Patent Damages and Real Options: How Judicial Characterization of Non-Infringing Alternatives Reduces Incentives to Innovate
1 October 2007
By Dr. Gregory Leonard with Dr. Jerry Hausman of the MIT Department of Economics and Dr. J. Gregory Sidak of the Georgetown University Law Center
The legal framework under which patent damages are calculated changed substantially after the Federal Circuit decided Grain Processing Corp. v. American Maize-Products Co. in 1999. Grain Processing eased the restriction on the set of non-infringing substitutes available in the but-for world by allowing an infringer to claim that it would have offered a non-infringing product that, although not actually sold in the marketplace, was technically feasible at the time and could have been made commercially available relatively quickly. In this article from the Berkeley Technology Law Journal, NERA Senior Vice President Dr. Gregory Leonard, MIT Professor of Economics Dr. Jerry Hausman, and Georgetown Professor of Law Dr. J. Gregory Sidak examine a factor that the authors see as one of the decision's most important economic ramifications: the grant of a free option to the infringer. Although it is widely appreciated how Grain Processing has made it more difficult for patent holders to claim lost profits damages, it is less well understood how Grain Processing has affected the incentives of companies to risk litigation by using patented technology (without a license) rather than to avoid infringement by using an economically inferior non-infringing technology.
