Alternative Damage Rules and Probabilistic Intellectual Property Rights: Unjust Enrichment, Lost Profits, and Reasonable Royalty Remedies

Intellectual Property

Article Snapshot


Jay Pil Choi


Information Economics and Policy, Vol. 21, Issue 2, pp. 145-157, 2009


This paper considers the effects of alternative damage rules in patent infringement cases on competition.

Policy Relevance

If patent holders are not given enough damages when their patents are infringed, it will discourage research and development.

Main Points

  • In the United States, if Firm B infringes Firm A’s patent, courts require Firm B to pay Firm A damages. Firm B must pay either Firm A’s lost profits, or Firm B’s ill-gotten gains from infringement (“unjust enrichment”).
  • The model in this paper shows that a competing patent holder prefers the lost profit damage rule if its costs are the same as those of the infringer. The author prefers this rule because it will not discourage research and development.
  • If the firms’ costs are different, the unjust enrichment rule makes everyone better off unless
    • The infringer’s costs of production are lower than the patent holder’s.
    • Or if the infringer gives consumers choices that increase demand.

  • Negotiations about royalty rates take place before firms are certain that the patent is valid. But damages are measured after a court has found the patent valid. The author argues that it is not logical to use “reasonable” royalty rates as a measure of damages; the value of a winning lottery ticket is not the same as the value of a lottery ticket before the drawing. 

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