Friday, August 30, 2013

Awards of defendant's profits and nonpracticing entities

As I discuss in my book, most countries allow the prevailing patentee three principal damages options:  the patentee's own lost profit; a reasonable royalty; or an award of the defendant's profit attributable to the infringement.  The U.S. is an outlier (for better or worse) in that, since 1946, we have not made this third remedy available except in cases of design patent infringement.  In countries where the remedy is available, however, the conditions under which it can be awarded differ to some degree.

First, under one theory, awards of defendant's profits are intended to be a proxy for the patentee's own lost profit, which might be difficult for the patentee to prove.  From an economic standpoint, this is not a very good rationale, since the defendant's profit and the plaintiff's own lost profit may be wildly different.  The Japanese case I blogged about the other day, Sangenic v. Aprica, however, seems to understand the award of defendant's profits as merely a presumption of the plaintiff's lost profit, which the defendant can then try to whittle down to something that might more closely approximate the plaintiff's lost profit.  This still strikes me as an approach that invites error, but there it is.  In any event, if a patent system views awards of defendant's profits as a proxy for the plaintiff's lost profit, then it makes sense to render such awards only when there is reason to believe the plaintiff has suffered some lost profit as such, and not merely a loss of royalties.  Under this rationale, then, awards of defendant's profits wouldn't be available to nonpracticing entities.  Under Japanese law, however, it appears that this remedy is available as long as the plaintiff lost a profit, even if for example that profit would have been earned through reliance on an exclusive distributor to do the actual selling, or from sales of products that would have competed against the infringing products.   

Second, one could view awards of defendant's profits as deriving their justification on the basis of an unjust enrichment (or some such) theory, which from an economic perspective might suggest a deterrence rationale.  If the infringer must disgorge the profit earned from the use of the patent, infringement is deterred.  At the same time, we probably don't want to overdeter, that is, to make defendants unreasonably cautious about launching new products or undertaking excessive searches for existing patents prior to launch.  This might suggest that, if awards of defendant's profits are to be available, they should be premised on some level of intent or knowledge on the part of the defendant, and not merely a presumption that the defendant was aware of the patent.  (See my discussion with Professor Siebrasse in the comments section to my recent post on a Canadian case, Varco Canada Ltd. v. Pason Systems Corp.)  Thus, the Canadian standard, under which awards of defendant's profits are discretionary and the defendant's act of deliberate infringement is an important factor, might make more sense than a rule that accords the patentee an entitlement to seek such an award.  Since many cases brought by NPEs do not involve deliberate copying on the part of the defendant, NPEs often would not be entitled to awards of profits.  
However, as Axel Walz points out in his recent article, Patentverletzungen im Lichte des Kartellrechts:  In Sachen Europäische Kommission gegen Orange-Book, GRUR Int. 2013, 718, in Germany the conventional wisdom seems to be that the patentee has a choice among the three options.  Walz, however, cites a 1909 German Supreme Court case for the proposition that the patentee must be using the patent in some commercial sense if it wants to recover an award of defendant’s profits, and he believes that merely using the patent to derive licensing revenue wouldn’t count.  He seems to suggest a rationale similar to that followed in Japan, that awards of profits are allowed because patentees can’t always prove their lost profits, and that this rationale wouldn’t apply in the case of an NPE, whose “lost profits” are really lost licensing revenues and thus relatively easily calculable.  Walz also argues that awards of defendant’s profits are not appropriate, under E.U. competition law, in cases involving standard-essential patents.  He notes the following from the BGH’s 2004 Standard-Spundfaß decision, which discusses the competition-law defense that later came to be the Orange-Book-Standard defense:
compensation for damages to the plaintiff resulting from the use the defendant has made can in any case only be demanded for the amount to which the plaintiff would have been entitled if it had not refused (illegally) to grant the defendant . . . a licence for the disputed patent.
BGH, July 13, 2004, GRUR 2004, 966—Standard-Spundfaß, English translation available at 36 IIC 741, 748-49 (2005). 

Of course, if and when the remedy of defendant's profits is available, there are a host of further issues to take into account, among them how to determine the portion of the profit that is properly attributable to the use of the infringed patent, and whether to deduct only variable or some portion of fixed costs from the defendant's revenue.     
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On issues completely unrelated to the above, Dennis Crouch has an interesting write-up here on a recent Federal Circuit case on declaratory judgments, and Robert Lundie-Smith has one on a recent U.K. matter addressing what qualifies as a threatened infringement proceeding.

Wednesday, August 28, 2013

New paper on damages in Japan

The July 2013 issue of AIPPI--Journal of the Japanese Group of AIPPI has several articles of interest.  One is by Eiji Katayama, Makoto Hattori, and Kaoru Kuroda is titled "Study on Requirements for Claiming Damages Based on Lost Profits."  The article discusses a recent Grand Panel of the IP High Court decision that I blogged about in May, here.  (A summary of the decision is now available in English on the IP High Court's website, here.)  As I mentioned then (citing a write-up by Michiru Takahashi and Harukuni Ito of Jones Day, Tokyo), the plaintiff Sangenic had an exclusive Japanese distributor who sold the patented articles in Japan.  The court awarded the plaintiff the defendant's profits under article 102(2) of the Japanese Patent Act.  Under this provision, however, the defendant's profits are viewed as a proxy for the plaintiff's own lost profits, rather than as a stand-alone type of remedy.  Some previous cases had held that a patentee may not recover an award of the defendant's profits if the patentee does not practice the invention itself, but the new case holds that 102(2) applies as long as the plaintiff can show that it would have made a profit but for the infringement, even if the plaintiff is not itself practicing the patent.  Katayama et al. discuss the case, as well as the legislative history, commentary, and precedent relating to article 102(2).  In their view, the High Court decision was correct to interpret article 102(2) as giving rise to a presumption that the plaintiff suffered a loss of profits equal to the defendant's profit, as long as there is reason to believe the plaintiff suffered some loss of profit (that might otherwise be difficult to quantify) and the presumption is rebuttable.  That is, if there is reason to believe the plaintiff suffered a loss of profits greater than what would be awarded under a reasonable royalty theory (article 102(3)) but the plaintiff cannot quantify what that profit is (article 102(1)), article 102(2) gives rise to this presumption, and the defendant can then try to whittle it down by showing that such a recovery would be "excessive due to a difference between the patentee and the infringer in terms of the manner of business."  Going back to the facts of the case, Katayama et al. suggest, however, that because the exclusive distributor itself might have a claim for damages against the infringer, the court should have deducted from Sangenic's award the damages suffered by the distributor.  The article concludes with a comparison of U.S. law, which does not award defendant's profits (except in design patent cases) but does require the plaintiff seeking lost profits to show that it suffered a loss; a loss suffered by an affiilated company is not, by itself, enough.   

I may have some more to say about awards of defendant's profits, in the specific context of nonpracticing entities, later this week . . .  

The journal also has an interesting writeup by Kay Konishi, titled "NPEs Now Coming to Courts in Japan--Recent Three NPE Cases," and a response by AIPPI Japan to questions concerning relief in IP proceedings other than injunctions or damages (e.g., declaratory judgments, destruction of infringing goods, publication of judgment, apology, etc.).

Monday, August 26, 2013

Abuse of Right as a Rationale for Denying Injunctive Relief (and Damages?)

As I will be discussing in a forthcoming paper, courts in different countries have considered at least four different rationales for withholding injunctive relief to the prevailing plaintiff in a patent infringement case. 

First, in cases involving FRAND-encumbered standard essential patents (SEPs), there is the possibility that a court will consider the FRAND commitment to create a binding contract under which the patent owner commits itself to forgo the right to seek injunctive relief.  So far, the argument that FRAND commitments create enforceable contracts for the benefit of third parties has made some headway in the U.S.—specifically, in Microsoft v. Motorola contract dispute currently pending in the Western District of Washington and in the Apple v. Motorola suit that was before Judge Crabb in the Western District of Wisconsin--but not in some others, including Germany and South Korea. 

Second, in common-law countries including the United States, the U.K., and Canada, injunctions are discretionary, and courts may deny them in the exercise of their discretion.  (The eBay decision in the U.S., however, appears to grant considerably more discretion than do the relevant cases in England and Canada, where injunctive relief remains the norm.)    

Third, in an appropriate case courts may invoke competition law (antitrust) as a ground for denying an injunction.  The question of what conditions must be present for a patent owner’s alleged refusal to conclude a license to be considered an abuse of dominant position, in violation of competition law, is currently at issue in the E.C.’s investigations against Samsung and Google, and in the German case between Huawei and ZTE in which the Düsseldorf court has referred certain questions concerning the Orange-Book-Standard defense to the Court of Justice for the European Union.  (I think the antitrust rationale has less of a prospect for success in the U.S., notwithstanding the FTC's consent orders in Bosch and Google.)

A fourth, distinct, approach is to ask whether the patent owner’s alleged refusal to conclude a license amounts to an abuse of right or a failure to negotiate in good faith.  So far, two courts in the ongoing mobile devices patent litigation have held that, in the cases before them, Samsung’s failure to conclude a license with Apple amounted to an abuse of right.  The first was Rechtbank‘s-Gravenhage, Mar. 14, 2012, Nos. 11-2212, 11-2213, 11-2211, in which the court reasoned that an injunction would have enabled Samsung to abuse its patent rights, because the terms Samsung had offered were not FRAND and the evidence did not show that Apple was unwilling to take a license.  The court specifically declined to address whether Samsung’s conduct also amounted to an antitrust violation.  For further discussion, see Michael Fröhlich & Gertjan Kuipers, FRAND and Injunctive Relief, AIPPI e-News, No. 25 (July 2012); Christof Karl, PowerPoint,  The FRAND Defense in European Litigation Involving Standard-EssentialPatents (Mar. 27, 2013); Torsten Körber, Machtmissbrauch durch Erhebung patentrechtlicher Unterlassungsklagen?  Eine Analyse unter besonderer Berücksichtigung standardessentialer Patente, WRP 2013, 734, 740-41; and this post by Florian Mueller on Foss Patents. 

The second was Apple Japan Limited Liability Co. v. Samsung Electronics Co. Ltd., Tokyo District Court, Judgment of Feb. 28, 2013, Case No.  2011 (wa) No. 38969.  (Discussions can be found in Tomofumi Sato, Apple Japan Limited Liability Company (Plaintiff) v. Samsung Electronics Co., Ltd. (Defendant), Tokyo District Court/Judgment of Feb. 28, 2013/Case No.  2011 (wa) No. 38969; Case to seek declaration of nonexistence of liability, 38 AIPPI J. 174 (2013); and in write-ups by, among others, Judge Shinji Oda, Hogan Lovells, World Intellectual Property Review, Foss Patents (here and here, with a link to a filing by Apple in the U.S. ITC that includes a translation of portions of the decision) and (on IPKat, with a link to the decision in the original Japanese) Kaori Minami.)  Samsung had sought a preliminary injunction against the importation and sale of certain models of Apple devices that allegedly infringed a standard-essential patent, Japan Patent No. 4642898, that was subject to a FRAND obligation.  In response, Apple filed an action seeking a declaration that its devices did not infringe, and that Samsung did not have a right to claim damages.  With respect to Apple's claims, the court held, first, that two of the four devices infringed.  On the issue of remedies, however, the court invoked article 1 of the Civil Code of Japan, which states that:
(1) Private rights must conform to the public welfare.

(2) The exercise of rights and performance of duties must be done in good faith.
(3) No abuse of rights is permitted.
Thus (quoting here from Apple's translation), while "there are no express provisions regarding the duties of parties at the stage of preparation for contract execution . . . it is reasonable to understand that, in certain cases, parties that have entered into contract negotiations owe a duty to each other under the principle of good faith to provide the other party with important information and to negotiate in good faith.”  The court rejected Samsung’s argument that the duty to negotiate in good faith had not arisen because Apple’s offer reserved the right to contest validity, and concluded that Samsung had not acted in good faith because, inter alia, it had refused to disclose information Apple had requested to substantiate Samsung’s offer a 2.4% royalty for all patents essential to the UMTS standards, and had continued to seek a preliminary injunction in the Japanese proceedings.  The court therefore concluded that Samsung’s conduct constituted an abuse of rights precluding Samsung from the right to seek damages from Apple. 

Apparently the concept of "abuse of right" could come up in other countries as well.  In her book Industrial Property Rights, Technical Standards and Licensing Practices (FRAND) in the Telecommunications Industry (Carl Heymanns Verlag 2010), Dr. Claudia Tapia discusses the possibility that the prospective licensee could have a claim under BGB (the German Civil Code) section 242, in conjunction with sections 19 and 20 of the German Competition Law or (what is now) article 102 of the TFEU (the same statutory or treaty provisions that would be invoked in the application of Orange-Book-Standard).  (Florian Mueller also notes this possibility, in one his posts cited above.)  According to Dr. Tapia (pp. 39-41, 51, 74-75, 78-79), section 242 "does not allow the beneficiary of right to exercise its right, if it has previously acted in contradiction to it."  Cases in which this claim has succeeded, however, are "very rare," because the section "only prohibits conduct that is previous to the exercise of the rights and are later on 'in unsolvable contradiction it', which makes it 'unacceptable'" (citations omitted).  Dr. Tapia goes on to state that "to balance the interests of the parties, all circumstances of the case will be taken into account, such as, e.g., the expected economic disadvantages (of paying a license outside FRAND), or having a standard held-up."  In addition, the prospective licensee must show that it relied to its detriment.  She also notes similar provisions in the laws of some other countries, including Austria, Italy, Spain, and France.  Anyway, Dr. Tapia seems to think the theory might be applicable in Germany to some SEP/FRAND matters.  (It might be worthwhile to take a look at the recent German SEP/FRAND cases to see if they have discussed this theory as distinct from Orange-Book-Standard.  This is not something I have focused on previously in my research.) 

For what it’s worth, I think that the decision whether to enter an injunction should depend primarily on whether an injunction will enable patent holdup.  In this regard, probably the most relevant consideration is whether the value of the patent ex post (after adoption of the standard) is substantially higher than its value ex ante (before adoption), because when this condition is satisfied an injunction enables the patent owner (in effect) to extract a license the value of which depends in large part on the difficulty of designing around the standard, and not on the value of the patented technology as such.  Allowing injunctions under such circumstances threatens to harm consumers by increasing prices beyond what is necessary to induce invention and may work to undermine the standard setting process itself.  My view therefore is that some version of the common-law discretionary standard for entering injunctions, which (ideally) can take such matters into account, is the preferable tool for deciding whether to grant or deny an injunction.  (Presumably it can also take into account circumstances such as the possibility that the defendant is to blame for refusing to conclude a license on readily available FRAND terms.)  By contrast, I’m a little concerned that the “abuse of right” rationale invoked in the above two cases could be rather standard-less and ad hoc, and that it arguably places too much emphasis on the parties’ states of mind.  The Tokyo court’s approach seems particularly troubling for the additional reason that it appears to deny the SEP owner a damages remedy in the event of an abuse of right.  In that regard, it seems a little like the U.S. doctrine of patent misuse, which allows courts to render patents unenforceable where the patent owner has “misused” its patent.  I’ve critiqued the misuse doctrine for being ad hoc (unless it simply mirrors antitrust law, in which case it is largely duplicative), and potentially overdeterrent.  Perhaps, though, I just need to learn more about how the abuse of right doctrine is applied in Japan and the Netherlands; and, conceivably, the abuse of right doctrine provides the necessary exception to the patent owner's entitlement to injunctive relief, if no other doctrinal tool is up to the task under national law.