REASONABLE CERTAINTY IN CONTRACT AND PATENT DAMAGES.

• Author: Golden, John M.
• Position: Symposium: Intellectual Property and the New Private Law

TABLE OF CONTENTS I. INTRODUCTION 257 II. PATENT DAMAGES AND PATENT COMMUNITY DISCONTENT 259 A. The Basic Remedies Framework 259 B. Recent Developments in Patent Remedies Law 260 C. Continuing Concerns with Damages Valuation 263 III. UNCERTAIN DAMAGES IN CONTRACT LAW 266 A. The Reasonable Certainty Standard 267 B. The Equity and Pragmatics of Reasonable Certainty 271 IV. REASONABLE CERTAINTY FOR REASONABLE ROYALTIES 273 V. CONCLUSION 277 I. INTRODUCTION

Assessment of "reasonable royalty" damages for patent infringement has become a leading issue in the substance and procedure of modern patent law. (1) Occasional jury verdicts of several hundred million dollars or more have brought cries for reform. (2) On a more day-today basis, judges, attorneys, and damages experts grapple with questions of what methodologies and evidence are acceptable to support reasonable royalty awards in individual cases. (3)

This Article contends that private law decisions and doctrines can provide inspiration for judges' efforts to regulate reasonable royalty awards in patent cases. In particular, the Article focuses on how contract law's demand for "reasonable certainty" with respect to damages can offer instruction on how courts might flexibly regulate proof of reasonable royalties. The basic contention is that, in both situations, a standard of reasonableness of proof allows courts, in addressing the admissibility or sufficiency of evidence, to take into account context-specific factors not currently highlighted by the standard Georgia-Pacific factors for assessing reasonable royalty damages in patent cases. (4) Such context-specific factors include the size of claimed damages amounts, the relative innocence or blameworthiness of the parties, and the potential availability or non-availability of better methods or evidence for developing a damages calculus. Attention to these context-specific factors can enable courts to tailor their approaches to determining the sufficiency or admissibility of evidence on reasonable royalty awards in ways that support proper ex ante incentives to innovate and to patent, deter opportunistic behavior by infringers and patentees, and encourage use of the best techniques and evidence for assessing damages that are justifiable in light of their cost.

The Article proceeds as follows. Part II provides a primer on patent remedies law and continuing concerns with the calculation of reasonable royalty damages. Part III discusses how contract law has used a "reasonable certainty" requirement as a flexible and context-sensitive mechanism for regulating damages awards that can, in general, be only imprecisely assessed. Part IV describes how patent law might incorporate and implement a similar reasonableness requirement to regulate the availability and amount of reasonable royalty damages.

2. PATENT DAMAGES AND PATENT COMMUNITY DISCONTENT

   Reasonable royalty damages are one of the fundamental forms of remedies for patent infringement explicitly made available by the U.S. Patent Act. (5) This Part highlights key aspects of patent remedies doctrine as well as recent doctrinal developments and continuing concerns.

   1. The Basic Remedies Framework

      Reasonable royalty damages are a sort of residual remedy under the U.S. Patent Act. In a series of statutory sections, the Act provides that, as remedies for patent infringement, patent holders may obtain injunctions to prevent infringement, (6) damages awards, (7) enhanced damages increasing a damages award up to three times the amount otherwise assessed, (8) and "in exceptional cases... reasonable attorney fees." (9) The Act's section on damages explicitly presents reasonable royalty damages as a remedial floor that becomes effective when proof of greater damages fails. Specifically, 284 of the Act states:

      Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. (10) Although the extent to which the statutory language on reasonable royalty damages means to guarantee a relatively substantial damages award is disputed, (11) that language might be viewed as consistent with Judge Learned Hand's description of the reasonable royalty remedy as a mechanism to achieve at least a minimal level of justice for a patent owner whose rights have been infringed:

      The whole notion of a reasonable royalty is a device in aid of justice, by which that which is really incalculable shall be approximated, rather than that the patentee, who has suffered an indubitable wrong, shall be dismissed with empty hands. (12) Almost needless to say, Hand's description of this approximation of the "really incalculable" leaves open how a reasonable royalty award is to be assessed--a question with which courts continue to struggle (13) and that is discussed further in Sections II.B and II.C of this Article. But Hand's reference to a reasonable royalty as "a device in aid of justice" and his concern with "empty hands" might helpfully inform modern reasonable royalty analysis. In particular, these aspects of Hand's description can be understood to support Part IV's argument that relative blameworthiness and practical evidentiary difficulties should factor into the nature of a court's demands for proof of a specific value for a reasonable royalty.

   2. Recent Developments in Patent Remedies Law

      The first decades of the twenty-first century witnessed concerted efforts by industry incumbents to rein in the remedies available to so-called "non-practicing" patent holders, patentees who do not directly exploit the patented invention or substantial analogs through the manufacture, sale, importation, or use of goods or services. (14) Although Congress was a prime target of these efforts, (15) adjustments to the law on patent remedies or its manner of application generally came through the courts. In a 2006 decision in eBay Inc. v. MercExchange, L.L.C., (16) the Supreme Court embraced a "four-factor test" for permanent injunctions that explicitly places the burden on a patent holder to justify an injunction even after prevailing on questions of patent infringement and validity. (17) The Federal Circuit understood this test generally to obliterate a prior presumption in favor of granting such relief. (18) Meanwhile, in 2007, the Federal Circuit clamped down on the availability of enhanced damages by holding "that proof of willful infringement permitting enhanced damages requires at least a showing of objective recklessness," (19) although the Supreme Court later held that this requirement overly restricted the availability of enhanced relief. (20) Finally and without contradiction as of 2016, the Federal Circuit issued a series of decisions tightening the evidentiary standards for establishing the value of reasonable royalty damages. (21) These decisions emphasized constraints on the use of expert testimony to support such damage awards, (22) made clear the Federal Circuit's willingness to overturn jury-determined damages as excessive, (23) and abrogated a "25% rule of thumb" that various district courts had used to treat a default portion of an infringer's profits as the starting point for reasonable royalty assessment. (24) Even more specifically, the Federal Circuit has held that (1) previously contracted licenses used as a basis for assessing a reasonable royalty must be shown to have substantial comparability (25) or be accompanied with testimony "accounting for... distinguishing facts," (26) (2) a patentee may not generally use as the base for calculating reasonable royalties the "entire market value" of a product or process in which the patented invention has only a cameo role, (27) and (3) in such situations, the patentee instead must often use as the base the value of the "smallest salable patent-practicing unit," the smallest salable portion of the overall accused product or process that embodies or performs the patented invention. (28)

      Nonetheless, the Federal Circuit and district courts have continued to demonstrate a willingness to allow parties to fudge certain aspects of the reasonable royalty calculus. Even after tightening the standards for proving reasonable royalty amounts, the Federal Circuit has emphasized that "[a] party challenging a jury's verdict on damages must show that the award is, in view of all the evidence, either so outrageously high or so outrageously low as to be unsupportable as an estimation of a reasonable royalty." (29) The Circuit has noted that "estimating a reasonable royalty is not an exact science" and that "there may be more than one reliable method" for making such an estimate. (30) Although many lament the courts' continued reliance on an unwieldy list of fifteen so-called Georgia-Pacific factors in assessing reasonable royalties, (31) continued invocation of this laundry list might further indicate courts' commitment to flexibility in seeking to combine containment of damage amounts with assurance that, when a patentee establishes a substantial pattern of infringing conduct, there generally will be some legally acceptable means to support a more than nominal patentee recovery. (32) As Part III shows, this combination of a demand for restraint and a commitment to context-sensitive flexibility also characterizes substantial chunks of the jurisprudence on contract damages.

   3. Continuing Concerns with Damages Valuation

      The fundamental concern with reasonable royalty calculations is that, even after several years of increased scrutiny and new instruction from the courts, they remain enmeshed in massive methodological and quantitative uncertainty. With patent licenses generally held secret, much activity relating to patent valuation remains confidential and effectively inaccessible for parties and courts looking to assess the value of individual sets of...