Easterbrook on Patent Damages
Justice Easterbrook delivered the following explanation of Patent Damages in Grain Processing Corp. v. American Maize-Products Co., 979 F. Supp. 1233 (1997):
“Lost-profits damages are designed to give the patent holder the economic benefits it would have enjoyed had its intellectual property been respected. This rule calls for a reconstruction of the way the market would have developed in the absence of infringement. Reconstruction takes account not only of substitutes actually produced but also what would have been produced, had it been economically advantageous to do so. This is the point of the Federal Circuit’s statement that “to be an acceptable noninfringing substitute, the product or process must have been available or on the market at the time of infringement” (emphasis added). A product that is within a firm’s existing production abilities but not on the market effectively constrains the holder’s profits. Potential competition can be as powerful as actual competition in constraining price. To see this, consider two examples.
The dominant storage medium for digital data today is the Winchester drive mechanism, the basic technology behind modern hard disks. Bits are encoded as magnetic domains on a metal oxide and read by a head on a mechanical arm as a platter spins beneath it. One rival on the horizon is holograms stored in crystal lattices, read by lasers. Suppose this technology is patented and brought to market. It is likely to be more reliable (it has fewer moving parts), faster (beams of light can be deflected faster than arms can move or disks turn), and cheaper (light can encode more data per unit of area, and the crystal can store in three dimensions while the magnetic disk stores in only two). Suppose that hard disks can be manufactured for 10 [cents] per megabyte, while holographic memory costs 6 [cents]; consumers accordingly turn to crystals, and hard disks vanish from the market. Next suppose that someone infringes the patent on holographic crystal memory. What will be the patent holder’s lost profits? Although they could be less than 4 [cents] per megabyte of memory sold, they cannot be more–for if the patent holder put its devices on the market at 11 [cents] per megabyte, it would pay to bring Winchester drives back into production. (The patent holder’s implicit threat to engage in limit pricing in response to entry could be defeated by long-term contracts, a strategy Baumol and colleagues discuss.) The profit could well be less than 4 [cents] per megabyte: improvements in hard disk technology might make reentry at a price below 10 [cents] attractive, and at all events even a monopolist might find than the profit-maximizing price (where marginal cost equals marginal revenue) is less than 10 [cents] per megabyte. All that matters for current purposes, however, is that a product missing from the market can strongly affect, if not determine, the price a patent holder can obtain, and therefore the profit lost by infringement.
The computer-memory example assumed that the product was patented. Suppose instead that a process patent covers the most economical way of producing an unpatented product. The gasoline cracking patent case, provides the inspiration for this second example. Gasoline used to be made by simple distillation, which converts only a small portion of crude oil into the lighter fractions such as gasoline and kerosene that consumers value highly. Catalytic cracking of the residue left after simple distillation produces a much higher yield per barrel of oil. An antitrust problem arose when holders of different patented cracking technologies pooled their patents; the effects of this merger depended on whether the patents were competitive or blocking. That dispute does not matter for current purposes. Suppose there was only one patented cracking technology, and that the unpatented distillation technologies remained available. At what price could the owner of the cracking patent sell a gallon of gasoline? Not for a penny more than gasoline made by the old technology, because gasoline is fungible. Thus the maximum lost profit, in the event of infringement of the cracking patent would have been the difference between the actual price of gasoline and the price a manufacturer using the old distillation technology would have charged.”
Basically, in the two above examples, Easterbrook distinguishes manufacturing processes from patent technologies. A new way to store memory is, in and of itself, a new technology – the end product is novel. The gasoline cracking example illustrates two different manufacturing processes to deliver the same, non-patented, product.
A little long, but a good clarification nonetheless.
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Excellent post..Keep them coming
Thanks for sharing.