Cost-Plus Patent Damages

Abstract

This Article assesses recent proposals to use risk-adjusted costs of producing an invention as a basis for either setting patent damages or valuing patents taken by eminent domain. In theory, cost-plus damages can address one of the central challenges of patent law: ensuring that a patentee does not obtain excessive rents for an invention. But cost-plus damages have three principal problems. First, risk may be difficult to estimate, and estimates may be infected by hindsight. Second, if the permitted rate of return is too low, there may be insufficient incentives to invent. Indeed, even a rate of return that seems generous for existing companies may discourage entry into the industry. Third, inventors may spend much more on invention, anticipating that these greater expenses will not only increase the chance of success, but also increase the amount that they can charge. This Article assesses recent literature proposing cost-plus patent damages, and it offers a simulation model to assess the magnitude of these problems. It concludes that while these problems are serious, social welfare still might be increased by considering cost­plus damages as a factor in the patent damages calculus.