Federal Circuit Upholds Disgorgement Rule for Design Patent Infringement

In an opinion handed down yesterday, Nordock, Inc. v. Systems Inc., the U.S. Court of Appeals for the Federal Circuit affirmed a judgment of infringement and validity of a design patent, but vacated a  jury award of $46,825 in reasonable royalty damages and remanded for a new trial on damages.  I'll focus on the damages issues.

The design patent in suit "claims the ornamental design of a lip and hinge plate for a dock leveler" (p.2).  As the court notes (pp. 11-12):

In the case of design patent infringement, a patentee can recover damages under § 284 or under 35 U.S.C. § 289, which is entitled “[a]dditional remedy for infringement of design patent.” See Catalina Lighting, Inc. v. Lamps Plus, Inc., 295 F.3d 1277, 1290 (Fed. Cir. 2002). Section 289 provides as follows: 

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties. 

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.

35 U.S.C. § 289. Therefore, the plain language of the statute permits design patentees to claim either $250 or the infringer’s “total profit” on sales of “any article of manufacture” to which the patented design was applied.

We have recognized that where, as here, “only a design patent is at issue, a patentee may not recover both infringer profits and additional damages under http://comparativepatentremedies.blogspot.com/2015/05/federal-circuit-affirms-damages-awards.html4.” Catalina Lighting, 295 F.3d at 1291 . . . . ; see also Robert Bosch, LLC v. Pylon Mfg. Corp., 719 F.3d 1305, 1310 n.1 (Fed. Cir. 2013) (en banc) (“An infringer’s profits are, of course, no longer an available remedy for the infringement of a utility patent. See 35 U.S.C. § 284. Such profits, however, remain available in cases of design patent infringement. See 35 U.S.C. § 289.”); Signode Corp. v. Weld-Loc Sys., Inc., 700 F.2d 1108, 1113 n.6 (7th Cir. 1983) (“An infringer of a design patent is liable to the patent owner to the extent of his total profit or $250, whichever is greater, under 35 U.S.C. § 289.”). Accordingly, a design patentee can recover either (1) total profits from the infringer’s sales under § 289, or (2) damages in the form of the patentee’s lost profits or a reasonable royalty under § 284, or (3) $250 in statutory damages under § 289, whichever is greater. See Catalina Lighting, 295 F.3d at 1291. 

The district judge instructed the jury that "If you find infringement, and do not find the ’754 Design Patent is invalid, you are to award Nordock Systems’ total profit attributable to the infringement. Systems’ “total profit” means the entire profit on the sale of the article to which the patented design is applied, or with which it is used and not just the portion of profit attributable to the design or ornamental aspects of the patent" (p.12).  The jury came back with a reasonable royalty award of $46,825, and "found that Systems' profits were $0" (p.12).  The district judge denied a motion for new trial.

On appeal, the Federal Circuit vacates, stating that the district court's decision "was erroneous because it relied upon [defense expert] Bero's so-called 'cost savings methodology.'"  More specifically, Bero had testified that an appropriate award of profits would be the profit "Systems earned on its lip and hinge plate ornamental design. And the cost savings that Systems received as a result of using that design are something again less than $15 per unit. So on that lip and hinge plate design the profitability attributable that Systems earned—this is defendant’s profits—was something less than $15 per unit. It’s the same number as the royalty damages. It’s actually less than that" (pp. 13-14).  The problem is that Bero is right as a matter of economics but wrong as a matter of the Federal Circuit's interpretation of § 289, under which the infringer of a design patent can be required to pay the entire profit earned from the sale of the infringing article (as the Federal Circuit recently held in Apple v. Samsung, see blog post here).  

From an economic standpoint, of course, the rule that the court applies is stark raving mad:  there is no principled reason why the infringer of a design patent (or any IP right) should be required to disgorge the entire profit earned from sales of an infringing article, unless all of those profits are actually attributable to the infringing subject matter.  But such is the state of current U.S. design patent damages law:  even when the patented design accounts for only a portion of the defendant's profit on the sale of an article of manufacture, the defendant is required to disgorge the entire profit.  There is no allocation or apportionment.  To be fair, the Federal Circuit's interpretation of § 289 is one possible reading of the statute (though not necessarily the only one), and the court is following its own precedent in this regard.  But I really do hope that someday Congress considers correcting the statute to avoid what I predict is going to be an increasingly problematic remedy in years to come, as the number of design patents increases.  

In addition, the court held that "the manifest weight of the evidence shows that Systems' profits were over $600,000 for its infringing LHP/LHD levelers," so the verdict must be vacated and remanded for calculation of the infringer's profit.  Finally, the court held that the district court erred "[t]o the extent [it] believed that the jury could simply choose between awarding damages under § 284 or § 289 . . . . Only where § 289 damages are not sought, or are less than would be recoverable under § 284, is an award of § 284 damages appropriate. " (pp. 20-21).  So on remand it looks like Nordock will be entitled to a § 289 recovery in excess of $600,000.  Oy vey.

Does the E.C. Enforcement Directive Permit Supracompensatory Damages?

Interesting post on IPKat today on three cases now pending before the Court of Justice for the European Union on the subject of supracompensatory damages for the infringement of IP rights.  I have previously blogged on the first of them (see here), Case C-481/14 (Jørn Hansson), which was referred by the Oberlandesgericht Düsseldorf and involves Community Plant Variety Rights.  The other two, Case No. C-99/15 (Liffers) and Case No. C-367/15 (Stowarzyszenie Oławska Telewizja Kablowa) involve copyright matters and I was not previously aware of them.  No hearing dates or opinions are scheduled yet in any of these, so it could be quite a while before the court issues any judgments.  For general discussion of enhanced or punitive damages for IP infringement in my book, see pp. 72-73, 275-76.

Empirical Studies of Patent Remedies

Professor John Golden and I have recently completed a draft of a chapter titled Empirical Studies Relating to Patents—Remedies, which will be published in volume 2 of Research Handbook on the Economics of Intellectual Property Law (Peter Menell, David Schwartz & Ben Depoorter eds., Edward Elgar Publishing, forthcoming 2016).  Here is a link to the paper, and here is the abstract:

This chapter from the forthcoming Research Handbook on the Economics of Intellectual Property Law surveys the empirical literature on patent remedies. Part I discusses the literature on injunctions, beginning with an overview of legal doctrine and economic debates over “property rules” versus “liability rules,” and concluding with a summary of empirical studies that examine the frequency and circumstances of injunction grants or the nature of injunctions’ content and scope. Part II discusses the literature on patent damages, beginning with an overview of the law and economics of damages before proceeding to a review of the empirical literature on the prevalence of different types of damages, damages amounts, and possible explanations for damages outcomes. Part III briefly discusses other remedies, including declaratory judgments, for which there appears to be little relevant empirical literature. The Conclusion suggests possible avenues for future research.

We would appreciate comments and criticism, or citations to any relevant studies we may have overlooked.

Why Switching Costs Are Irrelevant to Patent Holdup

Today's post is jointly authored by Norman Siebrasse and Thomas Cotter.

Over the past several months, the two of us have been working on a paper titled The Value of the Standard, which proposes a new theoretical framework for calculating FRAND royalties.  In the course of working on the paper, we’ve noticed that, in the standards context, the terms “sunk costs” and “switching costs” are often used more or less interchangeably as phenomena that give rise to patent holdup. This is a bit odd. In the general economic literature on holdup, “sunk costs” refers to transaction-specific investments that have been made by one of the parties. Holdup occurs when the other party tries to charge a higher price than it would have been able to before those sunk costs were incurred. In this sense, sunk costs were necessarily incurred in the past; a party cannot be held up for costs that it has not yet incurred. “Switching costs” on the other hand, imply costs that would take place in the future, to switch to an alternative, non-standard technology. For example, consider the statement that “If the patented technology is adopted after the standard issues and the adopting firm and consumers make investments that are specific to the standard, the cost of switching to the alternative technology is prohibitively expensive” (Gilbert, Deal or No Deal, 77 Antitrust LJ 855, 862 (2011)).* The first phrase of this sentence clearly refers to sunk costs – which is to say, transaction-specific investments – while the second phrase refers to the cost of switching to the alternative technology, which is evidently a future cost. We therefore thought it might be useful to analyze, as precisely as possible, the relationship between sunk costs and switching costs in order to better evaluate the extent to which the royalty that an implementer might agree to ex post under the threat of an injunction will exceed the value of the patented technology over the best alternative.

Our basic point is that switching costs as such – the ex post cost of implementing the alternative – are not in themselves relevant, even though in the standards context they can be very high. The amount that is subject to holdup is sunk costs plus the opportunity cost of selecting the infringing technology over a noninfringing alternative. Moreover, while our discussion was prompted by the standards context, both sunk costs and switching costs arise outside that context as well, and accordingly our discussion is general.

We will define Technology 1 as the technology which is in fact initially adopted, and Technology 2 as the next best available technology. The revenue from a technology is R and the cost of implementing the technology is C. Costs and revenues may change after Technology 1 is adopted. This will be indicated by the subscript “A” for ex ante costs / revenues and “P” for ex post costs / revenues. We will assume all expectations are accurate; changes in revenues and costs after Technology 1 is adopted are real changes, not due to new information. Because Technology 1 is actually adopted and expectations are accurate, it follows that:

R_1A = R_1P = R₁

In general both the cost and revenue associated with Technology 2 may change ex post. For example, in the standards context, the expected revenue from Technology 2 conditional on its having been initially adopted as the standard might have been very high, but very low or even zero if in fact a particular implementer adopts it only after 1 has become the standard. It seems very unlikely that the expected revenue from 2 would go up ex post, so in general

R_2A ≥ R_2P

However, our analysis is not affected if R_2A < R_2P.

In general, the cost of implementing Technology 2 might go up or down. The cost of implementing Technologies 1 and 2 might include some costs that are common to both, such as training personnel in a general field of technology, which would need to be incurred to implement Technology 2 on its own, but do not need to be incurred a second time if Technology 2 is adopted after Technology 1 is first adopted, in which case C_2P < C_2A. On the other hand, complementary components might have been designed in light of 1, and redesigning them to function with 2 might be more expensive than it would have been to design them to function with 2 in the first place, in which case C_2P > C_2A. Further, in cases where the costs and revenues associated with the best alternative change, it is possible that one technology is the best alternative ex ante and a different technology is best ex post. The term Technology 2 refers to the technology that is the best alternative at any given point in time, and is not necessarily always the same technology.

The maximum royalty, r, that can be extracted ex ante as the value of Technology 1 is its incremental ex ante value over Technology 2

r_maxA =  (R₁ – C₁) – (R_2A – C_2A)

Now consider implementer D’s options if D adopts Technology 1, the patent on Technology 1 is found to be valid and infringed, and the court enjoins D’s further use.  If D is enjoined, it has three options: 

Option 1:  Abandon 1 and exit the market.   D’s future payoff (i.e., ignoring the sunk costs, which may affect D’s decision ex ante but not D’s decision ex post) = 0.

Option 2:  Switch from 1 to 2 :  D’s future payoff = R_2P – C_2P, where C_2P = the cost of implementing (2), that is, the switching costs. 

Option 3:  Pay a post-injunction royalty for the use of 1:   D’s future payoff = R₁ – r.

Given these options, D prefers to pay rather than to abandon if R₁ – r > 0, that is, as long as r < R₁.  D prefers to pay rather than to switch if R₁ – r > R_2P – C_2P, that is, if r < R₁ – (R_2P – C_2P).  And D prefers to switch rather than to abandon if R_2P – C_2P > 0, that is, if R_2P > C_2P, which is to say (intuitively) if using the alternative still would be profitable ex post.

Define r_H, the holdup royalty, as the difference between the maximum ex post and ex ante royalty:

r_H ≡ r_maxP – r_maxA

If switching is preferable to abandoning, then

r_H = [R₁ – (R_2P – C_2P)] – [(R₁ – C₁) – (R_2A – C_2A)] = C₁ + [(R_2A – C_2A) – (R_2P – C_2P)]

That is, the holdup royalty is equal to the sunk costs associated with Technology 1, plus the difference between the ex ante and ex post payoffs associated with Technology 2: the “differential profit” of 2. A caveat is that both the terms (R_2A – C_2A) and (R_2P – C_2P) are bounded from below at zero. If (R_2P – C_2P) < 0,_, 2 is not profitable ex post, abandoning is preferable to switching, and D will pay up to R₁ to continue using 1, for a profit of 0 going forward. Similarly, if (R_2A – C_2A) < 0, then the alternative to Technology 1 is not to enter the market at all, and so R₁ – C₁ defines the ex ante value of the invention.

To simplify this equation, define “differential profit” of Technology 2:

ΔP₂ ≡ [(R_2A – C_2A) – (R_2P – C_2P)]

Then

r_H = C₁ + ΔP₂  

This means that switching costs per se are irrelevant to holdup, in the sense that they cannot be extracted by a patentee with an injunction. It is only differential switching costs – the difference between the ex ante and ex post cost of adopting 2 – or more precisely, the differential profit of 2, ΔP₂, that is relevant.

Now consider the special case when Technology 2 is entirely unrelated to Technology 1, so that the costs and revenues associated with 2 will not change when 1 is adopted; 2 is simply an outside option, which implies that  R_2A = R_2P and C_2A = C_2P, and so ΔP₂ = 0. In that case:

r_H = C₁

This verifies that when the alternative is an outside option, our model reduces to the standard point that opportunism allows the patentee to extract sunk costs associated with the technology. But it also raises our main point. The cost of implementing Technology 2 might be very substantial, and that cost is no different from switching costs in the standards context. Whether the cost is that of switching to a different standard technology, or to an entirely different undertaking in an unrelated area, it is still the cost of the next best alternative. Yet it is not relevant to holdup, and no one has ever supposed it is. When we talk about holdup in the traditional context, such as Riles v Shell Oil, 298 F.3d 1302 (Fed. Cir. 2002), no one ever says that the patentee can hold up the user for the cost of switching to a different technology. The reason that these “switching costs” drop out is that they are considered both ex post and ex ante. It is true that by licensing ex post, the user will avoid the cost of adopting the alternative technology; but that is also true if the user licenses ex ante. The notion that the user can be held up for switching costs reflects ex post thinking.

Now consider the case where Technology 2 is related, in the sense that the costs and/or revenues associated with Technology 2 change when 1 is adopted. This will often be the case with standards.

First consider the simpler case when the cost of implementing 2 is not affected by whether 1 is adopted, but revenue is affected: that is, R_2A > R_2P and C_2A = C_2P. For standards it is likely that R_2A > R_2P, and it is at least plausible that C_2A = C_2P for some standards. In that case:

r_H = C₁ + [R_2A – R_2P]

Again, switching costs, C_2P, are not zero – indeed they may be very large – but they are nonetheless irrelevant to holdup, for the reasons just discussed.

Thus, in the standards context, it is not switching costs that can be extracted in addition to sunk costs, it is differential profit.

The reason that it is only differential profits that are relevant is that both ex ante and ex post, the profitability of the best alternative disciplines the amount the patentee can charge. When these are the same, they drop out. But when they are different, the difference between the ex post and ex ante profitability adds to the amount the patentee can charge.

To understand why, it is perhaps helpful to approach the derivation from a different angle. The differential profit discussed above, ΔP, is the difference in profitability of a given technology at two different points in time (ex ante and ex post). Now let us focus instead on the difference in profitability between the two different technologies at a given point in time.

Define comparative differential profit, δ₁₂ ≡ P₁ – P₂

We are accustomed to thinking of the true value of a technology as being its ex ante profitability over the next best available technology: in our notation, this is δ_12A ≡ P_1A – P_2A, But from the perspective of a user, the value of a technology at any given time, and consequently the maximum royalty that can be charged, is always its profitability over the best alternative. Ex post, the value of a licence to Technology 1 is its differential profitability over Technology 2: δ_12P ≡ P_1P – P_2P. The holdup royalty is the difference in the value of the technology to the user (which is not necessarily the same as the true value of the technology), ex ante versus ex post. That is:

r_H = δ_12P – δ_12A

Once the cost of implementing 1 is sunk, P_1P = R₁

r_H = [(R₁ – (R_2P – C_2P)] –  [(R₁ – C₁) –  (R_2A – C_2A)]

    = C₁ + ΔP₂  

That is, sunk costs holdup really represents holdup due to the differential profitability of Technology 1 ex ante and ex post. The differential profitability of Technology 2 represents a separate source of holdup. The profitability of Technology 2 is relevant because the threat of switching to Technology 2 disciplines the amount that can be extracted by the patentee; it is not the absolute profitability that can be extracted, either ex ante or ex post, but only the profitability related to the alternative. The sunk costs holdup related to Technology 1 arises because the profitability of Technology 1 from the user’s perspective changes once costs are sunk; the profitability increases, because the costs no longer have to be incurred. Similarly, if the profitability of Technology 2 changes, the disciplining value of the user’s threat to switch also changes. We will refer to the term that captures this, ΔP₂, as opportunity cost holdup: .the reduction in the profitability of Technology 2 ex post is the opportunity cost of not having chosen Technology 2 ex ante.

While there are no doubt cases where C_2A < C_2P so that differential costs contribute to the differential profit, we suspect that differential revenues are generally characteristic of standards. Normally, R_2A > R_2P because the value of a non-standard technology is much lower than the value of the same technology if it were the standard.

In summary, switching costs as such are irrelevant to hold up. Second, it is differential profits which are important. Third, differential revenue is likely to be an important contributor to differential profits in the standards context, and it may well be generally more important differential cost, so switching costs are doubly irrelevant. 

* Similarly, the joint report of the U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 28 (2007) states at 28 that "Generally, the greater the cost of switching to an alternative standard, the more an IP holder can charge for a license." And the Report of the Fed. Trade Comm’n, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition (2011) at 5, stating that "At the time a manufacturer faces an infringement allegation, switching to an alternative technology may be very expensive if it has sunk costs in production using the patented technology. That may be true even if choosing the alternative earlier would have entailed little additional cost. If so, the patentee can use the threat of an injunction to obtain royalties covering not only the market value of the patented invention, but also a portion of the costs that the infringer would incur if it were enjoined and had to switch. This higher royalty based on switching costs is called the “hold-up” value of the patent. Patent hold-up can overcompensate patentees, raise prices to consumers who lose the benefits of competition among technologies, and deter innovation by manufacturers facing the risk of hold-up."

Follow-Ups to Recent Posts on Noninfringing Alternatives in Canada, Punitive Damages in India

1.  As a follow-up to two previous posts on Apotex v. Merck and the noninfringing alternative defense in Canada (see here and here), Norman Siebrasse published an interesting post last week on Sufficient Description questioning why Canada's Federal Court of Appeal seems to premise the availability of the defense on the defendant's not having infringed intentionally.  I agree with Professor Siebrasse that intent shouldn't be relevant to this issue, though (like Professor Siebrasse) I am happy that the court accepted, in principle, the relevance of noninfringing alternatives to the calculation of patent damages.  Now if only someone could convince the courts in the U.K. to follow suit.  For one of my periodic gripes on U.K. practice in this regard, see here.  For my previous post on the Apotex case, see here.

2.  On SpicyIP, Kiran George has published an interesting post on punitive damages for trademark infringement in India, which makes for a nice sequel to Prashant Reddy's post on which I blogged here.

Federal Circuit Affirms $15 Million Damages Award Against Samsung

In an opinion handed down yesterday, Summit 6, LLC v. Samsung Electronics Co. (available here) the Federal Circuit affirmed a $15 million judgment against Samsung in a case involving a patent on a "web-based media submission tool" that allegedly is infringed by users of Samsung smartphones.  The opinion is by Judge Reyna.  

After affirming the district court's claim construction and the jury's determinations on infringement and validity, the court focuses on the admissibility of the plaintiff's expert's testimony:

To estimate a reasonable royalty rate in this case, Mr. Benoit started by estimating that the carriers pay Samsung $14.15 to include a camera component in Samsung’s phones. J.A. 6372. To arrive at this estimate, Mr. Benoit used Samsung’s annual reports, internal cost and revenue spreadsheets, and interrogatory responses to determine that the camera component accounted for 6.2% of the phone’s overall production cost. J.A. 6374. Accordingly, he attributed 6.2% of Samsung’s revenue from selling each phone—i.e., $14.15—to the camera’s functionality. J.A. 6374.

To apportion the camera-related revenue further, Mr. Benoit estimated the percentage of camera users who used the camera to perform the infringing methods rather than for other purposes. To do this, he relied on surveys commissioned by Samsung in the ordinary course of its business and on another survey he found on his own. J.A. 6374-75. The surveys were conducted by J.D. Power and Associates, Pugh Research, Forrester, and ComScore. J.A. 6375. Using the surveys, Mr. Benoit estimated that at least 65.3% of camera users used the camera regularly to capture only photos rather than video. J.A. 6377-79. He calculated that at least 77.3% of those users who captured only photos shared the photos, and that at least 41.2% of those users who shared the photos did so by MMS rather than by email or web storage. J.A. 6379-84. Lastly, Mr. Benoit observed that 100% of those photos shared by MMS were resized. J.A. 6384. Multiplying these percentages together, Mr. Benoit thus estimated that at least 20.8% of camera users utilized the camera for the infringing features rather than for other camera related features.

Based on these usage statistics, Mr. Benoit concluded that 20.8% of Samsung’s $14.15 revenue for including the camera component in each phone—i.e., $2.93—was due to the infringing features. J.A. 6386. Using Samsung’s annual reports to estimate its profit margins and capital asset contributions, Mr. Benoit concluded that $0.56 of the $2.93 revenue was profit attributable to the infringement. J.A. 6386-89.

Mr. Benoit testified that to determine a reasonable royalty at a hypothetical negotiation, the parties would focus on allocating the $0.56 benefit Samsung gained by utilizing the patented features. Mr. Benoit testified that the negotiation would concern the entire $0.56 benefit because Samsung had no non-infringing alternatives, and the entire benefit was therefore incremental profit from using the patent. J.A. 6390. Mr. Benoit testified that because neither party had a stronger negotiating position, the parties would have split the $0.56 evenly to derive a reasonable royalty of $0.28 per device. J.A. 6389-91, 6395. Mr. Benoit cited three academic articles and the Nash Bargaining Solution to support his theory of an even split.^/3 Based on the per-device royalty and on the number of infringing devices sold by Samsung, Mr. Benoit estimated that a hypothetical negotiation would have resulted in a reasonable royalty of $29 million. J.A. 6398. . . .

In this case, Mr. Benoit’s damages methodology was based on reliable principles and was sufficiently tied to the facts of the case. Mr. Benoit first estimated Samsung’s economic benefit from infringement by specifically focusing on the infringing features and by valuing those infringing features based on Samsung’s own data regarding use and on its own financial reports outlining production costs and profits. Mr. Benoit then envisioned a hypothetical negotiation in which the parties would have bargained for respective shares of the economic benefit, given their respective bargaining positions and alternatives to a negotiated agreement. Mr. Benoit’s methodology was structurally sound and tied to the facts of the case. 

That Mr. Benoit’s methodology was not peer-reviewed or published does not necessitate its exclusion. . . .

Samsung argues that Mr. Benoit’s “premise . . . that a feature’s use is proportional to its value” was incorrect and contradicted by expert testimony. Defendant-Appellant’s Opening Br. at 6. But as we noted in Lucent, “an invention used more frequently is generally more valuable than a comparable invention used infrequently” and “frequency of expected use and predicted value are related.” 580 F.3d at 1333. There is no dispute that use of the claimed invention is relevant under Georgia-Pacific: Georgia-Pacific factor 11 looks at use of the invention and at evidence probative of the value of that use. . . .

To the extent Mr. Benoit’s credibility, data, or factual assumptions have flaws, these flaws go to the weight of the evidence, not to its admissibility. . . .

^/3  On appeal, Samsung does not challenge Mr. Benoit’s use of Nash Bargaining.

Maybe I'm misunderstanding something here, but the court's characterization of $0.56 as the "benefit Samsung gained by utilizing the patented features" strikes me as a bit odd, because (at least the way the court discusses this matter) it sounds as if the expert simply said "Here's the profit attributable to this feature," without any consideration of possible noninfringing alternatives.  From an economic perspective, the benefit must be judged in light of those alternatives, and only the incremental benefit is properly considered value derived from the use of the patented technology.  But maybe the record discloses that there was no reasonable alternative, or there is some other reasonable explanation, so let's move on.

Next, the court considers whether it was error to consider two licenses the plaintiffs had entered into with Facebook and RIM, in settlement of litigation, as comparables.  The court agrees that the Facebook license (the features of which the court does not discuss) was not comparable, but notes that Samsung did not argue for the inadmissibility of the RIM license, and finds (again without detailed discussion) that the license was relevant.

Finally, the court addresses Summit's cross-appeal that the jury-awarded reasonable royalty should not have been considered compensation for both past and future infringement:

. . . Summit also argues that its equitable claim for future damages is not an issue for the jury. Thus, Summit concludes that it is entitled to recover damages for future infringement. We disagree. This court has not directly addressed whether a jury can award lump-sum damages through the life of the patent. We have, however, permitted such relief. . . .

In this case, the district court properly denied Summit’s request for an ongoing royalty because the jury award compensated Summit for both past and future infringement through the life of the patent. Samsung’s expert, Mr. Martinez, testified that a lump-sum award was appropriate. J.A. 7089-90. He also testified regarding the weight the jury should give the license agreements introduced into evidence, all of which were lump-sum licenses. Moreover, Summit’s expert, Mr. Benoit, admitted that a lump-sum award would compensate Summit through the life of the patent. J.A. 6452, 6479-80. When the jury returned its verdict, it indicated on the verdict form that the award was a lump sum by writing “lump sum” on the verdict form. We see no basis to disturb the district court’s determination and hold that the district court did not abuse its discretion in denying Summit’s request for an ongoing royalty.

The issue of whether an ongoing royalty is equitable or legal relief nevertheless is a tricky one, in my view--see, e.g., my comment on Judge Moore's comment on this issue in the Apple v. Samsung oral argument earlier this year--though the court may be right that if the jury viewed the award as compensation for past and future infringement, there should be no problem. 

Federal Circuit Retains Laches Defense to Claims for Patent Damages

Last year in a copyright case, Petrella v. Metro-Goldwyn-Mayer, the U.S. Supreme Court held that "the equitable defense of laches (unreasonable, prejudicial delay in commencing suit)" does not bar a claim for damages occurring within three years of filing suit, though "[a]s to equitable relief, in extraordinary circumstances, laches may bar at the very threshold the particular relief requested by the plaintiff. And a plaintiff’s delay can always be brought to bear at the remedial stage, in determining appropriate injunctive relief, and in assessing the “profits of the infringer . . . attributable to the infringement.” (For my blog post on the case, see here).  The Court left open the possibility, however, that (as the Federal Circuit had earlier held in the Aukerman case) laches might bar a patent infringement claim brought within patent law's six-year statute of limitations.  Late last year, the Federal Circuit decided to hear en banc SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, to determine whether laches remains a viable defense to a patent claim after Petrella.  This past Friday, in an opinion by Chief Judge Prost, a majority of the court held that the answer is yes (link to opinion here):

We conclude that Congress codified a laches defense in 35 U.S.C. § 282(b)(1) that may bar legal remedies. Accordingly, we have no judicial authority to question the law’s propriety. Whether Congress considered the quandary in Petrella is irrelevant—in the 1952 Patent Act, Congress settled that laches and a time limitation on the recovery of damages can coexist in patent law. We must respect that statutory law.

Nevertheless, we must adjust the laches defense in one respect to harmonize it with Petrella and other Supreme Court precedent. We emphasize that equitable principles apply whenever an accused infringer seeks to use laches to bar ongoing relief. Specifically, as to injunctions, considerations of laches fit naturally within the eBay framework. In contrast, Menendez v. Holt, 128 U.S. 514 (1888), and Petrella counsel that laches will only foreclose an ongoing royalty in extraordinary circumstances.

So unreasonable, prejudicial delay in filing suit can preclude the recovery of damages for past infringement, even if the plaintiff seeks damages only for losses caused within the six years prior to the filing of the complaint.  In reaching this conclusion, the majority mostly relies on legislative history and similar materials to distinguish the patent context from the copyright context at issue in Petrella; but it also notes that copyright infringement requires proof of copying, whereas patent law does not, thus arguably creating a greater risk that a patent infringement defendant could suffer undue harm from the plaintiff's unreasonable delay in filing suit.  As for injunctive relief and ongoing royalties, however, the majority has this to say (pp. 38-41):

Many of the facts relevant to laches, such as the accused infringer’s reliance on the patentee’s delay, fall under the balance of the hardships factor. Id. Unreasonable delay in bringing suit may also be relevant to a patentee’s claim that continued infringement will cause it irreparable injury. More than anything, district courts should consider all material facts, including those giving rise to laches, in exercising its discretion under eBay to grant or deny an injunction. See eBay, 547 U.S. at 394. . . .

With respect to ongoing royalties, while the principles of equity apply, equity normally dictates that courts award ongoing royalties, despite laches. Menendez, an influential case contrasting laches and equitable estoppel in the trademark context, guides us here. According to Menendez, delay in exercising a patent right, without more, does not mean that the patentee has abandoned its right to its invention. Rather, the patentee has abandoned its right to collect damages during the delay. Equitable estoppel, on the other hand, is different—the patentee has granted a license to use the invention that extends throughout the life of the patent . . . .

In sum, we must recognize “the distinction between . . . estoppel and laches . . . .” Id. (first alteration in original). Whereas estoppel bars the entire suit, laches does not. As outlined above, laches in combination with the eBay factors may in some circumstances counsel against an injunction. However, a patentee guilty of laches typically does not surrender its right to an ongoing royalty.

Judges Hughes, Moore, Wallach, Taranto, and Chen dissented from the principal holding that laches remains a defense to a claim for past patent damages, stating that "The Supreme Court has repeatedly cautioned this court not to create special rules for patent cases."  They agree, however, that in an appropriate case laches can bar equitable relief.

To be honest, I don't have a strong inclination one way or the other on this issue, but I would note that a group of law professors, including Professor Samuel Bray (whose work I've mentioned here in the past), filed an amicus brief arguing that the court should not recognize laches as a defense to a claim for past damages.  For coverage on Patently-O, see here.

Speaking Engagement Today on Antitrust/IP Issues

From 3:30 to 4:30 this afternoon I will be on a panel with Bethany Krueger of Greene Espel and Scott Flaherty of Briggs & Morgan at the 2015 Midwest IP Institute in Minneapolis.  The title of our panel is "What You Need to Know About Antitrust Developments and How They Relate to IP."  After a brief overview of the relationship of antitrust to IP, we will be covering the Supreme Court's recent decision in Kimble (see my rather critical blog post here); FRAND issues; potential claims arising from cease-and-desist letters; and reverse payments.  As always, I will be happy to meet any of my readers who happen to be around.

Federal Circuit Vacates Denial of Injunction in Apple v. Samsung

Again, here is a link to the opinion.  The appeal involves three patents, including the one with the "slide to unlock" feature.  Judge Moore wrote the majority opinion, and the key issue on appeal is whether there was a sufficient "causal nexus" between Samsung's infringement and Apple's alleged lost sales, i.e., whether the infringement caused Apple to suffer irreparable harm.  Here is the key passage from Judge Moore's opinion (pp. 10-12):

When a patentee alleges it suffered irreparable harm stemming from lost sales solely due to a  competitor’s infringement, a finding that the competitor’s infringing features drive consumer demand for its products satisfies the causal nexus inquiry. In that case, the entirety of the patentee’s alleged  harm weighs in favor of injunctive relief. Such a showing may, however, be nearly impossible from an evidentiary standpoint when the accused devices have thousands of features, and thus thousands of other potential causes that must be ruled out. Nor does the causal nexus requirement demand such a showing. Instead, it is a flexible analysis, as befits the discretionary nature of the four-factor test for injunctive relief. We have explained that proving a causal nexus requires the patentee to show “some connection” between the patented features and the demand for the infringing products.  Apple III, 735 F.3d at 1364.^/1  Thus, in a case involving phones with hundreds of thousands of available features, it was legal error for the district court to effectively require Apple to prove that the infringement was the sole cause of the lost downstream sales. The district court should have determined whether the record established that a smartphone feature impacts customers’ purchasing decisions. Apple III, 735 F.3d at 1364. Though the fact that the infringing features are not the only cause of the lost sales may well lessen the weight of any alleged irreparable harm, it does not eliminate it entirely. To say otherwise would import a categorical rule into this analysis.

/1  As we explained in Apple III, “some connection” between the patented feature and consumer demand for the products may be shown in “a variety of ways,” including, for example, “evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions,” “evidence that the inclusion of a patented feature makes a product significantly more desirable,” and “evidence that the absence of a patented feature would make a product significantly less desirable.” Id. These examples do not delineate or set a floor on the strength of the connection that must be shown to establish a causal nexus; rather, they are examples of connections that surpass the minimal connection necessary to establish a causal nexus. Apple III included a fourth example to demonstrate a connection that does not establish a causal nexus—where consumers are only willing “to pay a nominal amount for an infringing feature.” Id. at 1368 (using example of $10 cup holder in $20,000 car). There is a lot of ground between the examples that satisfy the causal nexus requirement and the example that does not satisfy this requirement. The required minimum showing lies  somewhere in the middle, as reflected by the “some connection” language.

Judge Moore then praises the virtues of property rights and exclusivity (p.12):

The right to exclude competitors from using one’s property rights is important. And the right to maintain exclusivity—a hallmark and crucial guarantee of patent rights deriving from the Constitution itself—is likewise important. “Exclusivity is closely related to the fundamental nature of patents as property rights.” Douglas Dynamics, 717 F.3d at 1345. And the need to protect this exclusivity would certainly be at its highest when the infringer is one’s fiercest competitor. Essentially barring entire industries of patentees—like Apple and other innovators of many-featured products—from taking advantage of these fundamental rights is in direct contravention of the Supreme Court’s approach in eBay. 547 U.S. at 393 (“[E]xpansive principles suggesting that injunctive relief could not issue in a broad swath of cases . . . cannot be squared with the principles of equity adopted by Congress.”).

As a result, she writes, "The district court thus erred when it required Apple to prove that the infringing features were the exclusive or predominant reason why consumers bought Samsung’s products to find irreparable harm," and that it "should have considered whether there is 'some connection' between the patented features and the demand for Samsung’s products," that is, that it "should have required required Apple to show that the patented features impact consumers’ decisions to purchase the accused devices" (p.12).  Moreover, Judge Moore writes, "the record here establishes that these features do influence consumers’ perceptions of and desire for these products" (p.13), after which she discusses evidence that she believes indicated that Samsung copied, a matter that on the facts of this case was relevant to the issue of whether "carriers or users valued those features" (pp. 13-15).  She also notes Apple's expert's "conjoint study, which established that consumers would not have purchased a Samsung phone if it lacked the patented features, that they valued these features, and that they were willing to pay considerably more for a phone that contained these features" (p.15)--thus perhaps giving a boost to future uses of conjoint studies in matters relating to patent remedies (a topic I have blogged about here and here).

Having concluded that the irreparable harm factor weighed in Apple's favor, Judge Moore also concludes that the "inadequate remedy at law" factor does too (not surprising, since those factors more or less mean the same thing), given the difficulty in quantifying "the extent of Apple's downstream and network effect losses" (p.18).  The court then agrees with Judge Koh that the balance of hardships and public interest factors weighed in favor of Apple.  In discussing the public interest factor in particular, Judge Moore again stresses the value of property rights and exclusivity (p.21):

. . . the public generally does not benefit when that competition comes at the expense of a patentee’s investment-backed property right. To conclude otherwise would suggest that this factor weighs against an injunction in every case, when the opposite is generally true. We base this conclusion not only on the Patent Act’s statutory right to exclude, which derives from the Constitution, but also on the importance of the patent system in encouraging innovation. Injunctions are vital to this system. As a result, the public interest nearly always weighs in favor of protecting property rights in the absence of countervailing factors, especially when the patentee practices his inventions. 

The result is a remand that presumably will result in an injunction conditioned (as Apple proposed) on Samsung having 30 days to design around the patents at issue.  

If Judge Moore's opinion ultimately carries the day (I imagine there may be a request for rehearing en banc or a cert petition, and if so I don't know what to predict), this could signal to the district courts that at least some of the judges on the Federal Circuit are eager to reinvigorate injunctive relief, which at present is granted about 75% of the time to the prevailing patent owner.  All the more so given Judge Reyna's concurring opinion, in which he writes (pp. 4-5):

Though we read eBay to overrule our presumption of irreparable injury, we cautioned that courts should not necessarily “ignore the fundamental nature of patents as property rights granting the owner the right to exclude.” Robert Bosch LLC v. Pylon Mfg. Corp., 659 F.3d 1142, 1149 (Fed Cir. 2011). Yet our recent cases have done precisely that, ignoring the right to exclude in determining whether to issue an injunction. . . .

I believe that this recent trend extends eBay too far. Infringement on the right to exclude is, in my view, an “injury” that is sometimes irreparable. An “injury” is not limited to tangible violations but rather encompasses “violation[s] of another's legal right, for which the law provides a remedy; a wrong or injustice.” 

There is no reason to treat patent rights differently. 

Actually, I can think of reasons why it might be desirable to treat patents differently, the principal one being their utilitarian nature:  they are a means to an end, and thus the law of remedies for their infringement should turn exclusively on economic factors, among them the risk (or not) of holdup and the ability (or not) of the courts to adequately preserve the patent incentive by awarding compensatory damages.  In other words, I'd rather see the discussion turn (as it often does in antitrust law) on economics than on formalistic invocations of the sanctity of property.  (To be fair, Judge Reyna isn't making a purely formalistic argument--see his opinion at pp. 6-7, for example--but I am concerned about how all of this constitutional and property-based rhetoric is going to be used in the future.  And Judge Reyna, unlike Judge Moore who does not reach this issue, would find that Apple was threatened with injury to its reputation as an innovator, even without any empirical evidence to substantiate this, see pp. 10-18 of his concurrence.)

Judge Prost's strongly worded dissent seems consistent with her previous pronouncements on the "causal nexus" issue in previous litigation between these parties.  Here's her opening salvo (pp. 1-2):

This is not a close case. One of the Apple patents at issue covers a spelling correction feature not used by Apple. Two other patents relate to minor features (two out of many thousands) in Apple’s iPhone—linking a phone number in a document to a dialer, and unlocking the screen. Apple alleged that it would suffer irreparable harm from lost sales because of Samsung’s patent infringement. For support, Apple relied on a consumer survey as direct evidence, and its allegations of “copying” as circumstantial evidence. The district court rejected both evidentiary bases. On the record of this case, showing clear error in the district court’s factual findings is daunting, if not impossible. 

She also disputes the majority's findings on the issues of carrier and user preferences and copying as not being supported by the evidence (pp. 7-12).

Again, we'll see what happens, but I wonder if this case will be taken as a signal to the district courts to be more willing to grant injunctions in cases involving component patents, that is, patents that make up but one feature of a product that may embody many more patented and unpatented technologies.  Perhaps, if as Samsung asserted at oral argument it can easily design around the patents in suit and at present only sells one product that incorporates any of them (majority op. pp. 5, 20), it would have made more sense to resolve the case on narrower grounds rather than making sweeping claims about the wonders of injunctive relief; but so it goes.

One other thing I would note as well:  some previous descriptions of the "causal nexus" requirement might have led one to think that injunctions would rarely issue in cases in which the patent owner cannot demonstrate that the patented feature at issue sufficiently "drives the demand" for the product to satisfy the entire market value rule (though even Judge Prost has stated that that is not necessarily the case, see discussion on this blog here).  In any event, the majority opinion here seems to dispel any such notion.

Finally, I must confess that I called this one wrong:  I thought the Federal Circuit would affirm.  See here.