Monday, July 6, 2015

Westerngeco v. ION: No Lost Profits on Lost Extraterritorial Sales

Last week, the Federal Circuit handed down opinions in WesternGeco L.L.C. v. ION Geophysical Corp. (link here).  At issue are four patents asserting claims "relating to technologies used to search for oil and gas beneath the ocean floor" (p.3).  WesternGeco makes and sells products embodying the patented technologies, and its accused its competitor ION of violating 35 U.S.C. § 271(f)(1) and (2).  I'll focus exclusively on the remedies issues.

In relevant part, § 271(f) reads: 
(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
The Federal Circuit affirmed the jury's finding of liability under § 271(f)(2) (and did not reach the issue of liability under § 271(f)(1)), but the majority (in an opinion by Judge Dyk, joined by Judge Hughes) concluded that this did not entitle WesternGeco to lost profits on certain contracts that WesternGeco believes it would have earned, but for the violation.  

To understand the ruling requires some factual background.  According to the court (pp. 16-17):
WesternGeco makes the Q-Marine [described earlier in the opinionas "its commercial embodiment of the patented technologies"] domestically and performs the surveys abroad on behalf of its customers—oil companies looking to extract oil from the sea floor. ION makes the DigiFINs [described earlier as the "allegedly patent-practicing device"] domestically and then ships them overseas to its customers, who, in competition with WesternGeco, perform surveys abroad on behalf of oil companies. WesternGeco identified ten surveys for which it believes that, but for ION’s supplying of DigiFINs to ION’s customers, WesternGeco would have been awarded the contract. These ten surveys allegedly would have generated over $90,000,000 in profit. According to WesternGeco, ION’s customers would not have been able to win the contracts if they did not have access to the DigiFINs. Thus, according to WesternGeco, but for ION’s sales to its customers, WesternGeco would have earned over $90 million in profit from the ten lucrative services contracts performed abroad. 
ION argues that WesternGeco cannot receive lost profits resulting from the failure to win these contracts. The service contracts were all to be performed on the high seas, outside the jurisdictional reach of U.S. patent law. There is also no contention that the service contracts were entered into in the United States.
Invoking the presumption against extraterritoriality, and characterizing § 271(f) as expanding territorial scope only to the extent of treating the export of components of a patented system the same way as the export of a finished system, the court sided with ION (pp. 18-19):
It is clear that under § 271(a) the export of a finished product cannot create liability for extraterritorial use of that product. The leading case on lost profits for foreign conduct is Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (Fed. Cir. 2013). There, the patentee, a chip supplier, lost contracts to supply a prospective customer with computer chips in the United States and abroad because the accused infringer became a competitor for such contracts as a result of the U.S. infringing sales. If the accused infringer had been precluded from U.S. infringement, the patentee alleged that the accused infringer could not have competed for the contracts which necessarily involved supplying chips both in the United States and abroad. The patentee argued that it should recover world-wide lost profits. 
We rejected that argument: “[Our patent laws] do not thereby provide compensation for a defendant’s foreign exploitation of a patented invention, which is not infringement at all.” Power Integrations, 711 F.3d at 1371. Rather, “we find neither compelling facts nor a reasonable justification for finding that [the patentee] is entitled to ‘full compensation’ in the form of damages based on loss of sales in foreign markets which it claims were a foreseeable result of infringing conduct in the United States.” Id. at 1372. “[T]he entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.” Id. at 1371–72. Under Power Integrations, WesternGeco cannot recover lost profits resulting from its failure to win foreign service contracts, the failure of which allegedly resulted from ION’s supplying infringing products to Western-Geco’s competitors.
The majority also responded to dissenting Judge Wallach's arguments in support of a lost profits award (pp. 20-22):
First, the dissent identifies Supreme Court cases it believes approved awards of lost profits for foreign sales, citing Goulds’ Manufacturing Co. v. Cowing, 105 U.S. 253 (1881), Dowagiac Manufacturing, Co. v. Minnesota Moline Plow Co., 235 U.S. 641 (1915), and Duchesne, 60 U.S. 183. None of these cases is remotely similar to this one. To be sure, they suggest that profits for foreign sales of the patented items themselves are recoverable when the items in question were manufactured in the United States and sold to foreign buyers by the U.S. manufacturer. See Goulds’ Mfg., 105 U.S. at 254; Dowagiac Mfg., 235 U.S. at 642–43; Duchesne, 60 U.S. at 196. There is no such claim here. Rather, the claim is for lost profits from the use abroad of the items in question. . . .
Second, the dissent argues that the surveys should be recoverable as “convoyed sales” of the domestically manufactured components of the infringing DigiFINs. But, WesternGeco did not raise this argument before the district court or this court. And, the dissent points to no case extending the convoyed sales doctrine to cover sales of related products or services abroad. . . .
Third, the dissent expresses concern that our ruling today might effectively prevent WesternGeco from recovering lost profits at all, as the surveys were conducted on the high seas and were outside of the territorial reach of any patent jurisdiction in the world. This may or may not be the case. Indeed, WesternGeco does not contend that it is barred from recovering in the jurisdiction in which the services contracted was negotiated and signed, nor does it contend that it is barred from recovering in the jurisdiction from which the ship performing the seismic surveys is flagged. In any event, the possible failure of liability provides no basis for ignoring the presumption against extraterritoriality.
As a result, the court held that WesternGeco could recover only a reasonable royalty--noting, however, that  "[t]he extent to which these royalties may be affected by lost profits suffered abroad is an issue not presented here. See Union Carbide Chems. & Plastics Tech. Corp. v. Shell Oil Co., 425 F.3d 1366, 1378 (Fed. Cir. 2005), overruled on other grounds, Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348, 1365 (Fed. Cir. 2009) (en banc); see also Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F.3d 1365, 1378 n.7 (Fed. Cir. 2015)" (p.20 n.7).  The issue of whether a royalty can reflect foreign use that allegedly is attributable to an initial act of infringement in the U.S. is currently on appeal in the Carnegie-Mellon case (see blog post here.)

Also on the issue of royalties, the court affirmed the district court's decision to exclude testimony from WesternGeco's expert  that an appropriate royalty would have been 10% of the $3.3 billion in revenue that ION's customers received from performing surveys with ION's DigiFIN, reasoning that the court did not abuse its discretion given that the proposed royalty "would have exceeded ION's revenue by four times" (p.24).  The court also affirmed the decision not to enhance damages, on the ground that ION's defenses were reasonable.

Though I need to give the matter some more thought, I'm inclined to think the majority view is correct. WesternGeco may have lost sales, and thus profits, to foreign customers as a result of ION's alleged conduct in violation of § 271(f), but to allow recovery would seem to undermine the presumption against extraterritoriality.  The causal chain has to stop somewhere.  I am more receptive in such cases to the idea of basing a reasonable royalty on the value of the use to the defendant, where such value contemplates sales to foreign buyers; though there too I'm not entirely sure I've made up my mind.  This is quite a complex area of damages law.

Thursday, July 2, 2015

Attorneys' Fees to Octane Fitness on Remand; Cert. Petitions Filed re Standard for Enhanced Damages

Hat tip to my colleague Prentiss Cox for bringing to my attention this July 1 opinion from Judge Ann Montgomery determining, on remand, that Octane Fitness is entitled to recover attorneys' fees under 35 U.S.C. section 285.  The amount of the award is yet to be determined.  For my blog post on the Supreme Court decision from last year, see here.

In other news, both Halo and Stryker have filed cert. petitions (Numbers 14-1513 and 14-1520, respectively) asking the Supreme Court to eliminate willfulness as a precondition for an award of enhanced damages, and also to eliminate the Seagate requirement of a showing of objective and subjective recklessness, which is simialr to the standard for exceptional case that the Court discarded last year.  (Hat tip to BNA Bloomberg's Patent, Trademark, and Copyright Journal.)  Here is Halo's question presented (there is a second question relating to the definition of "sale" or "offer to sell" under section 271(a), which I will skip):
1. Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.
And here are Stryker's:
1. Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys’ fee awards in exceptional cases?
2. Does a district court have discretion under 35 U.S.C. § 284 to award enhanced damages where an infringer intentionally copied a direct competitor’s patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?
While there is certainly an arguable case for both petitioners' positions, in my opinion the policy arguments for awarding attorneys' fees are much stronger than the arguments for awarding enhanced damages (as suggested by the fact that in many countries attorneys' fees are routinely awarded, while enhanced or punitive damages almost never are).  A return to something like the pre-Seagate standard for enhanced damages would in my view be a colossal mistake.  But we'll see what happens.  So far the Supreme Court has no IP cases yet on its docket for 2015-16.  For previous blog posts on Halo and Stryker, see here and here.

This is a busy day.  The Federal Circuit also decided an interesting damages case today, Westerngeco L.L.C. v. ION Geophysical Corp.  I'll be back either tomorrow or Monday with a write-up.

CJEU to Decide Huawei v ZTE on July 16

As reported on the EPLaw Blog today, the Court of Justice for the European Union will be releasing its judgment in Case No. C-170/13 (Huawei v. ZTE) on July 16 at 2:30 p.m. (which will be 9:30 a.m. in the U.S. Central Time Zone.)   This will be big news, whichever way it turns out.

For my blog posts from last November on AG Wathelet's opinion, see here and here.

Samsung Seeks En Banc Review of Federal Circuit Panel Decision on Design Patent Damages

Florian Mueller has already covered this on FOSS Patents, but if you haven't seen it yet, here's a copy of Samsung's petition for rehearing en banc in the Apple v. Samsung case.  (The panel opinion, which I blogged about here, came down in May.)   The petition takes issue with the panel decision both on the substantive law of design patents and on damages.  In addition, here is a copy of an amicus brief in support of Samsung's petition filed by Professor Mark Lemley.  

As you may recall, the panel read 35 U.S.C. § 289 as requiring the defendant to disgorge its entire profit earned as a result of the infringement of a design patent, without any apportionment--a result that is impossible to square with any rational principle of damages.  I would be delighted to see the court grant en banc review, though admittedly the Supreme Court's recent decision in Kimble  doesn't say much for the courts' receptiveness to arguments based on economic rationality alone.   The petition and the brief make some interesting arguments based on legislative history, text, and precedent, though, so there may be hope that the court will see fit to reconsider.  We'll see.

Tuesday, June 30, 2015

U.S. ITC to Review FRAND Issues

I'm still catching up on things after returning from Japan, and only today came across this post from Friday's Essential Patents Blog titled "ITC grants partial review of ALJ Essex’s decision concerning FRAND issues (337-TA-613)."  I don't have anything to add at this point, other than to concur in blogger David Long's statement that "These questions and the ITC’s ultimate resolution of the issues promises to result in one of the most important ITC decisions in litigating SEPs in the ITC, and perhaps elsewhere."

For previous mention of this case on this blog, see here and here.

Monday, June 29, 2015

A Chinese Case on Preliminary Injunctions

Judge Ma Yunpeng (Judge of the Beijing Intellectual Property Court) recently published an article in China Patents & Trademarks No. 2, 2015, pp. 42-47, titled Analysis of Substantive Factors in Pre-trial Act Preservation against Patent Infringement, discussing a case in which Shanghai Novartis Trading Co. (Novartis Co.) sought a preliminary injunction (a/k/a "act preservation") against Jiangsu Haosen Pharmaceutical Co. (Haosen) and Beijing Jewim Pharmaceutical Science and Technology Co. (Jewim).  According to the article, the patent in suit "is directed to a method for preparing a medicament defined by use, namely a second medical use patent," specifically the use of a compound known as imatinib (which is marketed under the brand name GLEEVEC) "or a pharmaceutically acceptable sale thereof for the manufacture of pharmaceutical compositions for use in the treatment of gastrointestinal stromal tumours," or GIST.  The respondent Haosen makes and sells a generic drug called XINWEI, which Jewim resells.  According to Novartis, the instructions for the use of XINWEI would induce doctors or patients to infringe the patent in suit.  

The Beijing No. 2. Intermediate Court court granted the injunction, concluding first that Novartis Co. had a right to file the application, based on evidence showing that Novatis AG (the Swiss drug company that is a coowner of the patent in suit) had "signed a Patent Exploitation License Agreement with the other three patent co-owners acting as assignors to allow its Chinese subsidiary to solely exploit and maintain the patent right," thus satisfying the requirements under Chinese law that the applicant be an interested party (p.43).  Second, according to the article, "the applicant is required to prove that the patent in suit is legitimate and valid and in a stable state" (p.44).  If I understand correctly, this means that, for a patent for a new invention (as here) "the applicant is required to provide prosecution history of the patent and relevant materials in patent invalidation proceedings (if any) before application," whereas for utility models and design patents (the patents the author refers to as "less stable") "the applicant is required to provide an evaluation report, and references provided by both parties and defences made by the respondent using prior art (design) shall be carefully scrutinized" (id.)  The author also notes, however, that because China bifurcates infringement and validity determinations, "[t]he court's opinions on status of the patent in suit only serve as a reference for decision making," and "[i]n principle a court for hearing infringement cases can presume a patent valid before the patent in suit is determined invalid by an effective administrative decision" (p.44).  I would note that the same is true in Germany, where infringement and validity are bifurcated but courts hearing applications for preliminary injunctions normally will consider whether the patent is likely to be valid (see, e.g., this post from this past February).

Third, the court concluded that the respondents' conduct likely constituted an act of infringement.  According to the author, on an application for a preliminary injunction courts "should not be over-strict" in demanding proof of infringement, and "[i]t is unnecessary to reach an extent to which 'infringement certainly exists', and a high likelihood thereof would suffice" (p.44).  Here, the evidence indicated that the active ingredient of XINWEI is a pharmaceutically acceptable salt of imatinib, that that ingredient is used for the manufacture of the pharmaceutical composition XINWEI, and that the instructions inform how use XINWEI to treat GIST.  Thus, "it is highly likely that the information included in the instructions . . . falls within the protection scope of the patent in suit" (p.45).

Fourth, the court concluded that the conduct threatened Novartis Co. with irreparable harm.  According to the author, irreparable harm means harm that "can hardly be converted into money" and "involves property loss, as well as loss in competitive advantage, market share of a product and potential commercial reputation" (p.45).  Here, irreparable harm was present because XINWEI was sold "at a sharp price advantage," the "current medicare medication list in some areas usually records only generic names of active substances of medications," "imatinib can be found in the medicare medication list in some areas," XINWEI "is in fact in the circulation process," and its sales have "greatly influenced the sales of" GLEEVEC.

Fifth, the court considered the balance of rights and interests including the public interest.  The court concluded that the requested injunction would not prevent the respondents from marketing XINWEI for its first medical use, and thus would not drive them out of business, and also would not be detrimental to the public interest, despite the price differential.

Finally, Novartis provided a guaranty of 10 million RMB, which the court concluded would cover the respondents' loss from a wrongly issued injunction (and could be supplemented if necessary).

For previous discussion on this blog of preliminary injunctions in China, see here, here, here, here, and here, as well as my book (pp. 351-52).      

Friday, June 26, 2015

Layne-Farrar et al. on Royalties, FRAND-Committed Patent Bundling

1.  Anne Layne-Farrar, Gerard Llobet and Jorge Padilla have published a paper titled Patent Licensing in Vertically Disaggregated Industries: The Royalty Allocation Neutrality Principle in Communications & Strategies, no. 95, 3d quarter 2014, pp. 61-84.  Here is a link to the paper, and here is the abstract:
This paper investigates patent licensing in vertically disaggregated industries, where patent holders may license to upstream producers only, downstream producers only, or to both upstream and downstream producers. We consider whether consumer welfare will be greater if the patent holder's ability to license multiple parties along a production chain is restricted. We also analyse whether a policy that restricts licensing to upstream manufacturers constitutes appropriate public policy. These questions have significant policy implications. Under the legal doctrine of first sale, or patent exhaustion, a patent holder's ability to license multiple parties along a production chain is restricted. How and when such restrictions should be applied is a controversial issue, as evidenced by the US Supreme Court's granting certiorari in the Quanta case. Some commentators have even argued that refusing to license to upstream component manufacturers may constitute an abuse of dominance and thus infringe the competition laws. We find that under ideal circumstances how royalty rates are split along the production chain has no real consequence for social welfare. Even when we depart from ideal conditions, however, we still find no economic justification for restrictions of the patent holders' ability to license multiple parties or to license to downstream producers only. 
2.  Anne Layne-Farrar and Michael A. Salinger have posted a paper on ssrn titled Bundling of Rand-Committed PatentsHere is a link to the paper, and here is the abstract:
We assess the implications of the literatures on bundling and tying and on patent bundling in particular for whether a company that makes a RAND (reasonable and non-discriminatory) commitment on a patent may license that patent only in a bundle with patents on which it has not made a RAND-commitment. Patent bundling/tying is a common practice that often has sound efficiency justifications, but forcing a licensee to accept a license on a patent it does not want to obtain a RAND-committed patent that it does want can be a way of circumventing the RAND-commitment. Mixed bundling, where the licensor offers licensees the option of taking a license to RAND-committed patents only or taking a license to the full portfolio, is the most straightforward solution. However, we argue that a licensor can nonetheless offer a RAND-committed patent only in a bundle with patents on which it has not made a RAND-commitment, provided that the royalty would be RAND for the RAND-committed patents alone. The patent owner cannot deduct the value of non-RAND-committed patents from the license fee from the bundle and argue that it has honored its RAND-commitment as long as the difference is RAND for the RAND-committed patents.