On July 9, 2012, Stout Managing Directors John Bone and David Haas, had an opportunity to sit down and discuss various patent damages topics with the Chief Judge of the United States Court of Appeals for the Federal Circuit, Randall R. Rader. Chief Judge Rader was appointed to this Court by President George H.W. Bush in 1990 and took the helm as Chief Judge in June 2010. In his tenure at the Federal Circuit, as well as instances in which he sat by designation as a District Court Judge, Chief Judge Rader has authored some of the most important opinions dealing with patent damages. In addition to his judicial duties, Chief Judge Rader also regularly teaches advanced intellectual property courses at George Washington University Law School and various other prestigious law schools. His deep knowledge of the subject matter and his passion and dedication to the field of intellectual property law have earned Chief Judge Rader numerous awards and make him one of the most influential thought leaders in this area. Stout Journal would like to thank Chief Judge Rader for accepting our invitation to participate in this interview.
Stout Journal: Before we jump into the deep waters of patent litigation and damages, let’s start with a couple of questions that will help our readers understand you as a person. So, along those lines, where did you grow up?
Chief Judge Rader: Portland, Oregon. Oregon, in general, if you stretch it to “growing up,” because I lived in other parts of the state, such as Grants Pass and Tillamook and then, finally, Portland.
Stout Journal: What would your classmates most remember about you from high school?
Chief Judge Rader: I’m not sure that’s all printable, but I bet some of them would remember I used to climb the television tower on the weekends, which is against the law, and I was a bit of a fun-loving student, not always as dedicated to my studies as I should have been. Leaving that open, let’s talk about my tennis record. I did okay in tennis. I played some tennis in high school, and I still play tennis to this day.
Stout Journal: And we understand you are also a musician?
Chief Judge Rader: Well, I am a musician, and I did some of that when I was in high school, too, but that part of my career is still peaking. We still expect to be on the cover of “Rolling Stone” sometime soon.
Stout Journal: When did you decide to take up the practice of law and why?
Chief Judge Rader: Well, there are probably two answers to that. I decided mostly when I was living in Finland and gained some greater appreciation for our form of government. The other one involved me deciding how I would make money as an English major, and that led me to law as well.
Stout Journal: What were you doing in Finland?
Chief Judge Rader: I was sent there by my church as a missionary when I was 18. I lived in many cities in Finland and actually became fluent in the language. I did some work as a translator during the three years I was there. It was a pretty important time in my life, as I had to live on my own – those accomplishments were confidence-builders.
STOUT JOURNAL: What did you see over there that piqued your interest in law?
Chief Judge Rader: Well, they were living – at that time, this is the late ‘60s, early ‘70s – and they were living very much in the shadow of the Soviet Union. It reminds me of a time that I accidently crossed the border illegally and got picked up, fortunately, by the Finnish border guards. And all of a sudden I forgot how to speak Finnish. I could speak as well as those guards, but all of a sudden I forgot everything. Luckily for me, they realized that I had just made a mistake and walked in areas I shouldn’t have walked. The overall experience of being so close to the Soviet Union at the height of the Cold War and the Finnish people being very apprehensive of everything Soviet, and yet having to abide by certain requirements that were placed on them by the stronger Russia. I remember coming away with some distinct feelings of joy at our system of government.
STOUT JOURNAL: So then you came back, and you went to law school?
Chief Judge Rader: Yes, I came back and became enamored with studying the Constitution and our governmental systems, and that brought me here to Washington.
Stout Journal: Thank you for sharing a little of your background with us. You’ve been deeply involved in trying to push damages quantification in patent litigation towards more analytically sound methodologies and eliminating those that are flawed, like the 25 Percent Rule. In your review of reasonable royalty cases and damages testimony over the years, have most of the analyses for those reasonable royalty determinations been based on an analysis of the Georgia-Pacific factors?
Chief Judge Rader: Whenever I hear “Georgia-Pacific” I bristle a little bit because the Georgia-Pacific factors are really just a laundry list of various things to be considered. The Georgia-Pacific factors were never meant to be a test or a formula for resolving damages issues. They are merely a list of things to consider. And somehow it gets blown out of context – I see it time after time after time. I can tell you exactly how it gets blown out of context.
The expert – I trust this is not you gentlemen – is sitting on the stand and he or she will testify: Well, there are 15 Georgia-Pacific factors and six of them favor us and the other nine are neutral. Well, that is an attempt to convert this laundry list into some kind of a methodology. However, many of those 15 factors may be overlapping or irrelevant to a particular case. Yet some will try to make their case seem more reasonable by stacking up so many Georgia-Pacific factors in their favor and the rest are against their opponent or neutral. And that’s not what the Georgia-Pacific case was ever about and it’s a flawed methodology. Those factors were not meant to be counted up the way you count up balls and strikes during a baseball game.
Stout Journal: Is there a more methodologically sound way to address the reasonable royalty issue?
Chief Judge Rader: Yes, I think so. While every case is going to be different, you have to look at the relevant economic evidence in each case. I like to use an analogy which people understand quite readily; and that is, you go to a realtor and you ask a realtor what enhancement to the value of their home will they get if they add a second garage or if they change the countertops in their kitchen or if they put a bathroom in the basement. And realtors can tell you with great confidence, magnificent accuracy, and some dependable uniformity within a thousand dollars or so what each of those components of the larger saleable unit, the house, is worth. And that’s often what we are doing in our intellectual property cases. We are trying to decide what this claimed invention, which is a tiny component or maybe a larger component, but it’s a component of a larger device or process, what is the value of that component? Well, that’s like, is it a countertop or is it a second-car garage? The realtors can do it. Why can’t we? I know part of the answer, of course. You know, a real estate market has 20, 30, 40 comparables on the same block.
And you are going to have a market to analyze and assess. But I do think that’s where our emphasis ought to be, not on counting Georgia-Pacific factors, but on locating the best market we can come up with. That’s usually going to be licenses, and, of course, that gets you into the difficult task of deciding how comparable those licenses are, and how much value to give to divergent clauses and services provided in each license. But that’s where our emphasis has to be in analyzing the market occupied by the claimed invention, not counting Georgia-Pacific factors.
Stout Journal: And certainly within the context of transactions, you would look at market development and how the market reacted to the addition of that particular invention?
Chief Judge Rader: Exactly, absolutely. And I think there is more of this – well, I know there is more of this going on than appears in your average patent trial. I mean the companies are in constant negotiation with each other, there is constant licensing going on of saleable factors, bundled together perhaps with other factors, but of course the difficulty becomes the regression analysis and stripping away the other factors so that you can analyze the claimed invention in its proper market context. But that’s what has to happen, and not a counting of Georgia-Pacific factors.
STOUT JOURNAL: Zeroing in on the question of comparable license agreements, because there have been a number of opinions that have related to those as well.
Chief Judge Rader: You are going to yell at me about ResQNet, aren’t you?
Stout Journal: No, no. I’ll stick with asking questions. We have seen some courts preclude experts from relying on certain license agreements because they’re not comparable, as if there’s some sort of litmus test between what’s comparable and what’s not. Whereas other courts have said there are degrees of comparability, recognizing that there’s information that you can pull out of these agreements. So where do you fall on that spectrum?
Chief Judge Rader: Well, I should have started with my caveat here. It’s not my job to tell district judges how to decide cases. And I’m talking to you much as I’d talk to my class over at George Washington University. Each judge will apply his or her judgment as the case requires. But if they are actually working to find the comparability of licenses, they are focused on the right question. And I’m not really too concerned about where they draw the line. I would hope they would draw the line to make the market broader because the broader your market sample, the more reliable it will be.
So your economists will tell you: Give me wide comparability and then we’ll discuss the discounting or enhancement of each individual sample according to how comparable it is. I think that’s a sounder economic approach. But as long as they are focused on the comparability to the claimed invention, I think the eye is on the right ball and they’ll make contact more often than not.
Stout Journal: That’s, in large part, how we’ve approached complex license agreements, because there may be relevant information that can be garnered from certain agreements, while other agreements should be discounted altogether because they are so different.
Chief Judge Rader: Yes, they are just completely off limits. Well, and you have to know your judge. Those judges will draw that comparability line and you have to deal with the line that’s drawn. But I would argue if you were the expert sitting there,
"Well, Your Honor, if you’ll let me use this, I will discount it for areas that it has no applicability and I will enhance it where it really is right on point and I think you’ll see, even though it’s a bit on the periphery, it has relevance.” And the judge will come back and say, “Well, but this could be prejudicial, and you have to promise that you can deal with that.”
Stout Journal: Courts have paid a lot of attention to damages in recent cases like Lucent, i4i, Cornell, ResQNet, Uniloc, cases that you’re intimately familiar with.
Chief Judge Rader: But I’m going to bristle a little bit because those are recent cases, and I would argue quite persuasively that our court has been sending this same message in the Grain Processing era, in Riles v. Shell, Crystal Semiconductor. Oiness was another case. We mentioned the BIC case. I think going all the way back to Rite-Hite, we started looking at it in the early ‘90s, and I think we’ve given a pretty constant drumbeat on the need for sound economic evidence and a focus on the scope of the claimed invention. But the recent cases have brought that more closely into focus. And so, now that I’ve bristled, let’s go on to the question.
Stout Journal: Well, the question is: Do you think the lessons from these cases have been absorbed by lawyers, damages experts, and the district courts?
Chief Judge Rader: Well, in general, yes. I think that they are getting the idea that we need sound economic analysis. That’s the central point here. My favorite example of the ugly argument is, say Microsoft makes $60 billion a year, and I’m just asking for one small percentage of that. Of course the $60 billion, if that’s the right number, I’m making that up by the way, whatever they make is irrelevant, it has nothing to do with the market impact of the claimed invention. It’s prejudicial to be before the jury, and we need to keep our eye on the right ball.
STOUT JOURNAL: At a recent conference, you spoke about the need for early case assessments. Are there specific things that you would suggest that district courts do differently for a billion dollar case as opposed to, let’s say, a million dollar case from a practical standpoint?
Chief Judge Rader: Here, once again, I need to start with my clear recognition that each judge is entrusted with the proper procedure to which I give strict deference here on the appellate level. Looking at adjudication itself as a market, however, if we don’t exercise proper efficiencies, we can end up investing a vast amount of resources in an enterprise that doesn’t justify that investment. And if we do that often enough, we will find ourselves with no time for the areas that need significant investments and we’ll lose to our competitors. Those competitors can be foreign adjudicatory systems, they can be rival areas where these cases can be resolved such as mediation, arbitration. But it’s just very clear that you’ve got to marshal your resources intelligently.
Now, what would I do differently if I were sitting as a district judge and I recognized that that case has marginal impact on the market? Well, I’d be very quick to narrow the issues to one claim and one patent or two claims and two patents or whatever. I would entertain summary judgment motions quite enthusiastically. I would set time limits. I would put witness limits on. I would make sure that this question for which the parties have a right to an answer, gets an answer, but I’d get them their answer in days, not weeks.
Stout Journal: That’s very helpful. I’m going to move on to another topic – the “Entire Market Value Rule.”
Chief Judge Rader: Sure, but before you ask your question, I’d like to say a few things about the Entire Market Value Rule.
Stout Journal: Sure.
Chief Judge Rader: The Entire Market Value Rule is meant to be an exception, not the rule. This is a doctrine which operates in that rare instance where the little component drives the demand for the larger product. Let me try and put this in an example. If I really do invent a chip that makes smartphones work three times as fast as other smartphones, that’s probably why people will buy it. And that will make it, the small component, even if it’s only worth a quarter, will be a tremendous demand driver. But that is extremely exceptional in the marketplace. It’s very rare that it’s one little factor that causes people to buy a product with many features, such as a new car. They all have basically the same features, and a new computer feature or a fancier radio is not likely to be the demand driver for a Mercedes Benz, but, of course I’m using simple examples. But the thing I want to stress is the Entire Market Value Rule is an exception. It should not arise in every case and it arises far too often.
Stout Journal: That’s a very helpful set up for my next question. Some recent Federal Circuit decisions seem to indicate that the patented technology or feature has to be the sole basis of demand for the larger product to fit within that exception. However, other decisions haven’t been quite as clear, suggesting that the patented feature could be a part of the demand, and not necessarily the sole basis of demand. Is there a distinction that the Court is trying to make there?
Chief Judge Rader: I don’t think we’re trying to ease up on the basic rule that this has got to be the source of the demand. Now, if it’s 90 percent of the demand, we would probably all agree that’s the source or pretty close – it’s as close as anything gets to being a source. So I suppose that we should, we could recognize a primacy rule or something, but this is what’s driving demand. I kind of like that way of discussing it, “driving the demand,” which would allow some subsidiary demand components, but the driver is the claimed invention.
Stout Journal: So, as it relates to determining what is the driver of demand, there are various sources of information that experts can rely on to show that or establish that, one of which is just from the case documents in discovery. Another source would be surveys. Do you have or does the court have an opinion or a view on the use of surveys to determine what’s driving demand?
Chief Judge Rader: I’ve had survey evidence in a few of the cases I’ve tried, and I’ve never found it to be as definitive or convincing as it is put forth to be. Of course the best evidence would be: Here was our market sales, we incorporated the patented feature, and the next month it jumped and every month thereafter. Of course, that doesn’t happen very often. It’s never quite that clean. But I guess I would prefer to have market evidence rather than survey evidence. Surveys can be subject to biases based on the way the questions are presented, but I would prefer a sounder regression analysis that strips away the rest of the features and says here’s what this feature is driving.
Stout Journal: Just to follow up on the types of market evidence that you would prefer to survey evidence, can you
give us an example?
Chief Judge Rader: Yes, I’ve always had the sense that if I could, for example, put a company’s chief financial officer or other company witness on the stand, he or she could give me an idea of the value of every feature on their product. I mean somebody has got to be able to do that, right? That’s their business.
And they’ve got to decide which features they put on their products and which they don’t to compete in the marketplace. But I don’t seem to get that CFO or company person testifying with that degree of specificity – that is, the dollar value of every feature which must be in somebody’s file.
Stout Journal: Going back to the issue of the appropriate royalty base, let’s say we have a patent that relates only to a feature of a product and that feature is never sold separately, and given the available information, you can’t isolate the value of the feature. And let’s assume for a moment that we know that feature doesn’t drive demand. So, what, then, is the appropriate royalty base? Historically, I think experts have just said, “Okay. Well, the royalty base will be the entire product, but we’ll apply a very low royalty rate to reflect the fact that the feature is not that important to the overall product.” Is that problematic in your view?
Chief Judge Rader: Yes, it is. I’ve seen this balancing of the royalty rate against the royalty base done a lot. But they are really separate inquiries. And I’d be more interested in seeing the base more reflective of what is the value of that component. And there are ways to apportion the various marketable portions of any machine or even any process from the whole. I’d prefer to see us deal with that base question as it should be, honestly, and then deal with the rental value, the rate, on that basis, and not trying to balance them against each other. I don’t think that’s sound economics. They are two separate concepts.
Stout Journal: So you favor apportionment, if necessary, as a way to determine the appropriate royalty base?
Chief Judge Rader: Yes. And then let’s talk about the rental value of that apportioned component.
Stout Journal: And that apportioned value, the dollar amount that is determined to be appropriate as a base, doesn’t necessarily need to be a saleable unit?
Chief Judge Rader: Well, it’s nice if you get it to some saleable unit because then you’ve got a price. You’ve got something that the market has told you is the value. And it becomes a little less of you guessing what the value is. The markets set the value. So if you can conveniently find an apportionable part, which is also for sale, you’ve got a price, you don’t have to try and estimate it. You’ve got the value right there. And then you can discount that value for the share of that apportioned saleable unit that the claimed invention actually contributes. That’s at least a closer approximation of value than starting with the whole house, and then I’ll tell you that the countertop in the kitchen is a part of that value. Well, yes, but wouldn’t we be much better off talking about kitchens instead of whole houses?
And I realize I’ve got a push/pull thing going on here. I’m talking to you about efficiency and doing things according to the value of the case. And now, all of a sudden, I’m telling you that you’re also going to have to do a lot of work to ascertain what the apportioned component is before you even start on the rental value, which may involve looking at the licenses and other evidence. And so, suddenly, I’m multiplying your efforts on the damages side of the case when I’m trying to tell you to reduce the cost of preparing this case through less discovery and more efficient preparations. I think my answer to that apparent inconsistency is that this is a good investment. If we can properly value the technology, so much falls into place the rest of the way. Settlements are more easily achieved, that’s easy, but also just the procedure that we use to try the case can be tailored, the issues can be focused. And so I think every investment in the valuation end of the case is a good investment of our trial preparation dollar.
Stout Journal: I think this is probably a good segway into the next area we want to talk about – the consideration of non-infringing alternatives.
Chief Judge Rader: That’s very important.
STOUT JOURNAL: Do you consider it to be the burden of the patent owner, the alleged infringer, or is it a combination of both parties?
Chief Judge Rader: It’s going to be both parties. Both parties are going to have to be involved in this analysis, because this will be one of your best value indicators. The market is telling you what you could do without infringing. Well, that’s kind of a ceiling, or something close to a ceiling, because they could always switch over and do that. So you add the switching cost, time, et cetera, plus that ceiling, and you would get some kind of a feeling for what the alternative is to infringement.
Stout Journal: Sometimes the first time you’ll hear about asserted non-infringing alternatives is in the rebuttal technical and damages expert reports. So, do you believe that it is appropriate to start to address the issue of discovery of non-infringing alternative in expert discovery?
Chief Judge Rader: Well, it would strike me as sounder methodology to deal with them as a part of the case in chief. They are really a central part of the valuation exercise. I think Grain Processing taught us that, didn’t it? Right back to that very important case where the non-infringing alternative wasn’t even on the market, but it was known and it was known you could shift to it. And that became a key component of the resolution of the value of the patented technology in the case.
Stout Journal: You would prefer not to see, for instance, a patent owner put his head in the sand and say, ‘I’m not aware of any alternatives,’ and then wait for the defendant to say, ‘Well, here are the alternatives’?
Chief Judge Rader: If I heard that on the stand, if I was in front of a jury, I wouldn’t say anything, but I can tell you what would echo in my head, and that is: There are always alternatives. Demand curves slope downwards. I’ve just said in two different ways the same thing, as you economist types know: There are always alternatives. When I teach this in my class I always say: Are there ways to make a car where you would never die if it had a crash? Is there an alternative there? And the answer is: Yes, it would be a tank that would travel at 10 miles an hour and it would be armored, and if it hit even a building you wouldn’t be hurt inside. But, now, there are some tradeoffs, of course.
Stout Journal: Maneuverability?
Chief Judge Rader: Yeah, you need to move a little quicker.
Stout Journal: Costs.
Chief Judge Rader: And you need a parking place, exactly. Well, there are always alternatives, always alternatives, but you economists know that. It’s the lawyers who have to sometimes be reminded of that.
Stout Journal: Now, given that there are always alternatives, in terms of costing these alternatives, which is an important part of this analysis, once you’ve established that they are available and acceptable, do you believe this costing analysis should be done by a damages expert, a technical expert, or a company fact witness?
Chief Judge Rader: It’s probably a combination of all three, isn’t it? You’re going to need the damages expert to give the value after the facts have been established. The witness shows that it is a substitute, or to what extent it’s a substitute. And now the word there that you are supposed to throw back at me at this point is the word “acceptable.” We have some case law that says that only the infringing device itself is acceptable. That is true as a legal matter. It is not true as an economic matter. There are non-infringing alternatives which would be acceptable substitutes. And so the economics of that do not limit acceptability to just infringement, infringing articles.
Stout Journal: Okay. And then getting back to our favorite case, Grain Processing.
Chief Judge Rader: Oh, good.
Stout Journal: In that decision the Federal Circuit stated that “a fair and accurate reconstruction of the but-for world must also take into account, where relevant, alternative actions the infringer foreseeably would have undertaken had he not infringed rather than just leave the market altogether if it can compete in some other lawful manner.” And, given that, do you think it’s appropriate to consider non-infringing alternatives that would be available through some kind of further wrongdoing such as breaching a contract or infringing somebody else’s patents?
Chief Judge Rader: We had a case not long after Grain Processing, a couple of years – and I’m trying to remember the name of it – where we did not consider an alternative because it wasn’t a readily available substitute. It would have taken years and vast amounts of effort to convert to that different methodology. And that took it out of the category of a substitute. I think the same sort of reasoning would apply in the case of something which is illegal, an illegal substitution is a 15-yard penalty, you know, you don’t get to throw touchdowns to a receiver that was illegally substituted. You’ve got to have something which is acceptable, and here acceptable does have a meaning. In the long run we are looking for the best and most reasonable estimate that you can give us based on all the economic factors within the scope of the claimed invention. That has to be – I guess, the emphasis point there was “reasonable.”
Stout Journal: Okay, changing gears a little bit. If you could provide advice to lawyers and damages experts who are presenting damages evidence or testimony for your review, what would that advice be?
Chief Judge Rader: Well, the area that I see the most difficulty around is identifying these comparable licenses. And there’s a corollary to that. It’s getting your hands on all the licenses, too. I have a feeling the licenses are not provided as prolifically as they occur. There are many reasons for that: Trade secrets, settlement agreements, and a variety of other things. But to make this work, we have to have the widest possible sampling of the market and then we have to have some sophistication in valuing the likeness and the dissimilarity of these comparables. So that’s where the challenge of your profession is most acute.
Stout Journal: Do you expect to continue sitting by designation in district court patent cases?
Chief Judge Rader: Yeah, but right at the moment I’m a little busy as the Chief Judge. Although, you know, Judge Bryson is sitting by designation in ED Tex. He kind of filled my slot there this year. And I hope to encourage some of my other colleagues to follow his example. But the answer is, yes, I’ll get back there again, but right now I don’t have time for it.
Stout Journal: I’m just curious. Was there anything you learned as part of sitting at the district court level?
Chief Judge Rader: Oh, absolutely – that if I was king of the world I’d make every appellate judge serve for six months as a trial judge before they could come to the appellate bench just to realize how hard it is to accumulate a record and how hard it is to narrow issues and how many competing views there are on every subject. It gives you a better appreciation for what you are doing on appeal when you have had to put together a record as well as just read one.
Stout Journal: All right. We’ve got a couple of softballs for you to finish up here. As Chief Judge of the Federal Circuit you have undoubtedly heard some interesting arguments during appellate proceedings. Can you share some of the most unusual, creative or bizarre arguments that you’ve heard.
Chief Judge Rader: You know, most of those stories would be negative stories. The good appellate argument is really not an argument at all, and it certainly isn’t a stage play or a histrionic exhibition. It’s a conversation. I don’t know if you’ve been down to our courtroom, but we’ve put the podium within inches of the bench so that when you’re appearing before the Court you are close enough just to talk to us. And that’s what makes an effective argument, when you are able to just converse and carry on an informative, high-level conversation about your case. “Bizarre” was one of the words you used. The bizarre occurs when people try to use graphics and demonstratives and different techniques which are more suitable for a jury and a trial. We’re a very low-key conversational institution.
Stout Journal: Good. You’ve served on the Federal Circuit now for over 20 years.
Chief Judge Rader: Ouch. You aren’t going to put that in there, are you?
Stout Journal: To date, what do you consider to be your greatest accomplishment on the court?
Chief Judge Rader: I don’t know. Someone else is going to have to give that answer.
Stout Journal: What are you most proud of?
Chief Judge Rader: Well, I’m proud of the close relationship that the Federal Circuit has had in the last few years, how, even as the personnel of the Court has changed, the Court’s character has not. We’ve maintained a continuity in a time of change. And I don’t think I get to take any credit for that because that’s really a function of all of my colleagues and their magnificence, but I am very proud of the Court in the way that it continues to be the Federal Circuit.
Stout JournalL: What else do you have on your to-do list as Chief Judge?
Chief Judge Rader: Well, we talked a little bit about that discovery order that we hope will bring a little more efficiency to the greatest weakness of the American adjudicatory model. We simply have to be more efficient. In that same vein, the advisory council, I give them great credit for their work on that e-discovery model order. They are now pursuing another model order with the assistance of a half dozen top district judges, a model order dealing with appropriately narrowing issues. And so that is another effort to bring economic efficiency to our discipline. So I’m talking your language. I’m trying to impress you with your own arguments here.
Stout Journal: Excellent. In the future, after you’ve completed your service to this Court and this country, what would you most like to be remembered for?
Chief Judge Rader: A couple of my rock performances.
Stout Journal: If you time it right, we can actually put a couple of venues and the timing in the article as a promotion.
Chief Judge Rader: Actually, yeah, the band is going out to Indiana next month, and we’ve got a few other performances. We are working up a couple of our own numbers and we’ll be in touch – I’ll be back in touch with you when “Rolling Stone” puts us on the cover. I didn’t deal with your question very seriously, but, again, I hope I am remembered as a good judge.
Stout Journal: Excellent. Thank you for sharing your time with us. We appreciate your thoughtful and candid responses.