patent-remedies

PATENT REMEDIES AND ROYALTIES

Gasaway

I. Introduction

A. There are three major points to remember in dealing with patent remedies

1. Ordinarily, the patentee is awarded an injunction to prevent future infringements
and is compensated for losses caused by past infringement.

                2.     Preliminary junctions were hard to get, but became easier. However, there are
                        serious social costs to such injunctions and their ups and downs reflect this
                        concern.

3. Other sorts of preliminary relief are sometimes available to deter infringement.

B. There are also basic policy questions worth considering.

1. Should intellectual property really be considered "property" protected by injunctive
relief, or would liability rules better balance public and private interests?

2. How wide is the scope of remedies?

a. The patents-as-property approach and the broad view on remedies better
protect the patentee and create the maximum incentive to innovate.

b. Liability rules and narrow views on remedies are better in terms of assuring that
the public will actually be able to benefit from new technologies.

C. There is a six year quasi statute of limitations in the Patent Act.

II. Damages

        A.     The measure of a patentee’s monetary award is damages adequate to compensate for
                  the infringement. That is, the patentee’s lost profits, in no event less than a reasonable
                  or established royalty.

1. The theory of patent damages is to deny the infringer the fruits of the illegal acts.

2. Another theory is to restore the patentee the benefits he or she would have derived
from the patent monopoly had he or she not been denied the infringing sales.

3. In patent law, there is a distinction between damages and profits.

a. Profits refer to what the infringer makes from the use, sale, etc.

b. Damages signifies the patentee’s losses by such infringement.

B. Treble damages may be awarded in addition to the attorney’s fees in exceptional cases.

1. Double damages have also been awarded where the infringer was aware of the
existence of the patent from the time the infringement started.

2. Absent an award of double or treble damages, a patent owner’s potential monetary
recovery is at best purely compensatory and not punitive or exemplary.

a. Therefore, many business people had rather infringe than pay royalties,
knowing their liability will be limited to a reasonable royalty rate.

                        b.     If sued for infringement, the business person will more than likely challenge the
                                validity of the patent. Courts tend to hold patents invalid, so the infringer will pay
                                damages only if validity of the patent is upheld. Perhaps this is a reason why
                                there are so many infringement suits.

C. Section 283 of the Patent Act permits a court to grant equitable relief as a remedy for
infringement.

                1.     "The several courts having jurisdiction under this title 35 U.S.C. may grant
                        injunctions in accordance with the principles of equity to prevent the violation of any
                        right secured by a patent, on such terms as the court deems reasonable."

2. However, courts have declined to issue injunctions where:

                        a.     An injunction would have meant that an infringer would have been forced out of
                                business and the patentee would get no future royalties because he or she was
                                not engaged in the exploitation of the invention.

b. Also, where a license had been refused on the patent solely because of a
personal feud between plaintiff and defendant, an injunction has been refused.

            3.     Although courts have the power to issue preliminary injunctions in patent suits, they
                    are rarely granted, since a clear showing of irreparable harm and likelihood of
                    success on the merits must first be demonstrated.

a. Because of the 17 year life span of the patent, it is hard to show such harm.

                    b.     Also, to show likelihood of success on the merits would require a clear showing of
                            the validity of the patent. Given court’s predilection for holding patents invalid,
                            this is hard to do.

c. Interestingly, courts deem patent validity a question of law, so on appellate
review the courts may redetermine this issue.

III. Defenses

A. There are three major substantive defenses to patent infringement.

1. Invalidity of the patent will excuse infringing conduct.

a. A court may and normally does inquire into validity even though if finds no
infringement.

b. A judgment of invalidity binds the patentee as against persons not party to
the suit unless the court failed to provide fair opportunity to litigate the claim.

2. Fraudulent procurement of inequitable conduct is a major defense.

3. The third major defense is misuse or violation of the antitrust laws.

a. The courts will withhold any remedies for infringement if the patentee is guilty of
patent misuse.

b. The rights of the patent owner are restored if and when the misuse is purged
and abandoned and its consequences are dissipated.

B. Each of these defenses has many subissues such as compulsory licensing, compelling
of attorney’s fees awards, liability under the securities laws, etc.

C. Equitable defenses are also available such as laches and estoppel.

III. Royalty Payments

A. In patent law, the term royalty when used in a patent license situation means the
compensation the licensee pays the patent owner for use of the patented invention.

B. The royalty rate generally is set at whatever the market will bear.

1. The following factors have been considered by licensors in setting the royalty base.

a. The strength of the patent,

b. Availability of competing technology,

c. The cost to develop the invention,

d. The savings or profit to be realized,

e. The cost of the suit,

f. Nature of license (exclusivity, etc.),

g. Negotiation costs,

h. Cost of assembling concomitant technical information for licensee,

I. Cost of serving the agreement (start up assistance, etc.), and

j. Investment required by licensee.

2. From the commercial viewpoint, there are three principle considerations:

a. Royalty patterns in the industry,

b. Experience with the product of related product, and

c. Calculation of a reasonable share of anticipated profits.

C. Royalty Base

1. The royalty rate is devoid of meaning unless it is applied to a solid royalty base.

a. The unit if measurement which will be considered the base must be established.

b. The most common royalty base is sales volume.

2. When sales volume is used, royalty is payable on licensee’s billings, less such
deductions as taxes, discounts, packing, returns and special services.

3. When a court becomes involved in setting royalty rates, it generally uses a range of
2-10% of gross sales.

a. Courts attempt to arrive at a reasonable royalty by calculating what a
reasonable and prudent licensee will pay a reasonable and prudent licensor.

b. An existing license will be given great weight, however.

                        c.     When profits are considered, they are used as a factor to determine what a
                                willing licensee will pay. A rule of thumb is 1/4 to 1/3 of the anticipated profits
                                from the use of an invention as appropriate royalty.

4. License agreements frequently contain clauses relating to minimum and maximum
royalties.