Price Erosion and the Second Premise

Price erosion is equally problematic in its determination and can equally have opportunistic effects. In theory, the price erosion compensatory head might appear to be easier to determine than lost sales. This is because it is ease to compare the patentee’s pre-infringement with prices the patentee is able to charge during the period of infringement. Yet the real reason why prices dropped may be unrelated infringement. Glick accurately posits that a proper ascertainment of price erosion requires paying close attention to substitutability.151

Epstein believes that to ignore substitutability may culminate in the patentee being overcompensated through the price erosion head in circumstances where buyers would have avoided the goods or shifted away to other alternatives.152 _He

gives the following example:

Suppose, for example, that in a market for widgets a patent holder sold 800 units and an infringer, the sole competitor, sold 200 units and that the actual price was $10. The patent holder therefore had revenue of $8,000, the infringer had revenue of $2,000, and the total market size was $10,000. Assume the infringement caused 10% price erosion (i.e., in the but-for market the patent holder would have charged $11) and that there was 40% profit margin on each actual sale. An erroneous damages calculation that ignored elasticity might proceed as follows: 10% price erosion times $10,000 total market revenue ($1,000) plus the product of 40% profit margin times $2,000 “lost” sales ($800) equals $1,800 total lost profits. The problem is, due to elasticity, the higher but-for price would not allow the patent holder to sell the 1,000 widgets that underlie this calculation.153

151 _{Mark Glick, ‘The Law and Economics of Patent Infringement Damages’ (1997) 10 Utah Bar}

Journal 11; see also Paul Schaafsma, ‘An Economic Overview of Patents’ (1997) 79 Journal of the Patent and Trademark Office Society 241.

152 _{Roy Epstein, ‘Modeling, available at Patent Damages: Rigorous and Defensible Calculations’}

(2003) http://www.royepstein.com/epstein_aipla_2003_article_website.pdf (last accessed 04/06/2016).

Another factor likely to cause overcompensation, in this context, is the condition of ‘quantity accretion’. This relates to an increase in sale accrues to a producer as result of reduction in prices, such that that producer is able to sell more than would have otherwise have been the case if higher prices had been maintained. Thus, when a patentee receives compensation for the measure of loss owing to price erosion without regard to the gains to the patentee from ‘quantity accretion’, then the patentee would naturally be overcompensated.154

As can be gleaned from case law analysis, courts are not blind to market realities. For example, in Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd155_{the English}

High Court refused a full award of damages under this head of compensation because, for a given period, significant market factors other than the infringement caused the patentee to reduce prices.156_{This notwithstanding, judges are prone to}

award speculative sums based on their overall impression, using statistical probability, if they perceive that there has been price erosion due to infringement. This was clearly the case in Gerber v Lectra,157 _{where Justice Robin Jacob said:}

‘[t]aking the best estimate I can, I think a figure of 90% is too high. More realistic I think is 60%. This must then be further discounted by 25% of itself to allow for the other’. The simple implication of this indeterminacy is overcompensation, the quintessence of patentee opportunism.

4.4 Conclusion

The leitmotif of this chapter is to demonstrate the dissonance and divergence between the purposes of the patent system, which is to promote inventive engagements, and compensatory damages, which are best suited to the protection of libertarian entitlements. The chapter argues that the patent system and compensatory damages are at cross-purposes, so that the two regimes cannot be harmoniously melded without the latter defeating the utilitarian objectives of the

154_{William Murphy, John Orcutt and Paul Remus, Patent Valuation: Improving Decision Making}

through Analysis (John Wiley and Sons, 1st edition, 2013) 281; see also 155 _{[2006] EWHC 1344 (Pat).}

156 _{Ibid, paragraph 135.} 157 _{[1995] RPC 418.}

former. For this reason, the submission of this article is that compensatory damages should be abolished from patent law. This submission is made chiefly because of the deleterious abrasion to social welfare which the mismatch poses. By avoiding this mismatch, the patent market would function more optimally; and certainly, there would be mitigation in the prevailing inefficiencies besetting the patent system, particularly the undue bargaining powers vested in patent holders. To reiterate, the first premise shows that compensatory damages over-protect the commercial interests of patentees, and this has the propensity to go beyond what is necessary to ensure the promotion of inventive engagements. Therefore, the application of compensatory damages to patent law marks a doctrinal cleavage between the remedy and the utilitarian foundation of the patent system. The upshot of which is that the marginal social costs of operating the patent system likely surpass its marginal social benefits.

As to the second premise, case law analysis demonstrates that the quantification of compensatory damages is wholly probabilistic and speculative. The process is innately fraught with factual ascertainment difficulties, which the courts seek to address by applying statistical probability to resolve factual uncertainties and decide on damages computation. Its implication is to occasion a likelihood of unfairness to either infringers or patentees. But there can be no denying of the fact that the propensity of unfairness to infringers is greater. Even if the factual indeterminacies that surround causal ascertainment under direct causation can be mitigated (e.g. by adopting the US conception of the ‘NIA considerations’ model), opportunism remains inevitable.