Thursday, December 1, 2016

Enhanced Damages for the Infringement of Standard Essential Patents

On November 1, 2016, United States District Judge Rodney Gilstrap entered a final judgment in Core Wireless Licensing S.a.r.l. v. LG Elecs., Inc., awarding Core Wireless a 20% damages enhancement based on a jury finding that LG had willfully infringed two Core Wireless standard essential patents (copy of the judgment here).  Among the factors Judge Gilstrap cited for his decision were the following:  (1) "LG had detailed knowledge of the patents-in-suit long before the filing of this lawsuit"; (2) LG's ability "to muster a non-infringement position during negotiations and at trial does not necessarily insulate it from enhanced damages"; (3) its invalidity defense was "belied by the admission of LG’s corporate representative"; and (4) "the manner in which LG abruptly terminated licensing negotiations," including "making Core Wireless send representatives to Korea to be handed a one-page document" stating, among other things, that "LG would prefer to wait until another major cell phone manufacturer licensed the portfolio, at which point LG intended to be a 'a follower' in the established royalty scheme".  The judge concluded that a 20% enhancement (amounting to $456,000 on a $2,280,000) was appropriate.

I first learned about the judgment from David Long's November 22 post on the Essential Patent Blog.  Mr. Long states that"This appears to be the first case of a court enhancing damages based on willful infringement of a standard essential patent."  He also says that Judge Gilstrap awarded the enhancement sua sponte, following the jury's finding of willfulness, without further briefing from the parties, but that he stayed execution to permit the parties to file post-trial motions.

A few days later, I came upon Greg Sidak's article Enhanced Damages for Infringement of Standard-Essential Patents, 1 Criterion Journal on Innovation 1101 (2016). which also discusses Judge Gilstrap's final judgment (fast work, Greg!).  Here's the abstract of the article:
In Halo Electronics, Inc. v. Pulse Electronics, Inc., the Supreme Court overruled the Federal Circuit’s Seagate standard for enhancing patent damages for willful infringement, as provided by section 284 of the Patent Act. The Court said that egregious infringement alone could justify a court’s decision to enhance the damages award, regardless of the objective reasonableness of the infringement defense. However, some standards implementers have urged courts not to read Halo to permit enhanced damages for the infringement of SEPs, on the rationale that infringement is an expected part of standard setting. That argument, which implies that the infringement of SEPs is never so egregious as to justify the enhancement of a damages award, does not withstand scrutiny.
Enhanced damages for the infringement of SEPs are likely to be unavailable as long as the contract arising from the FRAND obligation governs the relationship between the SEP holder and the infringer. However, the SEP holder’s FRAND commitment becomes moot as a matter of contract law as soon as the infringer has exhausted its rights as a third-party beneficiary of the FRAND contract by rejecting the SEP holder’s FRAND offer, either expressly or by operation of law. Thereafter, the governing law reverts to the Patent Act and its interpretation by the federal courts, pursuant to which the SEP holder may seek enhancement of the damages award under section 284. As the Court emphasized in Halo, the decision to enhance the damages award rests in the court’s discretion, provided that the infringement is egregious. Factors such as the infringer’s knowledge of the SEPs’ existence and the infringer’s conduct in negotiating a license for SEPs inform whether the infringer has engaged in egregious misconduct justifying a punitive sanction.
According to Mr. Sidak, Judge Gilstrap had earlier rejected LG's argument that "enhanced damages are inappropriate for SEPs because 'infringement is an expected part of the standard setting model.'"  As suggested by the abstract, Mr. Sidak agrees with the judge that enhanced damages may be appropriate, because in his view (1) a FRAND commitment is an enforceable contract; (2) a SEP owner discharges its FRAND obligation by extending a FRAND offer; (3) the infringer extinguishes or exhausts its rights as a third-party beneficiary of the FRAND commitment by rejecting or failing to accept the offer within a reasonable time; and (4) once those rights are extinguished, the contractual constraint of the FRAND commitment is no longer applicable (pp. 1105-07).

For my part--and without having given the matter a huge amount of thought yet--I'm inclined to agree that enhanced damages should be available for the willful infringement of a SEP.  As readers of this blog may be aware, I'm not a big fan of enhanced damages generally,especially when they are conditioned on the infringer's state of mind rather than on objective criteria.  But as I've stated before, I do think they can be justified "when compensatory damages alone (1) would leave the plaintiff worse off than it would have been but for the infringement (perhaps because certain harms are not susceptible to quantification); or (2) would leave the defendant in a better position than a willing licensee (perhaps because the infringer avoids certain risks that a licensee normally would shoulder); or (3) would be necessary to achieve adequate deterrence (perhaps because the infringing act was of a type that often would go undetected, or the defendant has deliberately driven up litigation costs to discourage an impecunious patentee from filing suit)."  Moreover, as I've also stated before, in the context of SEPs I think that courts generally should deny injunctive relief in order to avoid holdup, but at the same time they should be careful to ensure that an award of past damages plus ongoing royalty is fully compensatory, and that the infringer isn't better off for having infringed.  It seems to me that, in order to ensure that infringers don't benefit from undue delay (whatever that means) in coming to terms, a modest damages enhancement might be appropriate.  After all, attorneys' fees, even when awarded, usually are not fully compensatory (in the U.S. and in some other countries as well); prejudgment interest, even when awarded (as it usually is, in the U.S.) and compounded (as it often is in the U.S., but not necessarily elsewhere), may not be fully compensatory if the patentee or the infringer has a higher internal rate of return than is reflected in the interest rate the court uses; and other costs of delay (opportunity costs, etc.) probably won't be compensated at all otherwise.  (I realize that this compensatory rationale is at odds with the Supreme Court's statement in Halo that enhanced damages are not intended to be compensatory, but I'm just speaking as a matter of policy here.)  

One other note:  it doesn't appear that Judge Gilstrap awarded Core Wireless its attorneys' fees, which may well be correct under U.S. law; the case probably wasn't "exceptional."  But again, as a matter of policy, it strikes me as odd that we're so hesitant to award fees (even when they aren't fully compensatory, as they usually aren't) but less so to award enhancements, at least after Halo.  That seems to get things backwards, in my view.

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