Rethinking Patent Damages
Roger D. Blair
University of Florida - Warrington College of Business Administration - Department of Economics
Thomas F. Cotter
University of Minnesota Law School
February 23, 2001
Determining the appropriate monetary remedy for patent infringement has always been a complicated and confusing task, for two principal reasons. The first is that the rules courts have developed for estimating patent damages have been, all too often, both complex and contradictory. This observation continues to be true even after the creation of the United States Court of Appeals for the Federal Circuit, which since 1982 has heard all appeals in patent infringement suits. The second reason is that the proper application of even relatively simple rules to real cases can be surprisingly difficult. In recent years, courts have begun to abandon the formalism that once characterized their approach to patent damages in favor of an analysis more solidly grounded in the economics of market structure, but much work remains to be done to set the law of patent damages on a rational footing.
Our goal in this article is to provide a comprehensive economic framework for analyzing and estimating patent damages in the form of either lost profits or reasonable royalties. We begin with an overview of the law of patent damages, paying particular attention to the development of legal standards for estimating lost profits and reasonable royalties over the past thirty years. As we show, the courts have been moving by fits and starts toward adopting a general tort-law framework involving the application of cause-in-fact and proximate cause doctrine, though without completely giving up the idea that the law of patent damages should remain materially different from the law of damages as applied to other torts. We then provide a rationale for a general but-for causation standard and demonstrate how this standard might apply to a variety of market arrangements. Finally, we discuss the concept of proximate cause and what it might mean in the context of patent infringement. Although our results are largely supportive of some of the legal standards the Federal Circuit has adopted over the past ten years, we argue that the court has ignored some potent counterarguments, and that these counterarguments must be resolved before one can have any confidence in the standards chosen. In reaching our results, we therefore address, though ultimately reject, arguments that patent owners should systematically recover less than the amount of their but-for loss, in order to encourage efficient infringement or to avoid anticompetitive schemes of preemptive patenting or tying.
Number of Pages in PDF File: 144
JEL Classification: K00, K13, K29, K39working papers series
Date posted: March 30, 2001
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