Is Disgorgement of Profits a Jury Issue?

This morning the Federal Circuit issued its opinion in Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics Am., Inc., f/k/a/ Intersil Corp., opinion by Judge Taranto (joined by Judges Dyk and Bryson).  The facts are somewhat complex, but to summarize plaintiff TAOS sued defendant Intersil for patent infringement and (under Texas law) for trade secret misappropriation, breach of contract, and tortious interference with prospective business relations.  The jury returned a verdict for the plaintiff on all of these claims "and awarded (1) $73,653.51 as a reasonable royalty for patent infringement; (2) $48,783,007 in disgorgement of Intersil’s profits and $10 million in exemplary damages for trade secret misappropriation; (3) $12 million as a reasonable royalty for breach of contract; and (4) $8 million in lost profits and $10 million in exemplary damages for tortious interference. . . . The jury also found Intersil’s infringement to be willful" (p.7).  The trade secret issues were premised on the alleged misappropriation of three alleged trade secrets, and on appeal the Federal Circuit concludes that there was substantial evidence for the misappropriation of only of one of the three.  For this reason, and also because the award of profits covered profits earned on certain sales that occurred after the subject information was no longer a trade secret, the court vacates the award of profits and exemplary damages (pp. 19-22).  In addition, the court concludes that there is no right to trial by jury on the issue of disgorgement (discussed below).  It also concludes that at least some portion of the reasonable royalty awarded for the infringement of TAOS's patent was duplicative of the award for trade secret misappropriation, so it remands for a reconsideration of the patent damages award as well, and for reconsideration of whether an award of enhanced patent damages may be appropriate.  Finally, the court vacates and remands for reconsideration the district court's denial of a permanent injunction, and its judgment that the awards for breach of contract and tortious interference were duplicative.

This blog focuses on patent remedies, and since 1946 awards of infringer's profits have not been available in the U.S. (as they are in many countries) for the infringement of a utility patent.  But awards of profits are available in the U.S. for trade secret misappropriation, as this case demonstrates, as well as under appropriate circumstances for copyright and trademark infringement, and--as readers know from the Supreme Court's 2016 decision in Samsung v. Apple--design patent infringement.  And while I'm not a Seventh Amendment expert, I'm inclined to find the Federal Circuit's analysis of why there is no right to trial by jury on the disgorgement of profits for trade secret misappropriation (1) persuasive, and (2) equally applicable to other IP claims, including design patent infringement.  Indeed, I've long suspected that there might not be a right to a jury determination of the profits available for the infringement of a design patent, and have been surprised that few others so far (to my knowledge) have taken up this question.  Anyway, see what you think--here is an excerpt from the court's analysis of the jury issue (pp. 24-35):

In some cases, a plaintiff seeking disgorgement as a remedy for trade secret misappropriation might prove that this measure of relief, though focused on the defendant’s gains, is good evidence of damages in the form of the plaintiff’s losses or of a reasonable royalty for use of the secret. But this is not such a case. In the trial court here, TAOS sought disgorgement of Intersil’s profits as such, not based on any evidence or argument that such profits soundly measured, and hence were a case-specific proxy for, TAOS’s losses or a reasonable royalty. . . .

. . . The question in this case is whether disgorgement of the defendant’s profits, considered on its own terms, without proof that it was a sound measure of the plaintiff’s harm, was available at law in 1791 for this sort of wrong. . . .

TAOS has not shown that such disgorgement was available. And there are strong reasons to think that it was not.

Disgorgement of a defendant’s gains is often called “restitution.” See, e.g., Kokesh, 137 S. Ct. at 1640; Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 215 (2002); Harris Tr. & Sav. Bank v. Salomon Smith  Barney Inc., 530 U.S. 238, 250 (2000). The Supreme Court has made clear that, “[i]n the days of the divided bench, restitution was available in certain cases at law, and in certain others in equity.” Great-West Life, 534 U.S. at 212 (citing sources). . . .

Examples are informative. Restitution could be obtained in equity when the underlying cause of action was equitable (e.g., a claim of breach of a trustee’s fiduciary duties) or when a party sought a specific equitable remedy, such as a constructive trust or lien or (in some circumstances) accounting for profits. See Great-West Life, 534 U.S. at 213–16 & n.2; Sereboff, 547 U.S. at 363–68. The Court has referred to disgorgement as equitable in various circumstances, often as ancillary to a request for an injunction. . . . On the other hand, in some circumstances, a “plaintiff had a right to restitution at law through an action derived from the common-law writ of assumpsit.” Great-West Life, 534 U.S. at 213.

Here, “the basis for [TAOS’s] claim,” id., is trade secret misappropriation. Claims for that wrong were first recognized in the American and English equity (or chancery) courts in the nineteenth century. . . .

Once claims of trade secret misappropriation came to be accepted in the Nineteenth Century, several decisions quickly recognized that a plaintiff properly asserting jurisdiction in equity could also request incidental monetary relief in the form of disgorgement (restitution) of the defendant’s profits based on the defendant’s past use of the trade secret. . . . In contrast, we have been pointed to no sound basis for concluding that, for this wrong, the law courts would have awarded disgorgement of the defendant’s profits, notwithstanding that the law courts, through a writ of assumpsit, sometimes awarded such relief for certain other wrongs.

We also consider appropriate analogues from 1791 in the Seventh Amendment historical inquiry. . . .

Consider patent infringement. Congress never authorized quasi-contract (legal) actions based on patent infringement. See 7 Donald S. Chisum, Chisum on Patents § 20.02 (2011). Originally, damages were authorized through traditional actions on the case. . . . No legal action for disgorgement of profits was recognized. See Coupe v. Royer, 155 U.S. 565, 582 (1895); Tilghman v. Proctor, 125 U.S. 137, 143–46 (1888). That remained true when a reasonable royalty came to be recognized as an available remedy, starting in the second half of the Nineteenth Century, and then definitively in Dowagiac Manufacturing Co. v. Minnesota Moline Plow Co., 235 U.S. 641, 648 (1915), and a subsequent statute, Pub. L. No. 67-147, § 8, 42 Stat. 389, 392 (1922). Not long before Congress abolished disgorgement of defendant’s profits as a patent remedy, see Aro Mfg. Co. v. Convertible Top Replacement Co., Inc., 377 U.S. 476, 504–05 (1964) (describing 1946 amendment), the Supreme Court observed that “recovery of profits . . . had been allowed in equity both in  copyright and patent cases as appropriate equitable relief incident to a decree for an injunction,” Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 399 (1940) (emphasis added); see Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 259 (1916) (trademark case following patent cases, Root and Tilghman, to recognize that equity could award disgorgement of profits where equity jurisdiction otherwise attached, typically because the plaintiff had a right to an injunction).

Certain scholars furnished an explanation for the law courts’ not providing disgorgement of the defendant’s profits for patent infringement, even though patent infringement sounded in tort, see Schillinger v. United States, 155 U.S. 163, 169 (1894), and restitution through a writ of assumpsit was broadly available for torts, including for the improper taking or use of intangible property, based on a theory of a contract implied in law (quasi-contract) . . . Citing the facts that another’s use of a patent-protected idea does not prevent a patent owner from also using the invention and that all the infringer has taken at the owner’s expense is the owner’s right to exclude the infringer, these scholars reasoned that “the true measure of recovery” in restitution in an action in assumpsit based on patent infringement would not be “the profits actually reaped by the infringer, as in the case of a suit in equity for an injunction and accounting, but the value of the use of the invention—ordinarily determined by reference to the royalty or price paid for such use by licensees.” . . . On that rationale, they said, the assumpsit measure of relief for this tort was limited to a reasonable royalty. . . .

The apparent fact is that for patent infringement, disgorgement of profits was not historically  available at law. As for copyright and trademark infringement, we have seen no support for concluding that disgorgement of profits was available at law for those wrongs. . . .

We see no basis for drawing a different conclusion for TAOS’s request for disgorgement for trade secret misappropriation in this case, based on Intersil’s improper taking and use of TAOS’s intellectual property in the photodiode structure. For Seventh Amendment purposes, claims for patent, copyright, or trademark infringement are appropriate analogues of the trade secret claim here. From all we have seen, no disgorgement remedy was available at law in 1791 for the former claims. We conclude that no such remedy would have been available at law for the trade secret misappropriation here, either.

The court then goes on to distinguish the Supreme Court's 1962 Seventh Amendment decision in Beacon Theatres, concluding that in that case the plaintiff was entitled to a trial by jury because it was seeking compensatory damages.  (A couple of pages earlier, the court cites my former colleague Mark Thurmon's paper Ending the Seventh Amendment Confusion:  A Critical Analysis of the Right to a Jury Trial in Trademark Cases, 1 Tex. Intell. Prop. L.J. 1 (2002), which as I recall reached the same conclusion.)

Anyway, it certainly seems to me, based on the above, that any argument there is a right to a jury determination on the disgorgement of the infringer's profits for design patent infringement now rests on thin ice.  Do readers agree or disagree?  Sarah Burstein, what do you think?

Finally, in a somewhat related vein, I'd note that the Federal Circuit yesterday heard oral argument in a case brought against the U.S. government for the use of a patented invention, Hitkansut LLC v. U.S., Case No. 17-1853.  Such claims are litigated not under the Patent Act as such but under a federal statute, 28 U.S.C. § 1498, which requires the federal government to pay "reasonable and entire compensation for such use and manufacture."  Cases are brought tin the U.S. Court of Federal Claims, and there are no juries.  Anyway, I had not been following this case, but I saw a reference to it this morning in Jacob Sherkow's write-up on the Written Description Blog of the oral argument in the appeal from the PTAB's decision in the CRISPR patent interference.  Toward the end of his very interesting post on the CRISPR matter, Professor Sherkow notes that the court also heard argument in Hitkansut, which presents "a simple question: does § 1498 provide for prospective remedies like running [ongoing] royalties? Prospective remedies in private infringement cases don’t have the greatest statutory grounding. But this makes running royalties in § 1498 cases especially suspect because the statute is both jurisdictional in nature and written in the past tense."  I agree that that is an interesting question, and one that hadn't occurred to me either, so I will be eager to see how the Federal Circuit decides it.  It's a bit reminiscent of the German case I blogged about yesterday in which the court awarded a royalty for a compulsory license to use the drug Isentress, because § 1498 cases functionally are compulsory licensing proceedings whereby the government takes a license for its own use.  But I mention the matter here because (again in my view) there is a lingering question about whether awards of ongoing royalties in private infringement cases are legal (thus requiring a jury) or equitable (not requiring a jury).  The Federal Circuit has held to the latter view, but on at least one occasion Judge Moore has seemed to suggest the opposite (see discussion here), and I'm honestly not sure which view is correct. 

Update (May 9, 2018):  On the question raised in the last paragraph above, I see that the Federal Circuit today affirmed Hitkansut without opinion.  So no definitive answer as to whether §1498 provides for prospective remedies such as ongoing royalties.