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Patent reform reached its climax when President Obama signed the America Invents Act (or AIA). The AIA contains numerous significant modifications to the Patent Statute. (see also Fish & Richardson’s webpage on legislative patent reform: www.fr.com/patentreform.) However, one of the most hotly contested issues in damages reform – patent damages – did not make it into the AIA. Nevertheless, the history of the debate and the congressional effort to reform damages law are interesting topics and are recounted in the following sections.
Much of the debate over patent damages reform stemmed from the conflicting positions of the parties involved, including at least (1) the information technology sector, (2) the biotechnology and pharmaceutical industry, and (3) the non-practicing entities and patent licensing companies. Broadly speaking, information technology companies have found themselves inundated with patent litigation as each of their products may be covered by tens or even hundreds of patents, and they therefore have sought ways to limit or apportion the damages on any single patent to only that portion of a product actually related to the patent’s invention. Pharmaceutical and biotechnology companies, on the other hand, invest vast amounts of money in the research and development of a single drug or product that may be only covered by a single patent they file after development of that drug or product, and they therefore want strong damages provisions to protect investments. Similarly, non-practicing entities – whether large research universities, sole inventors, or companies that buy patents from others solely to enforce them – generally receive money from licensing and litigating patents and therefore oppose any efforts to create additional damages-specific patent cases. The result has been a heated debate between the conflicting positions.
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Patent Reform Act of 2007
Serious discussions regarding patent damages reform began in 2004, with increased activity starting in 2006 and 2007 because of multiple attention-grabbing jury verdicts. The result was the Patent Reform Act of 2007, which was introduced in the House of Representatives by Congressman Howard Berman as H.R. 1908 and in the Senate as S. 114u5 by Senator Patrick Leahy, both on April 18, 2007.
Two of the major changes the Act sought to establish involved the entire market value rule and the apportionment of reasonable royalty damages. First, the entire market value rule would apply only if the claimed invention’s “specific contribution over the prior art” formed the “predominant basis” for the product’s demand. This obviously would limit damages when a patent covered only a minor feature in a much larger product. Second, a reasonable royalty rate would apply “only to the portion of the economic value of the infringing product or process properly attributable to the claimed invention’s specific contribution over the prior art.” This apportionment provision would thus uphold larger damages on pioneer patents introducing society to truly new technologies while limiting damages on patents in well-developed fields or that improved only slightly upon the prior art. The House version of the Act passed by a vote of 220-175 on September 7, 2007. However, the Senate version failed to pass in the 110th Congress.
Patent Reform Act of 2009
The Patent Reform Act of 2009 (H.R. 1260 and S. 515) was introduced in both the House and Senate on March 3, 2009. Both the House version of the 2009 Act, introduced by House Judiciary Committee Chairman Conyers, and the Senate version, which was introduced by Senate Judiciary Committee Chairman Leahy, initially maintained the damages language from the 2007 Act. However, as will be described below, S. 515 was later amended to remove the entire market value rule and apportionment language from the proposed 2007 Act, installing instead a “gatekeeper” function for the courts in handling damages.
As a testament to the importance of damages reform, on the same day the 2009 Act was introduced, Senator Specter wrote a letter to Senator Leahy asking that consideration of the bill be delayed until May 2009. Senator Specter wanted to give the Federal Circuit time to hear oral argument in Lucent Technologies v. Gateway, Inc., a case that involved the entire market value rule:
Given the symbiotic relationship between the judicial and legislative branches with regard to changes to the patent system, I further ask that the bill not be placed on the Executive Business Agenda until late May, after the Court of Appeals for the Federal Circuit has the opportunity to hear argument in Lucent Technologies, Inc. v. Gateway, Inc. The court may consider issues related to the damages debate; specifically the scope of the “entire market value” rule when assessing damages. This issue was very contentious as we worked on the bill last year, and I believe that oral argument has the potential to facilitate a compromise or clarify the applicability of damages theories in various contexts.
Similarly, on March 9, 2009, seven senators wrote to Senators Leahy and Hatch, urging the Judiciary Committee not to rush consideration of this new legislation, due to the importance of damages reform. The seven senators cited the need for careful consideration of the provisions regarding calculation of damages and suggested that it would be helpful to hear from the new PTO director, who had yet to be confirmed.
Despite these requests for postponement, the Senate Judiciary Committee amended S. 515 on April 2, 2009. In particular, the Committee wanted the Act to be less rigid and thus deleted the entire market value rule and apportionment provisions. The April 2 “Manager’s Amendment” instead strengthened the district court’s role as a “gatekeeper” in preventing unsound damages theories and irrelevant evidence from reaching the jury and in providing clear jury instructions on damages. Introducing the amendment, Senator Leahy issued a statement that said, in part:
Earlier this week I thanked Senators for working together on a compromise. Patent reform is urgently needed. We need to move forward. Over the last couple of days we have reached agreement on issues that had prevented the bill from moving forward. I will include in the record the letters and statement of support for our compromise, including those from the Coalition for Patent Fairness, the Coalition for 21st Century Patent Reform, the Association of American Universities, the American Intellectual Property Law Association, Pharmaceutical Research and Manufacturers of America, and the Biotechnology Industry Organization. Today I will begin by offering a Leahy-Specter-Feinstein-Cornyn-Whitehouse-Kaufman amendment on damages, post-grant review, venue, and other issues.
This compromise represents an important step forward. It includes the “gate keeping” concept that Senators Feinstein and Specter have worked hard to develop. It is a provision that will provide juries with more direction on the appropriate legal standards that apply in a given case. It is true that I would have gone farther. One of the problems with patent litigation today is the lack of guidance given to juries. But another is that courts simply are not focusing on the essence of the invention. The Supreme Court recently reminded us that, “the primary purpose of the patent law is not creating private fortunes but to promote the progress of science.” Senator Specter pointed out earlier this month that there remain important cases that bear on how damages are calculated. I hope they move the law toward compensation for what the actual invention is.
The April 2 Manager’s Amendment created a judicial gatekeeper role in three places: (1) identifying the relevant damages methodologies and factors, (2) limiting the parties and the jury to those identified methodologies and factors, and (3) determining whether sufficient evidence supports the damages proposed by a party or found by a jury.
First, the district court is required to “identify the methodologies and factors that are relevant to the determination of damages.” The parties are required prior to trial to submit in writing the proposed methodologies and factors the parties propose for instruction to the jury in determining damages. The parties must also specify the relevant underlying legal and factual bases for their assertions. The court then acts as the gatekeeper in identifying which methodologies and factors will be allowed.
Second, the court and the jury are then limited to considering only the court-identified methodologies and factors. This means the parties are limited to presenting evidence on only the identified methodologies and factors and that the court should exclude other evidence.
Third, the court is required to consider whether either party’s damages contentions lack “a legally sufficient evidentiary basis.” For each proposed methodology or factor, the court must identify on the record those that do have sufficient evidence and those that do not. Similar to above, the court then “shall only permit the introduction of evidence … that is relevant” to the methodologies and factors that are supported by sufficient evidence. Conversely, the court should exclude evidence addressing factors that lack a legally sufficient evidentiary basis. While trial courts have always had the discretion to act as a gatekeeper, the amended Act would have imposed a statutory duty on judges to act as the gatekeeper, in specifically enumerated ways.
Even though new USPTO Director Kappos and the Commerce Department spoke out in favor of amended S. 515, passage of the bill stalled after the Manager’s Amendment was issued in April 2009. The same was true for H.R. 1260, as the House did little on its bill after April 2009. Congress had other issues to address, and patent law reform went essentially dormant for the remainder of the year.
2010 Senate Compromise
Senate activity on patent reform resumed in February and March of 2010. Senator Leahy reported on February 25 that a tentative agreement had been reached on a patent law reform bill that would preserve the core of the compromise bill reported by the Senate Judiciary Committee in April 2009. He particularly thanked Republican Senators Hatch, Kyl, and Sessions and USPTO Director Kappos for their contributions, stating: “I expect that we will be able to release details as they are finalized in the coming days after consultation with the House.”
On March 4, 2010, Senator Leahy issued a press release confirming that a second Manager’s Amendment had been drafted that would be substituted for the version of S. 515 that the Senate Judiciary Committee had approved in April 2009. (The text of the second Manager’s Amendment can be found here.) The March 4 Manager’s Amendment retained the gatekeeper role and, like the previous Manager’s Amendment, dispensed with the entire market value rule and apportionment provisions. Senator Leahy’s press release pronounced:
The bipartisan Manager’s Amendment makes the following changes to current law:
* * *
– Includes a more robust, procedural, gate keeping role for the court, pursuant to which judges will assess the legal basis for the specific damages theories and jury instructions sought by the parties. The gate keeping provisions will ensure consistency, uniformity, and fairness in the way that courts administer patent damages law.
In addition, the March 4 Manager’s Amendment updated the name of the bill to the Patent Reform Act of 2010. The amendment also added one further important provision on damages: allowing either party to request a sequencing of trial. The first trial would decide infringement and validity, while a second trial would determine damages and willful infringement. The same jury would be used for both trials, but sequencing would clearly affect what evidence the jury saw prior to determining infringement and validity. Moreover, the court would have been required to grant a motion for sequencing absent good cause.
Judicial Response to Patent Reform
Statements at conferences and road shows by some Federal Circuit judges stated a belief that the courts can self-regulate without congressional involvement. In particular, these judges asserted that rigid rules would be neither practical nor efficient. As evidenced by the heated disputes over the damages provisions of the Patent Reform Acts of 2007 and 2009, there was no “one size fits all” statute that would have been effective in every case or every technology. On May 3, 2007, then-Chief Judge Paul R. Michel of the Federal Circuit wrote an open letter indicating his position on the 2007 Act’s shortcomings, including the apportionment provision:
[T]he provision on apportioning damages would require courts to adjudicate the economic value of the entire prior art, the asserted patent claims, and also all other features of the accused product or process whether or not patented. This is a massive undertaking for which courts are ill-prepared. For one thing, generalist judges lack experience and expertise in making such extensive, complex economic valuations, as do lay jurors. For another, courts would be inundated with massive amounts of data, requiring extra weeks of trial in nearly every case. Resolving the meaning of this novel language could take years, as could the mandating of proper methods. The provision also invites an unseemly battle of “hired-gun” experts opining on the basis of indigestible quantities of economic data. Such an exercise might be successfully executed by an economic institution with massive resources and unlimited time, but hardly seems within the capability of already overburdened district courts.
Several cases led analysts to believe that the Federal Circuit was trying to self-regulate damages law. For example, in the February 2010 decision of ResQNet.com, Inc. v. Lansa, Inc., the Federal Circuit overturned a district court’s royalty rate as “speculative and unreliable” because it was based on prior licenses when “none of these licenses even mentioned the patents in suit or showed any other discernible link to the claimed technology.” ResQNet was in line with the September 2009 decision of Lucent Technologies, Inc. v. Gateway, Inc. In that case, the Federal Circuit wiped out a $357 million verdict because the calculation lacked sufficient evidentiary support. While noting there were no definitive rules for the entire market value rule or the Georgia Pacific factors and that a flexible approach is best, the Lucent court held that evidence still needs to be tangible and reliable. In short, the Federal Circuit held that district courts must act as gatekeepers when damages awards or experts lack sufficient evidentiary support, precisely the role mandated by the proposed congressional patent reform. The Federal Circuit’s December 2009 decision of i4i L.P. v. Microsoft Corp. also stressed the importance of the parties challenging the sufficiency of the evidence of damages lest such challenges be waived.
Chief Judge Rader of the Federal Circuit, sitting by designation in district court cases, handed down two significant district court decisions addressing damages. In the Northern District of New York case Cornell University v. Hewlett-Packard Co., Cornell’s patent claimed a means to enhance performance of computer microprocessors, yet Cornell sought damages based upon the entirety of HP’s servers and workstations. In March 2009, Judge Rader excluded the testimony of Cornell’s damages expert on the entire market value rule as insufficiently supported and reduced the size of a jury award by more than 70%. One year later in March 2010, Judge Rader, sitting by designation in the Eastern District of Texas for IP Innovation L.L.C. v. Red Hat, Inc., again excluded a damages expert’s testimony on the entire market value rule for failing to show a “sound economic connection between the claimed invention and this broad proffered royalty base.” In particular, Judge Rader found that the accused feature (a workspace switching feature in Linux operating systems) represents “only one of over a thousand components included in the accused products.” Judge Rader also excluded the expert’s testimony because his royalty rate was based upon a broad industry average that had no specific relation to the patents or technology in suit, similar to ResQNet. Thus, in both Cornell and IP Innovation, Judge Rader fulfilled the role of damages gatekeeper.
The Outcome of Damages Reform in the AIA
As mentioned at the outset of this web page, Congress ultimately rejected damages reform in the AIA. None of the statutory reform Congress had considered – entire market value, apportionment, or gatekeeping – made its way into the AIA. Instead, Congress left the courts to administer the gatekeeping function, opting not to include such a provision in the statute.