Damages for indirect patent infringement.

• Author: Karshtedt, Dmitry
• Position: Abstract through IV. Evidentiary and Atomistic Approach to Indirect Infringement Damages A. Lucent's Evidentiary Approach, p. 911-944

Abstract

In many patent infringement cases, the only practical way that the plaintiff can obtain relief is on a theory of secondary liability, which is generally referred to as indirect infringement. The remedy in patent cases frequently includes damages for past infringement. Because jury verdicts in patent cases can amount to hundreds of millions of dollars, patent damages have become a hotly litigated issue. Nevertheless, much to the frustration of the litigants in these high-stakes lawsuits, the courts continue to struggle to clarify how damages for indirect infringement should be determined.

The Court of Appeals for the Federal Circuit, which has exclusive appellate jurisdiction over patent cases, has deepened the confusion over calculating damages. Two opinions from the Federal Circuit have made contradictory pronouncements on the issue of accounting for proven acts of primary (i.e., direct) infringement in determining damages for indirect infringement. Lucent Technologies, Inc. v. Gateway, Inc. held that the extent of directly infringing use of the patent should be viewed as one of many pieces of evidence for measuring the extent of damages ("the evidentiary approach "). In contrast, Cardiac Pacemakers, Inc. v. St. Jude Medical, Inc. endorsed a rule that enables trial judges to limit damages as a matter of law to proven, enumerated acts of direct infringement of the asserted patents ("the atomistic approach ").

The conflict between the two approaches raises fundamental, unanswered questions concerning the relationship between patent infringement and ordinary torts. This Article fills a gap in the literature by identifying, and working toward unraveling, one of the puzzles of indirect infringement. Specifically, it examines what the legal fiction of formally

imputing an act of one entity to another--an important tenet of secondary liability in tort--means for patent damages. The answer is surprising: the atomistic approach is consistent with the principles of tort law, but is at odds with well-established, general rules for determining patent damages. Conversely, the evidentiary approach seems to ignore tort law's imputation principle and embodies the pragmatic, patent-specific damages rules that the atomistic approach eschews. This Article resolves the tension in favor of the evidentiary approach and explains that considerations of policy, logic, and precedent support a damages analysis that reflects fundamental differences between patent law and tort law.

Table of Contents I. INTRODUCTION II. PRINCIPLES OF INDIRECT PATENT INFRINGEMENT A. The Direct Infringement Element B. The Intent Element C. The Act Element D. Putting It All Together III. PRINCIPLES OF PATENT DAMAGES A. The Patent Act, Reasonable Royalty, and Lost Profits B. Reasonable Royalty: Hypothetical Negotiation, the Book of Wisdom, Royalty Rate, and Royalty Base 1. Basic Principles 2. Summary and Implications IV. EVIDENTIARY AND ATOMISTIC APPROACHES TO INDIRECT INFRINGEMENT DAMAGES A. Lucent's Evidentiary Approach: The Probative Value of Proven Acts of Direct Infringement for Indirect Infringement Damages 1. Background and Infringement Liability 2. Reasonable Royalty Damages B. The Atomistic Approach of Cardiac Pacemakers 1. Background 2. Limitation of Damages 3. Tension with Lucent V. EVALUATING THE EVIDENTIARY AND ATOMISTIC APPROACHES A. Pragmatic Reasons for Adopting the Evidentiary Approach 1. The Atomistic Approach Is More Likely To Lead to Error and Confusion 2. The Atomistic Approach Is in Tension with the Ex Ante Georgia-Pacific Hypothetical Negotiation Framework 3. The Evidentiary Approach Correctly Frames the Relevant Facts in Motions To Limit Damages as a Matter of Law B. Theoretical Reasons for Adopting the Evidentiary Approach 1. Indirect Patent Infringement Is Different from Secondary Liability in Other Areas of Tort Law 2. The Evidentiary Approach Properly Tracks the Scope of the Patent Right VI. CONCLUSION I. INTRODUCTION

Secondary liability in various areas of law, sometimes also called "indirect liability," (1) entails holding a party liable for the wrongdoing of another, "primary" actor--the person who actually performed the offending act. (2) One familiar example of such liability is vicarious liability, which is derived from a special relationship (e.g., agent-principal or employee-employer) between the primary actor and the entity on which such liability is imposed. (3) In contrast, certain affirmative acts that aid and abet, encourage, induce, or otherwise facilitate the commission of a tort by the primary actor provide another, distinct basis for secondary liability. (4) Whatever the basis, the law treats the indirectly liable party as if it were the person who committed the wrongdoing, subject to the same penalties as the primary actor, or "principal"; some courts and commentators explain that the acts of the principal are treated as "imputed" to the aider-and-abettor. (5) Criminal law, for example, may punish an aider-and-abettor to the same degree as the principal. (6) Likewise, tort law impliedly relies on the imputation principle when it treats the secondary actor as jointly and severally liable to the plaintiff along with the primary actor. (7)

The law of patent infringement, a cause of action that is often described as a species of a property tort, (8) incorporates indirect liability provisions. gSimilar to other areas of law that prescribe such liability, (9) the Patent Act holds indirectly liable those who cause others to infringe or aid in the commission of directly infringing acts. (10) As with secondarily liable parties in other areas of tort law, indirect infringers are jointly and severally liable with direct infringers (11) to the patent owner. (12) Nevertheless, when it comes to calculating damages for indirect patent infringement, applying the imputation principle can--surprisingly--lead to erroneous results. I argue in this Article that the imputation principle can cause problems when combined with the most established approach for calculating damages in patent law--the so-called "hypothetical negotiation" approach.

There are reasons to be cautious before drawing direct analogies between patent law and tort law. Although common-law principles often motivate the analysis of secondary liability for intellectual property torts, (13) there are many important differences between general secondary civil liability and indirect patent infringement. For example, claims of indirect infringement in patent law, and in intellectual property law in general, (14) are asserted much more frequently and command a significantly greater degree of attention than analogous claims in general tort law. (15) In the well-known case of Halberstam v. Welch, Judge Patricia Wald described secondary civil liability tongue-in-cheek as an area of law where "[precedent, except in the securities area, is largely confined to isolated acts of adolescents in rural society." (16) Although this area of law has surely grown in stature since Halberstam was decided, (17) there is no doubt that in intellectual property law, including patent law, secondary liability is of relatively greater significance than in general tort law. Some of the most important patent, copyright, and trademark cases of recent years have been predicated on theories of indirect infringement. (18) In the area of patents, commentators and courts agree that indirect infringement causes of action often provide the patentee with the only effective form of legal recourse and are normatively justified: "[t]he goal of secondary liability is to give patent owners effective protection in circumstances in which the actual infringer either is not the truly responsible party or is impractical to sue." (19)

The fact that circumstances encountered in indirect patent infringement cases can differ quite dramatically from those in secondary liability cases in general tort law underscores this point. In tort law, aiding-and-abetting and inducement cases often involve encouragement or assistance to a specific individual who then goes on to commit an intentional tort. (20) In contrast, a typical scenario in an inducement of patent infringement case occurs when a manufacturer sells a product that includes patented technology and comes with instructions or other tools that direct end users to employ it in such a way as to infringe the patent directly (think of familiar items like Microsoft Word, Microsoft Outlook, and Rubik's Cube). (21) The end users generally have no idea that a patent on the technology exists, let alone that they are infringing it, (22) and are almost never themselves sued by the patent owner. (23) In Lucent Technologies, Inc. v. Gateway, Inc., (24) an important case that I will discuss extensively in this Article, computer users were found to directly infringe the plaintiffs asserted patent, (25) therefore opening the door for the defendants' inducement of infringement liability. (26) The infringing acts constituted selecting appointment dates and times by clicking on Microsoft Outlook's calendar display. (27) Most readers who have used this so-called "date-picker" (28) feature of the Outlook calendar would be very surprised if they were served with a patent infringement complaint.

Given the factual differences and the heightened importance of secondary liability in intellectual property law, the courts sometimes pause before relying too heavily on the formalisms of tort law in indirect patent infringement cases. The sense that the inducer who provides the enabling technology is the real tortfeasor, while the primary actor is something of a passive instrumentality, (29) may explain some seemingly anomalous results

in the arena of secondary liability for intellectual property torts.* 30 For example, in Akamai Technologies, Inc. v. Limelight Networks, Inc., the en banc Court of Appeals for the Federal Circuit (Federal Circuit) refused to impose direct...