In Depth: Recent Reform Damages Proposals Part 1

February 22, 2010

There has been much discussion and escalating controversy in recent years about patent damage awards for infringement. With each iteration of proposed patent law reforms, Congress has become increasingly aware of the impact patent damages have in modern business. This is particularly true in light of the role NPE’s (patent trolls) play in the system and the steadily increasing rate of the average damage award. A recent PriceWaterhouseCoopers study found the annual median damages award has ranges from $2.2 to $10.6 million and, more notably, damages awards for NPEs have averaged more than double those for practicing entities – meaning those that actually create – since 1995.

In this post, we look into the most previously proposed patent damage reforms, and reasons for the failure to pass. In understanding its shortcomings, we hope to provide insight into supporting new reforms, which have better chances of passing.

Bills have been introduced to reform the patent system in the current and two previous Congresses. In the 109th Congress, the primary bills were H.R. 2795.S. 3818, and H.R. 5096. The stronger bi-partisan, bi-cameral reform push occurred during the 110th Congress, in 2007, with H.R. 1908 and S. 1145. In the current Congress, patent reform has advanced in the form of H.R. 1260 and S. 515. Unfortunately, these efforts have been watered down over time as various interests have lined up to protect the status quo (including the patent bar itself, which, as Supreme Court Chief Justice Roberts observed, profits from our over-expansive patent system).

110th Congress…

We’ll start where the House and Senate jointly proposed substantial new revisions to the patent laws in 2007. While the House was ultimately able to pass its version of reforms, the Senate did not; forcing this session of Congress to take up deliberation of the issue from the start again. These reforms were noteworthy for the breadth of the reforms proposed, yet for the sake of this posting, we will focus solely on the statutes relevant to damages reform.

In the House of Representatives, the issue of patent reform was led by Congressman Howard Berman (D-CA), who introduced H.R. 1908 in mid-April 2007. Under the House bill, the individual judges would have been given tremendous influence and power over damages determined by the use of reasonable royalty calculations. Specifically, the bill would have mandated that judges serve essentially as gatekeepers; whereby they would have the responsibility for figuring out not only what type of evidence could be used in making this finding, but also the means of measuring it as well. As a corollary to this methodology, the jury in an infringement case would be barred from considering anything besides what has been permitted by the judge.

Given that juries would be restricted by the evidence which they could use to find damages, the awards given to patentees would likely be much less vulnerable to the wild swings and inflated amounts that have currently wreaked havoc on the patent system. The PriceWaterhouseCoopers study, referenced above, found the disparity between jury and bench awards has widened and is likely the contributing factor in the significant increase in use of juries since 1995. Juries decided just 14 percent of cases in the 1980’s and just 24 percent in the 1990’s, but in the last decade that has increased to 51 percent.

Judges could help juries sort through the relevant evidence to prevent an over focus on inapplicable material that would unfairly inflate the amount of damages that a patentee would be entitled to receive. In the case of patent trolls, such a proposal could work to limit recovery of damages. For example, judges could require that a jury consider the fact that the patentees do not produce any useful invention, or describe the patent trolls’ business method to be used as a factor in the finding of damages. Alternatively, if a judge prevents the consideration of what a patentee believes to be crucial in the finding of an acceptable reasonable royalty rate as part of their gatekeeping function, this may spur patent trolls to settle for lesser terms, rather than risk a lower amount in damages from a jury.

More tomorrow on apportionment of damages and what the 2007 legislation would do…

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