Federal Circuit Denies Rehearing En Banc on Question of Lost Profits from Extraterritorial Sales

In July, I blogged about the Federal Circuit's opinion in WesternGeco L.L.C. v. ION Geophysical Corp., holding that a finding of liability under Patent Act § 271(f)(2) did not entitle WesternGeco to recover lost profits on certain extraterritorial contracts WesternGeco believed it would have earned, but for the violation.  Today the court denied WesternGeco's petition for rehearing en banc, over the dissent of Judge Wallach (who dissented from the original panel opinion), joined by Judges Newman and Reyna.  The dissent is brief:

For the reasons articulated in my dissent from the panel opinion, I dissent from the denial of the petition for rehearing en banc. See WesternGeco L.L.C. v. ION Geophysical Corp., 791 F.3d 1340, 1354–64 (Fed. Cir. 2015) (Wallach, J., dissenting-in-part). 

In addition, an amicus brief submitted in support of the petition for rehearing en banc raised the issue of whether extension of the presumption against extraterritoriality to damages, in the manner done by the panel in this case, is at odds with the longstanding and analogous “predicate act” doctrine in the copyright context. The predicate act doctrine holds that a copyright owner “is entitled to recover damages flowing from the exploitation abroad of . . . domestic acts of infringement.” L.A. News Serv. v. Reuters Television Int’l, Ltd., 149 F.3d 987, 991–92 (9th Cir. 1998) (tracing the predicate act doctrine to Judge Learned Hand’s opinion in Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45 (2d Cir. 1939), aff’d, 309 U.S. 390 (1940)); see also Tire Eng’g & Distrib., LLC v. Shandong Linglong Rubber Co., 682 F.3d 292, 306 (4th Cir. 2012) (“We adopt the predicate-act doctrine, which posits that a plaintiff may collect damages from foreign violations of the Copyright Act so long as the foreign conduct stems from a domestic infringement.”); Update Art, Inc. v. Modiin Publ’g, Ltd., 843 F.2d 67, 73 (2d Cir. 1988) (“It is well established that copyright laws generally do not have extraterritorial application. There is an exception—when the type of infringement permits further reproduction abroad—such as the unauthorized manufacture of copyrighted material in the United States.”).

In this case, WesternGeco’s damages flowed from the exploitation abroad of domestic acts of patent infringement under § 271(f). The court’s denial of rehearing en banc unfortunately prevents consideration of the predicate act doctrine, which is of particular import given “the historic kinship between patent law and copyright law.” Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 439 (1984). For this reason, and for other reasons already explained, I respectfully dissent.

Back in July, I wrote that although "I need to give the matter some more thought, I'm inclined to think the majority view is correct. WesternGeco may have lost sales, and thus profits, to foreign customers as a result of ION's alleged conduct in violation of § 271(f), but to allow recovery would seem to undermine the presumption against extraterritoriality.  The causal chain has to stop somewhere."  I'm still inclined to think that is right, though I will have to take a look at the copyright precedents Judge Wallach cites and give the matter some additional thought.  For discussion of the court's treatment of the somewhat analogous issue that arises when the patent owner argues that it is entitled to royalties for foreign sales that would not have occurred, but for an act of domestic infringement, see my post on the court's August decision in Carnegie-Mellon v. Marvell.

Berthet on Preliminary Injunctions in France

Élisabeth Berthet has published an article titled Application du critère des contestations sérieuses dans le cadre d'un référé brevet ("Application of the criterion of serious questions with regard to a patent in suit") in the July 2015 issue of Propriété Industrielle (pp. 16-17).  Dr. Berhet argues that a 2014 judgment of the Cour de cassation, Société Ausio MPEG Inc. v. Société Electro dépôt France, Cass. com., 21 Oct. 2014, No. 13-15,435, has resolved the question of whether under L 615-3 of the Code of Intellectual Property as revised in 2007 a person opposing a preliminary injunction must demonstrate, as under previous law, only "serious questions" (contestations sérieuses) regarding infringement or validity of the patent in suit, or instead "manifest nullity" (la nullité manifeste).  In relevant part, the pre-2007 version of this statute provided that a court could award a preliminary injunction only "if the substantive proceedings appear well founded"  ("si l'action au fond apparaît"), while the new law reads "Toute personne ayant qualité pour agir en contrefaçon peut saisir en référé la juridiction civile compétente afin de voir ordonner . . . toute mesure destinée à prévenir une atteinte imminente aux droits conférés par le titre ou à empêcher la poursuite d'actes argués de contrefaçon ("Any person with a right to assert a claim for infringement may commence an emergency civil proceeding to obtain . . . any measure intended to prevent an imminent harm to the rights conferred by this act or to cease alleged acts of infringement") (my translation, see blog post here; see also discussion in my book at pp. 242-43).  Apparently, under the old law the consensus was that a "serious question" was sufficient to defeat the application for a preliminary injunction; and while most courts and commentators believed that this standard still applied under the new law, according to Dr. Berthet there was a minority view that the new law required a stronger showing on the part of the defendant, namely "manifest nullity." 

Anyway, the issue was raised in the case referenced above, and while the Cour de cassation did not expressly state that the Cour d'appel had erred in requiring a showing of manifest nullity, it did (in affirming the appellate court's judgment in favor of the applicant) state that the evidence suggested a probable infringement (contrefaçon vraisemblable) of the patent and that it did not make out a serious case of invalidity (aucune cause sérieuse d'annulation).  Dr. Berthet reads this as indicating that the Cour de cassation approves the use of the old "serious questions" standard, which she believes balances the interests of the parties. 

Some Recent Papers on Royalties

1. Greg M. Allenby, Jeff Brazell, John R. Howell, and Peter E. Rossi have published a paper titled Valuation of Patented Product Features, 57 J. L. & Econ. 629 (2014).  Here is the abstract:

Ultimately, patents have value to the extent to which the product features enabled by the patents have economic value in the marketplace. Products that are enhanced by inclusion of patented features should generate incremental profits. Incremental profits can be assessed by considering demand for products with patented features and contrasting that demand with demand for the same product without the patented features. Profit calculations must be based on valid estimates of demand as well as assumptions about how competitive forces affect demand via computation of market equilibria. A conjoint survey can be used to estimate demand. Recently, conjoint methods have been applied in the patent setting, but the measures of value used are purely demand based and do not involve equilibrium profit calculations. We illustrate our method using the market for digital cameras and show that current methods can overstate the value of a patent.

Hat tip to Norman Siebrasse for pointing this one out to me.  

2. Alan Cox and Natalia Soboleva have published a short article in Law360 titled Misuse Of Patent Citation Analysis In Finjan v. Blue Coat.  Here is a link to the paper, which argues that the district court in this case (2015 WL 4272870, N.D. Cal. July 14, 2015))  properly "excluded that part of the plaintiffʼs expert testimony in which patent citation analysis was purportedly used in establishing the value of the patent. The order is properly interpreted as a critique of the clear errors in the expertʼs execution of patent citation analysis. It is not a critique of the concept itself."  This case also has been discussed on the Patent Damages Blog, here.

3.  Reid Dodge has published a student note titled Reasonable Royalty Patent Infringement Damages: A Proposal for More Predictable, Reliable, and Reviewable Standards of Admissibility and Proof for Determining a Reasonable Royalty, 48 Indiana Law Review 1023 (2015).  Here is a link to the paper.  From the introduction:

This Note proposes reform that will promote certainty—through predictability, reliability, and reviewability—while having the added benefit of simplicity, in that its implementation can be effected virtually immediately (i.e., without Congress’ involvement). The proposal is two-fold. First, courts should require the use of comparable licenses as a starting point in every reasonable royalty analysis, and the court, in its gatekeeping role, should admit only the most comparable license for the jury’s use as a damages award starting point. Second, courts should require experts to attach numerical associations to each Georgia-Pacific factor assessment such that any evidentiary review can efficiently and accurately evaluate the evidence. Then, as the damages assessment diverges from the comparable license starting point, courts should increase the scrutiny by which they admit these numerical factor associations.

4.  Erik Hovenkamp has posted a new paper on ssrn titled A Broader Look at Patent Royalties and Antitrust.  Here is a link to the paper, and here is the abstract:

It is well known in antitrust economics that competitors can rely on patent licensing with high royalties as a surrogate for price fixing. This paper addresses a number of alternative situations in which patent royalty agreements may raise antitrust concerns, even if the royalty rate is ostensibly reasonable. For example, a royalty charged to a competitor creates an "alignment effect" by giving the licensor a stake in its rival's success. This is the same problem that arises when a firm buys stock in a competitor (a potential antitrust violation). By aligning the firms' interests, this blunts competition and benefits both parties independently of the underlying exchange. Thus, for example, if a firm charges a rival $5 per unit for an invention that lowers production costs by the same $5, then even the rival-licensee strictly benefits, because its net costs are unchanged, but now the market is less competitive. More generally, the alignment effect may lead welfare to decline overall even if the royalty rate is strictly lower than the licensing value (e.g. $4), just as a merger may reduce welfare even if it produces some cost efficiencies. 

Additionally, offsetting (i.e. reciprocal) license payments between competitors often warrant scrutiny even if each royalty appears individually reasonable. Even under cross-licensing, offsetting payments are never necessary for the parties to reach a mutually-beneficial agreement, which is generally the relevant antitrust question. Instead, the practical effect of offsetting royalties is to replicate a collusive agreement to restrain consumer pass-through, ensuring the firms retain more of the licensing surplus. The results shed new light on the competitive impact of patent pools, which typically create widespread royalty offset and alignment between competing members, even if patents are complementary.

Some Recent Papers on Licensing

Readers of this blog might find these four articles of interest.  The first two call to mind some issues that Professor Alexander Peukert raised at a conference I attended earlier this year in Bayreuth, Germany, and which I blogged about here.

1.   Andrew Michaels has posted on ssrn a paper titled Tones that Echo from a Past Era of Rigid Jurisprudence: Pre-Challenge Royalties and the Federal Circuit's Shell Test, 31 Santa Clara Computer & High Tech. L. J. (forthcoming 2015).  Here is a link to the paper, and here is the abstract:

In the 1969 decision Lear v. Adkins, the Supreme Court held that patent licensees were no longer estopped from challenging the validity of licensed patents, citing the “federal patent policy” of incentivizing prompt adjudication of the validity of patents. In the 1997 Shell decision, where the licensed patent was found invalid, the Federal Circuit nevertheless held that a licensee was not relieved of royalty obligations that had accrued prior to the licensee’s validity challenge. The decision as a whole applied Lear in view of its underlying policies and reached the correct result. However, the end of the decision sets forth a one-sentence test which, when applied rigidly, can lead to results contrary to the policies and equitable considerations underlying both the Lear and Shell decisions. Some district courts have applied Shell’s test rigidly, whereas others have taken a more holistic and flexible approach. This article argues that the holistic and flexible approach to Shell is the correct one, comporting better with both Shell’s developmental roots, and the Supreme Court’s current tendency to repudiate rigidity in Federal Circuit jurisprudence. Besides the factors captured in Shell’s one-sentence test, an examination of the Shell opinion and the doctrine as a whole reveals that courts should also consider the structure of the license agreement at issue, as well as the nature of the invalidating prior art, in deciding whether and when a licensee should be relieved of royalty obligations accrued under an invalid patent.

2.   Allan Miller and Michal Gal have posted a paper on ssrn titled Licensee Patent Challenges, 32 Yale J. Regulation ___ (forthcoming 2015).  Here is a link to the paper, and here is the abstract:

We analyze contractual clauses which limit the ability of licensees to challenge patents at the basis of their licensing agreements. In particular, we study no-contest clauses, which prohibit licensees from contesting the validity of the patent, and challenge-penalty clauses, which penalize licensees for doing so. We develop a model that we use to compare three legal regimes: “No Restriction,” in which the patent holder is given complete contractual freedom, “Partial Restriction,” in which no-contest clauses are forbidden but challenge penalties are allowed, and “Total Restriction,” in which neither no-contest nor challenge penalty clauses are enforced. We show that No Restriction is unlikely to be optimal, and further, we provide necessary and sufficient conditions under which Total Restriction is optimal. The rule we suggest differs significantly from the one currently applied by most courts.

3.  Jorge Contreras has posted a paper on ssrn titled FRAND Market Failure: Analyzing IPXI's Unsuccessful Attempt to Establish an Exchange for Unitized Standards-Essential Patent Licenses.  Here is a link to the paper, and here is the abstract:

This case study pertains to Intellectual Property Exchange International, Inc. (IPXI), which was formed in 2008 to create a market-based trading exchange for aggregated patent license rights, particularly standards-essential patents (SEPs). IPXI based its model on existing commodities exchanges, proposing that non-exclusive patent licenses could be standardized, commoditized, and traded on an open market, thus eliminating costly and inefficient bilateral negotiations and providing a royalty rate likely to be viewed as “reasonable”. IPXI’s most ambitious offering involved a portfolio of 194 U.S., European and other patents deemed essential to IEEE’s 802.11n “Wi-Fi” standard. IPXI offered up to 50,000 tradable Unit License Right contracts (ULRs), each granting the holder a worldwide right to manufacture and sell 1,000 compliant devices. Despite the backing of several significant patent holders, IPXI’s offering failed to attract sufficient interest, and IPXI ceased operations in March 2015. This paper analyzes the failure of IPXI based on the documentary record, public statements by IPXI executives and interviews with industry experts. It concludes that, despite its potential to improve the efficiency of the SEP licensing market, factors including a lack of participation by key patent holders, an untested record of enforcing patents against infringers, and constraints imposed by the standardized ULR, led to IPXI’s demise.

4.  Finally, here is one that came out in 2012 but which only recently came to my attention (it was cited in the Mazzeo, Zyontz & Ashtor paper I recently mentioned here), and that readers might find interesting:  Jiaqing "Jack" Lu, The myths and facts of patent troll and excessive payment: have nonpracticing entities (NPEs) been overcompensated?,  47 Bus. Econ. 47 234 (2012).  Here is the abstract:

"Nonpracticing entities" (NPEs) own patents but do not practice the patented technologies. They are sometimes referred to as "patent trolls," who hold up practicing companies to seek exorbitant payments. This paper conducts a review of the theoretical literature, which is inconclusive on whether NPEs have been systematically overcompensated. This study offers the first empirical study in license royalty rates, and its econometric analysis demonstrates that NPEs have not been overcompensated in license markets, regardless of whether other relevant variables are controlled. This conclusion is then put back into the larger context of NPE economics to lay out topics for further research through cross-examining other major conclusions in this field.

Bennett on Torpedo Actions and the Unified Patent Court Agreement

A "torpedo action" is a declaratory judgment action filed by a potential patent infringement defendant in a European state that is believed to have a slow-moving docket, with the goal of preemptively staying proceedings in a faster forum in which the patent owner is likely to file an infringement action.  I've discussed torpedo actions in my book (pages 253-55) and on this blog (here, here, here and here).  Now Richard Bennett has published an article in the July 2015 issue of Mitteilungen der deutschen Patentanwälte (pp. 301-08) titled Das Übereinkommen über ein einheitliches Patentgericht—das Ende des Torpedos? ("The Unified Patent Court Agreement—The End of Torpedo Actions?").  Here is the abstract (my translation from the German):

The Unified Patent Agreement (UPA) has as its goal the faster and simpler enforcement of patents.  The continued alternative or supplemental jurisdiction of national courts for claims concerning both Unitary Patents and European Patents, however, offers the possibility to present to a national court a question of rights preliminary to an infringement action.  In particular, in view of the interplay of the UPA with the Brussels Regulation (Recast) 2015 the possibility of such preliminary questions is not averted.  In this regard, the UPA achieves its self-imposed goal at best only conditionally.

Mr. Bennett argues that, during the 7-year transitional period provided under article 83 of the Unified Patent Court Agreement, prospective defendants may be able to stay litigation before the European Patent Court by initiating torpedo actions in slow-moving national courts, and that even after that period prospective defendants may be able to stay actions before the EPC by initiating related actions such as actions for a competition law-based  compulsory license.

Halo and Stryker

At this point, I have no clear idea what to expect from the U.S .Supreme Court when it takes up the issue of enhanced patent damages in Halo and Stryker (see post below).  One possibility is that the Court will interpret section 284, which in relevant part states only that “the court may increase the damages up to three times the amount found or assessed," to involve some sort of totality-of-the-circumstances standard akin to what it did in Octane Fitness, the attorneys' fee case, last year.  As I noted in my blog post on Stryker late last year:

. . . a question that Stryker does not address is whether the Federal Circuit’s willfulness framework still makes sense in the wake of Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), and Highmark Inc. v. Allcare Health Mgt. Sys., 134 S. Ct. 1744 (2014), the Supreme Court’s opinions earlier this year on awards of attorneys’ fees in “exceptional cases” (see my post, here).  As Jason Rantanen has noted (see here) in his post on Judge O'Malley's recent concurring opinion in Halo Electronics, over the years the Federal Circuit has come to link the standards for willfulness and for “exceptional case.”  However, now that the “exceptional case” standard has changed, does it still make sense to premise a finding of willful infringement on proof, by clear and convincing evidence and subject to de novo review on appeal, of objective baselessness?

See also this post on Halo from this past May.  Another possibility is that the Court will try to reconstruct what standard or historical practices the drafters of the 1952 Patent Act may have had in mind when they enacted section 284.  Or maybe they will do something else.

As I wrote this past July, in my view it would be very bad policy to return to the pre-Seagate, pre-Knorr Bremse state of the law under which willfulness was frequently pleaded and enhanced damages were more often awarded than they are today (for discussion of the relevant empirical studies conducted by then-Professor Kimberly Moore and by Professor Christopher Seaman, see my paper with John Golden here).  On the other hand, and looking at the matter more optimistically, if it is the case that deliberate copying is rarely pleaded or proven, as Cotropia and Lemley argue here, maybe we won't see much of an upswing in cases awarding enhanced damages.  Moreover, some of the mischief under the Federal Circuit's pre-Seagate, pre-Knorr Bremse case law was the rule stated in Underwater Devices Inc. v. Morrison-Knudson, Inc., 717 F.2d 1380 (Fed. Cir. 1984), that "[w]here . . . a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing,” which “affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.”  Section 298 of the U.S. Patent Act ("The failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, or the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed the patent or that the infringer intended to induce infringement of the patent"), which was passed as part of the AIA, won't allow the Supreme Court won't revive that rule, at least.  Even so, in my opinion enhanced or punitive damages should be granted only in cases in which infringement is difficult to detect or there is otherwise some concern that infringers will not be adequately deterred.  (I would be willing to award attorneys' fees more often than is common in the U.S., however.)  I would be concerned that once again allowing enhanced damages greater play would result in overdeterrence, overcompensation, and greater uncertainty regarding potential damages liability.  Indeed, from a policy perspective, more awards of enhanced damages would seem to contravene much of the Supreme Court's recent curtailing of expansive interpretations of patent law in other areas including nonobviousness, injunctive relief, and patentable subject matter.

I'm sure there will be lots of amici chiming in on this one . . .

U.S. Supreme Court to Determine Standard for Awarding Enhanced Patent Damages

From the U.S. Supreme Court's Order List for today:

14-1513  HALO ELECTRONICS, INC. V. PULSE ELECTRONICS, INC., ET AL.
14-1520  STRYKER CORPORATION, ET AL. V. ZIMMER, INC., ET AL.
The petition for a writ of certiorari in No. 14-1513 is granted limited to Question 1 presented by the petition. The petition for a writ of certiorari in No. 14-1520 is granted. The cases are consolidated and a total of one hour is allotted for oral argument. The motion of Independent Inventor Groups for leave to file a brief as amici curiae is granted. The motion of Nokia Technologies OY, et al. for leave to file a brief as amici curiae is granted.

Here is question 1 from Halo:

1. Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.

Here are the questions presented in Stryker:

1. Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys’ fee awards in exceptional cases?

2. Does a district court have discretion under 35 U.S.C. § 284 to award enhanced damages where an infringer intentionally copied a direct competitor’s patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?

Links to SCOTUS Blog and Patently-O here.  I'll be back with more later this afternoon.

On Wisconsin? Jury Awards WARF $234 Million in Patent Suit Against Apple

Here is the story from this morning's Wall Street Journal on a jury verdict that was handed down in the U.S. District Court for the Western District of Wisconsin on Friday.  As the story indicates, the patent in suit (U.S. Patent No. 5,781,752, titled "Table based data speculation circuit for parallel processing computer" and owned by the Wisconsin Alumni Research Foundation ("WARF")) issued 17 years ago.  Here is a copy of the jury verdict on liability; I haven't seen a copy of the damages verdict yet.  Presumably there will be post-trial motions and an appeal, unless the matter settles, so stay tuned.  

Further coverage of the story can be found in Ars Technica, the Milwaukee Journal-Sentinel, Reuters, and the Wisconsin State Journal.

Friday Miscellany: From Around the Blogs

For your weekend reading enjoyment:

1.  The Antitrust & Competition Policy Blog published a post yesterday announcing the publication of a new issue of the CPI Antitrust Chronicle addressing the antitrust/IP intersection, with a special focus on FRAND and SEP issues in Canada, China, India, Japan, and Korea.  I haven't had a chance to read the papers yet myself but will probably report back on some of them in due time.

2.  On FOSS Patents, Florian Mueller has a post titled Oracle moves to disqualify damages expert because Apple v. Samsung is practically Apple v. Google, which discusses not only the pending copyright matter between Oracle and Google but more generally the use of court-appointed damages experts.

2.  The Kluwer Patent Blog published an interesting post earlier this week on a FRAND session at the recent AIPPI meeting in Rio, which included among others as panelists Judges Peter Meier-Beck, James Robart, and Judge André Fontes (of Brazil's Federal Court of Appeals).

3.  Kluwer also has a post on the draft bill in the U.K. amending the statute on groundless threats to sue for infringement.

4.  On Sufficient Description, Norman Siebrasse has a post on the recovery of costs in Canada, which he describes as a hybrid of U.S. and U.K. practice leading to "the worst of both worlds."

Fox et al. on Infringers' Profits in European Patent Infringement Cases

Nicholas Fox, Bas Berghuis, Ina vom Feld, and Laura Orlando have published a paper titled Accounting for Differences:  Damages and Profits in European Patent Infringement, 37 European Intellectual Property Law Review 566-74 (2015).  Here is the abstract:

Although the IPR Enforcement Directive has gone some way towards harmonising practice, the various courts across Europe have different approaches to the assessment of damages for patent infringement.  This article reviews the different approaches in Germany, France, Italy, the Netherlands, and England and Wales, and questions how a future Unified Patent Court might address these differences.

As the abstract suggests, the paper provides an overview of how courts award damages for patent infringement in the top five European jurisdictions for patent infringement litigation, and note some interesting differences, among them that French courts are much more likely to take into account "moral prejudice" (which, according to the authors, often does not involve "examining whether the inventor's reputation has suffered damages," but rather is "used to 'round up' the final damages following an overall assessment"); that Italian courts often take "the standard royalty applied in the specific market and increas[e] it to take account of the infringement," and also make "a strong distinction . . . between  the innocent, the negligent, the grossly negligent and the wilful (i.e. the intentional) infringer," with wilful infringers potentially liable for "the claimant's loss of profits, and their own infringing profits" [!]; and that awards of infringer's profits are, following the 2000 BGH judgment in Gemeinkostenanteil, "more frequent in Germany than elsewhere."  Overall, they state, "moral prejudice, liability attached to culpability, and the role and assessment of an account of profits, have significant divergences in the national case law . . . ."

The most interesting part of the paper, however, is the discussion of how courts are likely to determine damages under the Unified Patent Court (UPC) system, once it is up and running.  UPC article 68 states:

(1)
The Court shall, at the request of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in a patent infringing activity, to pay the injured party damages appropriate to the harm actually suffered by that party as a result of the infringement.
(2)
The injured party shall, to the extent possible, be placed in the position it would have been in if no infringement had taken place. The infringer shall not benefit from the infringement. However, damages shall not be punitive.
(3)
When the Court sets the damages:
(a)
it shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the injured party by the infringement; or
(b)
as an alternative to point (a), it may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of the royalties or fees which would have been due if the infringer had requested authorisation to use the patent in question.
(4)
Where the infringer did not knowingly, or with reasonable grounds to know, engage in the infringing activity, the Court may order the recovery of profits or the payment of compensation.

As the authors note, "[m]uch of the wording . . . is copied directly from art. 13 of the IPR Enforcement Directive.  However, given the existing differences in damages law from one jurisdiction to another, the authors wonder to what extent such couleur locale will influence the damages jurisprudence of UPC decisions.  They speculate that claims for moral damages will, "if granted at all . . . be nominal," and that the UPC will treat all infringers equally "once the threshold of scienter is crossed."  Nevertheless, as they note, only "[t]ime will tell."  

Upcoming FRAND Conferences

The Essential Patents Blog has a post today titled Upcoming Programs Dealing with Standard Essential Patents, with information on an IPO webinar taking place later today and upcoming programs hosted by the Sedona Conference (October 19-20) and by AIPLA (October 22-24).   Meanwhile, readers in China might be interested in checking out an international symposium on intellectual property and antitrust, which is being organized by the China University of Political Science and Law (CUPL) (Beijing, October 22-23).  I was invited to speak at this last event myself; unfortunately, I can't make it but I understand that Dr. Rudi Bekkers of the Eindhoven University of Technology will be one of the speakers, and if I get more information on it I will post it.  

Finally, a conference at which I will be speaking will be the December 10-11 TILEC Conference on Competition, Standardization, and Innovation, which will be held in Amsterdam.  The full program is not posted yet on the conference website, but again I will keep readers posted.  Keynote speakers will be Josef Drexl, Alison Jones, Mark Schankerman, and Jean Tirole, and I understand that Brad Biddle, Jorge Contreras, and Anne Layne-Farrar will be among the participants.

TPP's IP Remedies Provisions

According to this leaked text of the Trans-Pacific Partnership (TPP) Agreement's intellectual property provisions, and based on my very quick review, it doesn't appear that the agreement would impose any TRIPs-plus requirements relating to patent remedies.  But it would require member states to provide for either pre-established or "additional damages" (the latter may include "exemplary of punitive damages") for copyright and related rights infringement and for trademark counterfeiting.  It also would require members to provide criminal penalties for some forms of trade secret misappropriation, in addition to "willful trademark counterfeiting or copyright or related rights piracy on a commercial scale."

Among the more interesting substantive provisions are the requirement for a 1-year grace period for patent applicants and an extension of the copyright term (which I believe currently remains at life plus fifty in some of the affected countries, including Japan) to life plus seventy.

Patent Damages in Russia

Elena Beier and Anne Wright Fiero have published a paper titled The U.S. and Russian Patent Systems: Recent Amendments and Global Implications for the Protection of Intellectual Property Rights, 14 J. Marshall Rev. Intell. Prop. L. 504 (2015).  Here is a link to the paper, and here is the abstract:

Recent legislative and geo-political activity might suggest little common ground between the United States and Russia. The respective intellectual property laws of these two countries, however, share many common goals. In fact, as reflected in the Report of the Innovation Working Group of the Russia-US Bilateral Presidential Commission (initiated by the Ministry of Economic development of the Russian Federation and U.S. Department of State), the two countries are trending towards cooperative intellectual property legislation. This article compares U.S. and Russian patent laws, with a particular emphasis on recent amendments in the areas of inventorship, prior art, and technology transfers. It further explores how these legislative amendments can shape and encourage global competition and innovation.

One of the last parts of the paper discusses the new Russian law on damages, which Nadia Wood and I blogged about last year here.  The authors write:

. . . since January 2015, Russian law allows for compensation in connection with patent infringement as follows:

10,000 - 5 ,000,000 Rubs, upon court's decision;

or double the commercial value of the invention, utility model or industrial design. This value is usually comprised of the price which is usually established for using this patent or double the price of products where such patent is used.

These values are based on the prices which are charged in similar conditions for lawful use of the invention, utility model or industrial design or double value of goods in which such invention utility model or industrial design is used.

This change will strengthen liability for patent infringements and will allow right holders as an alternative to set a fixed compensation and avoid complicated calculations on damages and lost profit.

Stern on FRAND

Richard Stern has published a paper in Issue 9 of the European Intellectual Property Review (2015), pp. 549-57, titled "What are Reasonable and Non-discriminatory Terms for licensing a Standard-essential Patent?"  Here is the abstract:

The Federal Circuit's recent Ericsson decision, and the IEEE's new, expanded policy of prescribing added specificity for the patent licensing assurances it requires before agreeing to embody patented technology into an IEEE standard, provide different ways to address the plague of litigation over what terms and conditions are reasonable and non-discriminatory in the licensing of patents essential to implementing a standard.  The Federal Circuit's after-the-fact patch-up of contract failure in the Ericsson case and the IEEE's pre-contract clarification efforts in its new policy have their limitations, however, and difficult problems still remain.  

Mr. Stern makes some interesting arguments, some of which I agree with, some not. 

First, On the issue of holdup, he takes issue with the Federal Circuit's statement in Ericsson that "Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in . . . refusal to instruct the jury on patent hold-up," arguing that the test should be whether "the rate is too high relative to what a license on comparables of analogous technology in the industry sells for?  In other words, hold-up is not properly judged only on the basis of the patentee's historical acts, but rather on the basis of the general practice in the industry.  The patentee's acts, such as raising rates after adoption of the standard, may be relevant as sufficient proof of hold-up, but proof of such acts is not necessary." (p.551 n.14).  In my view, the economic concept of holdup involves the extraction of a royalty that is based on the user's sunk costs and related switching costs, not the extraction of a royalty that is higher than industry standards (though I would accept that departure from "general practice in the industry" could be evidence of holdup properly defined).  See my recent paper with Norman Siebrasse, here.  (For my blog post on Ericsson, see here.)

Second, Mr. Stern takes issue with respect to the Ericsson court's handling of the question of royalty stacking.  (The court affirmed the district court's decision not to instruct the jury on royalty stacking, on the ground that the defendants "failed to provide evidence of patent hold-up and royalty stacking sufficient to warrant a jury instruction. . . .")  Mr. Stern argues that it is "quite unrealistic" to "expect[ ] evidentiary proof (which costs money) on a point where common sense tells us it is unlikely to be needed," and that "[i]t is virtually impossible for it not to occur."  (p.552)  Rather, he argues, there should be "at least . . . a rebuttable presumption that rouyalty stacking occurs at some SEP level, say 50 or 100 SEPS . . . . That would shift the burden to the patent holder to produce evidence of no stacking . . . ." (id.)  Nevertheless, he writes, "it is by no means clear what should be done about stacking.  How do you conclude that Ericsson has to bear all the financial impact of the stacking, if there is any, rather than those SEP patentees who came earlier to the table to collect royalties?"  (id.).

My own view, as I have expressed it before, is that stacking is a serious theoretical issue, and that an ideal system of patent damages would try to avoid it by ensuring that royalties are reasonably proportional to the patent's contribution to the value of the standard (see again the paper with Norman Siebrasse, above).  Put another way, if a royalty for a relatively minor aspect of the standard would (if multiplied by all of the other patents in the standard, including the more important ones) exceed the profit earned from sales of standard-compliant devices, something has gone wrong.  In other words, concerns about royalty stacking can act as a sort of "sanity check" against awarding a royalty that is disproportionately high in comparison with the value produced by the patent in suit.  Beyond that, I agree with Mr. Stern that there isn't much courts can do to about royalty stacking, given the constraints under which they operate.

Third, Mr. Stern makes an interesting argument regarding the U.S. rule that the royalty base should be the smallest salable patent-practicing unit.  The principal rationale for the rule is that a jury won't necessarily be able to correctly apportion the value of the patented invention if it hears testimony about the defendant's entire sales revenue, but Mr. Stern provides another possible reason, namely that "there is inherently a greater risk of error."  As an example, suppose that the correct royaltyis 5 cents, which is 5% of a $1 chip or 0.02% of the $500 price of the end product.  Mr. Stern argues that either a jury or judge could easily award 0.01% or 0.1% of $500, such that "the cash value of the error is multiplied greatly by starting out with an inflated royalty base" (p.544 n.26).  I'll have to think about that some more.

Fourth, Mr. Stern argues that a patent pool would be a better solution to the problem of valuing SEPs, because it would take all or most of the relevant stakeholder interests into account such that the royalty stacking problem would probably evaporate" (p.555).  Professor Siebrasse and I make some similar observations about pools in our paper (noted above); for another take on pools and SEPs, see Jorge Contreras, Fixing FRAND:  A Pseudo-Pool Approach to Standards-Based Patent Licensing, 79 Antitrust Law Journal 47 (2013).

Another interesting paper in this issue of EIPR is by Nicholas Fox, Bas Berghuis, Ina vom Feld, and Laura Orlando, titled Accounting for Differences:  Damages and Profits in European Patent Infringement.  I'll be blogging about this one in the near future.

IEEE Conference on Standardization Starts Today

The IEEE-SIIT 2015 (9th Annual Conference on Standardization and Innovation in Information Technology) begins today in Sunnyvale, California, and runs through Thursday, when Norman Siebrasse and I will present some of our work on standards and holdup.  Here is a link to the conference agenda.  Looks like there will be loads of interesting content and speakers.  I'll only be there for the Thursday morning sessions myself, unfortunately, but as always I'd be glad to meet any readers and to get some feedback on my work.

Some Recent Papers on FRAND

1.  Carl Shapiro and Fiona Scott Morton have posted a paper on ssrn titled Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?  Here is a link to the paper, and here is the abstract:

The 2011 America Invents Act was the most significant reform to the United States patent system in over fifty years. However, the AIA did not address a number of major problems associated with patent litigation in the United States. In this paper, we provide an economic analysis of post-AIA developments relating to Patent Assertion Entities (PAEs) and Standard-Essential Patents (SEPs). For PAEs and SEPs, we examine the alignment, or lack of alignment, between the rewards provided to patent holders and their social contributions. Our report is mixed. Regarding PAEs, we see significantly improved alignment between rewards and contributions, largely due to a series of rulings by the Supreme Court. Legislation currently under consideration in Congress would further limit certain litigation tactics used by PAEs that generate rewards unrelated to contribution. We also see some notable developments relating to SEPs, especially with the recent reform to the patent policies of the IEEE, a leading Standard-Setting Organization (SSO) and with several recent court decisions clarifying what constitutes a Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate. However, other steps that could better align rewards with contributions on the SEP front have largely stalled out, particularly because other major SSOs do not seem poised to follow the lead of the IEEE. Antitrust enforcement in this area could further improve the alignment of rewards and contributions.

2.   Lizhi Ning, Shubha Ghosh, and Wei Zhou have published a paper in the Journal of Antitrust Enforcement titled Price discrimination in patent licensing and the application of FRAND.  Here is a link to the paper (behind a paywall, however), and here is the abstract:

With the increasing amount of global trade and the accelerating process of economic globalization, the economic entities of the world have reached a consensus on protecting equal trading opportunities—especially through pricing and other trading conditions—to achieve substantially fair global trade transactions. The arrival of the era of the knowledge economy increases the role of intellectual property in manufacture and trade and increases attention to the patent licence systems in many countries. In patent licence practice, licensors grant patent licences with many conditions attached. On the one hand, differential treatment will stimulate competition in the market and bring generous profits to the licensors; on the other hand, excessive differential treatment can seriously affect fair competition in the relevant market and undermine the normal operation of the market economy. Therefore, this article explores the issue of price differential treatment in the practice of patent licensing and reasonable royalty fees or rates under FRAND, in order to provide inspiration for further improvement and development of China’s patent licensing market. 

3.  Theo Bodewig has published an article in the July 2015 issue of GRUR Int. (pp. 626-34), titled Einige Überlegung zur Erschöpfung bei Zwangslizenzen an standardessentiellen Patenten ("Some Observations on the Exhaustion by Compulsory Licensing in Respect of Standard Essential Patents").  Here is my translation of the abstract:

In recent years, when the business sections of newspapers have discussed patent law, the military concept of "patent wars" frequently appeared.  It was and is a matter of complaints with values of over 100 million or even billions of euros in connection with patent infringement actions, with which the largest firms in the filed of information technology worldwide have been inundated.  In PCs, laptops, tablets, game consoles, smartphones, and other electronic devices hundreds of components are used, which incorporate protected patents, utility models, or design rights.  Insofar as these protected rights are incorporated into industrial standards (standard essential), one can scarcely avoid them.  As a rule, they also cannot be replaced with alternative technologies.  A single smartphone can include over 1000 protected inventions.  For component manufacturers or distributors it is however often difficult to clarify the scope of protection and to avoid infringing.

The author argues that a compulsory license accorded on competition grounds (e.g., under the Orange Book Standard) pursuant to national law will not exhaust the patent owner's rights outside the nation granting the license,  but that a compulsory license granted under EU law (e.g., under TFEU article 102) would exhaust those rights throughout the entire EU.

Three New Papers on Holdup, Standards

1.  Rudi Bekkers has posted a paper on ssrn titled Concerns and Evidence for Ex-Post Hold-Up with Essential Patents.  Here is a link to the paper, and here is the abstract:

Patented technologies may add significant value to technical standards. But the owners of patents that are necessary required in order to implement a standard (“essential patents”) obtain a particularly powerful position. One of the widely recognized risks here is patent holdup, where the patent owner demands inflated prices, much beyond the value of their specific patented technology, knowing that implementers are locked in and have no other choice than to obtain a license. Many standard setting organisations have “FRAND” patent policies in place that aim to avoid hold-up, among other things. 

While it has been argued that hold-up is a theoretical risk only, and does not manifest itself in 'real world' scenarios, this paper discusses a number of recent, seminal court cases in which the judge determined that for essential patents, fees were demanded that wildly exceeded what the court ultimately deemed to be a FRAND royalty rate. In other cases, competition authorities have issued decision in which they ruled that for a patent owner, seeking injunctive relief for essential patents can be an illegal act as such, considering that such conduct further increases the risk for hold-up.

The risk for hold-up is recognised by standard setting bodies, witnessed by the many discussions taken place in these organisations, in the past but especially over the last two years. Yet, possible policy changes are often hard to agree upon, given the strongly divergent interests of the members of such organisations. IEEE is the first standard setting body to make significant changes to its policy, aiming to mitigate hold up risks. As pointed out by the US Department of Justice in their review, IEEE’s new policy has some significant potential benefits.

2.  Taking a rather different view is this paper by Alexander Galetovic, Stephen Haber, and Ross Levine, titled An Empirical Examination of Patent Holdup.  Here is the abstract:

A large theoretical literature asserts that standard-essential patents (SEPs) allow their owners to “hold up” innovation by charging fees that exceed their incremental contribution to a final product. We evaluate two central, interrelated predictions of this SEP holdup hypothesis: (1) SEP-reliant industries should experience more stagnant quality-adjusted prices than non-SEP-reliant industries; and (2) court decisions that reduce the excessive power of SEP holders should accelerate innovation in SEP-reliant industries. We find no empirical support for either prediction. Indeed, SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.

(Hat tip to Danny Sokol, who mentioned this paper recently on his antitrust blog.)  For an earlier paper by the same three authors, titled Patent Holdup:  Do Patent Holders Hold Up Innovation?, Hoover IP2 Working Paper Series No. 14011 (May 2014), see here; for my reservations regarding the conclusion expressed in that paper, see here. 

3.  Nuno Pires de Carvalho has published a paper titled Technical standards, intellectual property, and competition--a holistic view, 47 Washington University Journal of Law & Policy 61 (2015).  Here is the abstract:

Until now, most of the literature that regards the interaction between intellectual property and both mandatory and voluntary technical standards has been limited to a particular area of intellectual property. This Article examines the interaction from a holistic perspective, involving the main intellectual property disciplines: patents, trademarks, and copyrights. Most generally, a tension exists between intellectual property and technical standards due to their differing—and somewhat opposing—objectives and public policies. Further, the interaction between technical standards and intellectual property typically depends on the categorization of the technical standard as mandatory or voluntary. Because the public policies that inform technical standards are oriented towards reducing product and service differentiation, they reduce market freedom. The reduction in market freedom is limited, however, because technical standards are frequently adopted for technical and economic efficiency, which may have a downstream, positive effect on competition.

Microsoft, Google/Motorola, Settle Patent Disputes

Readers may have seen this news already, but if not here are stories in Bloomberg News, Reuters, and The Wall Street Journal. According to Reuters, "The companies said they have been cooperating on such issues as the development of a unified patent court for the European Union, and on royalty-free technology for speeding up video on the Internet," and Bloomberg News reports that "the two companies are lobbying to ensure" that PAE suits "don’t become as prevalent in Europe as they are in the U.S."

Update:  Florian Mueller's analysis on FOSS Patents is available here.