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.

Oracle v. Google: 50% royalty rate?

In Oracle America, Inc. v. Google Inc. (C 10-3561 WHA), the defendant has recently filed a writ requesting leave to file a Daubert or other motion directed at the damages report of Oracle’s expert Iain Cockburn.

Apparently, Oracle’s expert is not only fixing an unprecedented royalty rate, but also (i) fails to tie his royalty rate to the value of the patented technology actually at issue in the case (ii) argues that royalties would be owed even after expiration of Oracle’s patents and, believe it or not, (iii) would be including a portion of Google’s advertisement pie!

May Google be facing a sort of punitive damages in this case?

Arguments used by Google:

"First, Cockburn has no basis for including all of Google’s revenue from Android phones into the base of his royalty calculation. The accused product here is the Android software platform, which Google does not sell (and Google does not receive any payment, fee, royalty, or other remuneration for its contributions to Android). Cockburn seems to be arguing that Google’s advertising revenue from, e.g., mobile searches on Android devices should be included in the royalty base as a convoyed sale, though he never articulates or supports this justification and ignores the applicable principles under Uniloc and other cases. In fact, the value of the Android software and of Google’s ads are entirely separate: the software allows for phones to function, whether or not the user is viewing ads; and Google’s ads are viewable on any software and are not uniquely enabled by Android. Cockburn’s analysis effectively seeks disgorgement of Google’s profits even though “[t]he determination of a reasonable royalty . . . is based not on the infringer’s profit, but on the royalty to which a willing licensor and a willing licensee would have agreed at the time the infringement began.” ...

Second, Cockburn includes Oracle’s “lost profits and opportunities” in his purported royalty base. This is an obvious ploy to avoid the more demanding test for recovery of lost profits that Oracle cannot meet… Most audaciously, Cockburn tries to import into his royalty base the alleged harm Sun and Oracle would have suffered from so-called “fragmentation” of Java into myriad competing standards, opining that Oracle’s damages from the Android software includes theoretical downstream harm to a wholly different Oracle product. This is not a cognizable patent damages theory, and is unsupported by any precedent or analytical reasoning.

Third, after improperly inflating the base of his royalty calculation, Cockburn proceeds to apply an unprecedented fifty percent royalty rate to that base through use of improper short-cuts. In contravention of long-settled precedent, he fails to tie his royalty rate to the value of the patented technology actually at issue in this case. ... He treats the patents and copyrights at issue as a single, indivisible unit, casually dismissing critical differences in the patents (such as the technologies they embody and expiration dates over a decade apart) by deeming them all “essential” to Java, without pointing to any facts that could justify that conclusion. Instead of satisfying the Lucent standard, he adopts a presumption that is contrary to Lucent, stating that there is “no clear economic basis” for apportioning the total value of Android into value attributable to the patents and copyrights in suit and any additional value added by Google. Under the case law, however, damages must be tied to “the claimed invention’s footprint in the market place.” …

Cockburn similarly inflates his royalty rate by calculating Oracle’s loss based on the alleged value of Java as a whole, even though the patented features are only a small part of Java….

Fourth, Cockburn cavalierly asserts that infringement of a Single claim of a single patent would result in the same … award as infringement of all of the asserted claims. The ‘720 patent, for example, it expires nearly eight years after every other patent-in-suit. But according to Cockburn, even if Google does not infringe the ‘720 patent, the damages should still run throughout its life, which extends to 2025…”

Only in America ... "Permanent Injunctions as Punitive Damages"

The Supreme Court tried many remedies,
but none had so great a punitive effect
as the permanent injunction

"Permanent Injunctions as Punitive Damages in Patent Infringement Cases" is the provocative title of a piece penned by Professor Paul J. Heald (University of Georgia Law School) and posted on the SSRN website here.  According to the abstrct:

"Although much ink has been spilled over the decision of the [US] Supreme Court in eBay v. Mercexchange to modify the test for equitable relief in patent cases and to nullify the long-standing [and erroneous, if equity is supposed to involve the exercise of judicial discretion -- JJP] presumption that victims of infringement are always entitled to permanent injunctions, an obvious point is never pursued: Injunctions in patent cases can function like punitive damages at common law. In cases where the infringer’s costs of switching to an alternative non-infringing technology are sufficiently high, patent "hold up" will occur, whereby the patentee will be able to negotiate a post-injunction license that exceeds the amount that would have been determined by an ex ante arms-length bargain (i.e., a reasonable royalty). Permanent injunctions that result in the recovery of an extra-compensatory bounty function like punitive damages and can be analyzed as such. This article examines the economic literature on punitive damages and identifies the limited set of circumstances where permanent injunctions are warranted.".

This piece will subsequently emerge as a chapter in an upcoming Cambridge University Press book, Intellectual Property and the Common Law. Meanwhile, if any discerning PatLit readers would like to cast a critical eye across this ingenious and controversial hypothesis, we'd all be pleased to know what they think.