Patent Law

I was organizing some old files and came across a copy of Frank Fisher's and Craig Romaine's article from the Winter/Spring 1990 issue of the Journal of Accounting, Auditing & Finance titled, "Janis Joplin's Yearbook and the Theory of Damages." The following are some excerpts:

Most of the analysis so far given has begged an important question.  How should one estimate the stream of lost profits to be discounted?  In particular, should one use hindsight, estimating what would have happened had there been no violation, or should one instead use only such information as was available when the violation took place?  Where there are few carry-over effects from a particular violation, this issue does not matter.  Where carry-over effects are large and long lasting, it can matter very much. Since, as discussed in the preceding section, ongoing violations are likely best to be treated without much adjustment for carry-over effects, the hindsight problem is most likely to be important in practice in the case of a single violation destroying an asset.

...our position is that hindsight should not be used. Rather, the stream of returns should be estimated using the information available as of the time of violation.  Indeed, as we shall see, expectations as of that time are particularly relevant.

Some simple examples will illustrate what is involved.  The first -- and the one to which we shall return -- is a somewhat simplified version of a hypothetical posed to one of us (Fisher) in a deposition in the ETSI case [this was a case I was involved with for several years working on behalf of the defendants].  The case was to be tried in Beaumont, Texas, adjacent to the town of Port Arthur.

Janis Joplin, the rock star, went to high school in Port Arthur, Texas.  Suppose that when she graduated she signed one copy of her high-school yearbook.  Suppose further that nobody had any idea that Ms. Joplin would one day be famous.  Assume that signed high-school yearbooks were being bought and sold for $5.00 in Port Arthur, regardless of whose signatures they contained.

Assume that a thief stole and destroyed the copy of the yearbook with Janis Joplin's signature.  The legal proceedings that followed took considerable time, and, by the time a damage award is to be made, Janis Joplin is known to have been a star, with her autograph selling for $1,000.  Ignoring punitive issues (and assuming that the yearbook has no sentimental value), what damage award will make the plaintiff (the book's owner) whole?

The temptation, of course, is to use hindsight and award $1,000.  The other answer -- $5.00 plus interest at the risk-free rate -- seems somehow very unfair.  That perception is incorrect, however, and the temptation ought to be resisted.

The book's owner was not deprived of a yearbook containing the autograph of a rock star.  He or she was deprived of a yearbook plainly worth $5.00 that contained one or more signatures.  Associated with that yearbook was uncertainty as to whether any of the autographs it contained would ever be worth anything.  The $5.00 price of the yearbook included the value of the small probability that they would.  It also included the value of the rather more likely outcome that they would not.  A book equally valued by the owner at the time could have been purchased for $5.00, and the owner could have, in effect, mitigated the damage by purchasing a replacement and acquiring an essentially identical asset.

Read the full article here.