Wednesday, March 20, 2019

Federal Circuit Vacates Judgment of Willful Infringement, Enhanced Damages

The decision, released earlier today, is SRI Int'l, Inc. v. Cisco Sys., Inc.  The majority opinion is by Judge Stoll, joined by Judge O'Malley.  The principal issue on appeal is whether the claims recite patentable subject matter.  Representative claim 1 of the '615 Patent reads:
A computer-automated method of hierarchical event monitoring and analysis within an enterprise network comprising:
deploying a plurality of network monitors in the enterprise network;
detecting, by the network monitors, suspicious network activity based on analysis of network traffic data selected from one or more of the following categories: {network packet data transfer commands, network packet data transfer errors, network packet data volume, network connection requests, network connection denials, error codes included in a network packet, network connection acknowledgements, and network packets indicative of well-known network-service protocols};
generating, by the monitors, reports of said suspicious activity; and
automatically receiving and integrating the re-ports of suspicious activity, by one or more hierarchical monitors.
The majority agrees that the claim is patent-eligible, stating (at p.9) what is arguably becoming the dispositive factor in U.S. cases involving computer-related subject matter--namely, that "the claims are directed to an improvement in computer network technology."  Judge Lourie dissents on this issue. 

There are some other issues as well, including anticipation and claim construction, but I'll focus on damages.  The jury awarded damages for past infringement using a 3.5% rate on infringing products, and it also found that Cisco had willfully infringed.  The judge then doubled the damages; concluded that the case was exceptional and awarded SRI its attorneys' fees; and awarded SRI an ongoing royalty, in lieu of an injunction, at the same (3.5%) rate as the pre-verdict damages.  The Federal Circuit vacates the willfulness finding, but affirms the finding that the case was exceptional and the ongoing royalty.

On willfulness, the court concludes that the evidence did not permit the inference that Cisco willfully infringed during the entire time period that finding covered, and remands for further proceedings:
In denying Cisco’s motion for JMOL on willfulness, the district court concluded that the jury’s willfulness determination was supported by two evidentiary bases. First, the court identified evidence that “key Cisco employees did not read the patents-in-suit until their depositions.” . . . Second, the court identified evidence that Cisco designed the products and services in an infringing manner and that Cisco instructed its customers to use the products and services in an infringing manner. . . . 
On appeal, SRI identifies additional evidence that pur-portedly supports the jury’s willfulness verdict. Specifically, SRI presented evidence that Cisco expressed interest in the patented technology and met with SRI’s inventor in 2000 before developing its infringing products. . . .  Additionally, SRI submitted evidence that Cisco received a notice letter from SRI’s licensing consultant on May 8, 2012, informing Cisco of the asserted patents (a year before SRI filed the complaint). Finally, like the district court, SRI makes much of the fact that “key engineers” did not look at SRI’s patents until SRI took their depositions during this litigation. . . .
Even accepting this evidence as true and weighing all inferences in SRI’s favor, we conclude that the record is insufficient to establish that Cisco’s conduct rose to the level of wanton, malicious, and bad-faith behavior required for willful infringement. First, it is undisputed that the Cisco employees who did not read the patents-in-suit until their depositions were engineers without legal training. Given Cisco’s size and resources, it was unremarkable that the engineers—as opposed to Cisco’s in-house or outside counsel—did not analyze the patents-in-suit themselves. The other rationale offered by the district court—that Cisco designed the products and services in an infringing manner and that Cisco instructed its customers to use the products and services in an infringing manner—is nothing more than proof that Cisco directly infringed and induced others to infringe the patents-in-suit.
It is undisputed that Cisco did not know of SRI’s patent until May 8, 2012, when SRI sent its notice letter to Cisco. . . . It is also undisputed that this notice letter was sent years after Cisco independently developed the accused systems and first sold them in 2005 (Cisco) and 2007 (Sourcefire). As SRI admits, the patents had not issued when the parties met in May 2000. Indeed, the patent application for the parent ’203 patent was not even filed until several months after the parties met. Thus, Cisco could not have been aware of the patent application.
While the jury heard evidence that Cisco was aware of the patents in May 2012, before filing of the lawsuit, we do not see how the record supports a willfulness finding going back to 2000. As the Supreme Court recently observed, “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.” Halo, 136 S. Ct. at 1933. Similarly, Cisco’s allegedly aggressive litigation tactics cannot support a finding of willful infringement going back to 2000, especially when the litigation did not start until 2012. Finally, Cisco’s decision not to seek an advice-of-counsel defense is legally irrelevant under 35 U.S.C. § 298.
Viewing the record in the light most favorable to SRI, the jury’s verdict of willful infringement before May 8, 2012 is not supported by substantial evidence. Given the general verdict form, we presume the jury also found that Cisco willfully infringed after May 8, 2012. . . . We leave it to the district court to decide in the first instance whether the jury’s presumed finding of willful infringement after May 8, 2012 is supported by substantial evidence. . . .  
Cisco also argues that the district court abused its discretion by doubling damages. Enhanced damages under § 284 are predicated on a finding of willful infringement. Because we conclude that the jury’s finding of willfulness before 2012 was not supported by substantial evidence, we do not reach the propriety of the district court’s award of enhanced damages. Instead, we vacate the award of enhanced damages and remand for further consideration along with willfulness. (pp. 18-21).
Surprisingly, perhaps, since fees often are not awarded to the plaintiff unless the infringement was willful, the court affirms the exceptionality finding, though it remands for a recalculation:
We see no such error in the district court’s determination that this was an exceptional case. The district court found:
There can be no doubt from even a cursory review of the record that Cisco pursued litigation about as aggressively as the court has seen in its judicial experience. While defending a client aggressively is understandable, if not laudable, in the case at bar, Cisco crossed the line in several regards. . . .
The district court further explained that “Cisco’s litigation strategies in the case at bar created a substantial amount of work for both SRI and the court, much of which work was needlessly repetitive or irrelevant or frivolous.” . . . Indeed, the district court inventoried Cisco’s aggressive tactics, including maintaining nineteen invalidity theories until the eve of trial but only presenting two at trial and pursuing defenses at trial that were contrary to the court’s rulings or Cisco’s internal documents. . . .  The district court concluded that all of this, in addition to the fact that the jury found that Cisco’s infringement was willful, led it to exercise its discretion pursuant to § 285 to award SRI its attorneys’ fees and costs. . . . We conclude that the district court did not abuse its discretion in so finding.
We thus take no issue with the district court’s award of attorneys’ fees generally (including keeping the attorneys’ billing rates without adjusting them to Delaware rates). At the same time, however, the district court erred in granting all of SRI’s fees. Section 285 permits a prevailing party to recover reasonable attorneys’ fees, but not fees for hours expended by counsel that were “excessive, redundant, or otherwise unnecessary.” Hensley v. Eckerhart, 461 U.S. 424, 434 (1983). We accordingly conclude that the district court should have reduced SRI’s total hours to eliminate clear mistakes. For example, one billing entry reads “DON’T RELEASE, CLIENT MATTER NEEDS TO BE CHANGED.” J.A. 32384. Accordingly, we remand only for removal of attorney hours clearly included by mistake and consequent recalculation of reasonable attorneys’ fees (pp. 22-23).
Finally, the court rejects Cisco's argument that "the district court abused its discretion in awarding the 3.5% ongoing royalty on 'all post-verdict sales' without considering Cisco’s design-arounds," on the ground that Cisco didn't raise this issue in a timely fashion below.  Nevertheless, the court concludes that "the district court has not yet determined whether products and services that were not accused (that is, changed after the jury verdict) are colorably different for purposes of ongoing royalty calculations. Such an issue could be resolved in a future proceeding" (pp. 24-25).

Tuesday, March 19, 2019

My Law360 Article on FTC v. Qualcomm

My analysis, titled US Antitrust Law Supports An FTC Win Against Qualcomm, is now available on Law360. In the piece, I argue that "if Judge Koh credits the factual evidence the FTC assembled during the course of the January trial, that evidence would appear sufficient to sustain the FTC’s claims, as well as an injunction forbidding Qualcomm from engaging in similar tactics in the future."

Monday, March 18, 2019

Federal Circuit Declines to Vacate $140 Million Damages Award

This morning the Federal Circuit published a modified nonprecedential opinion in Sprint Communications Co. v. Time Warner Cable, Inc., replacing the original panel opinion issued in November 2018.  (I blogged about the original opinion, affirming a $140 million judgment in favor of Sprint, here.)  The modifications seem slight, the only material differences being that the Federal Circuit added an additional cite to Ericsson v. D-Link, and a few additional sentences discussing Sprint's expert witness's testimony.  I highlight these passages below:
Time Warner argues that Sprint’s damages case was flawed because Sprint did not apportion the damages award to the incremental value that the patented invention added to the end product. See Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). That argument, however, ignores that the objective of apportionment can be achieved in different ways, one of which is through the jury’s determination of an appropriate royalty by applying the so-called Georgia-Pacific factors, under proper instructions embodying apportionment principles. See Exmark Mfg. Co. v. Briggs & Stratton Power Grp., LLC, 879 F.3d 1332, 1349 (Fed. Cir. 2018) (“[T]he standard Geor-gia-Pacific reasonable royalty analysis takes account of the importance of the inventive contribution in determining the royalty rate that would have emerged from the hypothetical negotiation.” (quoting AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338 (Fed. Cir. 2015))); Ericsson, 773 F.3d at 1228 n.5 (“While factors 9 and 13 of the Georgia-Pacific factors allude to apportionment concepts, we believe a separate instruction culled from Garretson [v. Clark, 111 U.S. 120 (1884)] would be preferable in future cases.”).
Such an analysis often considers rates from comparable licenses, and we have explained that “otherwise comparable licenses are not inadmissible solely because they express the royalty rate as a percentage of total revenues, rather than in terms of the smallest salable unit.” Commonwealth Sci. & Indus. Research Org. v. Cisco Sys., Inc., 809 F.3d 1295, 1303 (Fed. Cir. 2015). The fact that two other licenses were granted for the same technology, together with the Vonage verdict—all of which were for the same royalty rate as the rate utilized in the Vonage case to yield the $1.37 per VoIP subscriber per month damages assessment—provides strong support for Sprint’s argument that the damages award in this case reflected the incremental value of the inventions and thus satisfied the requirement of apportionment. See Ericsson, 773 F.3d at 1227–28 (damages testimony regarding real-world rele-vant licenses “takes into account the very types of appor-tionment principles contemplated in Garretson.”).
Contrary to Time Warner’s contention, the jury’s damages award was based on the value of what was taken from Sprint, not the value of unpatented features of Time Warner’s VoIP system. Sprint’s damages expert addressed apportionment at some length during his testimony, explaining that his damages calculations were designed to determine “the incremental profits that are attributable to the patents in suit.” And the jury was specifically instructed on apportionment. The court directed that the reasonable royalty “must be based on the incremental value that the patented invention adds to the end product. When the infringing products have both patented and unpatented features, measuring this value requires a determination of the value added by the patented features.” Time Warner did not propose alternative instructions on damages, so the issue is simply whether the evidence was sufficient to support the jury’s award. In light of the Vonage verdict and the other two licenses, as well as testimony from Sprint’s expert as to the cost to Sprint and the benefit to Time Warner from Time Warner’s decision to operate the VoIP system itself rather than contracting that work out to Sprint, the jury had an adequate basis from which to find that damages should be awarded in the amount of $1.37 per VoIP subscriber per month.

Thursday, March 14, 2019

Video of My "Patent Wars" Lecture

Two weeks ago I gave a public lecture on my book Patent Wars at John Marshall Law School.  The video is available here.  Thank you to John Marshall Law School, and Professor Daryl Lim, for inviting me!

Wednesday, March 13, 2019

Lex Machina 2019 Patent Litigation Year in Review

As I noted the other day in my post on injunctions, Lex Machina recently published its Patent Litigation Report 2019.  In addition to compiling statistics on permanent and preliminary injunctions--and showing a decline in both federal district court and PTAB case filings in 2018--the report also includes some interesting statistics on damages.  In particular, the report states that "Even though 2018 saw around the same quantity of cases awarding damages as in the previous five years"--56 in 2018, compared with 57 in 2017--"there was a much greater total amount of damages awarded, the highest since 2014. The large increase in damages from the previous years is attributable to large jury awards of reasonable royalty damages. Particularly, in Virtnex Inc. v. Apple the jury awarded plaintiff over $500 million in damages and in Kaist IP v. Samsung the jury awarded $400 million in damages."  The report further breaks down damages awards into reasonable royalties (accounting for 38 cases), lost profits, enhanced damages, and other categories.  Readers who have access to Lex Machina should definitively request a copy.

Monday, March 11, 2019

News on Injunctions

1.  Citing Lex Machina's recently released Patent Litigation Report 2019 (which I plan to say about in a forthcoming post), Ryan Davis recently published an article on Law360 titled Patent Injunctions Drop Sharply in 2018.  According to the article, U.S. courts granted 17 permanent injunctions in patent cases last year and denied 9.  (There were also "134 injunctions issued on consent judgments.")  By comparison, in 2017 there were 36 grants and only 3 denials (along with 184 issued on consent judgments).  As for preliminary injunctions, in 2018 there were 8 grants and 23 denials ("compared to nine granted and 41 denied the year before").  The numbers for permanent injunctions surprise me a bit, since (until recently, I guess) most of the empirical studies reported that the ratio of grants to denials was holding steady at about 75%--though if you average out 2017 and 2018,  you get a grant rate of just over 80% (not counting the consent judgments).  Moreover, things can vary from one year to another.  And, as one Mr. Davis's interviewees noted, there is probably something of a self-selection effect; if you know the odds of getting an injunction are low, you may not waste time and money on a losing effort.  

2.  Nadine Herrmann has published an article titled Injunctions in Patent Litigation Following the CJEU Huawei v. ZTE Ruling (Germany), 9 J. Eur. Competition L. & Prac. 582 (2018).   Hat tip to Professor Danny Sokol for calling this to my attention on the Antitrust Law & Policy Blog.   The article provides a good overview of how the German courts have interpreted or are likely to interpret the procedural requirements of the Huawei case.

3.  The Kluwer Patent Blog published a short interview with Professor Rafal Sikorski, in an article titled 'eBay decision has led to much better understanding of how injunctions affect markets'.  Professor Sikoski discusses the rationale for conferring discretion on courts to deny injunctions in certain types of cases, and observes that such flexibility is at present available in some countries by way of equity, competition law, or the abuse of rights doctrine.  As the article notes, Professor Sikorski recently published an edited volume titled Patent Law Injunctions; and as I noted in my blog post on the book a few weeks ago, he's also the coauthor of two chapters in the forthcoming Patent Remedies and Complex Products:  Towarda Global Consensus (Brad Biddle, Jorge L. Contreras, Brian J. Love & Norman V. Siebrasse eds., Cambridge Univ. Press), to which I also contributed some material.

Friday, March 8, 2019

Stays Pending Design-Around in Germany, Part 4

On a few occasions I've blogged about whether courts should more readily grant stays of injunctive relief, pending the defendant's implementation of a non-infringing alternative.  As I noted here last May, Colleen Chien and Eric Shulman have nicely summarized the rationale for granting such "tailored" injunctions: 
Making tailored injunctions in component patent cases, rather than full injunctions the default when injunctions are warranted, has several benefits. First, tailored injunctions are less disruptive than removing the product but more powerful than simply giving damages. In this way, it can address both hold-up: the wielding of power by the patentee in light of the high costs of switching, and hold-out: the refusal of accused infringers to consider legitimate patent demands because they can. Under the threat of a non-tailored injunction, an implementer may end up settling based on unnecessary switching or design around costs, even though the patent is invalid or not infringed, a concept often referred to as “hold-up.” But without the threat of injunction, the patentee cannot get the alleged infringer to the table, a concept often referred to as “hold-out.” 
While the prospect of a tailored, rather than all-or-nothing injunction, changes the dynamic for the parties, it benefits third parties as well. Tailored injunctions reduce the risk of error in calculating long-term damages. Rather than having to approximate the damages until the patent expires, the court orders the specific relief of injunction. That relief is simpler to determine (though it does create monitoring costs). Tailored injunctions reduce disruption to the public or third parties who have sunk costs into the existing solution.
Courts in the U.S. do occasionally stay injunctions pending design-around, rather than denying injunctive relief altogether; and so has the Patents Court for England and Wales in at least one case (see here).  

Courts in Germany, on the other hand, have been reluctant to grant such stays--known as Aufbrauchfristen in German--absent truly exceptional circumstances.  I have discussed this topic in a series of posts three times previously (see herehere, and here).  The first two posts discussed the Bundesgerichtsfhof's Judgment of 10 May 2016, X ZR 114/13 (Wärmetauscher, or "Heat Exchanger"), available in the original German here.  The third post mentioned a more recent decision of the Düsseldorf Landesgericht, the Judgment of March 9, 2017, 4a O 17/15, in which the court denied an Aufbrauchfrist that would have stayed an injunction to enable the defendant to design around a medical device (an "Apparatus for endovascularly replacing a patient's heart valve").

One thing that wasn't clear to me from these previous decisions was whether German courts would be authorized to grant interim damages pending the design-around period, had they been inclined to delay entry of the injunction.  Recently, however, a German Ph.D. student, Maximilian Schellhorn, alerted to me a 1960 decision in which the Bundesgerichtshof indicated that the claim for damages during this period would be untouched (unberührt).  It's an unfair competition case, the Judgment of May 31, 1960, I ZR 16/59--Sektwerbung (BGH), in which the court authorized a four-month Aufbrauchfrist, apparently to enable the defendant to sell off its inventory of Sekt (a sparkling wine) pending a change in its labeling.  The facts are a bit quirky.  The plaintiff claimed to be the first wine merchant to sell Sekt in Germany, dating back to 1826.  The defendant had been in the wine business starting in 1794, but began producing Sekt only in 1843.  For several years preceding the lawsuit, however, the defendant had sold only Sekt, and its bottles, ads, etc. bore the legend "gegründet 1794" or "seit 1794" ("founded 1794," "since 1794").  The court agreed that this amounted to misleading advertising, insofar as some consumers might think the firm had been selling Sekt (and not merely conducting business) that long.  Given that the violation was neither willful nor grossly negligent, however--and that the plaintiff had tolerated it for quite a long time--the court allowed the defendant to avoid the injunction for a period of four months, until September 30, 1960.  As noted, however, the court indicated that the plaintiff could recover a judgment for damages covering the entire period in which the defendant continued to sell infringing products (Judgment part V.4, para. 33).

Although German decisions do not identify the parties by name, based on what the court says about the companies that litigated the case it would appear that both the plaintiff and the defendant remain in business.  I will make a note to sample some of their products when I'm in Germany later this month--all in the interest of research, of course.