Senate Bill May Do Damage to Damages: Sources

By Jacqueline Bell, jackie.bell@portfoliomedia.com

Portfolio Media, New York (January 30, 2008)--Wielding the power to potentially curtail damages in many patent suits, the U.S. Senate's Patent Reform Act has been fiercely debated among patent experts, who question what the proposals to alter damage awards would do to patent litigation.

“It's looked at by the patent community as a limitation on damages. All it's really doing is requiring a more nuanced view of an invention's market power,” said Aaron Fellmeth, associate professor at Arizona State University College of Law.

The Senate bill does aim to reign in what some see as outsize and inappropriate patent infringement awards and make damage awards more predictable at the outset of litigation.

But critics argue that the methodology proposed by the Senate bill could end up reducing the value of patents.

“The unabashed intent of those promoting this change is to give cover for cuts in infringement damages,” the National Association of Patent Practitioners wrote in a frank letter to Senate leaders in December.

Still others wonder why Congress has chosen to zero in on this issue in its renewed attempt to reform patent law.

“It's a strange provision. There was not really an outcry for reform on that subject. It came in to fix something that I don't really think is broken,” said Donald Ware, chair of the intellectual property group at Foley Hoag LLP.

Currently courts have a lot of freedom to determine how damages will be calculated, either in terms of profits lost by the patent holder or as a so-called “reasonable royalty” on the patent at issue.

When a patent infringer is selling a competing product, patent holders usually choose to pursue damages related to profits they've lost as a result of having that infringing product on the market. The Senate bill does not propose to change those types of damage awards.

But in other cases, particularly when the patent holder is not actively producing a product based on a particular invention, a jury must instead calculate a reasonable royalty to compensate a patent holder.

With an eye towards reducing what some see as out-of-control damage awards that result from those types of damage determinations, the Senate bill aims to create a damage calculation process that focuses more on the economic contribution of a particular patent to a product's overall value.

Calculating a reasonable royalty can be a big task for juries, and there is currently no standard method by which they are required to make this type of calculation. Many courts give jurors the 15 so-called “Georgia-Pacific factors” to consider in their calculations, which stem from the 1970 district court case, Georgia-Pacific Corp. v. U.S. Plywood Corp., but there is no mandated methodology.

Section 4 of the Senate legislation aims to clear up any vague language and give juries more specific guidance on how to properly calculate a reasonable royalty.

Under the Senate bill, the judge is required to determine for a jury what rules it should be using to determine damages. Damages should be calculated either by considering the entire market value of the product in question or by looking at the broader market for licensing the patent at issue, or a judge must determine that the case falls outside of either of those categories.

The “entire market value” rule, according to the Senate proposal, would be used if the patented invention is the main reason that there is a demand for the infringing product.

The “marketplace licensing” rule can be used if the patented invention has been licensed, and it can be established that there have been enough of those types of deals made to indicate that the marketplace recognizes those agreements as reasonable.

Under that rule a jury would base a reasonable royalty calculation on the value of those licensing agreements.

If neither of those rules could apply, the jury would be asked to calculate a reasonably royalty by looking at how much of the economic value of the product could be attributed to the invention's “specific contribution over the prior art,” which the legislation interprets to be the reason the patent was granted in the first place.

The exact methodology for that type of calculation is not set out in the legislation.

“One of the concerns I have is that the provision will just plain increase uncertainty,” said Ware, who contends that courts have already figured out a coherent way to deal with the comparatively simple language of the current damages rules.

“For the most part I think it's worked out pretty well. Now it's this complicated three-part analysis and language that's pretty ambiguous,” Ware noted. “My concern is that it'll be five years before anyone knows what this means.”

Another element of the provision preserves the court's ability to direct a jury to consider any other relevant factors when calculating a reasonable royalty, including the much used Georgia-Pacific factors. All this sounds a bit repetitive to some.

“The amendment is designed to rein in the occasional outsize jury award based on the entire market value rule,” said Kelsey Nix, partner at Willkie Farr & Gallagher LLP. “However, several Georgia-Pacific factors already constrain the entire market value rule by apportioning value between the invention's contribution and non-patented elements and focusing on the incremental advantages of the invention over old devices.”

If this provision were to become law in its current form, judges could also find themselves with a lot more work to do.

“The provisions that have been proposed would require trial judges to be more involved in determining reasonable royalties than they are now,” said Nix.

Getting a trial judge more involved in the process will in any case add cost, said Steven Rizzi, partner at Thelen Reid Brown Raysman & Steiner LLP.

“The judge is going to have to play the role at least in part of fact finder, which is always what the jury has done,” said Rizzi. “The judge is going to have to educate him- or herself on what's at issue, and probably have some sort of a hearing so that a decision can be made.”

As speculation rises that the legislation may soon be headed to the Senate floor, many are wondering what effect the growing controversy over several of the bill's provisions will have on the bill's future.

“The potential is there to come out with a bill that's quite acceptable, but unfortunately, where the bill is now, all you have to do is go through the list of organizations that oppose the bill. These are all professionals in this field who worked for years on patent reform,” said Ware.