Following up on my previous entry, according to a study conducted in 2007, 2/3 of all patent cases were either on appeal or had been overturned. Jury verdicts were 900% higher than bench verdicts, and juries found for plaintiff in 90% of cases whereas less than 50% of plaintiffs won in front of judges.
That is strong evidence that both juries and judges are having trouble with patent damages. Indeed, there is now a pilot program in US District Courts to learn how to better handle patent cases.
A lot of the trouble comes down to identifying the royalty base. If the invention is critical to the performance of the device, and the invention drives consumer demand, the royalty base should be the price of the entire device. This is known as the entire market value rule. If the invention is just an improvement on a subpart of the device, and/or does not drive consumer demand, then the royalty base should be allocated to that subpart. This is known as allocation, and this is where the ball game is in patent damages. Think – the price of the whole computer (EMVR) vs. the price of the music player on the computer (allocation).
This problem often comes up in high-tech cases. A smart phone makes phone calls, surfs the web, handles email, plays music, and has a camera, etc. Which of these is critical to the function of the smart phone? Which of these drive consumer demand? It’s not really clear. Potentially all of these functions are required in a smart phone, and a consumer would not buy the phone without all of them.
However, if a manufacturer had to pay royalties for every patent associated with these functions based on the entire market value rule, your phone would cost thousands of dollars, no one could afford it, and the patent holder would earn nothing.
That is where allocation has to come into play. Sometimes the patent holder needs a reality check. Is the patent important – yes. Does it drive consumer demand – yes. However, so do the thousands of other patents. So unless it is a massive improvement to an entire system on the phone, the entire market value rule does not apply. The royalty base is not a percentage of the $500 phone, but rather the $50 sub-component that, for example, takes pictures.
This is not just about money. It is about access to technology in electronics, medicine, and every part of life. It allows your children to call home, and lives to be saved.
Innovation is perhaps the greatest of human attributes and it must be nurtured. However, greed and self-importance are also human attributes, and they must be properly dealt with as well. That is the tug-of-war in patent damages.