The Book of Wisdom: How to Bring a Metaphorical Flourish into the Realm of Economic Reality by Adopting a Market Reconstruction Requirement in the Calculation of a Reasonable Royalty

The “book of wisdom” concept has been the source of much obfuscation and confusion in determining a reasonable royalty damage award in patent infringement cases. Some of the confusion regarding the doctrine results from the apparent binomial nature of the book of wisdom’s availability – which depends on the methodological approach used to calculate the royalty award. Federal Circuit precedent indicates that the doctrine is not available when courts engage in the “analytical” method of calculating a royalty award. In contrast, there is currently confusion in Federal Circuit jurisprudence with regard to the doctrine’s availability when courts utilize the more common “willing licensor-licensee” approach. There is a rational framework by which courts can utilize this equitable doctrine in a consistent manner and simultaneously bring the calculation of a reasonable royalty into conformity with Federal Circuit precedent addressing the other major patent damage measure – a plaintiff’s lost profits. Federal Circuit consideration of the issue is crucial, less the calculation of a reasonable royalty become the Lazarus of the now discarded “accounting of infringer’s profits” damage award. This article will advance the proposition that the proper role of the book of wisdom can be ascertained by placing the calculation of a reasonable royalty under the causation and market reconstruction paradigms developed for proving a plaintiff’s lost profits. It is certainly not apodictic that the evidentiary and analytical concerns of both calculations are identical. There is no need to go so far and it is not contended here. However, it is justifiable to assert that both damage measures should be bound by the same statutory mandate of focusing upon the economic loss suffered by the plaintiff. Understood in this framework, the book of wisdom doctrine becomes merely a metaphorical flourish acknowledging a well developed judicial interpretation of the patent statute. That interpretation acknowledges that an infringer’s profits are no longer awardable per se as a measure of damages, but may in appropriate circumstances be utilized as an element in the calculation of plaintiff’s pecuniary injury. However, the determination of when to utilize this data is restrained when courts are ascertaining proof of a plaintiff’s lost profits as the damage measure. This restraint is mandated by the Federal Circuit’s holding in Grain Processing, which requires litigants to reconstruct the relevant product market to serve as an appropriate context in which to consider causation. Analogously, the calculation of a reasonable royalty should also be placed within this larger economic and market-based paradigm of damage calculation. Therefore, the book of wisdom should only be allowed relevancy if utilized within a market reconstruction analysis as propounded by the Federal Circuit’s decision in Grain Processing. Viewed within this framework, the book of wisdom doctrine will no longer be perceived as a cart blanche grant of unrestrained equitable sovereignty to be wielded during the royalty calculation. This perception has invited litigants to exercise the clear vision attendant with hindsight and to thinly veil their attempts at infringer profit disgorgement as innocuous utilization of a court sanctioned analytical tool. Rather, the book of wisdom will properly be characterized as merely an artful acknowledgment that courts may utilize an infringer’s profits as an element in the calculation of a reasonable royalty – provided the analysis is grounded in economic reality assured by an appropriate market reconstruction. Understanding the book of wisdom in this manner will help restrain what has become an equitable “free for all” in reasonable royalty litigation.