Patent Reform Crawling Back In 2008? Lemley Proposal For Damages May Provide Answers

Friday's CongressDaily reported that Senate Minority Whip Kyl and his staff are in the process of drafting patent reform legislation, and they are expected to unveil their proposal in September. According to sources, the draft "is said to be much different from the version introduced by Senate Judiciary Chairman Patrick Leahy and Sen. Orrin Hatch."

While the details have not been revealed, the legislation is expected to address damages, post-grant review, inequitable conduct and "patent quality initiatives."

On damages, "litigants would be encouraged to use precise economic analyses to determine damages rather than less exact calculations." Post-grant reviews would be available for 12-18 months after issue, where reviews would be limited to issues of novelty and obviousness. On inequitable conduct, the legislation would "would require patent applicants to be more forthcoming to the PTO or face penalties." However, unlike previous legislation, the new proposal would address allegations of misconduct through administrative proceedings rather than in the courts.

Also, submission of search reports and analysis relevant to patentability will be required for every application. Commerce Secretary Gutierrez previously wrote to lawmakers that this provision would be "the strongest step toward improved patent quality."

For more information, see

- "Kyl Maps Out A Separate Course On Patent Legislation" (link)

- "Groups Plot Strategy For Patent Overhaul In Next Congress" (link)

Issues surrounding damages continues to divide the patent community however. Critics of the current regime argue that "reasonable royalty" damages are overcompensating (non-practicing) patentees. Accordingly, damage apportionment has been put forward as a means to curb the perceived overcompensation.

However, should Congress tweak reasonable royalty compensation, or should they look somewhere else? A recent paper by professor Mark Lemley suggests that easing restrictions on "lost profits" damages may provide a better means for market competitors to recoup damages, while reducing tendencies of courts to provide "kickers" on reasonable royalties. From the abstract:

[T]he lines between lost profits and reasonable royalties are blurring. In significant part this is because courts have insisted on strict standards of proof for entitlement to lost profits. Specifically, patentees must prove demand for the patented product, the absence of noninfringing substitutes, the ability to meet additional demand in the absence of infringement, and the proportion of those sales that represent profits. This in turn means that many patent owners who have in fact probably lost sales to infringement cannot prove lost profits damages, and turn to the reasonable royalty measure. The result is that courts have distorted the reasonable royalty measure in various ways, adding "kickers" to increase damages, artificially raising the reasonable royalty rate, or importing inapposite concepts like the "entire market value rule" in an effort to compensate patent owners whose real remedy probably should have been in the lost profits category.

In Part I, I explain the strict requirements for proving lost profits, and give examples of patentees who have failed to meet these requirements. In Part II, I explain how relegating these patentees to reasonable royalties has led to problematic changes in reasonable royalty law. Finally, I suggest in Part III that courts should draw a sharp division between the injury suffered by patentees who compete with infringers and those who do not. Patentees who compete should be entitled to the best estimate of lost profits, even if not all elements of proof are available. Doing so will avoid overcompensating patent owners in reasonable royalty cases.

Read more of Lemley's paper, titled "Distinguishing Lost Profits from Reasonable Royalties" here (link)