The Use and Misuse of Patent Licenses

Patents are becoming an increasingly large business with ever greater resources devoted to litigation and enforcement. At the center of that business lie the damages that courts award at trial and the ways in which courts go about calculating those damages. Yet the legal standards meant to govern patent damages are notoriously ambiguous and unhelpful. In the face of these difficulties, courts have sought a market mechanism that would aid them in calculating patent damages. The solution they have seized upon is to use existing licenses, typically granted by the plaintiff to third parties, as evidence of the proper measure of damages. But the use of existing licenses to measure reasonable royalty damages creates three significant and distinct problems: first, it relies upon private information available only to the parties to the preexisting licensing agreement; second, it is ineluctably circular; and third, it creates incentives for the patent holder to distort the value of the licenses it negotiates in order to mislead the court. This Article describes and analyzes these three problems and then turns to potential solutions. It evaluates a variety of possible reforms, including selection of particular licenses for comparison or the application of a multiplier to the value of existing licenses. Though several of these solutions show promise, none come close to being a complete answer. It may well be that courts have no choice but to largely ignore existing licenses when calculating patent damages, leaving them more at sea than ever