Edgar Explores Entropy in Patent Damages

Staff Attorney Craig Edgar has authored an article for the Drake Law Review on patent infringement damages. "Struggling Against Entropy: Monetary Patent Infringement Damages After eBay" features the following abstract:

“Just as the constant increase of entropy is the basic law of the universe, so it is the basic law of life to be ever more highly structured and to struggle against entropy.”

Abusive patent litigation is currently one of the biggest topics in patent law. The Federal Trade Commission issued a report on the economic damage caused by patent trolls in October 2016, and the Federal Reserve Bank of St. Louis issued a working paper in 2012 arguing the nation should eliminate the patent system entirely. The power of Congress to create a patent system appears in the Constitution and the First Patent Act was passed in 1790. How did a system that began 225 years ago reach such a crisis stage?

This Article argues that more than 200 years of court decisions and statutory changes have introduced bits of entropy that magnified over time. Early U.S. Supreme Court decisions reveal Justices understood that there was a difference between patentees having an interest in keeping their monopoly close and those, such as trolls, who merely desire to license. This fundamental differentiation was slowly forgotten as time passed and more patentees filed bills in equity, rather than cases at law, to enforce their patents. Because they were entitled to equity jurisdiction, patentees in equity courts received the equitable remedy of an injunction almost as a matter of course and monetary damages reflected such patentees’ entitlement to a close monopoly through assessing an infringer’s profits. After merger of equity and law, courts began forgetting to first establish entitlement to an equitable injunction before awarding monetary damages based upon an infringer’s profits.

The U.S. Supreme Court case of eBay Inc. v. MercExchange, L.L.C. in 2006 returned the courts to assessing the equitable factors before granting injunctions. However, when awarding monetary damages, the courts still award damages under the Georgia Pacific Corp. v. U.S. Plywood Corp. standards, which include consideration of an infringer’s profits, in virtually all cases. This Article recommends returning monetary infringement damages awards to their historical roots so that when a patent holder does not receive an injunction under the eBay factors, in most cases it is not entitled to consideration of the threat of deprivation under the Georgia-Pacific standards and thus is not entitled to assess an infringer’s profits to determine a reasonable royalty. Instead, such a patentee is limited to valuation of the technology itself. This may include basing a reasonable royalty on license evidence, valuation of comparable technology, or the purchase price of the patent sold on the open market.