Cost-Plus Patent Damages

Innovation and Economic Growth, Intellectual Property and Patents

Article Snapshot

Author(s)

Michael B. Abramowicz

Source

Texas Intellectual Property Law Journal, Vol. 26, pp. 133-185, 2018

Summary

Patent holders should not overcharge for their inventions at consumers’ expense. Courts could consider the inventor’s costs and the level of risk undertaken by the inventor in setting the value of patents in disputes.

Policy Relevance

Courts should experiment to discover whether cost-plus damages calculations are feasible. Setting patent damages too low could reduce incentives to innovate.

Main Points

  • One of the central challenges of patent law is ensuring that a patent holder cannot earn excessive profits from an invention at the expense of consumers.
     
  • Currently, the patent system does not consider the inventor's costs in setting damages for patent infringement or eminent domain cases; some scholars propose that the cost of producing an invention adjusted for risk taken by the inventor (“cost-plus damages”) should be used to establish the value of a patent in disputes, but these proposals are problematic.
     
  • The cost of producing an invention can be a rough proxy for the value of the invention, and should have some weight in the calculation of the value of a patent.
     
  • Hindsight bias will lead courts and juries to underestimate the risks and difficulties of producing an invention; however, if courts systematically underestimate risk, damages could be augmented across the board to compensate.
     
  • If cost-plus damages are used, inventors might “gold-plate” inventions, spending more to justify earning greater returns; courts would struggle to assess how much an inventor should have spent.
     
  • Even when entry costs are low and rates of return as high as 80 percent, some inventors will not enter the market, and mis-calibrating rates of return might lead to greatly reduced entry in the long run.
     
  • If cost-plus damages are used in setting damages in patent infringement suits, the law should protect inadvertent infringers; inadvertent infringers could opt to pay standard damages instead of cost-plus damages.
     
  • Experimentation would allow courts to test the feasibility of calculating cost-plus damages and determine whether gold-plating is occurring.
     
  • In the future, some defendants might be given the option of choosing cost-plus damages, if the defendant could show that the invention was of marginal non-obviousness, and estimates of the risks and costs borne by the patent holder are generous.
     

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