Monday, August 3, 2015

Dumont on Patent Quality as a Determinant of Damages Amounts in French Patent Cases

Béatrice Dumont has published a paper titled Does Patent Quality Drive Damages in Patent Lawsuits?  Lessons from the French Judicial System in 11 Review of Law & Economics 355-383 (2015), available here behind a paywall.  Here is the abstract:
This paper presents an empirical analysis of the link between patent damage awards and patent quality, based on information from suits filed during the period 2008–2013 in France. Our results show that civil damage awards attributed by French judges are significantly linked to patent quality, as assessed from a statistical point of view, but this link is imperfect.
The article reports an empirical analysis "based on a detailed assessment of enforcement suits handled at the Court of first instance of Paris," comprising "483 patent infringement suits encompassing 673 patents" filed in the Tribunal de la grande instance de Paris from 2008 to 2013.  From these 483 cases, Professor Dumont eliminated those involving "disputes over license contracts, legal arguments about compensation of employees' inventions, property claims and other cases where no infringement took place," leaving 379 cases.  Of these "379 cases decided on the merits, 102 were won by the patent holder, i.e., 26.91% of the cases."  Mean damages awarded in these winning cases of €323,270, and median damages were 60,000.  
 
To test the hypothesis that damages "are in line with an objective measure of the quality of the patents involved in litigation cases," Professor Dumont begins by positing various proxies for patent quality (including family size, claims, and backward and forward citations) and uses a factor model "to compute an estimate of the overall quality index of each litigation case." Second, she finds that the outcome of litigation (did the plaintiff win or not?) "relies rather on idiosyncratic unobserved factors than on the few explanatory variables used in the model, and thus remains mainly unpredictable. This may be thought of as a positive result in the sense that it means that the judge is neither influenced by the context (at least by the sector) nor by an a priori quality of patents, but that he rather examines in detail the case and is receptive to the collection of reliable proofs, notably those conferred by the search and seizure proceeding" (p.377). Third, she finds that the damages awarded in the cases that plaintiffs won "are based on objective grounds, related to the quality of the patents involved in the case" (pp. 378-79).  She concludes:
"Our results show that the outcome of patent litigation is mainly influenced by idiosyncratic elements that make it unpredictable. However, our results do not support the claim that judges are unable to assess patent quality. Indeed, we demonstrate that damage awards attributed by French judges are positively and significantly linked to patent quality, as assessed from a statistical point of view. . . .
". . . [W]hen patents are valid and declared to have been infringed, their value is correctly assessed by the judges."

Thursday, July 30, 2015

Ninth Circuit Opinion in Microsoft v. Motorola: Analysis

As I mentioned earlier, today the Ninth Circuit affirmed Judge Robart's judgment in Microsoft v. Motorola (opinion here).  Bottom line:  the court's decision is consistent with the emerging consensus, both in the U.S. and abroad (as reflected in the CJEU's decision in Huawei two weeks ago), that a patent owner who has made a RAND (a/k/a FRAND) commitment is (generally speaking) precluded from seeking injunctive relief against a willing licensee, and that RAND royalties should not reflect holdup value.  Here are some highlights:

1.  The court begins by noting that "[s]tandardization provides enormous value to both consumers and manufacturers," "increases competition by lowering barriers to entry and adds value to manufacturers' products by encouraging production by other manufactures of devices compatible with them" (p.8).  At the same time, however:
. . . once a standard becomes widely adopted, SEP holders obtain substantial leverage over new product developers, who have little choice but to incorporate SEP technologies into their products. Using that standard development leverage, the SEP holders are in a position to demand more for a license than the patented technology, had it not been adopted by the SSO, would be worth. The tactic of withholding a license unless and until a manufacturer agrees to pay an unduly high royalty rate for an SEP is referred to as “hold-up.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209 (Fed. Cir. 2014). “Royalty stacking” refers to the risk that many holders of SEPs will engage in this behavior, resulting in excessive royalty payments such that (1) the cumulative royalties paid for patents incorporated into a standard exceed the value of the feature implementing the standard, and (2) the aggregate royalties obtained for the various features of a product exceed the value of the product itself. Id.; see also Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991, 2010–13 (2007); Amicus Br. of Public Knowledge at 11–20. 
To mitigate the risk that a SEP holder will extract more than the fair value of its patented technology, many SSOs require SEP holders to agree to license their patents on “reasonable and nondiscriminatory” or “RAND” terms. . . . Under these agreements, an SEP holder cannot refuse a license to a manufacturer who commits to paying the RAND rate (9-10). 
Elsewhere, the court states that "Motorola’s actions [seeking injunctive relief] were intended to induce hold-up, i.e., to pressure Microsoft into accepting a higher RAND rate than was objectively merited, and thereby to frustrate the purpose of the contract" (p.41);  that "The evidence that the rates Motorola sought were significantly higher than the RAND rate found by the court suggested that Motorola sought to capture more than the value of its patents by inducing holdup, and that it filed infringement actions to facilitate that strategy by preventing Microsoft from using its patents—and therefore from implementing the 802.11 and H.264 standards—until it obtained a license at a rate significantly higher than the RAND rate" (pp. 41-42); that "The very purpose of the RAND agreement is to promote adoption of a standard by decreasing the risk of hold-up" (citing Mark A. Lemley, Ten Things to Do About Patent Holdup of Standards (And One Not To), 48 B.C. L. Rev. 149 (2001)) (p.53); and that "The fact that Motorola’s patents were of minor import to the H.264 standard, for example, was evidence from which the jury could infer that demanding a 2.25% royalty rate was not a good-faith effort to realize the value of the technology, but rather an attempt to capitalize on the value of the standard itself—that is, to obtain the hold-up value" (p.56).  

I think the view of holdup expressed above is generally correct, though as Norman Siebrasse and I argue in a paper we have been working on over the past few weeks, standardization can result in three distinct economic effects, namely (1) the patent owner can use the threat of an injunction to extract a royalty that reflects the defendant's sunk costs and the high cost of switching to another technology; (2) the patent owner can extract a royalty that is disproportionate (in comparison with other SEPs) to the individual patent's contribution to the value of the standard; and (3) the patent owner can demand a royalty that reflects value resulting from the standard's widespread use due to network effects.  We argue that a FRAND royalty should not reflect the first two effects, but in our view it may reflect (3).  To date, however, in their discussions of holdup courts have not clearly distinguished among the three effects, and this opinion is no exception.

2.  The court affirms the judgment that Motorola was contractually obligated, by reason of the RAND commitments it made to IEEE and ITU, not to seek injunctive relief, and that doing so breached Motorola's duty of good faith and fair dealing (see pp. 7, 14, 40, 54).  I am not a contracts law expert, and the courts' conclusions on these matters may well be correct under the governing contract law.  I would note, however, that in some other countries RAND commitments may not be interpreted in the same manner, though liability may arise under antitrust law (as discussed by the CJEU in Huawei) or the abuse of right doctrine (see here), both of which are less likely to work in the U.S.   For discussion of differing views on the contract issue, see my paper here at pp.4-8, 37-38.    

3.  Much of the opinion is taken up with procedural matters which the court resolves in favor of Microsoft:  specifically, that the Ninth Circuit (not the Federal Circuit) has jurisdiction over this appeal under the law-of-the-case doctrine (pp. 16-23); that Motorola consented to have Judge Robart determine the RAND rate and range at a bench trial prior to submitting to a jury the question of whether Motorola breached its contractual obligations (pp. 24-28); and that Judge Robart did not clearly err in admitting (in the jury trial) portions of his findings of fact from the bench trial and testimony concerning the FTC's investigation of Google/Motorola's licensing practices (pp. 55-63).

4.  Now to the meat of the opinion:  did the district court correctly determine the RAND rate?  Yes, according to the Ninth Circuit.  First, the district court applied a "hypothetical agreement"  framework that was generally consistent with both "the Federal Circuit's patent law methodology," which "can serve as guidance in contract cases on questions of patent valuation," and with Motorola's own recommended approach (p.29):
Applying that approach, the district court sought to approximate the royalty rates upon which the parties would have agreed by setting up a hypothetical negotiation between the parties. In doing so, the court carefully thought through the “factors an SEP owner and implementer would consider” in an actual negotiation directed at licensing a patent subject to RAND commitments. The court then discussed each of Motorola’s fifteen H.264 patents and eleven 802.11patents, considering the objective value each contributed to each standard, given the quality of the technology and the available alternatives as well as the importance of those technologies to Microsoft’s business. Finally, the court performed a meticulous analysis of the testimony of eighteen witnesses, including executives, economists, and technology experts, to sort out which evidence to rely upon in determining the RAND royalty rate. Generally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so. . . .
Motorola’s central RAND-rate merits contention is that Judge Robart’s analysis failed to meet Georgia-Pacific’s factor fifteen criterion, as interpreted and applied by the Federal Circuit, and so constituted error. Several portions of the court’s findings of fact and conclusions of law do indicate that the court did to an extent take into account the present day value to Microsoft of Motorola’s patents. For example, the court noted that a third-party valuation of Motorola’s 802.11 SEPs was only somewhat probative because, at the time of the valuation, “Motorola’s 802.11 SEP portfolio” was much larger than the portfolio “as it exists today.”
This partial present-day focus did not, however, render the district court’s RAND-rate determination invalid. First, the Federal Circuit has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations.” Ericsson, 773 F.3d at 1230.  . . . 
. . . An element of Microsoft’s claim is that Motorola maintained its demand of a 2.25% royalty rate throughout the proceedings, and also pressed its injunction suits even after Motorola was on notice that its actions were in tension with its RAND obligations. Given Microsoft’s argument that Motorola’s breach was ongoing, the district court could reasonably have concluded that it was appropriate to include the present-day value of Motorola’s SEPs as a factor in calculating the RAND rate-and-range for use in the breach-of-contract proceeding. 
Second, Motorola never specifies the past date the district court should have used. In pointing to “the time the infringement began, ” Georgia-Pacific, and subsequent cases applying its framework, referred to the date of the manufacturer’s first unlicensed use of the patented technology. 318 F. Supp. at 1120; see also Lucent Techs., 580 F.3d at 1324. But, as Motorola acknowledges, the “infringement” at issue in this case is Motorola’s breach of contract, not Microsoft’s use of Motorola’s patents. Motorola mentions both “the date Motorola sent the [offer] letters” and “the time right before Microsoft’s first [patent] infringement began” as possible hypothetical negotiation dates the court could have used, without specifying which is correct.
Motorola did not mention either date in putting forth its version of the hypothetical negotiation analysis in its posttrial brief. To assume the correct date would have been the date the breach of contract began is of no help, as the alleged breach of contract was not tied to any specific date. The jury could have found a breach of contract based on Motorola’s offer letters, its seeking a number of injunctions, or its overall course of conduct (pp. 29-32).
This is interesting, and probably right, but note that it doesn't take a position on the question of whether, in a  patent infringement case involving FRAND-encumbered SEPs, the date of the hypothetical negotiation should be a date just before the infringement began (as in a standard Georgia-Pacific analysis) or just before the standard was adopted.  The latter is probably the economically correct view in the SEP context, and it seems more consistent with Judge Robart's own view as expressed in paragraph 106 of his opinion (". . . the parties to a hypothetical negotiation under a RAND commitment would consider alternatives that could have been written into the standard instead of the patented technology. The focus is on the period before the standard was adopted and implemented (i.e., ex ante)"), as well as statements by Judge Holderman in Innovatio and Judge Posner in Apple v. Motorola).  Once the standard is adopted, the holdup problem may arise, whether or not the defendant has yet begun infringing.

5.  The court also approves of Judge Robart's consideration of the rates charged by the VIA Licensing 802.11 pool and the MPEG LA H.264 pool, noting that to account for differences between pool rates and negotiated rates "the court multiplied the pool rates by three" (p.35).  Though I have expressed some disagreement with the specifics of Judge Holderman's analysis related to the pool rates , I agree that such rates can be relevant and that, if anything, Judge Holderman's use of them may have been more favorable than necessary to Motorola (see here at pp. 47-50).  In addition, the court finds no clear error in Judge Robart's conclusion that the licenses Motorola suggested as comparable were in fact not comparable, because they were "too contextually dissimilar" (pp. 36-38).    

6.  The court finds that the jury had substantial evidence from which to conclude that Motorola sought injunctive relief for the purpose of "inducing holdup" (p.41), that this was indicative of bad faith (pp. 40-43), and that the Noerr-Pennington doctrine does not preclude liability for seeking an injunction under these circumstances (pp. 44-47) (though the court expresses agreement "with the Federal Circuit that a RAND commitment does not always preclude an injunctive action," for example where the defendant refuses a FRAND offer (p.47 n.19)).

7.  Finally, the court concludes that Motorola Microsoft was entitled to recover as damages for the breach the attorneys' fees it expended to defend itself against the actions for injunctive relief (pp. 47-54).

Ninth Circuit Affirms in Microsoft v. Motorola

Here's the opinion.  More later.

Wednesday, July 29, 2015

Canadian Court of Appeal Holds That Noninfringing Alternatives Are Relevant to Lost Profits

A recurring question in the law of patent remedies is whether a patent owner's ability to recover lost profits or an accounting of the infringer's profits should be affected by the fact that, if the defendant had not infringed, it could have made comparable sales by using an available noninfringing technology.  From an economic perspective, the correct answer is yes:  if the defendant would have made the same number of sales but for the infringement, the plaintiff has not lost any sales due to the infringement, and should recover only a reasonable royalty or, in countries which permit this remedy, the disgorgement of whatever additional profit or cost saving the defendant achieved by using the patented technology as opposed to the next-best alternative.  (Perhaps the defendant would have made the same number of sales using the alternative, but at slightly higher cost.)  Courts in the U.S. and France have long followed this principle, while the U.K. still adheres to a nineteenth century precedent, United Horse-Shoe & Nail Co. v. John Stewart & Co., rejecting it.  Courts in other parts of the world have given mixed signals.  In Canada, for example, the Supreme Court concluded in Monsanto v. Schmeiser, 2004 SCC 34, that noninfringing alternatives are relevant when the plaintiff seeks an accounting of the infringer's profits.  On the other hand, in two recent cases involving requests for lost profits, Eli Lilly & Co. v. Apotex Inc., 2014 FC 1254 (Jan. 23, 2015) (see blog post here), and  Merck & Co. v. Apotex, Inc., 2013 FC 751 (July 16, 2013) (see blog post here), trial courts in Canada have followed United Horse-Shoe.   (See also Professor Siebrasse's write-up on Sufficient Description of another recent Canadian trial court decision rejecting the use of noninfringing alternatives.)

Last week, however, the Federal Court of Appeal in Apotex, Inc. v. Merck & Co. (link here) held that noninfringing alternatives are indeed relevant to the calculation of lost profits (though the court dismissed the appeal on the ground that, as a factual matter, Apotex had not proven that it would have sold lovastatin made by use of a noninfringing process during the relevant time period).  Justice Dawson's analysis of the legal relevance of noninfringing alternative can be found in paragraphs 38-72, and her analysis of the factual evidence follows.  Key quotes from the Court of Appeal's legal analysis:
[48]           . . . if damages for lost profits are calculated never having regard to an available non-infringing alternative, the patentee will sometimes be better off than it would have been in the absence of infringement. This is so for the following reason. Where a defendant can make and sell a non-infringing alternative, the patent does not confer a complete monopoly on the patent holder. Instead, the patent confers a share of market power upon the patentee. In this circumstance, where, instead of using a non-infringing alternative, a defendant infringes, it is a question of fact whether, “but for” the infringement, the defendant would not have competed with it. The defendant’s lawful competition in the “but for” world may have deprived the patentee of some sales.
[49]           Put another way, in cases where, in the “but for” world, the infringer could and would have made and sold a non-infringing alternative, these sales may well reduce the patent owner’s sales. Awarding the patentee full damages for lost profits in every case will, therefore, sometimes over-compensate the patentee.
[50]           Perfect compensation requires consideration of: (i) what, if any, non-infringing product the defendant or any other competitors could and would have sold “but for” the infringement; and, (ii) the extent lawful competition would have reduced the patentee’s sales.
In addition, paragraph 60 quotes a portion of my book arguing that there is no policy reason to admit the relevance of noninfringing alternatives in cases involving accountings of profits, but to reject it in cases involving lost profits:
[60]           The Judge correctly understood that Monsanto did not change the existing law as to how the patentee’s lost profits are to be calculated. However, the significance of Monsanto is that if a court may consider a defendant’s resort to a non-infringing alternative when calculating the infringer’s profit, there is no reason in principle to ignore such conduct when calculating the patentee’s lost sales. This is particularly so where:
The problem with computing lost profits without considering the availability of noninfringing alternatives is that […] this practice renders the patentee better off than she would have been in the absence of infringement. (Analogously, ignoring noninfringing substitutes when calculating defendant’s profits renders defendants worse off than they would have been, but for the infringement.) [Emphasis in the original]
(Thomas F. Cotter, Comparative Patent Remedies: A Legal and Economic Analysis (New York: Oxford University Press 2013) at pages 189 to 190). 
As for the factual analysis, however, the court concludes, among other things, that Apotex did not prove that resort to the noninfringing process would have been economically feasible during the relevant period of time (paras. 91, 94).  Embracing the principle that noninfringing alternatives are relevant nevertheless is an important, and in my view welcome, contribution to the law of patent remedies.

Monday, July 27, 2015

Hinkelmann on Japanese Patent Damages Cases

Dr. Klaus Hinckelmann, author of Gewerblicher Rechtsschutz in Japan: Patente, Marken, Gebrauchsmuster, Geschmacksmuster, Know-how (Cologne, Germany : Carl Heymanns Verlag 2d ed. 2008) ("Industrial Property Rights in Japan:  Patents, Trademarks, Utility Models, Design Patents, Know-How"), has published an article titled Aktuelle Rechtsprechung auf dem Gebiet des japanischen Patentrechts ("Current Case Law in the Area of Japanese Patent Law") in the June 2015 issue of Mitteilungen der deutschen Patentanwälten (pp. 260-65).  The abstract (in my translation from the German) reads as follows:
Recent years have seen several important patent law judgments of the Japanese courts, especially the IP High Court.  This article discusses some important decisions of the last three years.  These decisions concern patentability (novelty, inventive step, enablement), the commencement of the national Japanese phase of international patent applications, the filing of an appeal, and patent infringement (damages, indirect infringement, claim construction, use in Japan).  The decisions illustrate, for example, the strict operation of the rules for commencing the national Japanese phase as well as a strict interpretation of the protective scope of product-by-process claims, but also an improved protection against patent infringement, insofar as the recognition of certain transactions as uses of a patent in Japan were improved and also the recovery of damages was made easier.
The two damages cases discussed are (1) Judgment of the IP High Court of Dec. 12, 2011, Case No. 2010 (Ne) 10091, and (2) Judgment of the IP High Court (Grand Panel) of Feb. 1, 2013, Case No. Hei-24 (Ne) 10015.  According to Dr. Hinkelmann, the first case (which I don't think I had come across before) holds that a patent owner cannot recover both lost profits and a reasonable royalty, but rather must choose one or the other.  This sounds reasonable, until you consider the case in which the plaintiff is able to prove that, say, the defendant sold 100 infringing goods, of which only 10 deprived the plaintiff of sales the plaintiff  would have made.  (Perhaps the plaintiff wouldn't have been able to compete for the other 90.)  From an economic standpoint, it would make sense for the plaintiff to recover lost profits on those 10 lost sales, and a reasonable royalty for the other 90.  Nevertheless, the case is consistent with an earlier Japanese case (Toei Tec K.K. v. Family K.K. (Massage Chair), Hei 17(ne) 10047 (IP High Ct. Sept. 25, 2006)) that I discuss in my book at pp. 315-18, and I believe that the same principle is applied in some other countries' laws as well (an issue I've been meaning to research for some time, but haven't).  The second case is one I have blogged about before (here, here, and here) and for which an English-language summary is available on the IP High Court's website (here).  The court awarded the plaintiff the defendant's profits under Japan Patent Act article 102(2), even though such awards are viewed in Japan as a proxy for the plaintiff's own lost profits and the plaintiff here did not itself practice the invention in Japan.  Its exclusive licensee sold products that embodied the patented technology, however, and the court was satisfied that the patentee lost profits as a result of the defendant's sales, so that was enough to invoke article 102(2).

On the product-by-process case referred to in the abstract, note that the Japanese Supreme Court reversed on June 5, 2015 (after Dr. Hinkelmann's article went to press), according to this blog post.

Thursday, July 23, 2015

Brazilian FRAND Ruling

Ed Taylor published a short article in the July 20 issue of Bloomberg BNA's World Intellectual Property Report titled Ericsson Wins Brazil Standard Essential Patent Dispute (available here, behind a paywall).  According to the article, on July 7 the Brazilian competition authority Conselho Administrativo de Defesa Economica (CADE) concluded that Ericsson did not violate Brazilian competition law by requesting injunctive relief in a dispute over 3G patents with TCT, which markets Alcatel products in Brazil.   Mr. Taylor was kind enough to provide me with a copy of the decision (which is dated June 8; I understand the July 7 decision rejected an appeal from the June 8 decision), available here (in Portuguese).

I don't read Portuguese, but assisted by Mr. Taylor's article and Google translate (which I used to generate a rough translation of the decision, and also of two other write-ups I found, one by Laura Ignacio and one by Cesar Peres Advocacia Empresarial), it appears that the patents in suit are subject to a FRAND commitment made to ETSI.  The Brazilian competition authority is of the view, however, that Ericsson did not violate Brazilian competition law by pursuing an infringement action TCT because (1) TCT delayed the negotiations over the terms of a license and did not establish its exhaustion defense; (2) Ericsson offered to arbitrate the amount of the royalty; and (3) Ericsson does not compete with TCT in the market for smartphones or tablets. 

It appears from this blog post, which I previously noted here, that a French court denied Ericsson a preliminary injunction against TCT Mobile in 2013, but I haven't investigated yet to determine if the Brazilian patents are exact counterparts to the ones at issue in the French case.

Wednesday, July 22, 2015

Apple Files Response to Petition for Rehearing Regarding Design Patent Damages

Florian Mueller has the details and links to Apple's brief, as well as to an amicus brief jointly filed by Dell, eBay, Google, Facebook, HP, Limelight, Newegg, and SAS here.   For my post earlier this month linking to Samsung's petition and an amicus brief filed by Professor Lemley, see here.