Monday, September 29, 2014

New Papers on FRAND/SEPs by Sidak, Lim, Contreras, Carrier, and Bohannon

1.  J. Gregory Sidak has a paper coming out in the Stanford Technology Law Review, titled Mandating Final-Offer Arbitration of FRAND Royalties for Standard-Essential PatentsHere is a link to the paper, and here is the abstract: 
Mark Lemley and Carl Shapiro propose that standard-setting organizations (SSOs) mandate that their members henceforth submit to binding, final-offer arbitration (commonly called “baseball arbitration”) to set fair, reasonable, and nondiscriminatory (FRAND) royalties in licensing disputes concerning standard-essential patents (SEPs). SSOs should reject this proposal. It does not rest on sufficient facts or data, nor does it apply intellectually rigorous principles and methods of law and economics in a reliable manner. This is not to say that the voluntary use of arbitration to resolve FRAND licensing disputes is inherently problematic. However, the incremental efficiency that Lemley and Shapiro claim that their proposal would achieve over litigation or conventional commercial arbitration is illusory. For one, it is much harder to value a portfolio of SEPs over the span of five years than to value an individual baseball player for a single season. The Lemley-Shapiro version of mandatory baseball arbitration would not shed light on the question of what constitutes a FRAND offer. To the contrary, Lemley-Shapiro arbitration by design collapses questions of validity, infringement, and essentiality of the patent to the standard into a single damage calculation in which the arbitrator’s sole responsibility is to choose one of two disparate estimates of reasonable royalties. Yet, a FRAND offer contains not only a price, but also terms and conditions that (because they are nuanced and possibly tailored to the unique needs of an individual licensee) do not lend themselves to being easily standardized, let alone summarized in a single number, as the description of Lemley-Shapiro arbitration might incorrectly lead some to assume. Lemley-Shapiro arbitration would not say whether a royalty offer was fair, reasonable, and nondiscriminatory. Lemley and Shapiro claim that their arbitration proposal offers “best practices” for SSOs. That label is unsupported and misleading. The package that Lemley and Shapiro call “best practices” is in fact not a narrow proposal for binding baseball arbitration but rather a roadmap to redefine patent rights in a manner that would transfer wealth from inventors to infringers. Embedded within Lemley-Shapiro arbitration are normative changes in patent law and policy that Lemley and Shapiro have previously advocated but that SSOs and courts have not adopted. An SSO that adopted Lemley-Shapiro arbitration could expect its members to commercialize their next generation of inventions outside that particular SSO, if not outside an open standard altogether.
2.  Daryl Lim has posted a paper on ssrn titled Standard Essential Patents, Trolls and the Smartphone Wars: Triangulating the End Game, 119 Penn St. L. Rev. (forthcoming 2014).  Here is a link to the paper, and here is the abstract:
Few legal issues in recent years have captured the public’s attention more powerfully than litigation over standard essential patents (“SEPs”). This Article explains how SEP litigation overlaps with two other major centers of patent litigation – litigation involving smartphones and patent assertion entities (“PAEs”). It observes that attempting to pre-empt patent hold-ups by imposing blanket ex ante disclosure obligations and royalty caps on standard setting organizations (“SSOs”) is misdirected and counterproductive. Instead, the solution lies in clear and balanced rules to determine “fair, reasonable and non-discriminatory” (FRAND) royalties and injunctive relief. This solution will help parties make more realistic assessments of their options and help adjudicators resolve SEP disputes.
Correctly framed, implementers bear the burden of proving the breach of a FRAND commitment. FRAND royalties should, in the absence of comparable licenses, focus on apportioning the profits based on the relative importance of the patented technology in the covered product.  Royalties should be measured at the time the standard is set but generally should not be discounted for the possibility of invalidity and noninfringement. Discriminatory licenses can be hard to detect, but targeted initiatives and improved transparency would make the task easier. Injunctions should be granted based the wording and intent of the relevant FRAND commitment, conduct of the parties, and proof that the technology drove the sales of the component or product on which the relief is sought. More broadly, courts must understand both the limits and opportunities of the antitrust and patent laws. While useful in arresting ex ante misconduct, antitrust is largely irrelevant to SEP litigation; patent law has a role in both improving patent quality and deterring vexatious litigation.
3.  Jorge Contreras has posted a paper on ssrn titled A Market Reliance Theory for FRAND Commitments and Other Patent Pledges, Utah L. Rev. (forthcoming 2014).  Here is a link to the paper, and here is the abstract:
Patent holders are, with increasing frequency, making public promises to refrain from asserting patents under certain conditions, or to license patents on terms that are “fair, reasonable and non-discriminatory” (FRAND). These promises or “patent pledges” generally precede formal license agreements and other contracts, but are nevertheless intended to induce the market to make expenditures and adopt common technology platforms without the fear of patent infringement. But despite their increasing prevalence, current contract, property and antitrust law theories used to explain and enforce patent pledges have fallen short. Thus, a new theory is needed to secure the market-wide benefits that patent pledges can offer.
This article proposes a novel “market reliance” theory for the enforcement of patent pledges. Market reliance is rooted in the equitable doctrine of promissory estoppel, but adds a rebuttable presumption of reliance borrowed from the “fraud-on-the-market” theory under Federal securities law. Under this approach, a patent holder’s public commitment is enforceable by any participant in the relevant market, absent a showing that it knowingly rejected the commitment. The market reliance theory offers a robust means for enforcing legitimate patent pledges by third party market participants, and extends the effect of such pledges to downstream purchasers of patents. As such, the market reliance theory could fill a critical gap in the existing patent enforcement landscape and give greater assurance to the technology markets that depend on them.
I mentioned an earlier version of this paper on this blog, here, last October.  Professor Contreras himself discussed the paper on the Patently-O Blog recently, under the title Why FRAND Commitments Are Not (Usually) Contracts

4.  Michael Carrier has posted a short paper on ssrn, to be published in Competition Policy International, titled What You Need to Know About Standard Essential Patents.   Here is a link to the paper, and here is the abstract:
In the past several years, standard essential patents, or “SEPs,” have exploded onto the scene. Courts and enforcement agencies around the world have grappled with the nuances they present. What exactly are SEPs? What do attorneys need to know about SEPs?
This article answers these questions. After presenting the setting in which SEPs arise, it addresses three issues: (1) injunctions; (2) antitrust enforcement (in the US, EU, China, India, and Germany); and (3) the determination of fair, reasonable, and nondiscriminatory (“FRAND”) royalties.   
5.  Mark Bohannon has posted a paper on ssrn titled Out of the Murky Lagoon and Into...Is There a Emerging Consistent US Government Policy on Standard Essential Patents (SEPs)?  Here is the link, and here is the abstract:

In January 2013, the USDOJ and USPTO issued a Policy Statement on remedies for Standard Essential Patents (SEPs) which concluded, that while an Section 337 exclusion order issued by the US International Trade Commission (ITC) for infringement of encumbered SEPs may be appropriate in some circumstances, “depending on the facts of individual cases, the public interest may preclude the issuance of an exclusion order in cases where the infringer is acting within the scope of the patent holder’s F/RAND commitment and is able, and has not refused, to license on F/RAND terms.” Contemporaneously, the FTC entered into a settlement with Google which defined what constitutes an SEP and demarcates specific steps to determine what is, in fact, an unwilling licensee, proscribing unilateral action by the SEP holder seeking damages or injunctions.
Together, these action bring some order to what has been a murky area in telecommunications standards. But, unlike the FTC in its settlement agreement, the USDOJ/PTO Policy Statement, went further, evidencing what appears to be an overreaching regarding U.S. Government (USG) policy on voluntary industry standards (and how patents relate to them), even though the factual situations arose in the peculiar industry of telecommunications. This paper explains how that sector differs from others, focusing especially on standards for software, Internet and Web fields, analyzes the risk (and inconsistency with other USG policies) for assuming that there is one approach for how patents are treated in standardization activities across all sectors, and outlines next step considerations for policy makers.

Sunday, September 28, 2014

Slides on PAEs from Yesterday's OPLA Conference

Yesterday I presented a talk titled Do Patent Assertion Entities Help or Hinder Innovation?  A Review of the Principal Arguments, at the Oregon Patent Law Association's 2014 Salishan Patent Law Conference.  The presentations were very good, and it was great to see a little bit of the Pacific Northwest during my stay.  I'd like to thank the Klarquist Sparkman firm in particular for its sponsorship of the event.

For readers who may be interested, here is a link to my slides, which update a talk I gave earlier this year and also cover efforts at the state and federal level to address perceived abuses by PAEs.
   

Thursday, September 25, 2014

Midweek Miscellany: Wrongful Enforcement Lawsuit in Canada, Accounting of Profits in the U.K., and More

1.  From time to time I have blogged about various claims that may be made in different countries for wrongful patent enforcement.  (See here, here, here, here, here, and here.)  Recently both Sufficient Description and PatLit have published posts on Low v. Pfizer Canada Inc., 2014 BCSC 1469, a case in which the Supreme Court of British Columbia (Canada) held that the complaint disclosed a cause of action sufficient to allow a class action, filed on behalf of a class of consumers who are demanding compensation for Pfizer's having charged an above-market price for Viagra prior to the eventual invalidation of Pfizer's Canadian patent on the drug, to go forward.  More specifically, the court denied a request to dismiss the complaint because it was not "plain and obvious" that the plaintiffs' claims for unjust enrichment and interference with economic relations were doomed to fail.  Whether the plaintiffs will succeed on the two claims remains to be seen; to prevail, the plaintiffs must prove, among other things, intent and bad faith.  Professor Siebrasse's discussion (on Sufficient Description) of the competing policy considerations in cases of this nature is worth reading.  

2.  John Fitzgerald and Alison Firth have published an article in the September issue of the Journal of Intellectual Property and Practice (JIPLP) titled Is Article 13 of the Enforcement Directive a redundancy notice for the account of profits remedy in the UK?  Here is a link to the journal's website, and here is the abstract of the article:
This article examines a consequence of Art 13 of Directive 2004/48 on the enforcement of intellectual property rights. 
The authors consider the extent to which at least in the UK,the remedy of damages has effectively usurped the role & function of the free standing remedy of account of profits.
It is argued that Art 13 has eliminated the need for electing between damages and account and a cascade is proposed, by which courts might approach the award of damages under Art 13.
The article makes two interesting points.  The first is that article 13 of EC Directive 2004/48 could be construed as meaning that an IP plaintiff "is entitled to recover both direct losses it has suffered and the unfair profits made by the defendant, provided always that there is no double counting," whereas UK law seems to  require an election between an award of lost profits and an award of the infringer's profits.  Second, however, the authors argue that UK law already permits courts to award both lost profits on lost sales and, in the very same cause of action, a reasonable royalty for those unauthorized uses which did not deprive the plaintiff of sales, so that extending this principle to include awards of both lost profits and (some portion of ) defendant's profits would not be a stretch (again, as long as there is no double counting).

(On a related note, a few weeks back a reader queried me on the topic of how different countries handle the question of election of remedies, i.e., whether a patentee may recover both lost profits and a reasonable royalty, as long as there is no double counting, or is the patentee limited to one choice of remedy?  I intend to published something on this topic in due time.)   

The journal also has a short article by Charles R. Macedo and Sandra A. Hudak titled Burden of proof to establish infringement remains with the patentee even in declaratory judgment action brought by licensee, about the U.S. Supreme Court's decision in Medtronic, Inc. v Mirowski Family Ventures, LLC, 134 S. Ct. 843 (2014).  For previous discussion of this case (and a comparison with German and U.K. practice) on this blog, see here.
 
3.  Patent Damages recently published an interesting post titled Allowing "Do-Overs" for damages experts, which briefly discusses how different U.S. District Courts operate when a damages expert whose opinion has been excluded under the Federal Rules of Evidence wants to file a subsequent report. On a related note, William Rooklidge and Matthew Silveira have published Hiding in Plain Sight: Analyzing Requests for Patent Damages Do-Overs Under Fed. R. Civ. P. 37(c)(1) in Bloomberg BNA Patent, Trademark & Copyright L. Daily, Sept. 16, 2014, available here (behind a paywall).  These authors argue that "Federal Rule of Civil Procedure 37(c)(1) has given rise to established standards for courts to resolve requests for patent damages do-overs. Application of those standards allows courts to prevent gamesmanship and undue prejudice, while ensuring that do-overs are available when a defect is curable and there is minimal disruption to trial. . . .  The four-factor test that courts have developed to aid in applying Rule 37(c)(1) can help judges avoid both knee-jerk denials and overly liberal grants of patent damages expert do-overs."

4. Anke Nestler has published an article titled Die Ableitung von angemessenen Lizenzsätzen aus öknomischer Perspektive ("The Derivation of Royalty Rates from an Economic Perspective") in the June 2014 issue of Mitteilungen der deutschen Patentanwälten (pp. 262-66).  Here is the abstract:
In third-party licensing practice the licensing parties often orient themselves towards the licensee's expected future profits and split this between themselves within the framework of license negotiations.  This policy is economically sensible.  The derivation of reasonable royalty rates should be based on business analysis.
(According to footnote *, the article is a slightly modified version of an article originally published in Betriebs Berater 2013, 2027-29.)  The author argues that a 25-33% division of expected profits from the use of a patent, converted into a running royalty based on a percentage of turnover, can be a useful guideline--not a hard and fast rule, as rejected in the Federal Circuit's 2011 Uniloc decision--taking into account all other relevant considerations such as the parties' preferences for risk-sharing, the expected contribution of other patents or trademarks to the product's profitability, and so on.  The author cites a 1972 work by Knoppe, Die Besteuerung der Lizenz- und Know-how-Verträge, throughout as approving such an approach.  

Wednesday, September 24, 2014

Upcoming Presentation on Patent Assertion Entities

This weekend I will be speaking at the Oregon Patent Law Association's 2014 Salishan Patent Law Conference.  My presentation, titled Do Patent Assertion Entities Help or Hinder Innovation?  A Review of the Principal Arguments, is an updated and expanded version of a talk I gave earlier this year, and will also cover various efforts at the state and federal level to curtail perceived abuses by PAEs.  Other speakers (on a variety of topics) include Professors Anna Laakmann, Tim Holbrook, Jeffrey Letsin, and Lisa Dolak, as well as Foley & Lardner's Hal Wegner.  Here is a link to the flyer.  I'd be happy to meet any readers from the Pacific Northwest who might be interested in attending.    

Monday, September 22, 2014

Federal Circuit Trashes Nash

Well, not the esteemed John Nash himself, but rather the use of the Nash Bargaining Solution for purposes of calculating of patent damages.  The decision at issue is the Federal Circuit's September 16 opinion in VirnetX v. Apple, and although Jason Rantanen and David Long beat me to the punch in blogging about the case on (respectively) Patently-O and Essential Patents, I would be remiss not to add my own observations as well.  What follows is mostly a review of the opinion; if there are any readers who are impatient to hear my conclusions as to its significance, they should scroll down to the bottom paragraph of this somewhat lengthy post.

The case involves four patents, all of which "claim technology for providing security over networks such as the Internet" (p.3). A jury found that none of the claims in suit were invalid, and that Apple's iOS devices (iPhones, iPads, and iPods) infringed.  Specifically, the jury found that Apple's VPN On Demand feature infringed the '135 and '151 Patents, and that Apple's FaceTime feature infringed the '504 and '211 Patents.  On appeal, the Federal Circuit affirmed the findings on validity and some of the findings of infringement with respect to VPN On Demand; reversed Chief Judge Davis's construction of the '504 and '211 Patents and remanded for further proceedings on those patents; and vacated the jury's damages award of $368,160,000.  The opinion is by Judge Prost, joined by Judge Chen; Chief Judge Rader participated in oral argument but retired from the court last June and therefore did not participate in the decision.

Focusing on the damages issues in particular, VirnetX's expert had proposed three different approaches.  The first applied a 1% royalty rate to a base consisting of the "lowest sale price of each model of the accused iOS devices containing the accused features" (p.24).  The 1% rate was based on VirnetX's "policy of seeking to license its patents for at least 1-2% of the entire value of products sold and several comparable licenses" (id.).  This approach would leave VirnetX with "$566 million for products including both FaceTime and VPN On Demand, and $142 million for those including only VPN On Demand" (id.)  Second, the expert proposed using the Nash Bargaining Solution to divide--on a 45%-55% basis, based on VirnetX's weaker bargaining position--the incremental profits Apple derived from the use of the patented technology.  The profits derived from the use of FaceTime were based on "the revenue generated by the addition of a 'front-facing' camera on Apple's mobile devices" (p.25).  This approach yielded $588 million for the infringement by Face Time.  Third, the expert proposed a Nash Bargaining Solution that assumed that FaceTime "'drove sales' for Apple iOS products," based on a survey asserting "that 18% of all iOS device sales would not have occurred without the addition of FaceTime" (id.).  This approach yielded $606 million in damages for FaceTime.

In vacating the award, the court first reaffirmed its holdings in LaserDynamics and Versata Software that basing damages on the entire market value of an end product that incorporates multiple patented features is permissible "only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts” (p.27).  In this case, however, the judge gave the jury the following instruction (p.28):
In determining a royalty base, you should not use the value of the entire apparatus or product unless either: (1) the patented feature creates the basis for the customers’ demand for the product, or the patented feature substantially creates the value of the other component parts of the product; or (2) the product in question constitutes the smallest saleable unit containing the patented feature.     
The court held that the instruction was erroneous (pp. 28-30):
To be sure, we have previously permitted patentees to base royalties on the “smallest salable patent-practicing unit.” LaserDynamics, 694 F.3d at 67. However, the instruction mistakenly suggests that when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base. That is wrong. For one thing, the fundamental concern about skewing the damages horizon—of using a base that misleadingly suggests an inappropriate range—does not disappear simply because the smallest salable unit is used.
. . . [T]he 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 (as VirnetX claims it was here), 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, that error cannot be considered harmless, as VirnetX’s expert relied on the entire value of the iOS devices as the “smallest salable units,” without attempting to apportion the value attributable to the VPN On Demand and FaceTime features.
In addition, the court concluded that the expert did not justify (under the first approach above) using the entire value of the Apple devices as the smallest salable unit for the royalty base (pp. 30-33).

On the question of the appropriate royalty rate, however, the court rejected Apple's argument that the six licenses VirnetX's expert used for comparison purposes were not comparable, stating that on the record presented comparability was an issue for the trier of fact (pp. 33-34): 
. . . Apple points out that two of the licenses predated the patents-in-suit. Both of those agreements related to technology leading to the claimed invention, and one contained a software license in addition to a license for various patent applications. Apple further complains that three of the other licenses were entered into in 2012, a full three years after the date of the “hypothetical negotiation,” set in June 2009. Apple argues that at the time those licenses were entered into, VirnetX was in a much better financial position (and therefore a better bargaining position) than it was in 2009. Finally, Apple notes that the sixth license covered sixty-eight VirnetX patents, and was therefore much broader than the license to four patents Apple would be seeking in the hypothetical negotiation. It also equated to a 0.24% royalty rate, which is significantly lower than the 1–2% rate Weinstein [the expert] testified VirnetX would accept.
We have held that in attempting to establish a reasonable royalty, the “licenses relied on by the patentee in proving damages [must be] sufficiently comparable to the hypothetical license at issue in suit.” Lucent, 580 F.3d at 1325. “When relying on licenses to prove a reasonable royalty, alleging a loose or vague comparability between different technologies or licenses does not suffice.” LaserDynamics, 694 F.3d at 79. However, we have never required identity of circumstances; on the contrary, we have long acknowledged that “any reasonable royalty analysis ‘necessarily involves an element of approximation and uncertainty.’” Lucent, 580 F.3d at 1325 (quoting Unisplay, 69 F.3d at 517). Thus, we have cautioned that “district courts performing reasonable royalty calculations [must] exercise vigilance when considering past licenses to technologies other than the patent in suit,” ResQNet, 594 F.3d at 869, and “must account for differences in the technologies and economic circumstances of the contracting parties,” Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197, 1211 (Fed. Cir. 2010).
With those principles in mind, we conclude that the district court here did not abuse its discretion in permitting Weinstein to rely on the six challenged licenses. To begin with, four of those licenses did indeed relate to the actual patents-in-suit, while the others were drawn to related technology. Moreover, all of the other differences that Apple complains of were presented to the jury, allowing the jury to fully evaluate the relevance of the licenses. See J.A. 1600, 1650, 1678–82. No more is required in these circumstances.
The most interesting part of the opinion, though, is the court's skepticism over the expert's use (in relation to his second and third approaches, above) of the Nash Bargaining Solution.  Here's what the court says about it (pp. 36-41):
Apple argues that the invocation of a 50/50 starting point based on the Nash Bargaining Solution is akin to the “25 percent rule of thumb” that we rejected in Uniloc as being insufficiently grounded in the specific facts of the case. . . .  [W]e agree with Apple . . . .
In recent years, numerous district courts have confronted experts’ invocations of the Nash Bargaining Solution as a model for reasonable royalty damages, with varying results. . . . 
For the reasons that follow, we agree with the courts that have rejected invocations of the Nash theorem without sufficiently establishing that the premises of the theorem actually apply to the facts of the case at hand. The use here was just such an inappropriate “rule of thumb.” . . .
. . . The Nash theorem arrives at a result that follows from a certain set of premises. It itself asserts nothing about what situations in the real world fit those premises. Anyone seeking to invoke the theorem as applicable to a particular situation must establish that fit, because the 50/50 profit-split result is proven by the theorem only on those premises. Weinstein did not do so. This was an essential failing in invoking the Solution. Moreover, we do not believe that the reliability of this methodology is saved by Weinstein’s attempts to account for the unique facts of the case in deviating from the 50/50 starting point. . . .
More importantly, even if an expert could identify all of the factors that would cause negotiating parties to deviate from the 50/50 baseline in a particular case, the use of this methodology would nevertheless run the significant risk of inappropriately skewing the jury’s verdict. This same concern underlies our rule that a patentee may not balance out an unreasonably high royalty base simply by asserting a low enough royalty rate. See Uniloc, 632 F.3d at 1320. Although the result of that equation would be mathematically sound if properly applied by the jury, there is concern that the high royalty base would cause the jury to deviate upward from the proper outcome. . . 
We note that the Nash Bargaining Solution does offer at least one noticeable improvement over the 25% rule: where the 25% rule was applied to the entire profits associated with the allegedly infringing product, the Nash theory focuses only on the incremental profits earned by the infringer from the use of the asserted patents. But while we commend parties for using a theory that more appropriately (and narrowly) defines the universe of profits to be split, the suggestion that those profits be split on a 50/50 basis—even when adjusted to account for certain individual circumstances—is insufficiently tied to the facts of the case, and cannot be supported.
It's those last couple of paragraphs, I think, that are the kicker.  I'm having a hard time imagining how the use of the Nash Bargaining Solution could ever be admissible after this, unless the expert somehow was able to substantiate that the parties themselves would have used a 50/50 split of the incremental profit as the starting point of their negotiations over the patented technology.  (How would he or she substantiate that, other than by saying it sounds reasonable?  Is there likely to be any evidence that the parties have expressly used a 50/50 split of incremental profits as their starting point in the past?)  Now, maybe that's as it should be, at least in a jury trial; starting from a 50/50 perspective may well skew the results.  (I wonder if the same result necessarily would follow, though, in nonjury patent cases--which are, of course, the only type of patent cases in the rest of the world.)  Still and all, if you can't start from some premise about how the parties would divide up the incremental profits, it may be pretty hard to use the incremental profits approach at all.  My concern, then, is that the court's effort to prevent jury confusion could actually lead to less accurate damages calculations by channeling most of the analysis to the use of comparable royalties (where, according to this opinion, there remains some leeway to let the jury sort things out), rather than to consideration of the expected profit from the use of the patent in comparison to the next-best available noninfringing alternative.

Thursday, September 18, 2014

A Recent English Decision on Accountings of Profits

Jeremy Phillips posted a very short blog on this case the other day on PatLit, but I thought I would elaborate on it because it touches on several important issues concerning the remedy of an accounting (disgorgement) of an infringer's profits.  The case, OOO Abbott v. Design & Display Ltd, [2014] EWHC 2924 (IPEC) (Eng.), involves the U.K. portion of European Patent No. 1,816,931, for "a snap-in insert made from a resilient metal like aluminium" (para. 2).  In an earlier proceeding, Justice Birss held that the patent was valid and infringed.  The plaintiff opted for an accounting of the defendant's profits, and Judge Hacon published the above opinion on September 4.  From an economic perspective, three matters in particular stand out.

First, the court reaffirms Justice Laddie's holding in Celanese Int'l Corp. v. BP Chemicals Ltd. [1999] R.P.C. 203, that " it should be no answer to an account that the defendant could have made the same profits by following an alternative, non-infringing course. The question to be answered is 'what profits were in fact made by the defendant by the wrongful activity?' It should not matter that similar profits could have been made in another, non-infringing way" (para. 16).  This principle was first articulated in a lost profits case, United Horse Shoe and Nail v. Stewart (1888) 3 R.P.C. 260, and as I have noted in my book (pp. 187-89) and on this blog, the English courts have continued to adhere to it ever since.  The rule has no basis in economics.  If in reality the defendant would have resorted to a noninfringing alternative, but for the infringement, an award of either plaintiff's lost profits or defendant's profits that fails to take the existence of such an alternative into account overvalues the patented invention and leaves the patent owner better off than it would have been absent the infringement.   Adhering to United Horse Shoe also requires the courts to engage in some convoluted analysis when dealing with situations in which the inventive concept is only a small portion of the claimed invention.  See, for example, paras. 19-20 of OOO Abbott, discussing Justice Laddie's hypothetical example of a claim to a battleship fitted out with an inventive whistle.  To avoid an obvious overvaluation problem that would result if damages in such a case were based on sales of the entire battleship, the courts concede that "the inventive concept is relevant tot he scope of an inquiry or account" but that "the scope will commonly not be limited to products precisely embodying it" (para. 20).  Overvaluation problems could be avoided more easily, however, simply by recognizing that the next-best available noninfringing alternative to the hypothetical claimed invention would be a battleship with a less inventive whistle, or with no whistle at all.

The overcompensatory and overdeterrent potential of United Horse Shoe is further heightened when the court awards profits based on sales of convoyed goods (para. 31).  Making matters worse, the court actually credits the defendant's argument that it "could have traded just as profitably without infringing," stating "No doubt that is true, but for the reasons discussed above it is irrelevant" (para. 33).  The court also recognizes that not taking the noninfringing alternative into account means that it is ignoring the defendant's opportunity cost of not infringing (para. 39); and, of course, opportunity costs are real costs, even if they are not usually quantified as accounting costs.  But precedent is precedent, and United Horse Shoe is a House of Lords decision.  Perhaps some day it will meet its long overdue demise.

Second, the court followed the Court of Appeals decision in Hollister Inc. v. Medik Ostomy Supplies Ltd in not deducting a portion of the defendant's allocable overhead from its gross profits.  Specifically, the court states (para. 38):
(1) Costs associated solely with the defendant's acts of infringement are to be distinguished from general overheads which supported both the infringing business and the defendant's other businesses.
(2) The defendant is entitled to deduct the former costs from gross profits.
(3) A proportion of the general overheads may only be deducted from gross profits in two circumstances:
(a) if an overhead was increased by the acts of infringement (i.e. the increase would not have occurred but for the acts of infringement), that increase may be deducted;
(b) if the defendant was running to maximum capacity such that the infringing business displaced an alternative business which otherwise would have been conducted, the apportioned overheads incurred by the infringing business (and which would have been incurred by the displaced business) may be deducted.
(4) The evidential burden is on the defendant to establish any of the above.
As I mentioned in  my May 2013 blog post on Hollister (here), "Although the court does not cite the German Federal Supreme Court's 2000 decision in Gemeinkostenanteil, see my book pp. 271-72, the court appears to be adopting an approach similar to the one applied there to the deduction of overhead.  The combination of these two holdings in Hollister could lead to substantially higher awards of profits in the U.K., as others have noted."  Further, although from an economic perspective it is a debatable issue whether allocable overhead should be deducted, there are some reasons to believe that such a deduction better reflects economic reality.  See my book pp. 206-08, citing and discussing Stephen E. Margolis, The Profits of Infringement: Richard Posner v. Learned Hand, 22 Berkeley Tech. L.J. 1521 (2007).       

Third, on the issue of intent, the court noted (para. 50) that under section 62(1) of the Patents Act 1977:
"In proceedings for infringement of a patent damages shall not be awarded, and no order shall be made for an account of profits, against a defendant or defender who proves that at the date of the infringement he was not aware, and had no reasonable grounds for supposing, that the patent existed; and a person shall not be taken to have been so aware or to have had reasonable grounds for so supposing by reason only of the application to a product of the word "patent" or "patented", or any word or words expressing or implying that a patent has been obtained for the product, unless the number of the patent accompanied the word or words in question."
The court concluded that the defendant had not raised this issue in a timely fashion, but beyond that stated the following (paras. 54-56): 
Even it had been, I am not satisfied that Design & Display has established the necessary lack of knowledge or reasonable grounds for supposing that the Patent existed. In cross-examination Mr Lloyd said that he had only heard of patents because he was a local historian and he did not know whether his colleagues knew what a patent was. While it is easy for those whose working lives are concerned with patents to over-assume how much the general public know about patents, I think most individuals, such as Mr Lloyd and presumably his colleagues, will have heard of the concept of patents and will have on board the basic notion that you can get one to protect your idea. It seems to me unlikely that an interest in local history is needed to know that much. 
Mr Lloyd made two further points. The first was that Design & Display's production director had drawn a snap-in insert of the type protected by the Patent so there was no reason for Design & Display to believe that patent protection was available in relation to that product. This may have happened but it was surprising since, as Mr Aikens pointed out to Mr Lloyd, such a drawing and the alleged home-grown conception of the idea had not been raised at the trial before Birss J despite Design & Display's arguments that the idea was obvious (and also despite its conceivably raising a defence pursuant to s.64 of the 1977 Act). Mr Lloyd's second point was that at the time the Claimants' patented insert had been introduced in 2007 Design & Display was, as he put it, not remotely interested in what its competitors were doing – although Mr Lloyd conceded that this might not have been true of the sales department.  
I think that to satisfy the burden under s.62(1) it would have been necessary for Design & Display to have produced satisfactory evidence from the sales department to show that the complete indifference to competition and therefore to any patent protection which the competition held, or alternatively total ignorance of the concept of patent protection, both of which Mr Lloyd relied on, ran throughout the company. Absent that, I would by default have inferred that Mr Lloyd or his sales colleagues had reasonable grounds to have become aware of the PCT parent application for the Patent, which was published in June 2006.
In my view, to the extent it makes sense at all to award the infringer's profits as a remedy for patent infringement, such awards should be limited only to cases of deliberate copying, in order to avoid pressuring innocent defendants to settle and thus potentially deterring lawful conduct.  Parliament should consider amending the statute to avoid such adverse consequences.       

Wednesday, September 17, 2014

More on Last Week's CJEU Hearing in Huawei v. ZTE

I blogged last week about the hearing before the Court of Justice for the European Union in Huawei v. ZTE, on the issue of injunctive relief for the infringement of FRAND-encumbered standard essential patents.  At the time the only write-up I had found on the hearing was this one, from the German-language online publication JUVE, which I summarized in my post.  A couple of additional articles are now freely available online, which readers may find of interest.

First, Dr. Axel Walz of the Munich office of King & Wood Mallesons SJ Berwin has now published a short paper, in English, on the issues in the case and the oral hearing, available here.  According to Dr. Walz, "most of the Court’s questions were addressed at Huawei and concerned, amongst others, the issue why, from a standard essential patent (SEP) owner perspective, it should not be sufficient to rely upon good faith negotiations. Huawei’s response was that a legally binding and irrevocable FRAND licence offer must be submitted by the standard user. There were also contentious arguments as to whether a licence offer can be made subject to the condition precedent that the patent in suit is valid and infringed. The question of third party determination of FRAND terms and conditions was an additional focus of the hearing."  Readers interested in this topic should check out Dr. Walz's informative article.  

Second, there is a brief write-up of the hearing in World Intellectual Property Review, titled CJEU Mulls Over Standard-Essential Patents Enforcement, available here.  The article quotes Dr. Walz, who attended the hearing.

The Advocate General's opinion is due on November 20.