Federal Circuit Vacates Denial of Attorneys' Fees

The case is Electronic Communication Technologies, LLC v. ShoppersChoice.com, LLC, precedential opinion by Judge Wallach, joined by Chief Judge Prost and Judge Dyk.  Long story short, the plaintiff asserted claim 11 of U.S. Patent No. 9,373,261 ("Secure Notification Messaging with User Option to Communicate with Delivery or Pickup Representative") against the defendant, and has asserted that or related patents against hundreds of other companies.  In this action, after the court dismissed the complaint on the pleadings, the defendant petitioned for attorneys' fees,  but the district court (citing the wrong statute, namely section 1117 of the Lanham Act) denied the request.  The Federal Circuit vacates and remands:

The District Court clearly erred by failing to address ECT’s manner of litigation and the broader context of ECT’s lawsuit against ShoppersChoice. . . . These are relevant considerations. . . . Before the District Court was evidence that ECT sent standardized demand letters and filed repeat patent infringement actions to obtain low-value “license fees” and forcing settlements. . . . For example, ShoppersChoice provided the District Court with evidence that, between 2011 and 2015, ECT, under its former name Eclipse, filed lawsuits against at least 150 defendants, alleging infringement of claims in the ’261 patent and in other patents in the ’261 patent’s family. . . . This number does not reflect the additional pre-litigation demands made by ECT. . . . ECT’s demand for a low-value settlement—ranging from $15,000 to $30,000—and subsequent steps—such as failure to proceed in litigation past claim construction hearings—indicates the use of litigation to achieve a quick settlement with no intention of testing the strength of the patent or its allegations of infringement. . . .  

Indeed, the True Grit opinion [Kindred Studio Illustration & Design, LLC v. Elec. Commc’n Techs., LLC, Case No. 2:18-cv-07661-GJS, 2019 WL 3064112 (C.D. Cal. May 23, 2019), another case involving the plaintiff's assertion of the '261 Patent] reveals problems with the District Court’s analysis. The opinion provided a detailed account of ECT’s practice of seeking nuisance-value license fees. . . . 

In addition, the Federal Circuit concludes that the district court "clearly erred by failing to consider the objective unreasonableness of ECT’s alleging infringement of claim 11 against ShoppersChoice," and recommends that, on remand, the court apply 35 U.S.C. § 285 (the Patent Act provision on attorneys' fees), not the Lanham Act--even though, the court states, "the exceptional case standard pertaining to 35 U.S.C. § 285 applies to 15 U.S.C. § 1117."

Dennis Crouch has an interesting write-up on this case on Patently-O. 

Disgorgement as an Equitable Remedy

Last week the U.S. Supreme Court handed down an opinion in Liu v. Securities and Exchange Commission (8-1 decision, majority opinion by Justice Sotomayor, dissent by Justice Thomas).  Normally I wouldn't comment on a securities law decision on this blog--it's hardly my field of expertise--but this one has some overlap with patent law, interestingly enough.  The question presented was whether "the SEC may seek 'disgorgement' in the first instance through its power to award 'equitable relief' under 15 U. S. C. §78u(d)(5)."  The majority concludes that it does, as long as the award "does not exceed a wrongdoer's net profits," and is awarded to the victims of the fraud.  The patent hook is that--as Professor Amy Landers pointed out on Twitter, and Professor Dmitry Karshtedt on the IP Profs listserv--in reaching this conclusion, the Court cites a large number of I.P. cases:  twelve patent, two copyright, and a trademark case.  (All of the patent cases are pre-1946, when Congress abolished this remedy for the infringement of utility patents.)  The main point of contention between the majority and the dissent is whether "disgorgement" is a traditional equitable remedy.  The dissent says no, it's a twentieth-century invention, whereas the majority says that although the term "disgorgement" wasn't commonly used until more recent times, nineteenth century cases (patent cases in particular) frequently awarded the defendant's net profits attributable to the infringement--and this was considered an equitable remedy.  Terminology aside, as long as the court in a securities fraud case abides by the traditional limitations on accountings of profits--the award goes to the victim, the defendant (usually) gets to deducts its expenses, etc.--this is a traditional equitable remedy available to the SEC.

The contemporary relevance to patent law in the U.S. is that, if disgorgement (or whatever you want to call it) of an infringer's profits is an equitable remedy, that would seem to lead to the conclusion that in a design patent case, where this remedy persists, there is no constitutional right to have a jury decide how much profit the defendant should disgorge (or account for, or whatever you want to call it).  I have noted this issue before (see, e.g., here and here; see also here, bottom paragraph).  So far, to my knowledge, courts deciding design patent cases haven't taken this issue up.  And maybe there is something different in the design patent realm, where the defendant (following Samsung v. Apple) must disgorge the entire profit attributable to the relevant "article of manufacture."  Maybe that's a departure from traditional equitable practice, or maybe there's an argument to be made that a litigant has a constitutional right to have a jury decide the preliminary question of what the relevant article of manufacture is.  I would tend to be skeptical of those arguments, though I hasten to add that I claim no special expertise on Seventh Amendment matters.  Seems like it's just a matter of time before someone does raise them in a design patent case, though.        

Carrier on Patent Holdup

Michael Carrier has posted a paper on ssrn titled Rescuing Antitrust’s Role in Patent Holdup, 168 U. Pa. L. Rev. Online (forthcoming).  Here is a link, and here is the abstract:

Standards, common platforms allowing products to work together, are ubiquitous in our economy. But imagine that a company:

(1) has a patent needed to use a standard,

(2) promises to license the patent on reasonable terms, and then

(3) says it was just kidding as it seeks to block the product or charge an exorbitant price.

In such a case, the users of the standard are stuck. They have invested in technologies based on the standard. And they may be forced to pay a price reflecting not the added value of the technology but the costs of switching to a new technology. In other words, they are subject to “patent holdup.”

The concerns threatened by patent holdup have consistently been acknowledged by officials in Republican and Democratic administrations. These concerns are front and center in Carl Shapiro and Mark Lemley’s excellent article, The Role of Antitrust in Preventing Patent Holdup. In contrast, they are neglected by the current Assistant Attorney General of the Department of Justice’s Antitrust Division, Makan Delrahim.

This Essay does four things. First, it explains why the Shapiro/Lemley article is important, particularly to situate today’s patent holdup debates in the larger context of transaction cost economics. Second, it raises questions related to standards organizations’ rules and antitrust law that the authors could more fully consider. Third, it offers additional support showing the radical nature of Delrahim’s position. And fourth, it opines on the nature of academic debate and its effect on antitrust enforcement. 

As the abstract indicates, Carl Shapiro and Mark Lemley have a paper on this topic coming out too.  I've read a draft and think it's very good, and will post a link when it becomes publicly available.

Meanwhile, in other FRAND news, as reported on FOSS Patents and on JUVE Patent earlier this week, the German Bundeskartellamt has requested that the Mannheim and Munich courts stay pending litigation between Nokia and Daimler, and in (FOSS's translation) "proposes to request the CJEU to opine on a set of specific legal questions: 1. The first question is whether it constitutes an abuse of a dominant position under EU competition law to pursue injunctive relief against an end-product maker while refusing to fully license its suppliers. 2. The second question relates to whether a SEP holder is 'entirely free' to choose the target of an infringement action regardless of its position in the supply chain. 3. The third question outlines specific cases in which the Federal Cartel Office is inclined to believe that suppliers are entitled to a license. 4. The fourth and final question raises the issue of whether SEP holders are free to offer a license only to a particular level of the supply chain."

So far, I haven't found the 24-page document, in which the Bundeskartellamt is said to have put forth its proposal, on its website.  For my own recent take on the license-to-all versus access-to-all debate, see here.

Sung on Liability for Wrongly Issued Preliminary Injunctions

Although this article came out in 2015, I just recently learned of it.  The author is Professor Huang-Chih Sung of National Chengchi University in Taipei, where I taught last December, and the article is titled Patentee's Liability for Wrongful Preliminary Injunction-Case Studies in China and Taiwan, 34 Biotechnology Law Report 133-151 (2015).  The article provides a good overview of the standards for determining whether a patentee is liable to an accused infringer, if the former obtains a preliminary injunction but (for example) the patent is later invalidated or found not to infringe.  The title mentions China and Taiwan, but the article also briefly discusses the relevant provisions under TRIPS and has a fairly extensive discussion of U.S. law as well.  The bottom line, at least as of 2015, is that it is more difficult for the wrongly-excluded defendant to obtain compensation under Taiwanese law than under either U.S. or Chinese law, and the author advocates some reforms.  Highly recommended.

For recent discussion on this blog of compensation for wrongly-issued injunctions in Australia, France, and the E.U., see here and here.  

Japan Study Group's Guide to SEP Valuation

On the Kluwer Patent Blog, Dr. Enrico Bonadio and Dr. Luke McDonagh published a post earlier this week titled Japan:  Guidelines on the 'Fair Value Calculation of SEP for Multi-Component Products'.  The post discusses a five-page document dated April 21, 2020, authored by a Study Group appointed by the Japanese Ministry of Economy, Trade and Industry.  The post accurately and thoroughly summarizes the document, so I don't have much to add.  The group argues that SEPs should be licensed on a license-to-all basis (see my recent post on this issue here), and that royalties should be calculated (1) using a top-down approach and (2) based on the value the patent contributes to the "main product that implements the SEP technology."  Interestingly, the study group says that while "some SEPs do not have a FRAND declaration . . . our 'concept' should also be applied to such SEPs."     

Federal Circuit Reverses Award of Attorneys' Fees

The court issued a precedential opinion last week in Munchkin, Inc. v. Luv N' Care, Ltd., opinion  by Judge Chen, joined by Judges Dyk and Taranto.  The court holds that the district court abused its discretion by awarding attorneys' fees to the prevailing defendant in a trademark and patent infringement action, in the absence of specific facts demonstrating that the case was exceptional.  The facts are as follows.  The plaintiff filed a complaint alleging trademark infringement, then later was permitted by the court to file an amended complaint alleging trademark, trade dress, and patent infringement.  The court held a Markman hearing on the patent claim, and rejected the defendant's proposed claim construction under which the patent's validity would have been dubious in view of two prior art references.  The defendant also filed an IPR, however, and succeeded in having the PTAB invalidate the patent; the Federal Circuit summarily affirmed.  The plaintiff eventually voluntarily dismissed all of its claims in the district court action, and the defendant moved for an award of attorneys' fees.  The district court granted the motion, but the Federal Circuit now reverses, writing:  

This case represents “an unusual basis for fees,” in that the district court’s exceptional-case determination rests on an examination of issues—trademark infringement, trade dress validity, and patent validity—that were not fully litigated before the court. Thermolife Int’l LLC v. GNC Corp., 922 F.3d 1347, 1356–57 (Fed. Cir. 2019). That fact alone, however, would not create a basis to deny a fee motion. . . . But when the bases of an attorney’s fee motion rest on issues that had not been meaningfully considered by the district court, as is the case here, “a fuller explanation of the court’s assessment of a litigant’s position may well be needed when a district court focuses on a freshly considered issue than one that has already been fully litigated.” Id. In the present case, the merits of the patent, trademark, and trade dress claims were all freshly considered issues for the district court, presented in the context of a fee motion, but LNC failed to make the detailed, fact-based analysis of Munchkin’s litigating positions to establish they were wholly lacking in merit. The district court’s opinion granting a fee award likewise lacked adequate support (p.9).

On the patent infringement claim in particular, the court rejects the argument that the mere fact that the PTAB decided to institute an IPR is a sufficient basis for finding a case exceptional:

The district court’s decision awarding LNC its attorney’s fees never adequately explains why Munchkin’s validity position was unreasonable when the district court’s claim construction ruling favored Munchkin and erected a serious hurdle to LNC’s invalidity challenge. The district court attempted to sidestep this hurdle by dismissing its own Markman claim construction as merely a non-final, interim order. . . . But the possibility of reconsideration of the claim construction, whether by the district court or this court, is immaterial. The relevant question for purposes of assessing the strength of Munchkin’s validity position is not whether its proposed construction is correct; rather the relevant question is whether it is reasonable. . . .

The district court was also led astray by LNC’s argument that Munchkin was unreasonable in maintaining its patent infringement lawsuit once the Patent Board instituted the IPR on the ’993 patent, because (1) published statistics at the time indicated that the Patent Board cancels some of a patent’s instituted claims 85% of the time and cancels all of the instituted claims 68% of the time, (2) the Patent Board’s final decision found all of the ’993 patent’s claims unpatentable, and (3) this court summarily affirmed that decision. These IPR statistics combined with the merits outcome are not enough, for they tell us nothing about the “substantive strength of [Munchkin’s] litigating position (considering both the governing law and the facts of the case).” Octane Fitness, 572 U.S. at 554 (emphasis added). That Munchkin’s patent was ultimately held unpatentable does not alone translate to finding its defense of the patent unreasonable. SFA Sys., 793 F.3d at 1348. Nor are the merits outcomes of other patent owners’ IPR cases material, as those case outcomes are based on their own, different facts. The upshot of LNC’s statistics and outcome-based argument would be to subject every patent owner to paying a § 285 fee award in a patent suit anytime its patent is canceled in a co-pending IPR proceeding, without any consideration of the relative strength of the patent owner’s legal theories, claim construction arguments, or proffered evidence in defense of the patent. That form of short-cut thinking is wholly incompatible with Octane Fitness’s fact-dependent, “case-by-case” requirement, and we reject it. In this case, LNC cannot point to any statement by the Patent Board suggesting that it viewed Munchkin’s position to be frivolous or anything out of the ordinary, nor did it or the district court ever conduct that required substantive analysis to demonstrate that Munchkin’s defense was so meritless as to stand out from the norm. Moreover, that the Patent Board adopted LNC’s preferred claim construction does not automatically indicate that it was unreasonable for Munchkin to rely on the district court’s claim construction, given that the two proceedings applied different claim construction standards (pp. 10-12; emphases in original).

Upcoming Remote-Speaking Engagements

1.  This coming Wednesday, June 17, at 12:15 Central Time I will moderating a panel titled "A Year in Review - Antitrust Developments 2019-2020," put on by the Minnesota State Bar Association Antitrust Section.  I mention it here because the featured topics will include FTC v. Qualcomm and other SEP-related issues.  The event is free.  Here is a link to register.

2.  On Tuesday, June 23, at 15:00 British Standard Time (9:00 a.m. Central Time) OxFirst will be hosting a free webinar at which I will be discussing my paper Damages for Noneconomic Harm in Intellectual Property Law, 72 Hastings L.J. __ (forthcoming).  Here is the Zoom link, and here is the webinar description:

This talk offers a comprehensive analysis of awards of “non-economic” damages for reputational and emotional harm in intellectual property (IP) law. It discusses, among other matters, the Second Circuit’s recent decision in Castillo v. G&M Realty LP, affirming a $6.75 million award of statutory damages for the infringement of artists’ moral rights in graffiti art; the European Union’s Intellectual Property Rights Enforcement Directive and its 2016 Liffers decision, which appear to require member states to award, where warranted, non-economic (“moral prejudice”) damages across the full range of IP cases; and some recent arguments in favor of awarding damages for emotional harm in, even, patent infringement actions. Courts should recognize reputational harm as a potentially cognizable injury throughout all of the branches of IP law, but damages for emotional harm should be limited to right of publicity and moral rights matters.