Rob
Merges has posted on ssrn a draft of a very interesting paper, titled Two
Patent-Related Harms, Two Remedies: Injury to Market and Uncompensated Input
Use. Here is a link, and here is the
abstract:
I argue that the two types of
damages described in the Patent Act are more than a menu of compensatory
options. They describe two distinct types of harm caused by patent
infringement. Each comes with a distinctive cluster of remedies. Harm to
Product Markets (HPM) is redressed by lost profit damages, and in most cases a
permanent injunction against future infringement. This type of damages can be
thought of as the mirror image of damages for violations of antitrust law.
Antitrust cases are about illicit lack of competition: a wrongful reduction in
the competitive state of a product market. Patent damages are about illicit
competition: the presence of an unauthorized competitor (the infringer) wrongly
increasing the level of competition in the market for the patented item. Odd as
it may seem to students of microeconomics, HPM damages are all about giving
compensation for interference with a virtuous, or at least
statutorily-protected, monopolist.
The other type of harm, Lost
Licensing Opportunity (LLO), occurs when a patent owner is not a participant in
the product market for products embodying the patented invention. The
traditional remedy of a reasonable royalty is applied in these cases: the law
in effect writes a hypothetical contract in which the patent owner licenses its
patent to the infringer. Compensation takes the form of an estimate of the
value the infringer gained by using the patent owner’s technology as an input.
When the input adds real value, and the infringer who used it has at least
general notice that the input is patented, the reasonable royalty measure of
damages does much the same as HPM damages. The only difference is that damages
in LLO cases are measured in markets for patent licensing, rather than for
patented products.
But not all LLO harm is truly equal.
Not all involuntary conferral of benefits should be thought of as the
equivalent of a market exchange. Restitution emerged as a distinct branch of
equity to address just this issue. Restitution principles reflect the fact that
sometimes a benefit is conferred not on a willing market participant, but on a
recipient who never asked for the “benefit” and had no effective notice of it;
would prefer not to have received it; and in some cases is the victim of
strategic, opportunistic tactics that make “receipt” of the benefit
unavoidable. One example from patent law is when a patent owner alters patent
boundaries to capture some of the value of the recipient’s own contributions
(“engineered encroachment”, as I refer to it). In most contemporary private law
interactions, the law protects the innocent defendant by requiring fault or
intent before liability is imposed. But lack of notice, and the good vs. bad
faith of the patent owner, are irrelevant in patent law’s regime of strict
liability for direct infringers. My proposal here is for courts to sort out the
different types of LLO harm using traditional principles of restitutionary
recovery. When a patented, intangible input (benefit) is used (received) by an
infringer, patent courts should deploy the full spectrum of restitutionary
doctrine in pursuit of interparty fairness under the facts of each infringement
case. In extreme cases of “engineered encroachment”, for example, courts might
deny any recovery for infringement.
I
need to reread and think about some of the issues Professor Merges raises in
the paper, but my initial reaction is that I agree with most of it. I was struck by his description of lost
profits as the mirror image of antitrust damages—which seems right to me,
though I had never thought of it that way before. And I agree with his discussion toward the
end of the paper, where he talks about how historically patent doctrine was
more flexible (less formalistic) than it is today, and arguably needs some more
flexibility now. One of his major points
is that the law of restitution could provide a tool by which courts tailor
(reduce) awards of reasonable royalties in cases in which the patentee is not an “idea
factory” but rather a patent troll (especially one who acquires a pending
application and amends the claims to cover after-arising products).
One
part where I think some additional variants might be useful is where Merges discusses
the following hypothetical:
Patent Owner A, for example, sells
truck docking devices for warehouses, retail stores, etc.; the devices keep
trucks snug to the loading dock while fork lifts and loading hands unload the
contents of a truck. Owner A made its reputation with its Good Old X model, the
first and most popular truck docking unit. But A designed a more high-tech (and
more expensive) docking unit, New Y, which A has positioned to succeed Good Old
X in the market. In pursuit of this plan, A recently announced the
discontinuance of the Good Old X model. Just after this announcement, a new
competitor company, B, launched operations. B announced it would commence
making a docking unit much like Good Old X. In response, A, which still holds
several patents on various features of Good Old X, filed a patent infringement
suit against B.
He
argues that in such a case the patentee should be able to recover an injunction against B and some sort of reasonable royalty:
Patent rights are no longer tied
tightly to the patent owner’s implementation of their claimed invention. They
now cover the right not to practice the invention: to use the patent right to
foreclose anyone from entering the exclusionary zone, so as to increase the
profitability of the product space adjacent to that zone. Patents also include
the right to use one of the patent owners’ stockpiled technological options not
to protect the owner’s own product, but to earn royalties on the products of a
rival who infringes a patent on one of the patent owners’ “roads not taken”.
All of these are examples of a patent on an intangible input being used by its
owner to protect the owner’s market-based income stream. . . . Where a patent
is used to prevent competition from one variant, so as to indirectly enhance
profits on a high-profit variant preferred by the patent owning firm, the
measure of restitutionary compensation could actually be higher than in the
case of an overlooked “idea factory” patent. The premium – recognized in some
actual cases – is justified by the situation. The owner would usually prefer
not to license the relevant patent at all. The patent’s value in blocking
competition may make it difficult to estimate what the owner would ask in
royalties in a willing bargain with the infringer/licensee. The difficulty of
putting a dollar value on a competition-blocking patent may support grant of an
injunction against future harm. But as for past damages, the courts are left
applying a “willing licensor-licensee” test to determine the royalty term in a
patent license that the patent owner is being dragged into against their will
and against their economic interests.
I
generally agree with this analysis, though I would add the (perhaps obvious)
point that if Patent Owner A has actually started selling New Y, it should
recover its lost profit, if any, on lost sales of New Y; I think Rite-Hite
Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir. 1995) (en banc), leads to that
result, and Roger Blair and I have argued (Rethinking Patent Damages,
10 Tex. Intell. Prop. L.J. 1, 74-84 (2001)), that that probably is the correct outcome
in such a case. On the other hand, a
variation in which I would be more skeptical of awarding an injunction—though I
confess to being unsure exactly how to calculate damages—would be one like Trebro Mfg., Inc. v.
FireFly Equip., LLC, 748 F.3d 1159 (Fed. Cir. 2014), where the patentee acquired (but didn’t
use or license) a patent after having already entered the market with a
different, unpatented product. Erik
Hovenkamp and I discussed that type of case in our article Anticompetitive Patent
Injunctions, 100 Minn. L. Rev. 871 (2016), arguing that courts shouldn’t
award an injunction, but leaving open the damages question.