In Depth: Recent Reform Damages Proposals Part 2

February 23, 2010

Yesterday we talked about how the 2007 legislation would have helped deal with growing patent damage awards. We’re focusing on the 2007 legislation now as it had stronger provisions to deal with some of the worst problems.

The House bill also would have made apportionment of damages a major aspect of the new damage regime; a methodology that would work to limit the extent of damages available to patent holders. Under apportionment, a patent holder would only be awarded damages for the specific contribution which the patented innovation adds over the existing technology. The debate has often been likened to the question of whether a patent holder should be awarded damages based on their contribution to the windshield wiper versus the value of the whole car.
As the legislative history of the bill noted, such a system would prevent overcompensating patentees and avoid unreasonable royalty rates on producers. Such changes would refocus the law on patent damages to fairly awarding patentees for the actual value of their patented invention and not extraneous factors. However, the use of apportionment to limit damages was far from a universally accepted proposal. A number of Representatives voiced their criticism that it was nothing more than an untested theory. Others argued that the apportionment standard was unnecessary in light of the fact that courts today already take into account the economic contributions made by inventions.

This proposal would not necessarily preclude awarding patentees for making breakthroughs in innovations, as a separate provision of the reform legislation would have continued the viability of the entire market value rule. Under this particular doctrine, damages could also be calculated on the ‘market value’ of the patented invention where that particular innovation forms the predominant basis for market demand. So patent holders could be properly compensated if their specific invention was sufficiently significant to drive the public’s demand for that invention.

Such a difference in calculation has tremendous implications, as it would provide for a patent holder to recover damages on both patented and non-patented features of the invention. Language similar to that found in the House bill should appear in any future reform proposals, as it would fairly award patentees whose inventions form the backbone and foundation of particular technological fields.

The 2007 House bill was not perfect. For example, language codifying the factors traditionally relevant in determining a reasonable royalty rate is an unnecessary proposal. Since 1970, the federal district court opinion in Georgia Pacific has been relied upon for delineating the factors, which may be considered in this endeavor. The House bill in its goal of providing clear and concrete guidance, would have statutorily mandated the consideration of a number of factors, but also would have included a catch all provision whereby courts could use any evidence and factors that were relevant. In essence, such language would likely have little real effect, as the catch all provision would be akin to the inherent flexibility offered by the Georgia Pacific test.

In his introductory remarks accompanying the Senate bill, S. 1145, Senator Patrick Leahy (D-VT) noted that patent reforms were necessary in order to promote “fair and equitable remedies” that current “litigation has not reliably produced.” For the most part, the Senate bill’s provisions were substantively similar to those in the counterpart House bill. For example, proposals to make judges gatekeepers of evidence in damages calculations, the adoption of the entire market value rule, and the use of an apportionment standard were all present in the Senate bill. However, there was criticism as to whether the Senate’s proposals would resolve uncertainty with damages, as well as pressure from anti-reform interests. Ultimately, this criticism and conflict over other provisions stalled any action before the conclusion of the 110th Congress.

111th Congress

With the Senate’s prior failure to pass substantive patent reform, the current session of Congress has picked up where the last session left off, with the introduction of three separate new patent reform proposals. The House version of the Patent Reform Act of 2009 was introduced in March of last year (H.R. 1260), while two separate proposals (S. 515 and S. 610) were introduced in the Senate. Unfortunately for the patent system and their proponents seeking to see some legislative solutions to the problems plaguing the system, not much has been accomplished this session. The House bill has been with the Judiciary Committee since its introduction. There was a committee hearing in April 2009 the most recent action on the matter. S. 515 has fared slightly better, as this version, sponsored by Senator Leahy has been the subject of a written report expressing additional, minority, and supplementary views regarding its provisions. S. 610, sponsored by Senator Jon Kyl (R-AZ), was referred to the Senate Judiciary Committee after its introduction, with no action since then.

As evident by the recent patent reforms proposals, Congress has sought to focus on certainty; certainty in terms of providing parties with predictable damages awards using reliable, non-speculative damage methodologies. The success of any future patent reform legislation must continue to make this a key focal point. In each of the proposals introduced by the current session of Congress, the bills’ authors have to a certain extent repeated the concepts raised in previous provisions related to damages. For instance, all three bills included language that would permit judges to serve as evidentiary gatekeepers for the jury. As mentioned above, such a role would aid with more predictable damage awards, by preventing juries from considering speculative damage calculation methods not supported by sufficient legal evidence.

By ensuring that certainty is at the forefront of the movement for damage reform, Congress can best limit the ability of patent trolls to exploit the patent system. The patent troll business model of “being infringed” is based on the threat of litigation and the unpredictable costs and damages that are associated with patent cases. By eliminating much of the uncertainty in this process, the leverage of patent trolls may be limited.

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