In March 2011, the Federal Trade Commission issued its most recent study of intellectual property issues titled,
“The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition” (“The FTC Report”). In 2003 and 2007, the FTC had issued two previous reports focusing on intellectual property issues. 1 These previous FTC Reports provided significant impetus for patent reform currently being considered by Congress. 2
The FTC Report 3 includes several recommendations for adjustments to legal rules and practices governing notice and remedies which it suggests would better align legal rules with competition policy without undermining the patent law’s support for innovation. Some of those recommendations would appear to depart from well-established Federal Circuit precedent.
For example, the FTC Report recommends that courts should reject dual awards of lost profits and reasonable royalty damages when competition from alternatives would have prevented the patentee from making all the infringer’s sales in a world but for infringement. 4 The Federal Circuit has held that:
“under 35 U.S.C. sec. 284, the floor for a damage award is no less than a reasonable royalty and the award may be split between lost profits as actual damages to the extent they are proven and a reasonable royalty for the remainder.” 5
The FTC Report reasons that awarding the patentee reasonable royalty damages in addition to lost profits overcompensates the patentee compared to the market reward for the invention because it ignores competition that the patented invention faced from non-infringing alternatives.
The FTC Report also recommends that courts reject the entire market value rule in both the context of lost profits and reasonable royalty determinations. 6
In lost profits determinations, the FTC Report recommends that:
“courts should reject the entire market value rule as a basis for awarding a patentee lost profits damages based on all infringing sales, and instead require proof of the degree of consumer preference for the patented invention over alternatives.” 7
The FTC Report reasons that the rule’s focus on whether a feature is “the basis for customer demand,” allows only a “yes” or “no” answer to the question. The “all or nothing” focus of the rule prevents courts and juries from giving adequate consideration to the degrees of substitutability that may exist with respect to noninfringing alternatives.
In the reasonable royalty context, the FTC Report recommends that:
“courts should eliminate the entire market value rule and the question of whether the patented feature was the ‘basis for customer demand,’ from the determination of the appropriate base.” 8
The FTC Report recognizes that a wide array of considerations apart from the entire market value rule influence the parties’ choice of a base in actual licensing negotiations. Often for practical reasons, the product may serve as the base even though the patented feature is not “the basis of customer demand.” 9
1Fed. Trade Comm’n & Dept. of Justice Antitrust Div., Antitrust Enforcement and Intellectual Property.
2 S. 1145, 110th Cong. Background and Purpose of the Patent Reform Act of 2007.
3 The FTC Report uses the term “PAEs” to describe patent owners that focus primarily on purchasing and asserting patents. According to the report, the term “NPE” (non-practicing entities) is inappropriate because it includes patent owners that primarily seek to develop and transfer technology, such as universities.
4 Report at 157.
5 Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 2010-1145, 2010-1177 (Fed. Cir. Feb. 24, 2011); Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1554 (Fed. Cir. 1995).
6 FTC Report at 156, 211.
7 Report at 156.
8 Report at 211.
9 Report at 208.