Reconfiguring Patent Infringement Damage Assessment Using Quasi Contract

 

Author: Shauli Bar-On, J.D. Candidate, 2023

INTRODUCTION 

Any first-year law student will be able explain three basic measures of contract damages: expectation, reliance, and restitution damages. Expectation damages put the promisee in a position he would be in had the contract been completed. Reliance damages return to the promisee the losses reasonably and foreseeably incurred in detrimental reliance of the contract. And restitution damages (also called “quasi contract” or “quantum meruit” damages) put the promisor in a position he would be in had he never entered the contract, depriving him of the benefit the opposite party provided him for which he did not adequately pay for. Expectation damages aside, these measures of recovery are applicable to IP infringement. 

IP law involves a myriad of issues, including property rights1, tortious interference with protections of these rights, and quasi contract or restitution calculations2 in cases of infringement. Accordingly assessing damages for infringement has proven to be a difficult task for the courts. The natural question arises: is the purpose of damages in cases of patent infringement to make the patentee whole (as in tort and expectation and reliance contract damages), or is it to prevent unjust enrichment of the infringer (as in quasi contract), or both? I argue that the answer should depend on the circumstances. This note argues for a simpler way to calculate a patentee’s damages and that in general, a patentee should be able to recover (1) actual damages, (2) restitution damages (subject to court’s discretion), and (3) punitive damages (subject to the court’s discretion).

CURRENT LAW

The United States Code already recognizes unjust enrichment damages (in addition to actual damages and, in some situations, punitive damages) for victims of copyright infringement.3

 Similarly, trademark damages law also recognizes such damages.4 In both trademark and copyright infringement cases, plaintiffs must simply prove defendants’ gross revenue, and defendants are charged with providing evidence to make the unjust enrichment damages truly reflect the profits resulting from the infringement and nothing more. 

But patent infringement claims work differently. Patent infringement damages are governed by 35 U.S.C. § 284, which provides in part that “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.” Some courts have capped infringement victims’ damages at “reasonable royalties,” meaning less than full quasi contract recovery. Others have allowed for lost revenue damages.[Mohamed Yusuf M. Mohamed, “Unjust Enrichment for Patent Infringement: A Novel Idea?,” 4 J. Intell. Prop. L. 123 (1996) at 34-37.] 

Following the 1946 amendments to the patent laws, the Supreme Court held that restitution damages had no place in patent infringement.5 The Court held that the legislative history of the amendments show that actual damages can be the only basis for recovery in such cases. However, the Court’s holding is contested among legal scholars. Professor Mohamed Yusuf M. Mohamed, for instance, persuasively argues that the House report discussing legislative amendments to patent infringement statutes explicitly show an intention to allow restitution damages.6

Patent infringement damages are awarded in part through “reasonable royalties,” which many times includes quasi contract principles in its assessment. At least one district7 court has attempted to standardize “reasonable royalties” through a fifteen-factor test. Unfortunately, standardization does not bode too well with fifteen factors. More recently, some courts have explicitly endorsed thinking about reasonable royalties as being quantum meruit in nature.8

PROPOSAL 

I argue that multifactor tests to determine royalties are excessive and courts should instead opt for a simpler configuration of patent damages, one which would explicitly allow restitution as a basis for recovery in certain cases. The targets of my proposal aim to ensure that . . . 

      1. . . .  the damages assessment does not incentivize infringement. If an infringer uses the patent in a more efficient way than the inventor or licensee, the infringer may well gain a profit despite shelling out “reasonable royalties,” particularly if the infringer is not forced to pay the transaction and detection costs. 
      2. . . .  the damages assessment does not undercompensate patentees. Recourse in the civil court system must allow victims of infringement to recover adequately, especially if their business was seriously harmed. 
      3. . . . the damages assessment does not overcompensate patentees, particularly so-called “patent trolls.” If a patentee has no projected profits from the patent, the patentee should not be able to recover more than the transactional costs and the value of the patent in its present state. 
      4. . . .  damages place the patentee in a position as good as before the infringement occurred. This combines tort and contract principles. A patentee suffers harm like a tort victim and is also victim of a breach of an implicit contract not to infringe the patent. 

I propose a clearer interpretation of 35 U.S.C. § 284: treat patent infringement claims as the law treats copyright and trademark infringement claims do. Such an interpretation would allow the patentee to 1) recover actual damages, specifically the patentee’s lost profits and 2) potentially recover unjust enrichment damages subject to the discretion of the judge. To be clear, this new configuration would not require any legislative amendments to 35 U.S.C. § 284. It would simply require a reinterpretation of the statute and a reversion back to a time when unjust enrichment claims were acceptable in patent infringement claims. To illustrate the model’s application, here are three general categories of patent infringement.9

Of course, whether an infringer fits into one of these categories is a question of fact. 

      1. The Willful Infringer. The willful infringer is the most egregious infringer. The Circuit Court in Seagate10 identified two prongs to determine willful infringement: 1) “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,”11  and 2) a subjective prong that the infringer knew or should have known he was acting recklessly12.  These infringers should be required to compensate the patentee and suffer punitive damages. Under the proposed model, the patentee would recover actual damages (lost profit and transaction costs), restitution for the unjust enrichment the willful infringer gained by unfairly using the patent, and, under the court’s discretion, treble damages as currently authorized by statute.  
      2. The Negligent Infringer. The negligent infringer is one “who should have been more diligent about potential infringement.”13 The patentee in such a scenario should recover actual damages (lost profit and transaction costs). To ensure the infringer does not receive a net gain and benefit from infringement despite losing the suit, the infringer should be subjected to pay reasonable royalties to the extent that their unjust profits exceed the patentee’s actual damages. 
      3. The Innocent Infringer and the Patent Troll. The innocent infringer is one who infringes a patent owned by a non-practicing entity or a “patent troll.”14 Similar to the negligent infringer, the innocent infringer should be compelled to compensate the patentee for its damages (transactional costs). If the patentee never intended to produce a product with the patent and thus suffered no lost profits, the patentee’s recovery should be limited to the expected value of the patent. This expected value could be calculated using its probable licensing fee, as Frye propose in her law review article.15 

CONCLUSION 

This note argues that patent infringement cases should be treated more similarly to copyright and trademark infringement claims and thus that courts should explicitly endorse restitution as a basis for recovery. Instead of complicating the damages analysis, I propose that each infringement is classified into one of three categories, and then subjected to a standardized damages assessment. This process yields the most just result for both sides, Further, this reconfiguration of assessing damages does not require any legislative amendments to the patent laws and reflects the true costs of patent infringement.

  1. Despite the Constitution’s Article I Section 8 clause allowing Congress to “secur(e) for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries,” some denigrate IP laws and protections to be part of the ever-expanding bureaucracy and even go as far as dubbing the area of law to be regulatory. Although it was not the Supreme Court’s primary holding, the high court made clear in its dicta that “copyrights are property rights.” Allen v. Cooper, 140 S. Ct. 994 (2020). ↩
  2. At least one circuit court has held that patent claims preempt restitution claims in cases of infringement. See Ultra-Precision Mfg., Ltd. v. Ford Motor Co., 411 F.3d 1369 (Fed. Cir. 2005). ↩
  3. 17 U.S.C. § 504. ↩
  4. 15 U.S.C. § 1117. ↩
  5. Aro Manufacturing Co. v. Convertible Top Replacement Co. (“Aro II”) 365 U.S. 336. ↩
  6. Mohamed Yusuf M. Mohamed, “Unjust Enrichment for Patent Infringement: A Novel Idea?,” 4 J. Intell. Prop. L. 123 (1996) at 34-37. ↩
  7. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). ↩
  8. Judge Posner’s opinion in Apple v. Motorola, 757 F.3d 1286 (2014) held in part that “a royalty is actually a form of restitution — a way of transferring to the patentee the infringer’s profit, or, what amounts to the same thing, the infringer’s cost savings from practicing the patented invention without authorization.” ↩
  9. These are three categories Prof. Amanda Frye described in her law review article: “INEXTRICABLY COMMINGLED”: A RESTITUTION PERSPECTIVE IN PATENT REMEDIES,” Harvard Journal of Law & Technology Volume 26, Number 2 (Spring 2013). ↩
  10. In re Seagate Tech., LLC 497, F.3d 1360, 1371 (Fed. Cir. 2007) ↩
  11. Id. at 1371. ↩
  12. Id. ↩
  13. Id. at 686. ↩
  14. Frye, supra, citing Tom Ewing, Indirect Exploitation of Intellectual Property Rights by Corporations and Investors, 4 HASTINGS SCI. & TECH. L.J. 1, 95 (2012). “Even if the infringer knows the technology was patented, she may not know that the patent has been transferred to the NPE, and she may believe that the patent has been abandoned if the original patentee is no longer manufacturing the patented technology.” ↩
  15. Frye, supra. ↩