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Patent Valuation – Damages Amounts Based on Patent Quality

Adnan M. ObissiFall 2018 (snippets)

Damages awarded in a patent infringement lawsuit are one of the most accurate metrics that can be used to value a patent. While other metrics, such as sale price, may be helpful in determining the value of a patent, damages awarded for infringement of a patent reflect the importance of the patent in a commercial product. For example, several of the Georgia Pacific Factors used for determining reasonable royalty rates during patent infringement suits are directly rooted in the practical utility and market sway associated with the infringed claims.[1] As such, patent acquisition teams can, when available, use the amount of damages awarded in relevant litigations in their patent valuation analyses.

However, damages awards alone might not tell the whole story – patent quality (e.g., the quality of an examiner or the extent to which a patent was vetted during prosecution) may shed additional light on why a particular damages award was provided. The quality of an examiner can be judged using particular metrics, such as the examiner’s allowance rate compared to the rest of his or her art unit and the examiner’s reversal rate on appeal. The extent to which a patent was prosecuted includes the number of added words to the claims and the number of times the patent was cited in subsequent patent applications.

Methodology

This article seeks to identify a correlation between the amount of damages awarded in a patent infringement lawsuit and the quality of the patent. To identify this correlation, we examined over 50 patent infringement lawsuits that awarded an average of about $10,000,000 in damages. After identifying the patents that were awarded damages, we analyzed the examiners and art units for each respective patent.[2]

Analysis

The initial hypothesis is that a higher quality patent should yield a higher amount of damages if and when the patent was litigated. As part of this analysis, we respectively correlated metrics deemed indicative of patent quality with the reviewed damage awards. These metrics include, for each litigated patent, (i) the number of references cited during examination, (ii) the allowance rate of the examiner, (iii) the allowance rate of the art unit, (iv) the average change in claims of the art unit, and (v) rate of reversal of the art unit (the results of which, collectively, are summarized in Table 1 below).

Table 1

Of these metrics, only the number of references cited during prosecution had a strong positive correlation. Namely, the number of citations during prosecution shared a 0.58 correlation with the damages awards. This statistic indicates that having a greater number of references cited in relation to the patent during examination corresponded to higher damages awards. This relationship might come about for several reasons, but may well be a result of applicants citing many references themselves during prosecution. In other cases, the citations may simply share several keywords with the examined patent application, and thus appear in a higher number of examiners’ searches. Thus, this correlation might denote a symptom rather than a cause.

Other metrics appear to have little or no correlation with infringement damages. For example, being cited by several other patent applications does not strongly correlate to higher patent damages awards (0.201 correlation). This might be because the patent has significant disclosure that anticipates or renders other applications obvious, and thus would appear in more searches, but has very narrow issued claims that cover a relatively small portion of a relevant product. Further, while the direction of other metrics is understandable and expected (e.g., an examiner having a higher allowance rate corresponds to lower damages awards), the magnitude of those relationships is small enough to cast doubt on any real relationship between them. And at least one metric militates against the hypothesis. Specifically, in the selected data, there is a positive correlation between an examiner’s allowance rate and patent damages (though the correlation is low). This indicates that examiners that vet the patents less produce more valuable patents, contrary to the initial hypothesis. Such an outcome might ring true because broader claims are likely to be issued by examiners with higher allowance rates. For instance, our data showed a -0.43 correlation between allowance rate and change in claims during prosecution.

To illustrate some examples that assisted in the determination of minimal correlation, we looked at notable damages outliers. For example, in DSM IP Assets, BV et al v. Lallemand Specialties, Inc.,[3] the patent owner was awarded $14,500,000 in damages for the infringement of U.S. Patent Number 8,795,998 (the “’998 patent”). The examiner for the ’998 patent has an average allowance rate of 74%.[4] However, the art unit, overall, has an average allowance rate of only 64%. Although no two cases are the same, this statistic indicates that patent prosecution before this examiner yields better results, on average, than prosecution before a different examiner in this art unit. Furthermore, although this examiner also has a reversal rate of 66.7% (higher than the average reversal rate in this art unit), the jury awarded $14,500,000 in damages.

By contrast, the damages award in Huzu, LLC v. Nine Line Apparel, Inc.[5] was only $44,056. Comparing examiner statistics, the examiner that examined the patents-in-suit has only a 42% overall allowance rate, compared to 66% allowance rate of this art unit. And, although this examiner boasts a 50% reversal rate (lower than the average reversal rate in this art unit), only $44,056 of damages were awarded.

However, these two anecdotal outliers simply confirm aspects of our analysis of the relevant metrics. That is, it is difficult to draw a connection between patent quality and patent damages for at least the reason that a high quality patent will include narrow claims just as often (and possibly more often) than would a lower quality patent.

Conclusion

Surprisingly, in sum, an analysis of the available data and selected metrics did not show a strong correlation between patent quality and patent damages. We note that concluding minimal correlation between these discrete patent quality metrics and patent damages does not necessarily imply that there is no such relationship, just that the available data and chosen metrics indicated as much.

The metrics used for this analysis indicate very little, if any, correlation between patent quality and damages awards. This is likely due to a number of factors, including technology field, market share, and consumer demand. These factors carry a larger weight than patent quality because during a lawsuit, patent quality is a threshold inquiry – a patent is either valid or invalid. It follows that high quality patents are desirable at least because they are less likely to be invalidated.[6] This aspect of a high quality patent’s value does not appear in damages awards, but might prove vital in licensing agreements or settlement discussions during litigation.

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[1] See Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1119-20 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir. 1971); see also Unisplay, S.A. v. American Electronic Sign Co., Inc., 69 F.3d 512, 517 n.7 (Fed. Cir. 1995). 

[2] Authors would like to acknowledge and thank Summer Associates Alexandra MacKenzie and Tyler Hoge for their research efforts for this article. 

[3] 3:16-cv-00497, D.I. 317 (W.D. Wis. May 15, 2018).

[4] An examiner’s allowance rate is ever changing as cases are allowed and/or abandoned, and this statistic was accurate as of Summer 2018.

[5] 4:17-cv-00164, D.I. 39 (S.D. GA Mar. 1, 2018).

[6] A natural follow-on analysis might involve use of the analyzed metrics and validity/invalidity determinations in PTAB or district court proceedings.