H.M. Stickle v. Heublein, the court stated that a “trial

court may award an amount of damages greater than a reasonable royalty so that the award is

‘adequate to compensate for the infringement.’” In Maxwell v. J. Baker, Inc., the court upheld a 39

damage award where the district court had instructed the jury to determine two awards – a

reasonable royalty award based on the hypothetical negotiation, and an additional award to the

extent needed to provide “adequate compensation.” The opinions do not, however, describe the 40

economic basis of any harm that the patentee might have suffered for which compensation is

required beyond the absence of royalty payments for the infringing use.41

A second line of cases purports to apply the hypothetical negotiation framework, but

arguably allows damage awards exceeding amounts to which a willing licensee would have
One commentator notes that “recent cases have highlighted that, as a legal matter, reasonable royalty 42

awards may exceed the amount the parties would have agreed to” in the hypothetical negotiation. He

explains that such “decisions make no economic sense.” Cotter, supra note 36, at 1185 n.163 (citing

Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359 (Fed. Cir. 2008)), Golight, Inc. v. Wal-Mart Stores,

Inc., 355 F.3d 1327 (Fed. Cir. 2004), and Monsanto Co. v. Ralph, 382 F.3d 1374 (Fed. Cir. 2004)). See

also Amy L. Landers, Let the Games Begin: Incentives to Innovation in the New Economy of Intellectual

Property Law, 46 SANTA CLARA L. REV. 307, 347-354 (2006) (describing Ralph and Golight cases as

ignoring constraints that the requirement of a willing licensor should place on damage awards); Love,

supra note 41, at 918-19 (criticizing Monsanto cases for awarding inflated damages that were higher than

the purchase price of seeds).

355 F.3d 1327 (Fed. Cir. 2004). 43

Id. at 1338 (quoting State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir.1989)) 44

(rejecting defendant’s contention that the royalty award “left Wal-Mart selling the accused product well

below cost” and “should be capped at . . . Wal-Mart’s profit forecast for the product,” and explaining that

defendant’s evidence showed what it “might have preferred to pay, which is not the test for damages.”).

See also Mars, 527 F.3d at 1373 (stating “an infringer may be liable for damages . . . that exceed the

amount that the infringer could have paid to avoid infringement” and rejecting counter-argument as

“wrong as a matter of law”); Chapter 7, Section III.A (discussing Mars and the role of alternative

technologies in the hypothetical negotiation).

Monsanto Co. v. McFarling, 488 F.3d 973, 978-81 (Fed. Cir. 2007) (affirming $40 royalty per bag of 45

soybean seed costing between $26 and $29); Monsanto Co. v. Ralph, 382 F.3d 1374, 1384 (Fed. Cir.

2004) (affirming royalties of $52-55 per bag of soybeans). The court applied the reasonable royalty

damage award in both cases to every bag of infringing seed replanted over a two-year period of

infringement. The royalty was based on a single planting of infringing seeds, so it did not encompass the

right to save and grow multiple generations of seeds. Thus, the damages royalty is analogous to the

purchase of a bag of seed and not an unlimited license to grow multiple generations of seed. McFarling,

488 F.3d at 977, 981; Ralph, 382 F.3d at 1383 (describing damage award of $52-55 per bag of saved seed

as “reasonable royalties for licenses to save and replant for a single year”).

See additional discussion of Ralph in Section IV.A., infra.

46

169

agreed. In Golight, Inc. v. Wal-Mart Stores, Inc., the Federal Circuit affirmed a reasonable 42 43

royalty award that was nearly four times greater than the infringer’s forecasted profit. The court

explained that “‘[t]here is no rule that a royalty be no higher than the infringer’s net profit

margin.’” In Monsanto v. McFarling and Monsanto v. Ralph, the Federal Circuit affirmed a 44

single use royalty rate that made it more expensive for a farmer to save infringing soybean seeds

from crops that he grew and replant them than it would have been to buy new seeds and plant

those. Certainly a willing licensee farmer would reject that licensing offer and buy new seeds 45

instead.46

The cases identify two concerns that may motivate courts to allow damage awards beyond

what a willing licensor and licensee would have agreed to in a hypothetical negotiation: the

counterfactual nature of the hypothetical negotiation and the insufficient deterrent to

infringement provided by reasonable royalty damages. As described below, these concerns do
Panelists worried about the ability of factfinders to implement the hypothetical negotiation. See, e.g.,

47

Rooklidge at 157-58 (5/5/09) (discussing how results from mock trials suggested that juries were not

constrained by the structure of the hypothetical negotiation in setting an award); Robinson at 146

(2/11/09) (asking "whether th[is] artificial legal construct really resonates to a typical juror"); Thomas at

146 (12/5/08) (“One of the big questions now is: Is th[e hypothetical negotiation] framework essentially

useless?”).

Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 (Fed. Cir. 1995) (en banc).

48

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978).

49

See Roger D. Blair & Thomas F. Cotter, Rethinking Patent Damages, 10 TEX. INTELL. PROP. L. J. 1, 76

50

(2001); Vincent E. O’Brien, Economics and Key Patent Damages Cases, 9 U. BALT. INTELL. PROP. L.J.

1, 27 (2000) (criticizing Rite-Hite for justifying a high royalty on the basis that the patentee did not wish

to grant a license).

170

not justify inflating the reasonable royalty award beyond the maximum amount a willing licensee

would have paid, assuming a valid and infringed patent. Doing so can overcompensate patentees

by awarding more than the economic value of the invention, which leads to the problems

described in Chapters 2 and 4.

A. The Counterfactual Nature of the Hypothetical Negotiation

The case law and some commentators and panelists worry that, due to its counterfactual

nature, the hypothetical negotiation is unreliable. The Federal Circuit has characterized the 47

notion of a voluntary agreement between parties in litigation as “absurd,” and “a pretense that 48

the infringement never happened.” Indeed, the fact that the parties have litigated the matter 49

through trial is evidence of their inability to reach agreement on payments for use of the patented

technology. These points are of course true, and they raise many practical issues for

implementing the hypothetical negotiation, which are discussed in Chapter 7. Determining an

accurate reasonable royalty award to fully compensate a patentee can be very difficult. But the

fact that the parties litigated through trial rather than reaching a licensing agreement does not

justify giving short shrift to the willing licensor/willing licensee model or inflating reasonable

royalty damages beyond the economic value of the invention.

There are two reasons why the parties may have failed to reach agreement before trial

where both otherwise would have been open to a licensing arrangement. Neither should

undermine the hypothetical negotiation analysis. First, one or both parties could have had

unrealistic expectations about the likely size of the reasonable royalty award. The patentee may

overvalue the invention, or the infringer may undervalue it. Since one would expect a license in

this situation but for one party’s imperfect information, it is appropriate for the court to award a

reasonable royalty based upon information offered by the parties about the value of the invention. 

It falls to the court to set the award based on the expectations of more realistic negotiators.50
See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009) (“The hypothetical

51

negotiation also assumes that the asserted patent claims are valid and infringed.”).

See discussion of Monsanto Co. v. Ralph, infra notes 59-63. 52

SKENYON et al., supra note 25, § 3:2 at 3-3. 53

SKENYON et al., supra note 25, § 3:5 at 3-18. These include a number of cases in which the award was 54

a substantial percentage of the revenues from the infringing sales. SmithKline Diagnostics, Inc. v.

Helena Labs. Corp., 926 F.2d 1161, 1168 (Fed. Cir. 1991) (refusing to award a competing patentee lost

profits but upholding a reasonable royalty award of 25% of the infringing product’s sales price); Minco,

Inc. v. Combustion Eng’g, Inc., 95 F.3d 1109, 1119 (Fed. Cir. 1996) (emphasizing that the patentee and

infringer “competed head-to-head” in awarding reasonable royalty of 20% of the infringer’s sales price

for sales beyond 95% of the patentee’s production capacity).

SKENYON et al., supra note 25, § 3:2 at 3-3. 55

Lemley, supra note 41, at 661-69. As discussed in Chapter 5, the law of lost profits must be flexible in 56

allowing patentees to demonstrate the harm caused by infringement. Rigid rules that reject claims to lost

profits damages based on a lack of precision in proving the amount of damages, rather than entitlement to

them, undermines the ability of damages law to fully compensate patentees. See id. at 657-61.

171

Second, even if the parties had similar views on the value of the invention, they may have

had very different views on the validity and infringement of the patent that made them unable to

compromise on a litigation risk discount for the reasonable royalty. Again, it appropriately falls

to the court to resolve the patent merits and award damages based on ascertained validity and

infringement. The parties’ failure to reach agreement in either circumstance does not make it 51

necessary to supplement the hypothetical negotiation amount or award more than a willing

licensee would pay (assuming validity and infringement) to fully compensate the patentee.

Another important source of courts’ unease with the willing licensor/willing licensee

model is a concern that the patentee would never accept the maximum royalty the infringer

would have paid in a hypothetical negotiation. In some cases, courts have been willing to

determine reasonable royalty damages based on what the patentee would have accepted with less

concern for what the infringer would pay. That might happen when the patentee could make 52

more selling the invention exclusively than through licensing, but the patentee fails to prove lost

profits or chooses not to. One treatise explains that “in the vast majority of damage cases today,

the reasonable royalty damages awarded are rarely the ‘floor’ represented by a negotiated

royalty.” The Federal Circuit, the treatise continues, “routinely affirms ‘reasonable royalty 53

awards’ that are obviously well in excess of what the parties would have actually” negotiated.54

Arguably, in these circumstances, the court considers a “reasonable royalty” as not just the award

based on the hypothetical negotiation, but as “the money awarded to the patent owner (however it

is computed)” in cases where “the patent owner is unable to prove actual damages (i.e. lost

profits).” One commentator posits that courts have expanded reasonable royalty damages 55

beyond the hypothetical negotiation amount in order to adequately compensate patentees that fail

to meet overly rigorous requirements for proving lost profits damages. 

56
One commentator has asserted that some patentees that have lost profits claims choose to pursue 57

reasonable royalty damages in hope of a larger award. Lemley, supra note 41, at 667-68. “Reasonable

royalty has now become the more prevalent measurement of damages.” Levko at 19 (2/11/09); Aron

Levko, 2009 Patent Damages Study: Preliminary Results 9, presented at FTC Hearing: The Evolving IP

Marketplace (Feb. 11, 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/feb11/docs/alevko.pdf (reporting that reasonable

royalties account for 54% of awards since 2000, an increase over prior years).

Lemley, supra note 41, at 667-68 (“By importing compensation concepts from lost profits into the 58

reasonable royalty context without importing the strict elements of proof, these courts have turned the

reasonable royalty from a floor on patent damages designed to avoid undercompensation into a windfall

that overcompensates patentees.”).

382 F.3d 1374 (Fed. Cir. 2004).

59

Ralph did argue that lost profits were shown and those should have been the measure of damages. The 60

court did not respond to this argument. Id. at 1383.

Id. at 1377-79; see n.45, supra.

61

172

Concerns about compensating unproven lost profits damages should not be allowed to

inflate a reasonable royalty damage award beyond the maximum amount that a willing licensee

would have paid. Arguments that the patentee would reject that maximum amount are based on

an assumption that the patentee could have made more by not licensing, which means it sold a

product. But if the patentee were better off selling or licensing the invention exclusively, it

should be entitled to damages based on lost profits. When a patentee has failed or chosen not to

prove its lost profits, allowing amorphous or unproven claims of harm to override the 57

hypothetical negotiation’s requirement of a willing licensee risks damage awards that are

unconnected to the economic value of the invention. This result misaligns the patent system 58

and competition policy by overcompensating patentees compared to a market absent

infringement.

Monsanto v. Ralph illustrates how reasonable royalty calculations that reject the 59

requirement of a willing licensee can overcompensate patentees whose harm is better measured

through lost profits. Monsanto developed and patented a series of “Roundup Ready” seeds that it

sold to farmers with the restriction that they not save and replant harvested seeds. Ralph did just

that, however, and infringed Monsanto’s patents. Each time the farmer replanted a bag of saved

seed, Monsanto and its distributors lost a sale. Thus, satisfying patent law’s overarching goal of

putting Monsanto in the position it would have been but for the infringement should have

involved calculating its lost profits based on the number of saved bags. In spite of this, 60

Monsanto pursued, and the Federal Circuit affirmed, a reasonable royalty damage award of about

$55 applied to each bag of saved infringing soybean seed. That royalty significantly exceeded

the approximately $25 cost per bag of new seed, the amount a willing licensee would have paid

and, presumably, any profits that Monsanto lost due to the infringement. 

61
Id. at 1384. 62

Ralph argued that the reasonable royalty awarded exceeded his anticipated profits and violated the 63

hypothetical negotiation framework. The Federal Circuit rejected that argument: “[A]lthough an

infringer’s anticipated profit from use of the patented invention is among the factors to be considered in

determining a reasonable royalty, the law does not require that an infringer be permitted to make a

profit.” Id. at 1383.

174 F.3d 1294 (Fed. Cir. 1999).

64

Id. at 1308. 65

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978).

66

173

The court reached this result by accepting the “limits” of the hypothetical negotiation

where Monsanto was unwilling to license farmers to save and replant seed “at any price.” 

62

Those limits freed the court to affirm a reasonable royalty award without concern for whether a

willing licensee would have paid it. But the impossibility of identifying a bargain between a 63

willing licensor and willing licensee in this case stems not from a flaw in the hypothetical

negotiation framework, but from the fact that lost profits are the more appropriate measure of

damages for patentees that wish to market their inventions exclusively rather than license them.

 

In at least one case, Rodime v. Seagate, the Federal Circuit rejected a patentee’s attempt 64

to incorporate unproven direct harm into a reasonable royalty calculation. The patentee, Rodime,

sought consequential business damages beyond the reasonable royalty amount. The patentee

argued that the infringer’s refusal to take a license deprived it of a revenue stream that would

have prevented bankruptcy. The court explained that allowing both consequential business

damages and reasonable royalty damages would be improper: “The ‘consequential damages’

Rodime [the patentee] seeks are merely a species of lost profits. Having elected to pursue only a

reasonable royalty, Rodime cannot, in the district court’s words, ‘bootstrap evidence of its lost

profits back into the case by reference to ‘reasonable royalties.’” Courts should not allow such 65

“bootstrapping” to support reasonable royalty awards beyond what a willing licensee would pay

in the hypothetical negotiation.

B. Deterrents to Infringement

Closely related to the concern about the counterfactual nature of the hypothetical

negotiation is the worry that reasonable royalty damages do not deter infringement, but rather

allow a patentee’s competitor to simply “elect[] to infringe” and thereby “impose a ‘compulsory

license.’” The case law explains that “the infringer would have nothing to lose, and everything 66

to gain [from choosing to infringe] if it could count on paying only the normal, routine royalty
H.M, Stickle v. Heublein, Inc., 716 F.2d 1550, 1563 (Fed. Cir. 1983) (quoting Panduit, 575 F.2d at 67

1158). 

Ralph, 382 F.3d at 1384 (“the ‘imposition on a patent owner who would not have licensed his invention 68

for [a given] royalty is a form of compulsory license, against the will and interest of the person wronged,

in favor of the wrongdoer’”) (quoting Rite-Hite, 56 F.3d at 1554 n.13) (en banc). 

See generally Love, supra note 41.

69

See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009) (“The hypothetical

70

negotiation also assumes that the asserted patent claims are valid and infringed.”).

King Instruments Corp. v. Perego, 65 F.3d 941, 951 n.6 (Fed. Cir. 1995) (“Such an increase, which may 71

be stated by the trial court either as a reasonable royalty for an infringer . . . or as an increase in the

reasonable royalty determined by the court, is left to its sound discretion.”) (quoting H.M. Stickle, 716

F.2d at 1563).

In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007) (en banc) (“[T]o establish willful 72

infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an

objectively high likelihood that its actions constituted infringement of a valid patent . . . . If this

threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined

risk . . . was either known or so obvious that it should have been known to the accused infringer.”).

174

non-infringers might have paid.” Some cases contain overtones of punishing infringers even 67 68

though compensatory damages for the strict liability offense of infringement are not meant to be

punitive. This argument ignores several other deterrents to infringement incorporated within the

patent system, and it presents an inappropriate reason to inflate reasonable royalty awards beyond

the market reward for the invention.69

First, the argument incorrectly assumes that damages following trial will be the “normal,

routine royalty.” The law, however, requires that the hypothetical negotiation amount

incorporate the assumption that the patent is valid and infringed. Therefore, a reasonable 70

royalty should be higher following trial than it would have been before because uncertainties

regarding liability have been resolved. Regular licensees would have bargained for a royalty rate

reflecting a discount for the probability that they would not have been found liable. The higher

royalty paid following litigation will provide some deterrent to infringement and encourage

settlement. The cases sometimes call for an “infringer’s royalty.” A royalty that is higher than 71

established rates because liability is ascertained is appropriate, but inflating damage awards for

other reasons unrelated to economic proof is not.

Second, the primary mechanism for deterring intentional infringement is the award of

enhanced damages and attorneys fees for willful infringement, which target only intentional and

not inadvertent infringement. Attempts to adjust compensatory damages to increase their 72

deterrence value risks making such damages punitive, which is inappropriate for the strict

liability offense of infringement in a patent system that suffers from significant uncertainty and
Rooklidge at 180 (5/5/09). 73

See Chapter 8, Section IV.B. 74

547 U.S. 388 (2006). 75

Innovation Alliance Comment at 10 (2/5/09); Maghame at 233 (2/11/09) (representative of R&D firm

76

expressing concern “that injunctions may no longer be available in a lot of instances”); Lasersohn at 183-

84 (2/11/09) (venture capitalist representative stating that “the fact that injunctive relief is less available

is a huge issue for us”).

See Chapter 8, Section II.B. See also eBay, 547 U.S. at 393 (explicitly warning against an analysis that 77

would automatically deny injunctions to patentees that do not practice the invention).

Underweiser at 219-21 (2/11/09); see also Cotter at 41 (2/11/09). 78

Loeb at 224-25 (2/11/09); Lasersohn at 232 (2/11/09); O’Brien at 174 (5/5/09). 79

175

lack of notice. That result could lead to the market distortions of overcompensation discussed in

Chapters 2 and 4 and deter innovation by potential targets of infringement suits.

Third, other significant costs and risks of infringement deter intentional infringement and

provide motivation to avoid inadvertent infringement. Infringement can lead to substantial

litigation costs, including potentially onerous discovery demands and business uncertainty.73

Moreover, the threat of an injunction provides an especially significant deterrent to knowing

infringement. If an adjudged infringer has sunk costs into research and development, or a plant

and equipment, to produce the infringing product, it risks losing that investment if it cannot

obtain a license.

74

Some participants raised the concern that, in the wake of the Supreme Court’s eBay, Inc.

v. MercExchange, LLC decision, permanent injunctions will no longer be available to firms that 75

do not practice their patents, and therefore provide less of a deterrent to infringement. As 76

discussed in Chapter 8 and Appendix B, a careful review of the cases demonstrates that the

injunction analysis is more refined and nuanced than this argument suggests, allowing nonmanufacturing patent owners to obtain injunctions in many scenarios. Moreover, Chapter 8 77

advocates an injunction analysis that supports the deterrence value of injunctions. Thus, the

change in injunction law brought by eBay and other concerns that reasonable royalty damages do

not deter infringement cannot justify awarding damages beyond the amount resulting from the

hypothetical negotiation analysis.

V. CONCLUSION AND RECOMMENDATION

The construct of a hypothetical, voluntarily negotiated agreement is widely used in

reasonable royalties determinations. Several panelists agreed that it was a “useful tool,” and 78

perhaps there is no “alternative that is any better.” The willing licensor/willing licensee model

79

can provide a patentee with the market reward based on the economic value of the invention by
176

determining the bargain the parties would have struck in light of competition from alternatives. 

Admittedly, the calculation is difficult due to its hypothetical nature. But as discussed in Chapter

7, courts and the parties can bring greater economic discipline to this analysis, thereby enhancing

its usefulness as a tool for determining the market reward.

Recommendation. The Commission recommends that courts award reasonable

royalty damages consistent with the hypothetical negotiation analysis and willing

licensor/willing licensee model. Concerns about punishing infringement,

deterring infringement, the counterfactual nature of the analysis or unproven lost

profits that the patentee may have suffered should not inflate the reasonable

royalty damage award beyond what a willing licensee would have paid for a

patent known to be valid and infringed. Doing so risks awarding patentees more

than the economic value of their inventions compared to alternatives and creating

problems of overcompensation and market distortion.
177

CHAPTER 7

CALCULATING REASONABLE ROYALTY DAMAGES

I. INTRODUCTION ................................................... 179

II. OVERVIEW OF THE GEORGIA-PACIFIC FACTORS AND THEIR

IMPLEMENTATION. ................................................ 179

A. The Factors. ................................................... 179

B. Reactions to the Georgia-Pacific Factors. ........................... 181

C. The Role of the Georgia-Pacific Factors. ........................... 183

III. THE ROLE OF ALTERNATIVE TECHNOLOGIES. . . . . . . . . . . . . . . . . . . . . . 185

A. Competition from Alternatives Defines a Cap for Reasonable Royalty

Damages. ..................................................... 185

1. Case Law Addressing Alternatives

B. The Timing of the Hypothetical Negotiation.. . . . . . . . . . . . . . . . . . . . . . . . 189

C. Consideration of Alternative Technologies When Establishing a 

Reasonable Royalty Applied to Standards. . . . . . . . . . . . . . . . . . . . . . . . . . 191

IV. COURTS’ GATEKEEPING ROLE IN REASONABLE ROYALTY DAMAGES

CASES . ............................................................ 194

A. The Role of Judge as Gatekeeper for Expert Testimony. . . . . . . . . . . . . . . . 195

B. The Need to Apply Gatekeeping to Reasonable Royalty Evidence. . . . . . . . 196

C. Applying FRE 702 in Two Methodologies of Damages Calculations. . . . . 199

1. Comparable Licenses and Averages

2. Rule-of-Thumb Evidence
178

V. CHOOSING THE ROYALTY BASE. ................................... 204

A. The Entire Market Value Rule Applied to Reasonable Royalties.. . . . . . . 205

B. The EMVR is Irrelevant When Choosing a Base. . . . . . . . . . . . . . . . . . . . . 207

C. Practical Problems When the EMVR is Applied to 

Reasonable Royalties. ........................................... 209

D. Identifying the Base. ............................................ 211

VI. CONCLUSION. ..................................................... 212
Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970),

1

modified and aff’d, 446 F.2d 295 (2d Cir. 1971); see also JOHN M. SKENYON, CHRISTOPHER S.

MARCHESE & JOHN LAND, PATENT DAMAGES LAW AND PRACTICE § 3:6, at 3–25 (2008) (hypothetical

negotiation is “almost always” based on Georgia-Pacific factors). 

179

CHAPTER 7

CALCULATING REASONABLE ROYALTY DAMAGES

I. INTRODUCTION

The goal of a reasonable royalty damages calculation is to replicate the market reward

(assuming a valid and infringed patent) for the invention in the absence of infringement for a

patentee that would not have, or cannot prove that it would have, made the infringer’s sales. As

discussed in Chapter 6, the proper measure of damages in this case depends on what a willing

licensee and licensor would have agreed to in a hypothetical negotiation. 

Accurately calculating reasonable royalty damages based on a hypothetical negotiation

presents numerous challenges for litigants and courts. An economically grounded approach that

reflects an appreciation of the role of competition in establishing the economic value of an

invention would increase the accuracy of that determination. Such analysis is important for

avoiding undercompensation of patentees, which can undermine incentives to innovate and

discourage innovation models based on technology transfer, as described in Chapter 1. Accurate

damage determinations are also important for avoiding overcompensation of patentees, which

can distort competition among technologies and deter innovation by raising costs and risks for

innovators, as described in Chapters 2 and 4. This Chapter suggests several steps courts should

take to increase the accuracy of reasonable royalty damage awards. They include: treating the

Georgia-Pacific factors appropriately; recognizing that alternatives cap the royalty a willing

licensee would pay; excluding unreliable expert testimony from evidence; and eliminating the

entire market value rule.

II. OVERVIEW OF THE GEORGIA-PACIFIC FACTORS AND THEIR

IMPLEMENTATION

A. The Factors

Awards of reasonable royalty damages typically have been based on a list of 15 factors

identified by the district court in the Georgia-Pacific case. Factor 15 is the hypothetical 1

negotiation amount and the other 14 factors list categories of evidence. The factors are:

1. The royalties received by the patentee for the licensing of the patent in suit, proving or

tending to prove an established royalty.

2. The rates paid by the licensee for the use of other patents comparable to the patent in

suit.
180

3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or

non-restricted in terms of territory or with respect to whom the manufactured product

may be sold.

4. The licensor’s established policy and marketing program to maintain his patent

monopoly by not licensing others to use the invention or by granting licenses under

special conditions designed to preserve that monopoly.

5. The commercial relationship between the licensor and licensee, such as, whether they

are competitors in the same territory in the same line of business; or whether they are

inventor and promoter.

6. The effect of selling the patented specialty in promoting sales of other products of the

licensee; that existing value of the invention to the licensor as a generator of sales of his

non-patented items; and the extent of such derivative or convoyed sales.

7. The duration of the patent and the term of the license.

8. The established profitability of the product made under the patent; its commercial

success; and its current popularity.

9. The utility and advantages of the patent property over the old modes or devices, if any,

that had been used for working out similar results.

10. The nature of the patented invention; the character of the commercial embodiment of

it as owned and produced by the licensor; and the benefits to those who have used the

invention.

11. The extent to which the infringer has made use of the invention; and any evidence

probative of the value of that use.

12. The portion of the profit or of the selling price that may be customary in the particular

business or in comparable businesses to allow for the use of the invention or analogous

inventions.

13. The portion of the realizable profit that should be credited to the invention as 

distinguished from non-patented elements, the manufacturing process, business risks, or

significant features or improvements added by the infringer.

14. The opinion testimony of qualified experts.

15. The amount that a licensor (such as the patentee) and a licensee (such as the

infringer) would have agreed upon (at the time the infringement began) if both had been

reasonably and voluntarily trying to reach an agreement.
RICHARD F. CAULEY, WINNING THE PATENT DAMAGES CASE: A LITIGATOR’S GUIDE TO ECONOMIC 2

MODELS AND OTHER DAMAGE STRATEGIES 6–7 (2009).

JOHN W. SCHLICHER, PATENT LAW: LEGAL AND ECONOMIC PRINCIPLES § 13:146 (1992).

3

See, e.g., Minks v. Polaris Indus., Inc., 546 F.3d 1364, 1372 (Fed. Cir. 2008) (“A determination of the 4

royalty stemming from a hypothetical negotiation is often made by assessing factors such as those set

forth in Georgia-Pacific . . . .”).

See, e.g., Skenyon at 103 (2/11/09); Mitchell G. Stockwell, Implementing eBay: New Problems in 5

Guiding Judicial Discretion and Enforcing Patent Rights, 88 J. PAT. & TRADEMARK OFF. SOC’Y 747, 759

n.58 (2006) (“Many standard jury instructions for determining a reasonable royalty reference the

multi-factor test set forth in Georgia-Pacific . . . .”); see also Pattern Jury Instructions: Fifth Circuit,

Civil Cases § 9.8 (Comm. on Pattern Jury Instructions Dist. Judges Ass’n Fifth Circuit 2006) (citing the

Georgia-Pacific factors) available at http://www.lb5.uscourts.gov/juryinstructions/fifth/2006CIVIL.pdf;

Uniform Jury Instructions for Patent Cases in the United States District Court for the District of

Delaware Instruction 6.11 (1993) (Factors for Determining Reasonable Royalty) (repeating the

Georgia-Pacific factors); Am. Intell. Property Law Ass’n, Model Patent Jury Instructions, 45–47 (listing

substantially all of the Georgia-Pacific factors and “[a]ny other economic factor that a normally prudent

business person would, under similar circumstances, take into consideration in negotiating the

hypothetical license.”). But cf. Model Patent Jury Instructions for the Northern District of California

(Nov. 29, 2007), available at http://www.cand.uscourts.gov/filelibrary/5/Model-Patent-JuryInstructions.pdf (citing Georgia-Pacific but not listing factors and advising jury to use the general

hypothetical negotiation framework applying the evidence presented). 

Brian C. Riopelle, Direct and Cross-examination of a Damages Expert, 766 PLI/Pat 781, 806 (2003) (to

6

“bolster [a damages expert’s] credibility . . . he should say he considered all the factors set forth in the

Georgia-Pacific case”).

Loeb at 180 (2/11/09); Johnson at 244 (2/11/09); Rhodes at 166 (2/11/09); PhRMA Comment at 16 7

(2/10/09); Innovation Alliance Comment at 11 (2/5/09) (“Georgia-Pacific simply restated the basic

principles and methodology that have historically guided courts in matters of patent damages . . . .

[They] are rooted in well-established (and arguably incontrovertible) legal and economic principles of

compensatory damages generally.”).

181

This list has become “virtually codified” by the Federal Circuit, and serves as a

“touchstone” for expert testimony and courts reviewing an award. As one commentator 2

observed, “some courts described the law governing so-called ‘reasonable royalty’ damages

solely by reference to the Georgia-Pacific list.” Courts frequently cite the district court decision 3

as authoritative. Indeed, standard jury instructions often recite a list of all or nearly all of these 4

factors. Expert witnesses often structure testimony around them, and may feel compelled to 5

opine on each factor to protect their overall assessment from attack.6

B. Reactions to the Georgia-Pacific Factors

Several panelists and commentators strongly supported the prominence of the GeorgiaPacific factors in calculating reasonable royalty damages. They identified the factors’ flexibility 7
Maghame at 234 (2/11/09) (“you need the flexibility to do a market based evaluation”); Burton at 77, 94 8

(2/11/09); Levko at 137 (2/11/09); Gauri Prakash-Canjels, Ph.D. Comment at 3 (4/16/09). 

Innovation Alliance Comment at 11 (2/5/09) (flexibility is needed so that “courts and juries . . . [can] 9

consider any and all evidentiary factors that would have been deemed relevant by the parties in a

hypothetical negotiation”); Lasersohn at 231 (2/11/09) (experts rely on the Georgia-Pacific factors

because determining economic value is “complicated,” varying according to company, competitor, and

economic environment); Loeb at 225 (2/11/09).

Rhodes at 237-38 (2/11/09); id. at 166 (“the 15 Georgia-Pacific factors really do replicate [] real world 10

licensing negotiation”); Johnson at 243-44 (2/11/09) (In negotiating hundreds of licenses per year, one

panelist’s firm uses “methodologies that are very much like the Georgia-Pacific factors.”).

Schlicher at 201 (5/5/09) (characterizing the case as a “historical tragedy”); Simon at 243 (2/11/09)

11

(observing that the Second Circuit reduced the award since the Georgia-Pacific district court had failed

to leave an appropriate profit for the infringer).

Leonard at 47 (2/11/09) (calling the Georgia-Pacific factors a “grab bag”); Levine at 37, 132 (2/11/09);

12

Simon at 200 (2/11/09); Chaikovsky at 195 (5/5/09) (describing “the Georgia-Pacific factors where I

have so many factors and anyone can kind of pick or choose”); Verizon Comment at 8 (3/20/2009).

Janicke at 15 (2/11/09). 13

NERA Economic Consulting Comment at 18 (3/9/09).

14

182

as an important benefit. The conditions under which parties enter licensing negotiations vary 8

tremendously, and flexibility is important in properly considering them. The discussions of 9

technology transfer licensing in Chapter 1 and ex post licensing in Chapter 2 illustrate how

licensing covers an extremely diverse range of technology and economic conditions. Several

panelists agreed that the Georgia-Pacific factors allow consideration of issues that would govern

real-world negotiations in a variety of contexts. For instance, one panelist praised the GeorgiaPacific factors as “mirror[ing] a lot of the considerations that take place in actual licensing

negotiations,” and “replicat[ing] what type of dynamic there would be between the patent holder

and one wanting to use the patented invention.”10

Other panelists, however, were highly critical of the Georgia-Pacific case and the manner

in which the factors are used in litigation today. In particular, many argued that the list of 11

factors provides little or no guidance to juries. One panelist stated, “the judge throws the grab 12

bag with all the factors to the jury and says, ‘Do what you think is right.’” Another explained, 13

“Georgia-Pacific provides a list of sometimes overlapping factors (the ‘GP factors’), without

giving a framework in which to evaluate those factors.”14

The lack of guidance and framework in the Georgia-Pacific approach creates two related

problems, according to panelists. First, it permits the patentee to introduce or emphasize

information that leads the jury away from an economically grounded analysis based on facts that
Schlicher at 202 (5/5/09) (emphasizing that the Georgia-Pacific factors permit evidence on the 15

infringer’s total profits and revenue); see also O’Brien at 205 (5/5/09) (Georgia-Pacific “emphasi[zes] []

the profitability of the product” even though “the value of a component has little to do with the

profitability of the product”). Cf. Rooklidge at 192 (5/5/09) (emphasizing the substantial prejudicial

impact of permitting evidence on the “company’s gross revenues or market capitalization”).

McKelvie at 193-94 (12/5/09).

16

Reines at 82 (2/11/09). 17

Doyle at 209 (5/5/09) (declaring that “Georgia-Pacific is notoriously empty of any real meaning here. 

18

It certainly hasn’t led to predictability of results.”).

See infra Section IV.B (describing standards of review for jury verdicts).

19

Cotter at 39 (2/11/09); see also Schlicher at 201 (5/5/09) (“Any rule that says consider 15 things and

20

anything else you think is relevant and arrive at a number permits any number.”); Simon at 200 (2/11/09)

(“[W]hatever a jury comes back [with] can be supported . . . because you can choose all, some or none of

those 15 factors.”).

Several panelists and commentators suggested the need for a conceptual economic framework to guide 21

reasonable royalty calculations. See, e.g., O’Brien at 205 (5/5/09) (“it would be much better having a

conceptual framework . . . as opposed to this list”); Agisim at 254-55 (2/11/09) (“ultimately . . . you need

to create an objective standard”); John W. Schlicher, Patent Damages, the Patent Reform Act, and Better

Alternatives for the Courts and Congress, 91 J. PAT. & TRADEMARK OFF. SOC’Y 19, 46 (2009) (“Factors

are useless without a coherent theory of reasonable royalty damages that enables judges and juries to

understand what they are trying to accomplish by an award and how to go about doing so.”); Levine at 37

(2/11/09) (suggesting courts consider “governing principles”); Leonard at 37 (2/11/09) (“What we really

need is a framework, a conceptually sound and coherent framework that lays out . . . how you do it, and

the valuation principles.”).

183

would have informed the licensing decision. One panelist drew a distinction between the facts 15

necessary to support lost profits and reasonable royalty damages: “[L]ost profits tend[] to be

constrained by the facts, and reasonable royalty isn’t constrained by the facts, but by the

imagination of the expert witness.” Second, the lack of guidance leads to “basically a free for 16

all” in which juries may render highly unreliable awards that courts may not be able to 17 18

overturn, given deferential standards for reviewing jury verdicts. One academic stated, “the 19

Georgia-Pacific factors . . . can be so easily manipulated by the trier of fact to reach virtually

any outcome.” 

20

C. The Role of the Georgia-Pacific Factors

Courts can improve reasonable royalty damages calculations by emphasizing the

hypothetical negotiation and willing licensor/willing licensee model as the conceptual framework

against which conduct of the damages trial should be tested. The first fourteen Georgia-Pacific

21

factors do not supply that conceptual framework. Rather, they are properly understood as a non-
See infra Section II.A for a review of the Georgia-Pacific factors.

22

See Chapter 6.

23

Levine at 37 (2/11/09) (“Sometimes the grab bag of factors is simply presented to the jury, and the 24

jurors have to figure out or sort of divine from that what kind of reward to give.”).

Daralyn J. Durie & Mark A. Lemley, A Structured Approach to Calculating Reasonable Royalties, 14

25

LEWIS & CLARK L. REV. 627, 632 (2010) (“the fifteen-factor test makes it extremely difficult for judges

to review a jury damage award for substantial evidence, either on judgment as a matter of law (JMOL) or

on appeal”).

Schlutz at 132 (5/5/08) (“you’ll have these experts on the plaintiff side versus the defense side and 26

sometimes the difference in their valuation will be a thousandfold”).

184

exhaustive list of categories of evidence potentially relevant to computing a reasonable royalty.22

Evidence within one of these categories may or may not be useful in proving the willing

licensor/willing licensee amount in any particular case. 

An increased emphasis on the hypothetical negotiation, with its requirement of a willing

licensee, and a better appreciation for the appropriate role of the Georgia-Pacific factors will 23

have practical consequences that courts should implement. First, courts should make damages

determinations as the trier of fact or review the sufficiency of jury determinations with a focus on

what a willing licensee and licensor would have agreed to in the hypothetical negotiation. 

Second, as further discussed in section IV of this Chapter, courts should not treat evidence as

reliable and admissible only because it falls into one of the Georgia-Pacific categories. Third,

courts should aid juries with instructions that focus attention on the hypothetical negotiation,

including the requirement of a willing licensee, as the touchstone for their determination. When

jury instructions present a complete or partial list of the Georgia-Pacific factors, they provide

little guidance. Simply admitting evidence that corresponds to any of the Georgia-Pacific

categories and charging the jury to use it to come up with a royalty can lead to confusion for

juries in making awards and difficulty for courts in reviewing them. 24 25

The wide variety of fact scenarios to which the hypothetical negotiation model may apply

counsels for a flexible approach when identifying evidence that may inform that determination. 

However, flexibility must be combined with a framework for testing and using the available

evidence. Without such discipline, the Georgia-Pacific factors provide a grab bag for use by

parties seeking to establish whatever reasonable royalty serves their purposes. Their competing

claims may bear little or no relationship to each other or to a credible effort to implement the

hypothetical negotiation model. Many courts and parties already apply this discipline, but 26

broader application would help increase the accuracy of reasonable royalty damage awards.

Recommendation. Courts should consistently adopt and apply the hypothetical

negotiation and willing licensor/willing licensee model as the conceptual

framework against which conduct of the damages trial is tested. In particular,
It may be that a patentee is only willing to accept an amount that is more than the infringer would pay 27

because the cost of the infringement in terms of lost profits or other direct damages is high. In that case,

the patentee should receive lost profits damages rather than an inflated reasonable royalty damages, as

discussed in Chapters 4 and 6.

RICHARD B. TROXEL & WILLIAM O. KERR, CALCULATING INTELLECTUAL PROPERTY DAMAGES § 5:18 28

at 269 (2009) (determining the value of the patented technology requires a comparison of “the gains that

the infringer expects to receive from using the infringing technology with the gains that would have been

available had the infringer gone forward with the next-best noninfringing alternative”).

See, e.g., Gregory K. Leonard & Lauren J. Stiroh, A Practical Guide to Damages, in ECONOMIC 29

APPROACHES TO INTELLECTUAL PROPERTY POLICY, LITIGATION AND MANAGEMENT 52-58 (Gregory K.

Leonard & Lauren J. Stiroh eds., 2005); cf. Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty

Stacking, 85 TEX. L. REV. 1991, 1995-96 (2007) (analyzing the negotiation of reasonable royalties under

various conditions “[u]sing the standard economic theory of Nash bargaining, [in which] the negotiated

royalty rate depends upon the payoff that each party would obtain if the negotiations break down, i.e., on

each party’s threat point in the licensing negotiations”).

185

courts should recognize that the first fourteen Georgia-Pacific factors provide

only a list of evidence categories. Implementing this recommendation will have a

variety of practical consequences.

III. THE ROLE OF ALTERNATIVE TECHNOLOGIES

The hypothetical negotiation’s assumption of a willing buyer and willing seller depends

on the existence of royalty rates that are acceptable to both parties. From the patentee’s

perspective, the damages must at least cover income that would have been earned but for the

infringement. From the infringer’s point of view, the maximum royalty cannot exceed the 27

increased profits the infringer anticipates based on using the patented invention rather than the

next best alternative. A willing licensee and willing licensor would typically reach a price 28

somewhere within this bargaining range, leaving both to profit from the agreement. Even if 29

that is not the case and the licensee pays the bargaining range’s maximum amount, competition

from alternative technologies plays an important role in establishing the maximum reasonable

royalty. Damages determinations that do not give sufficient weight to competition from

alternatives risk overcompensating patentees and distorting competition, as discussed in Chapters

2 and 4.

A. Competition from Alternatives Defines a Cap for Reasonable Royalty

Damages

In many instances, technologies compete for incorporation into new products, as

discussed in Chapters 1 and 2. Product designers choose technologies based in part on technical

advantages, consumers’ willingness to pay, and costs, some of which may include patent

royalties. For some non-core technologies, a high-tech firm “almost invariably ha[s] another

option at the time” of its “design decision,” which it would choose if a patentee’s royalty demand
Simon at 202-03 (2/11/09) .

30

O’Brien at 173-74 (5/5/09); Fresenius Med. Care Holdings, Inc., v. Baxter Int’l., Inc., No. C 03-01431, 31

2006 WL 1646113, at *2 (N.D. Cal. June 12, 2006) (allowing evidence that the infringer could have

successfully competed without the patented feature, and therefore would not have been willing to pay a

high royalty).

Lance E. Gunderson, Stephen E. Dell & Scott W. Cragun, The “Analytic Approach” as a Technique to 32

Determine a Reasonable Royalty, in ECONOMIC DAMAGES IN INTELLECTUAL PROPERTY: A HANDS-ON

GUIDE TO LITIGATION 181, 182 (Daniel Slottje ed., 2006) (“Generally, the maximum royalty amount that

licensee would be willing to pay is the excess profit licensee would expect to earn from the infringing

products over the return from its [next best alternative].”).

Peter B. Frank, Vincent E. O’Brien & Michael J. Wagner, Patent Infringement Damages, in 33

LITIGATION SERVICES HANDBOOK: THE ROLE OF THE FINANCIAL EXPERT Ch. 22 at 16 (Roman L. Weil,

Peter B. Frank, Christian W. Hughes & Michael J. Wagner eds., 2007).

 Leonard & Stiroh, supra note 29, at 63-64. 34

Cotter at 138 (12/5/09) (“hypothetical bargain . . . should wind up reflecting the expected value of the 35

patented technology in comparison to the next best alternative”); Janicke at 42 (2/11/09) (proposing “the

value added by a particular patent” as the best criterion for reasonable royalties). 

Schlicher, at 230-31 (5/5/09) (“damages ought to be the difference between the profits that a company 36

would have made selling a PDA with that memory chip minus the profits the company would have made

. . . using the next-best kind of memory chip it would have”); cf. Rooklidge at 180 (5/5/09) (suggesting

that “comparing the infringing product to the next-best alternative may very well work in the vast

majority of cases, but in some cases there may be alternate evidence that’s available”).

Gilbert at 221 (5/5/09) (central inquiry is “the incremental contribution [of the patented technology] 37

relative to the next-best noninfringing alternative”); Leonard at 127 (2/11/09) (describing how to estimate

186

was excessive. When substitute technology is not available, a product designer may leave the 30

patented feature off its product if revenues attributable to the feature do not justify the royalty

demand. Thus, at the time a company is designing a product, the incremental value that a 31

patented technology provides over alternatives (including an alternative product that lacks the

patented feature) constrains the royalty. The most a company would be willing to pay for 32

patented technology is the incremental value (i.e., the incremental profit) of the patented

technology over the alternative. 

Because the incremental value of patented technology over alternatives plays such a

crucial role in licensing negotiations, it must play a commensurate role in the hypothetical

negotiation that determines reasonable royalty damages. Commentators explain that evaluating

the available alternatives is “[e]conomically . . . crucial to establishing what the parties would

have agreed to” in the hypothetical negotiation. Indeed, with “sufficient data” the alternative 33

“can be incorporated directly into determining the licensee’s maximum willingness to pay.” 

34

Academics, practitioners, economists, and business representatives acknowledged the 35 36 37 38
“the incremental value that the patented technology gives you as the infringer”); O’Brien at 174 (5/5/09)

(opining that “it’s not necessarily the maximum, but it’s a benchmark”).

PhRMA Comment at 20 (2/10/09); Verizon Communications, Inc. Comment at 9 (3/20/09); Johnson at 38

268 (2/11/09) (a pharmaceutical company representative endorsing “compar[ing] [an invention] with its

closest non-infringing alternate”). 

Burton at 133 (2/11/09); see also id. at 77 (2/11/09) (expressing concern about “proposals that put a 39

single factor first or make that the primary one,” emphasizing that each case is “different, and it’s really

important to be flexible in your analysis”); Rhodes, at 238-39 (2/11/09) (pointing out that the GeorgiaPacific factors include consideration of the added benefit of the patented invention as compared to prior

products, but do constrain the analysis); Lasersohn at 230-32 (2/11/09); Maghame at 258 (2/11/09). 

See, e.g., Leonard & Stiroh, supra note 29, at 52 (explaining that a reasonable royalty “must be one in 40

which both sides benefit from the bargain”).

NERA Economic Consulting Comment at 16 (3/9/09) (describing ways to “determine where within the 41

range the negotiated royalty would fall”); Leonard & Stiroh, supra note 29, at 60 (suggesting that some

Georgia-Pacific factors may be used to assess bargaining power and thus where within the bargaining

range the final royalty would lie).

Georgia-Pacific, 318 F. Supp. at 1120 (“The utility and advantages of the patent property over the old

42

modes or devices, if any, that had been used for working out similar results.”).

187

importance of the value of the patented technology over alternatives to a reasonable royalty

damages analysis. 

Recognizing the key economic role of alternatives does not undermine the flexibility of

an analysis that considers a broad range of factors, including the relevant Georgia-Pacific factors. 

Some panelists argued that value over alternatives should not become a “single factor” test that

unduly inhibits the flexibility of Geogia-Pacific. However, the value of patented technology 39

over alternatives determines only the upper end of a bargaining range, whose lower end is

determined by the amount that the licensor is willing to accept. Other factors, including the 40

Georgia-Pacific factors, may be relevant in constructing the bargaining range and establishing a

royalty within it.

41

1. Case Law Addressing Alternatives

Georgia-Pacific factor nine allows consideration of alternatives. The Federal Circuit 42

has recognized that alternatives represent “a factor relevant to the determination of a proper

royalty during hypothetical negotiations,” explaining that an infringer would be in “a stronger

position to negotiate for a lower royalty rate knowing it had a competitive device ‘in the
Zygo Corp. v. Wyko Corp., 79 F.3d 1563, 1571-72 (Fed. Cir. 1996); see also Total Containment, Inc. v. 43

Environ Products, Inc., Nos. 96-1138, 96-1151, 1997 WL 16032 (Fed. Cir. Jan. 17, 1997) (unpublished

opinion) (observing that “when faced with an unreasonably high license fee for patented technology, the

market players ordinarily opt for ” the technology).

SmithKline Diagnostics, Inc. v. Helena Laboratories Corp., No. Civ.A. B-83-10, 1989 WL 418791, at 44

*6 (E.D. Tex. June 30, 1989) (a willing licensee “would be less inclined to agree to a high royalty

because of the availability of such non-infringing alternatives”); Novozymes A/S v. Genencor Int’l, Inc.,

474 F. Supp. 2d 592, 607 (D. Del. 2007) (parties “would consider available, or soon to be available,

alternatives” in agreeing to a royalty); Fresenius, 2006 WL 1646113, at *2 (alternatives are “a key part”

of damages determination); Cardiac Pacemakers, Inc. v. St. Jude Medical, Inc., No. IP 96-1718-C-H/K,

2002 WL 1801525, at *74 (S.D. Ind. July 5, 2002) (an important factor to consider), aff’d in part, rev’d

in part, and remanded, 381 F.3d 1371 (Fed. Cir. 2004), vacated, 315 Fed. Appx. 273 (Fed. Cir. 2009).

185 F.3d 1341, 1350-51 (Fed. Cir. 1999). This decision was the last in a series addressing the proper

45

remedy in the case. See Grain Processing Corp. v. American Maize-Products Co., 893 F. Supp. 1386

(N.D. Ind. 1995) (finding infringement, denying lost profits, and awarding a reasonable royalty), aff’d in

part, vacated in part, 108 F.3d 1392 (Fed. Cir. 1997) (nonprecedential) (reversing and remanding the

denial of lost profits), further decision on remand, 979 F. Supp. 1233 (N.D. Ind. 1997) (again denying

lost profits and awarding a reasonable royalty), aff’d, 185 F.3d 1341 (Fed. Cir. 1999) (affirming the

denial of lost profits).

Id. at 1347 (describing the district court’s reasoning regarding a reasonable royalty). See also Grain 46

Processing, 893 F. Supp. at 1392-93.

Grain Processing, 893 F. Supp. at 1392-93. The benefits of the license included eliminating the risk 47

that the alternative might have turned out to infringe the patent, which had happened in the infringer’s

initial attempts to design around the patent. Id. Judge Easterbrook also cited evidence of comparable

royalties and emphasized that “[a]s the infringer, AMP must bear the effects of uncertainty” resulting

from the lack of more detailed cost evidence. Id.

188

wings.’” Some district courts have also acknowledged the importance of alternatives to the 43

reasonable royalty analysis.

44

A leading case is Grain Processing Corp. v. American Maize-Products Co. The district 45

court, Judge Frank Easterbrook sitting by designation, held that the cost difference between using

the patented technology and an alternative “effectively capped the reasonable royalty award”

since if the patentee “had insisted on a [greater] rate. . . in the hypothetical negotiations” the

infringer would have adopted the alternative technology. Judge Easterbrook’s award of a three 46

percent royalty represented his “best estimate” of what the parties would have reached in light of

the 2.3% cost saving from the patented technology as well as other cost savings associated with a

hypothetical license agreement. 

47

The parties did not appeal the royalty amount, so the Federal Circuit did not review it. 

However, the appeals court stated that Judge Easterbrook “supported [the] royalty amount with
Grain Processing, 185 F.3d at 1353 n.5.

48

Id. at 1351. 49

527 F.3d 1359 (Fed. Cir. 2008).

50

Id. at 1373. 51

Levine at 73-74 (2/11/09) (explaining that in assessing “the next best alternative . . . [w]hat’s really

52

important if you’re applying that test properly is the timing,” specifically that it not be “after the infringer

has incurred a whole lot of switching costs”); Leonard & Stiroh, supra note 29, at 57-58; Schlicher at

184-85 (5/5/09). 

189

sound economic data and with actual, observed behavior in the market.” The Federal Circuit 48

also explained (in affirming a denial of a lost profit award) that “only by comparing the patented

invention to its next-best available alternative(s) – regardless of whether the alternative(s) were

actually produced and sold during the infringement – can the court discern the market value of

the patent owner’s exclusive right, and therefore his expected profit or reward, had the infringer’s

activities not prevented it from taking full economic advantage of this right.” 

49

In spite of its comments in Grain Processing, the Federal Circuit more recently suggested

that alternatives do not cap reasonable royalty damage awards. In Mars, Inc. v. Coin Acceptors,

Inc., the court stated in dicta that it “is wrong as a matter of law to claim that reasonable royalty 50

damages are capped at the cost of implementing the cheapest available, acceptable, noninfringing

alternative.” The Mars court continued, “to the contrary, an infringer may be liable for 51

damages, including reasonable royalty damages, that exceed the amount that the infringer could

have paid to avoid infringement.” 

Recommendation. Courts should recognize that when it can be determined, the

incremental value of the patented invention over the next-best alternative

establishes the maximum amount that a willing licensee would pay in a

hypothetical negotiation. Courts should not award reasonable royalty damages

higher than this amount.

B. The Timing of the Hypothetical Negotiation

An infringer’s ability to choose alternatives to the patented technology and the cost of

utilizing those alternatives can depend on the timing of the hypothetical licensing negotiation.52

In particular, when designing a product, a potential licensee may make many design choices, after

which it will make investments (e.g., building manufacturing facilities) that depend on those

choices. Costs associated with switching to a different design arise for many reasons, including

the expense of retooling a manufacturing facility or ensuring interoperability with related
The term “switching costs” is used throughout this chapter to refer to the costs that an infringer would 53

incur as a result of switching from its current design to the best alternative, including any costs of

redesign, investments in additional plant or equipment, any difference in incremental production costs,

and any difference in consumers’ willingness to pay for the product.

Scholars and practitioners have analyzed the potential for patentees to extract higher royalties from 54

infringers that face switching costs by threatening an injunction. See Chapter 8, Section IV.B.

The Federal Circuit has acknowledged that the result of the hypothetical negotiation can vary

55

significantly depending on when one assumes it occurred. Integra Lifesciences I, Ltd. v. Merck KGaA,

331 F.3d 860, 869 (Fed. Cir. 2003) (“The correct determination of this date is essential for properly

assessing damages. The value of a hypothetical license negotiated in 1994 could be drastically different

from one undertaken in 1995 . . . .”), vacated on other grounds, 545 U.S. 193 (2005).

Gilbert at 186, 200 (5/5/09) (suggesting that there should be one more factor in determining damage 56

awards “saying something about not attributing value to sunk investments” made by the infringer);

Lemley at 182 (5/5/09) (stating that reasonable royalty negotiations should not permit “somebody to

capture . . . value that’s the result of an irreversible investment made after that technology was chosen”).

Badenoch at 130 (2/12/09) (decision point for hypothetical negotiation should be “decision time for the 57

infringement”); O’Brien at 173 (5/5/09) (“I think if you take it back in then when the decision was made,

you’d get around a lot of” the hold-up problem).

Cotter at 83 (2/11/09). 58

See, e.g., Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1545, 1554 (Fed. Cir. 1995) (en banc) (citing 59

Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078 (Fed. Cir. 1983)).

190

products. As these switching costs increase, the royalty a willing licensee would pay for 53

permission to use the technology and avoid redesign increases. Thus, if the hypothetical 54

negotiation is deemed to take place after switching costs have increased, the reasonable royalty

may be higher than it would have been at the time of the design choice.55

A reasonable royalty damages award that is based on high switching costs, rather than the

ex ante value of the patented technology compared to alternatives, overcompensates the patentee. 

It improperly reflects the economic value of investments by the infringer rather just than the

economic value of the invention. To address this issue, panelists suggested setting the 56

hypothetical negotiation at the time the decision to use the infringing technology was made.

57

For instance, one panelist suggested that the hypothetical negotiation be made “more rational and

more predictable” by framing the question to the jury as: “What is the projected economic value

to the defendant of using this technology in light of the other possible alternatives before

incurring the [sunk] costs?” The case law on damages places the hypothetical negotiation at 58

“the time infringement began” but does not precisely define that point in time. 59
This analysis is consistent with infringement case law holding that early stage product development is

60

sufficient for infringement liability. Roche Prods., Inc. v. Bolar Pharms. Co., 733 F.2d 858, 863 (Fed.

Cir. 1984) (use of patented compound in experiments designed to enable launch of competing product

constituted infringement); Soitec, S.A. v. Silicon Genesis Corp., 81 Fed. Appx. 734, 737 (Fed. Cir. 2003)

(unpublished opinion) (“the early stages of process development is nonetheless a violation of patent

law”).

“Hold-up” is used throughout this report to describe a patentee’s ability to extract a higher licensing fee 61

after an accused infringer has sunk costs into implementing the patented technology than the patentee

could have obtained at the time of design decisions, when the patented technology competed with

alternatives. The patentee’s ability to extract hold-up value is based on fear of an injunction (see Chapter

8) and potential damages to the extent they overcompensate patentees compared to the ex ante economic

value of the technology. “Hold-up” is sometimes used in a more narrow sense, not intended here, to

describe situations in which a patent owner fails to disclose his patents to a standard setting organization

and attempts to license after an industry is locked into using the standard. See, e.g., U.S. DEP’T OF

JUSTICE & FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS:

PROMOTING INNOVATION AND COMPETITION 35 (2007), available at

http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf

See id. at 33; Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard Setting, Patents, 62

and Hold-Up, 74 ANTITRUST L.J. 603, 607 (2007) (“Standards and patents are very important in

information technology, but not only there.”); Krall at 134 (3/18/09) (“The standard setting practice is

really a critical part of the technology development process.”).

191

Recommendation. To prevent damage awards based on switching costs, courts

should set the hypothetical negotiation at an early stage of product development,

when the infringer is making design decisions.60

C. Consideration of Alternative Technologies When Establishing a Reasonable

Royalty Applied to Standards

The ability of patentees to demand and obtain royalty payments based on the switching

costs faced by accused infringers, rather than the ex ante value of the patented technology

compared to alternatives, is commonly called “hold-up.” One important context in which hold- 61

up may have especially severe consequences for innovation and competition is standardized

technology. 

In many IT industries, interoperability among products and their components is critical to

developing and introducing innovative products that satisfy a range of consumer needs.

Frequently, firms achieve this goal by working together in standard setting organizations (SSOs)

to jointly adopt industry-wide technical standards. SSOs conduct extensive processes for

identifying and evaluating alternative technologies and ultimately choosing those to incorporate

into the standard. While firms may not formally commit to using a standard in producing their 62

products, as a practical matter they will generally find it necessary to use standardized technology

if it becomes successful in the marketplace. 
Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 314 (3d Cir. 2007). Sun Microsystems, Inc. 63

Comment at 1 (2/5/09) (“[O]nce a patented technology is incorporated into an adopted standard,

implementers of the standard . . . have no choice but to license the patented technology from the patent

owner in order to conform to the standard”); see also ANTITRUST MODERNIZATION COMMISSION, REPORT

AND RECOMMENDATIONS 119-20 (2007), available at

http://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf. 

U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, supra note 61, at 37-38 (“switching to an alternative 64

standard would require significant additional costs” and could “delay the introduction of a new

product”); Farrell et al., supra note 62, at 612, 616.

Krall at 135 (3/18/09) (“Once you’ve got broad industry adoption of a standard, lock-in and investment, 65

irreversible investments in developing products on that standard when somebody comes out and asserts

patents against products to that standard, it causes quite a bit of disruption in the technology market and

ultimately impacts the consumer.”); cf. Graham at 140 (4/17/09) (reporting “research show[ing] that

patents disclosed to standard setting organizations are much more likely to be litigated”).

U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, supra note 61, at 42. 66

Id.

67

192

Before the standard is chosen, technologies often compete against each other for inclusion

in the standard, but once a particular patented technology is incorporated in a standard, its

adoption eliminates alternatives. At that point, a firm with a patent reading on the standard may

63

have market power in the relevant technology market. If so, the patentee can demand a royalty

that reflects not only the ex ante value of the technology compared to alternatives, but also the

value associated with investments made to implement the standard. Accused infringers may pay

royalties based on the costs of switching to another technology. Switching costs can be

prohibitively high when an industry standard is involved. For instance, it is often difficult to

modify a standard due to the need for newly manufactured products to be “backward-compatible”

and interoperable with similar products already owned by consumers. The industry may be 64

locked-in to using the standard. Were patentees able to obtain the hold-up value, this

overcompensation could raise prices for consumers while undermining efficient choices made

among technologies competing for inclusion in a standard. 

65

Many SSOs attempt to address this problem through disclosure and licensing rules.66

Disclosure rules typically require participants to disclose patents or patent applications during the

standard setting process before a standard is chosen. Licensing rules typically require that

participants agree to license disclosed patents on RAND (Reasonable and Non-Discriminatory)

or FRAND (Fair, Reasonable and Non-Discriminatory) terms. However, there is much debate 67

over whether such RAND or FRAND commitments can effectively prevent patent owners from

imposing excessive royalty obligations on licensees. Panelists complained that the terms RAND

and FRAND are vague and ill-defined – particularly with regard to what royalty rate is
Id. at 45-47; cf. Van Pelt at 182 (5/4/09) (“one of the frustrations [with RAND requirements] is, well, 68

what’s discrimination, because all the companies are different that are getting licensed, so you’re not

discriminating against.”); Layne-Farrar at 215 (5/26/10) (there is “a huge gray area over what licensing

terms and conditions are” under RAND or FRAND); Melamed at 235 (5/26/10) (“even for those who

participate in [SSO proceedings and] declared patents, we don’t know what the FRAND terms will

actually end up being”).

See, e.g., Melamed at 230-31 (5/26/10); Farrell at 292 (5/26/10); Marasco at 227 (5/26/10).

69

Business Review Letter from Thomas O. Barnett, Assistant Att’y Gen., U.S. Dep’t of Justice, to Robert

70

A. Skitol, Drinker Biddle & Reath, LLP (Oct. 30, 2006) (reviewing policy that required ex ante

disclosures of maximum royalties and default license terms), available at

http://www.usdoj.gov/atr/public/busreview/219380.pdf; Business Review Letter from Thomas O.

Barnett, Assistant Att’y Gen., U.S. Dep’t of Justice, to Michael A. Lindsay, Dorsey & Whitney, LLP

(Apr. 30, 2007) (reviewing policy that permitted ex ante disclosures of maximum royalties and default

license terms), available at http:// www.usdoj.gov/atr/public/busreview/222978.pdf.

See Lemley at 182 (5/5/09) (placing the hypothetical negotiation at the time of standard setting decision 71

could “solve a lot of the hold-up component of damages problems in multi-component industries”);

Schlicher at 184-85 (5/5/09) (suggesting that the infringer’s options should be assessed as of the date that

the standard was set).

Melamed at 211 (5/26/10) (arguing that “damages are not well cabined” and that since “potential 72

damage exposure to the assertion of a patent is . . . very large, there’s [] enormous incentive for hold-up);

Chandler at 233 (5/26/10) (describing how patentees taking advantage of uncertainty and damages to

leverage the system). 

Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the the Law: the Case of 73

Divorce, 88 YALE L.J. 950, 997 (1979) (“[i]ndividuals in a wide variety of contexts bargain in the

shadow of the law”). The availability of a permanent injunction will also affect a patentee’s ability to

demand the hold-up value, as discussed in Chapter 8.

193

“reasonable.” More generally, these policies cannot constrain those patent holders not 68

participating in the SSO’s process. Some SSOs have attempted to avoid these problems by 69

requiring or allowing patentees to announce royalty rates during the standard setting process so

that members can consider licensing costs in choosing technologies.70

Clarification of patent damages law, especially recognition of the role that the

incremental value of patented technology over alternatives plays in capping licensing rates and

setting the hypothetical negotiation at the time of design decisions, can help prevent or lessen

hold-up of a standard. Were courts to adopt these recommendations, reasonable royalty damages

for a patent asserted against a standard would consider alternatives available at the time of setting

the standard. Panelists recognized that the law of reasonable royalty damages has a significant 71

effect on the ability of patentees to obtain hold-up value. When a patentee and implementer of 72

standardized technology bargain for a licensing rate, they do so within a framework defined by

patent remedies law. That law sets the implementer’s liability if negotiations break down and the

parties enter patent litigation, and therefore heavily influences the negotiated amount. 

73
See generally Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90

74

CAL. L. REV. 1889, 1923-27 (2002). More recently, the issue of alleged failure to adhere to RAND as a

contract violation has been raised in Nokia Corp. v. Apple, Inc., C.A. 09-791-GMS (D. Del. filed Dec. 11,

2009) (Apple, Inc.’s Answer, Defenses and Counterclaims, at 45-46).

 One article has observed that the “fifteen factors in Georgia-Pacific that guide reasonable royalty 75

determinations for patent infringement cases are the most obvious starting point for FRAND, and they

appear to be readily applicable to reasonable royalties within SSOs.” Anne Layne-Farrar, A. Jorge

Padilla & Richard Schmalensee, Pricing Patents for Licensing in Standard-Setting Organizations:

Making Sense of FRAND Commitments, 74 ANTITRUST L.J. 671, 705 (2007). One important distinction,

however, is that a RAND royalty should not incorporate the knowledge that the patent is valid and

infringed, as reasonable royalty damages following patent litigation do, since the RAND royalty assumes

no infringement litigation.

Loeb at 180 (2/11/09); Maghame at 258-59 (2/11/09) (endorsing gatekeeping while emphasizing the 76

need for flexibility); Reines at 111 (2/11/09); Agisim at 256 (2/11/09); NERA Economic Consulting

Comment at 23 (3/9/09). 

194

Clarification of reasonable royalty damages law could also help support a definition of

“reasonable” licensing fees under a RAND commitment that avoids hold-up. No court has yet

directly addressed the definition of RAND, but a manufacturer that believes a patentee’s license

offer is unreasonable may raise the issue in a contract dispute. In that case, a court may look to 74

reasonable royalty damages law for guidance. Commentators have observed a close relationship

between the “reasonable” prong of a RAND commitment and the legal rules for determining

reasonable royalty damages. A definition of RAND based on the ex ante value of the patented 75

technology at the time the standard is set is necessary for consumers to benefit from competition

among technologies to be incorporated into the standard – competition that the standard setting

process itself otherwise displaces. 

Recommendation. Courts should apply the hypothetical negotiation framework

to determine reasonable royalty damages for a patent subject to a RAND

commitment. Courts should cap the royalty at the incremental value of the

patented technology over alternatives available at the time the standard was

defined.

IV. COURTS’ GATEKEEPING ROLE IN REASONABLE ROYALTY DAMAGES

CASES

Damages evidence in patent cases is frequently presented to the jury through an expert

witness who offers opinion on the appropriate damage award. The court acts as a gatekeeper in

determining whether that opinion testimony sufficiently satisfies the Federal Rules of Evidence

(FRE) to be presented to the jury. Calls for more vigorous gatekeeping in damages cases have

received heightened attention in the patent community recently and generated broad agreement

among panelists. Increased focus by courts on the need for experts to tie accepted 76
Unlike fact witnesses, qualified expert witnesses may offer opinion on scientific, technical, and other 77

specialized topics. Also unlike fact witnesses, expert witnesses may testify without personal knowledge

and rely on otherwise inadmissible hearsay. Fed. R. Evid. 703.

Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 152 (1999). 78

Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 595 (1993) (quoting Jack B. Weinstein, Rule 702 79

of the Federal Rules of Evidence is Sound; It Should Not Be Amended, 138 F.R.D. 631, 632 (1991)).

United States v. Frazier, 387 F.3d 1244, 1263 (11th Cir. 2004) (“[E]xpert testimony may be assigned

talismatic significance in the eyes of lay jurors, and, therefore, the district courts must take care to weigh

the value of such evidence against its potential to mislead or confuse.”).

Fed. R. Evid. 702. 80

The Daubert factors are: (1) whether the expert’s theory has been tested; (2) whether the theory has 81

been subject to peer review and publication; (3) the known or potential rate of error of a technique or

theory when applied; (4) the existence and maintenance of standards and controls; and (5) the degree to

which the technique or theory has been generally accepted in the scientific community. See Daubert, 509

U.S. at 594

Id., 509 U.S. at 595. 82

195

methodologies to the facts of a particular case, as required by the FRE, would strengthen the

reliability of damages evidence. 

A. The Role of Judge as Gatekeeper for Expert Testimony

The district court judge in any federal trial must determine whether expert witness

testimony is reliable under FRE 702. The purpose of this requirement is to “make certain that 77

an expert . . . employs in the courtroom the same level of intellectual rigor that characterizes the

practice of an expert in the relevant field.” Expert testimony is subject to this judicial scrutiny 78

because it “can be both powerful and quite misleading because of the difficulty in evaluating

it.”79

To meet the threshold of reliability, FRE 702 requires that expert testimony satisfy three

criteria. It must be (1) based on sufficient facts or data, (2) the product of reliable principles and

methods, and (3) result from reliable application of those principles and methods to the facts of

the case. If the testimony fails any of these conditions, the trial court must exclude it. In 80

Daubert v. Merrell Dow Pharmaceutical, Inc., the Supreme Court set out a non-exclusive list of

factors for evaluating the reliability of an expert’s methodology. In Daubert, the Court stated 81

that the focus of the reliability review “must be solely on principles and methodology, [and] not

on the conclusions they generate.” The Court clairified this statement in General Electric v. 82

Joiner, however: “[C]onclusions and methodology are not entirely distinct from one another. . . .

[N]othing in either Daubert or the Federal Rules of Evidence requires a district court to admit

opinion evidence which is connected to existing data only by the ipse dixit of the expert.” A
Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) (upholding district court’s decision to exclude expert

83

testimony because animal and epidemiological studies upon which experts relied were not sufficient to

support their conclusions, although neither court attacked reliance on such studies as an inappropriate

methodology).

See Fed. R. Evid. 702 Advisory Committee’s Note (2000) (“[t]he trial court’s gatekeeping function 84

requires more than simply taking the expert’s word for it”).

Naeem v. McKesson Drug Co., 444 F.3d 593 (7th Cir. 2006) (excluding testimony as unreliable where 85

expert offered general observations about employment practices but did not base opinion on the

controlling employment policy manual).

Deputy v. Lehman Bros., Inc., 345 F.3d 494, 506 (7th Cir. 2003) (vacating district court decision to 86

exclude expert witness testimony on credibility grounds, but remanding for consideration of whether

expert’s opinion was supported by sufficient data to be reliable).

See Knight v. Kirby Inland Marine, Inc., 482 F.3d 347, 355 (5th Cir. 2007) (“hold[ing] that the district 87

court did not abuse its discretion in excluding [] testimony upon reasonably concluding that the analytical

gap between the studies on which he relied and his conclusions was simply too great and that his

opinions were thus unreliable”); Moore v. Ashland Chem., Inc., 151 F.3d 269, 276 (5th Cir. 1998) (en

banc).

Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1391 (Fed. Cir. 2003). Lack of reliability has and 88

should be used to exclude expert testimony on lost profits damages also. DSU Med. Corp. v. JMS Co.,

471 F.3d 1293, 1309 (Fed. Cir. 2006). Expert testimony on lost profits has been subject to less recent

controversy, and so this section focuses on reasonable royalties.

196

court may conclude that “there is simply too great an analytical gap between the data and the

[expert’s] opinion proffered,” and exclude the expert’s evidence on that ground.83

The three requirements of FRE 702 reflect Joiner’s clarification that an expert’s

testimony must meet standards beyond being the product of a reliable methodology. Courts

84

must also exclude expert testimony as unreliable when it is not based on sufficient facts or the

methodology has not been reliably applied to the facts of the case. Expert testimony that is 85

unreliable for these reasons may also be unpersuasive, but a court should not abdicate its role in

evaluating reliability on the grounds that it may not weigh the evidence. The requirement of 86

reliability establishes a threshold that evidence must meet, as determined by the judge, before a

jury is allowed to weigh it.

87

B. The Need to Apply Gatekeeping to Reasonable Royalty Evidence

The legal standards governing judicial gatekeeping against unreliable expert testimony

apply in full measure to expert opinion testimony on patent damages. Indeed, vigorous 88

application is essential for achieving accurate damage awards. As a recent handbook for federal

district court judges explains, “[n]o issue in a patent trial cries out for strict application of the

gatekeeping tools of Federal Rule of Evidence 702 and the Supreme Court’s Daubert decision
Compensatory Damages Issues in Patent Infringement Cases: A Handbook for Federal District Court 89

Judges, at 21 (Jan. 2010), available at

http://www.nationaljuryinstructions.org/documents/DamagesHandbookFinal.pdf

Id. at 23. See also J. Robinson at 146 (2/11/09) (questioning whether the “artificial, legal construct” of

90

the the hypothetical negotiation “really resonates to a typical juror” who knows little about the market

apart from the case) Gilbert at 200-01 (5/5/09) (questioning “why we have juries doing” damage

determinations in this and other contexts, in light of their lack of experience); Rooklidge at 156-57

(5/5/09) (discussing how results from mock trials suggested that juries take actions that “are wholly

unrelated to the law” governing reasonable royalties).

Leonard at 116 (2/11/09) (asking, “Why isn’t Daubert used more in IP cases?”); Durie & Lemley, supra 91

note 25, at 635 (reporting that a search of decisions had uncovered only about 40 district court opinions

and 10 Federal Circuit court opinions ruling on Daubert motions regarding reasonable royalty

determination); Reines at 110 (2/11/09) (“the stronger your [Daubert] motion, the more the judge looks

at you and say[s]: ‘Well, great, you’ll have a great cross examination, that should be a lot of fun for

you.’”). But see J. Robinson at 148-50 (2/11/09) (criticizing the excessive reliance on Daubert motions

in IP cases).

Reines at 116-17 (2/11/09). Judge Robinson noted, however, that many challenges to expert testimony 92

are routine and not well-supported. J. Robinson at 149 (2/11/09). She also expressed concern that

granting Daubert motions based on substantive differences in the expert’s views can be “contrary to both

[Daubert] itself and to the true economic realities that the parties have a right to present to a jury.” Id. at

150.

197

more than damages.” For reasonable royalty damages, the jury’s difficult task of evaluating 89

technical testimony is compounded by the need to weigh evidence in the context of a

hypothetical legal construct, the willing licensor/willing licensee model.90

In spite of this, panelists reported that district courts rarely exercise their gatekeeping

authority in patent damages matters. According to one panelist, rather than exclude evidence 91

on a Daubert motion, courts often prefer to admit the evidence and allow the jury to make a

decision that will be subject to post-trial review. Two recent contrasting decisions by the 92

Federal Circuit illustrate a common rationale for admitting problematic expert damages

testimony, and a better approach. Courts often admit testimony under Daubert that they deem to

be based upon a common methodology, such as the hypothetical negotiation or Georgia-Pacific

factors. But this analysis is insufficient to judge whether expert testimony can reliably assist the

trier of fact in determining the royalty a willing licensee would pay and a willing licensor would

accept for the patent at issue as used in the infringing device. That judgment requires careful

consideration of whether the expert reliably applied the methodology to the facts of the case.

The Federal Circuit’s December 2009 decision in i4i v. Microsoft provides an example of

the courts’ hesitancy to exclude expert damages testimony from trial. For an improvement to the

XML editor of Microsoft Word, i4i’s damages expert calculated reasonable royalty damages of
i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 853 (Fed. Cir. 2010), cert. granted, 79 U.S.L.W. 3326 93

(U.S. Nov. 29, 2010) (No. 10-290). The patent covered an improvement in a method of editing

documents containing markup language such as XML that stems from storing a document’s content and

metacodes separately. 

Id. at 854. (“Microsoft’s disagreements are with Wagner’s conclusions, not his methodology.”).

94

Id. at 853-54. He then multiplied that rate times an estimated 2.1 million infringing uses of Word 95

identified through a survey to reach $200 million in damages. Id. at 854-55. Word sold for between $97

and $299. Microsoft claimed that it charged at most $50 more for versions of Word that included an

XML editor. Id.

Id. at 853. 96

Id. at 856 (quoting Daubert, 509 U.S. at 596). 97

Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055, 2011 WL 9738, at *20 (Fed. Cir.

98

Jan. 4, 2011). 

Id. at *21. 99

198

$200 million. Microsoft challenged the expert’s testimony as unreliable, but the Federal Circuit 93

affirmed the award, explaining that the testimony was based on a hypothetical negotiation and

the Georgia-Pacific factors, which was recognized as an acceptable methodology. The expert 94

determined a royalty rate of $98 per unit by taking the price of a “high-end” XML product ($499)

as a benchmark, multiplying by Microsoft’s profit margin (76%), attributing 25% of that amount

to i4i by invoking a rule of thumb, and adjusting upward based on the Georgia-Pacific factors.95

The court did not analyze whether there was sufficient evidence tying the choice of benchmark

and calculation steps to a hypothetical negotiation for incorporating the particular invention at

issue into Microsoft Word. Instead, the court repeated i4i’s assertions that the 25% rule was

“‘well-recognized’ and ‘widely used’” and that use of the “high-end” product’s price was

justified, among other reasons, due to a focus on customers “who ‘really needed’” an XML

editor. In addition, the court cited “vigorous cross-examination” and “presentation of contrary

96

evidence” as the means to attack “shaky” expert testimony.97

In contrast, the January 2011 Federal Circuit opinion, Uniloc v. Microsoft, discusses at

length the need for courts to consider whether a damages expert reliably applied a common

methodology to the facts of the case in assessing admissibility of expert testimony. As a

consequence of carefully considering this requirement of FRE 702, the court found that

testimony based upon a “25% rule of thumb,” discussed below, was unreliable and inadmissible. 

The court relied on Joiner when explaining that “a major determinant of whether an expert

should be excluded under Daubert is whether he has justified the application of a general theory

to the facts of the case.” The court elaborated, “evidence purporting to apply [to any of the 98

Georgia-Pacific factors] must be tied to the relevant facts and circumstances of the particular

case at issue and the hypothetical negotiations that would have taken place in light of those facts

and circumstances at the relevant time.”99
Expert testimony on damages must be based on “sound economic and factual predicates.” Riles v. 100

Shell Exploration & Prod. Co., 298 F.3d 1302, 1311 (Fed. Cir. 2002); see Cornell Univ. v. HewlettPackard Co., No. 01-CV-1974, 2008 WL 2222189, at *2 (N.D.N.Y. May 27, 2008) (Rader, J. sitting by

designation) (“Where, as here, such sound economic and factual predicates are absent from a reasonable

royalty analysis, a district court must exercise its discretion to exclude the proffered testimony.”).

Knight v. Kirby Inland Marine, Inc., 482 F.3d 347, 355 (5th Cir. 2007) (“[T]he expert’s testimony 101

must be reliable at each and every step or else it is inadmissible. ‘The reliability analysis applies to all

aspects of an expert’s testimony: the methodology, the facts underlying the expert’s opinion, the link

between the facts and the conclusion, et alia.’”) (quoting Heller v. Shaw Indus., Inc., 167 F.3d 146, 155

(3d Cir. 1999)).

Generally a district court will review a verdict on a motion for JMOL under a “substantial evidence” 102

test, Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009), and will grant a new

trial “only if the verdict is against the clear weight of the evidence.” Id. at 1309 (quoting Pavao v. Pagay,

307 F.3d 915, 918 (9th Cir. 2002)). See infra, Section VI.

199

Recommendation. In their gatekeeper role of enforcing FRE 702, courts should

test the admissibility of expert testimony on damages by evaluating whether it will

reliably assist the trier of fact in determining the amount a willing licensor and

willing licensee would have agreed to as compensation for use of the patented

invention in the infringing product. Courts should not deem evidence as 100

relevant, reliable and admissible solely because it falls within one of the GeorgiaPacific factors. 

Recommendation. Consistent with FRE 702, courts should require a showing

that a damages expert’s methodology is reliable, that he reliably applies the

methodology to the facts of the case, and that the testimony is based on sufficient

data. Evidence based on a reliable methodology that does not satisfy the other

two prongs should not establish admissibility. Subjecting jury damage awards 101

to post-trial review should complement, rather than substitute for, active

gatekeeping because of the broad latitude that juries have to determine an award

based on the evidence presented and the deferential standards for overturning a

jury verdict.102

C. Applying FRE 702 to Two Methodologies of Damages Calculations

A review of the issues surrounding the admissibility of expert testimony on two common

methodologies of damages calculations – royalty rates on licenses claimed to be comparable to

the hypothetically negotiated license and the 25% rule of thumb – illustrates the importance of

active gatekeeping through rigorous enforcement of FRE 702’s requirements. One commentator,

in urging courts to exclude testimony that was not consistent with economic principles, argued

that “unreliab[ly] large reasonable royalty outcomes typically arise when a plaintiff’s expert uses

one of the unreliable approaches to determining the reasonable royalty, e.g., blind application of
NERA Economic Consulting Comment at 20 (3/9/09); Rhodes at 239 (2/11/09) (agreeing “there is 103

room for improvement” regarding use of comparable licenses and rules of thumb, but favoring common

law development rather than legislation).

See, e.g., American Original Corp. v. Jenkins Food Corp., 774 F.2d 459, 462 (Fed. Cir. 1985) (using

104

the rate in licenses granted for a patent on prior art alternative processes as a reasonable royalty for the

process patent at issue).

Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970),

105

modified and aff’d, 446 F.2d 295 (2d Cir. 1971).

Lucent Techs., 580 F.3d at 1325 (“licenses relied on by the patentee” must be “sufficiently comparable

106

to the hypothetical license at issue”).

Krall at 100 (3/18/09) (“There’s no real comparable market data. You can’t do a comparable analysis

107

like when you’re selling your home about what other prices are in your neighborhood.”); Millien at 79

(12/5/08) (same).

Burton at 94 (2/11/09) (explaining that juries “don’t work with technologies day in and day out, and

108

even judges often don’t, and it’s very challenging to understand when someone puts forward something

that’s a comparable, why it is and isn’t”).

580 F.3d 1301 (Fed. Cir. 2009). The opinion considers whether a jury award of $358 million is 109

supported by substantial evidence, not whether the licensing evidence and related expert testimony was

properly introduced, because the defendants did not move to exclude that evidence. Id. at 1325.

200

rules of thumb or benchmarks, instead of the economic analysis of the hypothetical negotiation

taking into consideration the defendant’s alternatives and customer preferences.”103

1. Comparable Licenses and Averages

Looking to patent licenses that are “comparable” to the license for the infringed patent

that would result from the hypothetical negotiation is a common methodology for setting

reasonable royalty damages. Georgia-Pacific points to such evidence as helpful in factor 104

two. But such evidence can reliably assist the trier of fact only if the patented invention and its 105

infringing use are sufficiently similar to those of the comparable license. Key attributes for

evaluating similarity include the technology, the rights licensed (one patent or a portfolio),

royalty type (running royalty or lump sum) and terms of the license (one product or many).106

Such truly “comparable” licenses are rare, according to panelists. They criticized many 107

uses of comparable licenses in damages litigation: “[a] lot of comparables just plain aren’t

comparable, but it’s hard for a jury to really see that.” The district court decision reviewed by 108

the Federal Circuit in Lucent v. Gateway illustrates the problematic way that allegedly

comparable licenses are sometimes used to prove reasonable royalty damages. The calendar

109

function of Microsoft’s email program, Outlook, was found to infringe a patent covering a datepicker function. The patented invention was “a tiny feature of one part of a much larger software
Id. at 1332. 110

Id. at 1328. 111

Lucent Techs., Inc. v. Gateway, Inc., 580 F. Supp. 2d 1016 (S.D. Cal. 2008), aff’d in part, vacated in 112

part and remanded, 580 F.3d 1301 (Fed. Cir. 2009). Of the licenses relied upon by the patentee’s

damages expert, at $290 million the IBM/Dell agreement bore a lump-sum royalty closest to the $358

million jury award. Id. at 1328. 

Id. at 1328. 113

ResQnet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869-70 (Fed. Cir. 2010) (explaining that “[t]his court 114

has long required district courts performing reasonable royalty calculations to exercise vigilance when

considering past licenses to technologies other than the patent in suit” while rejecting reliance on

“licenses with no relationship to the claimed invention”).

609 F.3d 1308, 1320 (Fed. Cir. 2010). Cf. i4i Limited P’ship v. Microsoft Corp., 598 F.3d 831, 857

115

(Fed. Cir. 2010), cert. granted, 79 U.S.L.W. 3326 (U.S. Nov. 29, 2010 (No. 10-290) (refusing to overturn

a damages award under the “highly deferential” standard applicable to a motion for a new trial).

“[E]xperts’ work is admissible only to the extent that it is reasoned, uses the methods of the discipline, 116

and is founded on data. Talking off the cuff – deploying neither data nor analysis – is not an acceptable

methodology.” Lang v. Kohl’s Food Stores, Inc., 217 F.3d 919, 924 (7th Cir. 2000); IP Innovation, LLC

v. Red Hat, Inc. 705 F. Supp. 2d 687, 691 (E.D. Tex. 2010) (Rader, J. sitting by designation) (excluding

expert testimony that relied on evidence of average royalties in various industries in part because the

expert “offer[ed] no evidence that the alleged industry agreements are in any way comparable to the

201

program.” The patentee offered as a comparable license, among others, an agreement under 110

which Dell licensed IBM’s patent portfolio for the purpose of manufacturing a full line of

personal computers. The jury awarded damages that exceeded the payment under the 111

Dell/IBM agreement and the district court upheld the award.112

The Federal Circuit has recently applied a more rigorous review of damage awards that

considers whether licenses offered as “comparable” are sufficiently similar to support a jury

verdict. The appellate court vacated the damage award in Lucent v. Gateway because the

licenses offered as evidence were “vastly different” from the hypothetical license. In 113

ResQnet.com. v. Lansa, the court vacated a damage award based on testimony by the patentee’s

expert because the testimony did not “link” allegedly comparable licenses to the infringed

patent. The court vacated a third damage award based on inadequate comparable licenses in 114

Wordtech Systems v. Integrated Networks Solutions.

115

While the methodology of looking to comparable licenses may be generally sound, for an

expert to reliably apply that methodology, he must explain the similarities between the licensed

patent, the infringed patent, and their uses. Expert testimony that makes little attempt to explain

why the comparable license serves as a good proxy for the hypothetical negotiation cannot meet

the threshold of reliability under FRE 702. For instance, allowing expert testimony based on 116
patents-in-suit,” and finding the evidence “irrelevant or unreliable”).

Burton at 94-95 (2/11/09) (“[T]hat can be an area of significant abuse, particularly if you haven’t . . .

117

matched your royalty base, with your rates, so you’re seeing comparables at 5 percent when you should

be 1/10th of 1 percent on this particular base.”).

Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055, 2011 WL 9738, at *21 (Fed. Cir.

118

Jan. 4, 2011).

One described a “ludicrous” instance in which an expert relied on an average of licenses within the 119

same four digit SIC code, and compared this approach with opening a store that sells only shoes of the

average size. Leonard at 115-16 (2/11/09).

Inline Connection Corp. v. AOL Time Warner, Inc., 470 F. Supp. 2d 424, 432 n.38 (D. Del. 2007); see 120

also Civix v. Expedia, No. 03-C-3792, 2005 U.S. Dist. LEXIS 45948 (N.D. Ill. Oct. 25, 2005); Uniloc

USA, Inc. v. Microsoft Corp., 632 F. Supp. 2d 147, 150 (D.R.I. 2009) (“Microsoft claims [the expert’s]

methodology for concocting the reasonable royalty is just not ‘good science.’ But this is like saying

Alice did not serve Earl Gray at her tea party. Maybe so, but . . . it is close enough . . . .” ), vacated in

part and remanded, 2011 WL 9738 (Fed. Cir. Jan. 4, 2011). 

202

patents or portfolios that cover whole products when the infringed patent covers only one feature

of a complex product risks a jury award that overcompensates the patentee. Indeed, the 117

Federal Circuit recently suggested in Uniloc that expert testimony based on prior licenses is not

admissible unless there is “a basis in fact to associate the royalty rates used in prior licenses to

the particular hypothetical negotiation at issue.”118

The use of average royalty rates as a proxy for the hypothetical negotiation amount

suffers the same weaknesses as the use of comparable licenses. Without some demonstration of

similarity between the infringed patent and the licensed patents represented in the sample,

including the license terms and the circumstances in which they are used, the average royalty rate

is not helpful in constructing the hypothetical negotiation. Panelists were critical of this

approach.119

Recommendation. Courts should admit expert testimony based on comparable

licenses only upon a reliable showing of similarity between the licensed patent

and the infringed patent, and between the non-price terms of the comparable

license and hypothetical license. That showing should be sufficient to support an

inference that the royalty rate for the comparable license provides a reliable

indicator of the royalty that would be reached in the hypothetical negotiation.

2. Rule-of-Thumb Evidence

District courts also have allowed expert testimony based on “rule-of-thumb” evidence in

which the reasonable royalty is set at 25% of the expected profit for the infringing product. In 120

doing so, courts have cited Georgia-Pacific factor 12 which considers “[t]he portion of the profit

or of the selling price that may be customary in that particular business or in comparable
Georgia-Pacific Corp., 318 F. Supp. at 1120. 121

Robert Goldscheider, John Jarosz & Carla Mulhern, Use of the 25 Per Cent Rule in Valuing IP, 37 LES 122

NOUVELLES 123, 131 (Dec. 2002). The “25% rule” is based on a study of 18 commercial licenses in the

late 1950s. These licenses “tended to generate profits of approximately 20 per cent of sales on which

they paid royalties of 5 per cent of sales.” Therefore, “the royalty rates were found to be 25 per cent of

the licensee’s profits on products embodying the patented technology.” Id. at 123.

Leonard at 116 (2/11/09) (suggesting that courts exclude rule of thumb evidence under 123

Daubert); Burton at 95 (2/11/09); Johnson at 245-46 (2/11/09) (“[E]very invention is unique and

every situation is unique so I have a lot of sympathy for people who are objecting to industry

standard rates or rules of thumb or the like without an awful lot of foundation.”).

Burton at 95 (2/11/09). 124

NERA Economic Consulting Comment at 19 (3/9/09). 125

Paul E. Schaafsma, An Economic Overview of Patents, 79 J. PAT. & TRADEMARK OFF. SOC’Y 241, 126

251-52 (1997).

Mark Berkman, Valuing Intellectual Property Assets for Licensing Transactions, 22 LICENSING J. 16 127

(April 2002); see also Elizabeth M. Bailey, Alan Cox & Gregory K. Leonard, Groundhog Day:

Recurring Themes on Reasonable Royalties in Recent IP Damage Cases 6 (NERA Econ. Consulting Dec.

7, 2009) (declaring that “[t]he 25% rule makes no economic sense”), available at

http://www.nera.com/extImage/PUB_IP_Groundhog_Day_1209.pdf.

203

businesses to allow for use of the invention or analogous inventions.”121 A proponent of the 25%

rule explains that it is a tool that should not be used in all contexts, and when used, the

percentage can be adjusted according to the facts: “Ultimate royalty rates often are higher or

lower than 25 per cent of fully loaded profits, depending on a host of quantitative and qualitative

factors that can and should affect a negotiation (or litigation).”122

Panelists roundly criticized the rule-of-thumb methodology. Many challenged the 123

rule’s rigidity and lack of connection to the facts of a particular case: “it’s only happenstance and

luck if a rule of thumb is right in a particular circumstance, and yet people put rules of thumb

forward as if they’re gospel.” Another panelist explained, “it defies economic logic to claim 124

that this ‘rule’ fits every set of facts. For example, the rule would apparently give the same

answer for both a ‘large’ component and a ‘small’ component, which makes no economic

sense.” One commentator calls the 25% rule “an exercise in arbitrary business analysis”

125

because “it does not relate to the value and degree to which the patent can exclude substitute

products and therefore command a patent profit.” Another explains that the rule is unreliable 126

because “[n]o consideration is given to the number or value of economic alternatives or the

incremental value of using the patented technology over other viable alternatives.”127
Uniloc, 2011 WL 9738, at *18 (explaining that this has occurred when the rule’s “acceptability has not

128

been the focus of the case” or when “the parties disputed only the percentage to be applied” and citing 

i4i Limited Partnership v. Microsoft Corp., 598 F.3d 831 (Fed. Cir. 2010); Fonar Corp. v. General Elec.

Co., 107 F.3d 1543, 1553 (Fed. Cir. 1997); Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197, 1210-

11 (Fed. Cir. 2010).

Uniloc, 2011 WL 9738, at *19. 129

Id. at *21. 130

Leonard at 105 (2/11/09) (explaining that “in [the] real world, the parties negotiate . . . how the royalty 131

will be paid, so they could decide to have a lump sum or a per unit or a percent times a base”); Levko at

107 (2/11/09) (“units or dollars or time” are all used in real-life negotiations).

204

As recently as 2010, the Federal Circuit “passively tolerated” use of the 25% rule in

upholding reasonable royalty determinations. However, in 2011 it found, after a searching 128

examination, that “the 25 percent rule is a fundamentally flawed tool for determining a baseline

royalty rate in a hypothetical negotiation,” and specifically held it to be “inadmissible under

Daubert . . . because it fails to tie a reasonable royalty to the facts of the case at issue.” The 129

court explained that the rule is “an abstract and largely theoretical construct” which “does not say

anything about a particular hypothetical negotiation.” 

130

The Commission applauds the Federal Circuit’s decision to reject the 25% rule in

reasonable royalty damages determinations. Its reasoning provides a particularly clear example

of how application of the requirements of FRE 702 can significantly improve the assessment of

damage awards. 

V. CHOOSING THE ROYALTY BASE

The goal of the hypothetical negotiation is to mimic to the extent possible what the

parties would have done if they willingly had entered negotiations at the time infringement

began. Parties could approach the royalty calculation in one of three ways:131

• By identifying a relevant base product, calculating a dollar base such as total sales

revenues, and multiplying that dollar base by a percentage royalty rate; 

• By identifying a unit product, counting the number of infringing units sold and

multiplying that number by a dollar figure per unit; or 

• By agreeing to a lump-sum payment of a specific dollar amount.

Although the law allows other methods to be used in calculating reasonable royalty

damages, courts frequently have applied the first method, multiplying a percentage royalty rate by
Janicke at 96 (2/11/09) (“at the time we first got into [reasonable royalty awards], most licenses were – 132

almost all I think were negotiated based on a base and a [percentage] rate”); JOHN W. SCHLICHER,

PATENT LAW: LEGAL AND ECONOMIC PRINCIPLES § 9.44 at 9–06 (1992) (“The courts typically determine

some royalty rate, such as X% of sales revenue or $Y per unit.”)

See Yen at 55 (12/5/08); Doyle at 223-24 (5/5/09). These concerns have led many IT companies to 133

push for statutory changes to patent damages law – a move strongly opposed by other industries. See

Patent Reform Act of 2009: Hearing Before the S. Comm. on the Judiciary, 111th Cong., 1st Sess. (2009)

(testimony of David J. Kappos, Vice President and Ass’t General Counsel, IBM), available at

http://judiciary.senate.gov/pdf/09-03-10Kappostestimony.pdf; Patent Reform Act of 2009: Hearing

Before the S. Comm. on the Judiciary, 111th Cong., 1st Sess. (2009) (testimony of Philip S. Johnson,

Chief IP Counsel, Johnson and Johnson, Inc., on behalf of the Coalition for 21 Century Patent Reform), st

available at http://judiciary.senate.gov/pdf/09-03-10Johnsontestimony.pdf.

This was the case in Georgia-Pacific, where the infringing product was striated fir plywood and the 134

royalty rate was calculated as a dollar amount per thousand square feet of patented paper using a number

of the Georgia-Pacific factors. Georgia-Pacific Corp., 318 F. Supp. at 1123-43.

Lemley at 216-17 (5/5/09). 135

205

total revenues for an infringing product. Recent controversies in the patent community about 132

the role of “apportionment” and the “entire market value rule” in calculating reasonable royalty

damages have brought the legal rules for choosing a royalty base to the forefront of patent policy

debate. Critics of the current approach argue that it overcompensates patentees when it allows

damages for a small component, like an infringing windshield wiper, to be based on the price of a

much larger product, like a car. As explained below, courts should eliminate the entire market

133

value rule from the determination of the appropriate base in a reasonable royalty damages

calculation. The rule is irrelevant to identification of the base and it injects significant confusion

that threatens to produce inaccurate awards. 

A. The Entire Market Value Rule Applied to Reasonable Royalties

The choice of base may be uncontroversial where the patented invention corresponds to a

product sold in the market or the industry practice is to identify a product’s sales revenues as the

base. In that situation, parties in patent litigation typically will focus the dispute on determining

a royalty rate. The choice of a base may be disputed and more difficult, however, where the 134

inventive aspect of the patented technology is imbedded in one component of a complex product. 

Parties may dispute whether the appropriate base is the inventive technology, the component, or

the larger product. Identifying a component or sub-component of a larger product as the base is

sometimes discussed as one aspect of “apportionment.” As discussed in Chapters 2 and 3, this

135

situation is especially prevalent in the IT industry, where products incorporate literally thousands

of technologies. 
609 F. Supp. 2d. 279 (N.D.N.Y. 2009) (Rader, J. sitting by designation). 136

Id. at 283. 137

Cornell Univ. v. Hewlett-Packard Co., No. 01-CV-1974, 2008 WL 2222189 (N.D.N.Y. May 27, 2008). 138

Cornell, 609 F. Supp. 2d. at 282. 139

Id. at 293; Uniloc, 2011 WL 9738, at *24 (confirming that a plaintiff seeking to invoke the EMVR in 140

the reasonable royalty context must show that the patented invention is “the basis for customer

demand”).

Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001).

141

56 F.3d 1538 (Fed. Cir. 1995) (en banc).

142

Id. at 1549. 143

Id. (“When a patentee seeks damages on unpatented components sold with a patented apparatus, courts

144

have applied a formulation known as the ‘entire market value rule’ to determine whether such

components should be included in the damage computation, whether for reasonable royalty purposes, . . .

or for lost profits purposes . . . .”) (citations omitted). Moreover, Professor Lemley has noted the

apparent lack of any prior precedent supporting the Rite-Hite dicta. Mark A. Lemley, Distinguishing

Lost Profits from Reasonable Royalties, 51 WM. & MARY L. REV. 655, 662 n.34 (2009).

206

The recent district court decision, Cornell University v. Hewlett-Packard Co.,

136

illustrates the difficulty. Cornell’s patent read on one component of a computer processor. The

court explained, “the claimed invention is a small part of the IRB [instruction reorder buffer],

which is a part of a processor, which is part of a CPU [central processing unit] module, which is

part of a ‘brick,’ which is itself only part of the larger server.” Hewlett-Packard purchased the 137

CPUs and used them to build servers, which it sold. Cornell proffered expert testimony opining

that the royalty base should include Hewlett-Packard’s entire server and workstation systems,

which the court excluded unreliable under FRE 702. At trial, Cornell sought and received a 138

jury damages award using the CPU brick as an appropriate base. The court then granted

139

judgment as a matter of law to the defendant, recalculating damages using the processor rather

than the CPU brick as the appropriate base but keeping the royalty rate applied by the jury.140

In recent years, the case law of patent damages has analyzed this type of dispute by

applying the “entire market value rule” in the reasonable royalty context, as did the court in

Cornell v. Hewlett-Packard. In this context, the entire market value rule asks whether the

patented feature is the “basis for customer demand” in deciding whether an entire product or a

component should be used as the base. This approach was first adopted in 1995, in Rite-Hite 141

Corp. v. Kelley Co., where the Federal Circuit followed a long line of precedent in applying the 142

entire market value rule in determining lost profits damages. However, in dicta, the court also 143

declared that the rule applied to reasonable royalty calculations. Since Rite-Hite, courts have 144

looked to the entire market value rule and considered whether the patented component is the
See, e.g., Bose Corp., 274 F.3d at 1361 (affirming reasonable royalty award based on the value of

145

loudspeakers, rather than the value of a patented port-tube component); Fonar Corp. v. Gen. Elec. Co.,

107 F.3d 1543 (Fed. Cir. 1997) (using MRI machine as royalty base rather than patented imagining

component based on infringer’s marketing efforts praising the component).

See, e.g., Imonex Servs. v. W.H. Munzprufer Dietmar Trenner GmbH, 408 F.3d 1374, 1379-81 (Fed. 146

Cir. 2005) (holding that washing machine was not the proper base where patented invention related to an

attached coin sorting box); Lucent Techs. v. Microsoft Corp., 544 F. Supp. 2d 1080, 1106-07 (S.D. Cal.

2008) (refusing to grant summary judgment to plaintiff on contentions that the computer operating

system, media player, or game console serve as the basis for consumer demand), summary judgment

granted in part, summary judgment denied in part, 2008 U.S. Dist. LEXIS 99392 (S.D. Cal. Feb. 28,

2008).

Cotter at 85 (2/11/09); O’Brien at 217 (5/4/09) (In “the reasonable royalty context if you start talking 147

about the entire market value rule you’ve made a mistake right there”).

Lemley at 213 (5/5/09); Janicke at 63 (2/11/09) (the entire market value rule is “a meaningless 148

cliché”); Verizon Communications, Inc. Comment at 17 (3/20/09) (suggesting that “apportionment and

entire-market-value inquir[ies]” can confuse and distract fact-finders).

Reines at 82 (2/11/09). Cf. Skenyon at 64 (2/11/09) (suggesting that the entire market value rule may 149

not pose that “big a problem” since it is not used “in that many cases”).

Lemley, supra note 144, at 660-62. 150

207

“basis for customer demand” for the larger product in both permitting and rejecting the use

145 146

of a broad royalty base.

B. The EMVR is Irrelevant When Choosing a Base for Reasonable Royalty

Damages

Panelists roundly condemned use of the entire market value rule in reasonable royalty

damages determinations. One panelist called it a “complete category mistake to apply that in the

reasonable royalty context.” Another stated that “the entire market value rule has no place

147

whatsoever in reasonable royalty analysis,” explaining that “it doesn’t make any sense at all in a

world in which there is not a plaintiff’s product being sold.” One panelist expressed concern 148

that the entire market value rule has “displaced or atrophied Federal Circuit law development”

regarding how “we put some boundaries around the hypothetical negotiation” and left “an

absence of law and guidance . . . on what the base should be.”149

The entire market value rule, and its focus on whether a patented feature is “the basis of

customer demand,” arose in the context of calculating lost profits damages. Understanding the 150

role the rule plays in that context illuminates why it is irrelevant to the choice of base in a

reasonable royalty calculation. When an invention is only one component of a product, not all of

an infringer’s profit or the patentee’s lost profit is necessarily attributable to the patented

invention. In that case, the law allows the patentee to recover lost profits damages based on the
State Indus., Inc., v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989) (allowing lost profits 151

damages based on entire water heater where invention related to foam insulation). Chapter 5 explains

why the entire market value rule should be eliminated from lost profits analysis.

ROGER D. BLAIR & THOMAS F. COTTER, INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL 152

DIMENSIONS OF RIGHTS AND REMEDIES 215-17 (2005). For cases applying the entire market value rule to

lost profits, see Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354, 1371 (Fed. Cir. 2006)

(allowing lost profits damages on an artificial fireplace consisting of a patented ember burner and

unpatented artificial logs and grates).

Johnson at 269 (2/11/09).

153

See, e.g., Leonard at 105-06 (2/11/09); O’Brien at 217-18 (5/5/09). 154

SCHLICHER, supra note 132, § 9:37 at 9–97 (1992); Levko at 106 (2/11/09); Layne-Farrar at 92 155

(2/11/09); Maghame at 257 (2/11/09).

In Lucent Techs., Inc. v. Gateway, 580 F.3d 1301, 1336 (Fed. Cir. 2009) the Federal Circuit recognized 156

that parties choose the base of a royalty calculation for reasons other than whether the patented feature

drives demand for the product, such as “when there is no established market value for the infringing

component or feature.” Id. at 1339. The court further recognized that an entire product rather than some

component may be the most convenient base even where the entire market value rule is not satisfied. Id.

at 1338-39. The court described its analysis as embracing the entire market value because it allowed the

entire product to serve as the base. But actually the opinion is better understood as a repudiation of the

rule because it recognizes that the base in a hypothetical negotiation is chosen for reasons other than

whether the patented invention is the “basis of customer demand.”

208

entire market value of the product when the patented component is the “basis for customer

demand.” If the patented invention is not the basis of demand, lost profits damages will be 151

based only on the value of the patented component, or “apportioned.”152

The entire market value rule as applied to lost profits has no corollary in the reasonable

royalty context. There is no amount of potential damage funds, such as the profits lost on a

product, to be entirely awarded or apportioned. Many reasonable royalty damage awards result

from the multiplication of two inter-related variables, the base and the rate. Altering one

variable, (the base), in response to a legal test like the entire market value rule requires

recalibrating the other variable, (the rate), in order to accurately assess the value of the patent in

the hypothetical negotiation. This is a very different process from calculating lost profits

damages.

 Moreover, a wide array of considerations apart from the entire market value rule

influence parties’ choice of a base in actual licensing negotiations, including convenience of the

parties and the practice in the industry. Where the patented invention is only one component 153 154

of a larger product, the product may be the only item that is priced and can be monitored. For 155

practical reasons, that product serves as the base even though the patented feature is not “the

basis of customer demand.” In other cases, a patented component may easily serve as a base 156
 The 13th factor is “[t]he portion of the realizable profit that should be credited to the invention as 157

distinguished from non-patented elements, the manufacturing process, business risks, or significant

features or improvement added by the infringer.” Georgia-Pacific Corp., 318 F. Supp. at 1120.

 The Patent Reform Act of 2007: Hearing on H.R. 1908 Before the Subcomm. on Courts, the Internet,

158

and Intellectual Property of the H. Comm. on the Judiciary, 110th Cong. 65 (2007) (testimony of

Professor John R. Thomas), available at

http://judiciary.house.gov/hearings/April2007/Thomas070426.pdf (arguing that the entire market value

rule has been improperly expanded to “become[] the default damages principle” and been applied

without factual support); Yen at 55 (12/5/08) (arguing that a car should not be used as the base to value a

newly-invented tire); Levko at 71 (2/11/09); Doyle at 223-26 (5/5/09).

C.J. Michel at 115 (12/5/08) (explaining that “windshield wiper” example may be an urban legend of 159

patent damages, as he has been unable to find such a case); Detkin at 76-77 (12/5/08) (arguing that car

may be the appropriate base where patented tire required redesign of the automobile, or provided

increased gas mileage leading to increased demand);, William C. Rooklidge, “Reform” of Patent

Damages: S.1145 and H.R. 1908, at 7, 11 (2007), available at

http://www.patentsmatter.com/press/pdfs/Patent_Damages_Reform_Rooklidge.pdf (cases correctly state

principles governing the entire market value rule, and Federal Circuit’s affirmances of jury awards

adopting a broad royalty base are unsurprising in light of the deferential standard of review).

See, e.g., Cornell Research Foundation, Inc. v. Hewlett Packard Co., No. 5:01-CV-1974, 2005 WL 160

5955715, at *3-4 (N.D.N.Y. Oct. 11, 2005) (identifying vendors from whom Hewlett-Packard purchased

209

because it can be purchased separately. Because the choice of a base in actual licensing

negotiations is not driven by whether the patented feature is the “basis for customer demand,”

that question should not drive the choice of base in a hypothetical negotiation. This rejection of

the entire market value rule does not suggest that the concern of the rule – the extent to which a

patented invention drives consumer demand – is irrelevant to the reasonable royalty calculation. 

On the contrary, this concern is one of the Georgia-Pacific factors and crucial to identifying an

157

appropriate royalty rate.

C. Practical Problems When the EMVR is Applied to Reasonable Royalties

Commentators and panelists raised practical concerns about the application of the entire

market value rule to the choice of base when determining reasonable royalty damages. Some

commentators and panelists from the IT industry argued that courts applied the entire market

value rule too liberally, so that damages were too frequently based on a complex product when

only a component was patented. Others disagreed about the existence of the problem. 158 159

Panelists identified two consequences of patentees’ attempts to set a large, complex product as

the royalty base for an inventive feature in one component.

First, panelists described how patentees’ hopes of establishing a large royalty base in

order to garner large damage awards led patentees to sue manufacturers of complex consumer

products, like personal computers and cell phones, rather than manufacturers of the

components. Patent suits threatened “up the value chain” in order to obtain a larger base 160
allegedly infringing CPUs); Lucent Techs., Inc. v. Gateway, Inc., 543 F.3d 710 (Fed. Cir. 2008); Lucent

Techs., 580 F.3d at 1308-09 (plaintiff brought infringement suit against computer vendors based on a

feature in software programs supplied to them by Microsoft).

Agisim at 191 (2/11/09) (online banking system sued for third party-supplied products).

161

Doyle at 225-26 (5/5/09). 162

Reines at 87 (2/11/09) (“You have to control the base if you want a rational outcome” for a product 163

with a large annual revenue.”); Yen at 52 (12/5/08) (“[p]laintiffs regularly seek a percentage of the total

value of the product that is allegedly infringing rather than the value of what was actually invented,

which in many cases might be a minor feature of a particular product”); Doyle at 165 (5/5/09) (“if you

assign the value to the actual component in question, you may then get a much more reasonable result”).

Layne-Farrar at 92-93 (2/11/09) (adjustment of rate in response to base can give accurate damages); 164

Lucent Techs., 580 F.3d at 1339 (“the base used in a running royalty calculation can always be the value

of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable

range”).

Simpson at 233-34 (5/5/09); Lemley at 234 (5/5/09) (a broad base favors the patentee, since “it’s much 165

easier to persuade somebody to give a very small percentage of a very large base”); Gilbert at 219-20,

238 (5/5/09) (acknowledging that choice of base should not “make a huge difference,” although “in

practice it very well may”); Cotter at 86 (2/11/09) (“The problem comes in the application where courts

and juries are not exercising much judgment in determining what the royalty rate is.”).

Reines at 86-87 (2/11/09).

166

210

presents a practical problem for accused infringers that may have insufficient knowledge of the

technical issues surrounding infringement by a component manufactured elsewhere. This 161

makes licensing negotiations, patent litigation and settlement very difficult. But one panelist

reports that patentees “resolutely refuse” to approach the manufacturers of components.

162

Second, several panelists emphasized the need to properly identify the base in order to

produce an accurate reasonable royalty award where the inventive feature is a small component

in a complex product. Although the royalty calculation can decrease the rate in response to a 163

large base, they expressed concern that a trier of fact, particularly a jury, may apply an 164

insufficiently low royalty rate when the base is far larger than the inventive feature because an

appropriate rate might be “minuscule.” If the invention is “the twig on the twig on the twig on 165

the twig on the twig of a multi-featured box, it isn’t realistic to expect the jury to recommend a

“.00000001 rate.” In a similar vein, the Federal Circuit in Uniloc explained that the evidence

166

of very large total product revenue calculated from a large base “cannot help but skew the

damages horizon for the jury, regardless of the contribution of the patented component to this
Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055, 2011 WL 9738, at *24 (Fed. Cir.

167

Jan. 4, 2011). 

Janicke at 97 (2/11/09) (“Base only matters if you’re going to do a rate times base calculation. If

168

you’re going to do it five cents a unit, there is no base. There is no rate. [The negotiating parties] agree

on five cents a unit or $2 a unit, and base drops out of the calculation in the real license negotiation.”).

See, e.g., Reines at 128 (2/11/09) (describing a case involving a patent claiming a local area network, 169

when the key feature was one piece of a node).

Cotter at 130-31 (2/11/09). See also Janicke at 128 (2/11/09) (where the patentee claims the “circuit 170

connected to the module, connected to the computer, connected to a network . . . the claim really can’t

be the base”); Simon at 270 (2/11/09) (“There are articles written saying write claims to cover systems

because you can claim a bigger royalty base. That makes no economic sense to me, that the patent

attorney’s decision on how to write the claim is what’s going to determine what the royalty base is.”).

One panelist indicated that his company negotiates lump-sum license payments with many patentees. 171

Simon at 222–23, 228 (2/11/09); id. at 222 (“[Base times rate is] not the way we negotiate licenses at

Intel. Our view is it’s an inappropriate way to deal with it in our business . . . it’s a very different model.

Yet everybody uses this as a vehicle to try to say it would have been a running royalty rate.”).

211

revenue.” One panelist pointed out that calculating damages by multiplying a dollar amount 167

times units eliminates these problems.168

Recommendation. Courts should eliminate the entire market value rule and the

question of whether the patented feature was the “basis for customer demand”

from the determination of the appropriate base in a reasonable royalty damages

calculation. It is irrelevant and it risks injecting significant confusion that

threatens to produce inaccurate awards.

D. Identifying the Base

Another artificial construct for identifying the base that courts should reject is always to

equate it with the device recited in the infringed claim. In many cases, there will be an easy

correspondence between the inventive feature, the device recited in the infringed claim, and the

appropriate base. In other cases, the correspondence will not be so clear. For example, a

software invention for rendering video images can be recited in a claim covering video software,

or in a claim covering a standard personal computer running the video software. Several

169

panelists explained that in choosing a base “the real focus ought to be on the economic realities

and not the vagaries of claim drafting,” particularly because “the way claims are drafted [is] . . .

so manipulable.” 

170

Finally, courts should recognize that not all licenses, and therefore not all damage awards,

should be calculated by multiplying a base times a rate. When the evidence indicates that the

parties would have used another calculation method in the hypothetical negotiation, such as a

lump-sum payment, the finder-of-fact should apply that method. 171
Reines at 90 (2/11/09) (suggesting as the base “the closest unit that’s priceable in the vicinity of the 172

claimed invention”); Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d. 279, 288 (N.D.N.Y. 2009)

(choosing the processor as the base where it was the smallest priceable unit).

Fed. Rule Civ. Proc. 50, 59. JMOL is available to a party that can establish that there is insufficient

173

evidence to legally support the verdict. See 9B CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL

PRACTICE & PROCEDURE §§ 2521-40 (3d ed. 2008). Under one formulation, “a district court grants

JMOL only ‘if the evidence, construed in the light most favorable to the nonmoving party, permits only

one reasonable conclusion, and that conclusion is contrary to the jury’s verdict.’” Lucent Techs., Inc. v.

Gateway, Inc. 580 F.3d 1301, 1309 (Fed. Cir. 2009) (quoting Pavao v. Pagay, 307 F.3d 915, 918 (9th Cir.

2002)). Courts often describe this as the “substantial evidence” test. Id. at 1336. 

See 11 WRIGHT & MILLER §§ 2781-2821. Generally, a trial court “may grant a new trial only if the

174

verdict is against the clear weight of the evidence.” Lucent Techs., 580 F.3d at 1309 (quoting Pavao v.

Pagay, 307 F.3d 915, 918 (9th Cir. 2002)). The district court may consider credibility and weigh

evidence in exercising its broad discretion on whether to grant a new trial. Unisplay, S.A. v. Am. Elec.

Sign Co., 69 F.3d 512, 517 (Fed. Cir. 1995).

It is within a trial court’s discretion to deny a defendant’s motion for new trial on condition that the 175

plaintiff accept a reduction in the amount of the jury’s award (called a remittitur). 11 WRIGHT & MILLER

§ 2815 at 160, 169; Shockley v. Arcan, 248 F.3d 1349, 1362 (Fed. Cir. 2001).

212

Recommendation. Courts should identify as the appropriate base that which the

parties would have chosen in the hypothetical negotiation as best suited for

accurately valuing the invention. The practical difficulty of identifying a royalty

rate that accurately reflects the invention’s contribution to a much larger, complex

product often counsels toward choosing the smallest priceable component that

incorporates the inventive feature.

172

VI. CONCLUSION

Although the willing licensor/willing licensee model is a useful tool for replicating the

market reward for an invention in a reasonable royalty damages calculations, its hypothetical

nature makes it difficult to apply accurately. The recommendations of this chapter, if vigorously

applied, could help achieve damage awards that more accurately reflect the economic value of a

patented invention. They can also play an important role in preventing “hold-up” of a standard.

Both outcomes can encourage innovation and support competition among technologies that

benefit consumers.

Courts have tools to implement these recommendations and to improve the accuracy of

reasonable royalty awards. They can exclude expert testimony that is inconsistent with these

recommendations as unreliable under FRE 702. Courts can also supervise jury damage awards

through the grant of judgment as a matter of law (JMOL), new trial, and remittitur when 173 174 175

those awards are inconsistent with the economic principles underlying reasonable royalty awards.
213

CHAPTER 8

PERMANENT INJUNCTIONS IN PATENT CASES

I. INTRODUCTION .................................................... 215

II. CASE LAW ANALYZING PERMANENT INJUNCTIONS. . . . . . . . . . . . . . . . . 216

A. The eBay Case. ................................................ 216

B. Post-eBay Cases. ............................................... 217

III. INDUSTRY REACTIONS TO eBAY. .................................... 218

A. The Life Sciences Industry. ...................................... 218

B. Firms that Primarily License Out Patents.. . . . . . . . . . . . . . . . . . . . . . . . . . 220

C. IT Manufacturers ............................................... 221

IV. AN ECONOMIC VIEW OF THE PERMANENT 

INJUNCTION ANALYSIS.............................................. 223

A. Reasons Supporting the Grant of an Injunction .. . . . . . . . . . . . . . . . . . . . . 224

B. An Injunction’s Ability to Cause Hold-Up. . . . . . . . . . . . . . . . . . . . . . . . . . 225

C. Balancing Reasons for Granting and Denying Injunctions . . . . . . . . . . . . . 227

V. ANALYZING eBAY’S FOUR FACTORS ................................ 228

A. Irreparable Harm/Inadequacy of Money Damages. . . . . . . . . . . . . . . . . . . 228

B. Balance of the Equities and Hardships Between the Parties. . . . . . . . . . . . 231

C. Public Interest. ................................................ 232

D. Injunction Analysis in the Standard Setting Context.. . . . . . . . . . . . . . . . . 234

VI. REMEDIES FOLLOWING DENIAL OF AN INJUNCTION. . . . . . . . . . . . . . . . 235

A. Ongoing Royalties. ............................................. 235

B. Delaying the Injunction. ......................................... 238
214

VII. REMEDIES IN THE INTERNATIONAL TRADE COMMISSION .. . . . . . . . . 239

VIII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006) (“eBay”). 1

215

CHAPTER 8

PERMANENT INJUNCTIONS IN PATENT CASES

I. INTRODUCTION

In 2006, in eBay v. MercExchange, a unanimous Supreme Court rejected both a “general 1

rule” supporting the grant of a permanent injunction following a finding of patent infringement

and “expansive principles” supporting denial for a patentee that did not practice its invention and

was willing to license. Instead, the Court looked to “traditional equitable principles” and listed

four factors that a patentee must satisfy to obtain an injunction. 

The opinion of the full Court gave little guidance on how to apply the factors, however,

raising concerns about the impact of eBay that often fall along industry lines. The life sciences

industry and firms that primarily license out their technology generally favor predictable

injunction grants. As described in Chapter 1, they rely on an injunction or the threat of an

injunction to encourage innovation by protecting the exclusivity needed to recoup research and

development (R&D) investments, deterring infringement, and encouraging licensing. But as

discussed in Chapter 2, an injunction can also effectuate hold-up by allowing a patentee to

extract a higher royalty in ex post licensing negotiations, after costs have been sunk, than it could

have obtained when alternative technologies were available. Members of the information

technology (IT) industries, who face difficulties identifying all patent rights relevant to a product

prior to commercialization, worried about hold-up. They generally favored a more flexible

approach to injunction grants.

Although the injunction analysis is equitable, to most benefit consumers it should be

conducted in a manner that furthers the patent system’s goal of promoting innovation and

recognizes consumer interest in aligning the patent system and competition policy. A key

challenge is to balance an injunction’s ability to promote innovation and private contracting with

its ability to generate hold-up that can distort competition among technologies, raise prices and

deter innovation. One way to meet that challenge is to identify criteria that help determine when

the harm to a patentee from denial of an injunction and ongoing infringement is small compared

to the consumer harm from hold-up. This chapter identifies criteria helpful to that determination.

Economic concerns weighing the benefits of exclusivity against the harm of hold-up fit

well within the equitable nature of the injunction remedy and eBay’s four factor analysis. This

chapter recommends how courts can incorporate these concerns into each of eBay’s four factors. 

This chapter also discusses how remedies following denial of an injunction and remedies in the

International Trade Commission can be sensitive to these issues.
Richardson v. Suzuki Motor Co., 868 F.2d 1226, 1246-47 (Fed. Cir. 1989) (citations omitted).

2

Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547 (Fed. Cir. 1995) (en banc) (“Accordingly, courts have 3

in rare instances exercised their discretion to deny injunctive relief in order to protect the public

interest.”); see also MercExchange, LLC v. eBay, Inc., 401 F.3d 1323, 1338-39 (Fed. Cir. 2005),

vacated, 547 U.S. 388 (2006).

eBay, 547 U.S. at 393. 4

35 U.S.C. § 283. 5

eBay, 547 U.S. at 391. 6

Id. at 395 (Roberts, C.J., concurring) (the “long tradition of equity practice is not surprising, given the

7

difficulty in protecting a right to exclude through monetary remedies that allow an infringer to use an

invention against the patentee’s wishes - a difficulty that often implicates the first two factors of the

216

II. CASE LAW ANALYZING PERMANENT INJUNCTIONS

A. The eBay Case

By looking “to the laws of property, of which the patent law partakes,” the Federal Circuit

had established a “general rule” in favor of granting injunctions based on a presumption of

irreparable harm. Overcoming this general rule required a showing of significant public harm in 2

order to outweigh the irreparable harm presumed to be caused by infringement. In 2006, in eBay 3

v. MercExchange, a unanimous Supreme Court rejected both the Federal Circuit’s general rule

supporting the grant of an injunction and the district court’s “expansive principles” suggesting

that a patentee that did not practice its invention and was willing to license could not obtain an

injunction. Instead, relying on the express language of the Patent Act, which provides that 4

district courts “may” issue injunctions “in accordance with the principles of equity,” the Court 5

looked to “traditional equitable principles.” The Court listed the four equitable factors that a

patentee must satisfy to obtain an injunction:

A plaintiff must demonstrate: (1) that it has suffered an irreparable

injury; (2) that remedies available at law, such as monetary

damages, are inadequate to compensate for that injury; (3) that,

considering the balance of hardships between the plaintiff and

defendant, a remedy in equity is warranted; and (4) that the public

interest would not be disserved by a permanent injunction.6

Chief Justice Roberts’s concurring opinion, joined by Justices Scalia and Ginsburg,

cautioned that a major departure from the long tradition of equity practice should not be lightly

implied. Courts have granted injunctive relief in the vast majority of patent cases, they

explained, due to the difficulty of protecting a patentee’s right to exclude others from using the

invention through monetary damages.7
traditional four factor test.”) (emphasis in original). 

Id. at 396 (Kennedy, J., concurring) (citing FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE 8

PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY, ch. 3, at 38-39 (Oct. 2003)).

Id. 9

Ernest Grumbles III et al., The Three Year Anniversary of eBay v. MercExchange: A Statistical Analysis

10

of Permanent Injunctions, IP TODAY (Nov. 2009) (72% of requests granted through May 1, 2009, based

on review of decisions available through Lexis); Robert A. Cote, The State of Injunctions in a Post eBay

World, Loyola IP Focus Series - Los Angeles, CA, at 4, June 15, 2007, available at

http://www.lls.edu/ip/past-events/documents/Cote-Revised2.pdf (77% of requests granted in the first

year following the eBay decision).

Eric Keller, Time Varying Compulsory License: Facilitating License Negotiation for Efficient Post- 11

Verdict Patent Infringement, 16 TEX. INTELL. PROP. L.J. 427, 434 (2008). 

217

Justice Kennedy’s concurring opinion, joined by Justices Stevens, Souter and Breyer, 

however, did suggest situations in which district courts may find injunctive relief inappropriate. 

Citing the FTC’s 2003 IP Report, Justice Kennedy noted the development of a business model in

which non-practicing entities obtain patents primarily to garner license fees, not to practice the

inventions. “For these firms, an injunction, and the potentially serious sanctions arising from its

violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek

to buy licenses to practice the patent.” In addition, Justice Kennedy suggested that situations in 8

which the patented invention is “but a small component of the product the companies seek to

produce” may also be inappropriate for injunctive relief because “the threat of an injunction is

employed simply for undue leverage in negotiations.”9

B. Post-eBay Cases

After enumerating the four equitable factors, the opinion of the full Court in eBay gave

little guidance on their application. That, and the divergent emphasis of the two concurring

opinions, created significant uncertainty concerning the circumstances under which courts would

deny permanent injunctions following issuance of the decision in May 2006. Since that time, the

district courts have decided numerous requests for permanent injunctions and the Federal Circuit

also has addressed the four factors several times. Some trends have begun to emerge from this

body of case law. 

Surveys of post-eBay cases reveal that district courts have granted approximately 72%-

77% of permanent injunction requests. In the first year following eBay, courts awarded no 10

injunctions in the four cases involving non-practicing patentees. This result led many to worry 11

that this category of patentees would no longer be able to obtain permanent injunctions. That

concern is unwarranted, however. An updated review of the post-eBay case law through March

31, 2010, reveals that courts heard thirteen requests for permanent injunctions where the opinion
See Appendix B, n.23 (listing cases). 12

The Patent Reform Act of 2007: Hearing on H.R. 1908 Before the Subcomm. On courts, the Internet 13

and Intellectual Property of the H. Comm. on the Judiciary, 110th Cong. 65 (2007) (testimony of Kevin

Sharer, CEO & Chmn. of the Bd., Amgen, Inc.) Myers at 220-21 (3/18/09) (“typically . . . only one out of

thousands of compounds will be proven to be both medically effective and safe enough to become an

approved medicine”); Singer at 225 (3/18/09) (“Most promising drugs, as Jeff [Myers] said, fail along the

way.”).

Shafmaster at 214 (3/18/09) (“Throughout our history we’ve partnered with universities, research 14

institutions and private companies in order to find and develop products and bring them to market.”);

Myers at 221 (3/18/09) (“[Pfizer’s] innovations come from a lot of sources: Internal research, contracts

with third parties, collaborations with universities and biotech companies and with other pharmaceutical

companies. We also seek out promising compounds and innovative technologies by third-parties to

incorporate into our discovery and development processes as well as our product lines through

acquisitions and other arrangements.”).

218

suggests that the patent owner is one of several types of non-practicing entities, including

universities, research institutes and independent inventors. Of those thirteen cases, district courts

granted an injunction seven times. Appendix B presents the results of a survey by panelist

12

Steve Malin that provides an informative picture of how different fact patterns may influence

district courts’ decisions to grant or deny injunctions. Appendix B also provides a descriptive

summary of post-eBay cases.

III. INDUSTRY REACTIONS TO eBAY

Panelists’ concerns about the effects of the eBay decision often fell along industry lines,

with the life sciences industry generally favoring more predictable grants of injunctions and the

information technology (IT) industry favoring a more flexible approach. This categorization is

often not so simple, however, because a firm’s views will also depend upon whether it seeks to

license out its technology for others to produce.

A. The Life Sciences Industry

The research and development necessary to create new products in the life sciences

industry is long, risky and expensive. One company reports that development of a biologic drug

can cost from $800 million to $1.2 billion and take up to 15 years. The research and 13

development process often begins in a university, which then licenses the early-stage technology

to a start-up or a large company that must make substantial investments to move the invention

closer to a product. The start-up companies that develop early-stage technology generally engage

in technology transfer as described in Chapter 1, licensing their technology or partnering with

larger companies that have the resources to fund final-stage development and the clinical trials

necessary for regulatory approval. Life sciences companies and their investors depend on an 14

exclusive market position for successful products in order to recoup the high levels of capital
Singer at 223-25 (3/18/09) (investors in life sciences consider IP early); Ware at 144-48 (2/12/09) 15

(university research and technology transfer require patents and patent licensing).

Bellon at 225-29 (3/18/09) (biotechnology start-up began building patent estate based on early research

16

to establish value of the company); Shafmaster at 240-41 (3/18/09) (discussing multiple reviews during

development work to ensure freedom to operate). 

Armitage at 148-49 (2/12/09) (injunctions that preserve exclusivity critical to life sciences business 17

model); Loeb at 189-90 (2/12/09) (discussing development cycle in the life sciences and indicating that

certainty of 8-10 years exclusivity needed to induce investment).

Ware at 148 (2/12/09) (expressing concern that “venture capitalists will take their funds elsewhere, and 18

small biotech companies will shrink and die rather than grow”); Ware at 156 (2/12/09) (eBay could have

an adverse effect on university licensing); Katznelson at 53-54 (3/18/09) (describing the effect of eBay

on start-up licensing and business models). District courts have granted permanent injunctions to

universities that were asserting life sciences patents in two recent cases, however. Emory Univ. v. Nova

Biogenics, Inc., No. 1:06-CV-0141, 2008 WL 2945476 (N.D. Ga. 2008) (asserting patent on

antimicrobial properties); Johns Hopkins Univ. v. Datascope Corp., 513 F. Supp. 2d 578 (D. Md. 2007)

(asserting patent on methods for fragmenting clots within hemodialysis grafts), rev’d and remanded, 543

F.3d 1342 (Fed. Cir. 2008).

Ware at 205 (2/12/09) (arguing “that the market will benefit from price competition and [eBay 19

deprives] the patentee of its exclusive right”); Armitage at 205-07 (2/12/09) (public interest analysis

should focus on public health exceptions); Bellon at 258 (3/18/09) (the Amgen case could have eroded

the right to exclude inherent in the patent); Am. Intell. Property Law Ass’n Comment at 4 (5/18/09)

(including price competition in the public interest analysis undermines the right to foreclose competition

inherent in a patent grant).

219

they invest in research and development. Panelists reported that for this reason, companies 15

pursue early-stage research only in those areas where they can obtain patent protection for their

own inventions and freedom-to-operate in the face of others’ actual or potential rights.

16

The importance of exclusivity supported by patents led many panelists from the life

sciences industry to express concern about decreased predictability in injunction law following

eBay. Panelists worried that if the ability of a successful patent litigant to obtain an injunction

were in doubt, life sciences companies would have less incentive to invest in risky and expensive

research or be less able to attract the capital needed to fund research. The ability of start-up 17

companies to attract investment after eBay presented a particular concern because of the

perception that “non-practicing entities” are unable to obtain permanent injunctions.

18

Panelists also discussed the extent to which the public interest factor of the eBay analysis

might drive denial of injunctions in life sciences patent cases. They generally agreed that the

public interest factor should focus on public health concerns and not encompass competitionrelated price effects because such an inquiry would be contrary to the Patent Act, which grants

exclusive rights to avoid price competition.19
See Chapter 1. 20

This report uses the term “patent assertion entity” rather than the more common “non-practicing entity” 21

(NPE) to refer to firms whose business model focuses on purchasing and asserting patents. Taken

literally, the term NPE encompasses patent owners that primarily seek to develop and transfer

technology, such as universities and semiconductor design houses. Patent assertion entities do not

include this latter group. See Chapter 2, at 51 n.2.

As discussed in Appendix B, Sections II, III.A.2, III.A.3, district courts have granted injunctions to non- 22

practicing entities about 50% of the time. Where an injunction has been denied, the denial seldom turned

solely on the fact that the patent holder did not practice the patent.

Ware at 156-57 (2/12/09).

23

Cassidy at 165-67 (2/12/09).

24

Cassidy at 166-67 (2/12/09) (eBay may decrease incentives for manufacturing companies to bargain

25

with non-practicing patentees); Ware at 144-48 (2/12/09) (lack of a certain exclusive license in the wake

of eBay may diminish the value of IP for non-practicing universities and start-up companies); Patent Law

Reform: Injunctions and Damages: Before the Subcomm. on the Judiciary Patent Law Reform of the S.

Comm. on the Judiciary, 109th Cong. 984 (2005) (testimony of Carl Gulbrandsen, Managing Director,

220

B. Firms that Primarily License Out Patents

As discussed in Chapter 1, firms and individuals who invent and license patented

technology but do not manufacture a product can be an important source of new invention that

drives the creation of new products. The start-up companies of the life sciences industry fall

within this category, but it reaches into all technology sectors, including IT. Some develop early

stage technology, hoping eventually to partner with or be acquired by a larger company with the

resources to bring a product to market. Others act as design houses, developing inventive

technology that they then license to manufacturing companies for their ongoing use. As 20

discussed in Chapter 2, patent assertion entities (PAEs) also license patents without

manufacturing, but those transactions do not typically involve technology transfer for the creation

of new products.21

Non-practicing patentees of all types – developers of early stage technology, designhouses and patent assertion entities – worried that they could no longer obtain a permanent

injunction after winning patent litigation. One panelist asserted that there remains significant 22

uncertainty about how courts will analyze the irreparable harm factor when the patentee is a

licensing entity and the harm can be characterized as a lost royalty. Several panelists described

23

a dynamic that one called “infringer hold-out.” They asserted that manufacturers will be less 24

willing to license and more willing to litigate if the consequence of lost litigation is only a

compulsory license and not an injunction. They also argued that a manufacturing company may

take advantage of the fact that a smaller licensing entity does not have the resources to fund

expensive patent litigation by refusing to license.25
Wisconsin Alumni Research Foundation (WARF)) (“limits to injunctive relief simply create incentives to

infringe and to prolong litigation and, in fact, will potentially spawn additional litigation because

companies will choose to forego up-front licensing and instead wait for a lawsuit to create what would

be, in effect, a compulsory license . . . . Consequently, investors will have less incentive to fund such

innovative companies.”).

Ware at 148 (2/12/09) (“To the extent that changes in the patent system call into question the ability to 26

enforce the right of exclusivity through injunctive relief, venture capitalists will take their funds

elsewhere, and small biotech companies will shrink and die rather than grow.”).

Rhodes at 167-68 (2/12/09) (eBay factors may reduce to rigid tests that require patentees to 27

commercialize their IP immediately); Katznelson at 52-53 (3/18/09) (arguing that start-ups may need to

manufacture to obtain an injunction).

Katznelson at 60-61 (3/18/09). 28

Kiani at 63-64 (3/18/09) (arguing salvage value of patents did not incentivize investment in start-ups). 29

Thorne at 117 (3/18/09) (“product can have a thousand or more patents [read] on it”); Cockburn at 232- 30

33 (4/17/09) (IT patent thicket includes “a large number of patents . . . potentially overlapping, held by

numerous people”); see also FED. TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF

COMPETITION AND PATENT LAW AND POLICY, ch. 3, at 34, 52 (Oct. 2003) (“2003 FTC IP Report”),

available at http://ftc.gov/os/2003/10/innovationrpt.pdf.

221

Panelists identified several ways in which changed injunction law might affect inventive

activities. Patentees that seek to recoup investment in risky R&D through exclusive licensing

may invest less if they cannot be assured of a patent-protected exclusive market position in the

future, they said. Rigid rules denying injunctions to licensing entities, such as design houses, 26

may prevent them from effectively monetizing their intellectual property, causing them to forgo

design projects or move away from a business model that relies on licensing, and move toward a

potentially less efficient manufacturing scheme. Another panelist was concerned that the lower 27

value of patents in the hands of licensing companies means that independent inventors and startups would be less able to attract capital because investors sometimes look to the sale of patent

assets to recoup investment when the company’s original business plan fails. Not all agreed

28

with this latter point, however.29

C. IT Manufacturers

Panelists from the IT industry discussed how a complex patent landscape and the shortcomings of the patent system’s notice function could lead to patent hold-up from the threat of an

injunction. IT products typically comprise hundreds or thousands of patented components, with

no one company holding all the rights necessary to manufacture a product. In addition, many IT 30

products use industry standards to ensure interoperability, necessitating that manufacturers
Krall at 134-35 (3/18/09) (standard setting is critical to product development to ensure interoperability 31

and interchangeable products).

Krall at 114-15 (3/1809) (“in the tech industry doing [patent clearance] searches is almost cost- 32

prohibitive”); Sarboraria at 120 (3/18/09) (sheer number of patents and the uncertainty of claim scope

make clearance searches in the software industry costly and inadequate); Harris at 123 (3/18/09)

(searches unlikely to identify patents that might be asserted, since claim scope is often stretched

unpredictably); Phelps at 261-63 (5/4/09) (doing a patent clearance “up front” is “pretty ineffective” due

to the number of patents and many different entities who might have relevant patents); Luftman at 209-10

(2/12/09) (low margins in the IT industry may not support the costs of conducting such a large search);

Slifer at 125 (3/18/09) (“The uncertainty in unpublished applications, in pending applications, in claim

scope and damages, the sheer number of possible areas that technology could be relevant to a new

product, have . . . taught us . . . [that] expending a lot of energy and resources” in freedom to operate

searches is usually “futile.”). 

Massaroni at 192-93 (2/12/09) (describing hold-up as assertion of a poor quality patent, often issued 33

after commercialization of the accused product, when costs have been sunk); Badenoch at 79-80

(2/12/09) (“[T]he claims often come out way after the competitors have gone into the marketplace with a

lot of related technology. And so then you really have the sunk cost problem, and you have this issue

that suddenly injunctions might have an impact way beyond the invention that is the subject of the

patent.”). See also Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 TEX. L.

REV. 1991 (2007).

Luftman at 195-97 (2/12/09) (hold-up is especially problematic in standards-based technology when 34

companies have no choice but to use the patented standard); Thorne at 79 (3/18/09) (describing hold-up

in standard setting scenarios); Krall at 134-35 (3/18/09) (describing impact when successor patentees do

not honor licensing commitments made to standard setting organizations).

222

license technology that is essential to the standard. Panelists reported that the notice problems 31

described in Chapters 2 and 3 – the large number of patents, the uncertainty of patent scope and

late issuing patents – make identifying all patents that might be asserted against an IT product

prohibitively expensive and sometimes impossible. 

32

For these reasons, a manufacturer may face allegations of patent infringement after

incurring significant sunk costs to produce and distribute an infringing product. At that time, the

cost of switching to an alternative technology may be high compared to the cost of choosing an

alternative prior to incurring sunk costs. Because the manufacturer risks its investment if it

cannot obtain a license, the threat of an injunction allows a patentee to demand and obtain a

higher royalty payment than it could have obtained prior to costs being sunk, when alternatives

were available. That dynamic, often called hold-up, will be especially strong when the patent is

33

asserted against standardized technology and the industry is “locked-in.”34
See, e.g., Massaroni at 151-53 (2/12/09) (flexible injunction standards have had an impact on non- 35

practicing entities); Luftman at 153-54 (2/12/09) (flexible standards for injunction grants limit patent

holding companies from skewing licensing negotiations). 

Slifer at 82 (3/18/09) (Micron developed patent portfolio in part to cross license or defend against suits 36

from other companies); Harris at 87 (3/18/09) (AOL uses patents defensively); Thorne at 87-88 (3/18/09)

(Verizon, same); see also 2003 FTC IP Report, ch. 2, at 30-31; ch. 3, at 38-39, 52-53.

Luftman at 142-44 (2/12/09) (parties are more likely to focus on whether patent is valid and infringed in 37

settlement discussions rather than only avoiding the risk of injunction).

Jensen at 249 (3/18/09) (since eBay, more companies are willing to stand up to weak patent suits). 38

Luftman at 154-56 (2/12/09) (patent suits against Palm more than doubled since 2004); Krall at 131 39

(3/18/09) (increase in patent cases against Sun); Thorne at 133-34 (3/18/09) (Verizon faces more patent

suits following eBay than before); Delgado at 75 (4/17/09) (increase in patent litigation by patent holding

companies); Quatela at 74 (4/17/09) (Kodak faces sharp increase in patent assertions). 

See, e.g., eBay, 547 U.S. at 395 (Roberts, C.J., concurring) (difficulty of protecting right to exclude

40

with money damages supports history of issuing injunctions in vast majority of cases); Thomas F. Cotter,

Patent Holdup, Patent Remedies, and Antitrust Responses, 34 J. CORP. L. 1151, 1175 (2009). 

Sprigman at 45 (2/12/09). 41

223

The potential for hold-up caused by an injunction led most panelists and commentators

representing IT manufacturers to favor a flexible approach for awarding permanent injunctions.

35

This was especially true regarding patentees that are patent assertion entities (PAEs). When

facing infringement allegations brought by another manufacturer, an IT firm can often

countersue, a scenario that frequently results in cross-licensing. But this strategy is ineffective

when the patent owner is a patent assertion entity. As one panelist explained, however, since 36

the eBay decision, settlement negotiations between manufacturers and patent assertion entities

focus less on mitigating the risk of an automatic injunction. Panelists reported that

37

manufacturing companies are now sometimes more willing to litigate against weak claims, and

cases brought by assertion entities will settle for lower amounts due to a decreased threat of an

injunction. Panelists did not report a decrease in litigation, however. 38 39

IV. AN ECONOMIC VIEW OF THE PERMANENT INJUNCTION ANALYSIS

Consistent with the goals of the patent system, the principles for structuring and

conducting the injunction analysis should seek to promote innovation. As courts and

commentators have argued, this goal is best served by awarding a permanent injunction in the

large majority of cases. Indeed, courts applying eBay have continued to award injunctions in 40

most instances. One panelist explained that eBay did not make a fundamental change, but merely

shifted the availability of injunctions on the margins. However, eBay does allow a more 41

nuanced analysis that can recognize the ability of injunctions in some situations to unnecessarily
Su at 67-68 (2/12/09) (injunction analysis must consider what conduct to encourage). 42

Section III.A. & B., supra; see, e.g., F. Scott Kieff & Henry E. Smith, How Not to Invent a Patent 43

Crisis, in REACTING TO THE SPENDING SPREE: POLICY CHANGES WE CAN AFFORD 62-63 (2009)

(expectation of exclusion and credible threats of enforcement spur R&D).

See, e.g., Bellon at 227-28 (3/18/09) (a strong IP portfolio is critical to Hydra’s ability to grow its

44

business); Singer at 223-25 (3/18/09) (without strong IP enforcement, investors would not invest in new

products). 

See, e.g., Vincent E. O’Brien, Economics and Key Patent Damages Cases, 9 U. BALT. INTELL. PROP.

45

L.J. 1 (2000) (discussing consequences of injunction); ROGER D. BLAIR & THOMAS F. COTTER,

INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL DIMENSIONS OF RIGHTS AND REMEDIES 231 (2005)

(discussing consequences of injunction).

See, e.g., Bellon at 229-30 (3/18/09) (“If we thought there was going to be [a freedom to operate] 46

problem, we would not go into that area or we would try to license.”); Myers at 233-34 (3/18/09)

(ensuring freedom to operate before entering a product space is important); Jensen at 217-18 (3/18/09)

(companies start to search IP early in order to ensure freedom to operate as investment in technology

increases). 

224

raise costs and deter innovation. The challenge courts now face is how to approach that analysis

in a manner that furthers the goals of the patent system while aligning it with competition policy

so that consumers benefit from both innovation and competition among technologies. This 42

section identifies characteristics of injunctions that must be balanced to meet that challenge.

A. Reasons Supporting the Grant of an Injunction 

The first three characteristics of injunctions that should inform the eBay analysis

generally support granting an injunction. Of those, the first and most fundamental is that an

injunction preserves the exclusivity that provides the foundation of the patent system’s incentives

to innovate. Altering that exclusivity must be undertaken with significant care not to undermine

those incentives. Numerous panelists and commentators discussed the importance of

maintaining a patent’s exclusivity to support the patent system’s ability to spur research and

development.43

Second, the credible threat of an injunction provides a significant deterrent to

infringement in the first place. That deterrent, which is critical to many patentees when investing

in R&D, stems from the serious consequences to an infringer from an injunction. If an 44

adjudged infringer has sunk costs into R&D or a plant and equipment to produce the infringing

product, it risks losing that investment when faced with an injunction. The injunction may

render the infringer’s inventory valueless, and redesign of the product may be expensive or

impossible. Companies that are loathe to incur substantial costs where an injunction would 45

make the product unmarketable often devote substantial effort to ensuring freedom to operate.46

One panelist from the biotech industry explained, “[w]e take great care in our freedom to operate
Shafmeister at 216 (3/18/09).

47

Horton at 172-73 (3/18/09) (GE will acquire patents to ensure freedom to operate when pursuing 48

multiple research paths); Miller at 188 (3/18/09) (P&G has a policy of not infringing patents to avoid

risk); Griswold at 197 (3/18/09) (3M, same).

Cotter, supra note 40, at 1175-76. See also John M. Golden, Principles for Patent Remedies, 88 TEX.

49

L. REV. 505, 564-66 (2010) (identifying “devolution” as an important principle in structuring patent

remedies); Golden at 61 (2/12/09) (parties are closer to the changing facts); Sprigman at 66-67 (2/12/09)

(need to structure remedies to get information from the party in the best position to provide it); John

Schlicher Comment at 10-11 (5/15/09) (injunction is critical to functioning of the patent system in which

use and pricing decisions are made by private ordering); Smith at 84-85 (2/12/09) (threat of injunction

prevents potential infringers from engaging in hold-out to obtain lower royalties).

The term “switching costs” is used throughout this chapter to refer to all the costs associated with

50

switching from the current design to an alternative, including the expense of retooling and ensuring

compatibility with other components and products and the higher cost associated with using the

alternative. 

225

searches. We thoroughly analyze all of the patents out there. We keep an eye on third-party

patents and what’s happening with them, and we make sure before embarking on development

pathways that we will have all the rights we need.” Concern over the risk of an injunction after 47

a company has sunk substantial costs into a project is not unique to the biotech industry,

however.48

Third, a predictable injunction threat will encourage private ordering, and in particular,

licensing by the parties. An alleged infringer, knowing it faces an injunction if unsuccessful in

litigation, has an incentive to enter into a presumably more efficient private transaction. 

Commentators explain that this outcome is preferable to a compulsory licensing regime because

the patentee and infringer generally have better information about the appropriate terms of a

license than would a court, leading to lower administration costs and error rates. The parties also

have a significant advantage in developing efficient agreements, such as cross licensing

arrangements, that can reduce transactions costs.49

B. An Injunction’s Ability to Cause Hold-Up

The fourth characteristic of an injunction is its ability to cause patent hold-up in some

situations. The threat of an injunction will lead the manufacturer to pay royalties up to its

switching costs, which may be higher than the cost at the time of product design. 50

Commentators explain that the threat of hold-up gives patent holders excessive bargaining power

in component-based industries that allows the “patent owner to capture value that has nothing to

do with its invention, merely because the infringer cannot separate the infringing component
Lemley & Shapiro, supra note 33, at 2010. As an example, they cite the Blackberry case, NTP v.

51

Research in Motion, which settled for $612.5 million to avoid a potential injunction after a jury had

awarded reasonable royalty damages of $33.5 million. Id. at 2049 n.36. See also Cotter, supra note 40,

at 1160; Vincenzo Denicolò, Damien Geradin, Anne Layne-Farrar & A. Jorge Padilla, Revisiting

Injunctive Relief: Interpreting eBay in High-Tech Industries with Non-Practicing Patent Holders, 4 J.

COMPETITION L. & ECON. 571, 573 (2008).

J. Gregory Sidak, Holdup, Royalty Stacking and the Presumption of Injunctive Relief for Patent 52

Infringement: A Reply to Lemley and Shapiro, 92 MINN. L. REV. 714, 717, 736-43 (2008) (not

accounting for the potential welfare effects from lock-in); Einer Elhauge, Patent Holdup and Royalty

Stacking, 4 J. COMPETITION L. & ECON. 535, 565-66 (2008) (assuming infringer can “simply decline to

use the overpriced technologies”).

See Chapter 3. 53

Elhauge, supra note 52, at 535-36; John Golden, “Patent Trolls” and Patent Remedies, 85 TEX. L. REV.

54

2111 (2007); Sidak, supra note 52, at 714.

226

from the non-infringing ones” after it has sunk costs into the design and marketing of a product.51

The implementers of the patented technology do not receive the price benefits that competition

among technologies can provide, and they may pass those higher costs on to consumers. 

Moreover, hold-up and the threat of hold-up can discourage innovation by increasing costs and

uncertainty.

Critics of allowing concerns about hold-up to inform post-eBay injunction analysis

primarily raise two points. First, they argue that decreasing the likelihood of a patentee receiving

an injunction will lead manufacturers to choose infringement rather than licensing. This

argument assumes that a manufacturer “chooses” to infringe because either (1) it has notice of

the patent and a clear understanding of its boundaries when designing the infringing product; or

(2) it can easily redesign its product to exclude the patented technology after it has begun

manufacturing. The assumption about notice is generally not the case, however, especially in 52

the IT industries. The assumption about redesign ignores the problems of lock-in and high 53

switching costs. When either assumption is correct, the injunction analysis should take those

facts into account, as discussed below, but the analysis should not accept those assumptions as

universally true in the first instance.

The critics’ second point is that structuring the injunction analysis to avoid hold-up will

result in lower royalties that provide insufficient incentives to inventors to invest in optimal

levels of research and development. Consumers would be harmed by lower levels of 54

innovation. As other commentators have argued, however, the effect on innovation of lower

royalties resulting from the avoidance of hold-up is not so straightforward. Hold-up gives the

patentee more compensation than it could have earned through competition in the technology

market. The hold-up value can be seen as a windfall to a patentee that seeks to develop or sell its

technology for further development in a competitive technology market. That windfall cannot be
Cotter, supra note 40, at 1168-69, 1179; Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, 55

Standard Setting, Patents, and Hold-up, 74 ANTITRUST L.J. 603, 622-23 (2007).

See Chapter 1.

56

See Chapter 2; Meyer at 69-70 (2/12/09). See also John Johnson, Gregory K. Leonard, Christine Meyer 57

& Ken Serwin, Don’t Feed the Trolls?, 42 LES NOUVELLES 487, 488 (Sept. 2007); Mark A. Lemley &

Philip J. Weiser, Should Property or Liability Rules Govern Information?, 85 TEX. L. REV. 783, 786-88

(2007). 

Cotter, supra note 40, at 1171; Layne-Farrar at 82-83 (2/12/09) (requiring that infringement have been 58

easy to avoid ex ante had the infringer known of the patent).

227

understood to provide ex ante incentives to undertake innovative activity to generate new

products, but it can create the problems of overcompensation described in Chapters 2 and 4. 

Those problems include encouraging lie-in-wait behavior – ex post licensing and litigation by

patentees rather than ex ante efforts at technology transfer and the creation of new products.55

The availability of hold-up value to patentees may indeed encourage invention and

patenting activity, but that is not the same thing as encouraging the innovation necessary to bring

new products to market. Invention is the first step of innovation, but innovation often requires

significant additional development activity beyond that first step in order to get new products and

services to consumers. While increased invention and patenting activity will lead to increased 56

innovation in many contexts, it can decrease innovation in others. The risk that patentees that

have made no technical contribution to a product can extract hold-up value from manufacturers

increases uncertainty and costs and discourages innovation by those manufacturers.

57

C. Balancing Reasons for Granting and Denying Injunctions

These reasons for granting and denying injunctions should be balanced for the patent

system to promote innovation while maintaining alignment with competition policy. Although

the potential costs from hold-up should be considered, not all hold-up warrants denial of an

injunction. Denying an injunction every time an infringer’s switching costs exceed the value of

the invention ex ante would dramatically undermine the ability of an injunction threat to deter

infringement, protect a patentee’s exclusivity, and encourage licensing. An important step in

balancing these concerns is to set forth criteria that would help identify those situations in which

the costs of hold-up resulting from an injunction exceed the benefits of exclusivity due to the

patent grant.

A first criterion considers whether the patented technology is a minor component of a

complex product that would have been easy to design around ex ante. When true, these are the 58

cases in which the ex ante value of the patented technology is most likely to be small relative to

the cost of hold-up based on the value of the entire product. In contrast, depriving a patentee of
See Denicolò et al., supra note 51, at 573, 590-91 (requiring that infringement be inadvertent); Lemley 59

& Shapiro, supra note 33, at 2036-37 (requiring that infringer have independently developed the

technology and not copied it).

As discussed in Appendix B, Section III.A, courts and commentators often analyze the first two eBay 60

factors as one.

eBay, 547 U.S. at 393. 61

228

exclusive control over an invention that provides the majority of value to a product risks

undermining the patent system’s incentives to make and develop significant advances. 

A second criterion considers whether the infringer uses the patented technology to

compete against the patentee and the effect of the infringement on that competition. The

patentee’s ability to compete in both product and technology markets is important. A lack of

competition is more likely to support a conclusion of problematic hold-up, although that analysis

involves important subtleties discussed below. A third criterion is the absence or presence of

copying. This consideration is needed to support the ability of an injunction threat to deter 59

infringement and encourage parties to negotiate a license. 

V. ANALYZING EBAY’S FOUR FACTORS

Although the criteria discussed above can help assess whether the harm from hold-up

might outweigh the benefits from exclusivity for a particular invention, a court’s analysis and the

parties’ arguments will be structured according to the four equitable factors set out in the

Supreme Court’s eBay decision. In fact, concerns about balancing the harms and benefits of

injunctions to innovation and competition fit well within the eBay framework. 

A. Irreparable Harm/Inadequacy of Money Damages60

Much of the discussion on the state of injunction law post-eBay has focused on whether

the patentee and infringer compete in a goods market. Conventional wisdom assumes that nonpracticing patentees, meaning those who do not compete in sales of a product, cannot obtain

injunctions because money damages will adequately compensate any harm they may suffer from

infringement. Conventional wisdom also assumes that a patent owner practicing the patent can

and should always be granted an injunction. The case law review in Appendix B demonstrates

that neither assumption is accurate or consistent with the Supreme Court’s explicit warning

against categorical rules in the injunction analysis.

61

Moreover, assumptions about irreparable harm based solely on whether the patentee

practices the invention do not achieve the balance described above. On the one hand, the class of

non-practicing patent owners is too diverse to be subject to a simple rule. It includes universities,
See Chapter 1. 62

U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST GUIDELINES FOR THE LICENSING OF 63

INTELLECTUAL PROPERTY § 3.2.2 (1995) (“Technology markets consist of the intellectual property that is

licensed . . . and its close substitutes . . . .”).

Broadcom Corp. v. Qualcomm, Inc., 543 F.3d 683, 702 (Fed. Cir. 2008). 

64

Commonwealth Scientific and Indus. Research Org. v. Buffalo Tech., Inc., 492 F. Supp. 2d 600, 604-05 65

(E.D. Tex. 2007) (explaining that infringement can harm reputation and a research institution’s ability to

obtain funding and recruit scientists just as it can harm brand name or goodwill to a manufacturing

company); see also Emory Univ. v. Nova Biogenics, Inc., No. 1:06-CV-0141, 2008 WL 2945476, at *5

(N.D. Ga. 2008) (stating that negative effects from infringement on goodwill and prestige are real). 

Sections III.A and B, supra.

66

See, e.g., z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437, 440-41 (E.D. Tex. 2006). The 67

patented technology was a small component of the infringing product and unrelated to the product’s core

functionality. The court concluded that the patent holding company patentee would not suffer irreparable

harm because the only entity it was prevented from licensing in the future was the defendant. Id. See

229

start-ups, semiconductor design houses and patent assertion entities, to name a few. On the 62

other hand, a practicing patentee’s assertion of a narrow patent on a minor component can

generate the negative consequences of hold-up in the same way that a non-practicing patentee’s

can. Fortunately, the equitable test that governs the injunction analysis empowers courts to apply

a flexible, fact-specific approach to decision making.

A patentee that licenses as part of a technology transfer program, such as a university or

semiconductor design house, can suffer harm from infringement that is more akin to that suffered

by a manufacturing patentee. Although this category of non-practicing patentees does not

compete in a goods market, it does compete in a technology market to have its technology 63

purchased for incorporation into new products. As one court explained, such patentees compete

for “design wins.” The harm suffered by these patentees as a result of infringement can be 64

analogous to that suffered by manufacturing patentees, including loss of a customer base,

industry disregard of its patent rights, and harm to reputation as an innovator. Where a patentee 65

wishes to exclusively license, infringement can destroy its ability to do so. The availability of an

injunction is important to such patentees, who rely on the threat to deter infringement, encourage

ex ante licensing, and prevent infringer hold-out.66

However, when a non-practicing patentee seeks to license broadly, denial of an injunction

in the interest of avoiding hold-up and overcompensation may not prevent the patentee from

receiving the full value of the invention. This is more likely to be true when the patentee is a

PAE seeking to license companies that had independently created and marketed the technology. 

A PAE will not have the same concerns about deterring future infringement and protecting its

reputation as an innovator that other patentees may have.67
also Paice, LLC v. Toyota Motor Corp., No. 2:04-CV-211, 2006 WL 2385139, at *5 (E.D. Tex. 2006)

(injunction denied to licensing company plaintiff where the patented product was a small component of

the infringing device), aff’d in part, vacated in part and remanded, 504 F.3d 1293 (Fed. Cir. 2007).

IGT v. Bally Gaming Int’l, Inc., 675 F. Supp. 2d 487, 489-90 (D. Del. 2009) (injunction denied where 68

market contained more than two competitors and court required more than a summary overview of the

competitive landscape to find irreparable harm), aff’d in part, vacated in part and remanded, 508 F.3d

1293 (Fed. Cir. 2007). 

Sprigman at 35 (2/12/09); Malin at 12-13 (2/12/09). See, e.g., Brooktrout, Inc. v. Eicon Networks 69

Corp., No. 2:03-CV-59, 2007 WL 1730112, at *1 (E.D. Tex. 2007) (“intellectual property is quite

valuable when it is asserted against a competitor in the plaintiff's market”).

See, e.g., Sundance, Inc. v. DeMonte Fabricating, Ltd., No. 02-73543, 2007 WL 37742, at *2 (E.D. 70

Mich. Jan. 4, 2007) (injunction denied where court did not find irreparable harm because the market

included many competitors who produced products that did not contain the patented feature). See

Chapter 5 for a discussion of the effect of non-infringing alternatives on market analysis.

eBay, 547 U.S. at 391 (“plaintiff must demonstrate: (1) that it has suffered an irreparable injury . . . .”). 71

Moreover, equity places the burden of proving irreparable harm on the party seeking an injunction as the

one with easiest access to the relevant information. See Sprigman at 121 (2/12/09) (evidence of

irreparable harm is typically in the hands of the patentee and presumptions should be structured to

encourage disclosure).

230

This is not to say, however, that courts should assume all manufacturing patentees will

suffer irreparable harm from infringement. While that might often be the case, the analysis must

consider other facts, including the relationship of the patented invention to the infringing product

and the structure of the relevant market. Some courts have assumed that where parties 68

compete, infringement necessarily erodes market price and causes the patentee to lose market

share. If there are only two competitors in a market, then infringement is more likely to lead to 69

price and market effects. However, the patent may cover a minor component of the infringing

product, and competing products may include non-infringing alternatives that are acceptable to

customers. In that case, it is less likely that the infringement (as opposed to competition

generally provided by the infringer) is harming the patentee.70

The variety and complexity of factual scenarios discussed here caution against creating

any assumptions of irreparable harm based on a finding of infringement, a patentee’s use of the 71

patent, or its willingness to license. A careful consideration of the nature of the patented

invention, the infringing use, and competition in the relevant market may be required.

Recommendation. Courts should not presume irreparable harm based on a

finding of infringement or the patentee’s use of the patent. Conversely, courts

should recognize that infringement can irreparably harm the ability of patentees
eBay, 547 U.S. at 391 (“plaintiff must demonstrate . . . (3) that considering the balance of hardships 72

between the plaintiff and defendant, a remedy in equity is warranted”); cf. Acumed, LLC v. Stryker

Corp., 551 F.3d 1323, 1330 (Fed. Cir. 2008) (“[a]s a preliminary matter, the balance considered is only

between a plaintiff and a defendant”).

Kieff & Smith, supra note 43, at 68-69 (requiring a “grossly disproportionate hardship on the 73

defendant” to deny an injunction); see also Smith at 106 (2/12/09) (balance of hardships and public

interest factors are equitable safety valves).

Hynix Semiconductor, Inc. v. Rambus, Inc., 609 F. Supp. 2d 951, 984-85 (N.D. Cal. 2009) (denying 74

injunction, in part due to lock-in); Badenoch at 88 (2/12/09) (courts should evaluate the impact of an

injunction due to the defendant’s sunk costs); Su at 118 (2/12/09) (courts should require greater impact

on the infringer’s business than merely that which remedies the infringement, such as hold-up).

See, e.g., Schlicher Comment at 34 (5/15/09) (One criteria necessary for denying an injunction is that 75

“the infringer has made large investments . . . necessary to produce any product . . . and those

investments . . . are large relative to the value of the patented invention.”).

3M Innovative Properties Co. v. Avery Dennison Corp., No. 01-1781, 2006 WL 2735499, at *2 (D. 76

Minn. 2006); Johns Hopkins, 513 F. Supp. 2d at 586 (“the hardship for loss of sales and for ceasing

operations is not sufficient because they are direct consequences of the illegal patent infringement”);

Smith & Nephew, Inc. v. Synthes, 466 F. Supp. 2d 978, 983 (W.D. Tenn. 2006) (“Although Synthes’

231

that primarily engage in technology transfer through licensing to compete in a

technology market.

B. Balance of the Equities and Hardships Between the Parties

Under this factor, courts must consider the effect of an injunction on an infringer and

balance it against the harm that infringement imposes on the patentee. Commentators have 72

stated that, “the equitable approach is a safety valve for those situations in which someone who is

otherwise a good candidate for getting an injunction – such as a patentee whose patent has been

infringed – should not get one because of some glaring injustice.” But this factor also allows 73

courts to consider whether an injunction would subject the infringer to hold-up because it is

“locked-in” to using the patented technology due to high switching costs or compatibility

concerns. The expense and harm to an infringer facing hold-up can be weighed against the 74

harm to the patentee by considering the criteria discussed above. The balance will tend to tip

toward the infringer when the invention is a component of a downstream product accounting for

a relatively small portion of the product’s value, and when designing around the infringing

product ex post is more costly than it would have been ex ante. In addition, the infringer must

not have copied the invention.75

Some courts have dismissed infringers’ complaints of hardship by stating that “[o]ne who

elects to build a business on a product found to infringe cannot be heard to complain if an

injunction against continuing infringement destroys the business.” The quote originates from a 76
effort, time, and expense in redesigning [the infringing product] might be significant, that is the

consequence of patent infringement.”); see also Su at 86 (2/12/09) (courts not sympathetic to arguments

that equity should save people from hardship they have created).

Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1003 n.12 (Fed. Cir. 1986) (“One who elects to 77

build a business on a product found to infringe cannot be heard to complain if an injunction against

continuing infringement destroys the business so elected.”).

Hynix, 609 F. Supp. 2d at 970. 78

Id. 79

See Badenoch at 79-80 (2/12/09) (arguing that boundaries of patents are uncertain, making injunction 80

punitive where defendants independently developed product and incurred sunk costs).

E.g., 3M Innovative Properties Co. v. Avery Dennison Corp., No. 01-1781, 2006 WL 2735499, at *2

81

(D. Minn. Sept. 25, 2006).

eBay, 547 U.S. at 391 (“plaintiff must demonstrate . . . (4) that the public interest would not be

82

disserved by a permanent injunction”).

232

1986 Federal Circuit case that predates eBay. As one district court recently explained, reliance

77

on the quote in modern injunction analysis is inappropriate: “[t]o ignore harm to the infringer

because it cannot be heard to complain runs contrary to eBay’s mandate to consider the balance

of hardships between the plaintiff and defendant.” In the interest of equity, courts should limit

78

the quotation’s relevance to those instances where an infringer truly “elects” to infringe by

copying patented technology with knowledge of the patent. Given the notice problems and 79

uncertainty endemic in some sectors of the patent system, it is inaccurate to assume that many

infringers “elect” to infringe, and formulating injunction policy on the assumption that they do

threatens to make the remedy punitive rather than equitable. Doing so can lead to hold-up, 80

overcompensate patentees and harm consumers through higher prices and decreased innovation.

Recommendation. Courts should consider the hardship of an infringer facing

hold-up under this prong. Courts should reject the statement that an infringer

“cannot be heard to complain if an injunction against continuing infringement

destroys the business,” except in those instances where an infringer “elects” to 81

infringe by copying a patented invention with knowledge of the patent.

C. Public Interest

Under the public interest factor, courts must examine the effect an injunction would have

on third parties, including the public at large. In the past, courts denied injunctions “in rare

82

instances” to protect the public interest where an injunction would have serious consequences for
Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547 (Fed. Cir. 1995) (“courts have in rare instances 83

exercised their discretion to deny injunctive relief in order to protect the public interest.”); City of

Milwaukee v. Activated Sludge, Inc., 69 F.2d 577 (7th Cir. 1934) (overturning permanent injunction on

operation of sewage plant based on public health concerns).

See, e.g. Broadcom v. Qualcomm, Inc., 543 F.3d 683, 704 (Fed. Cir. 2008) (delaying start of injunction 84

on cell phone because immediate injunction would adversely affect public, network carriers and handset

manufacturers); Finjan Software, Ltd. v. Secure Computing Corp., No. 06-369, 2009 WL 2524495, at

*11 (D. Del. Aug. 18, 2009) (considering effect of injunction on computer security and service

disruptions but finding insufficient evidence to outweigh public interest in a strong patent system), aff’d

in part, rev’d in part and remanded, 626 F.3d 1197 (Fed. Cir. 2010); Amgen, Inc. v. F. Hoffman-La

Roche, Ltd., 581 F. Supp. 2d 160, 212-26 (D. Mass. 2008), aff’d in part, 580 F.3d 1340 (Fed. Cir. 2009)

(evaluating whether injunction could increase drug prices for government health programs).

Appendix B, Section III.C; see also, Telequip Corp. v. Change Exchange, No. 5:01-CV-1748, 2006 WL 85

2385425, at *2 (N.D.N.Y. Aug. 15, 2006) (“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”); Zen

Design Group, Ltd. v. Clint, No. 08-cv-14309, 2009 WL 4050247 (E.D. Mich. Nov. 23, 2009) (denial of

injunction would disincentivize scientific progress).

Ware at 199-200 (evaluating price competition under the public interest prong is contrary to the grant of

86

exclusivity inherent in the patent); Am. Intell. Property Law Ass’n Comment at 4 (5/18/09).

233

public health and safety. Since eBay, a few courts have appropriately broadened the scope of 83

the public interest concerns to include computer security and other burdens that would be borne

by the broader public. 

84

Courts often cite the public’s interest in “a strong patent system” as supporting an

injunction, but a more nuanced approach recognizing that the public has a strong interest in a 85

patent system that best promotes innovation is needed. As discussed above, such a patent system

will very often award injunctions to patentees. But in some circumstances, including those

involving hold-up based on a patent for a minor component, an injunction could distort

competition with unpatented technology, overcompensate the patentee, unduly raise prices to

consumers and undermine rather than promote innovation. 

Recommendation. When warranted by the facts, courts should consider the

public’s interest in avoiding patent hold-up, which can increase costs and deter

innovation. 

Panelists and commentators worried that courts might expand the notion of public interest

to include the benefit of lower prices, especially for medicines. For instance, one panelist

86

described the public interest factor as a “wild card” that could raise a series of welfare balancing
Sprigman at 121-24 (2/12/09).

87

See U.S. CONST. art. I, § 8; Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150-51 88

(1989) (the patent system embodies a carefully crafted bargain for encouraging new and non-obvious

advances in technology in return for exclusive rights for a period of years).

Krall at 134-35 (3/18/09) (standard setting is critical to ensure interoperability and interchangeable

89

products); see Chapter 7, Section III.C.

U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL 90

PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION at 35 (2007); Farrell et al., supra note

55, at 616.

234

decisions, comparing the benefits of patent exclusivity versus cheaper drugs. Beyond the 87

circumstances of hold-up that can raise prices by distorting competition with unpatented

technology, or extreme circumstances where pricing affects public safety, the public’s interest in

lower-priced goods generally should not influence the injunction analysis. In enacting the Patent

Act, Congress made the judgment that an exclusive right, through its ability to allow patentees to

charge higher prices, encourages innovation to the public benefit. Courts should not secondguess that judgment as a general matter.88

D. Injunction Analysis in the Standard Setting Context

Hold-up in the standard setting context can be particularly acute. Standards often are

adopted to make products compatible and interoperable with other products in the industry. 

89

“Lock-in” can make an entire industry susceptible to hold-up. In addition to higher prices and

other economic harms, hold-up in standards-based industries may discourage standard setting

activities and collaboration, which can delay innovation.90

eBay provides a framework for evaluating whether to issue an injunction in the standard

setting context. The balance of hardships and public interest factors of the injunction analysis

allows district courts to consider the effects of hold-up resulting from assertion of a patent

against a standard. The infringer may face significant hardship as a result of an injunction if it is

impossible to participate effectively in the market without complying with the standard. Designaround, at any cost, may not be an option. In that case, and where the patent covers a minor

feature of the product for which alternatives existed at the time the standard was set, the balance
Hynix Semiconductor, Inc. v. Rambus, Inc., 609 F. Supp. 2d 951, 984-85 (N.D. Cal. 2009) (finding 91

balance of hardships favored infringer where injunction on patent asserted against semiconductor

memory standard would “decimate” infringer’s business); but see TruePosition, Inc. v. Andrew Corp.,

568 F. Supp. 2d 500, 532-33 (D. Del. 2008) (evaluating harm to infringer due to standard lock-in, but

declining to find balance of hardship favored infringer because of lack of evidence), aff’d, 389 Fed.

Appx. 1000 (Fed. Cir. 2010).

Many standard setting organizations require that participants agree to license patents on RAND 92

(Reasonable and Non-Discriminatory) terms. See Chapter 7, Section III.C.

Some have argued that the RAND commitment should bar the patentee from seeking an injunction and 93

that disputes over licensing rates should be resolved through contract litigation over the RAND amount.

Joseph Miller, Standard Setting, Patents and Access Lock-In: RAND Licensing and the Theory of the

Firm, 40 INDIANA L. REV. 351, 358 (2007); Mark A. Lemley, Intellectual Property Rights and StandardSetting Organizations, 90 CAL. L. REV. 1889, 1902, 1925 (2002).

Concerns that industry members will litigate rather than license absent a credible injunction threat 94

diminish with the realization that past and ongoing damages following litigation will be based on a patent

known to be valid and infringed, and therefore higher than pre-litigation royalties. See Chapter 6,

Section IV.B and Chapter 8, Section VI.

235

of hardships may support denial of the injunction. A prior RAND commitment can provide 91 92

strong evidence that denial of the injunction and ongoing royalties will not irreparably harm the

patentee. The public interest factor may also consider whether grant of an injunction would 93

deprive consumers of interoperable products and threaten to undermine the collaborative

innovation that can result from the standard setting process.94

Recommendation. Courts should give careful consideration under each of eBay’s

four factors to the consequences of issuing an injunction prohibiting use of

patented technology incorporated into an industry standard. Whether the patent

owner made a RAND commitment will also be relevant to the injunction analysis.

VI. REMEDIES FOLLOWING DENIAL OF AN INJUNCTION

A. Ongoing Royalties

When the eBay analysis leads a court to deny an injunction, the question naturally arises

of what remedy to apply. The court opinions that address the question most commonly require

ongoing royalties that allow the manufacturer to continue making the infringing product. The

Federal Circuit has held that this remedy can be appropriate in lieu of an injunction. In doing so,

the court distinguished ongoing royalties from a compulsory license: “[t]he term ‘compulsory

license’ implies that anyone who meets certain criteria has congressional authority to use that
Paice, LLC v. Toyota Motor Corp., 504 F.3d 1293, 1313 n.13 (Fed. Cir. 2007), remanded, 609 F. Supp. 95

2d 620 (E.D. Tex. 2009).

Id. at 1314-15 (“court may want to take additional evidence . . . to account for any additional economic 96

factors”); see also Amado v. Microsoft Corp., 517 F.3d 1353, 1362 (Fed. Cir. 2008) (considering

damages for infringement during stay of injunction pending appeal).

Id. at 1315-16 (Seventh Amendment does not require jury to determine ongoing royalty); Cummins- 97

Allison Corp. v. SBM Co., Ltd., No. 9:07CV196, 2008 WL 4768028 (E.D. Tex. Nov. 3, 2008) (court

calculated royalty for post-verdict infringement); but cf. Ariba, Inc. v. Emptoris, Inc., 567 F. Supp. 2d

914 (E.D. Tex. 2008) (court issued pre-trial order stating it would consider sending the question of future

damages to the jury). 

Voda v. Cordis Corp., No. 03-1512, 2006 WL 2570614, at *6 (W.D. Okla. Sept. 5, 2006), aff’d, 536 98

F.3d 1311 (Fed. Cir. 2008) (judge imposed same royalty rate for future infringement as for past

damages); Finisar Corp. v. DirecTV Group, No. 1:05-CV-264, 2006 U.S. Dist. LEXIS 76380, at *5 (E.D.

Tex. July 7, 2006) (same), aff’d in part, rev’d in part, 523 F.3d 1323 (Fed. Cir. 2008).

Paice, LLC v. Toyota Motor Corp., 609 F. Supp. 2d, 620, 623-24 (E.D. Tex. 2009) (on remand, 99

recalculated ongoing royalty using Georgia-Pacific factors); Creative Internet Advertising Corp. v.

Yahoo!, Inc., 674 F. Supp. 2d 847, 861 (E.D. Tex. 2009) (judge calculated royalty based on increase over

jury determined rate); Boston Scientific Corp. v. Johnson & Johnson, No. 02-00790, 2009 WL 975424, at

*5-7 (N.D. Cal. April 9, 2009); (court reapplied Georgia-Pacific factors with different weights when

calculating the ongoing royalty).

Paice, 504 F.3d at 1314-15. See also Telcordia Tech., Inc. v. Cisco Systems, Inc., 592 F. Supp. 2d 100

727, 748 (D. Del. 2009) (ordering parties to negotiate a license); Hynix, 609 F. Supp. 2d at 986-87

(same).

236

which is licensed . . . By contrast, the ongoing royalty order at issue here is limited to one

particular set of defendants.”95

No consensus on how to set the royalty rate has emerged from the case law, however. 

The Federal Circuit has stated that district courts must articulate a reasonable basis for

determining the amount, and that the award should account for the changed relationship of the

parties resulting from an adjudicated finding of infringement of a valid patent. In most cases, 96

the judge rather than the jury has determined the rate because the relief is equitable rather than

legal. In some cases, district courts have used the royalty rate for past damages as the royalty 97

rate for ongoing damages. In others, courts have set different royalties, at times based in part on 98

the jury’s award.99

The Federal Circuit has encouraged district courts to allow parties to negotiate a license

themselves before imposing one. Although this approach may be a wise use of judicial

100

resources, parties are more likely to have similar expectations that allow them to reach agreement

if the legal rules for calculating the ongoing royalty are clear. The lack of clarity regarding
Meyer at 107-08 (2/12/09) (calculation of ongoing royalties is “an open question”); O’Brien at 258 101

(5/5/09).

See Chapter 4, at 142 n.3 and accompanying text (defining market reward as amount the invention 102

could command when competing with alternative technologies prior to costs being sunk).

Some panelists suggested that the hypothetical negotiation for determining ongoing royalties take into 103

account the known commercial success of the invention at the time of trial. A hypothetical negotiation

for calculating past damages is conducted at the time infringement began and would not necessarily

incorporate this knowledge. Rhodes at 223-25 (2/12/09); Layne-Farrar at 132 (2/12/09) (courts should

not entrench hold-up, but should also take into account the risk of commercial success that may have

existed at different points in time).

Chapter 6, Section IV (discussing how the hypothetical negotiation model seeks to replicate the market 104

reward for the invention); see also Badenoch at 130-31 (2/12/09) (supporting use of the royalty for past

damages as the ongoing royalty); Lemley at 253 (5/5/09) (“It seems to me if we get the damages rules

right for retrospective damages, those damages rules are just right as prospectively if we’ve decided that

injunctive relief is not appropriate.”). 

Ware at 225-26 (2/12/09); Bernard H. Chao, After eBay Inc. v. MercExchange: The Changing 105

Landscape for Patent Remedies, 9 MINN. J.L. SCI. & TECH. 543, 568-69 (2008). 

237

ongoing royalty determinations impedes the efficiency of the voluntary settlements that the

Federal Circuit seeks to promote.101

To form a coherent remedies system, the legal rules governing ongoing royalties must be

consistent with the rationale that supported denying the injunction in the first place. As

discussed above, that rationale may consider problems of hold-up that enable patentees that

assert patents ex post to extract royalties based on the sunk investment of the infringer. When a

court denies an injunction to ensure that the patentee cannot use the threat of injunction to extract

more than the market reward for its inventive contribution, it stands to reason that the ongoing 102

royalty should align with that market reward. Although the ongoing royalty need not be identical

to the royalty awarded for past damages, like reasonable royalty damages, it should be based on 103

a willing licensor/willing licensee model, with the assumption that the patent is valid and

infringed. Royalties incorporating the knowledge that a patent is valid and infringed account 104

for the changed relationship of the parties following litigation.

Some commentators and panelists advocated that courts not grant the infringer an

ongoing license and royalty after denying an injunction, but instead treat the infringer’s future use

of the invention as willful infringement, subject to treble damages. Others suggested that 105

ongoing royalties must be very high compared to damages for past infringement. They explained

that this would serve as a deterrent to future infringement and provide the patentee with greater
Golden at 110-11 (2/12/09) (“if you crank up the damages high enough or multiply it high enough, it 106

effectively works in many ways like an injunction”). 

See Lemley at 270 (5/5/09). 107

i4i Ltd. Partnership v. Microsoft Corp., 598 F.3d 831, 863-64, 1276-78 (Fed. Cir.), cert. granted, 79

108

U.S.L.W. 3326 (U.S. Nov. 29, 2010) (No. 10-290).

Verizon Servs. Corp. v. Vonage Holdings Corp., 503 F.3d 1295, 1311 n.12 (Fed. Cir. 2007) (“One 109

factor that is relevant to the balance of the hardships required by the Supreme Court's decision in eBay

was not considered by the district court, namely whether the district court should have allowed time for

Vonage to implement a workaround that would avoid continued infringement . . . .”).

238

leverage in post-verdict licensing negotiations. But such an approach would only recreate the 106

hold-up problem that denial of the injunction was meant to avoid. Concerns about preserving 107

the deterrent value of injunctions and the patentees’ incentives to innovate are best addressed by

carefully defining and limiting the circumstances under which injunctions are denied.

Recommendation. The Commission recommends that to fully compensate

patentees but avoid creating hold-up, courts base awards of ongoing royalties

following denial of an injunction on the willing licensor/willing licensee model,

assuming the patent is valid and infringed.

B. Delaying the Injunction

Courts do not always award ongoing royalties for the life of the patent. In several

instances, courts have granted the permanent injunction but delayed its start in order to give the

infringer time to design around the patent, or the parties time to reach a licensing agreement. An

ongoing royalty will generally run until the injunction takes effect. For instance, the Federal

Circuit recently affirmed a district court’s grant of an injunction but extended the delay for its

start from sixty days to five months. The Federal Circuit has also indicated that a delayed 108

injunction can be an appropriate method to mitigate harm to the defendant and the public.109

Where a design-around option is feasible and the infringer is afforded sufficient time to

implement it, a delayed injunction can be a useful tool to prevent hold-up while avoiding the

concerns associated with denying injunctions for the life of the patent. In addition to giving the

infringer an opportunity to design around the patent, which promotes innovation, a delayed-start

injunction allows the parties to bargain in light of the design-around alternative and reach a

royalty that reflects competition. This can enable inadvertent infringers to minimize some of the

potentially most serious costs associated with ex post patent assertions described in Chapter 2. 
19 U.S.C. § 1337(a)(1)(A)-(B). 110

Donald K. Duvall et al., UNFAIR COMPETITION AND THE ITC: ACTIONS BEFORE THE INTERNATIONAL 111

TRADE COMMISSION UNDER SECTION 337 OF THE TARIFF ACT OF 1930 § 2:20 (Philip J. McCabe & John

W. Bateman eds., 2007).

19 U.S.C. § 1337(f).

112

Limited exclusion orders block importation of infringing articles by “persons determined by the 113

Commission to be violating” Section 337. General exclusion orders ban the importation of any

infringing goods, but they are available only in narrow circumstances. 19 U.S.C. § 1337(d)(1), (2);

Kyocera Wireless Corp. v. Int’l Trade Comm’n, 545 F.3d 1340, 1356-58 (Fed. Cir. 2008).

Colleen V. Chien, Patently Protectionist? An Empirical Analysis of 114

Patent Cases at the International Trade Commission, 50 WM. & MARY L. REV. 63, 68 (2008).

Sapna Kumar, The Other Patent Agency: Congressional Regulation of the ITC, 61 FLA. L. REV. 529 115

(2009) (describing inconsistencies between federal court decisions and ITC decisions); Robert W. Hahn

& Hal J. Singer, Assessing Bias in Patent Infringement Cases: A Review of International Trade

Commission Decisions, 21 HARV. J.L. & TECH. 457 (2008) (assessing benefits of ITC’s 337 process and

239

VII. REMEDIES IN THE INTERNATIONAL TRADE COMMISSION

Although all federal district courts must follow the injunction analysis provided by the

Supreme Court in eBay, the International Trade Commission (“ITC”), another venue in which

patentees may litigate, does not. That discrepancy has generated some concern that the ITC may

attract suits by patentees that are less likely to obtain injunctions in district court, potentially

leading to hold-up and the resulting consumer harm described above.

Patent holders that believe that imported products infringe their patents may file a

complaint with the ITC under Section 337 of the Tariff Act of 1930. That statute prohibits

methods of unfair competition from imported goods, including patent infringement. 

110

Jurisdiction is in rem over the imported goods, which allows patentees to bring cases against

foreign defendants who might otherwise be outside the jurisdiction of U.S. district courts.111

After finding patent infringement, the ITC may issue a cease and desist order and an exclusion

order. A cease and desist order prohibits a defendant from selling infringing imported articles

out of U.S. inventory. An exclusion order, which can be either general or limited, directs the 112

U.S. Customs service to bar articles from entry into the United States. The ITC cannot award 113

monetary damages for past infringement.

Use of the ITC as a venue for patent challenges has tripled in the last ten years. Sixty- 114

five percent of those cases proceed simultaneously in federal district court. Expanded use of the

ITC and the parallel proceedings in the district courts have led some commentators to raise

concerns about inconsistent results in individual cases and incoherent development of patent

policy. One area of particular interest is the different remedial standards applied in the ITC 115
bias at the ITC in favor of complainants); Sprigman at 44-45 (2/12/09) (system gives plaintiffs “two bites

at the apple”). But see Rhodes at 227 (2/12/09) (explaining that parallel district court cases were filed to

avoid declaratory judgment actions and were often stayed so that few cases are fully adjudicated in both

venues); Chien, supra note 114, at 92-95 (reporting that 65% of ITC patent cases had parallel district

court cases, but finding very few inconsistent decisions).

Certain Baseband Processor Chips and Chipsets, No. 337-TA-543, slip op. at 62-3 n.230 (Int’l Trade 116

Comm’n, June 19, 2007).

19 U.S.C. 1337(d) (stating that if the ITC finds a violation of the statute, “it shall direct that the articles

117

concerned . . . be excluded from entry into the United States” subject to certain public interest analyses).

Spansion, Inc. v. Int’l Trade Comm’n, Nos. 2009-1460, 2009-1461, 2009-1462, 2009-1465, 2010 WL 118

5156992, at *20-22 (Fed. Cir. Dec. 21, 2010) (“Given the different statutory underpinnings for relief

before the Commission in Section 337 actions and before the district courts in suits for patent

infringement, this court holds that eBay does not apply to Commission remedy determinations under

Section 337. ”).

A survey of ITC patent investigations filed between 1995 and 2007 found that the ITC awarded an 119

exclusion order in 100% of the cases in which it found a violation. Chien, supra note 114, at 99.

McDaniel at 119 (5/26/10).

120

Id. at 115, 118-19 (5/26/10).

121

Doyle at 254 (5/5/09); Chaikovsky at 254 (5/5/09); Luftman at 227 (2/12/09); Barr at 123 (5/26/10).

122

Administrative law judges of the ITC have issued few opinions that appear to involve patent holding 123

companies since the 2006 eBay decision, although more complaints may have been filed. See Certain

240

(exclusion orders) and district courts (injunctions). The ITC has held that it may not apply

eBay’s equitable test when deciding whether to issue an exclusion order because Section 337

“represents a legislative modification of the traditional test in equity . . . [and] it is unnecessary to

show irreparable harm to the patentee in the case of infringement by importation.” The Federal 116

Circuit affirmed the ITC’s conclusion that its remedies are governed by statute, and in particular

the dictate that it “shall” enter exclusion orders, and not by equitable principles. Thus,

117 118

unlike the situation in district court, a finding of infringement in the ITC leads to a nearly

automatic exclusion order.119

It is not clear how much of the rise in ITC litigation is caused by patentees seeking to

avoid the eBay analysis, however. ITC litigation had been increasing prior to that 2006

decision. Moreover, patentees often choose to file in the ITC because of the agency’s 120

accelerated litigation timetable compared to that of many district courts and the availability of

administrative law judges with patent expertise. Nevertheless, panelists worried that patentees 121

might bring suit in the ITC more frequently in the future in the hope of obtaining exclusion 122

orders in circumstances where injunctions might not have been granted in federal district court.

123
Electronic Devices, including Handheld Wireless Communications Devices, Nos. 337-TA-673 & 337-

TA-667, slip op. at 3 (Int’l Trade Comm’n, October 15, 2009) (“Saxon Case”).

Joe Mullin, Will the ITC Become the New Troll Hangout?, THE AM LAW DAILY (January 13, 2009) 124

available at http://amlawdaily.typepad.com/amlawdaily/2009/01/

a-new-troll-hangout.html. Saxon is an intellectual property licensing company with a portfolio of 180

patents focused on consumer electronics. http://www.saxoninnovations.com/About.html. The litigants

settled the case. In the Matter of Certain Electronic Devices, including Handheld Wireless

Communications Devices, Nos. 337-TA-673 & 337-TA-667, slip op. (Int’l Trade Comm’n, Feb. 12,

2010). 

E.g. Certain Gaming and Entertainment Consoles, Related Software, and Components Thereof, USITC 125

Inv. No. 337-TA-752 (Answer of Respondent Microsoft Corp., filed Jan. 26, 2011, at 31-32).

Commentators have highlighted the need to harmonize the remedial standards in the two venues. See 126

Chien, supra note 114, at 109; Hahn & Singer, supra note 115, at 486-90; Kumar, supra note 115, at 574-

78.

19 U.S.C. § 1337(a)(3). See also Duvall et al., supra note 111, § 3:16 at 79; § 13.17 at 80. 

127

S. REP. No. 71, 100th Cong., 1st Sess., at 129-30 (1987). 128

241

The 2009 Saxon case, in which a patent assertion entity asserted three patents that it had

purchased against several mobile phone manufacturers, raised the specter of “patent troll” suits in

the ITC. Patentees have also asserted patents that are subject to RAND commitments against

124

standardized products in the ITC.125

An injunction or exclusion order granted to a patent assertion entity based on

infringement of a patent covering a minor component of a complex product poses the risk of

generating hold-up that can harm consumers. An injunction or exclusion order against

standardized technology also poses a significant risk of hold-up and consumer harm. Although

eBay provides an important tool for avoiding these outcomes, automatic exclusion orders

awarded by the ITC could undermine eBay’s value in this regard.126

Section 337 provides two mechanisms through which the ITC can limit the incidence of

hold-up generated by an exclusion order and the resulting harm to consumers. The first relates to

matters brought by patent assertion entities. To file suit in the ITC, a patent owner must establish

that “an industry in the United States, relating to the articles protected by the patent . . . exists or

is in the process of being established.” That domestic industry requirement can be satisfied by

showing “substantial investment in [the patent’s] exploitation, including engineering, research

and development or licensing.” When Congress added this provision to Section 337 in 1988, it 127

explained, “[t]he definition could . . . encompass universities and other intellectual property

owners who engage in extensive licensing of their rights to manufacturers . . . . The owner of the

property right must be actively engaged in steps leading to the exploitation of the intellectual

property, including application engineering, design work, or other such activities.”128
In Certain Coaxial Cable Connectors and Components Thereof and Products Containing the Same, the

129

ITC held that ex post and ex ante licensing activity “exploited” the patent and could support a domestic

industry. The opinion explains that “licensing activities that ‘put [the patent] to productive use,’ i.e.,

bring a patented technology to market, as well as licensing activities that ‘take advantage of’ the patent,

i.e., solely derive revenue,” both qualified as “exploitation” of the patent that could satisfy the domestic

industry requirement. Certain Coaxial Cable Connectors and Components Thereof and Products

Containing the Same, No. 337-TA-650, slip op. at 49-50 (Int’l Trade Comm’n, Apr. 14, 2010) The ITC

arrived at this position by relying on the “plain language” of the domestic industry requirement and

applying both of two dictionary definitions for “exploit” to the statute: (1) “to put a product to use” and

(2) “to take advantage of.” Id. at 49 (quoting Webster’s Ninth at 438). However, the availability of

multiple dictionary definitions for the statutory term “exploit” could equally well support the

reasonableness under Chevron of an interpretation based only on the first definition. See Smiley v.

Citibank (South Dakota), 517 U.S. 735, 740-47 (1996) (describing different definitions of “interest” and

“rate” and finding agency’s interpretation reasonable under Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984)). 

19 U.S.C. § 1337(d)(1). 130

The ITC has used this provision to deny an injunction only three times. Kumar, supra note 115, at 131

567-68. Those cases involved issues of public health or broad public interest. See Fluidized Supporting

Apparatus, USITC Pub. 1967, Inv. No. 337-TA-182 (Oct. 1984) (patents covered beds for burn victims

and patentee was unable to meet demand); Inclined-Field Acceleration Tubes, USITC Pub. 1119, Inv.

No. 337-TA-067 (Dec. 1980) (patents covered devices used in nuclear physics research, including

weapons development and other applications funded by the federal government, for which there were no

cost effective replacements); Automatic Crankpin Grinders, USITC Pub. 1022, Inv. No. 337-TA-060

(Dec. 1979) (patent covered automobile part that was in short supply and that improved fuel efficiency

242

The FTC suggests that the ITC consider interpreting the domestic industry requirement as

not satisfied by ex post licensing activity solely focused on extracting rents from manufacturers

based on products already on the market. As discussed in Chapters 1 and 2, the differences

between the economic consequences of ex ante licensing, which strives for technology transfer

and the creation of new products, and ex post licensing, which seeks payment from

manufacturers already using the technology, are significant. Section 337 requires an “industry”

based on “substantial investment” in “exploitation” of the patent through “licensing.” This

language can be interpreted as encompassing ex ante but not ex post licensing because only the

former seeks to “exploit” the patent by putting it into productive use to create an industry.129

This interpretation of the statute is consistent with the legislative history’s concern with

promoting innovation in the United States. Importantly, it will limit access to the ITC of those

patent owners most likely to be denied an injunction under the eBay analysis propounded above,

while allowing access to firms engaged in invention and technology transfer.

Second, Section 337 allows the ITC to consider “the public health and welfare,

competitive conditions in the United States economy, the production of like or directly

competitive articles in the United States, and United States consumers” in deciding whether to

grant an exclusion order. The ITC has rarely used this provision to deny an exclusion order, 130 131
during energy crisis).

Section V.D, infra.

132

The decisions of the ITC are subject to Presidential review and veto for “policy reasons.” 19 U.S.C. § 133

1337(j)(2). This presents another mechanism for considering when hold-up and consumer harm warrant

denial of an injunction in the ITC.

Tandon Corp. v. Int’l Trade Comm’n, 831 F.2d 1017 (Fed. Cir. 1987); Texas Instr. v. Cypress, 90 F.3d 134

1558 (Fed. Cir. 1996).

Commentators have also proposed broader statutory changes to further harmonize patent litigation in 135

the ITC and district courts. Chien, supra note 114, at 106-11; Hahn & Singer, supra note 115, at 486-90

(2008). 

243

but its language should allow consideration of how an exclusion order can cause hold-up, raise

prices and decrease innovation as the basis for denial. These economic concepts consider

“competitive conditions” by comparing the ex ante value of the patented technology in a

competitive technology market to the ex post value due to high switching costs, and the impact of

those “competitive conditions” on “United States consumers.” Assertion of a patent against a

standard, especially a patent subject to a RAND commitment, creates a particularly important

scenario for considering the public interest in deciding whether to grant an exclusion order. By 132

incorporating these economic concepts into its remedy analysis, the ITC would move that

analysis closer to that required in district courts by eBay.

133

Recommendation The FTC recommends that the ITC consider whether only

those licensing activities that promote technology transfer “exploit” patented

technology within the meaning of Section 337, and therefore satisfy the domestic

industry requirement. The FTC also recommends that the ITC incorporate

concerns about patent hold-up, especially of standards, into the decision of

whether to grant an exclusion order in accordance with the public interest

elements of Section 337.

The instances in which the ITC would deny an exclusion order based on these

considerations would be rare, especially if it interpreted the domestic industry requirement as

described here. However, that denial would leave the patent holder without an infringement

remedy in the ITC because that agency lacks the power to award damages for past infringement

or an ongoing royalty for future infringement. Of course, patentees can always seek relief in

district court, but this would require relitigation of the liability issues because ITC decisions are

not accorded res judicata effect in district court. Potential solutions deserve further study. 134 135
244

VIII. CONCLUSION

The eBay injunction analysis is grounded in equity. As such, it allows for a balancing of

harms to the patentee, the infringer and the public. That balancing must be undertaken with a full

appreciation of how an injunction and threat of an injunction can both further and hinder the

patent system’s goals. On the one hand, injunctions incentivize innovation, deter infringement

and encourage licensing. On the other hand, they can raise the cost and uncertainty of innovation

through hold-up. For that reason, the FTC recommends that courts incorporate concerns about

hold-up into the eBay analysis.

Moreover, an appreciation of the consumer harm from hold-up should extend to a court’s

design of a remedy following denial of an injunction. The FTC recommends that those remedies

be based on the market value of the patented technology compared to alternatives, assuming the

patent is valid and infringed. In addition, the FTC recommends that the ITC consider

mechanisms that lessen the risk that an ITC exclusion order could generate hold-up, including

revisiting the scope of the domestic industry requirement and incorporating competition and

innovation concerns into the public interest considerations when granting an exclusion order. 
Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991, 2029-35 1

(2007).

PricewaterhouseCoopers, 2010 Patent Litigation Study, The Continued Evolution of Patent Damages 2

Law: Patent Litigation Trends and the Impact of Recent Court Decisions on Damages, at 26 (Sept. 2010),

available at http://www.pwc.com/us/en/forensic-services/publications/2010-patent-litigation-study.jhtml.

Id. 

3

Id. 

4

Id. at 7. 

5

245

APPENDIX A

STATISTICS DESCRIBING PATENT DAMAGE AWARDS

Several authors have reported statistics describing damages awards by district courts. 

PricewaterhouseCoopers prepares studies of damage awards annually, the most recent of which

covers awards between 1995 and 2009. In a 2007 study, Professors Lemley and Shapiro

collected data on reasonable royalty rates from reported cases decided between 1982 to 2005.1

Professor Janicke and the University of Houston Law Center’s Institute for Intellectual Property

and Information Law provide a web-based service, Patstats (www.patstats.org), which has

collected and reported jury-awarded damages in patent cases since 2005 (and other data since

2000). Some of the results from these research projects are summarized in this appendix. 

I. PricewaterhouseCoopers Study

In its 2010 Patent Litigation Study, PricewaterhouseCoopers collected 1,587 district court

opinions issued since 1995. These decisions included final decisions both at summary judgment 2

and after trial on the merits. The authors collected these decisions from opinions available in 3

two Westlaw databases and corresponding PACER records. PricewaterhouseCoopers calculates 4

annual median damage awards for cases reported between 1995 and 2009 (expressed in 2009

dollars). (See Chart 1.) The annual median awards range from $2.4 million to $10.5 million,

with an overall median award of $5.2 million during this period. PricewaterhouseCoopers also 5

provides statistics on win rates, types of award (e.g., reasonable royalty damages), types of

plaintiff (e.g., NPE), and types of factfinder (judge or jury). 
Id. Chart 2a. Reproduced with permission from the authors. 

6

Id. 

7

Id. 

8

246

Chart 1 

6

Patent holder median damages awarded (in millions): 1995-2009

One striking trend reported in the PricewaterhouseCoopers study is the disparity that has

arisen between damage awards for non-practicing entities versus practicing entities in recent

years. During the 2001-2009 period, the median award to non-practicing entities was $12.9

million, while the median award to practicing entities was $3.9 million. In contrast, during the 7

period 1995-2001, the median damage award for practicing entities exceeded that for nonpracticing entities ($6.3 million versus $5.2 million). (See Chart 2.) 8
Id. Chart 2b. Reproduced with permission from the authors. 

9

Id. at 9 & Chart 3a. 10

Id. at 10. 11

Id. 

12

247

Chart 29

The PricewaterhouseCoopers study also identifies a shift toward jury trials versus bench

trials, with the former accounting for only 14 percent of cases during the 1980s but just over 50

percent since 2000. The authors suggest several factors that may contribute to this trend. They 10

find that patentees have a higher success rate and receive on average higher damage awards in

jury trials as compared to bench trials, creating a perception that juries provide more favorable

results for patentees. Additionally, the study reports an increase in litigation by non-practicing 11

entities, who are more likely than practicing plaintiffs to seek a jury trial. 

12
Id. at 11.

13

Id. 

14

Id. 

15

Id. Chart 3e. Reproduced with permission from the authors.

16

248

The PricewaterhouseCoopers study further finds that jury awards substanitially exceed

awards by judges, as the following two charts reflect. The first reveals that median damage 13

awards by juries have steadily increased over time and damages awards by judges in bench trials

have decreased significantly since 2000, leading to an increasing disparity between them. (See 14

Chart 3.) The second indicates that NPE plaintiffs have obtained substantially higher awards

from juries (but not from judges) than have other types of plaintiffs. (See Chart 4.) 15

Chart 316
Id. Chart 3f. Reproduced with permission from the authors. 

17

Id. at 12. 18

Id. at 13. 19

249

Chart 417

The authors of the PricewaterhouseCooper’s study also conclude that reasonable royalty

damages continue to be “the most frequent basis of damages awards,” reporting the 18

composition of damages awards for 1995-2001 and 2002-2009. (See Chart 5.) They observe

that the expanded importance of reasonable royalties relative to lost profits is in part attributable

to the increase in actions by non-practicing entities, which generally cannot recover lost profits.

19
Id. at 12 Chart 4. Reproduced with permission from the authors. 20

250

Chart 520

C OIYIPO'ition of darnagH awards 

10 III. ootities 

~, 
Lemley & Shapiro, supra note 1, at 2029-35. 21

Id. at 2031. The authors focused on royalty awards disclosed in written judicial opinions – they did not 22

include settlements, awards that they could not clearly identify as reasonable royalty awards, and

excluded “pure” jury verdicts. This resulted in a bias toward court opinions; jury awards represented

only eight of the opinions in their sample. Id. at 2030-31.

Id. at 2030-32. 23

Id. at 2032-33. Moreover, since the sample is biased toward court awards, which are generally much 24

lower than jury awards, this estimate may be low. 

Id. at 2034. 25

Id. at 2035. 26

These data are available on the 27 www.patstats.org website.

Patstats.org, U.S. Patent Litigation Statistics, 28 http://www.patstats.org/Patstats3.html. The excel

spreadsheet is available by clicking on the Jury Patent Damages Verdicts link at

http://www.patstats.org/Patstats2.html.

251

II. Lemley and Shapiro Study

Professors Lemley and Shapiro conducted an empirical study of the royalty rates adopted

in reasonable royalty damage determinations by surveying reported cases from 1982 to 2005.21

They found only 47 written opinions containing sufficient information for them to identify a

royalty rate, and point out that judicial damages awards may be overrepresented in the sample

relative to jury damages awards. Lemley and Shapiro calculate a mean royalty rate for all 22

sampled awards of 13.1% of the price of the infringing product. In contrast, they state that 23

“very few patent licenses negotiated without litigation (or even in settlement of it) result in

royalty rates anywhere near that high.” Lemley and Shapiro report a mean royalty rate of about 24

10.0% for claims of infringement of component inventions and a mean rate of 14.7% for claims

involving claims of infringement of integrated-product inventions. The authors observe that 25

these royalty figures exceed the economy-wide average profit margin over the sample period. 

26

III. Data Available on PatStats.org

The University of Houston Law Center’s Institute for Intellectual Property and

Information Law (“IPLI”) has collected data on patent decisions since 2000, and made the data

available on its web site Patstats. Since 2005, the Institute has identified jury damage awards in 27

those cases in a spreadsheet available for download from the website. These data are limited to 28

the actual amount the jury awarded in its verdict, and do not include interest or fees and are not
A paper based on this data identified those cases in which either a district court or an appellate court 29

modified the jury verdict for cases decided between 2005 and 2007. See Innovation Alliance, Moving

Beyond the Rhetoric: Jury Damage Verdicts in Patent Infringement Cases 2005-2007 (2008), available

at

http://www.innovationalliance.net/files/JURY%20DAMAGE%20VERDICTS%20IN%20PATENT%20I

NFRINGEMENT%20CASES%5B1%5D.pdf.

Patstats.org, U.S. Patent Litigation Statistics, 30 http://www.patstats.org/Patstats3.html.

See Paul Janicke, Patent Damages, Patent Verdicts from 1-1-05 to 1-6-09, presented at FTC Hearing: 31

The Evolving IP Marketplace (Feb. 11, 2009), available at

http://ftc.gov/bc/workshops/ipmarketplace/feb11/docs/janicke-medianverdits.pdf.

(Reproduced with permission from Professor Janicke.)

252

adjusted for decisions on post trial motions, appeals or settlements. The Patstats website listed 29

166 jury awards between January 1, 2005 and January 11, 2010, with a median award of $6.5

million. A list of the 166 awards is available on the FTC web site. 30 31
Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1002 (Fed. Cir. 1986) (citing Roche Products, Inc. v. 1

Bolar Pharmaceutical Co., 733 F.2d 858, 865-66, (Fed. Cir. 1984)). 

Richardson v. Suzuki Motor Corp., 868 F.2d 1226, 1246-47 (Fed. Cir. 1989) (citations omitted).

2

Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547 (Fed. Cir. 1995) (en banc) (“Accordingly, courts have 3

in rare instances exercised their discretion to deny injunctive relief in order to protect the public

interest.”).

MercExchange, LLC v. eBay, Inc., 275 F. Supp. 2d 695 (E.D. Va. 2003) (“eBay I”), aff’d in part, rev’d 4

in part, 401 F.3d 1323 (Fed. Cir. 2005), vacated and remanded, 547 U.S. 388 (2006). 

Id. at 711. 

5

253

APPENDIX B

OVERVIEW OF POST-eBAY PERMANENT INJUNCTION CASE LAW

I. The eBay Case

Not long after its creation, the Federal Circuit recognized that the Patent Act “empowers

district courts to grant injunctions in accordance with the principles of equity” and that “the

district court’s grant or denial of an injunction is within its discretion depending on the facts of

each case.” In 1989, however, the Federal Circuit established a “general rule” in favor of 1

granting injunctions based on a presumption of irreparable harm: 

Infringement having been established, it is contrary to the laws of

property, of which the patent law partakes, to deny the patentee's

right to exclude others from use of his property. The right to

exclude recognized in a patent is but the essence of the concept of

property. It is the general rule that an injunction will issue when

infringement has been adjudged, absent a sound reason for denying

it. . . . In matters involving patent rights, irreparable harm has been

presumed when a clear showing has been made of patent validity

and infringement.2

Overcoming this general rule required a significant showing of public harm in order to outweigh

the irreparable harm presumed to be caused by infringement. The Supreme Court’s eBay 3

decision corrected that analysis, however.

In the original action, MercExchange sued eBay and Half.com for infringing two patents

relating to on-line sales. The jury returned a verdict of willful infringement and awarded 4

damages of $35 million. The district court denied the patentee’s motion for a permanent

injunction even though it recognized that injunctive relief was “considered the norm.” In 5

reaching that decision, the court pointed to evidence that the patentee, a licensing company, did
Id at 714. 6

MercExchange, LLC v. eBay, Inc., 401 F.3d. 1323, 1338 (Fed. Cir. 2005) (“eBay II”), vacated and

7

remanded, 547 U.S. 388 (2006). 

Id. at 1338 (citations omitted).

8

Id. at 1339. 9

Id.

10

eBay, 547 U.S. at 393. 11

254

not practice its inventions, had licensed its patents in the past, and had made statements to the

media that it was willing to license eBay. The court also explained that the “public does not

benefit from a patentee who obtains a patent yet declines to allow the public to benefit from the

inventions contained therein.”6

On appeal, the Federal Circuit reversed the denial of permanent injunction on the grounds

that the district court had not provided a persuasive showing that the case is “sufficiently

exceptional.” The court reiterated the general rule that a permanent injunction will issue unless 7

a “patentee’s failure to practice the patented invention frustrates an important public need for the

invention such as the need to use an invention to protect public health.” It rejected the district 8

court’s concern that MercExchange did not practice the patents: “Injunctions are not reserved for

patentees that intend to practice their patent, as opposed to those who choose to license. The

statutory right to exclude is equally available to both groups, and the right to an adequate remedy

to enforce that right should be equally available to both as well.” Finally, the appellate court

9

stated, “[i]f the injunction gives the patentee additional leverage in licensing, that is the natural

consequence of the right to exclude and not an inappropriate reward to a party that does not

intend to compete in the marketplace. . . .”10

In 2006, a unanimous Supreme Court rejected both the Federal Circuit’s general rule

supporting the grant of an injunction and the district court’s “expansive principles” suggesting

that a patentee who did not practice its invention and was willing to license could not obtain an

injunction. Instead, relying on the express language of the Patent Act, which provides that 11

district courts “may” issue injunctions “in accordance with the principles of equity,” the Court

looked to “traditional equitable principles.” The Court listed four equitable factors that a

patentee, no different from any other plaintiff, must satisfy to obtain an injunction:

A plaintiff must demonstrate: (1) that it has suffered an irreparable

injury; (2) that remedies available at law, such as monetary

damages, are inadequate to compensate for that injury; (3) that,

considering the balance of hardships between the plaintiff and
Id. at 391.

12

Id. at 395 (Roberts, C. J., concurring) (explaining that the “long tradition of equity practice is not 13

surprising, given the difficulty in protecting a right to exclude through monetary remedies that allow an

infringer to use an invention against the patentee’s wishes - a difficulty that often implicates the first two

factors of the traditional four factor test.”).

FEDERAL TRADE COMM’N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND 14

PATENT LAW AND POLICY, ch. 3, at 38-39 (Oct. 2003) (“2003 FTC IP Report”), available at

http://ftc.gov/os/2003/10/innovationrpt.pdf.

eBay, 547 U.S. at 396 (Kennedy, J. concurring). 15

Id. 

16

MercExchange, LLC v. eBay, Inc., 500 F. Supp. 2d 556 (E.D. Va. 2007).

17

255

defendant, a remedy in equity is warranted; and (4) that the public

interest would not be disserved by a permanent injunction.12

Chief Justice Roberts’ concurring opinion, joined by Justices Scalia and Ginsburg,

cautioned that a major departure from the long tradition of equity practice should not be lightly

implied. Courts have granted injunctive relief in the vast majority of patent cases, they

explained, due to the difficulty of protecting a patentee’s right to exclude others from using the

invention through monetary damages.13

Justice Kennedy’s concurring opinion, joined by Justices Stevens, Souter and Breyer, 

however, did suggest situations in which district courts may find injunctive relief inappropriate. 

Citing the FTC’s 2003 IP Report, Justice Kennedy noted the development of a business model 14

in which non-practicing entities obtain patents primarily to garner license fees, not to practice the

inventions. “For these firms, an injunction, and the potentially serious sanctions arising from its

violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek

to buy licenses to practice the patent.” In addition, Justice Kennedy suggested that situations in 15

which the patented invention is “but a small component of the product the companies seek to

produce” may also be inappropriate for injunctive relief because “the threat of an injunction is

employed simply for undue leverage in negotiations.” On remand, the district court again 16

declined the patentee’s request for an injunction.17

II. Statistics on Post-eBay Cases

After enumerating the four equitable factors in the eBay decision, the opinion of the full

Court gave little guidance on their application. That, and the divergent emphasis of the two

concurring opinions, created significant uncertainty concerning the circumstances under which

courts would deny permanent injunctions in patent cases immediately following issuance of the
Robert A. Cote, The State of Injunctions in a Post-eBay World, Loyola IP Focus Series - Los Angeles, 18

CA, at 4 (June 15, 2007), available at http://www.lls.edu/ip/past-events/documents/Cote-Revised2.pdf. 

Id. at 7-8. 19

Ernest Grumbles III et al., The Three Year Anniversary of eBay v. MercExchange: A Statistical 20

Analysis of Permanent Injunctions, IP TODAY (Nov. 2009).

Id. 

21

Eric Keller, Time Varying Compulsory License: Facilitating License Negotiation for Efficient Post- 22

Verdict Patent Infringement, 16 TEX. INTELL. PROP. L.J. 427, 434 (Spring 2008). 

Broadcom Corp. v. Qualcomm, Inc., 543 F.3d 683 (Fed. Cir. 2008) (district court’s injunction grant 23

affirmed.); i4i Ltd. Partnership v. Microsoft Corp., 670 F. Supp. 2d 568 (E.D. Tex. 2009), aff’d, 598 F.3d

831 (Fed. Cir. 2010) (affirming the grant of an injunction while modifying its effective date), cert.

granted, 79 U.S.L.W. 3326 (U.S. Nov. 29, 2010) (No. 10-29); Creative Internet Advertising Corp. v.

Yahoo! Inc., No. 6:07cv354, 2009 WL 4730622 (E.D. Tex. Dec. 9, 2009) (injunction denied); Kowalski

v. Mommy Gina Tuna Resources, Nos. 05-00679, 05-00787, 06-00182, 2009 WL 856006 (D. Haw.

March 30, 2009) (injunction granted), clarified by, 2009 WL 1360695 (D. Haw. May 7, 2009); Joyal

Products, Inc. v. Johnson Electric North America, Inc., No. 04-5172, 2009 WL 512156 (D. N.J. Feb. 27,

2009) (injunction granted), aff’d per curiam, 335 Fed. Appx. 48 (Fed. Cir. 2009); Hynix Semiconductor,

256

eBay decision in May 2006. Since that time, the district courts have decided numerous requests

for permanent injunction and the Federal Circuit also has addressed the four factors several times

in permanent injunction cases. Some trends have begun to emerge from this body of case law.

In the first year following the May 2006 decision, one article reported that district courts

had granted permanent injunctions in 20 of 26 cases, or approximately 77% of the time. The 18

article identified lack of competition between the patent holder and infringer as a significant

indicator that a court would likely deny a motion for a permanent injunction in the remaining

23% of cases. A more recent survey of post-eBay cases examined 67 cases published in Lexis 19

or available from Lexis’ Courtlink function as of May 1, 2009. The authors found that district 20

courts had awarded permanent injunctions in 48 (or approximately 72%) of the cases.21

An article examining 27 cases decided in the year following eBay found that in the four

cases involving non-practicing patentees, courts awarded no injunctions. This result led many 22

to worry that patentees that did not practice their inventions would no longer be able to obtain

permanents injunctions. Although non-practicing patentees have been less likely than practicing

patentees to receive injunctions, the concern that injunctions are categorically unavailable is

unwarranted. A longer term review of the post-eBay case law reveals that as of March 1, 2010,

courts had heard thirteen requests for permanent injunctions where the opinion suggests that the

patent owner is one of several types of non-practicing entities, including a university, research

institute and independent inventor. Of those thirteen cases, district courts granted an injunction

seven times.23
Inc. v. Rambus Inc., 609 F. Supp. 2d 951 (N.D. Cal. 2009) (injunction denied); Telcordia Tech., Inc. v.

Cisco Systems, Inc., 592 F. Supp. 2d 727, (D. Del. 2009) (injunction denied), aff’d in part and vacated in

part, 612 F.3d 1365 (Fed. Cir. 2010); Voda v. Cordis Corp., No. CIV-03-1512, 2006 WL 2570614

(W.D. Okla. Sept. 5, 2006), aff’d, 536 F.3d 1311 (Fed. Cir. 2008) (injunction denied); Emory Univ. v.

Nova Biogenics, Inc., No. 1:06-CV-0141, 2008 WL 2945476 (N.D. Ga. July 25, 2008) (injunction

granted); Commonwealth Scientific and Indus. Research Org. v. Buffalo Tech., Inc. (“CSIRO”), 492 F.

Supp. 2d 600, 601 (E.D. Tex. 2007) (injunction granted); Johns Hopkins Univ. v. Datascope Corp., 513

F. Supp. 2d 578 (D. Md. 2007) (injunction granted), rev’d on other grounds and remanded, 543 F.3d

1342 (Fed. Cir. 2008); z4 Technologies, Inc. v. Microsoft Corp., 434 F. Supp. 2d 437, (E.D. Tex. 2006)

(injunction denied); Paice, LLC v. Toyota Motor Corp., No. 2:04-CV-211, 2006 WL 2385139 (E.D. Tex.

Aug. 16, 2006) (injunction denied), aff’d in part, vacated in part and remanded, 504 F.3d 1293 (Fed. Cir.

2007), on remand, 2009 U.S. Dist. Lexis 32723 (E.D. Tex. April 17, 2009). See Sections III.A.2 and

III.A.3 for discussion of cases.

547 U.S. 388 (2006). 24

Steve Malin & Ari Rafilson, Empirical Analysis of Permanent Injunctions Following eBay, presented

25

at FTC Hearing: The Evolving IP Marketplace (Feb. 12, 2009), available at

http://www.ftc.gov/bc/workshops/ipmarketplace/feb11/docs/smalin.pdf. 

Malin et al., Injunctive Relief After eBay v. MercExchange, available at 26

http://www.foley.com/files/tbl_s31Publications/FileUpload137/4541/InjunctiveReliefAftereBay.pdf.

Malin at 9-10 (2/12/09).

27

257

To gain a better understanding of how different fact patterns influence district courts’

decisions to grant or deny an injunction following the Supreme Court’s 2006 decision in eBay v.

MercExchange, panelist Steve Malin conducted a survey of post-eBay cases decided through 24

December 31, 2008. He presented the results at the FTC hearing on the Evolving IP Marketplace

on February 12, 2009. 

25

To generate the results presented at the FTC hearing, Mr. Mallin updated a survey he had

originally produced for a subcommittee of the American Intellectual Property Law Association

(AIPLA). The survey presented at the FTC hearing included 49 cases decided between May 26

15, 2006 and December 31, 2008. The sample did not include all post-eBay permanent

injunction cases decided during the time frame, however. If an opinion did not offer sufficient

information to determine the factors the courts used in deciding whether to grant an injunction, or

if an opinion focused on technical procedural issues, it was removed from the sample. 

27

The survey result statistics were generated by evaluating whether courts used any of 28

pre-identified factors in determining whether to grant a permanent injunction (see the blank

survey sheet below). At least two attorneys reviewed each opinion and determined whether it

discussed any of these factors. The statistics measure the courts’ assessment of the factors, and
If the court did not discuss the factor, the reviewing attorney would have check N/A. Attorneys did not

28

rely on information known to them outside of the opinion. For instance, one of the factors measured by

the survey was whether the patentee practiced the patent. If a case involved a consumer good that an

attorney knew the patentee produced, but the court did not indicate that the patentee practiced the patent,

that survey sheet for the case would not state that whether the patentee practiced the patent but have the

N/A box checked for that factor. 

Malin at 7-8 (2/12/09). 29

Id. at 7-8. 30

258

thus the opinion must have discussed the factor to receive a yes or a no check mark. If the 28

reviewing attorneys disagreed, they conferred and reached an agreement on the how the court had

reached its injunction decision. 

The factors fell into three subcategories: (1) those related to the patentee’s business; (2)

those related to the defendant’s business; and (3) those that related to the public interest. These

categories were also designed to track the four factors. Those concepts that relate to the

patentee’s business also track the factors courts have used to evaluate the irreparable harm and

inadequate damages prong of the eBay test and track plaintiff’s arguments. The concepts that 29

relate to the defendant’s business track factors that courts have used to evaluate the balance of

the hardship prong. The concepts that related to the public interest should track considerations 30

of the effect of an injunction on third parties and the public in general. Results are reported in

the table below and in Chapter 8 of this report. A blank survey checklist identifying all of the

factors used by the attorneys reviewing the cases is included at the end of this appendix.
259

Potentially Relevant

Fact Pattern 

Number of Cases 

(of 49) that Cited

the Fact

Grant Rate when

YES

Grant Rate when

NO

Patentee Facts

Practicing Patentee

43 83% 43%

Patentee and

Defendant Compete 42 87% 25%

Lost Sales to

Defendant 36 88% 25%

Harm to Patentee’s

Reputation 24 95% 0%

Patentee Licensed

Others 21 63% 80%

Defendant Facts

Willfulness 25 75% 40%

Impact on

Defendant’s Business 24 79% 70%

Harm to Defendant’s

Customers 19 50% 100%

Minor Impact of

Defendant’s Sales 17 80% 100%

Voluntary Offer to

Avoid Future

Infringement

15 80% 40%

Compliance with the

Injunction is Easy 

13 92% 0%

Public Interest

Health Concern 15 50% 91%
Windsurfing, 782 F.2d at 1003 (“One who elects to build a business on a product found to infringe 31

cannot be heard to complain if an injunction against continuing infringement destroys the business so

elected.”).

Telequip Corp. v. The Change Exchange, No. 5:01-CV-1748, 2006 WL 2385425, at *2 (N.D.N.Y. Aug. 32

15, 2006) (holding that absent available injunctions, the right to exclude would have only a fraction of

the value it was intended and would not be an incentive for scientific research); Zen Design Group, Ltd.

v. Clint, No. 08-cv-14309, 2009 WL 4050247 (E.D. Mich. Nov. 23, 2009) (holding that without a

permanent injunction a patent's actual value would be reduced to a fraction of its intended value).

Wald v. Mudhopper Oilfield Services, Inc. No. CIV-04-1693, 2006 WL 2128851 (W.D. Okla. July 27,

33

2006) (stating that irreparable harm often occurs when an injury cannot be adequately atoned for in

money); Paice, 2006 WL 2385139, at *5 (“Irreparable harm lies only where injury cannot be undone by

monetary damages.”); Sprigman at 28 (2/12/09) (stating that inadequacy of money damages is the mirror

image of the irreparable harm factor and courts have treated them as one inquiry).

DOUGLAS LAYCOCK, THE DEATH OF THE IRREPARABLE INJURY RULE, 8-9 (1991). Professor Laycock 34

argues that the “irreparable injury rule has two formulations.” One is“[e]quity will act only to prevent

irreparable injury” and the other is “equity will act if there is no adequate legal remedy.” According to

Professor Laycock, “[t]he two formulations are equivalent; what makes an injury irreparable is that no

260

III. Analysis of the Four Factors in Post-eBay Decisions

As more court decisions address the availability of injunctions post-eBay, several themes

and approaches for analyzing the four equitable factors have appeared. In many cases, courts

have focused the bulk of their discussions on the irreparable harm and inadequate damages

factors. In these cases, the analysis of the balance of hardships emphasized the irreparable harm

to the patentee. In many of these instances, courts declined to consider harm to the defendant,

relying on Federal Circuit precedent that a defendant who builds a business around an infringing

product cannot be heard to complain. Where courts have considered harm to the infringer, they

31

often look to the size of the infringing company, whether the injunction will affect a large portion

of its total sales, or whether the injunction will have other devastating effects. In evaluating the

public interest prong, courts will recite the public’s interest in a patent system that furthers

innovation. In cases where courts have engaged in additional analysis of the public interest, 32

they mainly have focused on traditional health and safety concerns. However, a few courts have

considered the effects on third party customers. 

A. Irreparable Harm/Inadequate Money Damages

The first two of the four equitable factors recited in eBay, irreparable harm to the patentee

caused by infringement and the inadequacy of money damages to remedy that harm, are closely

linked and courts sometimes analyze them together. They reason that “irreparable harm” is that

which “cannot be adequately atoned for in money.” One scholar also considers the irreparable 33

injury factor equivalent to the no adequate legal remedy factor. The inquiry has often focused 34
other remedy can repair it.” He adds, “I believe that no significant distinction can be drawn between

irreparable injury and adequate remedy formulations” and he uses the two interchangeably throughout his

book. 

See, e.g., z4, 434 F. Supp. 2d at 440 (E.D. Tex. 2006) (holding that eBay eliminated irreparable harm 35

presumption in permanent injunction context). In a non-precedential preliminary injunction case, the

Federal Circuit also stated that eBay removed the presumption of irreparable harm and “[t]he burden is

now on the patentee to demonstrate that its potential losses cannot be compensated by monetary

damages.” Automated Merchandising Sys. v. Crane Co., Nos. 2009-1158, 2009-1164, 2009 WL

4878643, at *3 (Fed. Cir. Dec. 16, 2009). But see Broadcom, 543 F.3d at 702 (“[i]t remains an open

question whether there remains a rebuttable presumption of irreparable harm following eBay.” (citations

omitted)).

Sprigman at 35 (2/12/09); Malin at 12-13 (2/12/09); Bernard H. Chao, After eBay Inc. v. 36

MercExchange: The Changing Landscape for Patent Remedies, 9 MINN. J.L. SCI. & TECH. 543, 549

(2008). 

See, e.g., Praxair Inc. v. ATMI, Inc., 479 F. Supp. 2d 440, 444 (D. Del. 2007) (denying injunction 37

because patentee put forth general arguments about lost market share, profits, and goodwill, but did not

identify specific losses or offer supporting data); IMX, Inc. v. Lendingtree, LLC, 469 F. Supp. 2d 203,

225 (D. Del. 2007) (denying injunction because plaintiff did not proffer evidence such as market or

financial data to support otherwise sweeping statements); Advanced Cardiovascular Sys., Inc. v.

Medtronic Vascular, Inc., 579 F. Supp. 2d 554, 560-61 (D. Del. 2008) (finding no irreparable harm

despite competition between parties because patentee failed to identify any specific lost customers).

See, e.g., Verizon Services Corp. v. Vonage Holdings Corp., 503 F.3d 1295 (Fed. Cir. 2007) (finding 38

that lost customers and price erosion provide evidence of irreparable harm); Power Integrations, Inc. v.

Fairchild Semiconductor Int’l, Inc., No. 04-1371, 2008 WL 5210843 (D. Del. Dec. 12, 2008) (lost market

share, harm to plaintiff’s reputation and goodwill); Sensormatic Electronics Corp. v. Tag Co. U.S., 632 F.

Supp. 2d 1147 (S.D. Fla. 2008) (future loss of market share and price erosion), aff’d in part, 367 Fed.

Appx. 143 (Fed. Cir. 2010) (non-precedential opinion); Becton Dickinson & Co. v. Tyco Healthcare

Group, LP, No. 02-1694, 2008 WL 4745882 (D. Del. Oct. 29, 2008) (lost market share and customers);

261

on whether the parties competed and the harm that the patentee would suffer as a result of that

competition, although courts have also found irreparable harm absent such competition. A lesser

but still significant area of inquiry has been the relationship of the patented invention to the

infringing product, and whether the invention was a small component that did not drive sales of

the product.

1. Cases in Which the Patentee and Defendant Competed

Many district courts have placed the burden of proving irreparable harm on the patentee.35

When patentees and infringers compete in a goods market, district courts have typically granted

permanent injunctions. However, some courts have declined to find this factor sufficiently

36

satisfied to warrant an injunction based solely on general assertions of competition. They 37

require clear evidence such as lost market share, lost customers and price erosion. The loss of 38
Brooktrout, Inc. v. Eicon Networks Corp., No. 2:03-CV-59, 2007 WL 1730112 (E.D. Tex. June 14, 2007)

(lost market share); MPT, Inc. v. Marathon Labels, Inc., 505 F. Supp. 2d 401 (N.D. Ohio 2007) (lost

market share and customer goodwill), aff’d in part, rev’d in part, 258 Fed. Appx. 318 (Fed. Cir. 2007);

Transocean Offshore Deepwater Drilling, Inc. v. GlobalSanteFe Corp., No. H-03-2910, 2006 WL

3813778 (S.D. Tex. Dec. 27, 2006) (citing evidence from the trial record that the parties had customers in

common and the defendant used its infringing products to win bids from the patent holder).

TiVo v. Echostar Commc’ns Corp., 446 F. Supp. 2d 664, 667 (E.D. Tex. 2006), aff’d in part, rev’d in 39

part, 516 F.3d 1290 (Fed. Cir. 2008).

Transamerica Life Insurance Co. v. Lincoln Nat’l Life Ins. Co., 625 F. Supp. 2d 702 (N.D. Iowa 2009), 40

rev’d on other grounds sub nom., Lincoln Nat. Life Ins. Co. v. Transamerica Life Ins. Co., 609 F.3d 1364

(Fed. Cir. 2010).

Martek Biosciences Corp. v. Nutrinova Inc., 520 F. Supp. 2d 537 (D. Del. 2007) (defining the market as 41

vegetarian DHA for adult foods and beverages), aff’d in part and rev’d in part, 579 F.3d 1363 (Fed. Cir.

2009); see also Arlington Indus., Inc. v. Bridgeport Fittings, Inc., No. 3:01-CV-0485, 2010 WL 817519,

at *3-4 (M.D. Pa. March 9, 2010) (the district court defined the market as the narrow subset of electrical

conduit fittings, essentially defined by the patents at issue).

Chapter 7, Section III.

42

Advanced Cardiovascular Systems, 579 F. Supp. 2d at 560-61 (D. Del. 2008). The court also noted the 43

patentee’s willingness to license other competitors in finding that money damages were adequate

compensation.

262

“sticky” customers has been one way to establish irreparable harm. In finding irreparable harm

based on Echostar’s infringement of TiVo’s digital video recorder (DVR) technology patents, the

court emphasized that competition in the nascent DVR market would cause TiVo to lose “sticky

customers,” those who are loyal or “locked-in” due to a hardware purchase, at a critical time. 

39

In Transamerica, the court also found irreparable harm based on the loss of “sticky customers”

who purchased long-term infringing retirement annuities. 

40

A few courts have recognized that a determination of whether the infringement caused the

patentee to lose customers will depend, in part, on the definition of the market in which the

patentee and infringer compete. In the Martek case, for example, the court relied upon a narrow

market definition to determine that the infringer was the patentee’s sole competitor, and therefore

necessarily targeted the patentee’s customers, causing irreparable harm through lost market

share. A broader market definition that included alternatives to the patented invention might 41

have supported a conclusion that the infringer’s customers would have chosen a non-infringing

product and so the infringement did not cause the patentee’s lost market share. For instance, 42

when finding no irreparable harm in Advanced Cardiovascular Systems, the court pointed to

market data establishing the presence of non-infringing competitors. The court also noted the

patentee’s admission that it had recaptured almost all market share lost due to infringement.43
Broadcom, 543 F.3d at 683. 44

Id. at 702.

45

See, e.g., Emory, 2008 WL 2945476, at *4. 46

z4, 513 F. Supp. 2d at 442; Callaway Golf Co. v. Acushet Co., 585 F. Supp. 2d 600, 621 (D. Del. 2008) 47

(holding that reputational harm supported injunction even though the patentee no longer marketed

patented golf balls), aff’d in part, vacated in part, 576 F.3d 1331 (Fed. Cir. 2009); see also Sprigman at

41-42 (2/12/09). 

Wald, 2006 WL 2128851, at *5. 48

Smith & Nephew, Inc. v. Synthes, 466 F. Supp. 2d 978, 983 (W.D. Tenn. 2006). 49

263

One case has recognized that the relevant market may extend beyond products that

incorporate the patented technology. The Federal Circuit affirmed the grant of a permanent

injunction after Qualcomm was found to infringe two Broadcom patents related to CDMA cell

phone technology. Qualcomm argued that Broadcom, which makes only WCDMA chips not 44

using the patented technology, suffered no irreparable harm because it did not compete with

Qualcomm’s infringing CDMA chips. But the district court rejected this argument on the basis

that the two firms competed for “design wins for the development and production of cell phones”

rather than for “each consumer sale.”45

In identifying irreparable harm caused by competition between a patentee and infringer,

courts have also looked beyond lost customers and price erosion to the more qualitative concern

of damage to a patentee’s reputation. As one court explained, competition from an infringing 46

product can damage the patentee’s good will or brand name recognition. Because that damage is

“impossible” to quantify, it cannot be adequately compensated by money damages, and so

supports the grant of an injunction. Similarly, in a case involving a product for treating oil 47

wells, the court cited harm to the patentee’s reputation as an innovator and its ability to maintain

its product as the “industry standard,” in addition to lost market share, to support its finding of

irreparable harm. Another district court cited evidence that the defendant’s infringement not 48

only harmed a medical device manufacturer plaintiff’s market share and profits, but also

interfered with the patentee’s ability to form relationships with surgeons, and as a result damaged

its reputation and ability to innovate.49

2. Cases In Which Courts Granted Injunctions to Patentees that Did Not

Practice the Patent

 Although courts typically find irreparable harm when a patentee and infringer compete in

a goods market, the converse – that they find a lack of irreparable harm absent competitionshould not be assumed. Courts have found irreparable harm that could not be adequately
See supra note 23. 50

In Joyal, the district court granted an injunction to a patent holder that had ceased manufacturing 51

operations and no longer practiced its patents based on argument that continuing infringement would

devalue the patent and undermine the patentee’s ability to sell it at a desirable price. Joyal, 2009 WL

512156, at *11; See also Kowalski, 2009 WL 856006, at *1 (injunction granted to independent inventor

based on right to exclude).

Emory, 2008 WL 2945476; Johns Hopkins, 513 F. Supp. 2d at 578. But see Voda, 2006 WL 2570614, 52

in which the court rejected the licensor patentee’s argument that it could demonstrate irreparable harm to

itself based on harm to its exclusive licensee. The exclusive licensee was not joined in the suit, and it

appears that the patentee did not provide evidence of how harm to the licensee would directly harm it. 

Johns Hopkins, 513 F. Supp. 2d at 586 (“In fact, it is the only competition and thus, its sale reduces the

53

Plaintiffs' market share.”).

Id. (“As the principal value of a patent is its statutory right to exclude, the nature of the patent grant 54

weighs against holding that monetary damages will always suffice to make the patentee whole.”

(citations omitted)).

Emory, 2008 WL 2945476, at *5. 55

264

compensated by money damages where the patentee did not practice the patent. Their 50

reasoning varies, depending on the nature of the patentee. In two cases involving non-practicing

patentees, the court relied only on harm to the patentee’s right to exclude and the economic value

of a patent as supporting an injunction. Other cases rely on additional evidence, however. 51

In two cases in which the patentees were universities, their exclusive licensees marketed

products in competition with the infringing products. In both cases, the university and its

licensee joined suit and the court granted an injunction. In Johns Hopkins, the court determined 52

that the exclusive licensee and the defendant were the only two competitors in the market and

any sales by the defendant would result in lost sales to the licensee. Additionally, the court

53

noted harm to the plaintiffs’ reputations and injury to the patentee’s right to exclude. In 54

Emory, the court found irreparable harm based on harm to the university’s reputation. The court

explained, “when an infringing company is not actively selling the offending product, the harm to

a patent-holder may seem esoteric. But the negative effects of the Plaintiffs' potential loss in

goodwill, market share, and prestige are real, and would be difficult to quantify solely through

monetary damages.”55

District courts have also granted injunctions to organizations that often seek to license

their patents non-exclusively. The Commonwealth Scientific and Industrial Research

Organisation (“CSIRO”), a scientific research organization established by the Australian

government, conducts scientific research in many technological areas and licenses its patented

technology. The court found that infringement of CSIRO’s patent on a wireless local area

network had caused irreparable harm by depriving CSIRO of licensing revenues that would have
CSIRO, 492 F. Supp. 2d at 603-08. The district court in Hynix v. Rambus criticized this rationale, 56

explaining that the court’s examination of irreparable harm was inappropriately retrospective and did not

examine the harm that CSIRO would prospectively incur upon denial of an injunction. The Hynix court

also criticized the CSIRO court’s reliance on harm caused by infringers other than the defendant. Hynix,

609 F. Supp. 2d at 983. Interestingly, the CSIRO court also failed to discuss the import of CSIRO’s

earlier RAND commitment to a standard setting organization. 

CSIRO, 492 F. Supp. 2d at 604. 57

Broadcom, 543 F.3d at 702 (Fed. Cir. 2008). 58

i4i, 598 F.3d at 831. 59

Id. at 862. 

60

Id. 

61

See supra n.23. 62

265

funded additional projects and diverting funds from its research function to patent litigation.56

The court also noted harm to CSIRO’s reputation as a research institution and its ability to recruit

top scientists. 

57

In Broadcom v. Qualcomm, the district court and Federal Circuit recognized that a

patentee may not practice its asserted patents, yet still compete with an infringer and suffer

irreparable harm stemming from that competition. Broadcom held patents covering aspects of

Qualcomm’s CDMA cell phone technology, but it did not practice that technology in its

WCDMA chips. The court found that the infringement might harm Broadcom’s ability to

compete with CDMA chips in a market for “design wins.” The court explained the irreparable

harm caused by the infringement: “In this kind of a market, the exclusion has a competitive effect

on a firm even if it does not have an immediately available product.”58

 In one case, the Federal Circuit and district court have based a finding of irreparable

harm in part on the past harm infringement imposed on the patentee. In i4i, the Federal Circuit 59

stated that it was proper for the district court to consider “strong circumstantial evidence that

Microsoft’s infringement rendered i4i’s product obsolete. . .causing i4i to. . .change its business

strategy to survive.” The court cited past infringement as causing 80% loss of market share, 60

loss of revenue, and harm to brand name recognition and customer goodwill.

61

3. Cases In Which Courts Denied Injunctions to Patentees that Did Not

Practice the Patent

District courts have denied injunctions to patent holders who did not practice the patented

invention in six identified cases. None of these decisions depend categorically on the fact that 62

the patentee did not manufacture a product to support denial of the injunction. In two cases,
Voda, 2006 WL 2570614, at *5. 63

Telcordia, 592 F. Supp. 2d at 747, aff’d in part, vacated in part, 612 F.3d 1365 (Fed. Cir. 2010).

64

z4, 434 F. Supp. 2d at 437. 65

Paice, 2006 WL 2385139, aff’d in part, vacated in part, and remanded, 504 F.3d 1293 (Fed. Cir. 2007).

66

Hynix, 609 F. Supp. 2d at 951. 67

i4i, 598 F.3d at 861-62. 68

Telcordia, 592 F. Supp. 2d at 747, aff’d in part, vacated in part, 612 F.3d 1365 (Fed. Cir. 2010).

69

Id. at 747-48. 70

Voda, 536 F.3d at 1329.

71

Id. Similarly, in a case involving practicing patent holders, the district court denied the injunction 72

because there was no nexus between the harm and party. In this case, the only party the court determined

had standing in an infringement case failed to proffer evidence of direct harm to itself and instead relied

on harm to a co-plaintiff. Medtronic Sofamor Danek USA, Inc. v. Globus Medical, Inc., 637 F. Supp. 2d

290 (E.D. Pa. 2009), aff’d, No. 2009-1525, 2011 WL 229563 (Fed. Cir. Jan. 26, 2011).

266

Voda and Telcordia , the patentee provided very little evidence that might have sufficed to 63 64

carry its burden of proving irreparable harm. In z4 and Paice , the court considered a wide 65 66

range of facts in finding no irreparable harm. The Hynix case is the first to emphasize that 67

equitable injunctions are forward, not backward looking, although the recent Federal Circuit

decision in i4i focuses attention on permitting an analysis of past harm to evaluate the 68

injunction decision. 

In Telcordia v. Cisco Systems, the district court rejected licensing company Telcordia’s

argument that it would suffer irreparable harm absent an injunction because “its lifeblood was its

ability to enforce its patents and continue to generate innovative solutions. . . .” The court 69

found this argument lacking primarily because it consisted of merely attorney argument, with no

supporting evidence of harm, such as lost sales, licensing or R&D opportunities. Telcordia was

able to obtain licenses from other companies, suggesting that its licensing program was not

harmed. In Voda, the Federal Circuit affirmed the denial of an injunction when the district 70

court rejected the licensor patentee’s argument that it could demonstrate irreparable harm to itself

based on harm to its exclusive licensee. The exclusive licensee was not joined in the suit, and it 71

appears that the patentee did not provide evidence of how harm to the licensee would directly

harm it. The Federal Circuit also rejected Voda’s argument that in denying the injunction, the 72

district court was adopting a categorical rule that denied injunctions to non-practicing patentees,
Voda, 536 F.3d at 1329.

73

z4, 513 F. Supp. 2d at 439-42. 74

Id. at 441 (discussing Justice Kennedy’s concurrence in eBay to support conclusion that monetary

75

damages would be sufficient to compensate z4 for any future infringement). 

Id. at 442.

76

Paice, 2006 WL 2385139, at *5. 77

Id. at *4-5. 78

Hynix, 609 F. Supp. 2d at 968-69. See also Nichia Corp. v. Seoul Semiconductor, Ltd., No. 06-0162,

79

2008 WL 346416, at *1 (N.D. Cal. Feb. 7, 2008) (holding that the purpose of an injunction is to prevent

267

stating that non-practicing patent holders may be able to obtain injunctions provided they can

prove irreparable injury to themselves and satisfy the four factor test.73

In z4 v. Microsoft, one of the first cases following the Supreme Court’s eBay decision, a

district court denied patent licensing company, z4, an injunction after a jury found that 

Microsoft’s Windows XP and Office products willfully infringed z4's patent on product

activation software. The court rejected z4's argument that its licensing program would be 74

irreparably harmed by ongoing infringement for several reasons. Because Microsoft did not offer

product activation software separate from its own products, customers would not be dissuaded

from licensing z4 technology by Microsoft’s infringement. z4 would suffer no lost market share

or name recognition. The court also relied on the fact that the infringing feature was a small

component of Microsoft’s products and that the component did not relate to their core

functionality. Finally, the court determined that Microsoft’s plans to phase out this software 75

would make the damages from any future infringement easy to calculate.76

Similarly in Paice v. Toyota, the district court considered many facts in finding a lack of

irreparable harm and denying the request for an injunction by a patent licensing company. 

Toyota was found to infringe Paice’s patent on drive train technology for hybrid electric vehicles. 

In evaluating irreparable harm, the court noted “that because Plaintiff does not compete for

market share with the accused vehicles, concerns regarding loss of brand name recognition are

market share. . .are not implicated.” The court found that Paice’s problems licensing its 77

technology were due to its business practices, not Toyota’s infringement. It also relied on the

fact that the patented invention was a small component of the accused device.78

In Hynix v. Rambus, the district court found that the patentee Rambus, a semiconductor

design firm that licenses its technology, did not prove irreparable harm and entitlement to an

injunction. The court’s analysis recognized that the purpose of equitable injunctions is to relieve

future harm and not to punish past conduct. For that reason, the court considered only the harm

79
future harm). 

Hynix, 609 F. Supp. 2d at 983-85. The court also denied the injunction because in weighing the 80

hardships on the parties, it found that an injunction would “decimate” the infringer’s business. Id. at 985.

i4i, 598 F.3d at 861-62. (“Although injunctions are tools for prospective relief designed to alleviate 81

future harm, by its terms the first eBay factor looks, in part, at what has already occurred.”).

eBay, 547 U.S. at 391. 82

See e.g., Brooktrout, 2007 WL 1730112, at *2 (holding that absent an injunction, Brooktrout would lose 83

goodwill, potential revenue, and the right to exclude); Visto Corp. v. Seven Networks, Inc., No. 2:03-CV333, 2006 WL 3741891, at * 4 (E.D. Tex. Dec. 19, 2006) (holding that if no permanent injunction were

entered, Visto would lose goodwill, potential revenue, and the right to exclude); 3M Innovative

Properties Co. v. Avery Dennison Corp., No. 01-1781, 2006 WL 2735499, at *2 (D. Minn. Sept. 25,

2006) (finding that patentee had been barred from exercising its right to exclude).

Malin at 98-99 (2/12/09); Badenoch at 111-12 (2/12/09). 84

3M Innovative Properties, 2006 WL 2735499, at *2 (citing Windsurfing, 782 F.2d at 1003); see also 85

Johns Hopkins, 513 F. Supp. 2d at 586 (holding that hardship for loss of sales and for ceasing operations

not sufficient because they were direct consequences of the illegal patent infringement), rev’d and

268

that the patentee would suffer in the future due to on-going infringement, and not the harm that it

suffered in the past. An injunction, by its nature, could not compensate the patentee for past

infringement harm, the court explained. Ultimately, the court found that since the patents in suit

would expire in a year, and Rambus was willing to license, any harm to the patentee from denial

of the injunction would be slight. This contrasts with the Federal Circuit’s statement that, even 80

though injunctions are tools for correcting future harm, it is proper for the district court to

consider past harm in determining whether to grant an injunction.81

B. Balance of the Hardships Between the Parties

eBay’s third equitable factor requires patentees to show that “considering the balance of

hardships between the plaintiff and defendant, [an injunction] is warranted.” The irreparable 82

harm analysis, to the extent it considers harm to the patentee from on-going infringement, will

define the hardship faced by the patentee. Some courts have also identified trespass of the

patentee’s “right to exclude” as a hardship to be considered. 

83

The third factor also requires courts to consider the hardship an injunction would impose

on the infringer. When courts have granted an injunction, some commentators have noted that

most of the analysis occurs during the irreparable harm factor. Courts frequently dismiss the 84

infringer’s complaints of hardship by explaining that “[o]ne who elects to build a business on a

product found to infringe cannot be heard to complain if an injunction against continuing

infringement destroys the business.” In other cases, courts have more carefully considered the 85
remanded, 543 F.3d 1342 (Fed. Cir. 2008); Smith & Nephew, 466 F. Supp. 2d at 984-85 (“Although

Synthes’ effort, time, and expense in redesigning [the infringing product] might be significant, that is the

consequence of patent infringement.”). 

Callaway Golf, 585 F. Supp. 2d at 622; TiVo, 446 F. Supp. 2d at 670; Power-One, Inc. v. Artesyn 86

Technologies, Inc., No. 2:05-CV-463, 2008 WL 1746636 (E.D. Tex. April 11, 2008), aff’d, 599 F.3d

1343 (Fed. Cir. 2010); Martek Biosciences Corp. v. Nutrinova Inc., 520 F. Supp. 2d 537, 559 (D. Del.

2007), aff’d in part, rev’d in part, 579 F.3d 1363 (Fed. Cir. 2009); MPT, 505 F. Supp. 2d at 420; 800

Adept, Inc. v. Murex Securities, Ltd., 505 F. Supp. 2d 1327 (M.D. Fla. 2007), aff’d in part, vacated in

part, and rev’d in part, 539 F.3d 1354 (Fed. Cir. 2008), rehearing and rehearing en banc denied, (2008).

Callaway Golf, 585 F. Supp. 2d at 622 (finding that defendant made several non-infringing products

87

and was owned by a multi-billion dollar conglomerate); TiVo, 446 F. Supp. 2d at 670 (finding that

patentee was a new and small company). 

Power-One, 2008 WL 1746636, at *1 n.1 (finding that infringer spent only $20,000 developing 88

infringing product compared to patentee’s $20 million). 

Martek, 520 F. Supp. 2d at 559 (finding that infringing product represented only a small percentage of 89

infringer’s total business); MPT, 505 F. Supp. 2d at 420 (finding that only 10-15% of the defendants

sales were for the infringing product); 800 Adept, 505 F. Supp. 2d at 1338 (finding that provision of

infringing services was a small part of infringer’s business, but the primary activity of patentee).

z4, 513 F. Supp. 2d at 443. 90

However, the Federal Circuit has held that the effect on third parties is irrelevant under the third prong 91

of the injunction test. Acumed, LLC v. Stryker Corp., 551 F.3d 1323, 1330 (Fed. Cir. 2008). 

Hynix, 609 F. Supp. 2d at 984-85. 92

269

effect of an injunction on the infringer, but found insufficient hardship to tip the balance towards

denying the injunction. Several reasons have been given, including: the defendant’s size, 86

especially compared to the patentee; the defendant’s minimal investment developing the 87

infringing product; and the percentage of the defendant’s business comprised of infringing 88

products.89

The cases in which courts have found that the balance of hardships tipped toward the

infringer and supported denial of an injunction are typically those in which the patentee failed to

prove irreparable harm and the consequences of an injunction for the infringer would have been

severe. In the z4 case, for instance, the court concluded that “turning off” activation software in

Microsoft products would flood the market with pirated software and lead to incalculable losses

for the defendant. In Paice, the court concluded that enjoining defendant Toyota’s car sales 90

would not only affect the defendant, but also its dealers and suppliers. The Hynix court worried 91

that prohibiting use of patented technology that had been incorporated into an industry standard

would “decimate” the infringer’s business in a situation where Rambus had not disclosed its

patent rights during the standard setting process.92
Broadcom, 543 F.3d at 704 (holding that a sunset provision would ameliorate the negative effects from 93

an injunction).

i4i, 670 F. Supp. 2d at 603. On appeal, the Federal Circuit increased the sunset provision to five 94

months, finding the district court erred in not citing evidence to support its 60 day sunset provision when

Microsoft witnesses had declared the redesign would take at least five months. i4i, 598 F.3d at 861 (Fed.

Cir. 2010), cert. granted, 79 U.S.L.W. 3326 (U.S. Nov. 29, 2010) (No. 10-290).

TiVo, 446 F. Supp. 2d at 671 (finding that an injunction would have a severe financial impact on

95

defendant’s core business).

Power-One, 2008 WL 1746636, at *1 n.1 (citing Brooktrout, 2007 WL 1730112, at *2). 96

TiVo, 446 F. Supp. 2d at 670. See also Funai Electronics Co., Ltd. v. Daewoo Elec. Corp., 593 F. Supp. 97

2d 1088, 1111 (N.D. Cal. 2009); Kowalski, 2009 WL 856006, at *2; Mass Engineered Design, Inc. v.

Ergotron, Inc., 633 F. Supp. 2d 361, 394 (E.D. Tex 2009); Becton Dickinson, 2008 WL 4745882, at *4

(noting that plaintiff offered no evidence of harm to public health or safety from the injunction); Emory,

2008 WL 2945476, at *5 (noting the public would not lose a major supplier of antimicrobial products);

Power Integrations, 2008 WL 5210843, at *1; Power-One, 2008 WL 1746636, at *1 n.1; Sensormatic,

632 F. Supp. 2d at 1182; TruePosition, Inc. v. Andrew Corp., 568 F. Supp. 2d 500, 533 (D. Del. 2008),

amended in part, 2009 WL 192470 (D. Del. Jan. 27, 2009), aff’d, 389 Fed. Appx. 1000 (Fed. Cir. 2010);

Trading Technologies Int’l, Inc. v. eSpeed, Inc., No. 04-C-5312, 2008 WL 4531371, at *5 (N.D. Ill. May

22, 2008), aff’d, 595 F.3d 1340 (Fed. Cir. 2010); Atlanta Attachment Co. v. Leggett & Platt, Inc., No.

1:05-CV-1071, 2007 WL 5011980, at *8 (N.D. Ga. Feb. 23, 2007); Baden Sports, Inc. v. Kabushiki

Kaisha Molten, No. C06-210, 2007 WL 2790777, at *3 (W.D. Wash. Sept. 25, 2007); Brooktrout, 2007

WL 1730112, at *2; Martek, 520 F. Supp. 2d at 558; MPT, 505 F. Supp. 2d at 420; O2 Micro Int’l, Ltd.

270

In some cases, courts have found that the hardship to the infringer can be ameliorated by

delaying the start of the injunction in order to give the infringer time to design around the patent. 

For instance in Broadcom, the district court permitted a twenty month delay to the start of the

injunction to reduce the effects of the injunction on infringer Qualcomm. Similarly, the district 93

court in i4i permitted a sixty day delay to abrogate the difficulties Microsoft would face in

redesigning its software to comply with the injunction. However, in TiVo, the court declined to 94

delay the start of an injunction, stating that the harm to the defendant’s business was insufficient

to warrant the delay and would further harm TiVo. Other courts have suggested that narrowly 95

tailoring the injunction will mitigate harm to the defendant. 

96

C. Public Interest Prong

The fourth factor of the equitable injunction analysis examines whether the public interest

would be disserved by a permanent injunction. Only a small number of post-eBay cases have

provided an extended discussion of this factor in deciding whether to grant an injunction. In the

majority of cases, courts simply recognize that the “public has an interest in maintaining a strong

patent system. This interest is served by enforcing an adequate remedy for patent

infringement.” Presumably, this common statement refers to the patent system’s role in 97
v. Beyond Innovation Tech. Co., Ltd., 2007 WL 869576, at * 3 (E.D. Tex. March 21, 2007), vacated, 521

F.3d 1351 (Fed. Cir. 2008); Ortho-McNeil Pharm., Inc. v. Mylan Labs., Inc., Nos. 04-1689, 06-757, 06-

5166, 2007 WL 869545, at *1 (D.N.J. March 20, 2007), aff’d in part, 520 F.3d 1358 (Fed. Cir. 2008);

Visto, 2006 WL 3741891, at *5; Black & Decker, Inc. v. Robert Bosch Tool Corp., No. 04 C 7955, 2006

WL 3446144, at *5 (N.D. Ill. Nov. 29, 2006). 

Sanofi-Synthelabo v. Apotex, Inc., 492 F. Supp. 2d 353, 397 (S.D.N.Y. 2007), aff’d, 530 F.3d 1075 98

(Fed. Cir. 2009).

Amgen, Inc. v. F. Hoffman-La Roche, Ltd., 581 F. Supp. 2d 160, 212-26 (D. Mass. 2008), aff’d in part, 99

vacated in part, 580 F.3d 1340 (Fed. Cir. 2009).

Advanced Cardiovascular Systems, 579 F. Supp. 2d at 560-61 (D. Del. 2008).

100

Finjan Software, Ltd. v. Secure Computing Corp., No. 06-369, 2009 WL 2524495, at *11 (D. Del.

101

Aug. 18, 2009), aff’d in part, rev’d in part, 626 F.3d (Fed. Cir. 2010).

271

promoting innovation for public benefit, and the manner in which exclusive rights protected by

injunctions support that role. 

Several cases providing more extensive discussions of the public interest factor involve

health care products. In a case finding that a generic drug infringed a patent held by a branded

drug manufacturer, the court recognized a public interest in access to lower-priced generic drugs. 

However the court weighed that interest against the public’s competing interest in “encouraging

the massive investment in research and development that is required before a new drug can be

developed and brought to market” and granted the injunction. In Amgen v. Hoffman-La Roche,

98

a matter involving a biologic drug, the district court collected extensive evidence related to the

public interest prong and then granted the injunction. The court found that it was unclear

whether the patented drug offered significant clinical advantages over non-infringing treatments,

and whether market entry of an infringing product would lower Medicare costs. The court also

determined that sale of an infringing drug would undermine incentives for innovation that the

patent system is designed to protect. The public interest in maintaining access to the infringing 99

drug-eluting stent supported denial of an injunction in Advanced Cardiovascular Systems.

Cardiologists had filed affidavits stating they preferred the infringing stents and expressed

concern for the success of their surgeries if they were not available. The court also

acknowledged the public’s interest in competition in the stent market in this situation where the

patentee had failed to establish irreparable harm.

100

A few cases have considered non-health related disruption to customers and the broader

public under the public interest prong. In a case involving computer security software, the court

noted that “computer security revolves around protecting highly sensitive information and. . .that

a disruption in service would be an incredible disservice to the public. . . .” However, it found 101

that these arguments were insufficient to outweigh the public’s interest in the enforcement of
Id.

102

z4, 434 F. Supp. 2d at 444. 103

Id. at 444-45. 104

Broadcom, 543 F.3d at 704. (“We agree that the sunset provisions mitigate the harm to the public and 105

that the district court did not abuse its discretion in fashioning a remedy that protects Broadcom’s rights

while allowing Qualcomm time to develop non-infringing substitutes.”).

Transocean, 2006 WL 3813778, at *7 (holding that a narrowly tailoring injunction would mitigate

106

harm to public).

272

patent rights. In z4, defendant Microsoft argued that because its Windows operating system 102

was ubiquitous, an injunction could flood the market with pirated software that could potentially

threaten computer security and could harm sectors of the public including small computer

manufacturers, retailers and, consumers. The court concluded that although it was impossible 103

to determine the actual effects of the two scenarios, even minor disruptions could harm the

public, thus tipping this factor in favor of denying the injunction. In Broadcom, the court

104

found that it could ameliorate the disruption to cell phone service by delaying the start of the

injunction in order to give the infringer time to design around the patent. Another court 105

concluded that narrowly tailoring the injunction will also mitigate harm to the public.106

IV. List of Post-eBay Cases

This list includes opinions available on Westlaw as of March 31, 2010 . To compile this list, we

searched for all cases citing eBay and limited the results to opinions discussing permanent

injunctions in patent cases. We did not include preliminary injunction cases or cases involving

other areas of the law such as trademark or copyright. In the period shortly after the Supreme

Court issued its opinion in eBay, the Federal Circuit remanded cases back to the district court

with instructions to perform a four factor analysis. We included the remand opinions. There are

instances in which courts have made statements about the four factors in dictum when discussing

other areas of patent cases such as willfulness or when discussing stays of permanent injunctions

pending appeal of infringement verdicts. We did not include those cases on this list. Some cases

turned on procedural or technical issues, such as standing and we did not include those cases on

this list.

A. Post-eBay Cases in Which the Court Denied a Permanent Injunction

Advanced Cardiovascular Systems, Inc. v. Medtronic Vascular, Inc., 579 F. Supp. 2d 554 (D.

Del. 2008)

Bard Peripheral Vascular, Inc. v. W.L. Gore & Associates, Inc., No. CV-03-0597, 2009 WL

920300 (D. Ariz. March 31, 2009)
273

Boston Scientific Corp. v. Johnson & Johnson, No. C 02-0790, 2008 WL 5054955 (N.D. Cal.

Nov. 25, 2008) (Ongoing Royalty Case) 

Creative Internet Advertising Corp. v. Yahoo!, Inc., 674 F. Supp. 2d 847 (E.D. Tex. 2009)

Emcore Corp. v. Optium Corp., No. 7-326, 2010 U.S. Dist. LEXIS 3287 (W.D. Penn. Jan. 15,

2010), decision reached on appeal, 2011 U.S. App. LEXIS 1826 (Fed. Cir. Jan. 26,

2011). 

Finisar Corp. v. DirecTV Group, No. 1:05-CV-264, 2006 U.S. Dist LEXIS 76380 (E.D. Tex.

July 7, 2006), aff’d in part, 523 F.3d 1323 (Fed. Cir. 2008) (Federal Circuit vacated the

district court’s holding of injunction, part of its analysis regarding the validity of the

patent, and remanded for new trial) 

Hynix Semiconductor Inc. v. Rambus Inc., 609 F. Supp. 2d 951 (N.D. Cal. 2009)

Hypoxico Inc. v. Colo. Altitude Training, 630 F. Supp. 2d 319 (S.D.N.Y. 2009)

IGT v. Bally Gaming Int’l Inc., 675 F. Supp. 2d 487 (D. Del. 2009)

IMX, Inc. v. Lendingtree, L.L.C., 469 F. Supp. 2d 203 (D. Del. 2007), on reconsideration in part,

No. 03-1067, 2007 WL 1232184 (D. Del. April 25, 2007). 

Innogenics, N.V. v. Abbott Labs., 512 F.3d 1363 (Fed. Cir. 2008) (upholding lower court’s grant

of injunction based on payment of a market entry fee to compensate the patentee for loss

of market power in the future)

Medtronic Sofamor Danek USA Inc. v. Globus Med., 637 F. Supp. 2d 290 (E.D. Pa. 2009)

Nichia Corp. v. Seoul Semiconductor, Ltd., No. 06-0162, 2008 WL 346416 (N.D. Cal. Feb. 7,

2008)

Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211, 2006 WL 2385139 (E.D. Tex. Aug. 16,

2006), aff’d in part, rev’d in part and remanded, 504 F.3d 1293 (Fed. Cir. 2007) (Federal

Circuit upheld the denial of the injunction and grant of on-going royalties but remanded

for the court to do a better job on calculating those damages), on remand at, 609 F. Supp.

2d 620 (E.D. Tex. 2009) (District court increased the on-going royalties from $25 per

license to $98 license)

Praxair Inc. v. ATMI, Inc., 479 F. Supp. 2d 440 (D. Del. 2007). In a later opinion patents were

held unenforceable for inequitable conduct. See 489 F. Supp. 2d 387 (2007), aff’d in

part, rev’d in part, 543 F.3d 1306 (Fed. Cir. 2008) (upholding the inequitable conduct

finding for one patent and reversing the inequitable conduct and infringement decisions

for a second, also vacating the finding of invalidity for a third patent)

Respironics, Inc. v. Invacare Corp., No. 04-0336, 2008 WL 111983 (W.D. Pa. Jan. 8, 2008)

ResQNet.com, Inc. v. Lansa, Inc., 533 F. Supp. 2d 397 (S.D.N.Y. 2008), aff’d in part, rev’d in

part, 594 F.3d 860 (Fed. Cir. 2010) (affirming patent valid and infringed; reversing and

remanding damages decision; reversing imposition of Rule 11 sactions)
274

Sundance Inc. v. DeMonte Fabricating Ltd., No. 02-73543, 2007 WL 37742 (E.D. Mich. Jan. 4,

2007). Patent declared invalid for obviousness by 550 F.3d 1356 (Fed. Cir. 2008).

Telcordia Tech., Inc. v. Cisco Sys., Inc., 592 F. Supp. 2d 727(D. Del. 2009), aff’d in part,

vacated in part, 612 F.3d 1365 (Fed. Cir. 2010)

Voda v. Cordis, No. CIV-03-1512, 2006 WL 2570614 (W.D. Okla. Sept. 5, 2006), aff’d, 536

F.3d 1311 (Fed. Cir. 2008) 

z4 Technologies, Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006)

B. Post-eBay Cases in Which the Court Granted a Permanent Injunction

3M Innovative Properties Co. v. Avery Dennison Corp., No. 01-1781, 2006 WL 2735499 (D.

Minn. Sept. 25, 2006)

800 Adept, Inc. v. Murex Securities, Ltd., 505 F. Supp. 2d 1327 (M.D. Fla. 2007), aff’d in part,

vacated in part, and rev’d in part, 539 F.3d 1354 (Fed. Cir. 2008), rehearing and

rehearing en banc denied, (2008) (Federal Circuit held that trial court erred on claim

construction on one set of claims and reversed the finding of infringement and vacated

the injunction; Federal Circuit upheld jury’s finding that a second set of patents were

invalid except for two claims and remanded for new trial on those claims.) 

Acticon Tech. v. Heisei Electronics Co., Ltd., No. 06-CV-4316, 2008 WL 356872 (S.D.N.Y. Feb.

5, 2008)

Acumed, LLC v. Stryker Corp., 483 F.3d 800 (Fed. Cir. 2007) (Federal Circuit remanded decision

to district court to apply eBay factors); 2007 WL 4180682 (D. Ore. Nov. 20, 2007)

(district court applied eBay factors and granted injunction), aff’d, 551 F.3d 1323 (Fed.

Cir. 2008). 

Allan Block Corp. v. E. Dillon & Co., 509 F. Supp. 2d 795 (D. Minn. 2007), aff’d per curiam,

287 Fed. Appx. 109 (Fed. Cir. 2008)

Amgen, Inc. v. F. Hoffman-La Roche Ltd., 581 F. Supp. 2d 160 (D. Mass. Oct. 2, 2008), aff’d in

part, 581 F. Supp. 2d 160 (D. Mass. 2008) (Federal Circuit reversed some of findings of

infringement and affirmed others and remanded; injunction undisturbed with instruction

that district court can revisit scope on remand if appropriate.)

Arlington Industries, Inc., v. Bridgeport Fittings, Inc., No. 3:01-CV-0485, 2010 WL 817519

(M.D. Pa. March 9, 2010)

Atlanta Attachment Co. v. Leggett & Platt, Inc., No. 1:05-CV-1071, 2007 WL 5011980 (N.D.

Ga. Feb. 23, 2007)

Baden Sports, Inc. v. Kabushiki Kaisha Molten, No. C06-210, 2007 WL 2790777 (W.D. Wash.

Sept. 25, 2007)
275

Becton Dickinson & Co. v. Tyco Healthcare Group, LP, No. 02-1694, 2008 WL 4745882 (D.

Del. Oct. 29, 2008)

Black & Decker Inc. v. Robert Bosch Tool Corp., No. 04 C 7955, 2006 WL 3446144 (N.D. Ill.

Nov. 29, 2006), aff’d in part, vacated in part, 260 Fed. Appx. 284 (Fed. Cir. 2008) (The

Federal Circuit overturned the district court’s claim construction and remanded, rendering

the initial grant of injunction moot.)

Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683 (Fed. Cir. 2008)

Brooktrout, Inc. v. Eicon Networks Corp., No. 2:03-CV-59, 2007 WL 1730112 (E.D. Tex. June

14, 2007)

Callaway Golf Co. v. Acushet Co., 585 F. Supp. 2d 600 (D. Del. 2008), aff’d in part, vacated in

part, 576 F.3d 1331 (Fed. Cir. 2009) (The Federal Circuit reversed the district court’s

summary judgment ruling on anticipation and vacated the district court’s finding on

obviousness and remanded. The Federal Circuit did not rule on the district court’s

injunction decision.)

Commonwealth Scientific and Industrial Research Organisation v. Buffalo Technology Inc., 492

F. Supp. 2d 600 (E.D. Tex. 2007), aff’d in part, 542 F.3d 1363 (Fed. Cir. 2008) (Federal

Circuit overturned the decision on willfulness and remanded).

Emory University v. Nova Biogenetics, No. 1:06-CV-0141, 2008 WL 2945476 (N.D. Ga. July 25,

2008)

Extreme Networks, Inc. v. Enterasys Networks, Inc., No. 07-cv-229, 2008 WL 4756498 (W.D.

Wisc. Oct. 29, 2008); motion to modify injunction denied and motion to stay injunction

granted by 2009 WL 679602 (D. Wisc. March 16, 2009), vacated and remanded, 395

Fed. Appx. 709 (Fed. Cir. 2010)

Finjan Software, Ltd. Secure Computing Corp, No. 06-369, 2009 WL 2524495 (D. Del. Aug. 18,

2009), aff’d in part, rev’d in part, 626 F.3d 1197 (Fed. Cir. 2010)

Flexiteek Ams., Inc. v. PlasTEAK, Inc., No. 08-60996, 2009 WL 2957310 (S.D. Fla. Sept. 15,

2009)

Fresenius Medical Care Holdings, Inc. v. Baxter Int’l, Inc., No. C 03-1431, 2008 WL 928496

(N.D. Cal. April 4, 2008), aff’d in part, rev’d in part, 582 F.3d 1288 (Fed. Cir. 2009)

(injunction vacated because of validity decision)

Funai Elec. Co., Ltd. v. Daewoo Elec. Corp., 593 F. Supp. 2d 1088 (N.D. Cal. 2009), aff’d, F.3d

1357 (Fed. Cir. 2010)

i4i Ltd. Partnership v. Microsoft Corp., 670 F. Supp. 2d 5680 (E.D. Tex. 2009), aff’d, 589 F.3d

1246 (Fed. Cir. 2009) (affirmed grant of permanent injunction but increased the delay

period before it started from 60 days to 5 months based on testimony supporting the time

necessary for Microsoft to design around.), superseded by, 598 F.3d 831 (Fed. Cir. 2010),

cert. granted, 79 U.S.L.W. 3326 (U.S. Nov. 29, 2010) (No. 10-29).
276

I-Flow Corp. v. Apex Medical Technologies, Inc., No. 07cv1200, 2010 WL 141402 (S.D. Tex.

Jan. 8, 2010)

Johns Hopkins Univ. v. Datascope Corp., 513 F. Supp. 2d 578 (D. Md. 2007), rev’d and

remanded, 543 F.3d 1342 (Fed. Cir. 2008) (jury’s finding of infringement was not

supported by substantial evidence; reversed the district court’s denial of JMOL and

remanded for entry of judgment; injunction held moot)

Joyal Products, Inc. v. Johnson Elec. North Amer., Inc., No. 04-5172, 2009 WL 512156 (D. N.J.

Feb. 27, 2009), aff’d per curiam, 335 Fed. Appx. 48 (Fed. Cir. 2009)

Kowalski v. Mommy Gina Tuna Resources, Nos. 05-00679, 05-00787, 06-00182, 2009 WL

856006 (D. Haw. March 30, 2009), clarified by, 2009 WL 1360695 (D. Haw. May 7,

2009)

Litecubes, LLC v. Northern Light Products, Inc., No. 4:04CV00485, 2006 WL 5700252 (E.D.

Mo. Aug. 25, 2006), aff’d, 523 F.3d 1353 (Fed. Cir. 2008)

Mannatech, Inc. v. Glycoproducts Int’l, Inc., No. 3-06-CV-0471, 2008 WL 2704425 (N.D. Tex.

July 9, 2008)

Martek Biosciences Corp. v. Nutrinova Inc., 520 F. Supp. 2d 537 (D. Del. 2007), aff’d in part,

rev’d in part, 579 F.3d 1363 (Fed. Cir. 2009) (Federal Circuit affirmed the denial of

JMOL for a finding of invalidity and non-infringement on some patent claims; reversed

grant the JMOL finding invalidity on other patent claims; upheld the district court’s claim

construction).

Mass Engineered Design, Inc. v. Ergotron, Inc., 633 F. Supp. 2d 361 (E.D. Tex. 2009)

MGM Well Services Inc. v. Mega Lift Systems, LLC, 505 F. Supp. 2d 359 (S.D. Tex. 2007), aff’d,

264 Fed. Appx. 900 (Fed. Cir. 2008)

MPT, Inc. v. Marathon Labels, Inc., 505 F. Supp. 2d 401 (N.D. Ohio 2007), rev’d in part, 258

Fed. Appx. 318, (Fed. Cir. 2007) (Federal Circuit found injunction overly broad and

remanded) 

Muniauction, Inc. v. Thomson Corp., 502 F. Supp. 2d 477 (W.D. Pa. 2007), rev’d in part, 532

F.3d 1318 (Fed. Cir. 2008) (injunction vacated because Federal Circuit found some patent

claims invalid for obviousness and other claims not infringed)

Novozymes A/S v. Genecor Int’l Inc., 474 F. Supp. 2d 592 (D. Del. 2007)

O2 Micro Int’l, Ltd. v. Beyond Innovation Technology Co., Ltd., No. 2-04-CV-32, 2007 WL

869576 (E.D. Tex. March 21, 2007), rev’d, 521 F.3d 1351 (Fed. Cir. 2008) (The Federal

Circuit vacating the finding of infringement and the injunction and remanding)

Ortho-McNeil Pharm., Inc. v. Mylan Labs., Inc., Nos. 04-1689, 06-757, 06-5166, 2007 WL

869545 (D. N.J. March 20, 2007), aff’d in part, 520 F.3d 1358 (Fed. Cir. 2008)
277

Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., No. 04-1371, 2008 WL 5210843

(D. Del. Dec. 12, 2008), motion for temporary stay granted by, 2008 WL 5351038 (D.

Del. Dec. 22, 2008)

Power-One, Inc. v. Artesyn Technologies, Inc., No. 2:05-CV-463, 2008 WL 1746636 (E.D. Tex.

April 11, 2008), aff’d, 599 F.3d 1343 (Fed. Cir. 2010)

Rosco, Inc. v. Mirror Lite Co., No. CV-96-5658, 2006 WL 2844400 (E.D.N.Y. Sept. 29, 2006)

Sanofi-Synthelabo v. Apotex, Inc., 492 F. Supp. 2d 353 (S.D.N.Y. June 19, 2007), aff’d, 550 F.3d

1075 (Fed. Cir. 2008) (infringement and validity decision upheld), cert. denied, 130 S. Ct.

493 (2009) Preliminary injunction opinion: 488 F. Supp. 2d 317 (S.D.N.Y 2006), aff’d,

470 F.3d 1368 (Fed. Cir. 2006)

Sensormatic Electronics Corp. v. Tag Co. U. S., 632 F. Supp. 2d 1147 (S.D. Fla. 2008), aff’d,

2010 WL 565606 (Fed. Cir. Feb. 17, 2010) (non-precedential opinion)

Smith & Nephew, Inc. v. Synthes, 466 F. Supp. 2d 978 (W.D. Tenn. 2006)

Spectrlytics, Inc. v. Cordis Corp., 650 F. Supp. 2d 900 (D. Minn. 2009)

Telequip Corp. v. The Change Exchange, No. 5:01-CV-1748, 2006 WL 2385425 (N.D.N.Y.

Aug. 15, 2006)

TiVo v. Echostar Commc’ns Corp., 446 F. Supp. 2d 664 (E.D. Tex. 2006), aff’d in part, rev’d in

part, 516 F.3d 1290 (Fed. Cir. 2008) (Federal Circuit overturned the infringement

decision with respect to hardware claims and upheld the infringement decision with

respect to software claims.)

Trading Technologies Int’l, Inc. v. eSpeed, Inc., No. 04 C 5312, 2008 WL 4531371 (N.D. Ill.

March 22, 2008), aff’d, 595 F.3d 1340 (Fed. Cir. 2010)

Transamerica Life Ins. Co. v. Lincoln National Life Ins. Co., 625 F. Supp. 2d 702 (N.D. Iowa

2009)

Transocean Offshore Deepwater Drilling, Inc. v. GlobalSanteFe, No. H-03-2910, 2006 WL

3813778 (S.D. Tex. Dec. 27, 2006)

TruePosition, Inc. v. Andrew Corp., 568 F. Supp. 2d 500 (D. Del. 2008) (post-judgment interest

order amended by 2009 WL 192470 (D. Del. Jan. 27, 2009).

U.S. Philips Corp. v. KXD Technology, Inc., No. CV 05-8953, 2007 WL 4984150 (C.D. Cal.

Sept. 7, 2007)

U.S. Philips Corp. v. Iwasaki Electric Co., Ltd., 607 F. Supp. 2d 470 (S.D.N.Y. 2009)

Verizon Servs. Corp. v. Vonage Holdings Corp., 503 F.3d 1295 (Fed. Cir. 2007)

Visto Corp. v. Seven Networks, Inc., No. 2:03-CV-333, 2006 WL 3741891 (E.D. Tex. Dec. 19,

2006)
278

Wald v. Mudhopper Oilfield Servs., No. CIV-04-1693, 2006 WL 2128851 (W.D. Okla. July 27,

2006)

Zen Design Group, Ltd. v. Clint, No. 08-cv-14309, 2009 WL 4050247 (E.D. Mich. Nov. 23,

2009)
279

V. Questionnaire Used in Malin Study

SURVEY OF ESAylNJUNCTION FACTORS 

CASE NAME: 

-------------------------------------------------------- CITATION: DECISION DATE: 

-------------------------- ----------------------- COURT: JUDGE: -------------------------- ----------------------- REVIEWER: FIRM NAME: 

INJUNCTION REQUESTED: DISPOSITION: 

D PERMANENT D PRELIMINARY D GRANTED D DENIED 

PATENTEE Yes No N/A Weight* EbayFactor** 

Delay in Bringing Suit D D D [QJ [I] ~ @J [II ~ @J GJ 

Practicing Patentee D D D [QJ [I] ~ @J [II ~ @] GJ 

Direct Competitor to Defendant D D D [QJ [I] ~ @J [II ~ @J GJ 

Patentee's Only/Primary Product D D D [QJ [I] ~ @J [II ~ @] GJ 

Lost Mkt. Share/Sales Linked to Infringement D D D [QJ [I] ~ @J [II ~ @J GJ 

Limited/Small Customer Base D D D [QJ [I] ~ @J [II ~ @] GJ 

Likely Price Erosion D D D [QJ [I] ~ @] [II ~ @J GJ 

Nascent/Developing Market D D D [QJ [I] ~ @J [II ~ @J GJ 

Critical/Developing Time for Patentee D D D [QJ [I] ~ @] [II ~ @J GJ 

"Sticky"/Loyal Customers D D D [QJ [I] ~ @J [II ~ @J GJ 

Licensing Others D D D [QJ [I] ~ @] [II ~ @J GJ 

Offered License to Defendant D D D [QJ [I] ~ @J [II ~ @J GJ 

Refused License to Defendant D D D [QJ [I] ~ @] [II ~ @] GJ 

Only Asserting Harm On Behalf of Licensees D D D [QJ [I] ~ @J [II ~ @J GJ 

Patentee's Reputation Harmed D D D [QJ [I] ~ @] [II ~ @] GJ 

ALLEGED INFRINGER Yes No N/A Weight* EbayFactor** 

Willful Infringement D D D [QJ [I] ~ @J [II ~ @J GJ 

Voluntarily Offer to Avoid Future Infringement D D D [QJ [I] ~ @J [II ~ @J GJ 

I mpact on Defendant's Business/Product Line D D D [QJ [I] ~ @] [II ~ @J GJ 

Inexpensive Noninfringing Alternatives Available D D D [QJ [I] ~ @J [II ~ @J GJ 

Invention a Trivial Component D D D [QJ [I] ~ @] [II ~ @J GJ 

Product at Core of Defendant's Business D D D [QJ [I] ~ @J [II ~ @J GJ 

Minor Impact on Infringer's Sales D D D [QJ [I] ~ @] [II ~ @J GJ 

Compliance w/lnjunction Easy D D D [QJ [I] ~ @J [II ~ @J GJ 

EFFECT ON THIRD PARTIES Yes No N/A Weight* EbayFactor** 

Harm to Defendant's Employees D D D [QJ [I] ~ @J [II ~ @] GJ 

Harm to Defendant's Customers D D D [QJ [I] ~ @J [II ~ @J GJ 

Product Ubiquitous/Relied on by Public D D D [QJ [I] ~ @J [II ~ @] GJ 

Health Concern Implicated D D D [QJ [I] ~ @J [II ~ @J GJ 

Product for Entertainment Only D D D [QJ [I] ~ @] [II ~ @] GJ 

* O=Treated as Irrelevant; 1=Mentioned But Not Very Significant; 2=Average; 3=Material to Holding 

** 1=lrreparable Harm; 2=Adequacy of Damages; 3=Balance of Hardships; 4=Public Interest 
Full transcripts of all the hearing testimony, agendas describing these hearings, biographies of the 1

panelists and speakers, and related materials are available at

http://www.ftc.gov/bc/workshops/ipmarketplace.

280

APPENDIX C

HEARING PARTICIPANTS

Participants in the FTC Hearings on 

the Evolving Intellectual Property Marketplace1

Participant Hearing Date

Keith Agisim

Associate General Counsel for Global Intellectual Property,

Bank of America

February 11, 2009

John A. Amster

Co-CEO, RPX Corp.

May 4, 2009

Robert A. Armitage

Senior Vice President and General Counsel, Eli Lilly & Co.

February 12, 2009

March 19, 2009

Ashish Arora

Professor of Strategy, Fuqua School of Business, Duke University (visiting)

H. John Heinz, III Professor of Economics, Innovation and Economic

Development, Carnegie Mellon University (on leave)

March 19, 2009

George E. Badenoch

Partner, Kenyon & Kenyon, LLP

February 12, 2009

Christine P. Bellon

Vice President of Intellectual Property & Legal Affairs, 

Hydra Biosciences

March 18, 2009

Keith Bergelt

Chief Executive Officer, Open Invention Network

April 17, 2009

James E. Bessen

Lecturer in Law, Boston University School of Law;

Director, Research on Innovation

March 19, 2009
Participant Hearing Date

281

Earl (Eb) Bright

General Counsel and Vice President, Intellectual Property, Exploramed

May 4, 2009

Bruce W. Burton

Senior Managing Director, FTI Consulting, Inc.

February 11, 2009

Dan L. Burk

Chancellor’s Professor of Law, 

University of California Irvine School of Law

May 5, 2009

Bernard J. Cassidy

General Counsel and Senior Vice President, Tessera Technologies, Inc.

February 12, 2009

Yar R. Chaikovsky

Partner, Sonnenschein Nath & Rosenthal, LLP

May 5, 2009

Henry Chesbrough

Adjunct Professor, Haas School of Business, U.C. Berkeley; 

Executive Director, Center for Open Innovation

May 4, 2009

Robert A. Clarke

Director, Office of Patent Legal Administration, 

Patent & Trademark Office

March 19, 2009

Iain Cockburn

Professor of Finance and Economics and Everett W. Lord Distinguished

Faculty Scholar, Boston University School of Management

April 17, 2009

Thomas F. Cotter

Briggs and Morgan Professor of Law, 

University of Minnesota Law School

December 5, 2008

February 11, 2009

Christopher A. Cotropia

Associate Professor of Law, University of Richmond School of Law

March 19, 2009

Timothy Crean

Chief Intellectual Property Officer, SAP AG

May 4, 2009

Marcus Delgado

Chief IP Counsel, Cox Communications, Inc.

April 17, 2009
Participant Hearing Date

282

Peter N. Detkin

Founder & Vice Chairman, Intellectual Ventures, Inc.

December 5, 2008

Dianna L. DeVore

Partner, Virtual Law Partners LLP

May 4, 2009

Q. Todd Dickinson

Executive Director, American Intellectual Property Law Association

December 5, 2008

Mary E. Doyle

Senior Vice President and General Counsel, Palm, Inc.

May 5, 2009

John F. Duffy

Oswald Symister Colclough Research Professor of Law, 

George Washington University Law School

December 5, 2008

Daralyn J. Durie

Partner, Durie Tangri Page Lemley Roberts & Kent LLP

May 5, 2009

Rebecca S. Eisenberg

Robert and Barbara Luciano Professor of Law, 

University of Michigan Law School

May 4, 2009

Ron Epstein

CEO, IPotential, LLC

May 4, 2009

Richard J. Gilbert

Professor of Economics and Professor of the Graduate School (Emeritus),

University of California, Berkeley

May 5, 2009

John M. Golden

Assistant Professor, University of Texas School of Law

February 12, 2009

Stuart Graham

Assistant Professor of Strategic Management, 

Georgia Institute of Technology

April 17, 2009

Gary Griswold

President and Chief IP Counsel, 3M Innovative Properties (retired)

March 18, 2009
Participant Hearing Date

283

Horacio Gutierrez

Corporate VP & Deputy General Counsel, Microsoft Corporation

May 4, 2009

Bronwyn Hall

Professor of Economics, U.C. Berkeley; 

Professor of Economics of Technology and Innovation, 

University of Maastricht

May 4, 2009

Sarah T. Harris

Vice President and Chief Counsel Intellectual Property, AOL 

March 18, 2009

Steven J. Hoffman

CEO, ThinkFire

April 17, 2009

Carl B. Horton

Chief Intellectual Property Counsel, General Electric Co.

March 18, 2009

Robert Hunt, Ph.D.

Assistant Vice President, Federal Reserve Bank of Philadelphia

March 19, 2009

Paul M. Janicke

HIPLA Professor of Law, University of Houston Law Center

February 11, 2009

Steven C. Jensen

Partner, Knobbe Martens Olson & Bear, LLP

March 18, 2009

Philip S. Johnson

Chief Intellectual Property Counsel, Johnson & Johnson

February 11, 2009

Brian Kahin

Senior Fellow, Computer & Communications Industry Association

December 5, 2008

David J. Kappos

Vice President and Assistant General Counsel, Intellectual Property Law 

and Strategy, IBM Corp.

March 19, 2009

Ron D. Katznelson, Ph.D.

President, Bi-Level Technologies

March 18, 2009
Participant Hearing Date

284

Joe E. Kiani 

Chief Executive Officer and Chairman of the Board of Directors, 

Masimo Corp.

March 18, 2009

F. Scott Kieff

Professor, Washington University School of Law;

Senior Fellow, Hoover Institution

March 19, 2009

William E. Kovacic

Chairman, Federal Trade Commission

December 5, 2008

Noreen Krall

Vice President and Chief IP Counsel, Intellectual Property Law,

Sun Microsystems, Inc.

March 18, 2009

Stephen G. Kunin

Partner, Oblon, Spivak, McClelland, Maier & Neustadt, P.C.

March 19, 2009

Jeffrey P. Kushan

Partner, Sidley and Austin LLP

December 5, 2008

Jack Lasersohn

Partner, The Vertical Group;

Member, Board of Directors, National Venture Capital Association

February 11, 2009

Anne Layne-Farrar

Director, LECG, LLP

February 11, 2009

February 12, 2009

Michelle K. Lee

Associate General Counsel and Head of Patents and Patent Strategy, 

Google Inc.

May 5, 2009

Mark A. Lemley

William H. Neukom Professor of Law, Stanford Law School;

Director, Stanford Program in Law, Science and Technology

April 17, 2009

May 5, 2009

Dr. Gregory K. Leonard

Senior Vice President, NERA Economic Consulting

February 11, 2009
Participant Hearing Date

285

Aron Levko

Principal, PricewaterhouseCoopers

February 11, 2009

Gail Levine

Assistant General Counsel, Verizon Communications Inc.

February 11, 2009

Gary H. Loeb

Vice President, Intellectual Property, Genentech

February 11, 2009

February 12, 2009

Bryan Lord

Vice President, Finance and Licensing and General Counsel, 

Amberwave Systems Corp.

February 11, 2009

Douglas B. Luftman

Associate General Counsel of Intellectual Property, Palm, Inc.

February 12, 2009

Richard J. (“Chip”) Lutton Jr.

Chief Patent Counsel, Apple Computer, Inc.

May 4, 2009

Taraneh Maghamé

Vice President, Patent Policy & Government Relations Counsel, 

Tessera Technologies, Inc.

February 11, 2009

Steven C. Malin

Counsel, Sidley & Austin, LLP

February 12, 2009

James E. Malackowski

President & Chief Executive Officer, Ocean Tomo, LLC

April 17, 2009

Kenneth M. Massaroni

Senior Vice President and General Counsel, Seagate Technology

February 12, 2009

Daniel P. McCurdy

Chief Executive Officer, Allied Security Trust; 

Chairman, PatentFreedom, LLC

December 5, 2008

The Honorable Roderick R. McKelvie

Partner, Covington & Burling; 

formerly Judge, United States District Court for the District of Delaware

December 5, 2008
Participant Hearing Date

286

John T. McNelis

Partner and Chair of the Patent Group, Fenwick and West

May 5, 2009

Peter S. Menell

Professor of Law, U.C. Berkeley Boalt Hall School of Law;

Director, Berkeley Center for Law and Technology

May 5, 2009

Robert P. Merges

Wilson Sonsini Goodrich & Rosati Professor of Law and Technology, 

U.C. Berkeley Boalt Hall School of Law;

Director, Berkeley Center for Law & Technology

May 4, 2009

Michael V. Messinger

Director, Sterne, Kessler, Goldstein & Fox

March 19, 2009

Michael Meurer

Michaels Faculty Research Scholar and Professor of Law, 

Boston University School of Law

December 5, 2008

Christine Meyer

Vice President, NERA Economic Consulting

February 12, 2009

The Honorable Paul R. Michel

Chief Judge, Court of Appeals for the Federal Circuit (retired)

December 5, 2008

Raymond Millien

founder, PCT Companies and CEO, PCT Capital, LLC

December 5, 2008

Joseph S. Miller

Associate Professor, Lewis & Clark Law School;

Visiting Associate Professor, University of Georgia Law School

December 5, 2008

Steven W. Miller

Vice President & General Counsel - Intellectual Property, 

The Procter & Gamble Company

March 18, 2009

Carol Mimura

Assistant Vice Chancellor for Intellectual Property & Industry Research

Alliances (IPIRA), University of California, Berkeley

May 4, 2009
Participant Hearing Date

287

Jeffrey Myers

Vice President and Assistant General Counsel, Intellectual Property

Enforcement, Pfizer, Inc.

March 18, 2009

Vern Norviel

Partner, Wilson Sonsini Goodrich & Rosati

May 5, 2009

Vince O’Brien

Managing Partner, OSKR, LLC

May 5, 2009

Lee Petherbridge

Associate Professor of Law, Loyola Law School, Los Angeles

May 5, 2009

Marshall Phelps

Corporate Vice President for IP Policy and Strategy, 

Microsoft Corporation

May 4, 2009

Richard F. Phillips

Chief Attorney, Technology, ExxonMobil Chemical Company

March 18, 2009

Laura G. Quatela

Chief Intellectual Property Officer & Vice President, Eastman Kodak Co.

April 17, 2009

Arti K. Rai

Elvin R. Latty Professor of Law, Duke University School of Law

March 19, 2009

Teresa Stanek Rea

Partner, Crowell & Moring, LLP

March 19, 2009

Edward R. Reines

Partner, Weil, Gotshal & Manges, LLP

February 11, 2009

Kevin H. Rhodes

President and Chief Intellectual Property Counsel, 

3M Innovative Properties Co.

February 11, 2009

February 12, 2009

Kevin G. Rivette

Chair, PTO Patent Public Advisory Committee

May 5, 2009
Participant Hearing Date

288

The Honorable Sue L. Robinson

Judge, United States District Court for the District of Delaware

February 11, 2009

Alexander H. Rogers

Senior Vice President and Legal Counsel, Qualcomm Inc.

March 18, 2009

William C. Rooklidge

Partner, Howrey, LLP

May 5, 2009

Paul Ryan

Chairman & CEO, Acacia Research

April 17, 2009

Matthew M. Sarboraria

Senior Patent Counsel, Oracle Corporation

March 18, 2009

Jason Schultz

Acting Director, Samuelson Law, Technology & Public Policy Clinic,

U.C. Berkeley Boalt Hall School of Law

May 5, 2009

John W. Schlicher

Attorney, Lafayette, California

May 5, 2009

Herbert F. Schwartz

Adjunct Professor of Law, University of Pennsylvania Law School and 

New York University Law School;

Partner, Ropes & Gray, LLP (retired)

March 19, 2009

Maggie Shafmaster

Senior Vice President & Chief Patent Counsel, Genzyme Corp.

March 18, 2009

Suzanne M. Shema

Senior Vice President, General Counsel and Corporate Compliance

Officer, ZymoGenetics, Inc.

May 4, 2009

David Simon

Chief Patent Counsel, Intel Corporation

February 11, 2009

P. Martin Simpson, Jr.

Managing Counsel - Business and Land Use, 

Office of General Counsel, University of California

May 5, 2009
Participant Hearing Date

289

Steven D. Singer

Partner, WilmerHale

Chair, Technology Transactions and Licensing Practice Group and

Co-Chair, Life Sciences Group

March 18, 2009

John M. Skenyon

Principal, Fish & Richardson P.C.

February 11, 2009

Russ Slifer

Chief Patent Counsel, Micron Technology, Inc.

March 18, 2009

Henry E. Smith

Professor, Harvard Law School

February 12, 2009

Jon Soderstrom, Ph.D.

Managing Director, Office of Cooperative Research, Yale University

March 18, 2009

Alex Sousa

Counsel, Innovalight, Inc.

May 4, 2009

Christopher J. Sprigman

Associate Professor, University of Virginia School of Law

February 12, 2009

John A. Squires

Chief Intellectual Property Counsel, Goldman Sachs & Co.

December 5, 2008

Jennifer M. Stec

Intellectual Property Counsel, Ford Global Technologies

March 18, 2009

Scott Stern

Associate Professor of Management and Strategy,

Kellogg School of Management, Northwestern University

March 19, 2009

Henry Su

Partner, Howrey, LLP

February 12, 2009

John R. Thomas

Professor of Law, Georgetown University Law Center

December 5, 2008
Participant Hearing Date

290

Tracey R. Thomas

Chief IP Strategist and License Negotiator, American Express Co.

April 17, 2009

E. Earle Thompson

Vice President and Chief Intellectual Property Counsel, SanDisk Corp.

May 4, 2009

John Thorne

Senior Vice President and Deputy General Counsel, 

Verizon Communications Inc.

March 18, 2009

Marian Underweiser

Intellectual Property Law Counsel, IBM

February 11, 2009

Duane R. Valz

VP & Associate General Counsel, Global Patents, Yahoo!

December 5, 2008

Lee VanPelt

VanPelt, Yi & James, LLP

May 4, 2009

Samson Vermont

Assistant Professor of Law, George Mason University School of Law

April 17, 2009

Polk Wagner

Professor of Law, University of Pennsylvania School of Law

April 17, 2009

Donald R. Ware

Partner, Foley Hoag, LLP

February 12, 2009

Stuart L. Watt

Vice President, Law & Intellectual Property Officer, Amgen, Inc.

May 4, 2009

Thomas G. Woolston

Chief Executive Officer, MercExchange, LLC

March 18, 2009

Mallun Yen

Vice President, Worldwide Intellectual Property, Cisco Systems, Inc.

December 5, 2008
Participant Hearing Date

The listed participants took part in the three panels held of the workshop that explored issues discussed 2

in this report: Panel 2 – Permanent Injunctions in the District Courts and ITC; Panel 3 – Standard

Setting, Patent Rights, and Competition Policy; and the Wrap-Up Discussion panel. A full transcript

from the workshop, an agenda, and biographies of the panelists are available at

http://www.ftc.gov/bc/workshops/ipmarketplace.

291

Rosemarie Ziedonis

Assistant Professor of Strategy, Stephen M. Ross School of Business,

University of Michigan and Co-Director, Program in Law, Economics, and

Technology, Michigan Law 

May 4, 2009

Participants on Selected Panels from the 

May 26, 2010 FTC/DOJ/PTO Workshop on the 

Intersection of Competition Policy and Patent Policy:

 Implications for Promoting Innovation2

William Barr

former General Counsel, Verizon Communications, Inc.

Bernard J. Cassidy

Executive Vice President and General Counsel, Tessera Technologies, Inc. 

Mark Chandler

Senior Vice President & General Counsel, Cisco Systems

Colleen Chien

Assistant Professor of Law, Santa Clara Law

Joseph Farrell

Director, Bureau of Economics, Federal Trade Commission

Patrick Gallagher

Director, National Institute of Standards & Technology, U.S. Department of Commerce

Stuart Graham

Chief Economist, U.S. Patent and Trademark Office

Brian Kahin

Senior Fellow, Computer & Communications Industry Association
292

Alice A. Kipel

Partner, Steptoe & Johnson, LLP

Anne Layne-Farrar

Director, LECG

Amy A. Marasco

General Manager, Standards Strategy, Microsoft Corp.

Stanford McCoy

Assistant U.S. Trade Representative for Intellectual Property and Innovation,

Office of the U.S. Trade Representative, Executive Office of the President

Christine McDaniel

Economic Adviser to Chairman Shara L. Aranoff,

U.S. International Trade Commission

Douglas A. Melamed

Senior Vice President & General Counsel, Intel Corp.

Carl Shapiro

Deputy Assistant Attorney General for Economic Analysis, Antitrust Division,

U.S. Department of Justice

Emily Ward

Vice President and Deputy General Counsel, eBay, Inc.
All public comments submitted to the FTC during the course of this project are available at

3

http://www.ftc.gov/bc/workshops/ipmarketplace.

293

APPENDIX D

PUBLIC COMMENTS AND PRESENTATIONS AT HEARINGS 

Public Comments3

Name Comment Date

Acacia Research Corporation

(Ryan, Paul)

May 14, 2009

American Intellectual Property Law Association

(Crowne, Jim) 

May 18, 2009

Biotechnology Industry Organization

(DiLenge, Tom) 

May 15, 2009

Choate, Pat February 3, 2009

Coalition for Patent Fairness 

(Pincus, Andrew) 

February 5, 2009

Cochran, William February 5, 2009

Computer & Communications Industry Association

(Schruers, Matthew)

February 5, 2009

Craig, Barbara November 10, 2008

Dolak, Lisa February 3, 2009

Durdik, Paul February 4, 2009

Furstenwerth, Greg December 2, 2008

IBM Corporation

(Mortinger, Alison) 

February 12, 2009

Innovation Alliance 

(Thomas, Eric) 

February 6, 2009
Name Comment Date

294

Jones, Nathan November 17, 2009

Kidder, Douglas May 15, 2009

Lass, Stanley February 4, 2009

Licensing Executives Society USA and Canada 

(Painchaud, Francois) 

May 14, 2009

Licensing Executives Society USA and Canada 

(Painchaud, Francois)

May 15, 2009

Martin, Michael May 15, 2009

Masse, Benjamin February 5, 2009

Morgan, Paul December 11, 2008

Morgan, Paul F. January 12, 2009

Morgan, Paul F. February 24, 2009

NanoBusiness Alliance 

(Murdock, Sean)

February 5, 2009

Nordin, Miles March 29, 2009

NERA Economic Consulting 

(Leonard, Gregory) 

March 9, 2009

Pharmaceutical Research and 

Manufacturers of America 

(Tauzin, Billy) 

February 10, 2009

Prakash-Canjels, Gauri April 16, 2009

Quillen, Cecil (Four comments submitted) February 5, 2009

Rearden LLC 

(Perlman, Steve)

February 5, 2009
Name Comment Date

295

Schlicher, John May 15, 2009 

Shane, Scott February 5, 2009

Software & Information Industry Association

(Kupferschmid, Keith) 

February 5, 2009

Strategic Advisory Group 

(Mattathil, George) 

November 12, 2008

Sun Microsystems, Inc. 

(Anastasio, Michael)

February 5, 2009

Trainor, Nuala May 15, 2009

Verizon Communications Inc. 

(Levine, Gail)

March 20, 2009 

Verizon Communications Inc. 

(Levine, Gail)

May 15, 2009

Vertical Group on behalf of 

the National Venture Capital Association

(Lasersohn, Jack)

March 6, 2009

Wi-Lan Inc. February 5, 2009

Wisconsin Alumni Research Foundation 

(Gulbrandsen, Carl) 

May 15, 2009 

Wren, Stephen February 4, 2009

Wren, Stephen February 5, 2009
All written presentations and materials provided by the panelists at the hearings are available at

4

http://www.ftc.gov/bc/workshops/ipmarketplace.

296

Panelist Presentations at the Hearings4

Keith Agism, Study of the Evolving IP Marketplace, (June 9, 2009)

Ashish Arora, Markets for Technology and the Division of Innovative Labor: A View from the

Ivory Tower (March 19, 2009)

James Bessen, Patent Notice and Markets for Technology (March 19, 2009)

Henry Chesbrough, Specialisation and Markets for IP (May 4, 2009)

Iain M. Cockburn, Licensing: A View from the Trenches (Selected findings from the LES

Foundation Surveys) (April 2009)

Thomas Cotter, Remedies for Patent Infringement: Theory and Practice (December 5, 2008)

Peter Detkin, To Promote the Progress...of Useful Arts: Investing in Invention (December 5,

2008)

Q. Todd Dickinson, Federal Trade Commission Workshop: Recent and Proposed Changes in

Remedies Law (December 5, 2008)

Stuart Graham, Patents and Technology Markets: How is the Market Operating, and Can it be

Improved? (April 17, 2009)

Bronwyn Hall, FTC Panel on Markets for IP and Technology (May 4, 2009)

Robert Hunt, The Federal Trade Commission’s Hearing on “The Evolving IP Marketplace”

(March 19, 2009)

Paul Janicke, Patent Damages (February 2009)

Brian Kahin, The Patent Ecosystem in IT: Business Practice and Arbitrage (December 5, 2008)

Ron D. Katznelson, “The Evolving IP Marketplace” Hearings on the Operation of IP Markets

(March 18, 2009)

F. Scott Kieff, The Importance of Marinating on Patents (March 19, 2009)

Mark A. Lemley, Ignoring Patents; How to Make a Patent Market (April 17, 2009)

Aron Levko, 2009 Patent Damages Study- Preliminary Results (February 11, 2009)

Bryan P. Lord, Hearing on Patent Damages (February 11, 2009)

James E. Malackowski, FTC Hearings on Developing Business Models and a National IP

Economic Infrastructure (April 17, 2009)
297

Steve Malin, Empirical Analysis of Permanent Injunction Decisions Following eBay (February

12, 2009)

Daniel P. McCurdy, Unique Operating Companies Involved in Patent Litigation with NPEs;

Patent Litigation Involving NPEs and Operating Companies (December 5, 2008)

Hon. Roderick R. McKelvie, Seagate Plus One: How the District Courts are Implementing

Seagate; Seagate Plus One (Article) (December 5, 2009)

Robert Merges, The Evolving IP Marketplace (May 4, 2009)

Joseph Scott Miller, Testimony of Professor Joseph Scott Miller, Lewis & Clark Law SchoolLegal Doctrines That Affect the Value and Licensing of Patents (Panel 3) (December 5, 2008)

Raymond Millien, The IP Marketplace Players, (December 5, 2008)

John W. Schlicher, Comments on Patent Damages, Injunctions, Recent Supreme Court Patent

Decisions, and Other Issues Identified in the Notice of Hearings on the Intellectual Property

Marketplace (May 16, 2009)

Suzanne M. Shema, The Need for Distinct Claims (May 4, 2009)

John A. Squires, Patent Remedies: Can Quanta Finish What eBay Started? (December 5, 2008)

Scott Stern, The Impact of the Patent System on the Market for Technology (March 19, 2009)

Jay Thomas, Patent Damages: Principles and Current Problems (December 5, 2008)

Marian Underweiser, Towards an Efficient Market for Innovation (February 11, 2009)

Duane R. Valz, Yahoo! Inc. - FTC Hearing on The Evolving IP Marketplace (December 5,

2008)

R. Polk Wagner, Patent Portfolios [Written]; Understanding Patent Quality Mechanisms

(January 6, 2009)

Donald R. Ware, Introductory Remarks and Presentation (February 12, 2009)

Mallun Yen, Cisco Systems, Inc. FTC Hearing on the Evolving IP Marketplace (December 5,

2008)

Rosemarie Ziedonis, Startups as Sources of New Technologies...and Patents (May 4, 2009)
Agendas describing the topics covered at the hearings and other materials related to the hearings 5

(including full transcripts of testimony, lists of witnesses, etc.) are available at

http://www.ftc.gov/bc/workshops/ipmarketplace.

298

APPENDIX E

ANNOUNCED AGENDA TOPICS FOR THE FTC HEARINGS ON 

THE EVOLVING IP MARKETPLACE5

 KICKOFF HEARING

(December 5, 2008)

Opening Remarks: William Kovacic, Chairman, Federal Trade Commission

Panel 1: Developing Business Models 

Some of the most significant recent changes in markets for intellectual property have

occurred through the emergence of new business models involving the buying, selling and

licensing of patents. The first panel will discuss the operation of emerging business models,

aspects of the patent system that support those models, and industry responses. The panel will

also explore the implications these developing business models have for patent valuation and

licensing. 

Keynote Address: The Honorable Paul R. Michel, Chief Justice, Court of Appeals for the 

 Federal Circuit

Panel 2: Recent and Proposed Changes in Remedies Law 

This panel will explore recent and proposed changes in remedies law, their impact on

innovation and consumers, and the use of economic analysis in determining remedies. Among

other topics, the panel will consider: what economic evidence is relevant when analyzing whether

to grant a permanent injunction; whether the legal rules governing patent damages result in

awards that appropriately compensate patentees; and whether changes in willfulness doctrine have

altered the behavior of patentees and potential infringers.

Panel 3: Legal Doctrines That Affect the Value and Licensing of Patents 

In the third panel, participants will examine changes in legal doctrines that affect the value

and licensing of patents brought about by recent Supreme Court cases on obviousness, declaratory

judgment and exhaustion. The panel will also discuss the role of unpredictability and notice in the

IP marketplace.
299

DAMAGES 

(February 11, 2009)

Panel 1: Standards for Assessing Patent Damages and Their Implementation by 

 Courts 

This panel will discuss trends in damage awards, the current standards governing patent

damages, and their impact on patent value and innovation. It will examine various approaches to

damages calculation and the evidence used in assessing damages, particularly in the context of

reasonable royalty determinations. Policy concerns relating to the calculation of reasonable

royalties and potential reforms will also be addressed. 

Keynote Address: The Honorable Sue L. Robinson, United State District Court for the 

 District of Delaware

Panel 2: Industry Roundtable Discussion

This panel, structured as an industry roundtable, will explore how patent damages affect

licensing, business strategies, and innovation in various sectors of the economy. In particular, it

will consider whether damage awards in patent cases result in awards that promote innovation. 

Panelists will examine various proposals to revise the standards for damage determinations and

discuss how such changes would impact their industries.

PERMANENT INJUNCTIONS & WILLFULNESS 

(February 12, 2009)

Panel 1: Changes in Injunction Law 

This panel will explore permanent injunctions in patent cases in the wake of the Supreme

Court’s eBay decision. It will examine the ways the courts have analyzed whether to grant or

deny injunctions, including the role of economic evidence in that analysis, and any trends that

have developed. Panelists will consider the implications of these developments for innovation,

competition, and consumer welfare.

Panel 2: Industry Roundtable Discussion

This panel will explore recent changes in injunction law and willfulness standards, and

their impact on innovation, licensing and business strategies. Among other topics, the panel will

consider the impact of the eBay decision on patent valuation and licensing; whether the changes in

the willfulness doctrine have altered the behavior of patentees and potential infringers; how these

court decisions have changed investment in R&D; and how changes in remedies law have

implicated incentives to bring, defend or settle patent suits.
300

INDUSTRY ROUNDTABLES 

(March 18, 2009)

Four panels featuring representatives from universities and entrepreneurs, the IT and

electronics industries, manufacturing and diversified companies, and the life sciences will

examine the operation of IP and technology markets and the impact of patent policies on those

markets. Panelists will discuss the factors they consider in determining how to use patents in the

IP marketplace, for instance, whether to enforce exclusivity or enter licensing agreements. The

panels will consider whether these markets operate efficiently and transparently, and what could

be done to improve their operation. The effect of recent Supreme Court decisions and uncertainty

in the patent system will be discussed, as will experience with the patent system's notice function. 

THE OPERATION OF IP MARKETS AND THE NOTICE FUNCTION OF PATENTS

(March 19, 2009)

Keynote Address: Herbert F. Schwartz, Former Partner, Ropes & Gray and Adjunct 

Professor, University of Pennsylvania and New York University Law 

Schools

Panel 1: Economic Perspectives on IP and Technology Markets

Panelists will examine how patents facilitate technology transfer, whether markets for

technology and IP operate efficiently and transparently, and what could be done to improve their

operation. The effect of recent Supreme Court decisions on licensing decisions will be discussed. 

Panel 2: Fulfilling the Patent System’s Public Notice Function

Experts from academia and the bar will address the extent to which the patent system

adequately fulfills its notice function – for example, ensuring that the firms seeking to develop

and introduce innovative technologies can obtain clear and reliable information regarding the

existence and scope of patent rights that could cover those technologies. Specifically, panelists

will consider how various patent law doctrines or procedural aspects of the system affect notice,

including (1) legal standards such as rules of claim construction and standards governing

indefiniteness, written description, and enablement, and (2) examination practice and procedures,

including notice available from the information that applicants are required to supply during the

examination process, the information provided by examiners in allowing claims, the use of

continuing applications, and the publication of applications and evolving claims.
301

MARKETS FOR INTELLECTUAL PROPERTY

(April 17, 2009)

Keynote Address: James E. Malackowski, President & CEO, Ocean Tomo

Panel 1: Roundtable Discussion

Some of the most significant recent changes in markets for intellectual property have

occurred through the emergence of new business models involving the buying, selling and

licensing of patents. This panel will discuss valuing and monetizing patents, strategies for buying

and selling patents, and the role of secondary markets for intellectual property. 

Panel 2: Recent Scholarship in Patent Markets

As markets for intellectual property have developed and evolved, so has the scholarship

analyzing them. This panel will showcase some of the recent academic thinking about the

development and functioning of markets for intellectual property and the policy implications

surrounding them. 

THE IP MARKETPLACES IN THE LIFE SCIENCES AND IT INDUSTRIES 

(May 4, 2009 Berkeley, CA)

Panels 1 & 2: Industry Roundtable Discussions

Panels 1 and 2 will examine the operation of IP and technology markets in the life sciences

and IT industries, respectively: how and why companies buy, sell and license patents; how patents

support innovation and technology transfer; what aspects of the patent system create difficulties

when seeking freedom to operate; and how the potential of patent litigation affects the operation

of IP markets. 

Panel 3: Markets for IP and Technology: Academic Perspectives

Panelists will examine how patents facilitate technology transfer, whether markets for

technology and IP operate efficiently and transparently, and what could be done to improve their

operation. 
302

THE NOTICE FUNCTION OF PATENTS AND PATENT REMEDIES

(May 5, 2009 Berkeley, CA)

Panel 1: The Notice Function of Patents

Experts from academia and the bar will address the extent to which the patent system

adequately fulfills its notice function, for example, ensuring that firms seeking to develop or

license innovative technologies can obtain clear and timely information regarding the existence

and scope of relevant patents and patent applications. Specifically, panelists will consider how

various patent law doctrines and patent examination procedures affect notice, including (1) legal

standards such as rules of claim construction and standards governing indefiniteness, written

description, and enablement, and (2) examination practices and procedures, including notice

available from information supplied by applicants and examiners, the use of continuing

applications, and the publication of applications. Panelists will also discuss the extent to which

the sheer number of potentially relevant patents and patent applications hinders effective notice

and will consider whether any adjustments to the patent system are warranted.

Panel 2: Patent Remedies

This panel will discuss trends in damage awards, the current standards governing patent

damages, and their impact on patent value and innovation. It will examine various approaches to

damages calculation and the evidence used in assessing damages, particularly in the context of

reasonable royalty determinations. This panel will also explore permanent injunctions in patent

cases in the wake of the Supreme Court’s eBay decision and the impact of recent changes to the

doctrine of willful infringement.