Tesla, Marconi, and the great radio controversy: awarding patent damages without chilling a defendant's incentive to innovate.

• Author: Harkins, Christopher A.
• Position: Great inventor Nikola Tesla

TABLE OF CONTENTS I. INTRODUCTION II. TESLA, MARCONI, AND THE GREAT RADIO CONTROVERSY A. Tesla: The War of Current and the Radio Controversy 1. Patent Royalties Denied 2. Radio Contributions Silenced B. Tesla vs. Marconi: The Supreme Court Voices Its Opinion III. FANNING THE FLAMES OF INNOVATION WITHOUT DOUSING THE INTERESTS OF GENIUS A. The Patent System's Goal of Promoting Innovation 1. Incentives to Innovate 2. Innovation Turned on Its Head B. Litigation Costs that Cool the Fire of Genius IV. REMEDIES FOR PATENT INFRINGEMENT A. Law of Infringement B. Injunctive Relief C. Damages 1. Statutory History 2. Lost Profits D. Established Royalties 1. Reasonable Royalties 2. Reasonable Royalty--Definition V. SIMULTANEOUS DISCOVERY AND INDEPENDENT DEVELOPMENT A. A Novel Theory to Mitigate Damages 1. Pleading Simultaneous Discovery and Independent Development 2. Proving a Prima Facie Case of Simultaneous Discovery and Independent Development 3. Helping a Jury to Visualize Simultaneous Discovery and Independent Development 4. Compensating a Plaintiff While Encouraging a Defendant to Innovate: Because Changing Times Demand It B. Support from Other Areas of Law 1. Obviousness under Section 103 2. The Doctrine of Equivalents 3. Copyrights and Independent Creation 4. Trade Secrets and Independent Creation VI. CONCLUSION I. INTRODUCTION

Advocates of the patent system generally see it, in one shape or another, as a way to encourage an inventor to innovate. (1) They might argue that no less than the United States Constitution supports this lofty goal by granting the inventor a monopoly over an invention for a number of years. (2) And should others trespass upon the metes and bounds of the plaintiff's monopolistic intellectual property, (3) surely the trespass should lead to an injunction (4) and damages (5) against the infringer, and possibly attorneys' fees. (6)

While calls for damages mount, (7) presumably to promote innovation in the name of the plaintiff, (8) calls have not been made to recognize that runaway juries and their verdicts can in fact stymie innovation of the defendant. Yet, controlling the costs of infringement by recognizing the reality of a defendant's simultaneous discovery and independent development ought to be considered as a means of encouraging--not some, but all--innovation by both the plaintiff as well as the defendant, while allowing companies to compete effectively in the marketplace.

Notably, leading commentators have only addressed the purpose of patent law from the patentee's perspective. (9) Failure to consider innovation from the defendant's perspective, however, serves a negative function and leads inexorably to a patent system that discourages investment in research and development.

For instance, consider a pharmaceutical company faced with a decision to invest in a new technology, such as an innovative drug that would foster the high standard of living in America and help developing countries in need of better medicine. Investments of time and money have been estimated to reach twelve years (10) and $800 million, (11) respectively. This means that for more than a decade a second company may discover, intentionally or unwittingly, a similar drug. Since United States patent applications are generally preserved in confidence, (12) the pharmaceutical company might not even know the second company filed a patent application until served with a cease-and-desist letter or a complaint alleging patent infringement based on a broadly worded "blocking patent" (13) seeking to prevent the pharmaceutical company from offering its innovative drug.

Has the pharmaceutical company been encouraged to take investment-based risks?

It is only fair that a plaintiff be rewarded for inventions. It is equally fair, but ignored, that the patent system should encourage all inventors (not just a plaintiff, but also a defendant) to risk investment in research and development (R&D) in pursuit of inventions that benefit society. The policy considerations in favor of promoting the sciences deserve the same respect when achieved by the defendant as when achieved by the plaintiff.

As one contemplates the patent system in general, and the impact that patent damages have on that system in particular, one should not lose sight of the price paid for innovation. Patent damages encourage a plaintiff to invent, but not without public costs. (14) When a plaintiff's right to exclude is blindly followed without regard to a defendant's legitimate, independent efforts and successes in developing the same or equivalent invention, society's goal of encouraging research in areas such as public health is jeopardized. Indeed, many achievements have not always resulted in immediate success, but oftentimes have resulted in expensive undertakings and long-term investments.

Moreover, while companies are slowed by plunking down hefty sums in R&D necessary to develop innovative products, a new breed of plaintiffs is not being slowed by any R&D budget, because they have none. Instead of commercializing products, these plaintiffs buy up patents (oftentimes older paper patents), wait for the technology and industry to grow up around the patents, and then use the patents as a holdup device for extorting money from manufacturers of purportedly related goods. (15) These plaintiffs ushered in the era of "patent trolls." (16)

To many, the damages claimed by patent trolls too often bear little relation to the value of the asserted patents. (17) A patent troll generally cannot rely on a lost profits theory of damages, (18) and must rely on a damage theory of an established royalty (19) or, in the absence of an established royalty, (20) a reasonable royalty based on a hypothetical licensing negotiation prior to infringement. The purpose of reasonable royalties is twofold. Congress set reasonable royalties as the floor for placing patent owners in as good a position as they would have been had the infringer entered into a licensing agreement. (21) Furthermore, without reasonable royalties, an infringer would have nothing to lose, and everything to gain, by infringing a patent with impunity in cases when a patent owner cannot prove lost profits or established royalties. But because the Federal Circuit has held that a reasonable royalty rate need not guarantee a defendant any profit, and could even result in significant losses if the defendant sells the product, (22) some commentators argue that reasonable royalties are "completely unmoored from their original purpose" (23) and allow a patentee to extract far more than what it would in an actual arm's length negotiation. As a consequence, fact-finders receive little concrete guidance in arriving at a reasonable royalty, often resulting in damage awards that are "at best arbitrary and at worst punitive." (24)

A patent "thicket," one that ensnares a plaintiff's patents and defendant's accused products, exacerbates the problem. A thicket exists when many overlapping patents held by different entities "cover actual commercial products. So, a company desiring legitimately to launch a product cannot do so without getting multiple licenses, which may be difficult because of unreasonable independent demands--or because it is too difficult to determine which of the patent 'thorns' in the thicket endanger the product." (25)

Therefore, in assessing damages, due emphasis ought to be given to the defendant's simultaneous discovery and independent development. Until that evidence is considered as a mitigating factor to cap patent damages, the goal of fostering innovation will be frustrated, and the result will be fewer research dollars and a loss of advancements in science. The loser will be not only the public but also the nation's economic vigor.

To stay competitive in the 21st century, stimulate invention of new products, and innovate ways to save and improve lives, the competing goals that favor a plaintiff's interests, a defendant's incentives, and the public good must be harmonized. As shown below, a path toward harmonization might be through the law of how damages for patent infringement are measured. Specifically, the plaintiff should meet its burden of proving actual damages, thereby guaranteeing a plaintiff adequate compensation for any trespass. (26) The burden then should shift to the defendant to prove that the accused product was the result of its simultaneous discovery and independent development, e.g., concurrently conceiving and producing the accused product by working independently of the plaintiff's disclosed invention.

Part II puts forth the problem against a backdrop of Tesla, Marconi, and the great radio controversy. Part III provides a background discussion on the rationale of the patent system to encourage innovation. It also explores a public interest rationale for challenging so-called "low quality patents," (27) which hurt scientific advancements by diverting resources away from research and to the courtroom. In addition, it offers an overview of the staggering costs of patent litigation that can cut against a defendant's incentive to test the validity or boundaries of even a low quality patent. Part IV discusses the calculation of patent damages, and a brief history of patent statutes relevant to measuring damages. Part V constructs an analysis of the "simultaneous discovery and independent development" consideration that might prove more useful, and more doctrinally satisfactory, to the goals of the patent system when assessing damages, while borrowing from well-established patent, copyright, and trade secret principles as support.

2. TESLA, MARCONI, AND THE GREAT RADIO CONTROVERSY

   July 10, 2006, marked the 150th birthday of the great inventor Nikola Tesla. What a story it would be if one could imagine a world without Tesla. Yet, he is hardly a household name, and the name "Tesla" to some may even conjure up images of a heavy metal rock band. (28) Notwithstanding his lack of...