Friday, April 18, 2014

Setting the Amount of an Injunction Bond (and a Brief Digression about the Wright Brothers)

In previous posts (see here, here, and here), I've noted that in many countries (including Canada, France, Germany, Spain, and the U.K.) a patentee is liable to an infringement defendant for the latter's actual damages in the event that a court awards the patentee a preliminary injunction that is later vacated or reversed on appeal.   In the U.S., by contrast, the patentee's liability is capped by the amount of the injunction bond.  As explained by Grosskopf and Medina, the U.S. can result in serious undercompensation of the damages suffered as a result of a wrongly issued injunction:
According to Rule 65(c) of the Federal Rules of Civil Procedure, the applicant for a preliminary injunction is required to give a security (a bond) “in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.” . . .  However, in practice, the plaintiff often bears only part of the actual costs incurred and harms suffered as a result of the issuance of a wrongfully-issued preliminary injunction. Three doctrines induce this outcome.
The first is that the trial court has the power--and perhaps even the duty--to consider the equities of the case before imposing liability upon the bond and awarding damages by extracting from the bond that was created prior to the proceedings. . . .  [T]he prevailing view is that courts retain their discretionary power to deny full, or even any, recovery on the bond.
A second reason for partial liability is the value of the bond. Notwithstanding the language of Rule 65(c), the sum of the bond is often lower than the costs incurred and damages suffered by parties who were wrongfully restrained. The court sets the bond at an early stage of the litigation when the defendant's possible costs and harms are often underestimated. Moreover, courts frequently set the bond amount on the basis of considerations such as the plaintiff's financial means or the public interest in the suit, which are not related to the defendant's expected costs and harms. Because the bond sets the upper limit for the defendant's recovery, the plaintiff often bears only part of the defendant's actual costs and harms.
Finally, the plaintiff does not bear the full cost of a wrongfully-issued preliminary injunction because she is not liable for the injunction's effects on third parties. . . . The combined effect of these doctrines is that the plaintiff ends up assuming only part of the social harm caused by the wrongfully-issued preliminary injunction.
Ofer Grosskopf & Barak Medina, Remedies for Wrongfully-Issued Preliminary Injunctions:  The Case for Disgorgement of Profits, 32 Seattle U. L. Rev. 903, 907-09 (2009).)  

Not surprisingly, perhaps, there doesn't appear to be a lot of guidance in the case law concerning how to go about setting the amount of the bond (although my research on this issue is still at an early stage).  Section 2954 of the Wright, Miller, Kane, Marcus & Steinman treatise on Federal Practice and Procedure, for example, cites only three patent cases addressing this issue; and only one of these, Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1384-85 (Fed. Cir. 2006), is an appellate decision.  In relevant part, the opinion states:
Lastly, Apotex challenges the court's decision to set bond in the amount of $400 million, which it asserts fails to provide sufficient security because it represents only 10% of the annual market and ignores Apotex's loss of market share. Sanofi responds that the amount far exceeds any damage Apotex may face, particularly in light of the fact that there was no recall of Apotex's generic product after it launched its product on August 8, 2006.
The posting of a bond is governed by Federal Rule of Civil Procedure 65(c) which provides that:

No restraining order or preliminary injunction shall issue except upon the giving*1385 of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.

Fed.R.Civ.P. 65(c). The amount of a bond is a determination that rests within the sound discretion of a trial court. Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 136 (2d Cir.1997) (noting that a district court has wide discretion under Rule 65(c) in setting the amount of a bond). The court based its determination on evidence presented before the court that concerned Apotex's “potential lost profits, lost market share and associated costs of relaunch” in the event of wrongful enjoinment. Sanofi–Synthelabo, slip op. at 57. We find no basis for disturbing the court's assessment of the facts, and thus conclude that the court did not abuse its discretion in setting the bond amount.
Aside from the court's use of the hideous word "enjoinment," the procedure used to determine the amount of the bond doesn't sound too bad--though I'd still like to get a better sense of how much effort district courts typically put into estimating the defendant's "potential lost profits, lost market share and associated costs," and would welcome any input from readers on this issue.  From a policy perspective, of course, the question still remains whether capping the amount of liability in the amount of the bond makes sense or not, which is one of the issues I plan to address in a project I am currently working on titled Wrongful Patent Enforcement:  A Comparative Law and Economics Analysis.   


Interestingly, the issue of injunction bonds was also present in a famous U.S. patent case that I taught earlier this week, Wright Co. v. Paulhan, 177 F. 261 (S.D.N.Y. 1910).  (The Wright Brothers' patent suits are the subject of this essay, and a forthcoming book, by Lawrence Goldstone, which I am quite eager to read.)  This was a patent infringement suit by the Wright Brothers' corporation against a French aviator, Louis Paulhan, who was flying his allegedly infringing plane at exhibitions in the U.S. during the early months of 1910.  Judge Learned Hand (then a district court judge) granted a preliminary injunction (which was later reversed on appeal).  Interestingly, according to the March 19, 1910, issue of Scientific American, "M. Paulhan was required to put up a $25,000 bond for one month in case he wished to continue making exhibition flights in the United States," though he "succeeded in getting the requirements changed to a weekly bond of $6,000."  In other words, the defendant was allowed to post a bond to continue engaging in the allegedly infringing activity.  It's not clear to me from the article whether this condition was, effectively, a condition for a stay of the injunction pending trial or a stay pending appeal; and I have been wondering whether a court today could, in effect, condition a preliminary injunction on the defendant's nonpayment of a bond, consistent with the Federal Rules.  (It looks like something similar was done in another patent case from that era, Kryptok Co. v. Harris, 216 F. 642 (S.D.N.Y. 1914).)  Having posed the issue on an IP Law Professor's listserv earlier this week, and having solicited the views of my colleagues who teach civil procedure, the answer appears to be probably no--although Professor Douglas Laycock suggested that Judge Hand might have been influenced by a somewhat similar practice that the New York state courts sometimes employed during that same period, namely enjoining a nuisance and then suspending the injunction to allow a court of equity to assess damages. See Douglas Laycock, The Neglected Defense of Undue Hardship (and the Doctrinal Train Wreck in Boomer v. Atlantic Cement), 4 J. Tort Law 1, 17-18 (2012).  Interesting from both a historical and a theoretical perspective, though.

Wednesday, April 16, 2014

Developments in the law of injunctions, arbitration, and related matters in Canada, France, Germany, Portugal, and the U.S.

1.  According to an article in yesterday's Wall Street Journal, in an oral ruling on Friday a federal district court judge in Delaware entered an injunction against Medtronic's CoreValve in a patent infringement suit brought by Edwards Lifesciences.  Last year I blogged about the Federal Circuit's decision reversing the district court judge's decision declining to award an injunction (see my post, here).  Joseph Walker, the author of the Wall Street Journal article, describes the ruling as a "surprise" and states further that:
. . . Judge Sleet said the court was "convinced" that Medtronic's CoreValve "is a safer device and that patients in whom it is implanted have better outcomes with a lower risk of death," according to a transcript of the ruling.
He added: "At the same time, the Court cannot downplay the strong public interest favoring enforcement of patent rights. Thus, the court finds that the public interest weighs in favor of granting Edwards a preliminary injunction."
He allowed for one exception, granting Medtronic the right to sell its product in cases where patients are ineligible to have the Edwards device implanted, which doctors said could occur because of anatomical differences between patients.
I'd like to read the judge's opinion in its entirety when he publishes one (the transcript can be downloaded from Dennis Crouch's Patently-O Blog), but my initial reaction is that I find the decision quite troubling.  The fourth eBay factor asks whether the patentee has demonstrated "that the public interest would not be disserved by a permanent injunction."  Notwithstanding the importance of patent rights in the medical device industry, it seems to me that the public interest would weigh in favor of an ongoing royalty if, as the judge is reported to have said, the CoreValve device is safer and poses "a lower risk of death."  

The article states that Medtronic has filed an emergency motion for a stay pending appeal, and Dennis Crouch has more information on this matter here (along with links to the transcript and the motion papers), which I commend to readers' attention.  Dennis writes:
. . . the Federal Circuit has asked for immediate briefing on whether to grant a stay of preliminary relief - a decision is expected by the expiry of the district court's seven business day temporary reprieve. . . .
. . . the patent expired in May 2012, but the FDA has granted an interim extension of patent rights under 35 U.S.C. § 156 (for delays in FDA approval). One limitation of a patent term extension is that ordinarily, the extension does extend the term of the entire patent, but instead is “limited to any use approved for the product.” In Merck v. Kessler (Fed. Cir. 1996), the court interpreted this as extending only to “the product on which the extension was based.” Here, Medtronic argues that its product – although perhaps covered by the original patent – is different from Edwards approved product (Sapien) and therefore is not covered by the term extension.
The district court considered these issues and decided that the clear language of Section 156(b) was limited approved uses not approved products. And, since the accused infringing product has the same use (valve transplant), then the patent covers it as well.
This is extremely interesting, and I'm sure that many of use will be keeping close watch on what happens.

2.  On April 9, 2014, the U.S. Court of Appeals for the Federal Circuit issued an opinion in Trebro Manufacturing, Inc. v. Firefly Equipment, LLC, vacating a district court order denying a preliminary injunction in a case involving the alleged infringement of a patent on a machine known as a sod harvester.  The Federal Circuit concluded that the district court erred in finding no likelihood of success on the merits and in finding a substantial question as to patent validity.  In addition, the court concluded that the plaintiff faced the prospect of irreparable harm, noting that "sod harvester market at issue . . . is a tiny market with only three players," and that "Trebro sells only roughly eight sod harvesters per year."  The court also noted the potential loss of market share and customers, and the possibility that Trebro would have to lay off workers.  Moreover, the fact that Trebro did not practice the patent in suit was not dispositive, since Trebro does compete with the defendant in the sale of sod harvesters.  Finally, the court noted that the district court had not resolved the final two factors (balance of equities and public interest) and remanded for further proceedings, though I would read the court's closing "observations" on these two factors as strongly hinting that it views the patent owner as having the stronger case here as well.

3.  PatLit published a post titled Compulsory Arbitration and Applications for Interim Relief:  Is Portugal's Law Invalid, or Just Plain Wrong?, from an article in BMA Newsflash by the Lisbon, Portugal firm of Baptista, Monteverde & Assodiados titled Patent Enforcement:  Is Mandatory Arbitration in Line with the Portuguese Constitution?  According to the article, a Portuguse law published in December 2011 requires that "disputes arising from industrial property rights, including injunctions, related to reference medicines are subject to mandatory arbitration."  Recently Bayer requested a preliminary injunction against Laboratórios Effik, which the court denied based on this law.  Bayer appealed to the Constitutional Court, and a decision is expected sometime this year.  The authors state, and I agree, that the Portuguese law seems hard to square with article 9 of the EC Enforcement Directive.

On the other hand, sometimes drug companies want arbitration.  Another article from Tuesday's Wall Street Journal notes that Eli Lilly is seeking to have Canada placed on the U.S. "Priority Watch" list of countries that do not offer sufficient protection for intellectual property rights, based upon some Canadian rulings invalidating Lilly patents under the "promise of the patent" doctrine.  (I don't profess to know much about the merits of this doctrine, though Professor Siebrasse has been highly critical of it.  See, e.g., this post.)  The article also briefly discusses Lilly's invocation last fall of a provision of NAFTA authorizing the arbitration of so-called investor-state disputes--that is, Lilly is compelling Canada to arbitrate Lilly's claim that Canada's law violates NAFTA, and that Lilly is entitled to $ Can. 500 million in damages.  For further discussion of the notice of arbitration, and the controversy over whether investor-state arbitration will be included in the TPP and TAFTA, see here, here, here, and here.    

4.  Thomas Musmann and Simon Klopschinski have a post on the Kluwer Patent Blog titled German Court is Soothsaying What the Future Will Bring for FRAND and Compulsory License Defenses, about a recent decision of the Karlsruhe Court of Appeals not to stay provisional enforcement, pending the CJEU's decision on the conformity of the German Orange Book procedure with E.U. competition law, of an injunction issued by the Karlsuhe District Court against the infringement of a FRAND-encumbered SEP.  The opinion itself (in German; it's fairly short) is also accessible from the post.

Update:  In going through some files I just discovered that I overlooked Florian Mueller's post on this same case from March 13.  Here's the link.

5.  The EPLaw Blog has a post from Véron & Associés about a recent French appellate decision. Biogaran v. Laboratoires Negma, awarding € 3,650,000 in damages for the enforcement of a preliminary injunction of a patent later found to be invalid and for abuse of proceedings.  According to the post (which also links to the decision itself in French and an English translation), this decision "is the first reported decision of a French court of appeal on the consequences of the enforcement of an interim injunction against an alleged infringer of a patent that is alter found invalid."   The court held that liability is "strict and automatic," and in addition concluded that the patent owner "committed abuse of proceedings by carrying out wrongful maneuvres" that "went beyond the legitimate defence of its interests".  The amount of damages included € 3,500,000 in lost profits, € 150,000 for harm to Biogaran's image, and € 30,000 for the abuse of proceedings.

Readers may be aware that in many countries damages are routinely awarded under such circumstances-- the Kluwer Patent Blog post above notes the availability of this form of relief in Germany too--though not in the U.S., where the patentee's liability for a wrongly issued injunction is capped by the amount of the injunction  bond.  I blogged about a recent English decision on this topic just a couple of weeks ago here (and more generally on the subject here), and may incorporate discussion of both the French and English cases in my forthcoming article on wrongful patent enforcement.  

6. The February 2014 issue of Mitteilungen der deutschen Patentanwälten has an article by Lars Petri, Eugen Tuchscherer, and Christian Stadler titled Probleme bei der Vollziehung der einstweiligen Verfügung im Gewerblichen Rechtsschutz ("Problems in Enforcing a Preliminary Injunction involving Industrial Property Rights").  Here is the abstract (my translation from the German):

Preliminary injunctions in industrial property rights can include, aside from an injunction order, an order for the disclosure of information (Auskunftsanordnung) and/or the surrender of alleged infringing goods with a view to the securing of a destruction order, which matter is decided first in the principal proceedings.  In order to sustain its legal validity over the long run, a preliminary injunction must be enforced within one month according to section 936 and 929(2) of the German Civil Procedure Code.  In this situation, different measures are necessary, respectively, for the enforcement of the different orders for injunction, disclosure, or surrender.  In practice, this sometimes leads to uncertainties; in the end, incorrect handling by one's legal advisor can easily lead to liability.  The following essay concerns itself with enforcement with the respective preliminary orders and makes proposals for handling them in practice. 
7.  Finally, while not relating to the law of injunctions, I'd like to call to readers' attention Florian Mueller's very interesting recent series on the damages/royalties issues in the Apple-Samsung litigation, here, here, and here.  Many of you probably have been following this discussion already, but if not it's certainly worth a look.

Monday, April 14, 2014

AIPPI Q236: Relief in Proceedings Other than Injunctions or Damages, Part 4: Some Final Thoughts

I've already blogged three times on AIPPI's Q236 on Relief in Proceedings Other than Injunctions or Damages (here, here, and here).  This post will finish things up with a few concluding observations about the responses to Q236, particularly as those responses relate to patent cases.  (The reports also discuss remedies for the infringement of other IP rights, of course.)  As noted previously, all of the relevant AIPPI documents are accessible from AIPPI's website, here.

First, on the topic of accountings of defendant's profits, as I've noted before the Working Guidelines state "Some jurisdictions treat profits made from infringing use of an IPR as a method of calculating compensatory damages. Other jurisdictions recognise a difference between damages and an account of profits. . . .  The Groups are invited to identify whether account of profits (or any monetary remedy) is available as a separate and/or alternative remedy to damages in their country."  The Summary Report further clarifies (p.3 n.10) that
This form of Additional Relief refers to the preparedness of the court to order that the infringer disgorge their wrongfully made profits to the IPR holder. It does not encompass the concept of lost profits the IPR holder may suffer by reason of the infringer's wrongful acts, eg the concept of lost profits under US law. As anticipated, a number of Groups reported that profits made from infringing use of an IPR are simply a measure of damages or method of calculating damages. Where that was apparent in the responses, those results are not included here.
So limited, the Summary Report indicates that only 18 of 40 member groups report the existence of accountings of profits as a separate remedy.  Some of the member groups reports do appear a bit confused on the point.  The U.S. report, for example, is one of the ones that sometimes appears to conflate an accounting of defendant's profits with an award of lost profits (see U.S. Report p.3).  (The latter, but not the former, is available in the U.S. for the infringement of a utility patent.  Awards of defendant's profits are available only for design patent infringement, a point which the U.S. report does mention later on, at p.11.)  Similarly, even though German courts sometimes award the IP holder the defendant's profits, the German report discusses this in relation to section 140d of the Patent Act, which relates to the production of documents.  (Perhaps because of the lingering view among some German jurists that awards of defendant's profits are a proxy for the plaintiff's actual loss?  For discussion of this issue on this blog, see here and here.)  The French report, in my opinion, reflects a better understanding of the question AIPPI was posing, stating that under article L.615-7 of the French I.P. Code, "the profits are taken into account in the fixing of the damages with the loss of earnings of the injured party and its moral damage," but that in the authors' view "this does not constitute additional relief.  The provision is not very clear: it seems to allow the judge to go beyond the principle of 'full compensation', but without necessarily going as far as account of profits."  Note also that, according to the summary report (p.10), in the U.K. and Australia an accounting of profits "may not be ordered against an innocent infringer in relation to patent or design infringement."  (I actually don't see the Australia report on the AIPPI's website.)

Second, the member group reports disclose quite a lot of variation with respect to the conditions under which declaratory judgments are available.  See, e.g., Summary Report p. 4 (stating that "in the Czech Republic and France, declaratory relief is available only in respect of patent infringement"); id. pp. 9-10 (noting variation with respect to standing requirements).  

Third, the discussion of the remedies of recall, removal from the channels of commerce, and destruction at pages 3-4 of the German report was quite illuminating. I won't attempt to summarize it here other than to note that the German courts are not yet of one mind on such issues as whether the patentee must precisely describe the activity it wants the infringer to undertake, and whether recall and removal are preparatory to or independent of a claim for destruction.

To sum up, the AIPPI materials can be a useful source for finding the law on certain types of remedies in a large number of countries.  Some of the country materials are more detailed than others, but I will probably refer back to some of these from time to time, at least a starting point for further research.

Friday, April 11, 2014

Some recent scholarship on patent remedies, FRAND

Here are some recent papers I have come across that may be of interest.  I have not yet read any of these in their entirety myself, so I may have more to say about some of them at another time.  Readers can decide from the abstracts if they want to beat me to the punch.   

1.  Professors Benjamin M. Cole, Brent J. Horton & Ryan Vacca have just published Food for Thought:  Genetically Modified Seeds as De Facto Standard Essential Patents in 85 University of Colorado Law Review 313 (2014).  Here is the abstract:
For several years, courts have improperly calculated damages in cases involving the unlicensed use of genetically modified (GM) seed technology. In particular, when courts determine patent damages based on the hypothetical negotiation method, they err in exaggerating these damages to a point where no rational negotiator would agree. In response, we propose a limited affirmative defense of an implied license due to the patent's status as a de facto standard-essential patent. To be classified as a de facto standard-essential patent, the farmer must prove three elements that reflect the peculiarities of GM seeds used in farming: (1) dominance, (2) impracticability, and (3) necessary to fulfill a basic human need, such as for use as food. Based on the approaches used by courts and standard setting organizations in licensing standard-essential patents in technological fields such as cell phones and software, designation of some GM seeds as standard-essential patents allows the courts to imply a license from patentees to farmers on reasonable and non-discriminatory (RAND) terms. Doing so shifts the case from a tort-based patent infringement suit to a breach of contract dispute and alters the damages regime from one based in compensation, deterrence, and punishment (a tort approach) to one based solely in compensation (a contractual approach). As a result of this novel proposal, the damages calculations in these suits return to economic reality.
It appears that a version of the paper is up on ssrn, and the full text can be downloaded from Westlaw.  It doesn't appear to be up yet on the University of Colorado Law Review's website, though I imagine it will be shortly.
  
2.  Professor David O. Taylor has a paper up on ssrn titled Using Reasonable Royalties to Value Patented Technologies, available here.  Here is the abstract:
In the last several years, commentators have expressed serious concerns with the state of the law governing awards of reasonable royalties as damages in patent infringement cases. Given these concerns, the proper assessment of royalties has been a recent, frequent topic for debate among economists and legal scholars. At the same time, all three branches of the federal government have studied ways to improve the law governing reasonable royalties. In this Article, I focus on the effort to ensure that courts efficiently and accurately award reasonable royalties by emphasizing a fundamental principle: reasonable royalties should value patented technology rather than rights associated with patent ownership. This fundamental principle explains the course of the common law governing the method for calculating reasonable royalties, comports with the public policies identified by courts as guiding the award of reasonable royalties, and, moreover, if fully adopted has significant benefits. I therefore consider several reforms that would focus the law governing reasonable royalty determinations on the value of patented technology, and I highlight several open questions related to full adoption of this fundamental principle.

Professor Taylor presented this paper at the recent PatCon 4 conference, and I am looking forward to reading the paper.

3. Dr. Peter Picht has published a paper titled Standardsetzung und Patentmissbrauch--Schlagkraft und Entwicklungsbedarf des europäischen Kartellrechts ("Standard Setting and Patent Abuse--Effective Potential and the Need for Development of European Competition Law") in 1/2014 GRUR Int. 1.  Here is the abstract (my translation from the German):
Since patent law is not yet in a position to effectively hinder the abuse of standard essential patents, an active competition law enforcement is necessary at present to address such cases.  "Exceptional circumstances", which justify an article 102-based interference with the licensing behavior of patent owners, are present if the welfare-enhancing functions of standardization--namely the selection function, the access function, and the collective use function--are impaired.  In accordance with this rule, the patent owner engages in abusive conduct if he completely refuses a license or demands non-FRAND licensing conditions, after he has failed to disclose his protected right during the standardization process or has made a FRAND licensing commitment.  If the licensing behavior of the patent owner is abusive, so is the patent owner's attempt to enforce his strategy by means of an injunction.  It is not a condition for an accusation of abuse that the respective SSO rules impose relevant behavioral conditions or that the patent owner was a participant in the standardization process.  The behavioral conditions that arise out of article 102 apply not only to the original patent owner, but also to a subsequent transferee.  In a patent infringement suit, a standard user can in particular derive a competition law-based compulsory licensing objection from the abusive behavior of the patentee.  The compulsory licensing mechanism as conceived by the BGH in Orange Book must however be remade, because in its present state it is contrary to European law.  Finally, analysis of the types of cases reveals a gap in competition protection through article 102.  This leads to the consideration, whether the market power requirement should be abandoned for the use of this standard.

Wednesday, April 9, 2014

A recent German case on reasonable royalties: Foliendruckverfahren

A couple of weeks ago in my post on reasonable royalties in the U.K. I also mentioned a German case, OLG Karlsruhe, Judgment of Aug. 5, 2013, 6 U 114/12--Foliendruckverfahren, that was reported in a recent issue of GRUR-RR and is also available from Openjur.de, here.  I thought it would be worthwhile to say a few words about the Karlsruhe Court of Appeals' analysis of reasonable royalties under German law.

The patent in suit is the German portion of EP 0578706 B1 for a film printing process and film transfer machine.  The patentee had granted an exclusive license to a company identified as "M." (German cases do not publish the names of the parties).  M. sued the defendant for infringement, based on the defendant's distribution of two printing machines that were alleged to infringe.  In an earlier proceeding, the trial court concluded that the machines infringed, which then set the stage for a trial on damages.  The exclusive licensee thereafter transferred its right to recover damages for the infringement back to the patentee, who pursued the claim for damages accruing to the licensee and to itself (based on the licensee's contractual obligation to pay the patentee 25% of any damages awarded).  The patentee could then sue for the entire damage accruing to both parties.  The patentee claimed that the amount of damages was at least 50,000 euros per device, because this was the price the exclusive licensee agreed to pay for any machines it made pursuant to the license.  The trial court agreed, and the defendant appealed.

In its opinion, the Court of Appeals recited the various factors and considerations that go into determining the amount of a reasonable royalty.  The goal is to award the amount that reasonable parties would have agreed to at the conclusion of a licensing agreement, if they had foreseen the future development and scope of the infringement (para. 68).  The court should consider the economic meaning of the protected right, which expresses itself in a profit opportunity and by which is determined the remuneration to be attained in the market.  Relevant factors include the technical advantages of the invention in comparison with the same or similar articles, the possible monopoly position of the IP owner, the possibility that purchasers would be able conveniently and efficiently to substitute for the infringing device, and whether or to what extent suitable and (from the perspective of the license taker) economically reasonable alternatives were available (para. 76).     

Here, one of the most important pieces of evidence was a 2010 sublicense agreement between the exclusive licensee and a company identified as KBA.  This agreement had been entered into in settlement of infringement litigation against one of KBA's customers, and allowed the continued use of the infringing machine.  The defendant argued that the settlement was not good evidence of what reasonable parties would have agreed to ex ante--an issue that also frequently comes up in U.S. litigation--but the Court of Appeals disagreed, stating that KBA is one of the major competitors of the licensee and the defendant, and that it is not plausible that it would have bound itself to pay an unreasonable royalty for the future use of the technology (para. 73).  Under this agreement, the royalty was 90,000 euros, which was ultimately the amount awarded for each of the defendant's infringing machines.  The court rejected the defendant's argument that this price, was allegedly amounted to somewhere between 25 and 50% of the value of the infringing component, was excessive, noting that the component is usually sold as a part of a complete machine; that buyers and sellers often use the value of the complete machine as a royalty base; and that, using the value of a complete machine as the royalty base, the rate was somewhere between 2 and 5% (para. 114). 

The court also awarded interest of 20,000 euros, based on the fact that an actual licensee who failed to pay its royalty on a timely basis would have been required, under the contract, to pay interest in at least this amount (paras. 115-17).

Towards the end of the opinion the court noted the general principle that the infringer ought not to be made either better off or worse off than a bona fide licensee (para. 118).  As I discuss in my book (pp. 269-70), however, courts in Germany sometimes do award modest royalty enhancements on the ground that an infringer enjoys certain benefits that an actual licensee does not; and some commentators argue that courts should do so more frequently and/or generously.  The Court of Appeals reviewed the case law and the arguments for and against enhancements before concluding that, first, in this case there was no particular reason to think the defendant enjoyed any benefits over and above what an infringer usually enjoys, and that these benefits also come with some corresponding detriments; and second, that it didn't really matter, because (if I'm reading this correctly) an award of 90,000 euros per infringing device was all that the plaintiff requested in its complaint; recall the plaintiff had requested "at least 50,000 euros" per infringing device (paras. 118-20). 

Monday, April 7, 2014

France Amends Damages Provisions of its Intellectual Property Code

In January, I posted this report on a pending French bill that would, among other things, amend the damages provisions of the Code de la Propriété Intellectuelle (Intellectual Property Code).  Specifically, the bill aimed to alter the relevant text from this (translated into English by Margaret Wade and me):
For assessing damages and interest, the court takes into account the negative economic consequences, including loss of profit, suffered by the injured party, the profits realized by the infringer and the moral prejudice caused to the rightholder by the infringement.

However, the court may, alternatively, upon request by the injured party, award damages as a lump sum that shall not be less than the amount of royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed. 
to this:
For assessing damages and interest, the court takes into account distinctly:

the negative economic consequences, including loss of profit and the loss sustained by the injured party;

the moral prejudice incurred by the latter;
 
the profits realized by the infringer and, where appropriate, the savings of intellectual, material, and promotional investments which the latter has derived from the the infringement.
 
If the court determines that the resulting amounts do not make good the entirety of the prejudice suffered by the injured party, it orders to the profit of the latter the confiscation of all or part of the revenue procured by the infringement.
However, the court may, alternatively, upon request by the injured party, award damages as a lump sum.  This amount is higher than the royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed.
My post mentioned that the amended provisions would read alike for all the various IP rights, including patents, copyrights, and trademarks.  (Actually, there was one small difference.  Instead of referring to a copyright infringement (contrefaçon) and copyright infringer (contrefacteur), the bill referred to an impairment of rights (atteinte aux droits) and an "author of the impairment" (auteur de l'atteinte aux droits).  This is carried over into the version discussed below as well.)  My post also mentioned articles on the pending legislation in Propriété Industrielle by Professor Christian LeStanc and by Xavier Buffet Delmas d'Autane and Jules Fabre.  Messrs. Buffet Delmas and Fabre characterized these amendments to the remedies provisions as the most ambitious part of the proposal; and expressed the view that, although judges had been reluctant to apply the new rules for calculating damages permitted under the 2007 revision and therefore that the proposal is a step in the right direction, there was reason to regret that the proposed amendment doesn't mention taking into account the infringer's bad faith.  They also discussed proposed amendments relating to customs and to saisies-contrefaçon.
  
Anyway, in a short article recently published in Bloomberg BNA's World Intellectual Property Report (accessible here, but you need a subscription), Buffet Delmas and Fabre report that a version of the bill has now been enacted into law, specifically Law No. 2014-315 of March 11, 2014.  Here's a link to the law, as passed by the National Assembly (in French).  It looks the damages provisions were altered slightly from the version that had passed the Senate and that previously blogged about.  In particular, the patent damages provision (article 615-7) now reads:
Pour fixer les dommages et intérêts, la juridiction prend en considération distinctement :

« 1° Les conséquences économiques négatives de la contrefaçon, dont le manque à gagner et la perte subis par la partie lésée ;

« 2° Le préjudice moral causé à cette dernière;

« 3° Et les bénéfices réalisés par le contrefacteur, y compris les économies d'investissements intellectuels, matériels et promotionnels que celui-ci a retirées de la contrefaçon.

« Toutefois, la juridiction peut, à titre d'alternative et sur demande de la partie lésée, allouer à titre de dommages et intérêts une somme forfaitaire. Cette somme est supérieure au montant des redevances ou droits qui auraient été dus si le contrefacteur avait demandé l'autorisation d'utiliser le droit auquel il a porté atteinte. Cette somme n'est pas exclusive de l'indemnisation du préjudice moral causé à la partie lésée.
I would translate this as follows, with the changes in boldface:
For assessing damages and interest, the court takes into account distinctly:

the negative economic consequences, including loss of profit and the loss sustained by the injured party;

the moral prejudice incurred by the latter;
 
and the profits realized by the infringer, including the savings of intellectual, material, and promotional investments which the latter has derived from the the infringement.
 
If the court determines that the resulting amounts do not make good the entirety of the prejudice suffered by the injured party, it orders to the profit of the latter the confiscation of all or part of the revenue procured by the infringement. 

However, the court may, alternatively, upon request by the injured party, award damages as a lump sum.  This amount is higher than the royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed.  This amount is not exclusive of the compensation for the moral prejudice suffered by the injured party.
Notice also that the paragraph that in the earlier bill read "If the court determines that the resulting amounts do not make good the entirety of the prejudice suffered by the injured party, it orders to the profit of the latter the confiscation of all or part of the revenue procured by the infringement" is now gone.

I'm sure there will be some commentary in upcoming issues of the French IP journals explaining the reason for these changes.  I would guess it may have something to do with the ongoing question of whether the amount of the infringer's profit is properly considered only as an aspect of the IP owner's damages, or may be awarded as an alternative remedy (disgorgement).  I will keep readers abreast of what I learn.

Finally, M. Fabre pointed out to me in a recent email that (as stated in the two articles he coauthored with M. Buffet  Delmas) the new law also extends the statute of limitations from three to five years.  (It was already five years for copyright, but not for patents and trademarks; see also this post by Brad Spitz on the Kluwer Patent Blog from November 2013.)  This too will, presumably, have an impact on damages awards.

Friday, April 4, 2014

PatCon 4: Patent Troll Debate

As I mentioned yesterday, one of the events at the PatCon 4 conference is a debate on the questions of whether hostility to patent trolls is "well  justified  theoretically or empirically" and whether said hostility "will likely result in bad law." Arguing that the hostility is not well justified are Professors John Duffy and David Schwartz.  Arguing that it is are Professors Mark Lemley and Michael Meurer.  (Note, however, that Professor Lemley's views in particular are somewhat more nuanced, as reflected in his article with A. Douglas Melamed, Missing the Forest for the Trolls.)  Although I wasn't planning on live-blogging today's proceeding, I thought this debate in particular would be of interest to readers, so here goes.

Professor David McGowan introduced the panel.  Professor Duffy then went first.  Alienability of patent rights should not be changed; alienability is a feature of any property system.  It's not just a matter of property rights generally, but applies to patents in particular.   Inventors may not be good at business.  If you're not hostile to ATT Bell Labs, but you're hostile to patent trolls, you're making a point about how corporations are integrated.  Should they be integrated into a large corporation, or should we have atomistic competition with middlemen?  The old model of having everything integrated into one corporation isn't necessarily good, but at any rate we should be agnostic about the matter. Second, litigation costs are high.  Patent trolls are more efficient at dealing with those costs of litigation.  They are capable of extracting value for these rights.  Moreover, if you believe in relatively narrow patent rights, you need a secondary market to aggregate those rights.  Patent trolls are developing a secondary market in patent rights and have an incentive to build better tools to evaluate patent value.  That is a huge public benefit.

Professor Meurer went next.  A hypothetical:  suppose we were evaluating global warming.  My opponents would argue that we should wait and see, etc.  I would express my surprise at their skepticism and say we should apply the precauutionary principle.  I concedee that teh case against patent trolls isn't that extreme, but it is strong.  First, in 2000 there were few troll lawsuits, not they are significant. Second, small businesses hae motivated state legislatures, Congress, and the executive to act.  Third, Peter Detkin of Innovation Ventures thinks that troll research shows that trolls are gaming the system (admission against interest).

Trolls impose a tax on innovation.  Before the 1990s, the patent system was already performing badly, as documenting in Meurer and Bessen's Patent Failure.   Research [I missed name of researcher] shows that being sued affects spending on R&D.  Moreover, patent trolls typically lose their lawsuits.  Bessen and Meurer estimated $29 billion loss according to one methodology, $80 according to another.  The harm to innovation captured in Katherine Tucker's paper re Acacia.  Litigation halted research relating to imaging software.  Colleen Chien:  55% of unique defendants are small firms.  Robin Feldman similar.  Further research by Tucker.

Professor Schwartz: the particular form of the entity that holds the patent is not the problem.  Are the suits frivolous?  There's a lot of anecdotal information,  but not a lot of good data.  The data are not overwhelming.  Most of it asks the wrong question.  PAE litigation grew dramatically, but are the cases bad?  Some guideposts for empirical study:  first, what is a PAE?  Meurer suggests it's anyone who doesn't practice a patent, but that includes universities and individual inventors and failed startups.  And it includes aggregators and speculators.   About a quarter of the NPE suits are individual inventor suits.  Second, you need a baseline.  Are the problems endemic to the litigation system?  If R&D spending goes down when there is litigation, it's not necessarily attributable to PAE litigation.  Third, we need to change the way we approach this research.  The data should not be proprietary but publicly available.

Lemley:  refers to article with Melamed, noted above.  So why am I on this side of the debate?  While trolls are not themselves the problem, they are a symptom of real systematic problems with our system.  Takes too long to get a patent, can't tell what it means (particularly software patents), incentive to draft broadly, and the combination of these things means I can make a plausible claim that I'm entitled to 5% of your revenues; and it takes years to litigate.  Bottom feeder model:  taking advantage of enormous costs and uncertainties to extort nuisance value settlements.  People sell to trolls not because of efficiencies but because trolls exploit these aspects of the system.  Lots of discovery, little of it used; troll goal is to raise cost of discovery. 

Is hostility to trolls creating bad law?  Consider eBay; greater sophistication in damages; eliminated willfulness game; expertise in PTO, PGRs; reducing forum shopping.  What might we do?  Giving courts more discretion to punish frivolous suits; more detail about what your patent covers; transparency; reducing cost of discovery; make you sue the manufacturer rather than mom & pop shops as a way of increasing royalty base.  So the hostility has led to good law, not bad law.

Meurer:  my job now is to rebut Duffy and Schwartz.  Like John, I worked at Bell Labs and I think decentralized research is a good thing.  If we look at performance of small patent owners over that time, they were able to enforce their patents without intermediaries (startups like Apple, Google, Microsoft).  Intermediaries not needed in biotech or pharma.  John emphasized intermediaries in the patent licensing market, not necessarily a benefit to innovators who want access to technology.  With regard to Dave's comments about whether PAE litigation is frivolous, Allison Lemley & Walker show they lose 90% of cases that go to court.  Should we be more protective of universities?  Yes, but they are infrequently represented in litigation.  With regard to transfer of rights, encouraging alienation of rights is great, but we need more transparency to make that work; don't need the inappropriate strategic litigation benefit.

Duffy:  I want to rebut the precautionary principle.  We study innovation, change; shouldn't be scared of it.  Maybe with global warming, we should be worried about change; not with patent law.  Trolls are an innovation in business and law.  In other fields with robust property rights, they are secondary markets.  They play an important role.  If my company goes bankrupt, I should be able to sell my IP.  Other aggregators like ASCAP are beneficial.  It's an oddity that we haven't had it in patent law.  As for the asymmetries of litigation, defendants also take advantage of this.  Meurer wrote in a paper about why large firms don't file DJ actions, waiting for evidence that patent owner has resources to litigate.  Finally, the evidence Meurer cites includes event studies.   Suit filed; see if stock price drops.  On page 138 of his book, one of the reasons the price drops is the risk that patent will be invalidated.  That's a gain for the public.  Moreover, there's a drop in value on both plaintiff and defendant sides.

Lemley:  John says we should welcome innovation, and I do.  But the kind of innovation John wants to encourage is innovative ways to use the legal system to extract revenue from the people who do the technical innovation.  Distressing fact:  if you ask the software industries, startups, VCs, they tell you overwhelmingly that the patent system is a cost, not a benefit.  That doesn't mean all software patents are bad or that all patents are bad.  But it suggests that perhaps we have too much innovation in the legal models, and it's imposing a tax on the technical areas.  Moreover, what do we want the secondary market to accomplish?  Is the secondary market putting patents to productive use?  These are patents that would have lain fallow.  But is there any reason to believe that people innovate in the belief that even if my company goes over I'll be able to sell my patent to a troll.  Secondary market argument is implausible.  Traditionally, 98% of patents not enforced.  What happens when these secondary markets mean we're enforcing 50-60-70% of all patents?  Not a recipe for tech transfer, but rather exclusivity transfer.

Schwartz:  Lemley talks about bottom feeder cases.  Duffy and I are against frivolous suits.  But the data is weakest here, and this is the linchpin of the argument.  Allison/Lemley/Walker paper is the main one, but that study has its limitations.  Many of the patents most litigated are outliers.  Not the right way to make inferences.  Kesan, Cotropia, and I doing further research.  In addition, just losing at summary judgment doesn't mean the case was frivolous.  Selection effects:  only about 10% of cases reach the merits phase.  Considering the 10% to make statement about the 90% may not be right.  Possibility of an injunction affects settlement negotiations, and  NPEs now can't get injunctions.  NPEs have only one way to settle a case, by money.

McGowan:  First (directed to Lemley and Meurer), isn't Duffy right that you don't want patent law to distort minimum patent size; different outcomes based on whether you practice or not?  Second (directed to Duffy and Schwartz), isn't there an aggregation effect at issue here--when you have a portfolio, you can sue serially, which is different from, say, a one-on-one Apple v. Samsung case.

Lemley:  should we single you out because you're an NPE?  No.  But that leaves room to recognize that motivations among parties.  Moreover, we need proxies in the absence of perfect information.  eBay does it pretty well.

Meurer:    we all agree not to tailor patent law based on status.  But some tailoring based on a proxy might be appropriate.  Something like eBay allows a court to find the right context and craft the right remedy.  Probably for many university plaintiffs, injunctions might be fine.  But what we need to push the courts to do is to be more conscious of strategic behavior.

Duffy:  By and large, no one is saying we should treat these inventors differently as a theoretical matter, and that is my basic point.

Schwartz:  on the portfolio issue (company can serially sue) is not unique to PAEs; big firms can do that too.  In response to Lemley and Melamed, serial enforcement might be a problem; royalty stacking.  There may be solutions but potential for mischief.

Duffy:  if the problem is that there are many junk patents, that's the problem to address, as in KSR.  Moreover, both parties have an incentive to avoid litigation.   Filing suit on a large number of frivolous claims can be a bad business model.

Meurer:  John cited my book but not the underlying article.  One thing he should have said is that one reason pharma companies lose value is that investors think they have rock-solid patents, and filing suit leads investors to question that.  Second, assertion by NPEs as more efficient:  the borderline patent that will be asserted will be of borderline quality.  Shifting assertion to NPEs automatically means there will be more borderline patents asserted.  And we still have problems after KSR.  PAEs are asserting patents that in the 1990s would have been asserted, if at all, by PEs.  PAEs aggravate the harm.  I don't like NTP v. RIM; that was not frivolous, but it's disastrous for the patent system.  I'm not as concerned about whether they are frivolous; it's the size of the patent tax that grows with the effectiveness of PAEs.

McGowan:  Do you concede or agree there's a positive correlation between R&D spending and being sued?  Why the spike in NPE suits in 2001?  Mike and Mark:  how confident are you that the data we have now is sound?

Duffy:  the bigger you are, the more likely to be sued.  More you spend on R&D, more likely to be sued.  Firms on the cutting edge are the ones that get sued for infringement.  As for the spike, there is innovation going on, and IBM (a PE) made money from licensing.  They show us new ways of doing things.

Schwartz:  Re the increase in litigation:  growing view that patents are valuable assets, and contingency fee suits.  More litigation doesn't necessarily mean the system is bad.

Lemley:  Worth saying that we know less than we would like to about suits that settle.  About 10-15% of cases do go to judgment, usually summary judgment.  They may be unrepresentative in some respect.  But academic literature suggests they should be about 50-50.  The fact that trolls lose when they go to judgment is still striking.  And when we say 90% of those cases fail, that's a significant chunk of all the cases in the system.  Colleen Chien survey on settlement and payout:  how much do you pay?  90% have payout of $10 million or less including attorneys' fees.  Suggests that most of the cases are settling for something like the cost of litigation.  Doesn't necessarily mean frivolous, but perhaps small stakes.  There are limitations to the data, and I agree.  Maybe we should require disclosure about patent settlements.  Finally, it's worrisome if the more I spend on R&D the more likely I am to be sued:  whether the problem is trolls or not.

Meurer:  What should the presumptions be?  The political economy of this problem is crystal clear.  We need to reform.  If we push too far, the concentrated interests will push back.  It's a rare opportunity that Congress and the executive care about patents.  Sensible thing to do is to reform.  There will be a continuous force in the opposite direction.

Question from Oskar Liivak:   Imagine two inventors who come up with process patent they won't manufacture.  Can try to license, or wait until someone else invents and then sue.  The inventor who actually pushes the technology out is more socially beneficial than the one who puts it in the drawer and waits.  The patent system puts them both on the same footing:  they get a reasonable royalty.

Duffy:  First, I agree that ex ante licensing is great.  The inventor may not be the best person to do it.  I might want a PAE who's ready to license you.  Second, patents don't get put in drawers; they get put on the Internet.

Lemley:  We want technology transfer.  We used to get it through the patent office because the diffusion of information was slow and the PTO was fast.  No longer.  If you're asserting a software patent, your technology is probably obsolete.  Or you're trying to recast what you invented as something on the market now.  That's not tech transfer, that's patent rights transfer.

Question from Nancy Linck:   In AIA, Congress told GAO to make a study about effect of PAEs on litigation.  Study found no effect?

Lemley:  Study concluded that; compared data concluding in 2011 before AIA joinder change.  Asked only how many lawsuits were filed, not how many people were sued.  Most lawsuits filed in 2000s were by PEs, but most people sued were sued by NPEs.

Meurer:  The GAO study told us there's a serious problem with software patents.

Schwartz:  The study did look at number of people sued as well.