Friday, February 21, 2020

Damages for Infringement Without Use or Sale?

This is the post I was working on in December, when I blogged about the Federal Circuit's decision in Amgen Inc. v. Hospira, Inc.  The issue is one I've been thinking about, off and on, for several months, and that I might want to develop into an article at some point--so I'd appreciate any feedback that readers may have.  Suppose that someone, without authorization, makes another's patented invention--or wrongly acquires another's trade secret--but then doesn't use, or sell any products  made from, the invention or secret.  Should the defendant be liable at all, and if so what is the remedy?

I started thinking about this issue a bit last summer, when I read that a jury (1) had found Huawei liable for wrongly acquiring trade secret information from a company called Cnex, but (2) awarded no damages based on a lack of evidence that Huawei had benefited from the information (see here).  Shortly thereafter, I discovered Sharon Sandeen's article Out of Thin Air:  Trade Secrets, Cybersecurity, and the Wrongful Acquisition Tort, 19 Minn. J. L. Sci. & Tech. (2018), which questions whether there should be a tort of wrongful acquisition of trade secrets (absent disclosure or use of the trade secret information), and also discusses whether the unauthorized acquisition of other types of information or data should give rise to liability absent proof of use.  In addition, I blogged about the U.K. Supreme Court's decision in Morris-Garner v. One Step Ltd [2018] UKSC 20, in which the court approved of the use of "user" or "negotiating" damages (based on a hypothetical ex ante negotiation) in a case involving a breach of a noncompete agreement, and noted the use of this principle in certain other contexts including IP and breach of confidence matters; and I came across a couple of commentaries on Morris-Garner in the European Intellectual Property Review, John Hull's A Reappraisal of Negotiating Damages:  The Supreme Court Judgment in Morris-Garner v. One Step (Support) Ltd,, 41 EIPR 180 (2019), and his earlier Aiming for "Jackpot Damages" in a Breach of Confidence Case:  Marathon Asset Management LLP v. Seddon.  The latter article discusses the implications of Morris-Garner in a case in which the defendant copied certain documents upon leaving his job, but then didn't use them in his new position.  It also occurred to me that these types of cases are similar to the fact pattern that arises when an infringer makes the patented invention but then decides not to use it.  Bernard Chao and Jonathan Gray have critiqued one such case, Monsanto Co. v. E.I. DuPont De Nemours & Co., 2012 WL 2979080 (E.D. Mo. July 29, 2012), in which the court awarded a reasonable royalty in the amount of $1 billion, based on the assumption that this is what the parties would have agreed to ex ante under the hypothetical bargaining approach.  See Chao & Gray, A $1 Billion Parable, 90 Denver U. L. Rev. Online 185 (2013).  Finally, you could make an analogy to data privacy cases in which consumers whose data has been stolen as a result of a corporation's inadequate safety precautions sometimes seek damages from the corporation, even though the data theft has not yet resulted in any actual economic harm such as identity theft.  As Daniel Solove and Danielle Citron argue in their paper Risk and Anxiety:  A Theory of Data Breach Harms, 96 Tex. L. Rev. 737 (2018), however, these uses may cause consumers to suffer emotional distress based upon the possibility of future use, but U.S. courts have not consistently recognized such harms as cognizable.

It seems to me that there are a range of possible choices to make in cases like those described above:

1.  There could be no liability at all, or liability with only nominal damages, in these types of cases, on the theory that acquisition or manufacture of an intangible without subsequent use causes no harm.

2.   Courts could award noneconomic damages for emotional distress, at least in the data privacy cases and perhaps some of the others, based on the theory that emotional distress is sometimes a real and foreseeable consequence of the wrongful acquisition or manufacture, but no economic damages.

3.  Courts could award economic damages in the form of a reasonable royalty, based upon the ex ante hypothetical bargaining approach as in Monsanto and as contemplated in Morris-Garner.

4.  Courts could award economic damages in the form of a reasonable royalty based on a contingent ex ante approach, as advocated by Norman Siebrasse and me in A New Framework for Determining Reasonable Royalties in Patent Litigation, 68 Fla. L. Rev. 929 (2016), in which we cite Chao & Gray with approval. In other words, award the royalty the parties would have negotiated ex ante had they known the extent to which the defendant would actually make use of the subject information ex post.  Where there was no use of the information ex post, that number is zero.

As suggested by point #4, I think the correct answer in patent cases is the contingent ex ante approach, for discussion of which I refer readers to my coauthored article (see here) and to pp. 31-33 of Patent Remedies for Complex Products.  (Briefly, we think the contingent ex ante approach betters aligns the reward with the contribution of the patented technology to the art.)  Point # 1 might make sense in some other bodies of law, as Professor Sandeen proposes, but I don't think it's an option under U.S. patent law, where the statute clearly defines unauthorized manufacture as an act of infringement.  As for trade secrets, there might be an argument for making wrongful acquisition unlawful even if in some cases there are no damages, if we think that otherwise defendants might be motivated to wrongly acquire trade secrets for purposes of evaluating whether to use them, which if nothing else puts the secret at risk and circumvents a potential license (but I need to think about this some more).  In the data privacy cases, it would be interesting to think about the consequences if consumers could use the hypothetical bargaining approach to demand a royalty for the unauthorized disclosure of their data.  Under the "pure" ex ante approach this might result in catastrophic liability on the part of negligent corporations--a fact which, if you think such liability would be disproportionate to the defendant''s fault, might might be a good reason not to recognize property rights in data (as some have advocated); but again I need to think about this some more. 

Readers:  any initial reactions? 

Note: I've had a lot of administrative work this month, and I probably will take a blogging break next week while I try to catch up on some other work, unless Unwired Planet or some other monumental decision comes out.

Wednesday, February 19, 2020

Federal Circuit Reaffirms Importance of Patent Marking

In a precedential decision this morning, Arctic Cat Inc. v. Bombardier Recreational Prods., Inc., the Federal Circuit reaffirmed the importance of patent marking to the recovery of damages for pre-complaint infringement.  As I explained in 2017, in connection with an earlier appeal in this matter:
U.S. Patent Act section 287(a) reads as follows: 
Patentees, and persons making, offering for sale, or selling within the United States any patented article for or under them, or importing any patented article into the United States, may give notice to the public that the same is patented, either by fixing thereon the word “patent” or the abbreviation “pat.”, together with the number of the patent, or by fixing thereon the word “patent” or the abbreviation “pat.” together with an address of a posting on the Internet, accessible to the public without charge for accessing the address, that associates the patented article with the number of the patent, or when, from the character of the article, this cannot be done, by fixing to it, or to the package wherein one or more of them is contained, a label containing a like notice.In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice. Filing of an action for infringement shall constitute such notice.
Generally speaking, then, a patent owner can recover damages for patent infringement that occurs only after the owner has put the defendant on either actual notice (e.g., by sending an appropriately worded cease-and-desist letter, or serving a complaint for infringement) or constructive notice (by complying with the patent marking statute). By encouraging patent owners to provide public notice of the patent-protected status of their products, the statute is said to help both implementers and the general public to identify which products are subject to patent protection. The rule has many complications and exceptions, however, and for what it's worth my view is that we'd be better off if we didn't condition the availability of damages on marking. . . . 
Anyway, in 2014 the plaintiff sued the defendant for infringement of two patents relating to a thrust steering system for personal watercraft (PWCs).  During the relevant time period, the plaintiff itself did not make PWCs, but until 2013 its licensee Honda did.  (Defendants argued that Honda was making patented PWCs until 2018, but as we'll see it doesn't matter.)  In the previous appeal in 2017, the Federal Circuit held that the plaintiff bears the burden of proving compliance with the marking statute.  On remand, the plaintiff apparently conceded that the PWCs made by Honda embodied the patented technology and were not marked.  It argued nevertheless that it was entitled to damages for the period of time, preceding the filing of the complaint, that Honda wasn't making any PWCs embodying the technology.  The plaintiff also argued that the defendant was willfully infringing during the entire six-year period preceding filing of the complaint--and thus was aware of the patents in suit--and that this actual knowledge should satisfy the "actual notice" requirement under § 287.   Consistent with prior case law, however, the Federal Circuit doesn't buy it:
. . . the issue presented is whether the cessation of sales of unmarked products excuses noncompliance with the notice requirement of § 287 such that a patentee may recover damages for the period after sales of unmarked products ceased but before the filing of a suit for infringement. We hold that it does not.
Arctic Cat argues that, because § 287 is written in the present tense, the statute by its terms only applies while a patentee is “making, offering for sale, or selling” its products. Thus, according to Arctic Cat, the statute limits damages only during periods when the patentee is actually making, offering for sale, or selling the patented article. Bombardier responds that, to begin recovering damages after sales of unmarked products have begun, § 287 requires that a patentee either begin marking its products or provide actual notice to an alleged infringer; cessation of sales of unmarked products is not enough. We agree with Bombardier.
We begin with the language of the statute. .  .  . While § 287 describes the conduct of the patentee in the present tense, the consequence of a failure to mark is not so temporally limited. Section 287 provides that “in the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter” (emphasis added). The statute thus prohibits a patentee from receiving any damages in a subsequent action for infringement after a failure to mark, rather than merely a reduced amount of damages in proportion to the amount of time the patentee was actually practicing the asserted patent.
Arctic Cat’s obligation to mark arose when its licensee began selling patented articles. The cessation of sales of unmarked products certainly did not fulfill Arctic Cat’s notice obligations under § 287, nor did it remove the notice requirement imposed by the statute. The notice requirement to which a patentee is subjected cannot be switched on and off as the patentee or licensee starts and stops making or selling its product. After all, even after a patentee ceases sales of unmarked products, nothing precludes the patentee from resuming sales or authorizing a licensee to do so. In the meantime, unmarked products remain on the market, incorrectly indicating to the public that there is no patent, while no corrective action has been taken by the patentee. Confusion and uncertainty may result. Thus, once a patentee begins making or selling a patented article, the notice requirement attaches, and the obligation imposed by § 287 is discharged only by providing actual or constructive notice.
This reading of § 287 comports with the purpose of the marking statute. The policy of § 287 is to encourage marking, not merely to discourage the sale of unmarked products. We have explained that the notification requirement of § 287 “serves three related purposes: (1) helping to avoid innocent infringement; (2) encouraging patentees to give public notice that the article is patented; and (3) aiding the public to identify whether an article is patented.” Arctic Cat I, 876 F.3d at 1366 (citing Nike, Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437, 1443 (Fed. Cir. 1998)). Requiring a patentee who has sold unmarked products to provide notice in order to begin recovering damages advances these objectives by informing the public and possible infringers that the article is patented. Arctic Cat’s proposed interpretation, on the other hand, would undermine these objectives. In Arctic Cat’s view, § 287 should be read to allow a patentee to mislead others that they are free to make and sell an article that is actually patented, but nonetheless allow the patentee to recover damages without undertaking any corrective action. We reject this view.  .  .  .
Arctic Cat also argues that, regardless of its failure to mark, it should nevertheless recover the maximum amount of pre-suit damages allowed by 35 U.S.C. § 286 because the jury’s finding that Bombardier willfully infringed the asserted claims should be sufficient to establish actual notice under § 287. Arctic Cat acknowledges, as it must, that this argument is foreclosed by our precedent. . . .  
Aside from our inability to reverse the decision of an earlier panel . . . we reiterate the conclusion that willfulness, as an indication that an infringer knew of a patent and of its infringement, does not serve as actual notice as contemplated by § 287.
In my view, the court is right on the law, but the result is a bit ridiculous as a matter of policy.  I've argued previously that the patent marking statute makes little sense in the modern world, and I adhere to that view today.  For previous discussion, see here and here.

Monday, February 17, 2020

Two More Remedies Cases from Japan

I recently mentioned a summary of an important damages case, NeoChemir Inc. v. Medion Research Labs. Inc., Case No. 2018 (Ne) 10063, Judgment of June 7, 2019 (IP High Court), that I had come across in the September 2019 issue of A.I.P.P.I.--Journal of the Japanese Group of AIPPI.  That issue includes summaries of two other remedies decisions, and translations of both judgments also can be found on the IP High Court's website.

1.  The first case is Apple Inc. v. Qualcomm, Inc., Case No. 2018 (Ne) 10048, Judgment of Feb. 19, 2019 (IP High Court), in which Apple sought a declaratory judgment that its products did not infringe Qualcomm's Patent No. 4685302 ("Method and apparatus for determining a reverse link transmission rate in a wireless communication system").  The IP High Court affirmed a judgment dismissing the claim, on the ground that Qualcomm had "made an unconditional and irrevocable covenant that it would not sue Apple for infringement of its nine patents involved in" the (subsequently settled) U.S. litigation between the parties, "including the US patent corresponding to the Patent.  As a result, the court concluded that Apple did not have an interest in seeking the declaratory judgment.  

The translation of the full judgment is available here. For further (brief) discussion of declaratory judgments in Japan, see my book at p.331. 

2.  The second case is Kawatsuru Co. v. Mori & Co., Case No. 2018 (Ne) 10053, 2018 (Ne) 10072, Judgment of Mar. 6. 2019 (IP High Court), in which the court affirms in part a judgment against the defendants for violation of the plaintiff's plant breeder's rights in a variety of shiitake mushroom.  The court construes the relevant statute as requiring the plaintiff to assert its rights against the producer of the propagating material (a Chinese company), rather than the named defendant (a Japanese company), once the plaintiff has notice of that entity's identity (as it did on June 4, 2012), and thus denied an injunction and request for destruction.  (The court also found it unnecessary to require the defendant to publish an apology.)  If I'm understanding correctly, however, the court awarded damages for lost profits from sales of mushrooms derived from mushroom beds transferred from China to Japan before June 4, 2012, based on (1) the quantity of mushrooms sold by the defendant, minus a small quantity it argued it had obtained from domestic Japanese producers, (2) multiplied by the percentage of infringing mushrooms in this quantity (82%), (3) multiplied by the plaintiff's profit margin (152 yen per kilogram), (4) multiplied by percentage of sales plaintiff had the capacity to make (30%).  The court also awarded investigation costs (1,011,960 yen) and attorneys' fees (810,000 yen), for a grant total of 8,916,375 yen.

The translation of the full judgment is available here.

Thursday, February 13, 2020

Video of FTC v. Qualcomm Oral Argument

It's available here, starting about thirty minutes in.  I watched the beginning of the argument this morning, then had to break for an event, and am about to resume.  I may have some thoughts later today or tomorrow.

Update:  Here's a short write-up coauthored by several reporters for Bloomberg Law.

Wednesday, February 12, 2020

Qualcomm Oral Argument Tomorrow

Oral argument in FTC v. Qualcomm takes place tomorrow, February 13, in Room 307 of the James R. Browning U.S. Courthouse in San Francisco.  According to the court's website, each side has only 20 minutes to argue (so I guess the DOJ will get five minutes of Qualcomm's time?), which isn't much for a matter of this complexity.  I imagine the matter will be principally decided on the briefs, which is usually the case anyway.  Here's an article in today's Law360 about the argument; it quotes me, among others, on what to expect.

Meanwhile, Erik Hovenkamp and Tim Simcoe have posted an interesting paper on ssrn titled Tying and Exclusion in FRAND Licensing: Evaluating Qualcomm, which is also forthcoming in the Antitrust Source.  Here is a link, and here is the abstract:
In an enforcement action brought by the Federal Trade Commission, a district court recently found that Qualcomm violated the antitrust laws by engaging in anticompetitive exclusive dealing and refusing to license its standard-essential patents (SEPs) to rivals. In this article, we unpack and evaluate three aspects of the Qualcomm decision. First, we describe how the tying relationship between chips and licenses goes primarily in the opposite direction of how most commentators characterize it. Second, we consider how Qualcomm’s commitments to license its SEPs on “fair, reasonable, and nondiscriminatory” (FRAND) terms bear on the antitrust analysis. Third, we discuss how FRAND might have been used to better justify finding an antitrust duty-to-deal with competitors.

Update:  It appears that the Ninth Circuit offers live video streaming of oral arguments.  Link here

Monday, February 10, 2020

Japan's IP High Court on Defendant's Profits, Royalties

A recent decision of Japan's Intellectual Property High Court, NeoChemir Inc. v. Medion Research Labs. Inc., Case No. 2018 (Ne) 10063, Judgment of June 7, 2019 (IP High Court), clarifies some points regarding awards of infringer's profits and reasonable royalties under Japanese law.  I came across a summary of the case in the September 2019 issue of A.I.P.P.I.--Journal of the Japanese Group of AIPPI, after which I also discovered a translation of the full judgment on the IP High Court's website.  I also just recently came across a German translation of portions of the decision in the December 2019 issue of GRUR-Int. (pp. 1186-91), along with (as I mentioned last week) a commentary by Atsuhiro Furuta.

The facts of the case, in brief, are as follows.  Plaintiff Medion accused NeoChemir and other firms of infringing Medion's patents relating to "carbon dioxide-containing viscous composition" by making and selling certain cosmetic products.  The court affirms on liability, and then proceeds to discuss damages.  Under the text of Japan Patent Act article 102 that remains in force until April 1, damages can be assessed as follows:
(1) Where a patentee or an exclusive licensee claims against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, and the infringer assigned articles that composed the act of infringement, the amount of damage sustained by the patentee or the exclusive licensee may be presumed to be the amount of profit per unit of articles which would have been sold by the patentee or the exclusive licensee if there had been no such act of infringement, multiplied by the quantity (hereinafter referred to in this paragraph as the "assigned quantity") of articles assigned by the infringer, the maximum of which shall be the amount attainable by the patentee or the exclusive licensee in light of the capability of the patentee or the exclusive licensee to work such articles; provided, however, that if any circumstances exist under which the patentee or the exclusive licensee would have been unable to sell the assigned quantity in whole or in part, the amount calculated as the number of articles not able to be sold due to such circumstances shall be deducted.
(2) Where a patentee or an exclusive licensee claims against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, and the infringer earned profits from the act of infringement, the amount of profits earned by the infringer shall be presumed to be the amount of damage sustained by the patentee or exclusive licensee.
(3) A patentee or an exclusive licensee may claim against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, by regarding the amount the patentee or exclusive licensee would have been entitled to receive for the working of the patented invention as the amount of damage sustained.
(4) The preceding paragraphs shall not prevent any relevant party from claiming compensation for damage in an amount exceeding the amount provided for therein. In such a case, where the infringer committed the infringement of the patent right or exclusive license without intent or gross negligence, the court may take these circumstances into consideration in determining the amount of damages.
The plaintiff here claims damages under article 102(2), though the court also considers what a reasonable royalty would be under article 102(3).  
As for the infringer's profits, the court reaffirms the understanding that Japan Patent Act article 102(2) presumes that the infringer's profit equals the loss sustained by the plaintiff.  As I have discussed previously stated--see, e.g., my book at pp.  323-24, and this paper at p.186--I don't think this presumption is all that sound as a matter of economics.  The court's analysis, however, is sensitive to the possibility that the defendant's profit may be attributable to factors other than the patented feature (though it concludes that the evidence here did not support that theory), and it discusses what types of costs should be deducted to determine the defendant's profit.  The court writes (pp. 29-34):
Further, it is reasonable to understand from the above purpose of Article 102, paragraph (2) of the Patent Act that an amount of profit made by an infringer due to an infringing act as provided in the same paragraph is a total amount of profit made by the infringer in principle, and there should be a presumption under the paragraph   for such a total amount of profit. Of course, the above provision is a provision of presumption. Thus in a case where an infringer establishes the fact that there is no connection between a damage on patentee and a part or all of profit made by the infringer, the above presumption may be rebutted to such extent. . . .
It should be construed that an amount of profit made by an infringer due to an infringing act of Article 102, paragraph (2) of the Patent Act is an amount of marginal profit in which only an additional cost that was necessitated in direct relation to manufacture and sales of infringing products by the infringer is deducted from sales figures of the infringing products by the infringer, and the burden of proof is on the patentee's side. . . .
As aforementioned, expenses to be deducted means expenses additionally required in direct relation to the production and sales of infringing products, which includes, for example, raw material cost, purchase cost, and shipping cost for infringing products. In contrast, for example, an employment cost as well as traveling and communication costs in administrative part do not correspond to additional expenses that were necessitated in direct relation to manufacture and sales of infringing products in usual circumstances. . . .
Regarding the rebuttal to the presumption under the provision of Article 102, paragraph (2) of the Patent Act, it is construed as an infringer who should bear burden of proof, similar to the circumstances of the proviso to the same paragraph, paragraph (1) of the Patent Act, and a fact for the rebuttal to presumption may be construed as including circumstances which could disprove the connection between a profit gained by the infringer and a damage on patentee. For example, the following facts may be considered as a fact for the rebuttal to presumption with respect to Article 102, paragraph (2) of the Patent Act, as similar to the circumstances of the proviso to the same article, paragraph (1) of the Patent Act: [i] a difference in business style (market is not the same) between patentee and infringer; [ii] the presence of competing products in a market; [iii] marketing efforts of infringer (branding, advertisement); and [iv] performance of infringing products (features other than patent invention including function and design). Further, even in a case where a patent invention is implemented for only a part of the infringing products, these facts may be taken into consideration as a fact for the rebuttal to presumption. It cannot be deduced directly from the fact that the patent invention is implemented for only a part of the infringing products that the above rebuttal to presumption is recognized, but it is reasonable to find by comprehensively taking into account the circumstances such as an importance of a part of an infringing product where the patent invention is implemented and the customer attracting force of the patent invention.
On the facts, however, the court concludes that the defendants have not rebutted the presumption.
The decision concludes with a discussion of the plaintiff's alternative claim for reasonable royalties under article 102(3); the court awards the plaintiff this alternative amount with regard to one product for which this leads to an amount higher than the amount calculated under article 102(2) (pp. 42-43, 51-52).  The court summarizes the law of royalties as follows (pp. 39-40):
Therefore, a royalty rate to be paid for the implementation should be determined as a reasonable royalty rate by comprehensively taking into account the following circumstances appeared in a lawsuit: [i] a royalty rate in the actual license agreement of the patent invention or if it is indefinite, a market rate of royalty rate in their business; [ii] the value of the patent invention itself; i.e., the technical content or significance of the patent invention, and the substitutability with alternative products; [iii] contributions to sales figure and profit when the patent invention is used for products and a manner of infringement; and [iv] a competition between patentee and infringer as well as a business policy of patentee.
Applying these factors, the court computes a 10% royalty rate (pp. 41-42):
As in the foregoing, it is reasonable to find that a royalty rate to be paid for the implementation of the present case to be determined post facto for a person who infringed a patent right would not fall below 10% by taking into account the following circumstances appeared in a lawsuit: [i] in this case, the royalty rate of the actual license agreement of the respective patents is not disclosed, whereas an average license fee in recent statistics of a technical field to which the respective inventions pertain is 5.3% in a result of questionnaire for domestic businesses, and 6.1% in the determination by court, and there is a case where a settlement money was found to be 10% of sales figure with regard to patent right infringement of patent in the same field owned by the Appellee; [ii] Invention 1-1 and Invention 2-1 have considerable importance, and no alternative technique is present; [iii] it can be said that the implementation of Invention 1-1 and Invention 2-1 contributes to the sales and profit of the respective Defendants' products; and [iv] the Appellee and the Appellants have a competitive relationship. Further, in view of the contents of Patent right 1 and Patent right 2, the royalty does not differ between one case and a combination of both cases.
The court also awards interest in the amount of 5%, and attorneys' fees.  

For discussion of an earlier case brought by NeoChemir, see here

Thursday, February 6, 2020

Remembering Judge Lawrence W. Pierce

Just a few hours ago, I published a short remembrance of Judge Deborah Batts.  And now, just a few minutes ago, I learned that the judge both she and I clerked for, the Honorable Lawrence W. Pierce, also has died.  Judge Pierce was 95.  I will always cherish the time I spent as a law clerk in his chambers, from 1987-88.  I remember his interest in genealogy and the Revolutionary War--he took us clerks to Fraunces Tavern, the site of Washington's farewell to his troops, on at least one occasion--and I recall hearing later about his post-judicial experiences in Cambodia.  

He was a kind man who led a remarkable life, and will be missed.

Update:  Obituaries have now been published in the New York Times (along with this memorial by the clerks), and by Fordham Law School and Yardley & Pino Funeral Home.