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."
Tuesday, June 30, 2015
Monday, June 29, 2015
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).
Friday, June 26, 2015
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 Patents. Here 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.
Wednesday, June 24, 2015
I returned from Japan last week following the speaking engagements in Tokyo, Kyoto, and Fukuoka that I mentioned here. I wish to express my heartfelt thanks to everyone whose hard work made these events possible, especially Professors Reiko Aoki, Ryoko Iseki, Sadao Nagaoka, and Masabumi Suzuki. I certainly learned a great deal and was honored to participate.
In Tokyo and Fukuoka, I presented a work in progress that I am coauthoring with Norman Siebrasse titled The Value of the Standard. We hope to finalize the paper sometime later this summer, and I will note when it is up on ssrn.
Monday, June 22, 2015
Kimble v. Marvel Enterprises: U.S. Supreme Court Reaffirms Brulotte v. Thys on the Unenforceability of Postexpiration Royalties
I really didn't call this one right, did I? Following the oral argument on March 31, I stated that, "based on the tenor of the oral argument I'd guess that there is a majority to overrule" Brulotte v. Thys. Turns out there wasn't. Instead, the Court (6-3, with the majority opinion authored by Justice Kagan) voted to retain Brulotte on stare decisis grounds. Opinion here.
For readers who aren't familiar with Kimble, Brulotte, or the issue of postexpiration royalties, here's a brief recap. Brulotte is a 1964 decision holding that an agreement to pay postexpiration patent royalties is per se unenforceable. Kimble is a more recent case involving the same principle, as explained in Justice Kagan's opinion (pp. 2-3):
Kimble sued Marvel in 1997 alleging, among other things, patent infringement. The parties ultimately settled that litigation. Their agreement provided that Marvel would purchase Kimble’s patent in exchange for a lump sum (of about a half-million dollars) and a 3% royalty on Marvel’s future sales of the Web Blaster and similar products. The parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can).
And then Marvel stumbled across Brulotte, the case at the heart of this dispute. In negotiating the settlement, neither side was aware of Brulotte. But Marvel must have been pleased to learn of it. Brulotte had read the patent laws to prevent a patentee from receiving royalties for sales made after his patent’s expiration. See 379 U. S., at 32. So the decision’s effect was to sunset the settlement’s royalty clause. . . . On making that discovery, Marvel soughta declaratory judgment in federal district court confirmingthat the company could cease paying royalties come 2010—the end of Kimble’s patent term. The court approved that relief, holding that Brulotte made “the royalty provision . . . unenforceable after the expiration of the Kimble patent.” 692 F. Supp. 2d 1156, 1161 (Ariz. 2010). The Court of Appeals for the Ninth Circuit affirmed,though making clear that it was none too happy about doing so. “[T]he Brulotte rule,” the court complained, “is counterintuitive and its rationale is arguably unconvincing.” 727 F. 3d 856, 857 (2013).
I would say that most economic analysts of patent law would agree that the rationale of Brulotte is unconvincing, and even Justice Kagan seemed to concede as much (p.5):
The Brulotte rule, like others making contract provisions unenforceable, prevents some parties from entering into deals they desire. As compared to lump-sum fees, royalty plans both draw out payments over time and tie those payments, in each month or year covered, to a product’s commercial success. And sometimes, for some parties, the longer the arrangement lasts, the better—not just up to but beyond a patent term’s end. A more extended payment period, coupled (as it presumably would be) with a lower rate, may bring the price the patent holder seeks within the range of a cash-strapped licensee. (Anyone who has bought a product on installment can relate.) See Brief for Memorial Sloan Kettering Cancer Center et al. as Amici Curiae 17. Or such an extended term may better allocate the risks and rewards associated with commercializing inventions—most notably, when years of development work stand between licensing a patent and bringing a product to market. See, e.g., 3 R. Milgrim & E.Bensen, Milgrim on Licensing §18.05, p. 18–9 (2013). As to either goal, Brulotte may pose an obstacle.
Nevertheless, as Justice Kagan notes, there are ways to draft around Brulotte (p.6):
To start, Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. See 379 U. S., at 31; Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S. 100, 136 (1969). A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-yearpatent term, but to amortize that amount over 40 years.That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, royalties may run until the latest-running patent covered in the parties’ agreement expires. See 379 U. S., at 30. Too, post-expiration royalties are allowable solong as tied to a non-patent right—even when closely related to a patent. See, e.g., 3 Milgrim on Licensing §18.07, at 18–16 to 18–17. That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone). Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share.
In response, one might ask why, if there are ways to draft around Brulotte, we need Brulotte at all. If the agreement uses the right magic words, the parties can agree to postexpiration royalties, otherwise not. The rule simply creates a trap for the unwary and (in my view) advances no substantive goal except in cases in which the arrangement somehow enables the licensor or assignor to expand or maintain monopoly power (in which case a rule of reason approach, as advocated by Marvel, would suffice to render the clause unenforceable; see opinion pp. 6-7).
But the Court is not swayed, invoking instead the principle that "[o]verruling precedent is never a small matter," and "[r]especting stare decisis means sticking to some wrong decisions" (p.7). Thus, "[t]o reverse course, we require as well what we have termed a 'special justification'—over and above the belief 'that the precedent was wrongly decided.' . . . What is more, stare decisis carries enhanced force when a decision, like Brulotte, interprets a statute. Then, unlike in a constitutional case, critics of our ruling can take their objections across the street, and Congress can correct any mistake it sees" (p.8). Moreover, 'Brulotte lies at the intersection of two areas of law: property (patents) and contracts (licensing agreements). And we have often recognized that in just those contexts—'cases involving property and contract rights'—considerations favoring stare decisis are 'at their acme'” (p.9). Given this framework, the Court says, the "superspecial justification" needed to warrant overruling Brulotte is lacking: "Brulotte’s statutory and doctrinal underpinnings have not eroded over time," and "second, nothing about Brulotte has proved unworkable" (pp. 10-11).
We then get to the most interesting part of the opinion, the policy discussion. Stating that "[a] broad scholarly consensus supports Kimble’s view of the competitive effects of post-expiration royalties, and we see no error in that shared analysis," (p.13), the Court nonetheless distinguishes the force of stare decisis in antitrust and patent cases (pp. 14-17):
If Brulotte were an antitrust rather than a patent case,we might answer both questions as Kimble would like.This Court has viewed stare decisis as having less-than-usual force in cases involving the Sherman Act. See, e.g., Khan, 522 U. S., at 20–21. Congress, we have explained,intended that law’s reference to “restraint of trade” to have “changing content,” and authorized courts to oversee the term’s “dynamic potential.” Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731–732 (1988). We have therefore felt relatively free to revise our legal analysis as economic understanding evolves and (just as Kimble notes) to reverse antitrust precedents that misperceived a practice’s competitive consequences. See Leegin, 551 U. S., at 899–900. Moreover, because the question in those cases was whether the challenged activity restrained trade, the Court’s rulings necessarily turned on its understanding of economics. See Business Electronics Corp., 485 U. S., at 731. Accordingly, to overturn the decisions in light of sounder economic reasoning was to take them “on [their] own terms.” Halliburton, 573 U. S., at ___ (slip op., at 9).
But Brulotte is a patent rather than an antitrust case,and our answers to both questions instead go against Kimble. To begin, even assuming that Brulotte relied on an economic misjudgment, Congress is the right entity to fix it. By contrast with the Sherman Act, the patent laws do not turn over exceptional law-shaping authority to the courts. Accordingly, statutory stare decisis—in which this Court interprets and Congress decides whether to amend—retains its usual strong force. See supra, at 8. And as we have shown, that doctrine does not ordinarily bend to “wrong on the merits”-type arguments; it instead assumes Congress will correct whatever mistakes we commit. See supra, at 7–8. Nor does Kimble offer any reason to think his own “the Court erred” claim is special. Indeed, he does not even point to anything that has changed since Brulotte—no new empirical studies or advances in economic theory. Compare, e.g., Halliburton, 573 U. S., at ___ (slip op., at 9–12) (considering, though finding insufficient, recent economic research). On his argument, the Brulotte Court knew all it needed to know to determine that post-patent royalties are not usually anticompetitive; it just made the wrong call. See Brief for Petitioners 36–40. That claim, even if itself dead-right, fails to clear stare decisis’s high bar.
And in any event, Brulotte did not hinge on the mistake Kimble identifies. Although some of its language invoked economic concepts, see n. 4, supra, the Court did not rely on the notion that post-patent royalties harm competition. Nor is that surprising. The patent laws—unlike the Sherman Act—do not aim to maximize competition (to a large extent, the opposite). And the patent term—unlike the “restraint of trade” standard—provides an all-encompassing bright-line rule, rather than calling for practice-specific analysis. So in deciding whether post-expiration royalties comport with patent law, Brulotte did not undertake to assess that practice’s likely competitive effects. Instead, it applied a categorical principle that all patents, and all benefits from them, must end when their terms expire. See Brulotte, 379 U. S., at 30–32; supra, at 3–5. Or more specifically put, the Court held, as it had in Scott Paper, that Congress had made a judgment: that the day after a patent lapses, the formerly protected invention must be available to all for free. And further: that post-expiration restraints on even a single licensee’s access to the invention clash with that principle. See Brulotte, 379 U. S., at 31–32 (a licensee’s obligation to pay post-patent royalties conflicts with the “free market visualized for the post-expiration period” and so “runs counter to the policy and purpose of the patent laws” (quoting Scott Paper, 326 U. S., at 256)). That patent (not antitrust) policy gave rise to the Court’s conclusion that post-patent royalty contracts are unenforceable—utterly “regardless of a demonstrable effect on competition.” 1 Hovenkamp §3.2d, at 3–10.
Kimble’s real complaint may go to the merits of such a patent policy—what he terms its “formalis[m],” its “rigid[ity]”, and its detachment from “economic reality.” Brief for Petitioners 27–28. But that is just a different version of the argument that Brulotte is wrong. And it is, if anything, a version less capable than the last of trumping statutory stare decisis. For the choice of what patent policy should be lies first and foremost with Congress. So if Kimble thinks patent law’s insistence on unrestricted access to formerly patented inventions leaves too little room for pro-competitive post-expiration royalties, then Congress, not this Court, is his proper audience. . .
Kimble also seeks support from the wellspring of all patent policy: the goal of promoting innovation. Brulotte, he contends, “discourages technological innovation and does significant damage to the American economy.” Brief for Petitioners 29. Recall that would-be licensors and licensees may benefit from post-patent royalty arrangements because they allow for a longer payment period and a more precise allocation of risk. See supra, at 5. If the parties’ ideal licensing agreement is barred, Kimble reasons, they may reach no agreement at all. See Brief for Petitioners 32. And that possibility may discourage invention in the first instance. The bottom line, Kimble concludes, is that some “breakthrough technologies will never see the light of day.” Id., at 33.
Maybe. Or, then again, maybe not. While we recognize that post-patent royalties are sometimes not anticompetitive, we just cannot say whether barring them imposes any meaningful drag on innovation. As we have explained, Brulotte leaves open various ways—involving both licensing and other business arrangements—to accomplish payment deferral and risk-spreading alike. See supra, at 6. Those alternatives may not offer the parties the precise set of benefits and obligations they would prefer. But they might still suffice to bring patent holders and product developers together and ensure that inventions get to the public. Neither Kimble nor his amici have offered any empirical evidence connecting Brulotte to decreased innovation; they essentially ask us to take their word for the problem. And the United States, which acts as both a licensor and a licensee of patented inventions while also implementing patent policy, vigorously disputes that Brulotte has caused any “significant real-world economic harm.” Brief for United States as Amicus Curiae 30. Truth be told, if forced to decide that issue, we would not know where or how to start.
So, if I may paraphrase, the Court recognizes that as a matter of economics the Brulotte rule probably condemns some private agreements that do not result in anticompetitive harm, but posits that the rule must survive because "Brulotte is a patent rather than an antitrust case." But patents are (indisputably, in my view) a utilitarian body of law--a means to an end--and as such, it's hard to see how economics can be irrelevant to their proper interpretation. Moreover, the Court's statement that "patent laws . . . do not aim to maximize competition" seems a bit off, given that the end that patent law is intended to achieve is to maximize dynamic competition through promoting innovation. And sure, we don't know (empirically) whether Brulotte has stifled innovation, but it imposes a needless cost (drafting around) and has no obvious merit other than formalism: the "categorical principle that all patents, and all benefits from them, must end when their terms expire" (unless you cleverly draft around the rule, I guess). Finally, much of patent law (historically, and today as well) is essentially common law, not clearly based on the language of the statute. While the Sherman Act is more in the nature of a delegation to the courts to create a common law of competition, the distinction between the two bodies of law (in my view) should not be exaggerated.
Justice Alito's dissent (joined by the Chief Justice and Justice Thomas) makes the case for overruling Brulotte (dissent pp. 1-2, 4, 7):
The Court employs stare decisis, normally a tool of restraint, to reaffirm a clear case of judicial overreach. Our decision in Brulotte v. Thys Co., 379 U. S. 29 (1964),held that parties cannot enter into a patent licensing agreement that provides for royalty payments to continue after the term of the patent expires. That decision was not based on anything that can plausibly be regarded as an interpretation of the terms of the Patent Act. It was based instead on an economic theory—and one that has been debunked. The decision interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent, and it disrupts contractual expectations. Stare decisis does not require us to retain this baseless and damaging precedent. . . .
Not only was Brulotte based on policymaking, it was based on a policy that is difficult to defend. Indeed, in the intervening 50 years, its reasoning has been soundly refuted. . . .
The majority downplays this harm by insisting that “parties can often find ways around Brulotte.” Ante, at 6. But the need to avoid Brulotte is an economic inefficiency in itself. Parties are not always aware of the prohibition—as this case amply demonstrates. And the suggested alternatives do not provide the same benefits as post-expiration royalty agreements. For instance, although an agreement to amortize payments for sales during the patent term would “bring down early outlays,” the Court admits that such an agreement might not reflect the parties’ risk preferences. Ante, at 6. Moreover, such an arrangement would not necessarily yield the same amount of total royalties, particularly for an invention or a medical breakthrough that takes decades to develop into a marketable product. The sort of agreements that Brulotte prohibits would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow-developing inventions. . .
Even taking the Court on its own terms, Brulotte was an antitrust decision masquerading as a patent case. The Court was principally concerned with patentees improperly leveraging their monopoly power. See 379 U. S., at 32–33. And it expressly characterized post-expiration royalties as anti-competitive tying arrangements. See id., at 33. It makes no sense to afford greater stare decisis protection to Brulotte’s thinly veiled antitrust reasoning than to our Sherman Act decisions.
Well, as I said, I am disappointed by the Court's refusal to overrule what Posner and Landes once (correctly) referred to as as “one of the all-time economically dumb Supreme Court decisions,” William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 418 (2003). I guess the case also goes to show that one cannot always predict how a justice will rule based on what he or she says during oral argument; apparently Justice Scalia was convinced by the stare decisis argument, even though he seemed to me to be unimpressed by the substance of the Brulotte rule at oral argument.
Here is the opinion. I'll be back later today with analysis. Needless to say, I am very disappointed.
Friday, June 5, 2015
Next week I will be presenting a paper that Norman Siebrasse and I are working on, titled Standard Value Holdup, at two events in Japan. First, on Tuesday, June 9, I will be presenting the paper in Tokyo at an event titled "International Workshop on Standards, Intellectual Property, and Innovation" at RIETI (the Research Institute of Economy, Trade, and Industry), with comments by Professor Reiko Aoki. I also will be commenting on Professor Masabumi Suzuki's presentation titled Enforcement of SEP: Japanese Situation from a Comparative Perspective. I imagine that RIETI will have the full agenda for this event--and for a related event that is scheduled to take place immediately afterwards titled "Innovation Seminar 'Future of RAND Licensing,'" at which I also will be participating as a panelist--on its website at some point in the near future. Second, on Wednesday, June 10, I will presenting a lecture at Doshisha University in Kyoto titled Patent Remedies: Recommendations for International Best Practice. Third, on Friday, June 12, I will be presenting Standard Value Holdup again at a Seminar on Standards, IP and Competition Policy taking place at Kyushu University in Fukuoka (agenda here).
I also will be taking a blogging break beginning today. I plan to resume on Monday, June 22, unless something very important happens in the interim and I just can't resist.
Thursday, June 4, 2015
In a nonprecedential opinion released this morning, Global Traffic Technologies LLC v. Morgan, the Federal Circuit (1) affirmed a finding of liability for indirect infringement, (2) reversed an award of enhanced damages, and (3) affirmed the district court's conclusions (a) that the plaintiff complied with the patent marking statute, (b) admitting the plaintiff's expert testimony on damages, and (c) that defendant KM Enterprises, Inc.'s sole shareholder and director was personally liable. (In addition to the individual, the defendants included KM Enterprises and another company, STC, Inc.) The patent in suit claims traffic control preemption methods and systems for emergency vehicles, using data from a GPS, and the opinion is by Judge O'Malley (joined by Judges Dyk and Taranto). I'll focus on the damages issues.
First, on the issue of enhanced damages, the court concluded that the defendants had a good faith defense which precluded a finding of willful infringement, and that the fact that defendants developed that defense after having been sued for infringement is irrelevant:
The district court found that there was ample evidence in the record that Appellants knew of the patent and determined that “an objectively reasonable person, with knowledge that a patent exists in the field in which the potential infringers wish to compete would not ignore the patent, but would investigate whether its design would infringe.” JMOL Order, 2014 WL 1663420, at *13. The infringer’s knowledge of the patent is irrelevant to the first Seagate prong, however. See Seagate, 497 F.3d at 1371 (“The state of mind of the accused infringer is not relevant to this objective inquiry.”). Instead, the district court should have considered whether Appellants acted “despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Seagate, 497 F.3d at 1371. This requires analysis of all of the infringer’s non-infringement and invalidity defenses, even if those defenses were developed for litigation. See Halo Elecs., Inc. v. Pulse Elecs., Inc., 769 F.3d 1371, 1382 (Fed. Cir. 2014) (“The court properly considered the totality of the record evidence, including the obviousness defense that Pulse developed during the litigation, to determine whether there was an objectively-defined risk of infringement of a valid patent.”).
In this case, the district court found that Appellants “had good-faith invalidity defenses once litigation began.” JMOL Order, 2014 WL 1663420, at *14. We agree. Because Appellants’ defenses during litigation were objectively reasonable, GTT failed to prove the first prong of our willfulness test. See Halo, 769 F.3d at 1382 (pp. 15-16).
Interestingly, the presence of a good faith defense of invalidity might have gotten the defendants off the hook for indirect infringement until last week, when the Supreme Court in Commil USA, LLC v. Cisco Systems, Inc. held that it doesn't.
Second, on the issue of patent marking, the defendants argued that the plaintiff was not entitled to recover damages for the period of time preceding the defendants' receipt of actual notice of infringement, because the plaintiff failed to mark the physical components of its system (which would constitute constructive notice). (Under U.S. law, you're not required to mark a process, but if you sue for the infringement of a patent's product (or system) and process claims but fail to mark, you can recover damages only from the date on which the defendant is put on actual notice. See Mformation Techs., Inc. v. Research in Motion Ltd., 830 F. Supp. 2d 815, 836-38 (S.D. Cal. 2011). Moreover, even if the defendant has actual knowledge of the patent sufficient to support a finding of indirect infringement prior to the date on which it is put on actual notice, the plaintiff still cannot recover damages for the period of time preceding receipt of actual notice, absent patent marking. See Fujitsu Ltd. v. Netgear Inc., 620 F.3d 1321, 1332 (Fed. Cir. 2010). I have long doubted that the complexity engendered by all of these byzantine rules is worthwhile, but so it goes. For further discussion on this blog of the patent marking statute, see here.) Anyway, in this case the court concluded that marking the product packaging sufficed:
As noted, the marking statute requires an analysis of the “character of the article.” 35 U.S.C. § 287(a). Certainly, the physical size of the article may be one factor in considering whether the article itself must be marked rather than the packaging. See Sessions v. Romandka, 145 U.S. 29, 49–50 (1896) (considering the patentee’s ability to stamp the patented screws with a legible mark based on the size of the screws). The physical size of the patented article, however, is not the only thing that defines the “character of the article.” 35 U.S.C. § 287(a). There may be many other aspects of a patented article that can affect whether marking the article provides sufficient constructive notice to the public. See Maxwell, 86 F.3d at 1111. Because we do not pretend to know all of the possible types, characteristics, or components of patented—and yet to be patented—machines and systems,we cannot construct a bright line rule regarding what aspects to consider in determining whether marking the packaging amounts to “substantial compliance.” Id. One example is a multi-component system that embodies a patent. In this example, marking the individual components of the system may not have the desired notice effect of providing public notice because such markings may mislead the public into believing that the marked components themselves are patented, as opposed to the entire multi-component system. As another example, patented articles may be immediately installed out of the public view once unpackaged. Again, in this example, the public may be better notified with marking on the packaging, as opposed to the article itself.
We use these examples to show that the physical size of the article is not the only aspect of the “character of the article” that may be considered. 35 U.S.C. § 287(a). Because there may be many factors that affect the character of a patented article, we hold that, when a patentee marks the packaging rather than the article, the district court should evaluate the specific character of the article at issue. See Sessions, 145 U.S. at 50 (“[S]omething must be left to the judgment of the patentee, who appears in this case to have complied with the alternative provision of the act, in affixing a label to the packages in which the [patented articles] were shipped and sold.”). This factual inquiry regarding the character of the patented article, moreover, may be submitted to a jury, as the district court did here.
In this case, there was substantial evidence for the jury to find that GTT substantially complied with § 287 by marking the Opticom packaging. Appellants presented evidence that their patented product was an entire system that contained multiple components that were separated once unpackaged. . . . Appellants’ expert also testified that some of the components are not in the public view once installed and that other companies had marked the product in the same way, that the marking used reflected industry custom. . . . Based on these factors, it was reasonable for the jury to conclude that marking the packaging of Opticom—the only time when all of the components that made up the patented system were together and in full view of the public—adequately served the purpose of providing constructive notice to the public that the entire Opticom system was patented (pp. 17-19).
Third, the court rejected the defendant's objections to the damages expert's testimony, which was based on the expert's alleged failure to consider price elasticity, based on the court's conclusion that the expert did in fact consider this matter, both at trial and in his report (p.20).
Fourth, the court affirmed the judgment of individual liability, based on its conclusion that "GTT presented substantial evidence to indicate that [the individual] personally induced customers to perform the patented method in claim 16 of the ’398 patent" (p.21). The court interpreted Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010), as standing only for the proposition that "a corporate officer—or perhaps only a corporate owner, see Wordtech, 609 F.3d at 1313 n.2—cannot be found derivatively liable for the corporation’s infringement without piercing the corporate veil" (pp. 22-23 n.6).
An aside--the court doesn't discuss how the actual damages (in the amount of $2,526,059) were calculated, but the issue of how to calculate damages for indirect infringement is an interesting one. For analysis, see Dmitri Karshtedt's article, which I mentioned on the blog here.
Wednesday, June 3, 2015
I'll be heading to Japan in a few days (more on this later this week) and so the time is ripe for discussion of an interesting Japanese case I just came across, NeoChemir Inc. v. KBC Co., IP High Court Judgment of August 27, 2014, Case No. 2014 (ne) No. 10016. Reimon Kunugi's write-up of the case can be found in Volume 40 of AIPPI-Journal of the Japan Group of AIPPI 102-03 (2015). There is also an English language summary of the case available on the IP High Court's website, here.
The facts are these. The plaintiff sought damages consisting of (1) compensation for the unauthorized post-publication, pre-grant use of the claimed invention in accordance with Japan Patent Act article 65(1), and (2) an award of damages for the unauthorized post-grant use and sale of the invention, in accordance with article 102(2). (If I'm reading this correctly, the defendant also sought some portion of its damages in the form of a reasonable royalty under article 102(3), but the main issue concerns article 102(2) and its relationship to article 102(1), as discussed below.) Article 102(2) reads as follows:
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.
The defendant argued, however, that the plaintiff's product itself infringes a patent owned by a third party, Medion, who is not a party to the litigation. According to the defendant, the fact that the plaintiff's product infringes requires the court to reduce the amount of damages under article 102(1) of the Japanese Patent Act, which reads as follows:
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.
The defendant's argument was that the infringing nature of the plaintiff's products constituted "circumstances . . . under which the patentee . . . would have been unable to sell the assigned quantity in whole or in part" under article 102(1); and that since article 102(2) merely provides a means for presuming the amount of the plaintiff's lost profit (a presumption I have criticized, but that's what the statute says), those same circumstances should reduce the recovery under article 102(2). (I also would assume that the defendant is not arguing that the defendant's own products infringe Medion's patent, which might be a dangerous argument for the defendant to make! Presumably it's just some of the embodiments produced by the plaintiff that infringe.) The IP High Court ruled against a reduction, however:
. . . the court first ruled that the amount of damages is calculated under Article 102, paragraph (2) of the Patent Act and that it is not reasonable to consider that the proviso to Article 102, paragraph (1) is applicable or applicable mutatis mutandis to said calculation. The court then ruled as follows: The circumstance pointed out by the appellee may fall under the circumstance that completely annihilates a presumption set forth in Article 102, paragraph (2) of said Act; however, there is no sufficient evidence to find occurrence of a situation where the sale and manufacture of the products in which the Patented Invention is worked is hindered, such as the aforementioned third party's request for discontinuance of manufacture and sale of the products, though some of the products certainly fall under products infringing the patent right of said third party. Therefore, said circumstance cannot be regarded as one that completely annihilates said presumption.
The question of whether damages should be reduced because the plaintiff's own product infringes is an interested one. I'm inclined to think that the answer is no; if the third party wants to assert its rights against the plaintiff, it may do so, but that's between the third party and the plaintiff, and we should be careful adjudging the plaintiff's product to be infringing when the owner of the relevant patent isn't before the court (and may not, as apparently was the case here, have any interest in suing for infringement). I could imagine the rule advocated by the defendant opening some floodgates, since it's often possible that a plaintiff's product infringes somebody's patent that perhaps neither party is initially aware of. The defense reminds me a bit of the U.S. patent misuse defense, though, under which the plaintiff's misconduct can sometimes render a patent unenforceable--though usually only when the misconduct expands the scope of the patent in some manner. Off the top of my head, I'm not aware of any cases in which anyone has argued patent misuse because the plaintiff's product infringes somebody else's patent, though the misuse defense is similar (and rather peculiar) in allowing the defendant to assert misconduct that targets someone other than the defendant itself. For more discussion of misuse, see my article here and Daryl Lim's book.
Monday, June 1, 2015
Erik Hovenkamp has posted a paper on ssrn titled How Reasonable Royalties Suppress Patent Licensing. Here is a link to the paper, and here is the abstract:
Patent remedies are essential to maintain a well-functioning patent system, but if not properly fashioned they may interfere with the dissemination of patented inventions and thereby foreclose many opportunities for mutually-beneficial licensing. This paper addresses two attributes of patent damages awards that engender such effects. The first is the monopoly fallacy: the tendency to overstate a patent holder’s market power in its licensing market by discounting or disregarding alternative options or potential workarounds, effectively allowing a plaintiff to recover a monopoly price for a license that would command only a competitive price if exchanged at arm’s length. As a result, settlements or judgments secured from unintentional infringers become a patent holder’s most lucrative means of licensing, and this substantially lessens its interest in actively disseminating its invention by seeking out potential licensees ex ante. In fact, if expected damages are sufficiently high in relation to the market value of a license, the patent holder’s most profitable strategy is to deliberately refrain from approaching known licensing candidates in the hope that some fraction of them will unintentionally infringe. Consequently many opportunities for efficient licensing are ultimately missed, and many of those deals that do occur could have been executed earlier and more efficiently.
A second problem is the courts’ reliance on precedential royalties, or reasonable royalty damages based on an established royalty for the infringed patent. While administratively convenient, the results of this approach will often be woefully imprecise, as there are many variables relating to the parties, the licensee’s intended licensing application, and the competitive landscape that collectively create a significant disparity in the licensing terms a patent holder would reach with different licensees or at different times in the patent term. Because a precedential royalty rule ignores these differences, the terms of a licensing contract may work against the licensor in its future dealings or disputes with other parties. Patent holders thus have a strong interest in not setting a bad precedent, and will reject many mutually-beneficial deals simply because the royalty rate would not appear particularly high. The result is that patent holders are induced to cut off a large segment of the market, even though they could have benefitted from these forgone transactions – an outcome that injures inventors, firms, and consumers.