Tuesday, May 31, 2016

Two Papers on Royalties

1.  Ryan Sullivan, DeForest McDuff, and Justin Skinner have published an article titled Downgrade To “Neutral”: A Diminishing Role Of The Georgia-Pacific Factors In Reasonable Royalty Analyses in the March 2016 edition of les Nouvelles (a publication of Licensing Executives Society International, which touts the article as its "article of the month").  Here is a link to the article.  From the introduction:
While rote recitation of the Georgia-Pacific factors was nearly a de facto standard for inclusion in reasonable royalty analyses, recent opinions of the Federal Circuit indicate otherwise. Because the Georgia-Pacific factors are neither mutually exclusive nor collectively exhaus­tive with respect to relevant economic issues, their utility in quantifying a reasonable royalty is inherently limited. In this article, we explore shortcomings and misapplications of the Georgia-Pacific factors as identi­fied by the Federal Circuit, indicating a diminishing role for the Georgia-Pacific factors in the future.
2. Anne Duchéne, Debapriya Sen, and Konstantinos Serfes have published an article titled Patent Licensing and Entry Deterrence:  The Role of Low Royalties, 82 Economica 1324-1348 (2015).  Here is the abstract: 
We study how an incumbent patent holder can use licensing strategically to reduce the threat of further entry, through a low royalty. This licensing strategy deters entry by making the terms of future licensing agreements less favourable to potential entrants. Strategic licensing induces a trade-off between a more concentrated market and a lower price. When this strategy is profitable for the patent holder, it is welfare enhancing if and only if the entry cost is high, or the efficiency edge of the technology is significant. Our analysis yields new policy implications (e.g. royalty floor) with respect to strategic licensing.

Thursday, May 26, 2016

Scott on Damages and Profits in the IPEC

Charlotte Scott has published a very interesting article titled Damages Inquiries and Accounts of Profits in the IPEC, 38 E.I.P.R. 273 (2016).  (For readers without a subscription to the European Intellectual Property Review, the article is available on Westlaw, and I highly recommend taking a look at it.)   Here is the abstract:
In recent years, inquiries as to damages and accounts of profits have become more and more common, especially in the Intellectual Property Enterprise Court. This article addresses the general principles that will be applied in determining the quantum of an intellectual property claim pursuant to an inquiry or an account, as they have been interpreted and applied in recent IPEC decisions. The article considers lost profits, convoyed goods, "user principle" damages, damages pursuant to the Enforcement Directive, and profits and deductible costs.
Among the more interesting points of discussion:

1.  Although traditionally there have been relatively few cases addressing damages for the infringement of intellectual property rights in the U.K., "in recent years there have been an increasing number of inquiries and accounts, especially in the" IPEC, in which there have been 15 (out of 58 judgments altogether) from January 1, 2014 to January 31, 2016.  The author attributes this to the fact that liability for costs is capped in the IPEC at £25,000 (though as Ms. Scott notes, damages are also capped, at £500,000).

2.  In Henderson v. All Around the World Recordings Ltd, a case involving an alleged infringement of performers' rights, Judge Hacon held that for purposes of calculating a reasonable royalty "it is relevant whether, at the time of the hypothetical negotiation, the defendant would have had available a non-infringing course of action."  In my view, this is a positive development in English damages law, even if courts in the U.K. still ignore noninfringing alterntives in the context of lost profits and awards of infringer's profits.  (See also my previous post titled Are noninfringing alternatives relevant to the determination of reasonable royalties in U.K. patent cases?)

3. Also on the topic of royalties, in the absence of comparable licenses the court will consider how much profit the defendant actually made, on the assumption "that the parties would have accurately predicted this figure and based their negotiations on determining the split of those available profits," with the actual split "likely to depend upon how profits tend to be split in that industry and the division of work between the licensee and licensor."  

4. In some recent cases, the IPEC has had to consider claims for "moral prejudice" under article 13 of the Enforcement Directive," but have indicated that such damages should be relatively uncommon--for example, "where a defendant infringes the copyright in photographs disclosing private grief" causing no lost profit but possibly acute emotional distress (though I imagine the person suffering the grief wouldn't always be the copyright owner).  For other posts on this blog on moral prejudice, see here and here.

5.  The IPEC also has considered claims for "unfair profit" under article 13, with the understanding that such profits are not identical to awards of defendant's profits attributable to the infringement--which in some instances may be zero--but may reach other profits related to the infringement, such as an expansion of business that is likely to cause the plaintiff to suffer future losses, where the defendant engaged in knowing infringement.

6.  There is also an extended discussion of the IPEC and appellate decisions in OOO Abbott v. Design & Display Ltd, previously discussed on this blog here and here

Monday, May 23, 2016

Shapiro on Property Rules, Liability Rules, and Patent Infringement

Carl Shapiro has posted a new paper on ssrn titled Property Rules v. Liability Rules for Patent InfringementHere is a link to the paper, and here is the abstract:
When a patent has been infringed, the court can impose a forward-looking remedy based on a property rule or based on a liability rule. Under the property rule, the court issues an injunction ordering the infringing party to stop infringing. Under the liability rule, the court allows the infringing party to continue to infringe the patent in question so long as it pays specified ongoing royalties to the patent holder. Since the Supreme Court’s landmark 2006 decision in the eBay case, the United States has employed a hybrid system: the lower courts have discretion, on a case-by-case basis, to issue an injunction or to establish ongoing royalties. This article develops a simple model, including the possibility of patent holdup, in which the court has an imperfect ability to measure the harm to the patent holder caused by ongoing infringement. In the model, the patent holder and the infringing firm can negotiate efficiently over a patent license following the court’s imposition of a remedy, subject to some antitrust limits. Remedy regimes are evaluated based on how close they come, in expected value, to compensating the patent holder for any ongoing infringement. The model identifies a fundamental tradeoff: ongoing royalties perform better, the greater are the switching costs the infringing firm would bear to redesign its product to avoid infringing, but an injunction performs better, the greater is the court’s uncertainty about the harm that ongoing infringement will cause to the patent holder. Based on this analysis, recommendations regarding prospective patent remedies are offered to the courts.
This is an important and thought-provoking paper.  Following the presentation of his mathematical model, Professor Shapiro sets out the following practical implications (p.24), which seem both intuitively right and feasible for courts to implement:
Our analysis indicates that the court should carefully assess the switching costs that the infringing party would incur if forced to stop selling infringing products. These switching costs include the out-of-pocket costs of redesigning the product plus any disruption costs that the downstream firm would bear during the redesign stage. If these switching costs are small relative to the value of the patented technology, an injunction is likely to be the better remedy. In terms of the eBay four factors, if the downstream firm’s switching costs are small, the balancing of harms favors the patent holder.
Conversely, if the court believes it can measure the harm to the patent holder caused by infringement and the benefits to the downstream firm from infringement with a high degree of accuracy, then ongoing royalties are likely to be the better remedy. In terms of the eBay four factors, this is the situation in which there is no irreparable harm and monetary damages are adequate to compensate the patent holder.
To go beyond these rules of thumb, it is helpful to distinguish between cases in which the patent owner has been awarded damages based on reasonable royalties and those in which the patent holder has been awarded damages based on lost profits.

Friday, May 20, 2016

Federal Circuit Judges to Speak in Minneapolis May 24

This may or may not have anything to do with patent remedies, but readers in the Twin Cites area in particular may be interested in an upcoming event sponsored by the Minnesota Chapter of the Federal Circuit Bar Association this coming Tuesday, May 24, from 4-5:30 p.m. at the Robins Kaplan firm, 800 South LaSalle Avenue.  The three speakers will be Federal Circuit Judges O'Malley, Chen, and Reyna.  Cost is $40, but the event is free for members of the Jimmie V. Reyna IP American Inn of Court and U.S. District Court employees/personnel.)  Here is a link to the organizer's email address, for anyone wanting to RSVP.   Hope to see some of you there.

Wednesday, May 18, 2016

Two Papers by Anne Layne-Farrar

1.  Anne Layne-Farrar has posted a paper on ssrn titled The Economics of FRAND, which will be a chapter in a forthcoming edited volume titled Antitrust Intellectual Property and High Tech Handbook (D. Daniel Sokol ed., Cambridge University Press).  Here is a link to the paper, and here is the abstract:
Since the issue first emerged in the policy arena in the early 2000s, economists have been debating the meaning and implications of FRAND licensing commitments within cooperative technology standard setting organizations (SSOs). Today the issue is global, with scholars and policymakers in Europe, Korea, Japan, China, Taiwan, India, and Brazil all weighing in. Most SSOs around the world ask their members to commit to offer any patents that might be needed to implement a standard in commercial products and services (that is, any patents that might be “essential” for the practice of the standard) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. But what exactly does it mean to license a patent on fair, reasonable, and non-discriminatory terms and conditions? Does promising to do so come with other, implicit, obligations as well, such as foregoing seeking an injunction which is otherwise an option for patent holders? And more fundamentally, why do SSOs ask their patent-contributing members to commit to FRAND?
In this chapter, I review the academic literature on FRAND licensing. My review is intended to discuss the economic underpinnings of FRAND, but it would be incomplete without discussing court rulings to date, as FRAND court decisions provide real world boundaries to interpretations of FRAND licensing. That being said, my summary of the court cases focuses on the economic interpretation of FRAND and the practical implications for expert analysis, and does not cover any legal assessment (for which I am unqualified). While the underlying economics of FRAND are universal, legal and institutional factors affect court outcomes and policy interests; I therefore restrict my discussion to the US.
2.  Dr. Layne-Farrar also has posted a paper titled A Theoretical Framework for Empirical Research on PAEs and PrivateersHere is a link, and here is the abstract:
Patent Assertion Entities – firms that acquire patents from others and then deploy them for licensing or damages revenues rather than for practice within their own products or services – have been a frequent subject of debate over the last several years. More recently, focus has centered on a new species of PAE, “privateers” or “hybrid PAEs”. These are entities that obtain patent enforcement rights from practicing entities, assert those patents in litigation, and then share the damages earnings with the original patent holder. This paper provides a theoretical assessment of how hybrid PAEs may alter the litigation landscape. The framework developed here can provide an important aid to guide empirical work.

Monday, May 16, 2016

Hu on Patent Damages in China

Jingjing Hu has published an article titled Determining Damages for Patent Infringement in China, 47 IIC 5 (2016).  You can find the first few pages of the article on Springer's website, here.  Here is the abstract:
This article examines the determination of damages for patent infringement in China.  Based on empirical data, Chinese judicial precedence and judicial interpretations, this article depicts how the size of damages for patent infringement is determined through three methods (the patentee's actual loss, the infringer's profits and reasonable royalties) and statutory damages in China.  In particular, it makes a comparison between Chinese and German approaches.  The comparison finds that Chinese courts have insisted on unrealistic standards of proof on the part of patentees for entitlement to the three methods.  Therefore, this has relegated the patentees to statutory damages that are not designed to compensate their losses in most patent infringement trials.  This article suggests easing the burdens of proof for the patentees under the three methods while strictly observing the restriction on recourse to statutory damages.
I think this is a very good article, with lots of useful information and analysis.  As the author points out, Chinese courts award "statutory" damages far, far more often than they award lost profits, reasonable royalties, or infringer's profits.  (See also my book pp. 353-60 and previous blog posts here and here.)  As referenced in the abstract, Ms. Hu argues that one reason for this is that Chinese courts' evidentiary standards are too strict (though she suggests there are other reasons courts prefer to award statutory damages as well, see pp.21-22); and she contrasts this with the German courts' practice, under article 287 of the Civil Procedure Code, to make a rough estimate of damages when the parties' evidence is inadequate (see pp. 12, 13, 23, 26; on the German courts' practice, see also my book p.262 n.160, citing Markus Schönknecht, Determination of Patent Damages in Germany, 43 IIC 309, 311–13 (2012)). In addition, Ms. Hu states that Chinese courts do not award reasonable royalties unless the patentee can "prove an existing licensing agreement" that is "lodged and recorded by administrative authorities" (p.6; see also p.17).  This obviously makes it more difficult than it would be in Germany (or the U.S., for that matter) to award royalties.   Finally, Ms. Ju argues that statutory damages are often undercompensatory, given their low amount (at present, Chinese law caps them at an amount equal to about U.S. $160,000), though in some cases they may be overcompensatory because courts do not strictly require patentees to prove any loss as a precondition for awarding statutory damages.  She proposes that China should mitigate the plaintiff's burden of proof in a manner analogous to the German approach, and that they should award statutory damages only when the other methods of damages calculation are unavailing due to the patentee's failure to provide even "rough evidence of damages suffered" (p.27).

I'll probably cite this paper in some of my own forthcoming work.

Friday, May 13, 2016

Some New Papers on FRAND

1.  Stanley Besen has published a paper titled Why Royalties for Standard Essential Patents Should Not Be Set by Courts, 15 Chi.-Kent J. Intell. Prop. 19 (2015).  Here is a link to the paper, and here is the abstract:
Although Standard Setting Organizations (SSOs) generally require patent holders to agree to license their technologies on Reasonable and Non-Discriminatory (RAND), or Fair Reasonable and Non-Discriminatory (FRAND), terms as a condition of including their technologies in a standard, SSOs have generally declined to accept responsibility for clarifying the meaning of these commitments. Despite this, a consensus has emerged among most commentators as to how F/RAND royalties should be determined for Standard Essential Patents. According to the consensus view, a F/RAND royalty should be the cost of obtaining a license just before the patented invention is declared essential to compliance with an industry standard, which should, in turn, reflect the value of the invention over its best alternative. However, based upon the way in which F/RAND royalties were determined in a number of recent cases, this article argues that courts generally will not have the information needed to implement the consensus view and that, as a result, greater effort should be taken to have these royalties determined before standards are adopted.
2. Edward Sherry and David Teece have posted a paper on ssrn titled Assessing RAND Royalties: A Response to Contreras and Gilbert, 'A Unified Framework for RAND and Other Reasonable Royalties'.  Here is a link to the paper, and here is the abstract:
In a recent working paper, Profs. Contreras and Gilbert propose a “unified framework” for assessing royalties for both (a) patents that are subject to a FRAND commitment and (b) patents that are not. We believe that these two classes of patents are different (if for no other reason than in the former case, but not the latter case, the patent holder has agreed to give up the exclusive right to use the patented technology granted by the patent law), so that using a “unified approach” risks ignoring an important difference. They urge the use of an “incremental value” approach to evaluating royalties, while downplaying the fact that measuring “incremental value” requires identifying the next-best alternative, and ignoring the fact that there is a very big difference between the situation in which the next-best alternative is in the public domain (and thus freely available for others to use at no charge) and the situation in which the next-best alternative is itself patented. We conclude that their proposal for using a “unified approach” to evaluate royalties for both FRAND-encumbered and non-FRAND-encumbered patents ignores significant differences between the two types of patents.   
For previous mention on this blog of the Contreras & Gilbert paper, see hereIn our paper The Value of the Standard, Norman Siebrasse and I discuss some of these issues as well--agreeing with Contreras & Gilbert that FRAND and reasonable royalties should be treated alike, but agreeing with Sherry & Teece that patented and nonpatented alternatives should be treated differently.  On that first issue, though, of whether FRAND and non-FRAND royalties should be determined in the same manner--thus rendering the FRAND commitment relevant only for purposes of determining whether there is a contract or contract-like commitment on the part of the patent owner to give up the right to seek an injunction--Sherry and Teece make much of the fact that in the non-FRAND context the patent holder has not given up the right to the exclusive use or exclusive licensing of its technology.  But I think that confuses the issue.  In my view, the first issue to consider is whether the patent owner is entitled to an injunction.  Applying the eBay factors (or, better yet, the relevant economic factors for which eBay is at best a proxy), I would conclude that if the patent owner's business model is one of exclusive use or exclusive licensing, it should rarely be denied an injunction.  If, on the other hand, its model is one of nonexclusive licensing and all it wants is a royalty, then other relevant considerations such as a risk of holdup would weigh against granting an injunction.  But the injunction question should be settled first.  At that point, if the patent holder is not entitled to an injunction (or is not even seeking one), the question arises what an appropriate ongoing royalty should be.  The answer should be some portion of the objective value of the technology to the licensee, but I don't see why the portion (that is, the rate) should be any different in the case of a FRAND- or non-FRAND-committed patent once we have arrived at this step.   And I certainly don't agree with the implication Sherry and Teece make at p.8 that the owner of a non-FRAND-committed patent should be able to extract holdup value--hard to see what justification there could be for setting a royalty that reflects such value.

3.  Sherry and Teece have coauthored another paper with Peter Grindley titled FRAND Commitments in Theory and Practice: A Response to Lemley and Shapiro's 'A Simple Approach'Here's a link to the paper, and here is the abstract:
We respond to a recent proposal by Profs. Lemley and Shapiro for compulsory binding final-offer (baseball-style) arbitration for disputes over licensing FRAND-commited standards-essential patents. We demonstrate that, contrary to their suggestions, their proposal is not "best practices" for any standards-setting organization and suffers from a number of practical and conceptual problems.