Ending Unreasonable Royalties: Why Nominal Damages are Adequate to Compensate Patent Assertion Entities for Infringement

According to § 284 of the Patent Act, damages for patent infringement are supposed to be compensatory. The statute only allows for recovery of “damages adequate to compensate for the infringement.” Even though it qualifies that such damages must be “in no event less than a reasonable royalty,” this language cannot be read to avoid the fundamental requirement that, as compensatory damages, any recovery must stem from actual harm suffered by the patent owner. Absent proof of actual harm, only nominal damages should be recoverable. Yet patentees who suffer no actual harm are regularly obtaining considerable amounts of money from alleged infringers as purported reasonable royalty damages. This state of affairs reveals a need to correct the course that damages law has taken. The most prominent group of patent owners receiving windfalls instead of compensatory damages are patent assertion entities (“PAEs”), also known as “patent trolls.” While there are other situations where patentees are not actually harmed by instances of infringement, PAEs’ business models and damages theories best highlight how existing damages law is being misread and exploited to support widespread overcompensation for infringement. * Daniel Harris Brean is an intellectual property attorney at The Webb Law Firm in Pittsburgh, PA, where he works primarily on patent litigation matters relating to computer network systems and e-commerce technology. Dan has defended more than a dozen online retailers in patent infringement lawsuits brought by patent assertion entities. He is a former law clerk to the Honorable Jimmie V. Reyna at the United States Court of Appeals for the Federal Circuit. He graduated in 2005 from Carnegie Mellon University with a BS in Physics and received his JD cum laude in 2008 from the University of Pittsburgh School of Law, where he received the Faculty Award for Excellence in Legal Scholarship and the ABA-BNA Intellectual Property Law Award. Dan is also an adjunct professor, teaching patent law, at the University of Pittsburgh School of Law. † I am tremendously grateful to those who helped me build the foundation for and improve this article. I owe special thanks to Janice Mueller, Bryan Clark, and Christian Ehret, whose comments on earlier drafts of the piece were invaluable. This article also benefitted greatly from various discussions I have had concerning patent infringement damages with J. Derek McCorquindale, Kent Baldauf, Jr., Anthony Brooks, James Bosco, Jr., Steven Johnston, Lee Cheng, W. Christopher Bakewell, and Raji Seshan. The views expressed in this article, as well as any errors, are solely my own and should not be attributed to The Webb Law Firm or any of its clients. Questions and comments are welcome to dbrean@webblaw.com. 868 Vermont Law Review [Vol. 39:867 PAEs are exclusively in the business of patent assertion, seeking to license their patents via actual or threatened litigation. They make and sell no products or services themselves, having no capacity or infrastructure to do so, nor do they partner with technology companies to develop and bring their patented products or services to market. Having no actual or prospective direct or indirect market participation relating to the technology, PAEs suffer no pecuniary loss from infringement—they are no worse off than they would be if the infringement had never occurred. PAEs are only legally harmed, not actually harmed, by infringement. The business model of PAEs is lucrative because of the erroneous assumption that substantial reasonable royalty damages must be awarded for any infringement. The statutory language allowing for damages “in no event less than a reasonable royalty” has been twisted and expanded, especially by PAEs in recent years, far beyond its strictly compensatory origin. PAEs emphasize improper restitutional facts instead of compensatory ones to unduly inflate their supposed damages—i.e., they focus on the benefits to the infringer instead of the harm to themselves. They also draw analogies to common law trespass principles to suggest that, just as a trespass interferes with a landowner’s use of real property, substantial damages are owed to patentees merely because they own the patent and the patent was infringed. When properly examined, however, these common law principles reveal that the analogy would support only nominal damages for such legally harmful but actually harmless trespasses. Nothing in the legislative history of the reasonable royalty statute suggests that a reasonable royalty was required to be a substantial sum. With no evidence that Congress intended a reasonable royalty to be substantial or have a special meaning, under the plain meaning of the statutory text a royalty should be deemed reasonable simply when it constitutes sensible and fair compensatory relief. This allows for case-bycase findings of actual damages without artificial legal constructs that distort the meaning of § 284. Under this fresh reading of the statute, patent owners who suffer no actual harm from infringement would be entitled to recover nominal damages only. In some cases, such as those brought by PAEs, a nominal royalty is reasonable. 2015] Ending Unreasonable Royalties 869