The IP Factor

There have been a number of big patent litigation suits against Microsoft, where record damages were awarded by the courts, which were subsequently drastically cut on appeal.

Over 2 billion dollars in jury awarded damages for patent infringement against Microsoft in favor of Lucent Alcatel were overturned on appeal, including a 1.538 billion award overturned by the Federal Circuit. At the end of September, an April award to Uniloc of $388 million in damages for infringement of patents by the activation technologies Microsoft uses in products such as Windows and Office was thrown out by US District Judge William Smith who noted that the jury who awarded damages “lacked a grasp of the issues before it and reached a finding without a legally sufficient basis.”

So what is going on?

To assess damages for patent infringement, the US courts attempt to work out what time of licensing agreement the parties would have reached had they negotiated an agreement at the time that the infringement started. The logic is based on Georgia Pacific’s alleged infringement of three patents held by American Plywood, the most important being one for a striated plywood, having grooves or striations in the uppermost ply that were popular since they were decorative, but more importantly, prevented the warping of the wood. This patent, that issued to a Donald Deskey in 1942 was litigated before a Judge Herlands who presided over the case for thirteen years, drafted a comprehensive opinion and then inconsiderately died before issuing his ruling. Luckily a Judge Tenney took over, and a year later issued a ruling, based on 15 factors that should be taken into account when assessing a reasonable royalty. The reasonable royalty award is what is still used to assess damages for patent infringement.

 ”Winning the Patent Damages case, A litigator’s Guide to Economic Models and Other Damage Strategies” by Richard F Cauley, Oxford University Press, 2008 is a handy 155 page flexible covered book that covers this esoteric field. Cauley believes that the parties in patent litigation too often concern themselves with proving or disproving infringment and do not put enough attention into calculating and proving the scope of the damages by vigorously pursuing a hypothetic negotiation to work out what would reasonably have been agreed by the parties.

The book is well written and may well be a good guide to how to litigate cases of this type. I don’t know, as I am not a litigator.

There is a lot of zero-sum game theory that makes sense. Nevertheless, I am a little uncomfortable with the concept that a reasonable damage award should be based on a hypothetic license based on an imaginary negotiation which is thus specific to the history and strategy of the parties.  Generally economic models are based on people behaving rationally and not emotionally. The sort of thing I find disturbing is the concept of taking into account previously paid out expenses in working out what is a reasonable license. Surely sunken costs should be ignored when making any objective assessment of what a technology is worth and I would prefer damages to be based on objective rather than subjective criteria. That said, clearly the focus on the book is how to litigate in the light of current case law, and it has little relevance if I think the system took a wrong turn 50 years ago.

the book was informative and generally well written.  It gave me a good insight into what happens in the US, and I imagine at some time, will help me advise my clients.

Personally I’d have liked a chapter summarizing what happens in other jurisdictions as well, particularly Europe and the Far East. However, any such guide would be totally superficial and probably beyond the author’s experience. The book is meant to provide practical tools and US patent professionals tend to be unaware that there are other jurisdictions, so I am not faulting Cauley for this.

The tools described may also of some value in analyzing what a patent is worth for licensing or selling.