The Use and Misuse of Patent Licenses

INTRODUCTIONIn 2014 alone, patent holders filed approximately 5700 lawsuits in federal court-and that substantial figure even represented a decline of approximately 13% from the all-time high of approximately 6500 cases filed in 2013.1 At the same time, the median patent damages award fell to $2.0 million.2 This continued a fifteen-year downward trend and represented the second lowest median damages award over the past twenty years.3 In combination, these two trends are striking. Patents are becoming an increasingly large business with ever greater resources devoted to litigation and enforcement. Yet at the same time that investments in litigation have increased, the rewards that patent owners are able to realize at trial have continued to decline.These trends have been accompanied by renewed attention to damages calculations from both the courts4 and the scholarly literature.5 Part of the explanation for the heightened importance of monetary damages in patent law is the Supreme Court's 2006 decision in eBay v. MercExchange.6 That decision made it more difficult for prevailing patent plaintiffs to obtain injunctions.7 One of the primary benefits of granting an injunction was that it often freed the judge from having to calculate damages, leaving that determination to the parties.8 With injunctions becoming less common in cases where a patent holder prevails, the calculation of damages for patent liability has moved closer to center stage.Nonetheless, the renewed attention to patent damages has not diminished the challenge of accurately calculating them at trial. In some instances, the plaintiff and defendant are both practicing entities that produce competing products.9 In these cases, the judge or jury has the comparatively easier task of determining damages by estimating lost profits: how many additional sales would the plaintiff have made had the 5 6 7 8 9 defendant not infringed its patent?10 Of course, one uses the word "easier" advisedly; this task is far from simple. It can be tremendously difficult to determine how many sales a patent holder lost because of the infringement, or if it lost any at all. The patent may cover a feature that is largely irrelevant to consumer decisions, or it may duplicate an equally attractive noninfringing technology that the defendant could have employed instead. Thus, determining lost profits requires a court to answer a complex counterfactual-how many units would the plaintiff have sold absent the infringement-without reliable access to much of the relevant information. Not surprisingly, the legal guidance provided by the courts of appeals- most notably the Panduit factors, after the case by the same name11-is notoriously ambiguous and unhelpful.However, in an increasing number of cases, the patent holder has no lost profits, cannot prove lost profits, or simply does not wish to attempt to do so.12 In those cases, the patent plaintiff will instead seek a "reasonable royalty," which the court must determine.13 Over the past decade, courts have used a reasonable royalty as the measure of damages in 81% of cases.14 Calculating lost profits is by no means trivial, but it is substantially more determinate and straightforward than estimating a reasonable royalty. To accomplish this latter task, a court must attempt to reconstruct a hypothetical negotiation between patent plaintiff and defendant-which likely never took place-and determine the amount of money for which the two parties would have agreed to settle.15 Worse still, the legal guidance provided to courts and juries is almost comically counterproductive. When determining reasonable royalty damages, courts are instructed to consider the influential fifteen-step Georgia-Pacific test,16 a laundry list of factors that shed little light on the appropriate dollar figures. The Federal Circuit has (correctly) struck down more determinate types of guidance, such as the "25% rule of thumb," according to which 25% of the defendant's profits should be paid to a patent defendant as a reasonable royalty. …