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Apportionment of damages will reward infringers

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Apportionment of damages will reward infringers

According to Senate Judiciary Chairman Patrick Leahy (D-VT), constructive patent reform would “reduce the unnecessary burdens of litigation” in the patent system and “enhance the quality of patents” granted by the Patent and Trademark Office. Better patent quality ought to be the focus of discussion, because only bad patents lead to unnecessary litigation. Most people would agree courts ought to vigorously enforce good patents. The Leahy-Hatch/Berman-Smith Patent Reform Act of 2007 (S. 1145 and H.R. 1908) fails to reflect this basic point. The bills misguidedly treat the goals of improving patent quality and reducing litigation as mutually exclusive goals to some extent. The result will be to reduce protection for all patents, not just the bad ones.
Take, for example, the right of an inventor to obtain damages for infringement. Sec. 5 of the patent reform proposals addresses the familiar situation where an invention which someone claims has been stolen is a mere component of a more complex product or service. Present law gives patent holders the right to prove their invention is the basis for consumer demand of the entire product or service, and it gives infringers the right to prove a portion of the profit is attributable to the manufacturing process, business risks or features or improvements added by the infringer. If the patent holder satisfies the burden of proof, damages will be calculated based on the full value of the product or service. If the infringer meets the burden of proof, the value of their additions will be subtracted. A leading patent attorney, William C. Rooklidge, explains the policy goals:

Apportionment recognizes the reality that consumer demand for an infringing product or process may in part spring from contributions from the infringer, and to reward the inventor for those contributions is inappropriate. On the other hand, the entire market value rule recognizes the reality that even complex assemblies may owe their marketability to a patented feature–a feature that drives consumer demand for the overall assembly. In those cases, it is entirely appropriate to reward the inventor according to the worth of her invention. To do otherwise would only encourage those who trespass and discourage inventors from making their intellectual efforts available to the public.

Sec. 5 would add the following two provisions to current law (35 U.S.C. ยง284):

(2) RELATIONSHIP OF DAMAGES TO CONTRIBUTIONS OVER PRIOR ART- The court shall conduct an analysis to ensure that a reasonable royalty under paragraph (1) is applied only to that economic value properly attributable to the patent’s specific contribution over the prior art. In a reasonable royalty analysis, the court shall identify all factors relevant to the determination of a reasonable royalty under this subsection, and the court or the jury, as the case may be, shall consider only those factors in making the determination. The court shall exclude from the analysis the economic value properly attributable to the prior art, and other features or improvements, whether or not themselves patented, that contribute economic value to the infringing product or process.
(3) ENTIRE MARKET VALUE- Unless the claimant shows that the patent’s specific contribution over the prior art is the predominant basis for market demand for an infringing product or process, damages may not be based upon the entire market value of that infringing product or process.

Rooklidge notes that sec. 5 eliminates the infringer’s responsibility for proving apportionment is appropriate — making apportionment the default method — and that sec. 5 would likely “preclude application of the entire market value rule in all but a few cases.”
Rooklidge also observes, among other things, that paragraph (2) would require courts to conduct an apportionment analysis in every case even though apportionment isn’t relevant in every case. This won’t promote patent quality, and it won’t even reduce litigation. Chief Judge Paul R. Michel of the U.S. Court of Appeals for the Federal Circuit further points out,

[T]he present bills require a new kind of macroeconomic analysis that would be extremely costly and time consuming, far more so than the current application of the well-settled apportionment law. Resulting additional court delays would be severe, as would attorney’s fees and costs.

This requirement will be an unnecessary litigation burden, to borrow Chairman Leahy’s phrase, in cases where a patent holder can satisfy the burden of proof for the entire market value rule. It will also tend to favor the defendant who appeals the verdict, because a significant disparity in the results that the entire market value and the apportionment analyses yield might make an impression of its own on appellate judges.
Complicated and nuanced proposals, like this one, for stacking the evidentiary deck and for limiting the discretion of courts to fully consider the unique facts present in each case and render a common-sense verdict are a milder, friendlier form of stripping the lower courts of jurisdiction to consider particular disputes at all. Most people wouldn’t tolerate the latter. But there isn’t a huge difference.
The damage provisions in the proposed Patent Reform Act of 2007 vastly increase the likelihood that someone who infringes a valid patent will derive at least some profit. That incentivizes infringement and is obviously no way to “secur[e] for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”
Why would Congress want to limit damage awards for the holders of good patents? That’s what sec. 5 is all about. The damage provisions are a blatant example of Congress picking winners and losers and ought to be dropped completely from the bills.