Monday, September 11, 2017

Criterion Journal on Innovation Papers on Patent Remedies

Volume 2 of the Criterion Journal on Innovation, for which Greg Sidak serves as editor, includes several papers on damages and injunctions, including the following.  (Note that I haven't read all of them yet myself.  Of these, I'm guessing, based on the abstracts, that I will agree at least in part with some of them and disagree quite vigorously with others, but in the meanwhile I will withhold judgment.)

1.  J. Gregory Sidak, Irreparable Harm from InfringementHere is a link to the article, and here is the abstract:
The Patent Act empowers a court to issue an injunction “to prevent the violation of any right secured by patent.” Whether a court will permanently enjoin an infringer depends on whether (1) the patent holder would suffer irreparable harm otherwise, (2) its legal remedies are inadequate, (3) the balance of hardships favors the patent holder, and (4) the injunction would not disserve the public interest. Similar factors inform the grant of a preliminary injunction. The Federal Circuit often says that the harm from patent infringement is irreparable if it cannot be measured. I say that such harm is irreparable because it irreversibly destroys wealth.
Patent infringement irreversibly obliterates wealth when it impedes society’s technical progress. Patent infringement does more than transfer wealth involuntarily from the patent holder to the infringer; it also harms third parties by devastating the surplus that consumers would derive from using the product practicing the new technology. Damages are impotent to cure that harm to the public interest. A court’s order of damages can no more recreate the wealth that has been or will be destroyed by an act of patent infringement than it can restore an ancient redwood after the axeman has felled it.
2.  J. Gregory Sidak, Is Harm Ever Irreparable?  Here is a link to the article, and here is the abstract:
Economic analysis yields three insights on the meanings of irreparable harm. First, the interpretation of “irreparable” harm as immeasurable harm has diminishing plausibility. Quantitative and empirical methods are generally sufficient to estimate injury in business disputes with reasonable confidence. Second, harm can be irreparable because the infringer cannot afford to pay damages, but other vehicles exist to address that problem of undercapitalization—namely, bankruptcy law and the market for corporate control. Third, legitimate grounds remain for finding irreparable harm and issuing an injunction when the court’s failure to do so would reduce consumer or producer surplus by reducing static or dynamic efficiency. In this third category, the reliable quantification of the destruction of value may be challenging when assessing dynamic inefficiency.
In contrast to the existing jurisprudence on injunctions, my three interpretations of irreparable harm would focus the objective of injunctive relief on averting the destruction of value caused by patent infringement, not the transfer of wealth from the patent holder to the infringer. The same logic would apply more generally to any form of involuntary exchange, including compulsory licensing or the forced sharing of valuable assets with competitors under competition law.
Consider the following question: when would a court ever need to grant injunctive relief to remedy the invasion of the plaintiff’s property rights? I do not find any of my three economic interpretations of “irreparable harm” to have great explanatory power in answering this question. So I offer a new conjecture.
Although courts are comfortable with the counterfactual framework of the hypothetical, voluntary exchange, I hypothesize that they are uncomfortable with including large estimates of opportunity cost in the bargaining range of that model. Perhaps courts (and competition authorities, for that matter) do not fully understand the implications of Armen Alchian’s definition that cost in economics means opportunity cost. This unease increases if the would-be licensor’s opportunity costs exceed the would-be infringer’s maximum willingness to pay. (This condition is a standard fact pattern in any of the high-profile margin squeeze cases in Europe and the United States, in which the wholesale price of access to the essential input exceeds the retail price that the vertically integrated firm charges in the downstream market.)
Perhaps, too, courts care about appearances concerning their institutional competence. If no transaction occurs when the would-be licensor’s opportunity costs exceed the would-be infringer’s maximum willingness to pay, it may appear to outsiders to be the court’s fault in setting too high an access price. Consequently, when a court recognizes that the bargaining range is negative, it may prefer to grant a permanent injunction instead of awarding the patent holder damages that exceed what the infringer would have been willing to pay in a hypothetical, voluntary negotiation.
If my conjecture is correct, it may signal an innate appreciation by courts of the Coase Theorem. If the would-be licensee does not value the would-be licensor’s asset at the level of the would-be licensor’s opportunity cost, the court will have no comparative advantage over a bilateral negotiation in making a transaction occur that increases social welfare. Rather than state publicly that the correct price emerging from a hypothetical, voluntary transaction would exceed the would-be licensor’s willingness to pay, the court may prefer to say that it cannot measure the harm from the unauthorized use of the asset. In that case, the court would issue a permanent injunction, which would permit the parties’ own post-injunction negotiations to confirm, in private, the conclusion that no gains from trade exist.
3.  Paul R. Michel & Matthew Dowd, Understanding the Errors of eBay.  Here is a link to the article, and here is the abstract:
eBay has had a profoundly negative effect on the enforceability of U.S. patents, including patents whose validity is beyond doubt. With the likelihood of an injunction severely diminished, patent infringers appear less willing to cease infringing activity. In contrast to U.S. practice, injunctions are routine in Germany and other European countries and becoming so in Asian nations, particularly China, for all technologies and all types of owners. Investment money is mobile and flows toward the high-value assets. eBay has crimped patent rights and thereby diminished investment incentives in the United States. The result: reduced research and development, less job creation, lower economic growth, and diminished American global competitiveness. This cannot be what the Supreme Court intended, but it is how the Kennedy concurrence is being implemented by most district courts that ignore the less forceful Roberts concurrence. The time has come for the Court, or at least the Federal Circuit, to rescue America from this folly.
4.  Maureen K. Ohlhausen, The Federal Trade Commission's Path Ahead.  Here is a link to the article, and here is the abstract:
Given my extensive experience as a leader at the Federal Trade Commission (FTC), I have developed views about how the Commission should carry out its work. In the months ahead, I hope to realize my vision by continuing the agency’s good work to protect competition while advancing principles that the FTC overlooked or undervalued under the Obama Administration.
First, a word on my antitrust philosophy: I believe in the power of markets—when free of restraints and unnecessary regulations—to provide the best outcomes for consumers. Antitrust enforcers guard the competitive process. We intervene when firms injure competition, and we advocate for consumers when governments consider anticompetitive legislation. But equally important is knowing when not to intervene.
As you know, competitive markets tend toward static efficiency, as firms experience market pressures to price near a measure of their costs. But even periods of monopolistic pricing can be consistent with—if not indispensable to—dynamically efficient markets. That is especially so when dominance reflects a firm’s superior innovation. The continuing rise of technology-driven industries makes that consideration more fundamental than ever. The Arrow-Schumpeter debate remains live and nuanced.
Importantly, competition enforcers should not intervene simply because they dislike certain market outcomes. Antitrust is about protecting the process, not guaranteeing a particular result at a particular time. We trust that markets in which firms must endure competitive pressures will produce favorable outcomes in terms of price, output, quality, and innovation in the long run. But if prices seem excessive or output stagnant at a point in time, we do not use antitrust enforcement to require firms to charge less or to produce more. In short, antitrust is not regulation. As the Supreme Court observed in National Society of Professional Engineers, “competition is the best method of allocating resources in a free market,” and even “occasional exceptions to the presumed consequences of competition” are not grounds for antitrust enforcement.
My record shows that I favor meritorious intervention. But, I believe, it is critical to wield our competition laws with regard for the limits of our knowledge, the risk of getting it wrong, and the relative costs to society of over-enforcement and under-enforcement. Those considerations inform my lodestar of “regulatory humility,” which I will follow in the months ahead. Impressionistic assessments of harm should not drive major interventions in the market. Rather, empiricism should control. Moreover, a rigorous application of economic theory is crucial for understanding the likely effects of business conduct and for informing enforcement decisions.
In this essay, I discuss the basic principles that inform my perspective on antitrust law and outlined certain policy priorities for me going forward. My philosophy of regulatory humility, my belief in the power of competitive markets, and a devotion to empiricism inform my view of antitrust. An important question, however, is how my views translate into specific policy goals for the FTC. I would like to see the Commission pursue some new directions. I specifically mention grounding action in a strong empirical basis, challenging abuses of the government process, and better use of Part 3. But, as I articulated at the Heritage Foundation recently, I have other goals, too. Those include the promotion of economic liberty, trimming the costs that the FTC imposes on business without hindering the Commission’s enforcement abilities, and protecting U.S. firms’ intellectual-property rights. I will continue to pursue those aims energetically.
5.  J. Gregory Sidak, Fair and Unfair Discrimination in Royalties for Standard-Essential Patents Encumbered by a FRAND or RAND CommitmentHere is a link to the article, and here is the abstract:
Legal disputes between SEP holders and implementers regarding FRAND or RAND royalties for SEPs have increasingly focused on the meaning of the nondiscrimination requirement contained in a FRAND or RAND commitment. However, as of August 2017, there is no agreement on the precise duties arising from such a requirement. The legal and economic literature has proposed divergent, and mainly normative, interpretations of the nondiscrimination requirement. Some commentators say that the nondiscrimination requirement prohibits the SEP holder from excluding individual implementers from using its SEPs, but that the requirement does not limit the terms and conditions that the SEP holder may offer to different licensees. Others say that the requirement imposes on the SEP holder a duty to offer similar terms to similarly situated implementers—although, even then, there is no agreement on how to implement the “similarly situated” construct in practice. The most misguided and unhelpful interpretation in that literature comes from economic scholars who contend that the nondiscrimination requirement imposes on the SEP holder the duty to create and maintain a “level playing field” among the SEP holder’s licensees. The majority of these proposed interpretations rest on normative expressions of what the nondiscrimination requirement should be, as opposed to positive principles of what that requirement is. Thus, they are limited in their ability to guide a court’s interpretation of the nondiscrimination requirement in the FRAND or RAND commitment at issue in a given dispute.
If American law controls the interpretation of the obligations arising from an SEP holder’s FRAND or RAND commitment, there exists a rich positive jurisprudence on nondiscrimination that provides common principles that can aid a court’s interpretation of an SSO’s nondiscrimination requirement. Those principles, which are consistently applied across various fields of law, suggest that evidence that the SEP holder has treated similarly situated implementers differently is necessary but insufficient to prove that the SEP holder has violated the nondiscrimination requirement of a FRAND or RAND commitment. The court must also examine whether the SEP holder had a valid justification for the differential treatment of similarly situated implementers. Economic analysis can help a court to determine whether (1) the claimant is situated similarly to other implementers, (2) the SEP holder has treated the claimant differently, and (3) a valid justification exists for any differential treatment. A finding of impermissible discrimination is supportable only when the SEP holder lacks a legitimate justification for the disparate treatment of similarly situated implementers.
6.  J. Gregory Sidak, Is a FRAND Royalty a Point or a Range?  Here is a link to the article, and here is the abstract:
Justice Birss said in Unwired Planet that there can be only a single FRAND royalty rate for a given set of circumstances between parties negotiating a license for an SEP. However, it would be untenable on both economic and legal grounds to infer from that opinion that FRAND or RAND can be only a single point in a voluntary negotiation between two parties, or that an SEP must command the same price across all licensees for a given SEP.
As an economic matter, an SEP holder’s commitment to license its SEPs on FRAND or RAND terms generates a range of reasonable royalties upon which the negotiating parties could voluntarily agree. The SEP holder’s minimum willingness to accept to license its SEPs and the licensee’s maximum willingness to pay to use those SEPs identify the bounds on the bargaining range. Any agreed-upon royalty within that prescribed range will make both the SEP holder and the licensee better off than they would be if they were not to execute the license. In a given negotiation, the royalty will converge on a point within that range according to the relative bargaining power of the specific negotiating parties. However, the ultimate point value of that royalty is not preordained by the supposed uniqueness of a FRAND or RAND rate; rather, the ultimate point value of the FRAND or RAND royalty in a given license depends on the circumstances surrounding the negotiation. Differences in the size of the bargaining range and differences in the relative bargaining power of the SEP holder and the implementer will surely exist across licenses for a given SEP, and those differences explain why the observed royalty rate for a given SEP routinely varies across licenses.
Legal interpretation of the FRAND or RAND commitment (under American law) independently confirms that a FRAND or RAND royalty may be situated anywhere along a range of possible outcomes. In both their interpretation of section 284 of the Patent Act and their application of the hypothetical-negotiation framework to determine damages for patent infringement under section 284, the federal courts recognize that a range of reasonable royalties exists for a given patent. Any contractual bargaining away by the patent holder of its rights arising from that statutory framework would need to be indisputably clear. However, such clarity is nonexistent. The patent policies of the major SSOs allow the SEP holder and the implementer to set licensing terms for an SEP, including the ultimate royalty rate, through voluntary, bilateral negotiation. Far from dictating a unique point value, that mechanism permits a range of FRAND or RAND royalties for a given SEP.
7.  J. Gregory Sidak, Using Regression Analysis of Observed Licenses to Calculate a Reasonable Royalty for Patent InfringementHere is a link to the paper, and here is the abstract:
Patent licenses reveal information about how the market values a patented technology and how the market values new information concerning the probability of a patent’s validity and infringement. One can use that information to determine the value of the patent in suit under the assumed conditions in the Georgia-Pacific hypothetical negotiation that the patent is absolutely valid and infringed. Using regression analysis, an expert economic witness can use the change in royalty rates that occurs after pretrial rulings (by district courts, by the PTAB, or by the ITC or its individual administrative law judges) to calculate the market value of the increasing probability that the patent in suit is valid and infringed, and to predict the outcome of the hypothetical negotiation on the eve of the defendant’s first infringement of the patent in suit. The line of best fit might predict a gradually increasing royalty over time, as uncertainty about the patent’s validity and scope decreases. If so, extending the line of best fit to the trial date would provide a conservative (lower-bound) calculation of a reasonable royalty under the assumptions of absolute validity and infringement that apply in Georgia-Pacific’s hypothetical negotiation. This methodology enables the calculation of a reasonable royalty for the patent in suit that incorporates both the underlying legal assumptions of the hypothetical-negotiation framework and the market-disciplined prices that one subsequently observes in actual patent licenses voluntarily negotiated at arm’s length between the licensor and willing third parties.
8.  J. Gregory Sidak and Jeremy O. Skog, Hedonic Prices and Patent RoyaltiesHere is a link to the article, and here is the abstract:
 A hedonic model explains a good’s price in terms of its characteristics. In this article, we use hedonic prices to estimate the permissible range for a reasonable royalty for a standard-essential patent (SEP) subject to its owner’s commitment to offer to license the patent on reasonable and nondiscriminatory (RAND) terms. Our methodology is equally applicable to the calculation of fair, reasonable, and nondiscriminatory (FRAND) royalties for SEPs.
Hedonic price analysis provides a scientifically rigorous means to satisfy the Federal Circuit’s directive in Ericsson v. D-Link to disaggregate the value of having a standard of any sort from the incremental value of the chosen standard, and then to disaggregate further the incremental contribution that a given SEP or portfolio of SEPs makes to the overall value of the technologies that allow the chosen standard to operate. The common additive form of the hedonic regression model is the most appropriate econometric model to meet that directive.
When implemented in an appropriate and thoughtful way, hedonic price analysis provides an expert economic witness—and, ultimately, the finder of fact—with a reliable methodology to determine whether a given license offer satisfies the reasonableness requirement of a RAND or FRAND commitment. If asked or required to set a specific RAND or FRAND rate for a specific portfolio of SEPs, a court or arbitral panel could take our analysis one step further, by determining where within the RAND or FRAND bargaining range a bilaterally negotiated royalty between the parties would most likely fall. Hedonic price estimation can also inform the calculation of a reasonable royalty in conventional patent litigation that does not involve standard-essential patents. Consequently, the use of hedonic price estimation is a conceptual breakthrough in the calculation of reasonable royalties for patent infringement, both for SEPs subject to a RAND or FRAND commitment and for patents that are not declared essential to any standard.
This one I have read, so I can offer a few comments.  I thought this was an interesting paper, and while I can't claim a deep understanding of the statistical techniques the authors use their proposal appears to me to be an improved version of the "top-down" approach used in Innovatio and Unwired Planet.  The authors try to isolate the ex post value of a new standard over an old one using the concept of hedonic prices, and then apportion that value to account for differing values among patents.  They accomplish the latter by analysis of forward citations, which as they point are a standard metric for patent valuation among economists.  But see Allison, Lemley & Schwartz, Understanding the Realities of Modern Patent Litigation, 92 Tex. L. Rev. 1769, 1798-99 (2014) (calling into question economists' reliance on citation counts as evidence of patent quality). 

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