Federal Circuit Affirms Award of Provisional Damages, Reverses Finding of Willfulness

The case is Innovention Toys, LLC v. MGA Entertainment, Inc., available here.  The opinion, authored by Judge Taranto and joined by Judges Lourie and Plager, is nonprecedential but interesting nonetheless in part because there simply aren't many opinions addressing provisional damages (damages for the post-publication, pre-issuance unauthorized use of a patented invention).  The patent in suit is for a chess-like board game using laser beams, and methods for playing the game.  Innovention exhibited a protoype of the game (under the name "Deflexion") at a trade fair in 2005 and filed a patent application in February 2006.  The application was published in October 2006, after which Innovention made certain amendments to the claims.  The patent issued in September 2007.   Late in 2006, however, Innovention learned of an MGA game called "Laser Battle," and sent MGA a notice letter with a copy of the published application.  MGA did not respond, and after the patent issued Innovention filed suit.  A jury concluded that the invention was nonobvious and infringed, and awarded  $1,405,708 in lost profits damages and $167,455 in reasonable royalties for the pre-issuance period.  The district court then trebled the lost profits damages for willful infringement, and the defendants appealed.  On appeal, the Federal Circuit affirms the nonobviousness determination and then moves on to the damages questions.

Like many countries, the U.S. permits awards of reasonable royalties for the post-publication, pre-issuance use of a patented invention, subject to certain conditions.  In relevant part, section 154(d) of the U.S., Patent Act reads as follows:

(d) PROVISIONAL RIGHTS.—

(1) IN GENERAL.— In addition to other rights provided by this section, a patent shall include the right to obtain a reasonable royalty from any person who, during the period beginning on the date of publication of the application for such patent under section 122(b), or in the case of an international application filed under the treaty defined in section 351(a) designating the United States under Article 21(2)(a) of such treaty, the date of publication of the application, and ending on the date the patent is issued—

(A) (i) makes, uses, offers for sale, or sells in the United States the invention as claimed in the published patent application or imports such an invention into the United States; or

(ii) if the invention as claimed in the published patent application is a process, uses, offers for sale, or sells in the United States or imports into the United States products made by that process as claimed in the published patent application; and 

(B) had actual notice of the published patent application and, in a case in which the right arising under this paragraph is based upon an international application designating the United States that is published in a language other than English, had a translation of the international application into the English language.

(2) RIGHT BASED ON SUBSTANTIALLY IDENTICAL INVENTIONS.— The right under paragraph (1) to obtain a reasonable royalty shall not be available under this subsection unless the invention as claimed in the patent is substantially identical to the invention as claimed in the published patent application. . . .

The issue on appeal was whether the invention as claimed in the patent was "substantially identical" to the invention as  claimed in the published application. Affirming the district court, the Court of Appeals concluded that it was, stating (pp. 10-11):

“[C]laims are ‘identical’ to their original counterparts if they are ‘without substantive change.’” Laitram Corp. v. NEC Corp., 163 F.3d 1342, 1346 (Fed. Cir. 1998) (quoting Seattle Box Co. v. Indus. Crating & Packing, 731 F.2d 818, 827–28 (Fed. Cir. 1984)) (interpreting “substantially identical” in the reissue context, 35 U.S.C. § 252). “[I]n determining whether substantive changes have been made, we must discern whether the scope of the claims are identical, not merely whether different words are used.” Id. We review de novo the ultimate legal conclusion that claims are identical in scope, id., and the parties have not suggested that there are any material underlying factual findings here, see Teva Pharm. USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831, 835 (2015).

MGA primarily argues against such so-called “provisional rights” damages on the ground that, because “no published [application] claim required movable key pieces while all of the [issued] patent claims do, the published and issued claims as a matter of law differ in scope.” . . . We reject that argument. For example, claim 31 of the published application required players to take turns “to move playing pieces.” . . . The movability requirement in no way excludes “key” game pieces (playing pieces): claim 31 itself refers to the piece to be illuminated as “a key playing piece,” J.A. 5026; and the written description makes express that (the to-be-illuminated) game piece 30 “is the key game piece” and describes “the moves that are available to a particular game piece 30 . . . .” J.A. 5021–22. We agree with the district court that the movability of key pieces was already present in the claims of the published application.

MGA argues in the alternative that some of the claims were subject to broadening amendments through a change of the transitional phrase “consisting of” to “comprising.” . . . But those amendments do not stand in the way of pre-issuance damages in this case. At least some of the claims found to infringe here retain their original scope, and MGA has not contended that any of the infringing acts here infringed only the broadened claims. See Aqua-Aerobic Sys., Inc. v. Richards of Rockford, Inc., 835 F.2d 871, at *1 (Fed. Cir. 1987) (unpublished) (“[T]he number of valid claims infringed here has no bearing on damages.”). That is sufficient reason to reject MGA’s contention. We need not further explore the effect of the transitional-language change in particular claims.

On willfulness, however, the court reversed, finding that the defendants' nonobviousness defense was objectively reasonable.  Perhaps hedging its bet that the standard of review for this aspect of willfulness (which currently is de novo) might change (see previous posts on this issue here, here and  here), the court specifically states that "regardless of the standard of review, we conclude that the district court erred in deeming MGA’s obviousness defense objectively unreasonable" (p.12).  The court therefore reversed the damages enhancement and the award of attorneys' fees, though it remanded for consideration of whether attorneys' fees might be appropriate "without reliance on the new-reversed willfulness finding" (p.14). 

Patentable Subject Matter Symposium Tomorrow

Just a reminder, for readers in the Twin Cities area, that I will be speaking tomorrow at the Fourth Annual University of Minnesota Law School Patent Symposium, cosponsored by Briggs and Morgan P.A.  This free event takes place at the law school, 229 19th Avenue South in Minneapolis, and starts at 8:30 (continental breakfast at 8 a.m.).  This year's topic is "Patentable Subject Matter Post Alice Corp. v. CLS Bank." More information is available here.

Nestler Responds to Hellebrand on Rules of Thumb

In January 2015 and September 2014 I published posts relating to an ongoing debate in the German press between Anke Nestler and Ortwin Hellebrand regarding the appropriateness of using some sort of "rule of thumb" to determine the value of intellectual property rights.  In particular, I noted that Dr. Nestler "argues that a 25-33% division of expected profits from the use of a patent, converted into a running royalty based on a percentage of turnover, can be a useful guideline--not a hard and fast rule, as rejected in the Federal Circuit's 2011 Uniloc decision--taking into account all other relevant considerations such as the parties' preferences for risk-sharing, the expected contribution of other patents or trademarks to the product's profitability, and so on."  Mr. Hellebrand, by contrast, contends that "market-standard rates are more likely to accurately reflect the value of the technology, and to be more administrable in practice."  Dr. Nestler has now published a response to Mr. Hellebrand in the February 2015 issue of Mitteilungen der deutschen Patentanwälten (pp. 62-63), titled Ableitung von angemessenen Lizenzsätzen aus ökonomischer Perspektive?  Eine Replik auf Ortwin Hellebrand ("Derivation of Reasonable Royalties from an Economic Perspective?  A Reply to Ortwin Hellebrand").  The abstract reads (my translation from the German):

In a previous essay, Nestler addressed the derivation of licenses from an economic perspective.  Hellebrand took up and critiqued her observations.  With this reply, Nestler shows that Hellebrand's observations ostensibly concern a specific type of case (compensation for employee inventors), in which suitable licenses are present.  Nestler does not reject the use of comparable, market-standard licenses.  Her essay is intended for general cases in which there are no suitable comparable licenses.

Nestler argues that licenses that are appropriately comparable are often not available, and that the use of market-standard rates drawn from public sources can be misleading.

For a recent post on a French case that appears to apply a version of the 25% rule, see here.  

Info-Hold v. Muzak: Federal Circuit Reverses Judgment of No Royalties

The case in Info-Hold, Inc. v. Muzac LLC, available here.  Plaintiff Info-Hold is the owner of U.S. Patent No. 5,991,374, "directed to systems, apparatuses, and methods for playing music and messages (e.g., advertisements) through telephones and public speaker systems."  Info-Hold filed separate infringement actions against Applied Music Technologies Corp. (AMTC) and Muzak LLC in the same federal district court, and the same district judge considered both matters.  Following the district judge's claim construction, Info-Hold and AMTC stipulated to a judgment of noninfringement to enable Info-Hold to appeal.  In the Muzac case, the judge's construction of a different claim term resulted in a stipulation of noninfringement as to certain claims at issue.  As for the remaining claims, the judge entered judgment for Muzac on the grounds that (1) Info-Hold offered no admissible evidence of damages, and (2) there was no genuine issue of material fact regarding Muzac's liability for inducement.  

The appeals in both cases were argued the same day and the two opinions, both authored by Judge Reyna, issued today.  In AMTC, the court reverses the district judge's claim construction of the term "transmit" and remands.  In Muzac the court affirms the construction of “when a caller is placed on hold,” but reverses on the damages and inducement issues.  

The damages issue in particular is reminiscent of Judge Posner's decision in Motorola v. Apple, in which he concluded that neither party had presented sufficient evidence on damages, that neither was an entitled to an injunction either, and that there was no right to proceed to trial for merely nominal damages.  The Federal Circuit, in an opinion by Judge Reyna, reversed on that issue last year (see my post here), so it's not surprising that it would do so again in Muzac.  Here is the relevant language from Judge Reyna's opinion from today:

The district court did not abuse its discretion in striking [Info-Hold's expert] Mr. White’s expert report. The district court stated that Info-Hold’s reliance on the entire market value rule, without presenting evidence that the patented features drove customer demand, was “improper” and itself sufficient to strike Mr. White’s evidence. J.A. 92; cf. J.A. 85. Info-Hold has not appealed this basis for striking the report. Mr. White’s damages analysis was also deficient because he relied on the 25-percent rule, which this court discredited as “fundamentally flawed” in Uniloc. 632 F.3d at 1315 (deeming evidence relying on the 25-percent rule as inadmissible for failing to tie the royalty base to evidence in the case). We therefore affirm the striking of Mr. White’s evidence. . . .

In Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1328 (Fed. Cir. 2014), we explained that at “summary judgment . . . a judge may only award a zero royalty . . . if there is no genuine issue of material fact that zero is the only reasonable royalty.” Therefore, if there exists a factual issue regarding whether the patentee is due any non-zero royalty, the district court must deny summary judgment. Id. Where the patentee’s proof is weak, the court may award nominal damages. Id. Moreover, we explained that a patentee’s failure to show that its royalty estimate is correct is insufficient grounds for awarding a royalty of zero. Id. By extension, the exclusion of the patentee’s damages evidence is not sufficient to justify granting summary judgment. As we made clear in Dow Chemical Co. v. Mee Indus., Inc., 341 F.3d 1370, 1381 (Fed. Cir. 2003), 35 U.S.C. § 284 requires the district court to award damages “in an amount no less than a reasonable royalty” even if the plaintiff’s has no evidence to proffer. We explained that, in such a case, the district court should consider the Georgia-Pacific factors “in detail, and award such reasonable royalties as the record evidence will support.” Id. at 1382 (footnote omitted).

Here, as in Apple, the issue of infringement has not been decided. The district court granted summary judgment to Muzak on the issue of reasonable royalty damages because, after striking its expert’s report and precluding him from testifying, Info-Hold was unable to make a prima facie case as to any reasonable royalty rate. There was other record evidence which the district court could use as a basis for determining a reasonable royalty, even after the exclusion of Mr. White’s report and testimony. In his deposition, [defendant's expert] Mr. Paris affirmed that reasonable royalty rates for Muzak’s Encompass LE 2 and Encompass MV systems would be 1 and 2 percent, respectively. He also discussed the Trusonic License, the royalty paid to Mr. Hazenfield under his assignment of the patent to Info-Hold, the profitability of the accused systems, and more.

The Federal Rules of Civil Procedure allow the use of deposition testimony for any purpose allowed by the Federal Rules of Evidence. . . . Here, Muzak has not specifically objected to the admissibility of Mr. Paris’ deposition testimony. We leave to the district court to decide whether the deposition may be considered in determining the reasonable royalty rate. In any case, there is other record evidence to demonstrate the existence of a genuine issue of material fact as to whether zero is a reasonable royalty rate.

French Court Applies 25% Rule of Thumb, Multiplier to Arrive at 3% Royalty

The case is Vorwerk & Co. Interholding GmbH v. Electrodomesticos Taurus SL, TGI Paris, Sept. 26, 2014, PIBD 1018, 919.  The patent in suit is EP 0757530, titled Robot ménager comportant un bac á agitation et un mécanisme d'entrainement de l'agitateur du bac (a food processor comprising an agitator vessel and a mechanism for operating the agitator).  If I am understanding this correctly, the inventive feature in suit appears to be something called a chapeau de cuisson á la vapeur, which I would translate as "steaming cap."  Plaintiff Vorwerk sued defendant Taurus for selling allegedly infringing food processors.  In earlier proceedings the court held that the patent was infringed, and this judgment was affirmed.  The proceeding at issue was to set the amount of the plaintiff’s damages.

At the time the events at issue occurred, article 615-7 of the IP Code read as follows:

Pour fixer les dommages et intérêts, la juridiction prend en considération les consequences économiques négatives, dont le manque à gagner, subies par la partie lésée, les bénéfices réalisés par le contrefacteur et le préjudice moral cause au titulaire des droits du fait de l’atteinte. Toutefois, la juridiction peut, à titre d’alternative et sur demande de la partie lésée, allouer à titre de dommages et intérêts une somme forfaitaire qui ne peut être inférieure au montant des redevances ou droits qui auraient été dus si le contrefacteur avait demandé l’autorisation d’utiliser le droit auquel il a porté atteinte.

This can be translated as 

For assessing damages and interest, the court takes into account the negative economic consequences, including loss of profit, suffered by the injured party, the profits realized by the infringer and the moral prejudice caused to the rightholder by the infringement. However, the court may, alternatively, upon request by the injured party, award damages as a lump sum that shall not be less than the amount of royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed.

(Article 615-7 was amended in March 2014, for discussion of which see here.  The amendment is not applicable to this case.) 

Vorwerk itself did not practice the patent but rather licensed some affiliated firms to do so.  Vorwerk asserted as its damages its lost profit (manque á gagner), based on the royalties it would have earned from Taurus and Taurus's distributors if they had concluded a license.  Again if I am understanding correctly, Taurus argued that Vorwerk's failure to work the patent meant that Vorwerk was not entitled to recover any damages, but the court disagreed and concluded that the injury suffered by the patent owner would be, at a minimum, equal to the royalties it would have received but for the infringement.

As for the amount, the court appointed an expert who first determined the infringing turnover (la masse contrefaisante).  The expert determined that this should include (1) sales of a model called Mycook that included the steaming cap, and (2) sales of a model called Mycook Pro that did not include the cap, but for which the cap was separately purchased as an accessory.  Altogether this equaled €4,245,557.  The court accepted the expert's analysis.

Next, to calculate the royalty rate the expert first calculated the infringer’s profit margin as 9.6%. Vorwerk argued that the expert deducted some fixed costs that were not tied to the manufacture of the infringing goods, and that the profit margin was actually 22%, but again the court affirmed the expert’s calculation.  Next, the expert multiplied 9.6% by 25%, a step the court refers to in the opinion as “une clé de repartition couramment admise en matière de license de brevet” (a sharing method commonly used in patent licenses)--basically, what sounds like a "rule of thumb" to me.  Next, the expert cut this figure in half based on his conclusion that the patented invention did not play a key role in the sale of the defendant's products, and then rounded this up to 1.5%.  Finally, the expert suggested that the court could multiply the 1.5% rate by 1, 2, or 3.  Taurus for its part argued that the royalty base should be reduced to the average price of the steaming cap times the number of infringing devices, and that any enhancement would be punitive in nature.  The court disagreed, specifically stating as to the latter issue the following (in my translation):

It is appropriate to apply the principle of enhancing the contractual royalty rate, because doing so takes into account the damaging situation in which the rightholder finds itself, who suffers the exploitation of the invention without any decision on its part.  It would be, in such a case, unjust to apply purely and simply a royalty rate equal to that which the parties would have consented to had they negotiated a license.

(For further discussion of royalty multipliers in France, see my book p.270 & n.187). Multiplying the masse contrefaisante as calculated by the expert (€4,245,557) by 3%, the court therefore awarded €127,367 in lost royalties.

Some New Papers on PAEs and Antitrust, Part 2

1.  Michelle Miller and Janusz Ordover have published a paper in the January 2015 issue of CPI Antitrust Chronicle titled Intellectual Ventures v. Capital One: Can Antitrust Law and Economics Get Us Past the Trolls?  Here is a link to the paper, and here is the abstract:

Patent trolls are currently under intense scrutiny by lawmakers, regulators, academics, and industry players. The term “patent troll” generally refers to patent owners that do not make or sell products, and instead focus on licensing and litigation to monetize their acquired patents. These entities are also known as “patent assertion entities,” and in this paper, we use the terms interchangeably. Infringement suits brought by trolls have exploded over the last few years—in 2012 patent trolls accounted for 62 percent of all patent infringement suits, and recent studies estimate that trolls imposed direct costs of $29 billion in 2011. And these costs appear to be deterring investment in new businesses and technologies—one study estimated that venture capital funding was $8.1 billion lower over a five-year period than it would have been without PAE enforcement. 

Although most commentators have concluded that many patent troll business models lead to market inefficiencies, it is not clear what can be done in the short term to address the wide variety of concerns that troll activities raise. Various legislative solutions have been suggested and attempted, but these do not address the full scope of the problem. Attempts to bring antitrust claims against trolls also largely have failed, as in the case of Intellectual Ventures I LLC v. Capital One Financial Corp. Using the facts alleged by Capital One as a case study, we suggest that antitrust law can curb some of these abuses immediately, and we explore alternative approaches to the antitrust claims in that case that could lead to a different outcome in future litigation. In particular, we observe that, by concealing the scope of a large patent portfolio, a PAE can diminish incentives to design-around individual technologies within that portfolio, thereby reducing the viability of competing technologies in those individual technology markets.

2.  Expressing a different view are John "Jay" Jurata, Jr. and Amisha R. Patel in their paper  Taming the Trolls: Why Antitrust Is Not a Viable Solution for Stopping Patent Assertion Entities, 21 Geo. Mason L. Rev. 1251 (2014).  Here is a link to the paper, and here is the abstract:

Certain operating companies, including Google Inc., as well as consumer protection advocates, trade organizations, academics, and antitrust enforcement agencies, have suggested that antitrust law may offer a solution to concerns over PAE behavior. These arguments, taken together with the FTC’s continued interest in the effects of PAE assertion activity, beg the question: is antitrust enforcement a viable solution for patent assertion entities? Some have suggested yes. Proponents of antitrust enforcement solutions argue that PAE behavior raises antitrust policy concerns because it results in patent holdup, raised rivals’ costs, exclusion of companies from markets, and/or harms to innovation. But few specifics have been offered to back up these various theories.

This Article seeks to apply a disciplined antitrust analysis to these theories. This Article undertakes a traditional antitrust analysis under Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act to assess PAE conduct. The analysis examines whether the alleged harms associated with PAE behavior are harms to competition or the competitive process—a necessary element for antitrust liability. Ultimately, this Article concludes that, outside limited scenarios, antitrust laws are not a solution to the problematic aspects of PAE behavior.

3.   I should also mention that Florian Mueller has an interesting post on privateering over on the FOSS Patents Blog today.  Privateering is also the topic of the Maurits Dolmans paper I mentioned yesterday, as well as something that Erik Hovenkamp and I touch on in a recent paper.

4. Finally, not so much in the antitrust vein but relevant to the question of whether state anti-PAE laws are constitutional is Nick Vogel's comment titled Patently Preempted, 14 John Marshall Review of Intellectual Property Law 268 (2015).  Here is a link to the paper, and here is the abstract:

Small and medium size businesses often take advantage of the latest advancements in technology. Doing so, however, now seems to carry the risk of patent infringement. In 2012, so called patent trolls, also known as Non Practicing Entities, began sending letters to small and medium sized businesses demanding money in exchange for a license to use allegedly patented technology. Many saw the demands as an abuse of the patent system. In response, states have passed or are considering statutes that outlaw patent holders from delivering a bad faith notice of infringement. The State of Vermont was the first to address this issue. Vermont amended its consumer protection laws to outlaw “Bad faith assertions of patent infringement.” But how far can Vermont and other states go before being preempted by the federal government? This comment asks that very question. After analyzing the original intent of Congress, a theory of field preemption and the Constitutional right to petition the government, this comment concludes with the opinion that state-based laws meant to discourage Non Practicing Entities from sending bad faith cease and desist letters are preempted by the federal patent regime. Finally, this comment proposes that the best way to discourage Non Practicing Entities from harassing companies with frivolous law suits is to allow victorious defendants in patent infringement suits to collect damages from the losing plaintiffs.

For other papers discussing this issue, see my post here.

Some New Papers on PAEs and Antitrust, Part 1

1.  Alan Devlin has posted a paper titled Antitrust Limits on Targeted Patent Aggregation, Florida Law Review (forthcoming 2015).  Here is a link to the paper, and here is the abstract:

Patent-assertion entities, or “PAEs,” are non-technology-practicing companies that aggregate and license patents under threat of suit. Their activities have drawn fire, including Presidential condemnation, and spurred proposed legislation to protect operating firms against them. PAEs leverage flaws in the patent system to extort firms that independently invent and sell technological goods to consumers. Since PAEs tax innovation, and appear not to act not as a conduit for wealth transfer to original patentees but as bottlenecks, their worst rent-seeking practices almost certainly reduce net incentives to innovate, and harm consumers. This is all the more true if, as seems likely, the principal desirable incentive that PAEs create is to file patents rather than to commercialize technology.

The idiosyncratic nature of today’s patent system facilitates PAE activity. Patents’ numerosity, vague scope, widespread invalidity, and sometimes-functional claiming prevent even the most assiduous technology companies’ securing guaranteed clearing positions before building products. These conditions guarantee that, ex post, a universe of potentially infringed patents of dubious validity exists in many industries, especially in information technology. Fortunately, atomized ownership of this intellectual property limits enforcement ex post because the unlikelihood of success in asserting few patents, combined with the risk of countersuit and high litigation costs, make suing a losing value proposition. The result is a public-goods benefit in constrained enforcement that ameliorates hold-up potential. Even ex post, owners of disaggregated patents typically lack market power unless those IPRs are likely valid and infringed. 

PAE accumulation changes all of that. By amassing hundreds or even thousands of patents, never building or selling goods, using shell companies to conceal the contents of their portfolios, and asserting patents in waves ex post, PAEs can realize immense hold-up power. Crucially, this conclusion holds true even if the great majority of their patents are invalid or not infringed. This dynamic leaves many operating victims vulnerable to threats of incessant litigation, thus forcing them to part with tens or even hundreds of millions of dollars for licenses that they never needed to engineer successful products. Commentators increasingly — though do not universally — accept that PAEs harm the economy. The solution, though, is less clear. Many propose reforming the patent system, such as requiring losing patentees to pay the other side’s costs and forcing PAEs to disclose their portfolios. Some legislative reforms do appear likely, and the Supreme Court in 2014 will consider whether to invalidate certain computer-implemented inventions. Nevertheless, modest changes are unlikely to remedy PAE hold-up in all its forms.

Lacking other solutions, some policymakers now look to the antitrust laws. To be sure, not everyone believes that competition rules proscribe PAE conduct, or otherwise suitably constrain patent hold-up. Indeed, antitrust rules are not a cure-all. This Article argues, however, that antitrust law can viably limit PAEs’ abuse of the patent system. Section 2 of the Sherman Act proscribes willful monopolization, Section 7 of the Clayton Act prohibits asset acquisitions that tend substantially to eliminate competition or to create monopoly, and the patent-misuse doctrine neutralizes an asserted patent the owner of which has improperly broadened in scope with anticompetitive effect. These provisions have sufficient teeth to catch the most egregious forms of hold-up founded on ex post patent aggregation and assertion. This paper explains how PAE activity can reduce social welfare, and how PAEs’ targeted patent acquisitions and assertion against profitable goods can violate competition rules.

This one has actually been up on ssrn for a while, but I must have overlooked it, so thank you to my student Kyle Kroll for calling it to my attention.

2.  All right, so this is not a new paper (it came out last year), but it just recently came to my attention via Danny Sokol's Antitrust & Competition Policy Blog, which noted that the paper (the author which I had the pleasure of meeting last summer in Brussels) is the recipient of a 2015 Antitrust Writing Award.  The author is Maurits Dolmans and the paper is titled Privateers and Trolls Join the Global Patent Wars; Can Competition Authorities Disarm Them?, published in the April 2014 issue of Computerrecht 2014 (pages 80-88).  Here is a link to the paper, and here is the abstract:

Patents are supposed to foster innovation, but are now also used to block it. The system is turning against itself. If antitrust authorities and courts allow this to continue, these practices will spread. Those who foster privateering may become the victims of their own strategems, and the problem may infect other industries. It may well be some time before consumers see increased prices and reduced competition, but when they do, it will be even more difficult to redress the problem. Prevention is better than cure. Privateering can and should be addressed under Article 101 TFEU.

More to come tomorrow or later this week.

Ferguson and Schneider on Enforcement of IP Rights in Africa

Vanessa Ferguson and Marius Schneider have published a paper titled Enforcement of Intellectual Property Rights in Africa in the April 2015 issue of the Journal of Intellectual Property Law & Practice, pages 269-79.  Here is a link to the article, and here is the abstract:

This article provides an overview of enforcement measures that are available to intellectual property right-holders on the African continent. Africa is rising—with comparatively high growth rates and a rising number of consumers—and so is the anti-counterfeiting challenge. There are, however, particularities when it comes to enforcing intellectual property rights in Africa which right-holders and practitioners will have to take into account.

The article examines the law and practice in relation to enforcement of intellectual property rights in the following countries and territories: Morocco, Algeria, Egypt, the African Intellectual Property Organization (OAPI), Nigeria, Ghana, Tanzania, Kenya, Uganda, Mauritius and South Africa.

The authors conclude that the enforcement of intellectual property rights in Africa remains a very complex issue, due to the absence of harmonisation of standards and procedures in relation to anti-counterfeiting measures. However, thanks to the efforts and the goodwill of right-holders, practitioners and law enforcement authorities, steady progress is being made when it comes to successful enforcement of intellectual property rights in Africa. 

Although most of the article focuses on measures against counterfeiting, there is also some discussion of border measures, preliminary measures, and civil and criminal penalties for infringement of IP rights generally, including under the Bangui Agreement to which the 17 OAPI states are members.

Drafting Around the Entire Market Value Rule?

Over at the Patent Damages blog, Chris Marchese published an interesting post a few weeks back titled Damages base--is the name of the game the claim?  Here's the set-up.  Under Federal Circuit precedent, the “entire market value” may serve as a royalty base only when “the patented feature drives the demand for an entire multi-component product,” and as a general rule the correct base is the “smallest salable patent-practicing unit.” LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) (quoting Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283 (N.D.N.Y. 2009)).  However, as the court further clarified in Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014), "the requirement that a patentee identify damages associated with the smallest salable patent-practicing unit is simply a step toward meeting the requirement of apportionment. Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature . . . the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. To hold otherwise would permit the entire market value exception to swallow the rule of apportionment. . . ."  Moreover, as explained in the even-more recent case of  Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014), the entire market value rule (EMVR) "actually has two parts, which are different in character."  The first is a "substantive legal rule" that the "the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more. . . .  When the accused infringing products have both patented and unpatented features, measuring this value requires a determination of the value added by such features."  The second is an evidentiary principle, "applicable specifically to the choice of a royalty base," that "where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product."  Once the jury hears that the defendant earned $1 billion from sales of an infringing product, in other words, it may be difficult for it to avoid awarding an inappropriately large royalty; as the court puts it, the large number may "skew the damages horizon for the jury."  (So does that mean that use of the entire value of the end product as a royalty base is all right in a bench trial, as long as the value of the infringing component is properly apportioned?  That would seem to follow, I think.)

Anyway, suppose an inventor invents component ABC, and that ABC serves as a small component in a larger, multicomponent product such as a smartphone.  Would the inventor be well-advised to include at least one dependent claim comprising "ABC incorporated into a smartphone"?  In a case in which a defendant infringes by incorporating ABC into a smartphone, could the inventor then assert that, with respect to the infringement of the dependent claim, the "smallest salable patent-practicing unit" is ABC plus smartphone?  Sure, the inventor would have to apportion the value of the patented feature further, under VirnetX.  But now the jury has heard the entire market value of the end product, which is what the EMVR is supposed to prevent.

According to Mr. Marchese, the case law thus far is not very clear on this issue.  But perhaps it wouldn't be surprising if patent owners started to include claims like the hypothetical dependent claim above, just in case it could come in handy later on in the event of litigation.  Indeed, in Ericsson the Federal Circuit was willing to allow the jury to hear about comparable licenses that use the EMVR as the royalty base as long as the court, on request, gives an appropriate cautionary instruction.

Assuming we don't want the jury to hear that number, however, perhaps a way around the problem would be to recast the EMVR as requiring the identification not of the smallest salable patent-practicing unit, but rather the smallest salable unit that incorporates the inventive principle or "point of novelty."  In the above hypo, this would mean that "smartphone + ABC" is not the appropriate base, but rather the smallest component of the smartphone that practices ABC (the inventive feature).  But then we would be inviting disputes over what the inventive feature is.  This introduces yet another complexity, and might be particularly hard to pin down in a case in which the inventive feature is a novel and nonobvious combination of preexisting features.

Alternatively, perhaps judges simply could be required to apply the "smallest salable unit" rule as long as the infringing product infringes the broader, independent claim (ABC), even if it also infringes the narrower dependent claim (ABC + smartphone).

If neither of these options work, however, are we stuck with a potential way to draft around the EMVR?  Does it really matter, or should we be less suspicious of juries' ability to understand the principle of apportionment?  Presumably the issue is much less pressing in other countries, where jury trials in patent cases are nonexistent . . . .    

Patentable Subject Matter Symposium

This is a bit off the topic of patent remedies, but I will be speaking at the Fourth Annual University of Minnesota Law School Patent Symposium, cosponsored by Briggs and Morgan P.A., on Wednesday, April 29 in Minneapolis.  This year's topic is "Patentable Subject Matter Post Alice Corp. v. CLS Bank." Attendance is free and CLE credit has been applied for.  More information is available here.

Some New Papers on FRAND, SEPs, and Related Issues

1.  Denis Borges Barbosa has posted a paper on ssrn titled Patents, Technical Standards and Frand License Offerings Under Brazilian Law.  Here is a link to the paper, and here is the abstract:

The matter of RAND or FRAND licences in connection to patents deemed to be essential to the establishment of some technical standards, and subject to the rules of some Standard Setting Organizations (SSO) is a much discussed legal issue. At this moment this theme is reviewed by the courts of a number of different jurisdictions. As it also concerns some legal actions under course in Brazil, this study covers the aspects of local law that might be pertinent to such an issue. 

2.  Ben Jonson has published a paper titled Public Standards and Patent Damages, 14 John Marshall Review of Intellectual Property Law 199 (2015).  Here is a link to the paper, and here is the abstract:

Some markets require legislation in order to exist. The products and/or services offered by those markets may be covered by one or more letters patent. In certain of those markets, a situation arises in which a private party owns a right to exclude others from participating in that publicly-enabled market. These situations may be referred to “public standards.” Like their cousins in the private sector, public standards require special consideration when it comes to determining potential compensation to the patentee from its competitors. Following the lead of the Western District of Washington, this paper recommends a modification of the traditional Georgia-Pacific reasonable royalty formulation for a patent damages calculation. Specifically, this paper recommends that calculating damages for public standard patents should require an explicit, thorough consideration of the public interest in addition to the patents themselves and the relationship of the involved parties. Only then will the interests of the public be adequately protected.

3. Björn Lundkvist has posted a paper titled Competition Law as the Limit to Standard-Setting (forthcoming in Josef Drexl and Fabiana Di Porto (eds.), "Competition Law as Regulation," Edward Elgar, 2015).  Here is a link to the paper, and here is the abstract:

The aim of this paper is to provide an analysis of the application of EU competition law to standard-setting, by looking at case law under both Articles 101 and 102 TFEU. I will try to show that there is, and should be, a difference in competition law treatment of standards and standard-setting conduct depending on whether the market exposed to the standard is plagued with network effects or not. For markets with network effects, collaboration to create standards is benign, even pro-competitive, while access to such standards, if covered by intellectual property rights, may, in exceptional circumstances, be granted under competition law. On the other hand, agreements to decide standards for markets which do not display network effects should benefit from a heightened antitrust scrutiny, because these standard agreements may cause exclusionary anticompetitive effects. 

The last part of the paper devotes some attention to the Motorola and Samsung FRAND matters in the E.U., as well as the U.S. Federal Trade Commission's Google settlement order.

New Edited Volume on Compulsory Licensing

Reto M. Hilty and Kung-Chung Liu have published a new edited volume titled Compulsory Licensing: Practical Experiences and Ways Forward (MPI Studies on Intellectual Property and Competition Law, Springer-Verlag 2015).  Here is a link to the webpage and table of contents.  (Professor Hilty spoke about compulsory licensing at the conference on IP and the Public Domain at the University of Bayreuth that I attended this past February, and I am happy that our library has now acquired a copy of the new book.)  The book's chapters are divided among three parts:  Practice Across Jurisdictions (which includes the chapter by Philip Maume on compulsory licensing in Germany, which I mentioned here); The Operation of Compulsory Licensing Regimes; and Doctrinal Discussions.  A chapter by Ichiro Nakayama and Yoshiyuki Tamura titled Denial of Injunctive Relief on Grounds of Equity:  Situation in the U.S. and Japan discusses the application of the abuse of right doctrine in the Samsung/Apple matter last year (see also my blog post here).  The authors conclude nonetheless that in most instances Japanese courts grant the prevailing patent owner an injunction almost automatically, though there are a couple of copyright cases that have denied injunctions in exceptional circumstances (and the authors appear sympathetic to the idea of conferring greater discretion upon the courts to deny injunctions in appropriate cases).  Even so, they conclude, "the prospects regarding the adoption of the eBay doctrine do not look very promising."

Yesterday's Ninth Circuit Oral Argument in Microsoft v. Motorola

I'm just passing this along from the Essential Patents Blog--I have not yet listened to the argument myself, but I imagine there are a lot of readers who will want to do so.  Tuesday's Essential Patents Blog provides a detailed pre- oral argument discussion of the issues on appeal.

Update:  I see that Florian Mueller also a write-up and a link to the oral argument video over at FOSS Patents.  

Hayman Capital: A Hedge Fund That Challenges Patent Validity

This article in today's Wall Street Journal is not directly relevant to the subject of patent remedies, but I thought it was pretty interesting and that readers of this blog might find it interesting too.  A hedge fund called Hayman Capital petitions for inter partes review (IPR) of certain drug patents while shorting the patent owner's stock (betting the price will go down).  (IPRs, a creation of the America Invents Act, are a means for challenging the validity of issued patents within the USPTO.)  An article in today's Bloomberg BNA Patent, Trademark & Copyright Law Daily (available here, but behind a paywall) discusses one Hayman-instituted challenge in particular.   Although the CEO of one of the firms asserts that IPRs have created "reverse patent trolls," I'm inclined to think that if the challenged patents are subject to invalidation, the fund is serving the public interest in challenging them; but I need to give the matter some more thought.   I wonder if there are any other firms like this, in the U.S. or elsewhere?

Federal Circuit Affirms in Part, Reverses in Part $76 Million Award Against Apotex

Last year Norman Siebrasse and I blogged about the district court's opinion in this case (here and here), and we also have written about it in our forthcoming article on reasonable royalties.  Here is our brief statement of the facts from that article:

Astrazeneca (Astra) owned a patent on the compound omeprazole, which it marketed as a gastrointestinal drug under the brand name Prilosec. This patent expired in 2001. Astra also owned two patents pertaining to a specific formulation of omeprazole. These patents expired in 2007. Between 2001 and 2007, therefore, generic drug companies could market omeprazole only if they avoided using Astra’s patented formulation. The first such company to do, KUDCo, began marketing a noninfringing omeprazole product in 2002 using its own patented formulation. The following year three other companies (Mylan, Lek, and Apotex) produced generic omeprazole “at risk,” that is, before any court had determined whether their formulations infringed. In 2007, a court ruled that Mylan’s and Lek’s formulations did not infringe but that Apotex’s did.The question before the court in 2013 was therefore the amount of damages that Apotex owed Astra, based on a hypothetical negotiation just prior to the date on which Apotex began infringing in November 2003.

This morning the Federal Circuit mostly affirmed the district court's damages award--$76 million not including prejudgment interest, based on 50% of Apotex's profits over the relevant period of time--in favor of Astra (opinion here), with the exception of damages that were awarded for a two-month period after which Astra's patents had expired but during which it enjoyed an additional six-month period of exclusivity under FDA law for having agreed to participate in pediatric studies.  (The FDA revoked Apotex's ANDA after the district court found that Apotex had infringed, but there was a two-month period before that revocation when Apotex made sales that invaded Astra's post-patent-expiration pediatric exclusivity period.  The district court included these sales in its calculation of patent damages, but the Federal Circuit held that since these sales did not infringe Astra's patents, because the patents had expired, it was error to include them as part of Astra's patent damages.  If I'm understanding this correctly, this is no remedy for these sales.  The principal portion of Judge Bryson's opinion, however, affirms the district court and is what I shall address below.)

Apotex's first challenge to the damages award was that it overcompensated Astra because it "(1) improperly discounted evidence that by November 2003 the market for omeprazole was 'well on its way to full genericization'; (2) placed undue emphasis on Astra’s ability to keep Apotex temporarily off the market by refusing to grant a license; and (3) gave 'short shrift to contemporaneous licensing agreements that Astra entered with other companies' for royalty rates lower than 50 percent" (p.12).  Not surprisingly, perhaps, given that the standard for reviewing the district court's evaluation of the evidence is clear error, the court affirms Judge Cote's evaluation of the assumptions under which a willing licensor and licensee would have bargained for a license as of November 2003.  

The theoretically interesting issue here, as Professor Siebrasse and I note in our article, is whether the value of that license should be based on the existence of noninfringing alternatives that existed as of November 2003 (KUDCo's, Mylan's, and Lek's  formulations), even though the latter two of those formulations were not yet adjudicated to be noninfringing.  As we discuss in the article, the theoretical question is whether the hypothetical ex ante bargain must be based only on evidence that itself was available ex ante, or on facts such as the existence of a noninfringing alternative that only becomes known ex post.  We argue for the latter, but Judge Bryson appears to disagree, stating that because the Lek and Mylan formulations "were not found to be non-infringing until 2007, [they] would not have been considered as non-infringing alternatives in November 2003" (p.26).  Nevertheless, Apotex also failed to convince Judge Cote that it could have used KUDCo's formulation without infringing KUDCo's patents (pp. 26-27); Judge Cote found that Apotex wouldn't have been able easily to copy the Mylan or Lek formulations (see pages 61-62 of her opinion, here); and Judge Bryson credits Judge Cote's finding that Apotex would have faced substantial technical and regulatory hurdles in trying to market a noninfringing alternative as of November 2003 (pp. 15-16). So perhaps one could argue that the statements about whether the alternative formulations could be considered, even though they were not yet recognized as noninfringing in 2003, are not dispositive.

The court also concluded that Judge Cote properly considered and "fairly weighed" certain licenses Astra had entered into, even though some were in settlement of litigation; "there is no per se rule barring settlements simply because they arise from litigation," and here the two settlement agreements in question had both been made after a finding of infringement, a setting "similar to the setting of a hypothetical negotiation" (p.18).  (Query, though, whether such a settlement also might reflect the infringer's sunk costs . . .  Nevertheless, given the deference due the district court's factfinding and the fact that this was a bench trial, the affirmance on this issue does not strike me as surprising.)

Apotex's second challenge was that "the district court improperly based its damages calculation on the value of the omeprazole product as a whole," even though the patents on the active ingredient had expired; rather, the court "should have calculated damages by apportioning the relative contribution of value between the active ingredient and the 'inventive element' of the patents" (p.20).  The court rebuffs this challenge too, however:

A threshold question arose below regarding the applicability of the entire market value rule in this case. As an initial matter, the district court noted that “there is little reason to import [the entire market value] rule for multi-component products like machines into the generic pharmaceutical context.” While we do not hold that the entire market value rule is per se inapplicable in the pharmaceutical context, we concur with the district court that the rule is inapplicable to the present case. . . .

While the entire market value rule does not apply to this case, the damages determination nonetheless requires a related inquiry. When a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone. . . .

Several of the factors set forth in the Georgia-Pacific case bear directly on this issue. Georgia-Pacific factors nine and ten refer to “the utility and advantages of the patent property over any old modes or devices that had been used” and “the nature of the patented invention, its character in the commercial embodiment owned and produced by the licensor, and the benefits to those who used it,” respectively. Factor thirteen, which refers to the “portion of the realizable profit that should be credited to the invention,” embodies the same principle. Thus, the standard Georgia-Pacific reasonable royalty analysis takes account of the importance of the inventive contribution in determining the royalty rate that would have emerged from the hypothetical negotiation. However, while it is important to guard against compensation formore than the added value attributable to an invention, it is improper to assume that a conventional element cannot be rendered more valuable by its use in combination with an invention. . . .

It is not the case that the value of all conventional elements must be subtracted from the value of the patented invention as a whole when assessing damages. For a patent that combines “old elements,” removing the value of all of those elements would mean that nothing would remain. In such cases, the question is how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone (pp. 21-23).

Applying that standard here:

The "district court did not clearly err in concluding that the subcoating is so important to the viability of the commercial omeprazole product that it was substantially responsible for the value of the product. . . By inventing a structure in which a subcoating separates the drug core, and thus the ARCs, from the enteric coating, and finding the right subcoating material, Astra was able to achieve both storage stability and acid resistance. That combination of features made it possible for drug manufacturers to commercialize omeprazole.

Astra’s formulation thus created a new, commercially viable omeprazole drug. That product was previously unknown in the art and was novel in its own right. Accordingly, the district court permissibly found no reason to exclude the value of the active ingredient when calculating damages in this case.

Fordham IP Conference, PatCon V Later This Week

. . . and I wish I were able to attend, but unfortunately I am not able to get away this week.  Here is a link to the Fordham conference program, which kicks off tomorrow in Cambridge, England, and features among other items a Thursday session titled "FRAND Royalties and Injunctions in the U.S. and E.U."  The session is moderated by Professor Daryl Lim and includes a talk by David Por and a panel consisting of James Aitken, Christian Harmsen, Paul Lugard, Hon. Ryuichi Shitara (Chief Judge of the IP High Court in Tokyo), and Professor Danny Sokol.  And here is a link to the PatCon V conference, which takes place Friday and Saturday at the University of Kansas School of Law.  Norman Siebrasse will be presenting a paper he and I are working on titled Standard Value Holdup.  Other remedies-related papers will be presented by Christopher Seaman, Ryan Holte, Ralph Clifford, and Chung-Lun Shen.  Should be a terrific conference.

News from Australia on Preliminary Injunctions, False Patent Marking

1. Andrew Mullane, Craig Humphris and Todd Shand have published Interlocutory injunction applications in Australia in 10 Journal of Intellectual Property Law and Practice 170 (2015), available here.  Here is the abstract:

In Australia, patentees can apply to the court for an interlocutory injunction to prevent a competitor entering the market before the court finally determines whether the patentee's rights would be infringed. An interlocutory injunction will be awarded if (a) the patentee has a prima facie infringement case and (b) the balance of convenience favours the injunction. In practice, unless the infringement case is particularly weak, or the invalidity case almost irresistible, a prima facie case will invariably be established. As a consequence, most interlocutory injunction applications are decided on the balance of convenience.

Assessing the balance of convenience entails a complex task of weighing all the surrounding factors to determine whether granting the interlocutory injunction is in the interests of justice. While the relevant circumstances are specific to each case, a number of common factors arise in most interlocutory injunction applications, such as the extent and nature of the parties' respective potential loss, the patentee's prospects of establishing infringement and the respondent's awareness of the patentee's rights before it sought to enter the market. When contesting an interlocutory injunction application, a party's litigation strategy must pay close regard to these factors to maximise their prospects of success.

A review of recent patent interlocutory injunction applications shows that a high proportion of interlocutory injunctions are granted. This is primarily a function of the test applied by the court. It appears that a respondent must establish that there are exceptional circumstances in order to avoid the grant of an interlocutory injunction.

I found this article to be something of an eye-opener.  In my book (p.178), I cite an article by Charles Lawson, The interlocutory injunction dilemma in patent infringement and invalidity disputes, 21 AIPJ 73 (2010), which argues that Australian courts in recent years have become more lenient toward patent plaintiffs.  The above article would appear consistent with this thesis (though we are dealing with a relatively small sample).  According to Mullane et al., "The court will grant an interlocutory injunction against a respondent if it is satisfied that: (a) the patentee has a prima facie infringement case and (b) the balance of convenience lies with granting the injunction" (p.171).  Thus, although some decisions had required the plaintiff to show irreparable harm, "Samsung Electronics Co Ltd v Apple Inc clarified the test by confirming that the risk of the patentee suffering irreparable harm forms part of the balance of convenience enquiry, rather than being its own separate facet" (id.).  (I would note, however, that the November 30, 2011 Samsung case is an intermediate appellate decision, not a decision of the Australian High Court.)  The authors further assert that "unless the infringement case is particularly weak, or the invalidity case is almost irresistible, the court will simply acknowledge that both positions are arguable, and find that the patentee has established a prima facie case. It is consequently rare for the court to find that a patentee has not established a prima facie case, and most applications are decided on the balance of convenience" (id.).  Most importantly:

Generally speaking, patentees have enjoyed a high degree of success in seeking interlocutory injunctions. Annex 1 summarises the interlocutory injunction applications relating to patent rights which have been decided since 2009. In that time, 18 cases have come before the court, with 13 being granted and five being refused (where a first instance decision was appealed, the first instance decision has been excluded from this calculation).

2.  Johnathon E. Liddicoat and Dianne Nicol published a paper in 2013 that only recently has come to my attention, titled Re-evaluating False Patent Marking in Australia, 22 Journal of Law, Information and Science 128 (2013).  Here is a link to the paper, and here is the abstract:

False patent marking has come to prominence in intellectual property circles due to a recent boom and bust cycle of litigation in the US. This article examines this cycle and its ancient roots from an Australian perspective. In the absence of false patent marking data in Australia, this article uses the causative legal mechanisms of the US cycle to conduct a natural experiment on Australian false patent marking provisions. This natural experiment gives insight into the likely prevalence and potential effects of false patent marking in Australia.

Consideration is also given to the harms created by false patent marking. Previous analyses discussed in this article posit that false patent marking negatively affects competitive markets and consumers. However, it is argued that from a realistic commercialisation and consumer perspective, these harms may be exaggerated.

An analysis of the utility of Australian false patent marking laws is also undertaken, based on the evidence at hand and comparative legal reasoning. This analysis indicates that deficiencies in Australia’s false patent marking provisions do exist. A call is made for further empirical research into the incidence and effects of false patent marking in Australia; it is possible that costs created by false patent marking are not being recognised. However, since no empirical or recent anecdotal data indicates false patent marking presents a serious issue, and Australian provisions comply with basal aspects of what has been described as an ‘optimal’ enforcement system, no major reforms are suggested at this stage. Minor amendments are recommended to simplify the enforcement of the current provisions and improve trust in the patent system. It is further recommended that a watching brief is kept on this area of patent practice.