قوانین جایگزین آسیب و حقوق مالکیت معنوی احتمالی: غنی سازی ناعادلانه، سود از دست رفته و راه های جبران منطقی تقصیر حق التالیف

This paper investigates how alternative damage rules in patent infringement cases shape competition when intellectual property rights are probabilistic. More specifically, I develop a simple model of oligopolistic competition to compare two main liability doctrines that have been used in the U.S. to assess infringement damages – the unjust enrichment rule and the lost profit rule. I show that the lost profit rule provides more protection to the patent holder than the unjust enrichment rule if the patent holder and infringer are equally efficient. When the lost profits from the infringement cannot be proved, the court accepts a “reasonable royalty rate” that would have been negotiated in a hypothetical bargaining situation as an alternative measure of damage. However, I point out that the concept of “reasonable” royalty rates lacks logical consistency when intellectual property rights are probabilistic.

This paper investigates how different damage rules in patent infringement cases shape competition when intellectual property rights (IPR) are probabilistic. Most of the literature on patent protection assumes ironclad patents and no uncertainty regarding patent claims. 1 The analysis of damage rules in the literature also seems to implicitly assume no uncertainty. However, patents can be challenged in the court, and there is a substantial amount of uncertainty when patents are litigated. According to Allison and Lemley (1998), for instance, approximately 46% of all litigated patents are found to be invalid. To reflect this reality, I develop a simple model of oligopolistic competition that incorporates the probabilistic nature of patents. Patent infringement damages are intended to protect intellectual property rights and compensate for the pecuniary loss that the patent holder has suffered from the infringement. In the US, there are two main liability doctrines that have been used to assess infringement damages. The “unjust enrichment” (UE) rule aims at deterring theft of intellectual property right by punishing the infringer who is required to disgorge all the profits from the infringement. As an example, suppose that the infringer had a profit of 10 as a result of patent infringement. The infringer is then required to pay back its ill-gotten profit of 10 when it is found to have infringed the patent. This doctrine was mainly used in the assessment of damages up until the 1946 Amendment of Patent Act. Since then US courts have shifted towards the “lost profit” (LP) doctrine that is compensatory in nature. It intends to make the patentee “whole” by enforcing the defendant to make up for the difference between the patentee’s pecuniary condition that would have been without infringement and the one after the infringement.2 As an example, suppose that the patent holder’s monopoly profit is 25. If the patent holder has earned a profit of 10 as a result of infringement, the infringing firm has to pay 15 (=25 − 10) to the patent holder if it is found to have infringed the patent. Considering the recent explosion in patent litigation and increasingly important role of intellectual property rights as a competitive strategy, it is important to understand the impact of different damage rules on market competition.3 Even thought there are a long standing interest and extensive discussions on patent damage rules in the law literature, formal and rigorous economics analyzes on this issue are virtually non-existent with the exceptions of Schankerman and Scotchmer (2001) and Anton and Yao (2007). I develop a simple model of oligopolistic competition to compare two main liability doctrines that have been used in the U.S. to assess infringement damages – the unjust enrichment rule and the lost profit rule. More specifically, I consider a duopolistic competition with a patent holder of product innovation/drastic process innovation and a potential infringer. Until recently, the existing literature on innovation typically assumed ironclad patents that are assumed to be valid with certainty and a well-defined scope of protection. In reality, however, most patents issued face a significant amount of uncertainty in terms of their commercial value, validity, and scope of protection. I thus develop a model that explicitly accounts for the uncertain nature of patents.4 In fact, in my basic model, which assumes product innovation and equal production cost, either there is no infringement or the market outcome stays essentially the same as if there were no infringement with ironclad patents under the damage rules analyzed below.5 Both the patent holder and potential infringer are aware of the probabilistic nature of patents and compete in the shadow of litigation in that the amount of damages to be paid in the case of infringement depend on the strategies taken in the market place. The set-up of the model reflects the fact that a significant number of infringements can go undetected for more than a nominal period of time and the resolution of disputes entails significant delays in the court system.6 Often the courts seem to conclude that all these approaches yield more or less the same estimate or similar effects, if implemented correctly. The aim of this paper is to analyze how these different damage rules affect competition in different ways and to understand what factors drive the differences. In particular, I show that the lost profit rule provides more protection to the patent holder than the unjust enrichment rule if the patent holder and infringer are equally efficient. The intuition for this result is as follows. In the UE regime, the patent holder partially internalizes the effect of its output decision on the potential infringer’s profit, since the patent holder receives the infringer’s profits with probability α when it prevails in patent litigation. This internalization incentive induces the patent holder to contract its output, shifting its reaction curve inward. In response, the imitator increases its output in my model with strategic substitutes. As a result, before any damage payments, the patent holder has a lower profit while the imitator has a higher profit compared to the Cournot equilibrium in the absence of IPR. In the LP regime, the role is reversed. Since the imitator has to compensate the patent holder for any profit reduction from the monopoly level when it is found to have infringed the patent, the imitator is the one that internalizes the effect of its output decision on the patent holder’s profit. As a result, the imitator contracts its output and the patent holder responds by expanding its output in the LP regime. Thus, in the event that the imitator is not found to have infringed the patent and there is no damage payment, the patent holder has a higher profit under the LP regime. In the other event where the imitator is found to have infringed the patent, the patent holder’s profit is restored to the monopoly level under the LP regime. In contrast, the patent holder’s profit after damage payment is the joint duopoly profits under the UE. Since the sum of infringement duopoly profits cannot be higher than the monopoly profit under our setting, the LP regime yields a higher payoff for the patent holder when the infringer is found to be liable. Thus, the LP regime provides more protection because the patent holder receives a higher payoff regardless of the litigation outcomes under the LP regime. When the lost profits from the infringement cannot be proved, the court accepts a “reasonable royalty rate” that would have been negotiated in a hypothetical bargaining situation as an alternative measure of damage. However, I point out the logical inconsistency in the concept of “reasonable royalty rates” when intellectual property rights are not ironclad. The main intuition for this result is that the hypothetical ex ante negotiation is supposed to take place before uncertainty about the validity of the patent is resolved, whereas the damage liability consideration is relevant only in the ex post case where the patent is found to be valid and there is no uncertainty about the validity. However, the equivalence between these two is exactly what the “reasonable” royalty rate doctrine implicitly requires, an impossible requirement with probabilistic patent rights. This suggests a need to modify the strict application of the rule in order to reflect the reality of ex ante probabilistic patent rights but ex post certain rights. 7 As discussed later, one way to rationalize the rule would be to adopt a more flexible approach to the notion of hypothetical negotiation by allowing the use of relevant “post-negotiation” information in setting the reasonable royalty rate. The main model of Schankerman and Scotchmer (2001) considers a vertical relationship in which a patent on research tools is licensed to a potential infringer who can develop a commercial product. Their model can be applied to a setting in which the patent holder does not have any manufacturing capacity and relies on other firms for marketing the product that incorporates the patent. An example would be upstart biotech firms that license their patents to large pharmaceutical firms. However, they analyze ironclad patents and show that the lost profit/reasonable royalty rate damage rule suffers from a multiplicity of equilibria due to the circularity of logic inherent in the concept. In contrast, I consider a probabilistic patent and the non-existence of a “reasonable” royalty rate that is consistent with the logic. 8 This paper is very closely related to Anton and Yao (2007) who independently developed an equilibrium oligopoly model of patent infringement in which they analyze the impact of patent infringement damages on market competition. They consider a non-drastic process innovation and provide an in-depth analysis of the lost profit measure of damages. In contrast, I analyze a product (or drastic process) innovation and the focus of my paper is on the comparison of different damage rules.9 For instance, I derive conditions under which one rule dominates the other in terms of social welfare. In addition, my analysis has implications for the welfare analysis of the effects of partial ownership of competitors’ assets in an industry. The difference in the nature of innovation – product or non-drastic process innovation – across these two papers turns out to be important. The non-drastic process innovation implicitly assumes the availability of substitute technologies. In particular, it allows a “passive” form of infringement under the lost profit rule, in which the imitator infringes and produces at a lower cost, but at the output level that would have been produced without infringement. This type of infringement can lead to no lost profits for the patent holder and complicates their analysis. However, such infringement strategy is ruled out under product innovation or drastic process innovation. In sum, my paper and Anton and Yao (2007) focus on different types of innovation and different aspects of damage rules. Henry and Turner (unpublished manuscript) recently developed a model of patent damages in which they investigate a similar set of issues addressed in this paper. In particular, they compare three regimes of patent damage in a model of product innovation: “lost profits”, “reasonable royalty” and “unjust enrichment.” They show that the lost profits regime yields better incentives to innovate than the unjust enrichment regime, which is consistent with my paper. They also point out that the concept of “reasonable royalty” based on a “hypothetical negotiation” is fundamentally flawed due to a multiplicity of royalty rates that satisfy the criterion.10 The main difference between my paper and Henry and Turner (unpublished manuscript) is that I consider a model of product competition in which infringement dissipates joint industry profit whereas they consider a model of product differentiation in which infringement can increase industry profit due to location economies. In other words, my model considers a situation in which there would be no licensing absent the threat of infringement. In contrast, the patent holder in the model of Henry and Turner has an incentive to license its technology to another firm to offer differentiated products.11 My model is therefore more appropriate for market competition with more or less substitute goods whereas the model of Henry and Turner can be applicable in a situation where the two firms offer differentiated or unrelated products and can thus expand the market coverage. Viewed this way, my paper complements both Anton and Yao (2007) and Henry and Turner (unpublished manuscript), and taken together these three papers provide a more complete picture of the impact of damage rules on competition. In a different vein, Ayres and Klemperer (1999) argue in favor of denying immediate injunctive relief and substituting delayed probabilistic determination with monetary damages. They show that delay and uncertainty restrict patentees’ market power and induce limited infringement without substantially undermining patentees’ incentives to innovate. In addition, any shortfall in the patentees’ profits due to limited infringement can be compensated by lengthening the length of the patent. Their argument is based on the logic of the envelope theorem and the “Ramsey intuition.”12 In this paper, I do not address the relative merits of delayed damage rules with uncertainty vis-à-vis injunctive relief. Instead, I take the uncertainty associated with the current damage system and substantial delay until the resolution of dispute as given, and compare the effects of different damage rules on interim competition. The remainder of the paper is organized in the following way. In Section 2, I set-up the basic model of competition with probabilistic patents under various rules of damages. I also extend and check the robustness of the basic model by considering the possibility of asymmetric cost structure between the patent holder and the infringer. Section 3 conducts a welfare analysis in which different damage rules are compared. Section 4 considers endogenous enforcement decisions and the possibility of pre-commitment not to enforce IPR. Section 5 analyzes the reasonable royalty rate rule and points out the logical inconsistency of the doctrine with uncertain patents. Section 6 allows ex ante licensing and analyzes how different damage rules affect the terms of ex ante licensing contracting. Concluding remarks follow in Section 7.

I have developed a simple model of product innovation in which I analyzed how different damage rules in patent infringement cases shape competition when intellectual property rights are probabilistic. In particular, I compared two infringement damage rules used in the US – the unjust enrichment rule and the lost profit rule. Ex post innovation, these two rules are equivalent in terms of outputs and social welfare if the patent holder and the potential infringer are equally efficient. However, with asymmetric inefficiency and a linear demand, the LP rule generates higher social welfare than the UE rule if and only if the patent holder is more efficient than the imitator. The analysis has implications for the effects of partial ownership in the industry since the competitive effects of damage rules are isomorphic to those of partial ownership. It also points out the logical inconsistency in the concept of the “reasonable royalty rates” when intellectual property rights are not ironclad, and suggests a more flexible approach to the notion of hypothetical negotiation by allowing the use of relevant “post-negotiation” information in setting the reasonable royalty rate.