Licence Analogy Back in the Game - with the worst Licensee you can Imagine

The calculation of damages using the licence analogy method has become somewhat unfashionable in Germany as the calculation of damages using the infringer’s profit is usually considered to give more favourable results for the patentee. This holds in particular since the possibilities of the infringer to deduce overhead costs have been limited strongly by the Federal Supreme Court (BGH) in the decision “Gemeinkostenanteil”.

The Munich District court has now issued a decision which might bring the licence analogy method back into the game.

The court finds that for the purpose of assessing the damages in a patent infringement procedure, the calculatory royalties should be noticeably higher than those on obtainable on the free licensing market.

The interesting point about this decision is that the court does not support this finding by arguing that a certain amount of punitive damages would be fair in order to achieve a discouraging effect as one might have expected. Rather, the court’s (and maybe the plaintiff’s) argument is entirely based on fairness arguments in line with Art. 13 lit. b of Directive 2004/48/EC.

Basically, the court accounts for the particular circumstances at the end of the procedure differing from those on the free licensing market. According to the court, the royalties paid on the free market are discounted for the following reasons:

• the general risk of the legal validity of the right,
  
• the risk due to the uncertainty of the infringement of the right
  
• the fact of asking for a license demonstrates a fair business conduct, which implies a certain credit worthiness.
  

The above factors are, however, not relevant at the end of the litigation where the validity is proven as well as the infringement and where the right owner risks to face further problems in enforcing his rights to timely payment of the royalties and to obtain documentary evidence for the sales. The delay of the payments to be expected increases the risk of insolvency of the infringer, which has to be accounted for.

In other words, the convicted infringer is considered to be comparable to a licensee with very low credit worthiness and the poorest payment record you can imagine in a case where the no uncertainty with regard to the validity of the right or with regard to the infringement exists. In the case at issue, the court found an increment of 66% over the usual royalties in the technical field to be reasonable.

The end of the American (damages) dream?

Most of the times a patent case is ruled in the US I’m surprised with the amount of damages award. I usually have the impression that more than damage repair, US Courts apply punitive damages.

The situation may change with the decision of the US Court of Appeals of the Federal Circuit in Uniloc v. Microsoft, rejecting a very popular damages calculation rule (the 25% rule of thumb). We read uin the ruling:

“Section 284 of Title 35 of the United States Code provides that on finding infringement of a valid patent, damages shall “in no event [be] less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” In litigation, a reasonable royalty is often determined on the basis of a hypothetical negotiation, occurring between the parties at the time that infringement began.
…
The 25 percent rule of thumb is a tool that has been used to approximate the reasonable royalty rate that the manufacturer of a patented product would be willing to offer to pay to the patentee during a hypothetical negotiation.
…
there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement. The rule does not say any-thing about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party. Relying on the 25 percent rule of thumb in a reasonable royalty calculation is far more unreliable and irrelevant than reliance on parties’ unrelated licenses, which we rejected in ResQNet and Lucent Technologies.
…
evidence purporting to apply to these, and any other factors, must be tied to the relevant facts and circumstances of the particular case at issue and the hypothetical negotiations that would have taken place in light of those facts and circumstances at the relevant time”.

It seems to me that from now on it will be difficult to reach figures we have seen in the past.

NERA critiques current US damages proposals

PatLit readers who are following the current debate on US patent reform may be interesting in A Brief Comment on the Damages Provisions in the Patent Reform Act of 2009, a NERA paper by Phillip Beutel, Alan Cox, Bryan Ray and Marion Stewart. NERA explains the background to the 4-page paper as follows:

"In March 2009, proposed legislation was introduced (as the Patent Reform Act of 2009) in the United States Senate and House of Representatives that, among other things, intends to enforce by statute the manner in which damages are to be calculated in patent infringement lawsuits. In this brief comment on the proposed legislation, [the authors] argue that this proposed legislation would not improve the standard for calculating damages. The authors previously published a paper in November 2007 that provides a discussion on the patent reform legislation then being considered by Congress. The issues and concerns they raised in 2007 are still pertinent and are summarized here".

You can read the paper here.

Sony to pay up, but is it a bargain?

The British-based Gamesdog website reports that computer games giant Sony has been ordered to pay US$18.5m in compensation, after a US court rules that the company was liable for infringement of eight of its patents. The court said it found "clear and convincing evidence" that Sony wilfully infringed patents covering "wireless local area network apparatus" while manufacturing its PSP, mylo Personal Computer and Network Walkman products. The successful claimant was Agere Systems, an integrated circuit components company which first filed the complaint eight patents in 2006. Agere has since merged with a company called LSI.

It may seem like a fair sum of money but, divided among the eight patents, infringed in respect of three separate products, US$18.5 million doesn't seem very much at all. We may speculate as to how much Sony would have had to pay if it had taken 3 x 8 conventional licences.