Some Articles on Disgorgement of Profits Under U.S. Law

As I've noted many times by now, like their counterparts in many other countries today, U.S. courts at one time were allowed to award the infringer's profits as a remedy for the infringement of utility patents.  Congress eliminated that remedy in 1946, supposedly due to the time, cost, and complexity that surrounded such awards at that time--but it kept the remedy in place for the infringement of design patents, where the governing statute (35 U.S.C. § 289) states that whoever applies a patented design "to any article of manufacture for the purpose of sale . .  . shall be liable to the owner to the extent of his total profit, but not less than $250 . . . ."  The predecessor version of this statute was enacted in 1887, when Congress sought to overrule two Supreme Court decisions that resulted in awards of only nominal damages for the infringement of a carpet design; but it gained prominence in recent years after the Federal Circuit in Apple v. Samsung  and Nordock v. Systems interpreted it to mean that the defendant could be required to disgorge its total profit from the sale of infringing merchandise, even when the design at issue constitutes only a portion of the entire product.  Last December, however, in Samsung v. Apple the Supreme Court held that "the term 'article of manufacture' is broad enough to encompass both a product sold to a consumer as well as a component of that product."  The case is now pending once again in federal district court, for determination of what the relevant "articles of manufacture" are and of the profit attributable to those articles.  For previous discussion on this blog, see, e.g., here.

Anyway, with that background, Professor Sarah Burstein has authored a paper titled The "Article of Manufacture" in 1887, 32 Berkeley Tech. L.J. __ (forthcoming).  Here is a link to the paper, and here is the abstract:

One of the most important questions in contemporary design patent law is how to interpret the phrase “article of manufacture” in 35 U.S.C. § 289. While there has been much discussion about what Congress intended when it enacted the predecessor to § 289 in 1887, there has been little discussion about what the phrase “article of manufacture” meant in 1887. This Article aims to fill that gap. It examines the relevant statutory text, late nineteenth-century patent treatises, Patent Office decisions, and court cases and concludes that, in 1887, the phrase “article of manufacture” did not mean “product” or any “thing made by hand or machine.” Instead, it was a term of art that referred to a tangible item—other than a machine or composition of matter—with a unitary structure made by humans and complete in itself for use or for sale. This historical evidence undercuts both the Federal Circuit and Supreme Court interpretations of the phrase “article of manufacture.” This evidence also should be considered in evaluating arguments about the statute’s plain meaning and the original congressional intent.

Professor Burstein concludes, among other things, that smartphones (had they existed) and dock levelers (at issue in Nordock) would not have been considered articles of manufacture in 1887.  She also gave a presentation on a follow-up article at PatCon 7 earlier this month, in which she presents her analysis of how courts should proceed in applying the statute today; I'll have more on this follow-up paper when there's a draft up on ssrn. 

2.  Professor Caprice Roberts previously published a paper titled The case for Restitution and Unjust Enrichment Remedies in Patent Law, 14 Lewis & Clark L. Rev. 653 (2010), in which she argued that "A patent owner should have access to a restitutionary disgorgement remedy. The goals served by the remedy could operate to benefit patent law aims. Depending upon the desired parameters, the remedy could serve to prevent the infringer's unjust enrichment, recapture wrongful gains to the owner who lost an opportunity to gain, deter infringement, and encourage bargaining for licenses."  She has a new essay out in 68 Florida Law Review Forum 1413 (2016), titled Supreme Court Disgorgement, which while not directly relevant to patents may be of interest.  Here is a link to the article, and here is the abstract:

Disgorgement of a defendant’s wrongful gains is an ancient remedy. It applies across a spectrum of contexts—from trademark infringement to fiduciary duties, from common law to statutes, from public to private law. This remedy is not regarded as quintessential in American contract law, but that is changing. My earlier work, as cited by the Supreme Court, predicted this shift based upon a new rule in the Restatement (Third) of Restitution and Unjust Enrichment. The rule operationalizes disgorgement of profits for opportunistic breaches of contract. This new conceptualization of precedent authorizes a gain-based remedy that exceeds the compensation goals of contract law’s preferred, default remedy of expectancy damages.

This remedy is bold and will affect the law of contracts, remedies, and restitution. I show, in a companion article, how state and federal courts resolve novel disgorgement requests for breach of contract claims. This Essay examines an unusual endorsement of disgorgement by the Supreme Court, sitting in original jurisdiction over the breach of a water-rights compact between states. Harnessing broad powers of equity jurisdiction, the Court adopts a $1.8 million disgorgement award exceeding compensation. It strips part of a defendant’s profits and stacks on a compensatory award for losses sustained. Relying on the Restatement (much to Justice Scalia’s chagrin), the Court permits disgorgement to deter a defendant from knowingly exposing a plaintiff to a substantial risk of breach. The Court’s provocative application offers a lens through which to explore broader questions: whether, when, and how the disgorgement remedy should apply to breach of contracts, whether public or private. This Essay concludes that disgorgement is a valuable remedy for breach of contract but that judges must exercise reasoned discretion, by applying disgorgement to proper facts and by using restraint in tying the measurement to causation. The inclusion of disgorgement in the stable of remedies broadens the scope of contract law to include inquiries and features typically associated with tort law. As in all of my remedies work, this Essay argues that remedies shape rights—here, granting the remedy of disgorgement expands the shape of the underlying contract right in both public and private law.

3.  This isn't a new article, but I only recently came across it (hat tip to Professor Pam Samuelson) and commend it to readers interested in disgorgement.  It's Mark Gergen's Causation in Disgorgement, 92 B.U. L. Rev. 827 (2012).  The article discusses, among other things, Judge Learned Hand's analysis of disgorgement in a famous copyright case, Sheldon v. MGM, and concludes as follows:

The major contribution of this Article is the insight that causal analysis can do a great deal of work in determining wealth in a wrongdoer’s hand subject to disgorgement once the appropriate counterfactual is chosen. Non-causal considerations of fairness and policy determine permissible counterfactuals. I used the law of deceit to illustrate the importance of clarity about permissible counterfactuals. A contentious point is my claim that causal analysis is fudged in some cases because it generates a measure of damages that is too low to deter the wrong. Candor on this point would make the law clearer and more coherent while weakening the claim in justice for damage awards that exceed the likely gain causally attributable to the wrong. I think this price is worth paying. Causal clarity makes it possible to identify reasons why causal analysis is inconclusive and it brings into view a normative benchmark to determine disgorgement damages when causal analysis is inconclusive. Causal analysis is inconclusive when the appropriate counterfactual is contestable, when factual analysis yields an uncertain answer, and when factual analysis yields a measure of damages that seems too low or too high. The purpose of disgorgement – to deter but not to punish – supplies a normative benchmark for all of these situations. This benchmark is a reasonable or fair price for the entitlement taken by the wrongdoer. Disgorgement damages should be set at a multiple of this price in an amount that is sufficient to deter persons such as the defendant from taking such an entitlement without bargaining for it.

Here is a link to the article.