1. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Enforcement in the Digital Age http://www.bsa.org/globalstudy/ News from the Business Software Alliance: (Who are they? (Why do they have Congress’ ear?

2. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Enforcement: Some Basic Facts Overall rate of litigation: ~19 filed suits per 1000 filed patents. Corporate owners less likely to be involved in patent suits than individual owners. 95% of filed patent suits are settled before trial Firms with the largest portfolios of patents also have the most highly cited (interpreted as most valuable) patents, but lowest litigation rates. Broader patents (those with more technology classifications) are litigated less than narrower patents Source: Lanjouw and Schankerman study

3. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Patent Enforcement Some Terms: –Injunction (stop doing it) –Liable (you are guilty as charged) –Damages (what you have to pay) –Treble Damages (patents, willful infringement) –Criminal penalties (got to jail) Cost of litigation? –$1-3M or $0.5M per claim (average claims/patent = about 12). Hall et al NAS study 2004 What can we make of litigation statistics? –two percent of patents are litigated. –How do we interpret that number -- is it high? Low? Does it mean that there is a lot of infringement going on?

4. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Enforcement and licensing The problem of enforcement changes our perspective on licensing –When we investigated licensing terms, assumed that firms would not infringe. –The option to infringe and suffer the consequences changes the “threat points” for making license agreements. –License agreements can be collusive - firms may use IP as an excuse to license even when there would not be infringement.

5. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 The Downside of Patent Litigation Settlements What if the patent(s) were not really infringed? –Selden patent What if the patentholder’s patent would have been judged invalid? –for stand-alone products –for follow-on products

6. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Monetary Damages Two objectives: (are they ever in conflict?) –Deterrence –Compensation What if Rowling had been judged an infringer? –What should damages be? –Should she go to jail? –Does either rule deter infringement? –Is this fair to the previous author? Two main theories of damages: –Lost profit (make the infringed party whole) –Unjust enrichment (take away the illegal gains)

7. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Patent Pools Substitute products/processes –Infringing: Airplanes --Glenn Curtis’ patents infringed the Wright brothers, who would not license. Selden Patent pool –Noninfringing -- what is the danger? Blocking Patents: the VISX/Summit Pool Complementary products/processes –Prices may be lower with patent pools, as discussed earlier in Cumulative Innovation

8. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Is there deterrence with unjust enrichment? Is there deterrence with lost profits? What if the court calculates lost profits using “lost sales”? What if the court calculates lost profits using “price erosion?” What does the court have to know in order to evaluate lost profit?

9. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 The “lost royalty” rule may lead to an indeterminacy in royalties. In the following diagram, can the patentholder raise the license fee if demand shifts?

10. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Basic and Applied Research: Will the second innovator infringe? How do equilibrium payoffs with licensing depend on the damage rule? (In Chapter 5 we assumed no infringement.) Examples: Hepatitus C code Harry Potter books? (copyright?) x =value of first innovation y =value of second d =damages

11. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Calculate damage as Unjust Enrichment: d=  Ty -c 2. Calculate damage (d) as Lost Royalty (L). For lost royalty, what is L? We can only infer d=L. That does not tell us very much. Is infringement deterred in equilibrium? Lost profit rule: No. Any d=L<  Ty could be license fees. Unjust enrichment Rule: Knife-edge case. Is deterrence good for the first patentholder? Deterrence gives the potential licensee bargaining power. Bottom Line: With licensing, the damage theory does not work very well because damages and license fees are indeterminate. Consequently the reward to the first innovator is indeterminate.

12. © Suzanne Scotchmer 10/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0Attribution-NoDerivs-NonCommercial Common Deed 1.0 Equilibrium Protection and Circumvention The DMCA may have a moderating influence on price. Best protection level leads to lower price than with perfect enforcement!