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Patent Damages Inflation – The Courts And Microsoft Spearhead The Reform

by Orlando Lopez

The recent Price Waterhouse Coopers report on patent litigation shows the difference between jury awards and bench awards, jury awards being larger. The old standard for patent damages, established by Polaroid, has now been topped, with cases in 2007 and 2009 where the patent damages exceeded $1 billion. The creep in patent damages and the increase in litigation by non-practicing entities (NPE’s-the entities formerly known as “patent trolls”) have been concerns of a number of companies, which are reflected in the patent reform proposals. While patent reform has been slow to move through Congress given the conflicting interests of stakeholders, the courts have been moving to bring rationality to patent damage awards.

The Supreme Court, in eBay v. MercExchange, placed limits on the granting of injunctions that prevent infringers of a patent from making their products. While patent damages are still possible, the CAFC has been steadily moving towards bringing rationality into the patent damage calculation. In Lucent v. Gateway & Microsoft, the CAFC outlined the boundaries and limitations of the “entire market rule” (using the entire market value of a product in determining damages). In the first week of 2011, the CAFC, in Uniloc USA v. Microsoft, held that a general rule of thumb is not appropriate for the damage calculation and that any reasonable royalty calculations must be related to the facts of the case. In retracting the carte blanche acceptance of the 25% rule in patent damage calculation, the CAFC joined other courts that reject “magical incantations” and followed the rational, reasonable royalty calculation approach started in ResQNet v. Lansa. The CAFC, with Microsoft being an actor in more than half of these opinions, has done its part in bringing rationality to patent damage calculations. Hopefully, patent damages will be sufficient to deter infringement, but not so large as to encourage the unlimited mushrooming of infringement actions.

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