Amicus brief on design patent damages; new paper on royalty stacking

1.  Mark Lemley filed an amicus brief this afternoon on behalf of 27 law professors (including me) in the Apple v. Samsung appeal from the judgment entered by Judge Koh in March 2014, available here.   From the summary of argument:

The jury in this case awarded to Apple Samsung’s entire profit from the products that infringed Apple’s design patents. Never mind Samsung’s own patents, its engineering and design work, and the technologies of Google and countless other inventors incorporated in the Samsung phones. The result was that it was Apple’s product design, not any technical features, that was responsible for the overwhelming majority of the damages award.

The jury did this because the district court held that current law required it.  See Apple, Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2012 WL 2571332 (N.D. Cal. June 30, 2012) (granting motion in limine excluding Samsung’s testimony on apportionment because design patents do not permit apportionment). Unlike patents on technical inventions, or for that matter copyrights or trademarks, the court held that design patent law requires that infringers—even innocent infringers—pay the plaintiff their entire profit from the sale of the infringing product, even if the design was only a small feature of that product. 35 U.S.C. §289.

That rule, based on rather different circumstances that are more than a century old, makes no sense. As applied to a modern, multicomponent product it drastically overcompensates the owners of design patents, and correspondingly undervalues technical innovation and manufacturing know-how. It punishes even innocent infringers, particularly now that one can infringe a design patent merely on a finding that two independently developed designs are too similar to the ordinary observer. And it leaves troubling questions about what to do with all the other claimants to a share of the defendant’s profits. We suggest that this Court interpret section 289, in accordance with wise policy and the remainder of the patent statute, to limit the award of profits in design patent cases to profits attributable to the act of infringement.

2.  Both Danny Sokol and Florian Mueller have alerted me to a paper on royalty stacking by Ann Armstrong, Joseph J. Mueller, and Timothy D. Syrett titled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones, available here.  Here is the introduction:

Competition in the smartphone industry is fierce, and for smartphone suppliers, achieving profitability is highly challenging. Indeed, few suppliers are meeting the basic goal of selling devices for more than the costs incurred in supplying them. This article examines one category of such costs: the cumulative royalty demands for the patents claimed to cover technologies in a smartphone.

The authors have years of experience studying such costs, as an in-house attorney at a supplier of components for mobile devices, and as litigators who have worked on many patent cases involving smartphones. For this article, we report only publicly-available information. To the extent that we have knowledge of confidential licensing information through our in-house or litigation work, we do not report it in this article, in any way. But, our collective experience has allowed us to effectively canvass publicly-available information to sketch the royalty landscape for smartphones.

Using exclusively this public information, the article presents a “bottom-up” analysis of smartphone royalties by examining the potential royalty burden on the major technologies and components in smartphones. We are unaware of any similar study. Some studies have focused on royalties on discrete technologies (e.g., cellular communication functionality), rather than the broad range of components across the entire device. Others have quantified relevant intellectual property rights but have not attempted to capture the royalty demands that may accompany them.

The data collected in this article are relevant not only to better understanding the dynamics of the smartphone market but also to the ongoing development of the law and business principles for determining a “reasonable royalty” under the patent laws and/or under commitments to license on “fair, reasonable, and non-discriminatory” (“FRAND”) or “reasonable and non-discriminatory” (“RAND”) terms.

In particular, there has been significant recent focus on “royalty stacking,” in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product. This article is intended to provide insight into the royalty stack that smartphone suppliers face. The data show that royalty stacking is not merely a theoretical concern. Indeed, setting aside off-sets such as “payments” made in the form of cross-licenses and patent exhaustion arising from licensed sales by component suppliers, we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone—which is almost equal to the cost of device’s components. Thus, the smartphone royalty stack across standardized and non-standardized technology is significant, and those costs may be undermining industry profitability—and, in turn, diminishing incentives to invest and compete.

We first explain the assumptions we have made and the limitations inherent in our public data collection. Next, we give context to the origins of royalty demands that smartphone suppliers face by briefly reviewing the wave of patent litigation involving smartphone suppliers. Finally, with that background, we present the data that we have collected in our component-by-component survey of royalty demands.

Some New Papers on Reasonable Royalties, FRAND

1.  Stefano Barazza has published a paper titled Licensing standard essential patents, part one:  the definition of F/RAND commitments and the determination of royalty rates in 9 J. Intell. Prop. L. & Prac. 465-81 (2014).  Here is the abstract:

The development of standards contributes to the diffusion of innovation, allowing companies to access the latest technology developed by third parties, and consumers to benefit from the availability of interoperable products at lower costs. Standardization, however, confers increased market power to the holder of a patent which is essential to practicing the standard, a situation which may potential generate anti-competitive effects, especially if the patent holder threatens to hold-up prospective licensees in order to obtain the payment of royalty rates higher than the pre-standardization value of the patent. To minimize this risk, standard-setting organizations commonly require the holder of standard-essential patents to commit to licensing them on fair, reasonable, and non-discriminatory terms (F/RAND). Courts, therefore, are often challenged with the tasks of evaluating the F/RAND nature of royalty rates and licensing terms, and assessing whether the patent holder is entitled to obtain injunctive relief against a prospective licensee. Although the principles that inspire the interpretation of F/RAND commitments appear to be shared worldwide, case law does not yet reflect this uniformity. The harmonization of the rules and methodologies applied by the courts, and the implementation of more comprehensive policies by the standard-setting organizations, appear to be key steps towards ensuring the right balance between the rights of patent holders and licensees. 

2.  Bernard Chao has published a paper titled The Infringement Conundrum in 35 Cardozo L. Rev. 1359 (2014), available here.  Here is the abstract:

For many years, patent law has struggled with the issue of permissible claim scope. A patent’s specification and its claims often suffer from a surprising disconnect. The specification generally describes an invention in terms of one or more specific implementations, suggesting a relatively narrow invention. But claims are drafted far more broadly. They frequently encompass unforeseen variations and even cover after-arising technology.
Although there are numerous existing doctrines that try to prevent claims from straying too far from their specification, these doctrines offer binary outcomes ill suited for patent law. Under these doctrines, as a claim encompasses subject matter further and further away from what the specification describes, there is a point where the inventor suddenly loses all rights. These outcomes make sense when all trespasses are considered equal wrongs. However, in reality, there is an infringement continuum. At one end of the continuum, infringement can look exactly like the invention described by a patent. That infringement should be treated far more seriously than infringement that resides at the other end of the continuum and looks very different from the invention.
Consequently, I propose a new theoretical framework that ties patent disclosure doctrine to the remedies the law provides. Although I would continue to use the claims to determine infringement, I suggest that the specification be used to assess the remedy. Specifically, I suggest replacing the current lost profits/reasonable royalty framework with one based on royalties that consider disclosure principles. The size of the royalty would be determined by comparing the infringement to the patent specification and adjusting the royalty based on the degree of similarity.
The proposal improves on existing doctrines in two fundamental ways. First, instead of offering binary outcomes, the proposed remedies are highly adjustable. Therefore, they are well suited for addressing the full infringement continuum. Second, this proposal does not just focus on the patentee’s injury, as does the current law. Rather, it advances the public interest by optimizing incentives for both initial and follow-on innovators.

3.  Richard F. Dole, Jr. has published a paper titled Statutory Royalty Damages Under the Uniform Trade Secrets Act and the Federal Patent Code in 16 Vanderbilt J. Enter. & Tech. L. 223 (2014), available here.  Here is the abstract:

Optional statutory royalty damages are provided for by both the version of the Uniform Trade Secrets Act that has been enacted by most of the forty seven adopting states and the federal patent code remedies for infringement of utility patents. Notwithstanding periodic recommendations that the Uniform Act follow the patent code concept of statutory royalty damages, this article takes the position that differences between the Uniform Act and the Patent Code regarding monetary remedies make it reasonable for the Uniform Act statutory royalty provisions to be construed more objectively than their federal counterpart. This will preclude statutory royalty damages acquiring the unwarranted significance under the Uniform Act that they have acquired under the Patent Code.

Some further notes on recent changes to patent damages law in Russia

Today's post is coauthored by Thomas F. Cotter and Nadia Wood.

In three previous posts, we have discussed Russia's recent adoption of statutory damages as a possible remedy for patent infringement (see here, here, and here).  More specifically, in Ms. Wood's (slightly revised) translation, new article 1406.1 of the Civil Code reads:

Article 1406.1. Liability for violation of exclusive rights to an invention, utility model or design patent.

In case of infringement of exclusive rights to an invention, utility model or design patent[,] author [inventor] or other rightsholder [owner of rights to the invention,] along with using other applicable methods of protection and liability measures established by the present Code (articles 1250, 1252 and 1253), has the right at their option to demand from the offender instead of [actual] damages [the following] compensation:

1)      in the amount of ten thousand to five million rubles determined at the discretion of the court based on the nature of the violation;

2)   twice the value of the right to use an invention [royalty rate], utility model or commercial sample determined based on the rate usually charged under comparable circumstances for the lawful use of corresponding invention, utility model, design patent in a manner utilized by the offender.

A recent article by Professors Andrey Kashinin and Elena Dubovitskaya, Die Reform des russischen Rechts des geistigen Eigentums ("The Reform of the Russian Law of Intellectual Property"), GRUR Int. 429 (2014), discuss these and other recent changes to Russian IP law (including clarifications as to the scope of patentable subject matter and the contents of the specification, as well as some modifications of copyright law).  The abstract to their article reads as follows (Professor Cotter's translation from the German):  

The Russian law of intellectual property was fundamentally modernized early in 2014.  The relevant changes make up a part of the large-scale reform of Russian civil law, which led to the drafting of the Law "Concerning the Modification of the First, Second, Third, and Fourth Portion of the Civil Code as well as Certain Laws of the Russian Federation."  The draft law passed the first reading in the Russian Duma on April 27, 2012.  As a result of numerous differences of opinion, which became apparent during the preparation of the draft for the second reading, it was split into several single drafts.  The partial draft concerning the law of intellectual property was approved by the Duma on February 25, 2014 and on March 5, 2014 by the Federation Council.  With some exceptions, the law (hereinafter the Reform Law) enters into force on October 1, 2014.

As for statutory damages in particular, the article briefly discusses article 1406.1 (which, according to these authors, actually enters into effect on January 1, 2015), though without commenting on the curious lack of the article "or" in between paragraphs 1 and 2 (which Ms. Wood discussed here). 

To clarify matters a bit, Russia's IP laws are found in Part IV of its Civil Code (see this helpful booklet on the Russian patent system, available on WIPO's website).  In relevant part article 1252 of the Civil Code (unofficial translation, as also available on WIPO's website) reads as follows:

Enforcement of Exclusive Rights

1. Enforcement of exclusive rights to the results of intellectual activity and to means of individualization shall be exercised in particular by putting forward a claim as regards:

1) the recognition of the right – against the person who denies or in another manner does not recognize the right, infringing thereby the interests of the rightholder;

2) preventing the actions infringing the right or creating a threat of its infringement – against the person being taken such actions or being prepared to take them;

3) reimbursement of damages – against the person who has unlawfully used a result of intellectual activity or means of individualization without the conclusion of an agreement with the rightholder (non-contracted use) or has infringed his exclusive right in another manner and has inflicted damage to him;

4) seizure of the physical carrier in accordance with Paragraph 5 of the present Article – against its producer, importer, depositor, carrier, seller, other distributor, or bad faith buyer;

5) the publication of the judicial decision on the infringement committed with an indication of the actual rightholder – against infringer of the exclusive right. . . .

3. In cases provided for by the present Code for certain types of results of intellectual activity or means of individualization, when the infringement of the exclusive right is being made the rightholder shall have the right, instead of reimbursement of damages, to demand from the infringer payment of compensation for the infringement of the aforesaid right. The compensation shall be subject to recovery upon proof of the fact of infringement of a right. In such a case the rightholder applying for enforcement of a right, shall not bear the burden to proof the amount of damages inflicted.

The amount of compensation shall be determined by the court within the limits as provided for by the present Code depending upon the nature of the infringement and other circumstances of the case with due account of the requirements of reasonability and justice.

The rightholder shall have the right to demand from the infringer payment of compensation for each event of unlawful use of the result of intellectual activity or means of individualization or for the infringement committed as a whole. . . .

By way of further clarification, the term "results of intellectual activity and means equated to them of individualization of legal entities, goods, work, services, and enterprises that are granted legal protection" is defined in article 1225 to include "1) works of science, literature, and art; 2) computer programs; 3) databases; 4) performances; 5) phonograms; 6) broadcasting or diffusion of radio- or television transmissions via cable; 7) inventions; 8) utility models; 9) industrial designs; 10) selection attainments; 11) topographies of integrated circuits; 12) secrets of production (know-how); 13) trade names; 14) trademarks and service marks; 15) appellations of origin; 16) commercial names."  Moreover, if we are reading this correctly, the distinction between "reimbursement in damages" (see section 1252(2)) and "compensation for damages" (see section 1252(3)) appears to be that the former consists of quantifiable damages for a proven injury, whereas the latter consists of damages that are less tied to a specific quantifiable injury.  The Kashanin & Dubovitskaya article uses the German term Geldentschädigung (rather than Schadensersatz) for this latter term and for what we are referring to as "statutory damages."

 

Apropos of section 1252, the Kashanin & Dubovitskaya article notes that the new law will revise article 1252(3).  According to the authors, in a case in which the injured party may request compensation for the infringement of its intellectual property rights and in which the defendant's act infringes rights in several IP rights belonging to the same party, the court should determine the damages for each infringed right.  The court may then reduce the damages to (no less than) 50% of the total sum.  Here is the relevant text in Russian, along with Ms. Wood's translation:

Если одним действием нарушены права на несколько результатов интеллектуальной деятельности или средств индивидуализации, размер компенсации определяется судом за каждый неправомерно используемый результат интеллектуальной деятельности или средство индивидуализации. При этом в случае, если права на соответствующие результаты или средства индивидуализации принадлежат одному правообладателю, общий размер компенсации за нарушение прав на них с учетом характера и последствий нарушения может быть снижен судом ниже пределов, установленных настоящим Кодексом, но не может составлять менее пятидесяти процентов суммы минимальных размеров всех компенсаций за допущенные нарушения.

1252(3) translation:

If one action violates the rights of several results of intellectual activity or means of individualization, the amount of compensation is determined by the court for each wrongfully used result of intellectual activity or means of individualization. In the event the rights to the corresponding results or means of individualization belong to the same rightholder, the total amount of compensation for violation of the rights to them taking into account the nature and consequences of a violation may be reduced by the court below the limits established by this Code, but cannot be less than fifty percent of the minimum amount of all compensation for the violations.

The bottom line, then, appears to be that Russian law soon will allow for statutory damages for patent infringement, and that a court generally should award such damages for each patent (or other IP) right that is infringed by the defendant's manufacture, use, or sale of an infringing good; but that the court may reduce the amount of such damages in a case in which the infringing good embodies multiple patents (or other IP rights).  These features are, to our knowledge, uncommon among the patent systems of the world, and we would appreciate further clarification from readers who are familiar with the new law.