Wednesday, November 20, 2013

Interesting Lost Profits Question in Apple v. Samsung Damages Retrial

Florian Mueller had an interesting post this past weekend on a question that arose in the Apple v. Samsung damages retrial taking place before Judge Koh in the Northern District of California.  To understand the question, two things are important. 

First, under U.S. law, the patent owner is entitled to lost profits only if it can establish but-for causation, e.g., that it would have earned lost $2 million if the defendant had not infringed, but in reality it earned $1 million, so it is entitled to recover $2 million - $ 1 million = $1 million.  As part of this analysis, if there was a noninfringing alternative available to the defendant that would have enabled the defendant to make just as many sales as it is made using the infringing component or process, the plaintiff hasn't really lost any profits, because in the absence of infringement the plaintiff still would have earned only $1 million.  The plaintiff should recover only a reasonable royalty for the unauthorized use of the patented invention.  (If the patented invention had no advantages over the noninfringing alternative, however, e.g., it didn't provide any cost savings over the alternative, as a matter of economic logic that royalty also should be zero, though whether the courts would agree on this point remains to be seen.  The other alternative, if a design patent is at issue, is to award the plaintiff the defendant's profit from infringing sales.  U.S. law is dysfunctional on this issue, however, because it awards the entire profit rather than just the profit attributable to the infringing design, which (again) on these hypothetical facts could be at or near zero.  See this post.)

Second, however, a patentee who markets products embodying his patent can recover damages only for infringing conduct that occurs after he has provided the requisite notice by (1) commencing an infringement action against the defendant; or (2) providing actual, specific notice of the infringement, prior to the filing of the lawsuit; or (3) providing constructive notice by means of patent marking, as set forth in Patent Act § 287(a).  See Roger D. Blair & Thomas F. Cotter, Strict Liability and Its Alternatives in Patent Law, 17 Berkeley Tech. L.J. 799, 802-03 (2002).  For more on patent marking rules in the U.S. and elsewhere, see this post.

Anyway, according to Mr. Mueller:
The district court agreed with Samsung that Apple's claim of lost profits due to Samsung's infringement must be based on the assumption that Samsung's designaround efforts would have started when infringement began, not when Apple notified it of its infringement claims. On this basis, Apple can seek lost profits only with respect to the '915 pinch-to-zoom API patent, but not with respect to four other patents (two design patents, the rubber-banding '381 patent, and the tap-to-zoom-and-navigate '163 patent) that Samsung would have hypothetically worked around even before it had notice, i.e., before the relevant damages period.
Mr. Mueller argues that this an illogical choice, and that it would have made more sense to rule either that (1) the noninfringing alternative was available from the beginning of the infringement, in which case there are no lost profits at all, or (2) the design-around effort would have begun only after Samsung received notice of the infringement, in which case Apple would be entitled to lost profits only for the period of the design-around (whatever that is for the relevant patent).  The least logical assumption is that Samsung would have started infringing and immediately starting working on a design-around before receiving notice of infringement. 

This is an interesting theoretical question, and here’s the way I would approach it.  Suppose that on Day 1, Infringer has two design choices for a specific component, A and B.  Either one will result in the same number of sales.  Infringer chooses A, which turns out to be infringing.  Infringer starts selling products on Day 2.  If Infringer could have deployed B on Day 2 and made the same number of sales as it made using A, Patentee is entitled to no lost profits.  Of course, in the real world, once you’ve chosen A or B and begun making products using that component, it might not be possible to turn to the alternative immediately.  Let’s say it would take a month to retool your facilities to begin using B instead of A, once you have started using A.  In that scenario, the Infringer had no alternative to A during that one-month period.  Nevertheless, on these facts, I think the better rule is that the patentee still isn’t entitled to any lost profits, because the noninfringing alternative was available as of the date the infringement started.

Now suppose that on Day 1 Infringer has two design choices, A and B, either of which (once implemented) will result in the same number of sales on, say, a monthly basis.  Infringer can start making products using A on Day 2, but if Infringer opts for B the product launch will be delayed by a month.  If Infringer chooses A, the patent owner is entitled to lost profits for that one-month period during which there was no alternative to A.  But for the infringement, Infringer would not have entered the market on Day 1 but rather on, say, Day 31.  Of course, if Infringer was not put on actual or constructive notice until after Day 31, it’s all a moot point anyway, because the patent owner can’t recover any damages at all for that pre-notice period.

To the extent Judge Koh’s ruling is consistent with scenario 2, it makes sense to me.  To the extent the factual underpinning is something more like scenario 1, however, I agree with Mr. Mueller that the ruling doesn’t seem logical.  In neither scenario would I assume the hypothetical design-around begins on the date of actual or constructive notice.  In my view, the rules concerning patent notice serve the purpose of cutting off damages claims that occur prior to the date of notice but shouldn’t be read as providing any insights into how damages are calculated for the period for which they are available.  

1 comment:

  1. I agree with your analysis. Compensatory damages of any kind, whether lost profits or a reasonable royalty, should capture the value of the patented invention as compared with the best non-infringing alternative. Technical debates over timing should not be allowed to obscure this basic principle.