Patent Law

Half Blind

By Gary Odom and Jordan Kuhn

35 U.S.C. §284 sets patent award "damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer." Georgia-Pacific v. United States Plywood enumerated 15 factors upon which royalty determination may be made, and has become the bedrock of damages case law. A reasonable royalty is judicially defined as that amount which would have been set based upon a hypothetical negotiation between willing parties. How would such a negotiation be conducted between an infringer and a purely economic patentee (PEP), a patent holder that is not practicing the infringed invention?

Richard Cauley of Wang, Hartman, Gibbs & Cauley in IP Law 360 sets up a straw man and knocks it down:

The more resistant the plaintiff is to granting a license to this particular defendant, i.e., the more valuable the patent is to the plaintiff in his business, the higher the "reasonable royalty" will be... [PEPs] have no economic interest in "walking away from the table" in the hypothetical negotiation... How, then, can such nonproducing plaintiffs justify large damages awards in the form of astronomical reasonable royalties? The answer is - they cannot... Indeed, since the [PEPs] only business is licensing its patents, the defendant can convincingly argue that the [PEP] would have been eager, even desperate, to license its patents and would have settled for a very modest rate in the hypothetical negotiation.

Only in this way can defendants reduce the intimidation factor of the troll's threats. Only by defunding the trolls can they finally be defeated.

Graham factor 15 goes to the hypothetical negotiation. Other factors go to the value of infringement to the infringer, as well as licensing history, if any, and competitive analysis, if competition exists.

There are two parties to a negotiation. A patent infringer has a price it is willing to pay to avoid removing the infringing feature. That serves as a basis to determine the value of infringement. The Graham factors include that angle, of "the established profitability of the product made under the patent; its commercial success; and its current popularity;" as well as the spillover effect of infringer profitability in selling other "non-patented items; and the extent of such derivative or convoyed sales."

Further, for damages apportionment fans, Graham factor "12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions."

It is not uncommon for manufacturing companies to hold patents which they do not practice, yet may choose to enforce. Not practicing an invention does not decimate the decimals behind a patent's worth.

In ignoring the established bases upon which reasonable royalty may be determined, Cauley is indulging in a fantasy axe grinding against PEPs. At best, it's a sales pitch for curmudgeonly clients.

Read The Patent Prospector Infringement Damages Primer, which lists the Graham factors.

Full post as published by The Patent Prospector on March 15, 2008 (boomark / email).