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Abstract

Over the past decade, eight-, nine- and even ten-figure damages awards have become a recurring feature in patent infringement litigation, and yet the principal methods for calculating reasonable royalties (the most common form of damages in patent cases) remain unsatisfying and incoherent. Most frequently, courts employ what we refer to as a “pure ex ante” approach, which aims to construct the hypothetical bargain the parties themselves would have struck prior to infringement (ex ante), based on whatever information would have been available to them at that time. This approach has the advantage of avoiding patent “holdup”— basing the royalty partly on the infringer’s sunk costs—but cannot easily explain other longstanding features of how royalties are calculated, and can result in awards that reflect the parties’ erroneous ex ante expectations. Alternatively, some commentators have proposed a “pure ex post” approach, which aspires to recreate the bargain the parties might have reached as of some later date, such as the date of judgment. This approach uses more accurate information about the technology’s actual value, but contrary to sound innovation policy it also would enable the patentee to capture some of the patent’s holdup value. In this Article, we show that a “contingent ex ante” framework, under which the court attempts to construct the ex ante bargain the parties would have struck on the basis of all relevant information that is available ex post, is superior to both of the above approaches. More specifically, our framework enables courts to base the royalty on the most accurate information available while avoiding the holdup risk arising from the pure ex post approach. We analyze how courts can apply this approach in various settings, including cases involving FRAND-committed standard essential patents, sequential infringement, regulatory uncertainty, and unexpected exogenous events.

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