The Economic Value of Snake-Oil

I’m reading through the big patent reform bill that’s currently stuck in the Senate. One of the big changes in the legislation concerns the calculation of damages for patent infringement. It reads, in part:

Upon a determination by the court that the showings required under subparagraphs (A) and (B) have not been made, the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly attributable to the claimed invention’s specific contribution over the prior art. In the case of a combination invention whose elements are present individually in the prior art, the contribution over the prior art may include the value of the additional function resulting from the combination, as well as the enhanced value, if any, of some or all of the prior art elements as part of the combination, if the patentee demonstrates that value.

I think an economist would tell you that this is completely incoherent. The only way to objectively determine the “economic value” of something is by observing the price it fetches in the marketplace. (The financial markets are currently learning the dangers of trying to compute asset values a priori) If the thing you’re trying to value is similar enough to something that’s commonly bought and sold (say, if your house is similar to your neighbor’s house that just sold), you can use that to get a reasonably accurate estimate of the product’s value. Likewise, if I want to determine the “economic value” of the “specific contribution” of the LCD panel in my MacBook to the laptop’s overall value, I can see what LCD panels with similar characteristics were selling for at the time my laptop was manufactured.

But a patent is not a commodity. It’s not a component of a manufactured product. Rather, a patent is a legal entitlement to sue people who build certain kinds of devices or perform certain processes without the patent holder’s permission. There isn’t any objective answer to the question of how much of a products value is “properly attributable” to the fact that any given patent holder has agreed not to sue the manufacturer. Trying to apportion the value of a product among the patents that apply to it is a category error because a patent’s value in the market place is determined by the leverage the legal regime confers on patent holders. The greater the powers the law gives to patent holders, the larger the monopoly rents they can extract from manufacturers, and the more valuable the patent will be on the marketplace. So it’s completely circular for the law to ask what the “economic value” of a patent is, when the economic value of a patent was created by the legal system in the first place.

Of course, the fact that a legal requirement is incoherent doesn’t mean that judges won’t give it the old college try. No doubt, there will be plenty of “expert witnesses” who will come up with all manner of elaborate methodologies for determining the “economic value” of a patent’s “specific contribution” to a product. A a practical matter, judges will take the passage of this reform bill as a signal that recent patent damage awards have been too big, and will scale back the awards accordingly. That’s what the technology industry wants. From their perspective, it probably doesn’t matter if the requirement is coherent, as long as it gets them the result they’re looking for.

But if you care about the rule of law, it should trouble you that the rules are so incoherent. We should always be concerned when the legislature gives legal force to concepts (like “blight”) that lack a clear definition. The patent system is full of concepts like this, and I think that lack of clarity is a major cause of the problems we’ve been seeing in recent years.

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