Friday, April 24, 2015

Info-Hold v. Muzak: Federal Circuit Reverses Judgment of No Royalties

The case in Info-Hold, Inc. v. Muzac LLC, available here.  Plaintiff Info-Hold is the owner of U.S. Patent No. 5,991,374, "directed to systems, apparatuses, and methods for playing music and messages (e.g., advertisements) through telephones and public speaker systems."  Info-Hold filed separate infringement actions against Applied Music Technologies Corp. (AMTC) and Muzak LLC in the same federal district court, and the same district judge considered both matters.  Following the district judge's claim construction, Info-Hold and AMTC stipulated to a judgment of noninfringement to enable Info-Hold to appeal.  In the Muzac case, the judge's construction of a different claim term resulted in a stipulation of noninfringement as to certain claims at issue.  As for the remaining claims, the judge entered judgment for Muzac on the grounds that (1) Info-Hold offered no admissible evidence of damages, and (2) there was no genuine issue of material fact regarding Muzac's liability for inducement.  

The appeals in both cases were argued the same day and the two opinions, both authored by Judge Reyna, issued today.  In AMTC, the court reverses the district judge's claim construction of the term "transmit" and remands.  In Muzac the court affirms the construction of “when a caller is placed on hold,” but reverses on the damages and inducement issues.  

The damages issue in particular is reminiscent of Judge Posner's decision in Motorola v. Apple, in which he concluded that neither party had presented sufficient evidence on damages, that neither was an entitled to an injunction either, and that there was no right to proceed to trial for merely nominal damages.  The Federal Circuit, in an opinion by Judge Reyna, reversed on that issue last year (see my post here), so it's not surprising that it would do so again in Muzac.  Here is the relevant language from Judge Reyna's opinion from today:
The district court did not abuse its discretion in striking [Info-Hold's expert] Mr. White’s expert report. The district court stated that Info-Hold’s reliance on the entire market value rule, without presenting evidence that the patented features drove customer demand, was “improper” and itself sufficient to strike Mr. White’s evidence. J.A. 92; cf. J.A. 85. Info-Hold has not appealed this basis for striking the report. Mr. White’s damages analysis was also deficient because he relied on the 25-percent rule, which this court discredited as “fundamentally flawed” in Uniloc. 632 F.3d at 1315 (deeming evidence relying on the 25-percent rule as inadmissible for failing to tie the royalty base to evidence in the case). We therefore affirm the striking of Mr. White’s evidence. . . .
In Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1328 (Fed. Cir. 2014), we explained that at “summary judgment . . . a judge may only award a zero royalty . . . if there is no genuine issue of material fact that zero is the only reasonable royalty.” Therefore, if there exists a factual issue regarding whether the patentee is due any non-zero royalty, the district court must deny summary judgment. Id. Where the patentee’s proof is weak, the court may award nominal damages. Id. Moreover, we explained that a patentee’s failure to show that its royalty estimate is correct is insufficient grounds for awarding a royalty of zero. Id. By extension, the exclusion of the patentee’s damages evidence is not sufficient to justify granting summary judgment. As we made clear in Dow Chemical Co. v. Mee Indus., Inc., 341 F.3d 1370, 1381 (Fed. Cir. 2003), 35 U.S.C. § 284 requires the district court to award damages “in an amount no less than a reasonable royalty” even if the plaintiff’s has no evidence to proffer. We explained that, in such a case, the district court should consider the Georgia-Pacific factors “in detail, and award such reasonable royalties as the record evidence will support.” Id. at 1382 (footnote omitted).
Here, as in Apple, the issue of infringement has not been decided. The district court granted summary judgment to Muzak on the issue of reasonable royalty damages because, after striking its expert’s report and precluding him from testifying, Info-Hold was unable to make a prima facie case as to any reasonable royalty rate. There was other record evidence which the district court could use as a basis for determining a reasonable royalty, even after the exclusion of Mr. White’s report and testimony. In his deposition, [defendant's expert] Mr. Paris affirmed that reasonable royalty rates for Muzak’s Encompass LE 2 and Encompass MV systems would be 1 and 2 percent, respectively. He also discussed the Trusonic License, the royalty paid to Mr. Hazenfield under his assignment of the patent to Info-Hold, the profitability of the accused systems, and more.
The Federal Rules of Civil Procedure allow the use of deposition testimony for any purpose allowed by the Federal Rules of Evidence. . . . Here, Muzak has not specifically objected to the admissibility of Mr. Paris’ deposition testimony. We leave to the district court to decide whether the deposition may be considered in determining the reasonable royalty rate. In any case, there is other record evidence to demonstrate the existence of a genuine issue of material fact as to whether zero is a reasonable royalty rate.

Thursday, April 23, 2015

French Court Applies 25% Rule of Thumb, Multiplier to Arrive at 3% Royalty

The case is Vorwerk & Co. Interholding GmbH v. Electrodomesticos Taurus SL, TGI Paris, Sept. 26, 2014, PIBD 1018, 919.  The patent in suit is EP 0757530, titled Robot ménager comportant un bac á agitation et un mécanisme d'entrainement de l'agitateur du bac (a food processor comprising an agitator vessel and a mechanism for operating the agitator).  If I am understanding this correctly, the inventive feature in suit appears to be something called a chapeau de cuisson á la vapeur, which I would translate as "steaming cap."  Plaintiff Vorwerk sued defendant Taurus for selling allegedly infringing food processors.  In earlier proceedings the court held that the patent was infringed, and this judgment was affirmed.  The proceeding at issue was to set the amount of the plaintiff’s damages.

At the time the events at issue occurred, article 615-7 of the IP Code read as follows:
Pour fixer les dommages et intérêts, la juridiction prend en considération les consequences économiques négatives, dont le manque à gagner, subies par la partie lésée, les bénéfices réalisés par le contrefacteur et le préjudice moral cause au titulaire des droits du fait de l’atteinte. 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 qui ne peut être inférieure 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.
This can be translated as 
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.
(Article 615-7 was amended in March 2014, for discussion of which see here.  The amendment is not applicable to this case.) 

Vorwerk itself did not practice the patent but rather licensed some affiliated firms to do so.  Vorwerk asserted as its damages its lost profit (manque á gagner), based on the royalties it would have earned from Taurus and Taurus's distributors if they had concluded a license.  Again if I am understanding correctly, Taurus argued that Vorwerk's failure to work the patent meant that Vorwerk was not entitled to recover any damages, but the court disagreed and concluded that the injury suffered by the patent owner would be, at a minimum, equal to the royalties it would have received but for the infringement.

As for the amount, the court appointed an expert who first determined the infringing turnover (la masse contrefaisante).  The expert determined that this should include (1) sales of a model called Mycook that included the steaming cap, and (2) sales of a model called Mycook Pro that did not include the cap, but for which the cap was separately purchased as an accessory.  Altogether this equaled €4,242,557.  The court accepted the expert's analysis.

Next, to calculate the royalty rate the expert first calculated the infringer’s profit margin as 9.6%. Vorwerk argued that the expert deducted some fixed costs that were not tied to the manufacture of the infringing goods, and that the profit margin was actually 22%, but again the court affirmed the expert’s calculation.  Next, the expert multiplied 9.6% by 25%, a step the court refers to in the opinion as “une clé de repartition couramment admise en matière de license de brevet” (a sharing method commonly used in patent licenses)--basically, what sounds like a "rule of thumb" to me.  Next, the expert cut this figure in half based on his conclusion that the patented invention did not play a key role in the sale of the defendant's products, and then rounded this up to 1.5%.  Finally, the expert suggested that the court could multiply the 1.5% rate by 1, 2, or 3.  Taurus for its part argued that the royalty base should be reduced to the average price of the steaming cap times the number of infringing devices, and that any enhancement would be punitive in nature.  The court disagreed, specifically stating as to the latter issue the following (in my translation):
It is appropriate to apply the principle of enhancing the contractual royalty rate, because doing so takes into account the damaging situation in which the rightholder finds itself, who suffers the exploitation of the invention without any decision on its part.  It would be, in such a case, unjust to apply purely and simply a royalty rate equal to that which the parties would have consented to had they negotiated a license.
(For further discussion of royalty multipliers in France, see my book p.270 & n.187). Multiplying the masse contrefaisante as calculated by the expert (€4,242,557) by 3%, the court therefore awarded €127,367 in lost royalties.

Tuesday, April 21, 2015

Some New Papers on PAEs and Antitrust, Part 2

1.  Michelle Miller and Janusz Ordover have published a paper in the January 2015 issue of CPI Antitrust Chronicle titled Intellectual Ventures v. Capital One: Can Antitrust Law and Economics Get Us Past the Trolls?  Here is a link to the paper, and here is the abstract:
Patent trolls are currently under intense scrutiny by lawmakers, regulators, academics, and industry players. The term “patent troll” generally refers to patent owners that do not make or sell products, and instead focus on licensing and litigation to monetize their acquired patents. These entities are also known as “patent assertion entities,” and in this paper, we use the terms interchangeably. Infringement suits brought by trolls have exploded over the last few years—in 2012 patent trolls accounted for 62 percent of all patent infringement suits, and recent studies estimate that trolls imposed direct costs of $29 billion in 2011. And these costs appear to be deterring investment in new businesses and technologies—one study estimated that venture capital funding was $8.1 billion lower over a five-year period than it would have been without PAE enforcement. 
Although most commentators have concluded that many patent troll business models lead to market inefficiencies, it is not clear what can be done in the short term to address the wide variety of concerns that troll activities raise. Various legislative solutions have been suggested and attempted, but these do not address the full scope of the problem. Attempts to bring antitrust claims against trolls also largely have failed, as in the case of Intellectual Ventures I LLC v. Capital One Financial Corp. Using the facts alleged by Capital One as a case study, we suggest that antitrust law can curb some of these abuses immediately, and we explore alternative approaches to the antitrust claims in that case that could lead to a different outcome in future litigation. In particular, we observe that, by concealing the scope of a large patent portfolio, a PAE can diminish incentives to design-around individual technologies within that portfolio, thereby reducing the viability of competing technologies in those individual technology markets.
2.  Expressing a different view are John "Jay" Jurata, Jr. and Amisha R. Patel in their paper  Taming the Trolls: Why Antitrust Is Not a Viable Solution for Stopping Patent Assertion Entities, 21 Geo. Mason L. Rev. 1251 (2014).  Here is a link to the paper, and here is the abstract:
Certain operating companies, including Google Inc., as well as consumer protection advocates, trade organizations, academics, and antitrust enforcement agencies, have suggested that antitrust law may offer a solution to concerns over PAE behavior. These arguments, taken together with the FTC’s continued interest in the effects of PAE assertion activity, beg the question: is antitrust enforcement a viable solution for patent assertion entities? Some have suggested yes. Proponents of antitrust enforcement solutions argue that PAE behavior raises antitrust policy concerns because it results in patent holdup, raised rivals’ costs, exclusion of companies from markets, and/or harms to innovation. But few specifics have been offered to back up these various theories.
This Article seeks to apply a disciplined antitrust analysis to these theories. This Article undertakes a traditional antitrust analysis under Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act to assess PAE conduct. The analysis examines whether the alleged harms associated with PAE behavior are harms to competition or the competitive process—a necessary element for antitrust liability. Ultimately, this Article concludes that, outside limited scenarios, antitrust laws are not a solution to the problematic aspects of PAE behavior.
3.   I should also mention that Florian Mueller has an interesting post on privateering over on the FOSS Patents Blog today.  Privateering is also the topic of the Maurits Dolmans paper I mentioned yesterday, as well as something that Erik Hovenkamp and I touch on in a recent paper.

4. Finally, not so much in the antitrust vein but relevant to the question of whether state anti-PAE laws are constitutional is Nick Vogel's comment titled Patently Preempted, 14 John Marshall Review of Intellectual Property Law 268 (2015).  Here is a link to the paper, and here is the abstract:
Small and medium size businesses often take advantage of the latest advancements in technology. Doing so, however, now seems to carry the risk of patent infringement. In 2012, so called patent trolls, also known as Non Practicing Entities, began sending letters to small and medium sized businesses demanding money in exchange for a license to use allegedly patented technology. Many saw the demands as an abuse of the patent system. In response, states have passed or are considering statutes that outlaw patent holders from delivering a bad faith notice of infringement. The State of Vermont was the first to address this issue. Vermont amended its consumer protection laws to outlaw “Bad faith assertions of patent infringement.” But how far can Vermont and other states go before being preempted by the federal government? This comment asks that very question. After analyzing the original intent of Congress, a theory of field preemption and the Constitutional right to petition the government, this comment concludes with the opinion that state-based laws meant to discourage Non Practicing Entities from sending bad faith cease and desist letters are preempted by the federal patent regime. Finally, this comment proposes that the best way to discourage Non Practicing Entities from harassing companies with frivolous law suits is to allow victorious defendants in patent infringement suits to collect damages from the losing plaintiffs.
For other papers discussing this issue, see my post here.

Monday, April 20, 2015

Some New Papers on PAEs and Antitrust, Part 1

1.  Alan Devlin has posted a paper titled Antitrust Limits on Targeted Patent Aggregation, Florida Law Review (forthcoming 2015).  Here is a link to the paper, and here is the abstract:
Patent-assertion entities, or “PAEs,” are non-technology-practicing companies that aggregate and license patents under threat of suit. Their activities have drawn fire, including Presidential condemnation, and spurred proposed legislation to protect operating firms against them. PAEs leverage flaws in the patent system to extort firms that independently invent and sell technological goods to consumers. Since PAEs tax innovation, and appear not to act not as a conduit for wealth transfer to original patentees but as bottlenecks, their worst rent-seeking practices almost certainly reduce net incentives to innovate, and harm consumers. This is all the more true if, as seems likely, the principal desirable incentive that PAEs create is to file patents rather than to commercialize technology.
The idiosyncratic nature of today’s patent system facilitates PAE activity. Patents’ numerosity, vague scope, widespread invalidity, and sometimes-functional claiming prevent even the most assiduous technology companies’ securing guaranteed clearing positions before building products. These conditions guarantee that, ex post, a universe of potentially infringed patents of dubious validity exists in many industries, especially in information technology. Fortunately, atomized ownership of this intellectual property limits enforcement ex post because the unlikelihood of success in asserting few patents, combined with the risk of countersuit and high litigation costs, make suing a losing value proposition. The result is a public-goods benefit in constrained enforcement that ameliorates hold-up potential. Even ex post, owners of disaggregated patents typically lack market power unless those IPRs are likely valid and infringed. 
PAE accumulation changes all of that. By amassing hundreds or even thousands of patents, never building or selling goods, using shell companies to conceal the contents of their portfolios, and asserting patents in waves ex post, PAEs can realize immense hold-up power. Crucially, this conclusion holds true even if the great majority of their patents are invalid or not infringed. This dynamic leaves many operating victims vulnerable to threats of incessant litigation, thus forcing them to part with tens or even hundreds of millions of dollars for licenses that they never needed to engineer successful products. Commentators increasingly — though do not universally — accept that PAEs harm the economy. The solution, though, is less clear. Many propose reforming the patent system, such as requiring losing patentees to pay the other side’s costs and forcing PAEs to disclose their portfolios. Some legislative reforms do appear likely, and the Supreme Court in 2014 will consider whether to invalidate certain computer-implemented inventions. Nevertheless, modest changes are unlikely to remedy PAE hold-up in all its forms.
Lacking other solutions, some policymakers now look to the antitrust laws. To be sure, not everyone believes that competition rules proscribe PAE conduct, or otherwise suitably constrain patent hold-up. Indeed, antitrust rules are not a cure-all. This Article argues, however, that antitrust law can viably limit PAEs’ abuse of the patent system. Section 2 of the Sherman Act proscribes willful monopolization, Section 7 of the Clayton Act prohibits asset acquisitions that tend substantially to eliminate competition or to create monopoly, and the patent-misuse doctrine neutralizes an asserted patent the owner of which has improperly broadened in scope with anticompetitive effect. These provisions have sufficient teeth to catch the most egregious forms of hold-up founded on ex post patent aggregation and assertion. This paper explains how PAE activity can reduce social welfare, and how PAEs’ targeted patent acquisitions and assertion against profitable goods can violate competition rules.
This one has actually been up on ssrn for a while, but I must have overlooked it, so thank you to my student Kyle Kroll for calling it to my attention.

2.  All right, so this is not a new paper (it came out last year), but it just recently came to my attention via Danny Sokol's Antitrust & Competition Policy Blog, which noted that the paper (the author which I had the pleasure of meeting last summer in Brussels) is the recipient of a 2015 Antitrust Writing Award.  The author is Maurits Dolmans and the paper is titled Privateers and Trolls Join the Global Patent Wars; Can Competition Authorities Disarm Them?, published in the April 2014 issue of Computerrecht 2014 (pages 80-88).  Here is a link to the paper, and here is the abstract:
Patents are supposed to foster innovation, but are now also used to block it. The system is turning against itself. If antitrust authorities and courts allow this to continue, these practices will spread. Those who foster privateering may become the victims of their own strategems, and the problem may infect other industries. It may well be some time before consumers see increased prices and reduced competition, but when they do, it will be even more difficult to redress the problem. Prevention is better than cure. Privateering can and should be addressed under Article 101 TFEU.
More to come tomorrow or later this week.

Friday, April 17, 2015

Ferguson and Schneider on Enforcement of IP Rights in Africa

Vanessa Ferguson and Marius Schneider have published a paper titled Enforcement of Intellectual Property Rights in Africa in the April 2015 issue of the Journal of Intellectual Property Law & Practice, pages 269-79.  Here is a link to the article, and here is the abstract:
This article provides an overview of enforcement measures that are available to intellectual property right-holders on the African continent. Africa is rising—with comparatively high growth rates and a rising number of consumers—and so is the anti-counterfeiting challenge. There are, however, particularities when it comes to enforcing intellectual property rights in Africa which right-holders and practitioners will have to take into account.
The article examines the law and practice in relation to enforcement of intellectual property rights in the following countries and territories: Morocco, Algeria, Egypt, the African Intellectual Property Organization (OAPI), Nigeria, Ghana, Tanzania, Kenya, Uganda, Mauritius and South Africa.
The authors conclude that the enforcement of intellectual property rights in Africa remains a very complex issue, due to the absence of harmonisation of standards and procedures in relation to anti-counterfeiting measures. However, thanks to the efforts and the goodwill of right-holders, practitioners and law enforcement authorities, steady progress is being made when it comes to successful enforcement of intellectual property rights in Africa. 
Although most of the article focuses on measures against counterfeiting, there is also some discussion of border measures, preliminary measures, and civil and criminal penalties for infringement of IP rights generally, including under the Bangui Agreement to which the 17 OAPI states are members.

Wednesday, April 15, 2015

Drafting Around the Entire Market Value Rule?

Over at the Patent Damages blog, Chris Marchese published an interesting post a few weeks back titled Damages base--is the name of the game the claim?  Here's the set-up.  Under Federal Circuit precedent, the “entire market value” may serve as a royalty base only when “the patented feature drives the demand for an entire multi-component product,” and as a general rule the correct base is the “smallest salable patent-practicing unit.” LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) (quoting Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283 (N.D.N.Y. 2009)).  However, as the court further clarified in Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014), "the requirement that a patentee identify damages associated with the smallest salable patent-practicing unit is simply a step toward meeting the requirement of apportionment. Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature . . . the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. To hold otherwise would permit the entire market value exception to swallow the rule of apportionment. . . ."  Moreover, as explained in the even-more recent case of  Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014), the entire market value rule (EMVR) "actually has two parts, which are different in character."  The first is a "substantive legal rule" that the "the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more. . . .  When the accused infringing products have both patented and unpatented features, measuring this value requires a determination of the value added by such features."  The second is an evidentiary principle, "applicable specifically to the choice of a royalty base," that "where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product."  Once the jury hears that the defendant earned $1 billion from sales of an infringing product, in other words, it may be difficult for it to avoid awarding an inappropriately large royalty; as the court puts it, the large number may "skew the damages horizon for the jury."  (So does that mean that use of the entire value of the end product as a royalty base is all right in a bench trial, as long as the value of the infringing component is properly apportioned?  That would seem to follow, I think.)

Anyway, suppose an inventor invents component ABC, and that ABC serves as a small component in a larger, multicomponent product such as a smartphone.  Would the inventor be well-advised to include at least one dependent claim comprising "ABC incorporated into a smartphone"?  In a case in which a defendant infringes by incorporating ABC into a smartphone, could the inventor then assert that, with respect to the infringement of the dependent claim, the "smallest salable patent-practicing unit" is ABC plus smartphone?  Sure, the inventor would have to apportion the value of the patented feature further, under VirnetX.  But now the jury has heard the entire market value of the end product, which is what the EMVR is supposed to prevent.

According to Mr. Marchese, the case law thus far is not very clear on this issue.  But perhaps it wouldn't be surprising if patent owners started to include claims like the hypothetical dependent claim above, just in case it could come in handy later on in the event of litigation.  Indeed, in Ericsson the Federal Circuit was willing to allow the jury to hear about comparable licenses that use the EMVR as the royalty base as long as the court, on request, gives an appropriate cautionary instruction.

Assuming we don't want the jury to hear that number, however, perhaps a way around the problem would be to recast the EMVR as requiring the identification not of the smallest salable patent-practicing unit, but rather the smallest salable unit that incorporates the inventive principle or "point of novelty."  In the above hypo, this would mean that "smartphone + ABC" is not the appropriate base, but rather the smallest component of the smartphone that practices ABC (the inventive feature).  But then we would be inviting disputes over what the inventive feature is.  This introduces yet another complexity, and might be particularly hard to pin down in a case in which the inventive feature is a novel and nonobvious combination of preexisting features.

Alternatively, perhaps judges simply could be required to apply the "smallest salable unit" rule as long as the infringing product infringes the broader, independent claim (ABC), even if it also infringes the narrower dependent claim (ABC + smartphone).

If neither of these options work, however, are we stuck with a potential way to draft around the EMVR?  Does it really matter, or should we be less suspicious of juries' ability to understand the principle of apportionment?  Presumably the issue is much less pressing in other countries, where jury trials in patent cases are nonexistent . . . .    

Tuesday, April 14, 2015

Patentable Subject Matter Symposium

This is a bit off the topic of patent remedies, but I will be speaking at the Fourth Annual University of Minnesota Law School Patent Symposium, cosponsored by Briggs and Morgan P.A., on Wednesday, April 29 in Minneapolis.  This year's topic is "Patentable Subject Matter Post Alice Corp. v. CLS Bank." Attendance is free and CLE credit has been applied for.  More information is available here.