On Tuesday, June 17, 2014, law professor Mark Lemley of Stanford University will headline a panel discussion about the phenomena of rising patent damage awards. The panel discussion will be available by webcast for free for those who register.
In advance of his presentation next week I reached out to Lemley to discuss what is going on and what accounts for the rise in patent damages observed in the Lex Machina report that will be released in conjunction with the panel discussion. I reached him yesterday at his office, and our conversation lasted approximately 30 minutes.
My first question to Lemley was why are patent damage awards increasing? Is this in response to any particular case or event? “An interesting question,” Lemley responded. “There is not a recent case that extends the scope of damages; if anything most of the cases seem to be moving in the opposite direction, such as doing away with 25% rule, for example.”
I would have to agree. I don’t believe any Federal Circuit or Supreme Court cases over the last year or two have made it more hospitable for patent owners seeking hefty damages. Indeed, it seems that the Federal Circuit has seemed to make it more difficult to achieve high damage awards. Lemley agreed: “Even as we are seeing the law get tighter we are seeing an increase in damage awards.”
Of course, when comparing damages year to year it is difficult to account for all of the variables that would influence the pool given the relatively small size of the sample from a statistical standpoint. For decades the number of patent trials has remained largely constant, hovering around 100 cases that go through to verdict a year. That being the case, when there are large verdicts in one or more cases in any particular year the averages can become easily skewed.
There was certainly some skewing of the data at the top end due to a $1 billion award to Monsanto in a case against DuPont dealing with genetically modified seeds. Further, the #2 and #3 cases were Apple v. Samsung where Apple won $599 million in one and $290 million in the other. Fourth on the list for 2013 was a $228 million award to Stryker regarding medical device infringement, and #5 was a $140 million award to Tyco Healthcare, also as the result of medical device patent infringement.
“Definitely it is the case that there is a very heavy skew in the data because the biggest awards are always out of proportion with other awards,” Lemley said. “Exceptional cases at the top end count for a substantial amount of the awards being given out every year… people are aiming for the big award, but the normal awards are not all that high.” It should be noted that Lemley was using the term “exceptional cases” in the everyday sense of the word, not in the technical legal meaning that might conjure up thoughts of attorneys fees under 35 U.S.C. 285.
Despite the fact that the damage awards in the typical patent infringement case are “not all that high,” as Lemley puts it, he did point out that “normal awards are going up, but it is not wildly out of proportion.”
Thus, the Lex Machina data, which will be released on June 17, 2014, as part of the panel discussion, shows that not only are the top line damage cases growing, but the typical patent infringement damages are increasing as well, albeit by far more modest amounts than those eye-popping damages awarded to Monsanto, Apple or even Stryker. Something must account for the increase, but what is that something?
“One thing that we have seen is a move away from lost profits,” Lemley explained. “15 or 20 years ago lost profits is where people thought you would get the big awards, but the shift to arguing for reasonable royalties has been growing.”
Frankly, the way that many plaintiffs argue damages has always amazed me, and this shift to reasonable royalties at least somewhat vindicates my long held position. The law on lost profits makes it extremely difficult for a patentee to prevail, although historically lost profits has been where big awards have come. Still, reasonable royalties are guaranteed as a minimum for a victorious plaintiff. I have long believed that spending more time making a compelling reasonable royalty case and painstakingly establishing the reason a reasonable, yet high royalty would pay dividends. I suspect this is particularly true in a world where there are over 7 billion people and counting, and by some estimates the number of mobile phones is predicted to surpass the number of people on the planet by the end of 2014. There were over 1 billion smartphones purchased in 2013. The sheer numbers of devices that can infringe are staggering.
Despite the overall rise in patent damage awards, Lemley singled out a few district courts during our conversation. “Even going all the way back to 2000 the Eastern District of Texas dominates in terms of the size of awards, totaling over $19 billion since 2000,” Lemley said. “Comparing the Eastern District of Texas to other courts, the others aren’t even close. The next is Western District of Pennsylvania, which comes in at $7 billion since 2000, and Delaware is at just over $2 billion total since 2000.”
Surprisingly, Lemley says that the median award in the Eastern District of Texas and Delaware are pretty close, in the $18 to $20 million range, which suggests a lot more higher end awards from the Eastern District of Texas. “The median for most other courts is below $2 million.”
But what does this mean for the future? How can companies who are the targets of patent infringement lawsuits come up with a strategy when the biggest concern has to be the small handful of cases a year that result in eye-popping damage awards? Lemley agreed with me when I said that the numbers really suggest that in-house counsel have to be afraid and vigilant because you never know which case will turn into the big one.
Lemley also pointed to one potential downfall for both plaintiffs, defendants and the system as a whole. He called it “the Lottery effect.”
“The more people that come in with an unrealistic number, having seen giant awards, the more the reaction of the defendants to put their head in the sand and to go into lock down mode if they think they are going to be held up for a large sum of money,” Lemley said. “So you wind up with a vicious circle. For patent owners the only way to get paid is to file a lawsuit.”
It is certainly true that unrealistic expectations can and do cause real problems. It is also true that in many instances large corporation simply cannot (due to policy) or will not (due to desire) entertain licensing patent rights unless they have been sued, as software expert Eric Gould Bear explained to us in our interview. His experience is all too common. Bear explained:
[My company] sued Apple because Apple all but said we can’t negotiate with you unless you sue us. The only emotion to have is sadness, because I’m a huge Apple fan. I learned to program on an Apple ][+ and was an intern at Apple right out of graduate school. In my family – my wife and my kids – everyone’s got a MacBook Pro, everyone’s got iPhones and iPods. We’ve got an iMac on the kitchen wall, a Mac mini for a server, and an AppleTV in the study. I have no negative feelings towards Apple. I’m an Apple shareholder and want everyone to be wildly successful. We also want to be able to find a balance that celebrates synergy between independent inventors and the companies that have the ability to get real products out into people’s hands.
Perhaps the vicious cycle will get worse moving forward, but it is already extremely unfortunate already.
In any event, if you are interested in the Lex Machine 2013 report on patent damages, or you just want to hear the panel discussion that will include representatives of Google and Aruba Networks, you can register for the free webinar by clicking here.