Thursday, August 28, 2014

Judge Koh Denies Apple a Permanent Injunction Against Samsung

This occurred yesterday afternoon, and is in regard to the case in which a jury awarded Apple $120 million this past May (see previous posts here and here).  Here are links to coverage on Foss Patents, the San Jose Mercury News, and the Wall Street Journal, and a copy of the opinion here.  

The denial is based primarily on the lack of a causal nexus between Samsung's infringement and any proven cognizable harm to Apple.  On irreparable harm in particular, the court concludes:
After careful examination of all the evidence, the Court concludes that Apple fails to prove that “the infringing feature[s] drive[] consumer demand for the accused product[s].” Apple II, 695 F.3d at 1375. Apple’s argument that the causal nexus requirement does not apply to reputational harm overextends Douglas Dynamics and contravenes the Federal Circuit’s guidance on irreparable harm. Apple has not demonstrated that it will suffer irreparable harm to its reputation or goodwill as an innovator without an injunction. Nor has Apple shown that it will suffer lost sales specifically due to Samsung’s infringement of the three patents at issue. For these reasons, the irreparable harm factor favors Samsung and disfavors an injunction.
Furthermore, on the issue of adequacy of legal remedies:
        The Court concludes that damages for Apple’s alleged irreparable harm in connection with alleged lost sales are difficult to quantify. As the Court determined in the 1846 Injunction Order, Apple’s past licensing behavior demonstrates a reluctance to license Apple’s patents to Samsung, and several factors distinguish Apple’s licenses to HTC and Nokia from the present circumstances. Moreover, Samsung has not established that Apple offered to license the ’647 patent to Samsung in August 2010.
          However, this determination does not overcome Apple’s failure to demonstrate a causal nexus between its alleged harm and Samsung’s infringement. As before, the Court will not issue a permanent injunction based on irreparable harm that Samsung’s infringement did not cause, even if monetary remedies will not compensate Apple for that irreparable harm. See 1846 Injunction Order at 37. Apple bears the burden of showing that legal remedies are inadequate to compensate for the specific alleged irreparable harm. See eBay, 547 U.S. at 391 (listing as the first two factors a patentee must show for an injunction “(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury”) (emphasis added); Apple III, 735 F.3d at 1371 (“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.”). To award an injunction to Apple in these circumstances would ignore the Federal Circuit’s warning that a patentee may not “leverage its patent for competitive gain beyond that which the inventive contribution and value of the patent warrant.” Id. at 1361 (quoting Apple II, 695 F.3d at 1375) (internal quotation mark omitted). The Court ultimately finds that—despite Apple’s apparent unwillingness to license the patents-in-suit to Samsung—monetary remedies would more appropriately remedy Samsung’s infringement than would an injunction. Accordingly, the second eBay factor favors Samsung.
On the balance of hardships:
Samsung repeatedly told the jury that designing around the asserted claims of the three patents at issue would be easy and fast. In light of those admissions, and the narrow tailoring of, and sunset provision in, the requested injunction, Samsung has failed to articulate any hardship. As the Federal Circuit has held, if the infringer “had a non-infringing alternative which it could easily deliver to the market, then the balance of hardships would suggest that [the infringer] should halt infringement and pursue a lawful course of market conduct.” Douglas Dynamics, 717 F.3d at 1345. For the above reasons, the balance of hardships favors Apple.
Finally, on the public interest:
Balancing all of the considerations that the parties have identified, the Court concludes that the public interest factor favors Apple.
Nonetheless, Judge Koh concludes that "[w]eighing all of the factors, the Court concludes that the principles of equity do not support a permanent injunction here.

*                   *                  *

On another note, with my teaching responsibilities resuming, starting next week I will go back to blogging only twice a week most weeks (most likely Mondays and Thursdays) unless something of particular importance (e.g., an important Supreme Court or CJEU case) comes down. 

Wednesday, August 27, 2014

Recent Indian Decision on Preliminary Injunctions

As reported by Rajiv Kr. Choudhry on the SpicyIP Blog on August 10, and by Madhur Singh in the August 12, 2014 issue of Bloomberg BNA World Intellectual Property Report (available here, behind a paywall), on August 5 Justice V.K. Shali of the High Court of Delhi at New Delhi lifted an ad interim stay--effectively denying a preliminary injunction--in a proceeding brought by Vringo Infrastructure Inc. and Vringo Inc. (collectively, "Vringo") against ZTE and an Indian subsidiary, ZTE Telecom Indian Private Limited (collectively, "ZTE").  (Here is a link to the opinion.)  Vringo owns Indian patent No. 200572, for "a method and a device for making a handover decision in a mobile communication system."  It purchased the patent from Nokia in 2006 and served a cease and desist letter on ZTE in December 2012.  According to the court, in order to obtain a preliminary injunction Vringo needed to prove three elements:  a prima facie case, that the balance of conveniences favored the plaintiff, and that the plaintiff was faced with irreparable harm.  The court concluded that Vringo failed on all of these elements.

As for the prima facie case, the court stated that there is no presumption of patent validity (p.17).  Instead:
The plaintiffs must establish such acts as will prima facie satisfy the court that there are strong and prima facie reasons for acting on the supposition that the patent is valid. It has been held in National Research Development Corporation of India vs. The Delhi Cloth & General Mills Co. Ltd. and Ors.; AIR 1980 Delhi 132 that the most cogent evidence for this purpose is either that there has been a previous trial in which patent has been held to be valid or that the patentee has worked the patent and enjoyed the same without dispute, either from the defendants or anyone. The defendants have set up a counter claim for revocation of the patent under Section 64 of the Act. Therefore, it cannot be said that the plaintiffs are having a prima facie good case on the basis of the registration of the patent alone. It is required to do something more. This something more is being sought to be shown by an affidavit by the plaintiffs which claims to be an affidavit of an expert (pp. 17-18).
The court, however, concluded that the submission of the plaintiffs' proposed expert that the defendant's products infringed did not make out a prima facie case.  According to the court, the expert had stated that "he is not a patent attorney and does not purport to provide expert opinions in this report on Indian patent law" (p.20).  The court also noted that he did not possess a science or engineering degree, and noted that he would not have been able to serve a court-appointed scientific advisor under Rule 103 of the Patent Rules (pp. 21-24).

On the balance of conveniences, the court stated that 
While examining the question of balance of convenience, a number of factors will have to be taken into account by the court depending on the facts and situations of each case. In the instant case, for example, the balance of convenience to be established by the plaintiffs would entail examination as to whether it is marketing the patented product in the Indian market, whether it has approached the court with clean hands without concealment of material facts and whether there has been any delay in approaching the court, etc. (p.24).
Here, the court noted that the assignment of the patent took place in 2006, that Nokia itself had never sued anyone for infringing it, that none of Vringo's licensees had demanded a lawsuit either, and that Vringo itself does not work the patent (pp. 25-32).

Finally, as for irreparable harm, the court stated that "the patentee has a right to get an injunction but that right is not an absolute right and a mandatory right. . . .      the patentee has prima facie a right to obtain an injunction but that injunction is not necessarily to be granted as a matter of course. It can be refused in case a party can adequately be compensated in terms of money or the court can sufficiently protect the interest of the plaintiffs by passing certain other directions" (pp. 33-34).     

Monday, August 25, 2014

FRAND Developments, Part 2

Here are some more recent papers on FRAND:

1.  By way of the Antitrust & Competition Policy Blog, I learned last week of a 298-page report published in May 2014 by George Addy and Erika Douglas of the Canadian firm Davies Ward Phillips & Vineberg titled Trolls, Hopping, Ambush and Hold-Up:  Emerging International Approaches to the Intersection of Competition and Patent Law Regimes.  Here is the abstract, from the firm's website:
Worldwide, regulators and courts are increasingly engaged in the complex legal and policy issues at the intersection of competition and patent regimes. Trolls, Hopping, Ambush and Hold-up: Emerging International Approaches to the Intersection of Competition and Patent Law surveys the state of play in major jurisdictions on four rapidly evolving issues at the forefront of this global debate: reverse payment settlements, standard-setting/FRAND licensing commitments, patent assertion entities and product hopping. The report, commissioned by Industry Canada, provides an in-depth survey of legal and policy developments in Canada, the U.S., Europe, Australia and the U.K., and considers the potential implications for Canadian competition law and patent rights.
2.  The Antitrust & Competition Policy Blog also announced the publication of GCR's European Antitrust Review 2015.  At least a couple of the papers discuss FRAND/SEP issues among other matters, including this one by Elena Cortés, Adam Dawson & Catriona Hatton (IP and Antitrust); this one by Laurent Godfroid and Stéphane Hautbourg (Telecoms and Media); and this one by Nadine Herrmann (Germany:  IP and Antitrust).

3.  Joanna Tsai and Federal Trade Commissioner Joshua D. Wright have posted a paper on ssrn titled Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts.  Here is the paper, and here is the abstract:
A large and growing number of regulators and academics, while recognizing the benefits of standardization, view skeptically the role standard setting organizations (SSOs) play in facilitating standardization and commercialization of intellectual property rights (IPRs). Competition agencies and commentators suggest specific changes to current SSO IPR policies to reduce incompleteness and favor an expanded role for antitrust law in deterring patent holdup. These criticisms and policy proposals are based upon the premise that the incompleteness of SSO contracts is inefficient and the result of market failure rather than an efficient outcome reflecting the costs and benefits of adding greater specificity to SSO contracts and emerging from a competitive contracting environment. We explore conceptually and empirically that presumption. We also document and analyze changes to eleven SSO IPR policies over time. We find that SSOs and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied across SSOs, and that contractual incompleteness and ambiguity for certain terms persist both across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret this evidence as consistent with a competitive contracting process. We conclude by exploring the implications of these findings for identifying the appropriate role of antitrust law in governing ex post opportunism in the SSO setting.
4.  Madhur Singh published an article titled Indian Draft Policy to Set Time Limit on Essential Telecom IP Licensing Talks in the August 18 Bloomberg BNA World Intellectual Property Report (link here, behind a paywall).  According to the article, on July 17 the Telecommunications Standards Development Society, India (TSDSI), "a public-private organization that establishes and implements standards for the telcommunications industry in India," discussed a draft policy under which negotiations relating to the FRAND licensing of SEPs should take place within a "'reasonable' time limit" of 6-12 months, during which period "none of the parties involved is to resort to any legal recourse such as injunctions."  The draft  policy is not yet available to the public.

5.  Tyrone Berger has posted the following abstract on ssrn of a paper to be published in the Australian Intellectual Property Journal
This paper investigates some key problems surrounding patented standards and technological standardisation. It surveys two emerging conflicts, namely patent hold-up and patent ambush, in light of potential anticompetitive conduct by industry participants in the development of a technical standard. A paired relationship is fostered when proprietary rights, such as patents, are adopted in a standard. For example, when new knowledge is generated through research and development, it is captured and widely distributed to the market, via standards, ensuring equal access to the new technology. However, a key concern is that this consensus-based practice may provide companies with a degree of market power, which if left unchecked, can result in higher licensing fees and a loss in consumer welfare. At the same time, Standard-Setting Organisations seek to reconcile their policy objectives of knowledge diffusion and technical performance, with the risks of patent hold-up and excessive royalties. Given the imprecise nature of these choices, this author argues that it is more accurate to characterise this situation as a ‘search for co-existence.’

Friday, August 22, 2014

FRAND Developments, Part 1

As reported last Friday on the Essential Patents Blog, the U.S. ITC issued a notice terminating the investigation prompted by InterDigital's complaint against Nokia and ZTE, which was the subject of ALJ Essex's Initial Determination that I blogged about here.  The Commission "takes no position on the FRAND issues raised by the respondents concerning their affirmative defenses. The Commission finds that it is in the interest of the efficient use of administrative, judicial, and private resources for the domestic industry and FRAND issues to be decided, if at all, subsequent to final disposition of the pending appeal in InterDigital Communications LLC v. ITC, No. 2014-1176 (Fed. Cir.), which involves many of the same parties and issues with regard to related patents."

Some recent papers on FRAND-related issues include the following:

1.  Christopher Yoo has posted a paper on ssrn titled Public Good Economics and Standard Essential Patents.  I believe this is a version of the paper he was working on and that he discussed at the University of Florida workshop last September (see here).  Here is the paper, and here is the abstract:
Standard essential patents have emerged as a major focus in both the public policy and academic arenas. The primary concern is that once a patented technology has been incorporated into a standard, the standard can effectively insulate it from competition from substitute technologies. To guard against the appropriation of quasi-rents that are the product of the standard setting process rather than the innovation itself, standard setting organizations (SSOs) require patentholders to disclose their relevant intellectual property before the standard has been adopted and to commit to license those rights on terms that are fair, reasonable, and non-discriminatory (FRAND).
To date courts and commentators have provided relatively little guidance as to the meaning of FRAND. The most common approach is to impose a uniform royalty based on a percentage over overall revenue. The baseline for setting this uniform royalty is the royalty that the patentholder could have charged had the standard had not been created. In essence, this approach takes the ex ante distribution of entitlements as given and attempts to ensure that the standard setting process does not increase patentholders’ bargaining power. However, comparisons to the ex ante baseline do not provide a basis for assessing whether the resulting outcome would maximize economic welfare.
Fortunately, public goods economics can provide an analytical framework for assessing whether a particular licensing structure is likely to maximize economic welfare. Although it is often observed that patentable inventions are public goods, key concepts of public good economics (such as the Samuelson condition that provides public good economics’ key optimality criterion) are rarely explored in any depth.
A close examination of public good economics reveals that it has important implications standard essential patents and FRAND. The resulting framework surpasses the current approach by providing a basis for assessing whether any particular outcome is likely to maximize welfare instead of simply taking the existing distribution of entitlements as given and allocating them in the most efficient way.
In addition, the insight that demand-side price discrimination is a necessary precondition to efficient market provision suggests that economic welfare would be maximized if holders of standard essential patents were permitted to charge nonuniform royalty rates. At the same time, the optimal level of price discrimination would allow consumers to retain some of the surplus. It also underscores that the fundamental problem posed by standard essential patents may be strategic behavior and incentive incompatibility. The literature also suggests several alternative institutional structures that can help mitigate some of these concerns.
2.  Knut Blind and Tim Pohlmann have published Patente und Standards:  Offenlegung, Lizenzen, Patentstreitigkeiten und rechtspolitische Diskussionen ("Patents and Standards:  Disclosure, Licenses, Patent Disputes, and Legal Policy Discussions") in the August 2014 issue of GRUR (pp. 713-19).  Here is the abstract (my translation from the German):
In recent years, the interaction of patents and technological standards increasingly has led to legal disputes.  In the process, the legal interpretation of license conditions is not always meaningful, the licensing over patent pools is often interminable, and SSO bylaws not infrequently chart differing requirements.  Situations, in which a patent is infringed in the implementation of a standard, present courts, competition authorities, and SSOs with complex legal challenges.  The question arises, under which legal frameworks patents in standards support innovation or create blockages for the development of new technologies and products.  Current surveys show that firms sense a degree of legal uncertainty with regard to the licensing of SEPs.  Especially problematic  are the lack of transparency with respect to the disclosure of SEPs, the specific meaning of license conditions and the legal handling of patent enforcement.  This article discusses and analyzes the legal as well as economic aspects of the interaction between patents and standards.
3.  In the same issue of GRUR (pp. 745-50), Clemens-August Heusch has published a paper titled Missbrauch marktbeherrschender Stellungen (Art. 102 AEUV) durch Patentinhaber:  »Orange-Book-Standard« und was die Instanzgerichte daraus gemacht haben ("Abuse of Dominant Position (Article 102  TFEU) by Patent Holders:  'Orange-Book-Standard' and What the Courts of First Instance Have Made of It").  Here's the abstract, again my translation from the German:
The tension between patent and competition law is pervasive, especially in the case of SEPs which manufacturers must use in order to make standard-compatible products.  For a long time it was debated whether a competition law claim could be used to counter a claim for a patent injunction.  The BGH answered this question in the "Orange-Book-Standard" case.  In so doing, however, it presented the practitioner with a range of follow-on problems.  This essay takes up a few of them.
To be continued on Monday.

Wednesday, August 20, 2014

Some Recent Japanese Cases on Patent Damages

The May 2014 issue of A.I.P.P.I.--Journal of the Japanese Group of AIPPI features an article by Yasufumi Shiroyama titled Overview of IP-Related Judgments Handed Down by Japanese Courts in the Second Half of 2013.  Among the cases discussed are three dealing with patent damages.

The first is the Judgment of the Osaka District Court of August 27, 2013 (2011 (wa) No. 6878, 21st Division, partially upheld).  (The term "partially upheld" means that the damages award was less than what the plaintiff sought.)  The patent covered a method that "produces the operation and effect of stabilizing coloring of a colored plaster composition."  Apparently the defendant used the process in making a colored plaster composition that consumers use as a plastering material.  According to the court, the invention prevents "color unevenness of colored plaster coating to be formed by using the colored plaster composition" and thus "will increase the utility of the composition as a plastering material."  Because the method "produces an operation and effect that is directly connected to the value of the product," the court invoked article 102(2) of the Japan Patent Act to award the plaintiff the defendant's profit from the sale of its colored plaster composition.  As I read Mr. Shiroyama's description, it sounds like the court awarded the defendant's entire profit, which could be excessive if the profit was attributable to other factors as well or could have been achieved in whole or in part by using alternative means.  For previous discussion on this blog of article 102(2), see here, here, here, and here

The second is the Judgment of the Tokyo District Court of September 26, 2013 (2007 (Wa) No. 2525, etc., 47th Division, counterclaim partially upheld).  According to Mr. Shiroyama, the court awarded a reasonable royalty for the infringement of a patent "regarding an operating switch (click wheel) of a portable music player" based on the expert witness's calculation of the defendant's sales multiplied by a reasonable royalty rate that is not disclosed "due to the restriction on inspection of the case record."  The court took into account, however, that the "invention made a limited contribution to the defendant's product."

The third is the Judgment of the Tokyo District Court of September 12, 2013 (2011 (Wa) No. 8085, etc., 47th Division, partially upheld), in which the court awarded a reasonable royalty for an invention relating to washing machine water levels "by multiplying the sales of the washing machine by the rate of contribution of the water level invention, 0.2 percent, and then by multiplying the result by a reasonable royalty rate, 3 percent (= 0.006 of the sales)."  For the infringement of another patent in suit relating to a dehydrating tank, the court considered the rate of contribution to be 15% and a reasonable royalty rate 1%, resulting in an award of 0.15% of sales.  Total damages amounted to about 45 million yen, or about U.S. $ 329,000.    

Monday, August 18, 2014

News from France on Injunctions

1.  Benjamin May and Marie Liens have published an article titled Brevets Pharmaceutiques:  Approche Pratique du Contentieux des Mesures d'Interdiction Provisoire ("Pharmaceutical Patents:  A Practical Approach to Litigating Provisional Measures") in the June 2014 issue of Propriété Industrielle.  Here is the abstract (my translation from the French):  
The launch of a generic drug is a sensitive moment:  too early, and the patent owner can obtain an injunction; too late, and the generic firm will lose the boost of being the first on the market and will see its profit margins fall.  The present study proposes an analysis of the pivotal dates of the process as well as a practical approach to litigation options.  
The relevant portion of the French Intellectual Property Code is article 615-3, which I discuss in my book at pp. 242-43.  In relevant part, the statute reads:
Toute personne ayant qualité pour agir en contrefaçon peut saisir en référé la juridiction civile compétente afin de voir ordonner, au besoin sous astreinte, à l'encontre du prétendu contrefacteur ou des intermédiaires dont il utilise les services, toute mesure destinée à prévenir une atteinte imminente aux droits conférés par le titre ou à empêcher la poursuite d'actes argués de contrefaçon. La juridiction civile compétente peut également ordonner toutes mesures urgentes sur requête lorsque les circonstances exigent que ces mesures ne soient pas prises contradictoirement, notamment lorsque tout retard serait de nature à causer un préjudice irréparable au demandeur. Saisie en référé ou sur requête, la juridiction ne peut ordonner les mesures demandées que si les éléments de preuve, raisonnablement accessibles au demandeur, rendent vraisemblable qu'il est porté atteinte à ses droits ou qu'une telle atteinte est imminente.
My very unofficial translation would be something like this:
Any person with a right to assert a claim for infringement may commence an emergency civil proceeding to obtain, if necessary under compulsion, against an alleged infringer or the intermediaries whose services he uses, any measure intended to prevent an imminent harm to the rights conferred by this act or to cease alleged acts of infringement.  The competent civil court may also order any such urgent measures ex parte when the circumstances demand that they be taken without opposition, especially when any delay may be of a type to cause irreparable harm to the movant.  In either case, the court should order the requested measures only if the elements of proof, reasonably accessible to the movant, make it probable that it is suffering an injury to its rights or that such an injury is imminent.    
The authors state that ex parte (sur requête) injunctions are almost never granted, and provide some examples from the case law (pp. 17-19).  They also note that preliminary injunctions are granted only in about a third of the pharmaceutical cases in which they are requested (p.20).  The discuss which actions on the part of the defendant qualify as potentially imminent acts of infringement (pp. 16-17).  They also note conflicting positions on the question of the extent to which the judge hearing the motion for a preliminary injunction may consider the validity of the patent.  The current version of article 615-3 uses the word "vraisemblable" (probable) in place of the former version's "caractère sérieux de l’action au fond" (serious nature of the underlying action), and some though not all judges have taken this to mean that they may consider invalidity (as opposed to infringement) only when it is manifest, rather than probable.  They also note, among other things, that judges only rarely order the patentee to provide security, although as in many countries the defendant against whom a preliminary enjoined is ordered may subsequently demand compensation if, for example, the patent is invalidated (though in France, as in the U.S., not if the invalidation occurs after the judgment has become final).

2.  The August 1, 2014 issue of  Propriété Industrielle Bulletin Documentaire (PIBD) reprints Written Question E-005062-14 of April 17, 2014 submitted to the European Parliament by Marc Tarabella, and the response dated July 4, 2014 by M. Barnier in the name of the European Commission.  The question and answer are also available from the European Parliament's website, so I'll reprint them in their English translation from that source:

Subject:  A European Unified Patent Court faced with a twin-track court system  
A working group consisting of representatives of the Member States is currently examining the draft regulation of the Unified Patent Court. The 15th draft regulation allows a twin-track procedure in two independently competent courts, one which rules on questions relating to the validity of a patent, the other on questions of breach. 
This introduces a considerable risk, namely that the Court determining a breach could issue an injunction excluding products from the market before the court with competence over validity has established that the patent is valid, thus penalising European companies even though their behaviour is entirely lawful.
Meanwhile, the Directorate General for Competition is concerned about abuses of a dominant position by companies which have sought to abuse their patent rights.
Does the Commission agree with injunctions that should not be applied on invalid patents?

Joint answer given by Mr Barnier on behalf of the Commission 
Written questions :E-005062/14 , E-005064/14 , E-005065/14
The questions raised by the Honourable Member concern the on-going work on the creation of the Unified Patent Court (UPC) and all raise similar concerns.
The Commission respectfully refers the Honourable Member to its reply to Written Question E-012200/13 and notes again that the Agreement on a Unified Patent Court (UPC) is an agreement concluded under international law and which, as such, is not part of EC law. As concerns the conditions for the granting of preliminary injunctions in the procedure before the UPC, in the abovementioned reply the Commission already provided the relevant factual information. In addition to that, the Commission may only reiterate that the Rules of Procedure in respect of the questions raised by the Honourable Member must provide for the requisite legal certainty. As to the measures taken by the court, they will have inter alia to comply with the basic principles of fairness, equitable treatment and proportionality.

Friday, August 15, 2014

Judge Davis's Damages Calculation in CSIRO v. Cisco

Today's post is a guest post by Professor Norman Siebrasse of the University of New Brunswick.

CSIRO v. Cisco, Case No. 6:11-cv-00343-LED  (E.D. Tex. 2014)

Judge Davis’s decision on damages in CSIRO v. Cisco is one of a handful of decisions to assess the quantum of a reasonable royalty for a standard essential patent, with infringement and validity having been stipulated. CSIRO's `069 patent relates to IEEE 802.11 wireless standards, in particular 802.11a, 802.11g, 802.11n and 802.11ac, but excluding 802.11b. The standards in question embodied the core technology of the ‘069 patent (p2), and that technology was an important factor contributing to the commercial success of the 802.11 products (p27). A RAND commitment was made with respect to the 802.11a standard, but not with respect to the other standards in issue (p8). However, Judge Davis made nothing of this point, as CSIRO has shown itself willing to license to all comers in any event.

Judge Davis largely rejected the evidence of the expert witnesses for both sides. CSIRO’s expert attempted to assess the value of the ‘069 technology by comparing the profitability of the infringing products with that of similar 802.11b products at a similar point in time (p11). This approach is sound, in that it represents an attempt to determine the value of the patented technology in comparison with the best non-infringing alternative, but it was rejected by Judge David largely for methodological reasons, such as inadequate sample size (p13). Cisco’s model was also rejected, primarily because it used as a basis a royalty that was negotiated in a non-arms length relationship, in which the royalty “was only one small part of the relationship created by the agreement” (p21). Consequently, the licence was not sufficiently comparable even to serve as a starting point for further adjustment (p20).

In the absence of satisfactory guidance from the parties, Judge Davis evaluated the evidence directly. He used as a baseline the rates actually discussed by CSIRO and Cisco in licensing discussions which ultimately did not come to fruition, $0.90 to $1.90 (p25). It was also clear that the parties would have a negotiated a rate varying with volume according to a discount schedule. Judge Davis then applied the Georgia-Pacific factors determine what adjustments to these initial rates were appropriate (p25). He ultimately concluded that while some factors favored an upward adjustment and other a downward adjustment, the sum of the factors was “essentially in equipoise,” and accordingly “no overall adjustment is needed to the baseline rates and a range of $0.90 to $1.90 is the appropriate outcome of the hypothetical negotiation here” (p28).

While the overall outcome was even, I am not sure I entirely agree with Judge Davis’ application of a number of the Georgia-Pacific factors. The first non-neutral factor was Factor 3, which considers the nature and scope of the license. Judge David remarked that “Although not explicit, it is reasonable to infer that both Cisco’s suggested royalty rate and CSIRO’s Voluntary Licensing Program assumed a worldwide license. Since the Court is considering damages only for infringing sales in the United States,  this factor favors adjusting the baseline rates downward” (p26). It is not clear to me why a worldwide licence would warrant a higher royalty rate. Obviously, there would be more sales with a worldwide licence, but that is reflected in the sales volume to which the royalty is applied, and also in the discount schedule. I don’t see why it should affect the rate to which the discount schedule is applied.

With respect to Factor 4, which looks at the licensor’s established policies and marketing programs, Judge Davis stated that
CSIRO was very willing to license the patented technology, sending offer letters to many wireless industry firms. Further, under its RAND obligation, CSIRO had a binding commitment to license the ’069 Patent with regard to 802.11a products. The Court agrees with both experts that this factor favors a downward adjustment of the baseline rates (p26-27).
Since the baseline rate was the rate offered by CSIRO to Cisco, this means a downward adjustment from the rate that CSIRO was willing to offer to Cisco. I don’t see the rationale for this adjustment. If Patentee A does not licence, and makes its money by exploiting the patent itself, and the closest comparison product is made by Patentee B, which exploits its patent rights by licensing, the rate charged by B should be adjusted upwards before it can be imputed to A, on the view that profit margins from exploiting the patent itself are higher. But why would the fact that CSIRO was willing to licence require a downward adjustment from the rate that CSIRO itself was willing to licence at?

I have much the same concern regarding Factor 5, which considers the commercial relationship existing between CSIRO and Cisco. Judge Davis noted that:
In this case, the parties are not competitors. CSIRO is a government organization focused on research and development. Cisco and Linksys engage in the marketing and sale of information technology products. CSIRO needed to license the ’069 Patent in order to commercialize and monetize it. Accordingly, this factor favors a downward adjustment of the rates (p27).
At the time CSIRO made the offer to Cisco, it was a government R&D organization, and Cisco was a product vendor, and the same is true at the time of infringement. Why is a downward adjustment necessary when the actual offer and the hypothetical negotiation took place in exactly the same circumstances? Again, if the comparison licence was different—the parties to the comparison licence were head-to-head market competitors—I can see the need for adjustment, but not here. The court makes essentially that point with respect to Factor 11 (p28), and I don't see why it is different with these factors.

Another concern I have is with the baseline rate itself. These offers and counter-offers, in the range of $.90 to $1.90, were discussed before the validity of the patent has been tested in court. Judge Davis started his analysis by noting that it is established law that “A hypothetical negotiation assumes the asserted patent claims are valid and infringed. Accordingly, the Court need not ‘discount’ the hypothetical rate due to uncertainty regarding validity or infringement.” (p23-24). But this implies that conversely, negotiations, whether consummated or not, that take place before validity has been established in litigation, are implicitly discounted to allow for the possibility of invalidity. (Non-infringement would not be an issue for a SEP). Maybe the reason that Cisco’s offer was lower than CSIRO was willing to accept was because Cisco was skeptical of the patent’s validity. It strikes me that this consideration is not neutral, but warrants an upwards adjustment of the baseline royalty. This is particularly a concern because Judge Davis noted that chip prices were depressed in the damages period because of “rampant infringement which occurred in the wireless industry” (p22). This is point is also relevant to some of Judge Davis’ criticisms of CSIRO’s expert. He says “Illogically, [CSIRO’s expert] proposes that at the hypothetical negotiations CSIRO and Cisco would have agreed to prices higher than CSIRO’s asking price.” I don’t see why this is illogical – it follows directly from the fact that the hypothetical negotiation takes place with validity established, while the actual negotiation did not.

Wednesday, August 13, 2014

Reasonable Royalties Based on Extraterritorial Sales

Last April I blogged about the $1.5 billion verdict in Carnegie Mellon University v. Marvell Technology Group, Ltd.  The court permitted the jury to award a reasonable royalty based upon the infringing use of its patent in the United States, which use led to sales and uses occurring abroad. The matter is now up on appeal, and some U.S. law professors are weighing in against the verdict.

First, Professor Brian Love filed an amicus brief on Monday in support of Marvell.  You can download the entire brief here or on ssrn here.  Here is the introduction and summary of argument:
Of the issues presented by this appeal, the measure of damages is the most broadly significant. The district court ruled below that infringing a patent during the course of research and development can subject a U.S. technology company to damages reflecting the value of all its sales worldwide. This ruling effectively transforms every U.S. patent into a worldwide patent. As explained below, that result cannot be justified as a matter of doctrine or policy. To the contrary, affirmance of the district court’s damages analysis will create material disincentives for domestic innovation and likely hasten the overseas migration of technology research facilities that are now in the U.S.
The vast majority of the damages awarded in this case—at least three quarters of the roughly $1.17 billion pre-enhancement total—is a reasonable royalty for the use of chips that were neither manufactured in nor imported into the U.S. Rather, these chips were fabricated in Taiwan, installed overseas in hard drives manufactured by third-party foreign-based companies, and eventually sold to foreign end-users who used their hard drives exclusively outside the U.S.  Under long-standing precedent, supported by the explicit territorial limitations in the Patent Act, extraterritorial actions like these fall outside the scope of conduct that constitutes patent infringement under U.S. law.  Nonetheless, the district court permitted Carnegie Mellon University (CMU) to recover damages incorporating the value of chips in hard drives that were manufactured, bought, and used outside the U.S. because Marvell Semiconductor, Inc.’s chip design and marketing activities took place in the U.S. In short, the district court ruled below that Marvell’s own use within the U.S. of a relatively small number of prototype chips during the process of negotiating with potential customers rendered Marvell liable in U.S. courts for all similar chips, including those not made in the U.S., in hard drives sold worldwide.
Affirming the damages award on that theory will effectively eliminate the long-standing prohibition on recovering damages under the U.S. Patent Act for extraterritorial patent infringement. Virtually all technology companies designing a new product produce a small number of prototypes, demonstrate those prototypes to potential customers, and tweak their designs based on customer feedback—often over the course of months or years in a lengthy iterative process indistinguishable from Marvell’s so-called “sales cycle.” A holding from this Court that such conduct is sufficient to draw worldwide sales into the ambit of U.S. patent litigation will effectively render the extraterritoriality rule a dead letter.
Moreover, limiting damages in this case to only those chips made, used, or sold in the U.S. will not create a disincentive to invention. A patentholder in CMU’s shoes could have sought and enforced foreign patent rights to protect its invention from foreign actions like Marvell’s without the need for a new, disruptive theory of U.S. patent damages.
To the contrary, affirming the district court’s view of the scope of infringement damages will often over-reward inventors and thereby reduce overall incentives to innovate. By transforming every U.S. patent into a de facto worldwide patent right, the damages principles approved below undermine the territorial sovereignty of patent law and will routinely lead to overcompensation. Those principles permit U.S. patentees to evade more restrictive patent regimes enacted in foreign nations: inventors who never obtained foreign patent rights could nonetheless seek damages in U.S. courts for products made, used, and sold abroad. Moreover, if left in place, the damages ruling below may allow inventors who do obtain both U.S. and foreign patent rights to recover damages twice for the very same conduct: once by asserting U.S. patent rights against domestic uses to recover a royalty reflecting the value of all uses worldwide, and again by asserting foreign patent rights in foreign nations where the patented technology was principally used. Drastically increasing the amounts at stake in U.S. patent suits—which at present levels are already the source of considerable criticism—threatens to upset the patent system’s delicate balance of adequately rewarding innovators of the past without handcuffing the innovators of today.
The damages theory adopted below also threatens to discourage domestic innovation in another way. If affirmed, such a rule will disadvantage technology companies that locate key R&D activities in the U.S. relative to companies that offshore those activities. Accordingly, it is likely that this rule will induce U.S.-based technology firms to move U.S. operations to overseas locations that are marginally less conducive to innovation.
Second, in a similar vein Professor Bernard Chao has posted a paper titled Patent Imperialism on ssrn.  Here is the abstract:
With a few narrow exceptions, U.S. patent law concerns itself with activity that either occurs within this country’s borders or crosses its borders. The result is that patent owners have only been able to recover money damages for activity that takes place in this country. In the typical case, that means that a patentee can recover lost profits or reasonable royalties for the domestic sales of infringing products. However, patentees have begun to advance a new and creative “worldwide causation” theory that would allow them to calculate damage based on sales everywhere. So long as some domestic infringement can be said to cause sales overseas, these patentees argue that there should be no territorial limitation on their recovery.

This Essay argues that the courts should reject this new theory on both doctrinal and policy grounds. As a purely statutory matter, permitting patentees to recover damages for sales that take place overseas would circumvent the explicit territorial limitations that are well established in U.S. patent law. This argument is reinforced by the presumption against the extraterritorial application of any U.S. law.

The worldwide causation theory of damages also makes bad international and domestic policy. Under the current international regime, each nation has its own patent system. This means that inventors must satisfy a country’s specific patent laws to obtain a patent, and navigate through its courts to obtain any remedy that the country sees fit to grant. The proposed worldwide causation theory would subvert this regime and allow United States patent law to trump laws in other countries. Of course other countries could also follow suit and exercise their own forms of “patent imperialism” thereby wreaking havoc with notions of territorial sovereignty in patent law. In addition to causing problems abroad, the worldwide causation theory provides troubling disincentives for U.S companies. Companies that locate key activities in the U.S. will be worse off than companies that offshore those activities. In sum, there are ample reasons to reject patent imperialism.
When I blogged on this case back in April, I wrote:
I'm still trying to decide for myself whether this theory makes sense, though I'm inclined to think it does.  On the one hand, but for the infringement, Marvell would have sought a license for its use in the U.S. of the patented methods, and arguably the amount of that license would have reflected Marvell's expected post-sales cycle benefits (even if those benefits themselves were attributable in part to foreign sales).  On the other hand, this might seem like a way to avoid the general rule that you can't recover damages for the infringement of a U.S. patent based on conduct that occurs abroad.  Perhaps the case demonstrates the artificiality of the rule against extraterritorial damages, but I'm not sure what we can do about that. 
Although I'm still somewhat on the fence, I'm now more inclined to think the amici and Professor Chao are right.  Perhaps the question a court should pose in a case like this one is not, what would a willing licensor and licensee have agreed to for the defendant's use of the patent, full stop,  but rather what would they have agreed to for uses that would result in sales or uses in the United States only?  Otherwise there may, as noted above, be a conflict with the nonextraterritoriality principle or an incentive to outsource activities that could result in liability for inadvertent infringement.  And perhaps there is no persuasive way to distinguish the case from the Federal Circuit's opinion in Power Integrations v. Fairchild Semiconductor Int'l Inc., as both the brief and the article argue.  Anyway, it will be interesting to see how the Federal Circuit rules in this one.

Monday, August 11, 2014

Hovenkamp and Cotter on Anticompetitive Injuntions

Erik Hovenkamp and I have posted a paper on ssrn titled Anticompetitive Injunctions, Unprotected Market Entry, and Diagonal Integration in Patent DisputesHere is the paper, and here is the abstract:
The current approach for determining when courts should award injunctions in patent disputes involves a myopic focus on the hardships an injunction might impose on the litigants and the public.  This article demonstrates, however, that courts sometimes could rely instead on a consideration far more relevant to the patent system's goal of promoting dynamic welfare:  the extent to which the right to exclude was actually a necessary quid pro quo for the plaintiff's decision to bring its products to market.  We begin with a discussion of a recent Federal Circuit decision, Trebro Mfg. Inc. v. FireFly Equipment, LLC, in which the court held that injunctive relief may be appropriate when a defendant infringes a patent that the plaintiff-competitor does not practice, and against which it lacked any legal protection when it entered the market in which the parties now compete.  We then present a simple economic model demonstrating that under these circumstances—which are increasingly common in industries with rich markets for secondhand patents, resulting in the formation of what we refer to as “diagonally integrated” nonpracticing entities—injunctive relief poses a threat to consumer welfare that is not offset by any plausible benefit to innovation.  The model’s implications extend to a range of topics at the core of contemporary patent policy debates, including patent privateering, FRAND-encumbered standard essential patents, and preemptive patenting.  In addition, we show that diagonally integrated NPEs are more likely to seek high licensing fees and aggressively seek injunctive relief than are conventional, “unintegrated” NPEs.