Monday, February 5, 2018

Federal Circuit Affirms Finding of Willfulness, Vacates and Remands Award of Treble Damages

The decision, which issued this morning, is WCM Industries, Inc. v. ICM Corp., nonprcedential opinion by Chief Judge Prost (joined by Judges Wallach and Taranto).  WCM owns three patents relating to an improvement in bathtub overflow assemblies.  The defendant marketed a product (referred to here as the "Classic Product") that allegedly infringed.  After WCM filed suit, the defendant stopped making that product and instead sold a "Revised Classic Product," which the plaintiff believed also infringed.  The jury verdict concluded that the Classic Product infringed literally, contributorily infringed, and induced infringement, and that the Revised Classic Product infringed under the doctrine of equivalents, contributorily infringed, and induced infringement.  The jury also found that a reasonable royalty rate was $1 per infringing unit of both products, and that the infringement was willful.  The district judge granted a JMOL on the doctrine of equivalents but concluded that the Revised Classic Product nevertheless indirectly infringed, and trebled the award of actual damages from $1,383,978 to $4,154,934.  (It did conclude that there was no willful infringement of one of the three patents in suit, because it issued after the complaint was filed, but that didn't affect the damages award.)  On appeal, the Federal Circuit affirms the judgment on liability, finding however that the defendant did infringe under the doctrine of equivalents as well as indirect infringement.  Focusing on remedies, the court also affirms as to the willfulness of the infringement of the two other patents in suit, but remands for further consideration of the amount, if any, of an appropriate enhancement.

On willfulness, the defendant argued that it lacked knowledge of the patents in suit until it was sued for infringement, and that as a result it couldn't be held liable for willful infringement.  The Federal Circuit expresses doubt that a lack of knowledge until the point at which one is sued necessarily means that one is not a willful infringer (which could be a big deal in other cases), though it also states that there was sufficient evidence for the jury to conclude that the defendant had knowledge before that (which would make the decision less of a blockbuster).  See what you think:
IPS’s principal argument on appeal is that the district court erred in refusing to grant judgment as a matter of law of no willfulness because there is no evidence that IPS had knowledge of the patents before the lawsuit began. In support, IPS largely relies on State Industries, Inc. v. A.O. Smith Corp., 751 F.2d 1226 (Fed. Cir. 1985), and Gustafson, Inc. v. Intersystems Industrial Products, Inc., 897 F.2d 508 (Fed. Cir. 1990). In State Industries, the court concluded that “[t]o willfully infringe a patent, the patent must exist and one must have knowledge of it.” 751 F.2d at 1236. Accordingly, the court held that the defendant’s infringement in that case was not willful because, among other reasons, its first notice of the existence of the issued patent came with the filing of the infringement suit against it. Id. Similarly, Gustafson held that “a party cannot be found to have ‘willfully’ infringed a patent of which the party had no knowledge.” 897 F.2d at 511.
We find IPS’s arguments unpersuasive. First, this court has already held that State Industries does not establish a per se rule, as IPS contends, but rather, “is in harmony with our prior and subsequent case law, which looks to the ‘totality of the circumstances presented in the case.’” . . . The Gustafson opinion itself also recognizes that “[w]hether an act is ‘willful’ is by definition a question of the actor’s intent, the answer to which must be inferred from all the circumstances.” 897 F.2d at 510–11 (emphasis added). Second, unlike in State Industries and Gustafson, here WCM provided sufficient evidence for a reasonable jury to conclude that IPS did know of WCM’s patents as they issued, if not earlier. . . . Not to mention, it is undisputed that IPS had knowledge of the ’220 patent and the ’970 patent at least as of the date the first Colorado suit [preceding the instant suit] was filed, about a month before this action was initiated.
In support of the jury’s verdict, WCM points to the evidence of record. First, although Mr. Casella, President of IPS’s Plumbing Division, knew that AB&A did not employ engineers or full-time product developers to create the Classic Product, he did not conduct an investigation into how AB&A developed the Classic Product during the due diligence period of the acquisition [of AB&A by IPS]. Additionally, IPS was aware of a 2010 patent lawsuit between WCM and AB&A at the time of the acquisition. Mr. Humber, IPS’s employee, testified that he had monitored WCM’s products for decades and possessed catalogs and other literature indicating that WCM’s products were marked with “patent pending.” . . .
WCM also introduced evidence of what it refers to as “a culture of copying at IPS,” including testimony from Mr. Kirk, former IPS Product Manager, regarding an email copying Gary Clarke, IPS’s Vice-President of Marketing and Engineering, in which Mr. Kirk asked Mr. Humber about one of WCM’s Watco drains. WCM provided evidence at trial that Mr. Ball had meticulously devised WCM’s Innovator Product and that a rational explanation for the Classic Products’ identical measurements and compatibility with WCM’s Innovator Product was that AB&A had copied the Innovator. 
In sum, WCM argues that the jury had more than enough evidence to conclude that IPS knew of WCM’s patents as they issued (if not earlier) and that the risk of infringement was known to IPS or so obvious that it should have been known. IPS continues to dispute several of these facts and what inferences might be drawn from them. For example, IPS points to Mr. Casella’s testimony that IPS did not have any notice of WCM’s asserted bath waste and overflow patents. The jury was free to decide, however, whose evidence it found more compelling on the question of willfulness and it found in WCM’s favor. . . (pp. 18-21).
On the issue of damages enhancement, however, the Court of Appeals believes that the district court gave some of the Read v. Portec factors short shrift, even though the factors themselves are "not mandatory" (pp. 22-25):
The first factor is “whether the infringer deliberately copied the ideas of another.” Read Corp., 970 F.2d at 827. The district court concluded that this factor weighed in favor of enhancing damages because there was evidence of copying on IPS’s part. In particular, the district court cited to testimony from Mr. Kirk, former IPS Product Manager, regarding an email copying Gary Clarke, IPS’s Vice-President of Marketing and Engineering, in which Mr. Kirk asked Mr. Humber about one of WCM’s Watco drains. That product, however, was not WCM’s Innovator product in this suit. Therefore, while there is evidence of a possible “culture of copying” at IPS that weighs in favor of enhancement, given that the email does not refer to a product involved in the litigation, this factor should not be weighed very strongly in favor of enhancing damages.
The second factor is “whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed.” Id. The district court found that this factor was “perhaps most important[]” and that IPS’s failure to investigate the asserted patents weighed strongly in favor of enhancing damages. J.A. 38. The evidence that the court cited in support of its conclusion, however, involves patents or products not at issue in this case. For example, the court cited to evidence that IPS knew that WCM’s products in general were patent protected and that IPS did not investigate certain patents involved in a different lawsuit. Thus, based on the record before the district court, this factor only slightly favors enhancing damages. The evidence certainly cannot support the district court’s conclusion that this factor was the most important and that it weighed strongly in favor of enhancing damages.
The third factor is “the infringer’s behavior as a party to the litigation.” Read Corp., 970 F.2d at 827. The court found that IPS did not engage in litigation misconduct and properly determined that this factor counseled against enhancement. The fourth and fifth factors are the “[d]efendant’s size and financial condition” and the “[c]loseness of the case.” Id. Despite IPS’s arguments to the contrary on appeal, the district court’s analysis of these factors is also reasonable. The district court determined that IPS’s size and financial condition weigh in favor of enhanced damages and that the closeness of the case was also in WCM’s favor because the jury verdict was not a close call and the evidence strongly supported WCM’s case.
The court did not analyze the sixth factor, which is the “[d]uration of the defendant’s misconduct.” Id. This factor would likely weigh against enhancement. For example, the patents issued only a short time before the filing of the lawsuit. Nor did the court analyze the seventh factor, “[r]emedial action by the defendant,” which may also weigh slightly against enhancement because IPS attempted to take remedial action (albeit ineffectively) when it modified its Classic Product and began selling its Revised Product during the pendency of this litigation. See id. . . .  
In sum, the district court clearly erred when it concluded that the second factor weighed strongly in favor of enhancement. Compounding this error, the district court did not appropriately weigh the third factor and other potentially mitigating factors, such as the sixth and the seventh factors, against the enhancement of damages. As WCM itself stated to the district court, when only a subset of factors weigh in favor of enhanced damages a court should award less than treble damages. Accordingly, we conclude that the district court made a clear error of judgment amounting to an abuse of discretion in deciding to award the maximum amount of damages.
Although the district court “may increase the damages up to three times the amount found or assessed,” 35 U.S.C. § 284 (emphases added), where the maximum amount is imposed, “the court’s assessment of the level of culpability must be high,” Read Corp., 970 F.2d at 828. The district court is also particularly obligated to explain the basis for the award where it awards treble damages. Id. Here, the district court provided only a single conclusory sentence as to why it was awarding the maximum amount. J.A. 41 (“The Court further finds, based on the egregious nature of IPS’s conduct, that treble damages are appropriate.”). We therefore vacate the district court’s decision to award treble damages and remand for the district court to reconsider, consistent with this opinion, the amount by which the damages should be enhanced, if at all.6/
6/Although the jury was not asked to decide the total number of infringing units sold by IPS on a product-by-product basis, on remand, in determining how much the damages should be increased, if at all, the district court may also consider whether the degree of the IPS’s culpability might be different for sales of the Classic Product as compared to sales of the Revised Product.
Going back to the issue of whether it is necessary to a finding of willfulness that the defendant know of the patent before infringing, perhaps this opinion will lend some support to Professor Dmitri Karshtedt's argument that courts should take into account whether the defendant was reckless in not searching for relevant patents in advance.  See Karhstedt, Enhancing Patent Damages, forthcoming UC Davis Law Review (available here).

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In other news, on FOSS Patents Florian Mueller has a very interesting post about a U.S. Huawei v. Samsung FRAND dispute pending in the Northern District of California, in which Samsung has filed a motion to enjoin Huawei from enforcing the injunction the court in Shenzhen recently granted it against Samsung.  For previous discussion of the Chinese case on this blog, see here.

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