Patents and damage calculations
For more than half a century, the U.S. patent system has been the subject of very little congressional reform. However, with the rise in patent litigation over recent years, the need for system improvement, restructuring, and modification was addressed by Congress in 2011 with the enactment of the Leahy Smith America Invents Act (AIA). Notably absent from such reform, though, was the presence of directorial principles to address issues concerning damage calculations in patent infringement disputes.

By employing a reformation approach which lacks regulatory provisions on the calculation of damages, the resolution of patent disputes, in terms of assessing award amounts for successful litigants, continues to remain primarily in the hands of our judicial system. As has been noted by many scholars, this approach was perhaps an intentional one, as opposed to a congressional oversight.  In their 2011 Patent Litigation Study, PWC commented, “the absence of reform guidance in this area suggested that Congress believed that the subject of patent damages is best left for the courts to address and regulate.”

Conceivably in accordance with legislative reform addressing other patent system issues, or simply as a result of the court’s recognition of their inherent ability to provide litigants with much needed clarification on unresolved damage issues, several decisions in 2011 and 2012 have greatly impacted methods of damage assessment in patent disputes. In Uniloc, U.S.A. v. Microsoft Corp. (Fed. Cir. 2011), the Court noted its “passive tolerance” in prior cases in applying unsound royalty damage assessment principles like the 25 percent rule of thumb. In Uniloc, the court held:

“[A]s a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.”

In support of its use of the rule, Uniloc’s expert stated that calculation methods were checked against the Georgia-Pacific factors, the long recognized standard approach used in damage assessment.  In rejecting Uniloc’s approach, the Court stated:

“[I]s of no moment that the 25 percent rule of thumb is offered merely as a starting point to which the Georgia-Pacific factors are then applied to bring the rate up or down. Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion.” (Slip op. at 46.)

Following the decision in Uniloc, the Nash Bargaining Solution emerged as a new method of damage calculation. As with prior methods, the new method also has met several challenges by defendants, resulting in acceptance by some jurisdictions, and rejection by others, thereby complicating litigators ability to determine what calculation technique is appropriate, and more importantly what evidence is necessary to support or challenge a party’s assertion of a specific award amount.

Perhaps left with more uncertainty than not, how can litigants to patent disputes—on both sides, one seeking to support their calculation method, the other wanting to challenge such figure—best prepare themselves for most important stage of litigation following assignment of liability? Although the answer to this question cannot be simply responded to, litigators who keep track of recent discretionary trends in similarly situated patent disputes, may find themselves at an advantage. As stated in PWS’s 2012 Patent Litigation Study:

“The broader lesson of these decisions, among others issued in recent years, is that the courts have been applying greater scrutiny to damages assessments in patent infringement matters; we expect this to continue. Patent litigation counsel and parties should monitor ongoing rulings that could affect damages opinions and methodologies.”

For more on these specific methods of damage calculation, see the following: Calculating Reasonable Royalties in Patent Infringement Disputes; and Damage Calculation in Infringement Disputes: Lost Profits, Reasonable Royalties & Price Erosion

By: Alicia McKnight, J.D.