Amicus brief on design patent damages; new paper on royalty stacking

1.  Mark Lemley filed an amicus brief this afternoon on behalf of 27 law professors (including me) in the Apple v. Samsung appeal from the judgment entered by Judge Koh in March 2014, available here.   From the summary of argument:

The jury in this case awarded to Apple Samsung’s entire profit from the products that infringed Apple’s design patents. Never mind Samsung’s own patents, its engineering and design work, and the technologies of Google and countless other inventors incorporated in the Samsung phones. The result was that it was Apple’s product design, not any technical features, that was responsible for the overwhelming majority of the damages award.

The jury did this because the district court held that current law required it.  See Apple, Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2012 WL 2571332 (N.D. Cal. June 30, 2012) (granting motion in limine excluding Samsung’s testimony on apportionment because design patents do not permit apportionment). Unlike patents on technical inventions, or for that matter copyrights or trademarks, the court held that design patent law requires that infringers—even innocent infringers—pay the plaintiff their entire profit from the sale of the infringing product, even if the design was only a small feature of that product. 35 U.S.C. §289.

That rule, based on rather different circumstances that are more than a century old, makes no sense. As applied to a modern, multicomponent product it drastically overcompensates the owners of design patents, and correspondingly undervalues technical innovation and manufacturing know-how. It punishes even innocent infringers, particularly now that one can infringe a design patent merely on a finding that two independently developed designs are too similar to the ordinary observer. And it leaves troubling questions about what to do with all the other claimants to a share of the defendant’s profits. We suggest that this Court interpret section 289, in accordance with wise policy and the remainder of the patent statute, to limit the award of profits in design patent cases to profits attributable to the act of infringement.

2.  Both Danny Sokol and Florian Mueller have alerted me to a paper on royalty stacking by Ann Armstrong, Joseph J. Mueller, and Timothy D. Syrett titled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones, available here.  Here is the introduction:

Competition in the smartphone industry is fierce, and for smartphone suppliers, achieving profitability is highly challenging. Indeed, few suppliers are meeting the basic goal of selling devices for more than the costs incurred in supplying them. This article examines one category of such costs: the cumulative royalty demands for the patents claimed to cover technologies in a smartphone.

The authors have years of experience studying such costs, as an in-house attorney at a supplier of components for mobile devices, and as litigators who have worked on many patent cases involving smartphones. For this article, we report only publicly-available information. To the extent that we have knowledge of confidential licensing information through our in-house or litigation work, we do not report it in this article, in any way. But, our collective experience has allowed us to effectively canvass publicly-available information to sketch the royalty landscape for smartphones.

Using exclusively this public information, the article presents a “bottom-up” analysis of smartphone royalties by examining the potential royalty burden on the major technologies and components in smartphones. We are unaware of any similar study. Some studies have focused on royalties on discrete technologies (e.g., cellular communication functionality), rather than the broad range of components across the entire device. Others have quantified relevant intellectual property rights but have not attempted to capture the royalty demands that may accompany them.

The data collected in this article are relevant not only to better understanding the dynamics of the smartphone market but also to the ongoing development of the law and business principles for determining a “reasonable royalty” under the patent laws and/or under commitments to license on “fair, reasonable, and non-discriminatory” (“FRAND”) or “reasonable and non-discriminatory” (“RAND”) terms.

In particular, there has been significant recent focus on “royalty stacking,” in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product. This article is intended to provide insight into the royalty stack that smartphone suppliers face. The data show that royalty stacking is not merely a theoretical concern. Indeed, setting aside off-sets such as “payments” made in the form of cross-licenses and patent exhaustion arising from licensed sales by component suppliers, we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone—which is almost equal to the cost of device’s components. Thus, the smartphone royalty stack across standardized and non-standardized technology is significant, and those costs may be undermining industry profitability—and, in turn, diminishing incentives to invest and compete.

We first explain the assumptions we have made and the limitations inherent in our public data collection. Next, we give context to the origins of royalty demands that smartphone suppliers face by briefly reviewing the wave of patent litigation involving smartphone suppliers. Finally, with that background, we present the data that we have collected in our component-by-component survey of royalty demands.