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«ENDING UNREASONABLE ROYALTIES: WHY NOMINAL DAMAGES ARE ADEQUATE TO COMPENSATE PATENT ASSERTION ENTITIES FOR INFRINGEMENT Daniel Harris Brean*† ...»

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ENDING UNREASONABLE ROYALTIES: WHY NOMINAL

DAMAGES ARE ADEQUATE TO COMPENSATE PATENT

ASSERTION ENTITIES FOR INFRINGEMENT

Daniel Harris Brean*†

ABSTRACT

According to § 284 of the Patent Act, damages for patent infringement

are supposed to be compensatory. The statute only allows for recovery of “damages adequate to compensate for the infringement.” Even though it qualifies that such damages must be “in no event less than a reasonable royalty,” this language cannot be read to avoid the fundamental requirement that, as compensatory damages, any recovery must stem from actual harm suffered by the patent owner. Absent proof of actual harm, only nominal damages should be recoverable. Yet patentees who suffer no actual harm are regularly obtaining considerable amounts of money from alleged infringers as purported reasonable royalty damages. This state of affairs reveals a need to correct the course that damages law has taken.

The most prominent group of patent owners receiving windfalls instead of compensatory damages are patent assertion entities (“PAEs”), also known as “patent trolls.” While there are other situations where patentees are not actually harmed by instances of infringement, PAEs’ business models and damages theories best highlight how existing damages law is being misread and exploited to support widespread overcompensation for infringement.

* Daniel Harris Brean is an intellectual property attorney at The Webb Law Firm in Pittsburgh, PA, where he works primarily on patent litigation matters relating to computer network systems and e-commerce technology. Dan has defended more than a dozen online retailers in patent infringement lawsuits brought by patent assertion entities. He is a former law clerk to the Honorable Jimmie V. Reyna at the United States Court of Appeals for the Federal Circuit. He graduated in 2005 from Carnegie Mellon University with a BS in Physics and received his JD cum laude in 2008 from the University of Pittsburgh School of Law, where he received the Faculty Award for Excellence in Legal Scholarship and the ABA-BNA Intellectual Property Law Award. Dan is also an adjunct professor, teaching patent law, at the University of Pittsburgh School of Law.

† I am tremendously grateful to those who helped me build the foundation for and improve this article. I owe special thanks to Janice Mueller, Bryan Clark, and Christian Ehret, whose comments on earlier drafts of the piece were invaluable. This article also benefitted greatly from various discussions I have had concerning patent infringement damages with J. Derek McCorquindale, Kent Baldauf, Jr., Anthony Brooks, James Bosco, Jr., Steven Johnston, Lee Cheng, W. Christopher Bakewell, and Raji Seshan. The views expressed in this article, as well as any errors, are solely my own and should

–  –  –

PAEs are exclusively in the business of patent assertion, seeking to license their patents via actual or threatened litigation. They make and sell no products or services themselves, having no capacity or infrastructure to do so, nor do they partner with technology companies to develop and bring their patented products or services to market. Having no actual or prospective direct or indirect market participation relating to the technology, PAEs suffer no pecuniary loss from infringement—they are no worse off than they would be if the infringement had never occurred. PAEs are only legally harmed, not actually harmed, by infringement.

The business model of PAEs is lucrative because of the erroneous assumption that substantial reasonable royalty damages must be awarded for any infringement. The statutory language allowing for damages “in no event less than a reasonable royalty” has been twisted and expanded, especially by PAEs in recent years, far beyond its strictly compensatory origin. PAEs emphasize improper restitutional facts instead of compensatory ones to unduly inflate their supposed damages—i.e., they focus on the benefits to the infringer instead of the harm to themselves.

They also draw analogies to common law trespass principles to suggest that, just as a trespass interferes with a landowner’s use of real property, substantial damages are owed to patentees merely because they own the patent and the patent was infringed. When properly examined, however, these common law principles reveal that the analogy would support only nominal damages for such legally harmful but actually harmless trespasses.

Nothing in the legislative history of the reasonable royalty statute suggests that a reasonable royalty was required to be a substantial sum.

With no evidence that Congress intended a reasonable royalty to be substantial or have a special meaning, under the plain meaning of the statutory text a royalty should be deemed reasonable simply when it constitutes sensible and fair compensatory relief. This allows for case-bycase findings of actual damages without artificial legal constructs that distort the meaning of § 284. Under this fresh reading of the statute, patent owners who suffer no actual harm from infringement would be entitled to recover nominal damages only. In some cases, such as those brought by PAEs, a nominal royalty is reasonable.





2015] Ending Unreasonable Royalties 869

TABLE OF CONTENTS

INTRODUCTION

I. OVERVIEW OF PATENT ASSERTION ENTITY BEHAVIORS

AND INCENTIVES

A. The Status Quo of Patent Assertion Entities

B. Monetary Incentives

C. Problems with Restitutional Theories, Trespass Analogies, and Strategic Overcompensation

II. THE ORIGIN AND BACKGROUND OF REASONABLE

ROYALTY DAMAGES

A. The Common Law Evolution of Reasonable Royalties

B. Legislative History of the 1946 Act

C. The Plain Meaning of “Reasonable Royalty”

III. ARO MANUFACTURING AND THE MEANING OF “DAMAGES”............... 901  A. Strategic Incidental Infringement Litigation and Overcompensation

IV. COMPENSATORY DAMAGES VERSUS RESTITUTION AND THE

GEORGIA-PACIFIC FALLACY

V. COMMON LAW TORT AND TRESPASS DOCTRINES AWARD NOMINAL

DAMAGES FOR HARMLESS CONDUCT

VI. NOMINAL DAMAGES ARE CONSISTENT WITH MINIMUM

REASONABLE ROYALTY DAMAGES

VII. FOREGONE ROYALTIES ARE NOT DAMAGES FOR PATENT

ASSERTION ENTITIES

CONCLUSION

870 Vermont Law Review [Vol. 39:867

INTRODUCTION

Damages for patent infringement are supposed to be compensatory.

The pertinent statute in the Patent Act only allows for recovery of “damages adequate to compensate for the infringement.”1 Although such damages must be “in no event less than a reasonable royalty,” this language does not take away from the compensatory nature of damages, whereby any recovery must be based on actual harm suffered by the patent owner.2 Upon a finding of infringement, historically only nominal damages— i.e., small sums that represent damages in name only—would be awarded unless the patentee could adequately prove actual harm as a result of the infringement. The reasonable royalty statute did not change this foundational aspect of compensatory damages law. Yet today the law allows patent owners that suffer no actual harm from infringement to obtain substantial sums of money as purported reasonable royalty damages.

This phenomenon appears to stem from the assumption that the “in no event less than” language of the statute requires reasonable royalties to be substantial in every case. That assumption is mistaken. Indeed, the Federal Circuit very recently acknowledged that a zero or nominal reasonable royalty award would be appropriate in some cases.3 It held that “[c]ertainly, if the patentee’s proof [of damages] is weak, the court is free to award a low, perhaps nominal, royalty, as long as that royalty is supported by the record.”4 This Article offers an in-depth historical analysis of the reasonable royalty statute and advocates for a fresh and plain reading that: (1) reaffirms its purely compensatory intentions; and (2) allows for nominal damages to constitute an appropriate reasonable royalty where that result is fair and sensible. To demonstrate how far afield the reasonable royalty law has gone from its compensatory origins, this Article focuses on the behaviors of

1. 35 U.S.C. § 284 (2012).

2. Id.

3. Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1328 (Fed. Cir. 2014). The Federal Circuit commented that “it seems unlikely that a willing licensor and willing licensee would agree to a zero royalty payment in a hypothetical negotiation, where both infringement and validity are assumed.” Id. It also noted that “[w]e know of no case where we found that the record supported an infringement award

of a zero royalty.” Id. at n.7. Examples given for where a zero damages award might be justified were:

(1) “in a case completely lacking any evidence on which to base a damages award”; and (2) where a record demonstrated that “at the time of infringement, the defendant considered the patent valueless and the patentee would have accepted no payment for the defendant’s infringement.” Id. at 1328.

4. Id.

2015] Ending Unreasonable Royalties 871 patent assertion entities (“PAEs”), also known as “patent trolls,” and explains why those behaviors mandate awards of only nominal damages.

PAEs are the largest and most prominent group of patent owners receiving substantial royalties despite the absence of actual harm. PAEs are solely in the business of monetizing their patents. Their only commercial activity is their effort to obtain license fees for use of their patents, primarily by threatening or pursuing litigation. They are generally holding companies—essentially, shell organizations that own patents directed to certain technologies but offer no products or services in those technical fields (and lack the capacity to do so).

PAEs also do not partner with technology companies to develop or bring the patented products or services to market—a practice that can be referred to as productive licensing. Rather, PAEs seek license fees to pay for alleged infringement of already-existing products or services. It is a retrospective, not prospective, licensing model, effectively extracting a tax or toll for past and current infringement. One commentator recently analogized PAEs to “parasites” because “both are naturally occurring phenomena that thrive by syphoning resources from hosts... mostly without necessarily killing [the hosts].”5 Having no actual, prospective, direct, or indirect market participation relating to the technology, PAEs suffer no pecuniary loss from infringement. Put another way, they are no worse off than they would have been if the infringement had never occurred.

5. Yaniv Heled, Patent Trolls as Parasites, JURIST (April 28, 2014, 6:00 PM ET),

http://jurist.org/forum/2014/04/patent-trolls-as-parasites.php. As Professor Heled explained:

A single patent troll usually poses no existential danger to any given company— as trolls are typically only after settlement fees and not their host’s entire cache of resources. Too many patent trolls, however, could eventually bring down even highly successful companies. Similarly, like most species of parasites, patent trolls tend to mount numerous attempts on their hosts with the expectation that only a few of these attempts will be successful, which still guarantees enough resources extracted from hosts to keep the trolls alive and, in many cases, thriving.

...

[A]s long as we have prosperous sectors relying on patents as a means of ensuring their success, there will be trolls exploiting such patents to exact a toll on this success.

Id. He concludes that patent trolls should not be left unchecked but, like the existence of biological parasites, some acceptable level of patent trolling exists. Id. (observing that “seeking to outlaw patent trolls as such is unlikely to succeed and—like taking too much antibiotics—might backfire,” but that “our inability to design perfect tools for fighting patent trolls should not deter us from taking action to thwart at least some of their harmful behavior and minimize its effects”).



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