The Economics of Patent Law Applied to Pre-Litigation Assessments

The Economics of Patent Law Applied to Pre-Litigation Assessments

We take a closer look to better understand the gray areas between these related disciplines.

August 30, 2018

Strategic pre-litigation discussions involving patent infringement matters often focus on liability and damages issues as if these were two separate concepts, when in fact, there are numerous overlapping considerations. Patent owners and their attorneys often wait too long to address these issues and the complex set of rules that frame the circumstances under which certain lawsuits might result in large damage amounts. Patent valuation diligence is as much a legal exercise as it is an economic and financial one. With this in mind, we will explore the gap between liability and damages with a focus on time limitations on damages, marking and notification limitations, intervening rights, and the prohibition of multiple recoveries.

Time Limitations on Damages

The patent statute, 35 U.S.C. Section 286, states that except as otherwise provided by law, “no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.” This time limitation is not a limit on when the patent owners can sue, but rather a limitation on the period for recovering damages. The rationale behind this policy is to prevent patent owners from sitting on their patent claims while the value of their damage claims grows ever larger.

While it is uncommon to see infringing actions go unchecked by competitors for many years, it may be expected that a small company or an independent inventor delay filing suit because they lack an appetite for the inherent risk and costs associated with the litigation process. Even if a defendant generated millions in revenue from the sale of an infringing product seven or more years ago, Section 286 could bar those damages claims. This issue is particularly important for inventors in high-tech industries where it might be difficult to identify historic infringement and where the technology exhibits a high degree of technical obsolescence (e.g., high-tech manufacturing and telecommunications). For instance, this could occur because an infringer used an infringing manufacturing process for silicon chips but ceased after a few years because that process was rendered obsolete by a new, more efficient process.

Notification and Patent Marking Requirements

A second issue that might limit a patent owner’s recovery in damages relates to 35 U.S.C. Section 287, the marking statute. The purpose of the marking statute is to put the public on notice of a patent, either granted or pending. This can be accomplished as constructive notice or actual notice. Constructive notification requires a patent owner, and its licensees, put the word “Patent” (or “Pat.”), together with the number of the patent on the product or its packaging. In 2011, the law was updated to allow for “virtual patent marking” that allows companies to map their patents to products on a web page – a valuable tool for manufacturers of small handheld products. Actual notification, on the other hand, requires an affirmative charge of infringement by a defendant’s product or device. In general, patentees can provide actual notification by threatening to sue or by filing complaint.

There is a complex set of rules that dictate when notice is required and when its omission can impact damages.[1] While there is some flexibility in the marking limitations, a patent owner is generally under an obligation to mark their patent number(s) on patent-embodying products that are manufactured, sold, offered or imported in the U.S. by their company or licensee.

It should be noted that the marking statute extends to licensees. Thus, the implication is that a patent owner might lose the right to collect historic damages if they do not police the marking provisions of their license agreements. Failure in this regard would allow an infringer to argue that it was not properly notified of the patent at issue.

Intervening Rights

Patent owners also need to be mindful of any substantial post-grant changes made to a patent’s claims, which raise the issue of intervening rights. When a patent’s claims are substantially amended during a post-grant procedure (reissuance, reexamination, or inter partes review [IPR]), the defendant might be shielded from liability of the originally issued claims. The logic of intervening rights is a substantive change in the claims and is treated as an irrefutable presumption that the original claims were materially flawed.[2] The effect of substantially amending claims in a post-grant procedure can erase years of damages – and in some cases take millions of dollars off the table.

Recently, accused infringers have increasingly requested reexaminations of asserted patents for the relatively lower-cost and potentially high-impact adjunct to a lawsuit. This may result in changes to the claims but will not broaden the claim scope. Similarly, patentees may request a reissuance, which allows them to apply for a reissued patent based upon any errors made during the original filing and prosecution.

From an economic perspective, broadening or narrowing claim language and claim scope may have a direct effect on the potential damages that may be awarded to a plaintiff. The exact impact is circumstantial, depending on the specifics of each reissue and reexamination application. However, going forward, we expect these issues to be more frequent as the cost of litigation increases. 

Prohibition of Multiple Recoveries – The Portfolio Paradox

When an individual purchases a single stock for $100, we know that the individual has gained $100 in portfolio value. When an individual purchases multiple stocks, we similarly understand that their portfolio value increases by the same multiple. Patent damages, however, do not necessarily follow the same multiplicative process. In fact, when multiple related-patents are asserted together in the same litigation, the damages may only be incrementally greater than if the patent owner had asserted a single patent. This is because when infringement claims arise from a similar set of facts, there may be only one recovery of damages rather than multiple recoveries. For example, it is possible that lost profit damages might end up being the same if the defendant is found liable for infringing one patent or multiple patents because the plaintiff can only recover its lost profits a single time. In addition, certain experts may conservatively assess reasonable royalty damages on a “portfolio basis” because the economic advantages associated with one patent might be consistent with or the same as the benefits associated with a parent/child patent.

Do Your Damages Diligence

In many pre-litigation assessments, counsel is initially engaged for liability reasons (validity and infringement). Then, right before a deal is finalized, counsel is asked to evaluate the potential size of damages – typically with time constraints – only to discover that there may be material damages-related issues such as a lack of marking or intervening rights that negatively impact value. Ideally, these issues are investigated and addressed early in a case’s assessment, so that counsel is aware of all economic constraints.

Skilled attorneys and consultants with a background in patent law can help patent owners define, evaluate, and analyze their patent portfolio. Ultimately, the breadth and depths of these inquiries should be proportional to the value that each patent bring to a monetization opportunity.

  1. Kenyon et al, “Patent Damages Law & Practice,” 1:24.
  2. C. Gregory Gramenopoulos and Elliot C. Cook, “Divine Intervention: Intervening Rights Based on Post-Grant Examination, Before and After the Leahy-Smith America Invents Act (AIA),” CIPA Journal, June 2012.