Monday, November 18, 2013

Federal Circuit Partially Vacates Judge Koh's Order Denying Apple's Motion for a Permanent Injunction Against Samsung

In an appeal arising from Judge Koh's December 2012 order denying Apple's request for a permanent injunction against Samsung, following the high-profile August 2012 jury verdict in Apple's favor, Judge Prost writing for the panel (1) affirms Judge Koh's ruling denying a permanent injunction with respect to Samsung's infringement of three design patents and its dilution of Apple's trade dress; and (2) vacates the portion of the ruling denying a permanent injunction with respect to the three utility patents.  The opinion can be downloaded from here.  My previous write-up on the case following oral argument in August 2013 is here.

The principal issues were (1) whether Judge Koh was correct to require proof of a causal nexus between Samsung's infringement and Apple's (established) loss of market share and downstream sales to Samsung, and (2) if so whether she correctly applied the "causal nexus" concept.  (The "causal nexus" requirement itself comes from two previous Federal Circuit decisions on preliminary injunctions, referred to in the opinion as Apple I and Apple II).  On the first issue, the Federal Circuit says yes:  "the district court was correct to require a showing of some causal nexus between Samsung's infringement and the alleged harm to Apple as part of the showing of irreparable harm."  The court rejected Apple's argument that "causal nexus" is an "unprecedented fifth requirement," and reaffirms that "causal nexus . . . is part of the irreparable harm factor."  On the second issue, however, the court "agree[s] with Apple that certain of the standards arguably articulated by the district court go too far."  Specifically:
First, the district court appears to have required Apple to show that one of the patented features is the sole reason consumers purchased Samsung’s products. . . .

It is true that Apple must “show that the infringing feature drives consumer demand for the accused product.” Apple II, 695 F.3d at 1375. It is also true that this inquiry should focus on the importance of the claimed invention in the context of the accused product, and not just the importance, in general, of features of the same type as the claimed invention. . . .  However, these principles do not mean Apple must show that a patented feature is the one and only reason for consumer demand. Consumer preferences are too complex—and the principles of equity are too flexible—for that to be the correct standard. Indeed, such a rigid standard could, in practice, amount to a categorical rule barring injunctive relief in most cases involving multi-function products, in contravention of eBay.

Thus, rather than show that a patented feature is the exclusive reason for consumer demand, Apple must show some connection between the patented feature and demand for Samsung’s products. There might be a variety of ways to make this required showing, for example, with evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions.  It might also be shown with evidence that the inclusion of a patented feature makes a product significantly more desirable. Conversely, it might be shown with evidence that the absence of a patented feature would make a product significantly less desirable. . . .

The second principle on which we disagree with the district court is its wholesale rejection of Apple’s attempt to aggregate patents for purposes of analyzing irreparable harm.

While it is true that this court analyzed causal nexus on a patent-by-patent basis in Apple I, we did not mean to foreclose viewing patents in the aggregate. Rather, we believe there may be circumstances where it is logical and equitable to view patents in the aggregate. For example, it may make sense to view patents in the aggregate where they all relate to the same technology or where they combine to make a product significantly more valuable.  To hold otherwise could lead to perverse situations such as a patentee being unable to obtain an injunction against the infringement of multiple patents covering different—but when combined, all—aspects of the same technology, even though the technology as a whole drives demand for the infringing product.
Applying these rules, the court concluded that Judge Koh did not abuse her discretion in finding no causal nexus between the design patent infringement and Apple's harm; but that she must reconsider the matter with respect to three utility patents.  (The court agreed with Judge Koh that there was no evidence Samsung would resume the trade dress dilution, and affirmed the denial of an injunction with respect to those rights on that ground.) With regard to the utility patents, the court wasn't swayed by Apple's survey evidence that "ease of use, in general, is important to the iPhone" or that Samsung copied.  This evidence, though relevant, wasn't enough by itself to show causal nexus.  But the court did find evidence in the form of a conjoint survey potentially more probative:
Dr. Hauser’s survey purports to show that consumers would be willing to pay fairly significant price premiums for the features claimed in Apple’s utility patents. In rejecting Dr. Hauser’s survey evidence, the district court stated that “evidence of the price premium over the base price Samsung consumers are willing to pay for the patented features is not the same as evidence that consumers will buy a Samsung phone instead of an Apple phone because it contains the feature.” Id. (emphasis added) (internal quotation marks omitted). As we have already discussed above, however, a showing of causal nexus does not require this level of proof. Rather, there may be a variety of ways to show
that a feature drives demand, including with evidence that a feature significantly increases the desirability of a product incorporating that feature. Moreover, we see no reason why, as a general matter of economics, evidence that a patented feature significantly increases the price of a product cannot be used to show that the feature drives demand for the product. This is not to suggest that consumers’ willingness to pay a nominal amount for an infringing feature will establish a causal nexus. For example, consumers’ willingness to pay an additional $10 for an infringing cup holder in a $20,000 car does not demonstrate that the cup holder drives demand for the car. The question becomes one of degree, to be evaluated by the district court. Here, the district court never reached that inquiry because it viewed Dr. Hauser’s survey evidence as irrelevant. That was an abuse of discretion.
As an alternative ground for affirmance, Samsung argues that there are other methodological flaws with Dr. Hauser’s survey. However, the district court did not base its decision on any such alleged flaws, and we believe it is more appropriate for the district court to addresses these arguments in the first instance. . . .
Moving on to the second eBay factor, adequacy of a remedy at law, the court says:
one of the two reasons the district court found this factor to weigh in favor of Samsung was Samsung’s ability to pay any monetary judgment. However, unlike an infringer’s inability to pay a judgment, which may demonstrate the inadequacy of damages, see Bosch, 659 F.3d at 1155-56, a defendant’s ability to pay a judgment does not defeat a claim that an award of damages would be an inadequate remedy. Rather, a defendant’s ability to pay merely indicates that a court should look to other considerations to determine whether a damages award will adequately compensate the patentee for the harm caused by continuing infringement.

We therefore turn to the district court’s other reason for finding that this factor weighed in favor of Samsung—Apple’s past licensing behavior. We have previously explained that:
While the fact that a patentee has previously chosen to license the patent may indicate that a reasonable royalty does compensate for an infringement, that is but one factor for the district court to consider. The fact of the grant of previous licenses, the identity of the past licensees, the experience in the market since the licenses were granted, and the identity of the new infringer all may affect the district court’s discretionary decision concerning whether a reasonable royalty from an infringer constitutes damages adequate to compensate for the infringement.

Acumed, 551 F.3d at 1328. Consistent with Acumed, we find no error in the district court’s decision to consider evidence of Apple’s past licensing behavior. However, the court erred by ending its analysis upon concluding that the asserted patents are not “priceless” and that Samsung is not “off limits” as a licensing partner. While perhaps relevant, these findings, by themselves, do not fully answer the question at hand—i.e., whether monetary damages will adequately compensate Apple for Samsung’s infringement of the particular patents at issue in this lawsuit. Rather, they merely show that Apple is willing to license the asserted utility patents in some circumstances, and that Apple is willing to license some patents to Samsung. . . .

In sum, the district court abused its discretion by failing to properly analyze whether damages would adequately compensate Apple for Samsung’s infringement of these patents. Accordingly, we vacate the district court’s finding with respect to this factor and remand for further consideration. Of course, if, on remand, Apple cannot demonstrate that demand for Samsung’s products is driven by the infringing features, then Apple’s reliance on lost market share and downstream sales to demonstrate the inadequacy of damages will be substantially undermined.
Finally, the court concluded that Judge Koh did not abuse her discretion in finding that the balance of hardships factor was neutral, or that the public interest weighed against an injunction.  On the public interest factor in particular, the court approved of Judge Koh's consideration of "the scope of  Apple’s requested injunction relative to the scope of the patented features and the prospect that an injunction
would have the effect of depriving the public of access to a large number of non-infringing features."
So what should we take away from all of this?  One point is that it is now clear that the Federal Circuit does not read eBay so literally as to require proof of all four of the eBay factors, but rather will apply something more like a traditional equitable analysis involving a balancing of factors.  This is a sensible approach, in my view.  Another is that causal nexus is here to stay, but it shouldn't be quite as difficult to satisfy as Judge Koh thought.  Again, this might be a reasonable compromise, because applied too rigorously causal nexus could result in dispensing with injunctions in an overly broad range of cases. Third, I think the court is right to say that merely because a patentee has licensed its patents on some occasions to some parties doesn't necessarily mean that monetary damages would always be an adequate remedy.  A fourth point to note is the court's possible receptivity to the use of conjoint analysis--though perhaps we shouldn't read too much into this, since Judge Koh still needs to consider the admissibility of Dr. Hauser's analysis.  (For further discuss on conjoint analysis, see here.)  

Fifth, notice a distinction between what it means to "drive demand" for purposes of causal nexus, versus what it means to "drive demand" for purposes of the entire market value rule.  According to the Federal Circuit, courts may apply the entire market value rule (that is, use the entire market value of an end product as the royalty base) only when “the patented feature drives the demand for an entire multi-component product. . . .” See LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) (emphasis added).  It's fair to say that the Federal Circuit wants the entire market value rule to remain the exception, not the rule; as the court says in LaserDynamics:
It is not enough to merely show that the disc discrimination method is viewed as valuable, important, or even essential to the use of the laptop computer. Nor is it enough to show that a laptop computer without an ODD practicing the disc discrimination method would be commercially unviable. Were this sufficient, a plethora of features of a laptop computer could be deemed to drive demand for the entire product. To name a few, a high resolution screen, responsive keyboard, fast wireless network receiver, and extended-life battery are all in a sense important or essential features to a laptop computer; take away one of these features and consumers are unlikely to select such a laptop computer in the marketplace. But proof that consumers would not want a laptop computer without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers. Put another way, if given a choice between two otherwise equivalent laptop computers, only one of which practices optical disc discrimination, proof that consumers would choose the laptop computer having the disc discrimination functionality says nothing as to whether the presence of that functionality is what motivates consumers to buy a laptop computer in the first place. It is this latter and higher degree of proof that must exist to support an entire market value rule theory.
On the other hand, the "causal nexus" aspect of irreparable harm shouldn't be (and isn't) quite that difficult to sustain.  In Apple, Judge Prost writes:
. . . a battery does not necessarily drive demand for a laptop computer simply because its removal would render the laptop ineffective as a portable computer. See Apple II, 695 F.3d at 1376. That is because consumers often do not choose a laptop based on its battery, and presumably at this point, no inventor has a patent covering all laptop batteries. Nevertheless, it is indisputable that the ability to carry around a computer without having to plug it in is one of the reasons people buy laptops. Thus, if the first person to invent a laptop battery had obtained a patent covering all laptop batteries, then it would be reasonable to say that the patented invention was a driver of demand for laptops. And if a particular patented laptop battery lasts significantly longer than any other battery on the market, then the replacement of that battery with a noninfringing battery might make a laptop less desirable. In that case, it might be reasonable to conclude that the patented battery is a driver of consumer demand for the laptop.
Using the court's example, it may be reasonable to conclude that a battery is a driver of consumer demand (sufficient for causal nexus) but not the driver of consumer demand (sufficient to trigger the entire market value rule).

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