Patent Law & Policy

Shifting Remedies: Encourage Innovation?

I. Introduction
In Rite-Hite Corp. v. Kelley Co., Inc. the court came to an expansive conclusion based upon the "but for" standard of calculating lost profits after patent infringement. In Grain Processing Corp. v. American Maize-Products Co., lost profits were found impossible to calculate, and the court calculated only a method for determining reasonable royalties. Lastly, in In re Seagate Technology, LLC., the court moved from an old standard for determining willful infringement and instead instituted a new "objective recklessness" standard. Both Rite-Hite and Grain Processing attempt to state "but for" infringement, what profits of the patentee might look like, but the results were vastly different, and neither was encouraging of innovation. Alternatively, Seagate initiated stricter limitations on prosecuting willful infringement designed to encourage innovation. Because of Rite-Hite, innovators may be less likely to attempt a design around, or more likely to create but not implement their patents, and similarly in Grain Processing, there may be consequences for research and development. In Seagate because it has become more difficult to prove willful infringement, innovators do not need to worry as much about potential infringements. While neither Rite-Hite nor Grain Processing is a perfect implementation of "but for," Seagate at least attempts to increase the motivation for innovation.

II. Money Damages and the Transition from Rite-Hite to Grain Processing.
Section 284 of the United States Patent Act (35 U.S.C. § 284) allows for monetary compensation to patent holders to recompense loses due to an infringement. These damages are awarded to restore the patent holder, not to punish the infringer, except in cases of willful infringement. To receive lost profits, a patentee must demonstrate the profits they would have made "but for" the infringing device. To show profits "but for" infringement, patentees will often use a test, articulated in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., which has four criteria that a patentee must establish in order to recover damages in the form of lost profits. In order to argue that the patentee would have made profits "but for" the infringement, the patentee needs to establish that there was (1) a demand for the patented product, that there was (2) an absence of non-infringing substitutes, (3) a manufacturing and market capability to exploit that demand, and (4) an amount of profit to be made.
The cases of Rite-Hite Corp. v. Kelley Co., Inc., and Grain Processing Corp. v. American Maize-Products Co. are used to demonstrate the dispersal of money damages in action. In Rite-Hite the Appellate Court held that damages from 35 U.S.C. §284 should include reasonably and objectively foreseeable competitive injuries, in particular the loss of both ADL-55 and ADL-100 sales, when only Rite-Hite's patent for ADL-55 had been infringed by Kelley. The Court calculated damages using a "but for" test, where the majority found that lost sales of products unprotected by the patent, but directly competing with the infringing device, specifically the ADL-100, are included in damage calculations. In contrast, the dissent found that if "damages" include unprotected products, then property rights are expanded outside of what is granted by the patent.
The "but for" test is the standard by which a patentee can claim damages based on lost profits, but this is not the only way to recoup damages suffered by an infringer. In Grain Processing Corp. v. American Maize-Products Co. the district court could not find lost profits because a non-infringing alternative was available, though unavailable on the market. Because it would be too difficult to measure lost profits, the court found a reasonable royalty of 3% and gave this to the Grain Processing Corp. as damages for infringement. The "reasonable royalty" method involves looking at comparable royalties, or if none exist, creating a hypothetical and historical negotiation between the two parties, to determine what a reasonable royalty might have been. The theory here is that the reasonable royalty standard is in theoretical agreement with the "but for" standard because the Panduit standard is not the sine qua non for proving "but for" causation.
An interesting shift happens in the transition of the "but for" standard between Rite-Hite and Grain Processing. Before Grain Processing, the standard was the above-mentioned "but-for" standard, where damages depended on the non-infringing substitutes that the infringer could have used. Crucially, before Grain Processing, this inspection of substitutes looked only at products that were "actually sold in the marketplace" (Hausman et al., 826). After Grain Processing, the standard became less restrictive: an infringer could now claim that "it would have offered a noninfringing product that, although not actually sold in the marketplace, was technically feasible at the time and could have been made commercially available relatively quickly" (826).
Because these products would have been identical to the consumer, damages were calculated on a reasonable royalty basis only, despite the increased cost to the infringer. Hausman et al. call this the "free option" where "a firm may keep its options open by using potentially infringing technology rather than technology that definitely does not infringe" (826). As a result of Grain Processing, though there are damages to pay, the risk of choosing this option are dramatically reduced because the potential size of the damages award is so drastically diminished. Hausman et al. argue that "by providing potential infringers with increased option value if they use the patented technology, Grain Processing reduces the deterrent effects of litigation and therefore encourages infringement. Consequently, it reduces the returns to research and development, and so also the incentives to innovate" (826-27).
I agree with Hausman et al. on this question. From a sensible, non-legal perspective, it makes the most sense to me to consider the infringer's alternative item rather than the hypothetical market and competitiveness against existing products when considering damages. Incentives to innovate are decreased when infringers need only pay royalties and not lost profits. As the book remarks about Rite-Hite, patents are made to protect the intellectual property of a company, not to protect the company from the market. But this requires innovation, research and development, all of which are costly. The incentives for companies are questionable: where is the incentive to invest time and money if the risks of an alternative route, as noted by Hausman, are so (relatively) costless.

III. Willful Infringement and Enhanced Damages
Before touching on willful infringement and enhanced damages, Nard discusses equitable relief and preliminary injunction, offering the example of Amazon.com, Inc. v. BarnesandNoble.com, Inc. But more interesting is the transition--somewhat like the change in standards from Rite-Hite to Grain Processing--of the legal standard on willful infringement.
The key case in the changing willful infringement standard is In re Seagate Technology, LLC. The new Seagate standard changes the burden of proof required by the patentee to illustrate willful infringement. Previously, it was the "duty of care" standard, but Seagate makes it the "objective recklessness" standard "that first requires a patentee to show by clear and convincing evidence that the alleged infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. If the patentee meets this first step, it must then show by clear and convincing evidence that the alleged infringer knew or should have know of this objectively high likelihood" (Bernstein).
This was a good transition on the willful infringement standard. It continues to punish those who are clearly in the wrong by potentially doubling or tripling fines for willful infringement. By raising the standard of willfulness and increasing the challenge of proving willfulness, it creates an environment where accidental infringers need not worry about violating willful infringement, as they might have with the previous standard. Some of the literature, including Bernstein, argues that the new standard makes it unduly hard for patentees to prove infringement, which I don't necessarily consider a good thing. But there is a small area, maybe easily overlooked, that I think redeems much of Seagate. Seagate seems to reward research and development and innovation in a way that Grain Processing doesn't. Before the new standard, companies would need to spend large amounts of money early on in the development process to investigate all possible permutations of patents to ensure they were nowhere near infringing on existing patents. By allowing these companies to innovate, with at least a temporary ability, to a degree, to ignore potential fines, the new willful infringement standard continues to encourage development. It is for this key reason that I believe the transition on willful infringement standards was a good and necessary transition.

IV. Conclusion
Because Rite-Hite unfairly punishes the infringer, and Grain Processing does not punish the infringer enough, neither motivates inventors to innovate. The cases raise questions such as "Why design around an existing patent (for example the ADL-100) if I might accidentally infringe another patent (ADL-55) and have to pay lost sales for both?" and "Why develop a new technology if the old technology only requires me to pay royalties?" Seagate tries to improve innovation by marking a shift in the standard for determining willful infringement. The Seagate decision might make it harder for patentees to prove willful infringement, and therefore it may incentivize research and development with less risk. Patent laws should exist to encourage innovation by protecting the rights of patent owners without discouraging new competing, non-infringing, inventions. We will have to wait to fully understand how the patent system as a whole reacts to these transitions.


Sources:
Bernstein, Matthew Cook. "Difficulties Prevailing on Willful Infringement Post-Seagate." May 2010. Accessed 26 November 2011. http://www.mintz.com/newsletter/2010/Newsletters/0430-0510-NAT-IP/web.html

Hausman, Jerry A., Gregory K. Leonard, and J. Gregory Sidak. "Patent Damages and Real Options: How Judicial Characterization of Noninfringing Alternatives Reduces Incentives to Innovate." Berkeley Technology Law Journal 22:825 (2007): 825-853.

Nard, Craig Allen. The Law of Patents. New York: Aspen Publishers, 2011.