Wednesday, September 30, 2015

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” 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.


  1. I like your " stark raving mad" line. Sometimes the courts are just so crazy that's all you can say. What's strange the US courts have generally been very sophisticated on this point in patent damages, and yet completely crazy on design patents. Yes, the statute is different, but as you say, there is still room on the text for a more sensible interpretation. I wonder if the general approach to statutory interpretation makes any difference? In Canadian law it is well-established that the text of a statute must be interpreted in light of its purpose, but I'm given to understand that is not so in the US. Also, Denis Crouch on Patently-O indicates that there is pending design patent legislation that would excuse spare-auto-parts manufacturers and sellers from liability. Do you think there's any chance of a more general reform of the damages provision?

    1. Thanks. In the U.S., there are different schools of thought on statutory interpretation, and some very well regarded scholars like Bill Eskridge have written extensively on the matter. But it's probably fair to say that at the U.S. Supreme Court level right now the more literal approach has at least four, sometimes five, adherents, and the Federal Circuit often seems to play down the role of the courts in shaping patent policy (even though they clearly do so, both as a matter of historical fact and given the many gaps in the statutory text).

      I haven't really been following the spare parts legislation, though I think it's more focused on that one specific industry than on more general matters relating to design patents. I don't think there's anything in the more extensive patent reform bills now pending before Congress on design patents, though maybe cases like this one and Apple v. Samsung will eventually get someone's attention.