IP Chat Channel: Future of Design Patent Damages After Apple v. Samsung

On Thursday, January 12, 2017, at 2 p.m. Eastern Time I will be one of three panelists for an IP Chat Channel webinar titled Future of Design Patent Damages After Apple v. Samsung.  Here is a link to the website, if you're interested in registering, and here is a description: 

In its recent opinion, the U.S. Supreme Court answered this question posed by Samsung: "Where a design patent is applied to only a component of a product, should an award of infringer's profits be limited to those profits attributable to the component?" The reply of the unanimous court, in an opinion written by Judge Sotomayor: "The term 'article of manufacture' is broad enough to embrace both a product sold to a consumer and a component of that product, whether sold separately or not." That answer rejects the Federal Circuit's longstanding interpretation of Section 289.

However, experts say the Supreme Court's opinion raises many more questions. The Federal Circuit must now create a test that will allow a jury to determine whether the "article of manufacture" covered by a design patent is the entire product or a component, and what that component is. For now, it is not clear whether the patent owner or the defendant bears the burden of proof. Then it will be up to a judge to apportion to the component some part of the infringer's entire profits on the product. Our panel -- a design patent litigator, a damages expert, and a law professor specializing in patent damages -- will discuss how the law of design patent damages might evolve, and see what the options might mean applied to cases currently being litigated such as Apple v. Samsung and Nordock v. Systems.

The other two panelists will be Dawn Hall, Senior Managing Director at FTI Consulting, and Richard Stockton of Banner & Witcoff, Ltd.  Should be a good discussion.

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I'll be taking a break from blogging from now through the end of this year, with a plan to resume on January 2 or 3.  I wish my readers a happy holiday season, and all the best for 2017.

New Articles on Royalties, ICT Orders

1.  Gerard Llobet and Jorge Padilla have posted a paper on ssrn titled The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents.  I reported on a presentation by Dr. Padilla of an earlier version of the paper here.  Here is a link to the current paper, and here is the abstract: 

It has been commonly argued that the decision of a large number of inventors to license complementary patents necessary for the development of a product leads to excessively large royalties. This well-known Cournot-complements or royalty-stacking effect would hurt efficiency and downstream competition. In this paper we show that when we consider patent litigation and introduce heterogeneity in the portfolio of different firms these results change substantially due to what we denote the Inverse Cournot effect. We show that the lower the total royalty that a downstream producer pays, the lower the royalty that patent holders restricted by the threat of litigation of downstream producers will charge. This effect generates a moderation force in the royalty that unconstrained large patent holders will charge that may overturn some of the standard predictions in the literature. Interestingly, though, this effect can be less relevant when all patent portfolios are weak making royalty stacking more important.

2.  Mark Rosenberg and Jake Berdine have published a paper titled A Reasonable Approach to Reasonableness:  A Proposal to Improve RAND Applications in Patent Arbitration Proceedings, 44 AIPLA Q.J. 460 (2016).  If you (or your institution) don't have a subscription to this journal, you can access it here if you're a member of AIPLA (the American Intellectual Property Law Association).  Here is the abstract:

There has been a substantial amount of recent debate regarding the best approach for determining what is reasonable and non-discriminatory for the royalty rate of a patent that has been subjected to arbitration. One approach that courts have recently implemented in litigation is a modified version of the Georgia-Pacific factors. Another approach that scholars have suggested is to transfer the burden for establishing fee shifting to the losing party, such that the losing party must pay all fees unless its position was “reasonably justified in law and fact or that special circumstances make an award unjust.” This Article advocates for a hybrid of these two approaches that would increase the efficiency and effectiveness of arbitrators in resolving patent disputes by encouraging parties to agree that their arbitrators will apply a modified Georgia-Pacific analysis and incorporate reciprocal fee-shifting terms into their arbitration provisions. These changes will furnish a clear framework for determining an appropriate royalty and incentivize parties to settle their disputes. The proposed framework will also streamline arbitration resulting from prior dispute resolution agreements between the parties and aid compliance with Standard Setting Organization (SSO) requirements.

For another paper on arbitration and FRAND that I reported on a few weeks back, see here.  

3.  Also in the above issue of AIPLA Q.J. is a paper by Mark Abate, Alexandra Valenti, and Marcia Sundeen titled How to Win Your Case When You Win It and When You Lose It:  Strategies to Avoid the Impact of ITC Exclusion Orders, 44 AIPLA Q.J. 369 (2016), link here.  Here's the abstract:

Facing an exclusion order from the International Trade Commission can seem an insurmountable obstacle. The prospect of a company’s product being excluded from importation into the U.S. is a severe remedy. But if your client is subjected to an exclusion order and comes to you with the question “what now?,” your answer need not be “nothing.” In reality, there are many avenues to explore in the face of this draconian penalty. This article will examine efficient and cost-effective strategies that can be employed to avoid the harsh impact of an exclusion order.

Jury Awards Merck $2.54 Billion in Damages Against Gilead

Reuters, the Wall Street Journal, and the International Business Times are reporting that a federal district court jury in Delaware today awarded Merck $2.54 billion--that's "billion," with a "b"--in reasonable royalties in a patent infringement suit relating to the treatment of hepatitis C.  According to the Reuters article, the award "was based on a 10 percent royalty rate from the sales of both drugs through August."  A quick look at Lex Machina indicates that the actual name of the case is Idenix Pharmaceuticals LLC et al v. Gilead Sciences, Inc., No. 1:14-cv-00846-LPS.  (The Reuters article indicates that Idenix is a company Merck acquired in 2014).  According to the International Business Times article, the jury also found that the infringement (which it was told to assume, based on the court's claim construction, according to one of the docket entries on Lex Machina) was willful, which could pave the way for a damages enhancement.

I don't know much about the specifics of this case, and I'm sure the award will be the subject of post-trial motions and probably an appeal, so I don't have much to say about it just yet.  It would be the largest patent damages award in U.S. history, though; and damages awards in the nine- and ten-figure range often are vacated or reversed later on, for one reason or another, so perhaps this one will be too.  Then again, the royalty base--sales revenue from Gilead's hepatitis C drugs Sovaldi and Harvoni--is also enormous, as discussed in the Reuters article and in Hannah Brennan et al., A Prescription for Excessive Drug Pricing:  Leveraging Government Patent Use for Health, 18 Yale J. L. & Tech. 275 (2016).  Thus, if liability and validity hold up, and 10% is the correct royalty rate, $2.54 billion may well be the right number, huge though it is.

Hat tip to Mark Lemley, who alerted many of us to this one by his posting on Facebook a few hours ago.  

From Around the Blogs: Lost Profits in China, Accountings of Profits in Canada, and Reasonable Royalties in the U.S.

1. On the the China IPR Blog, Mark Cohen published a short post earlier this week on Watchdata v. Hengbao, a recent patent infringement case against fifteen banks in which the Beijng IP Court awarded 50,000,000 RMB--which comes to about U.S.$7.2 million  (49,000,000 RMB in damages and another 1 million RMB in attorneys'  fees).  The post links to some other commentary on the judgment, including this one by David Huang in English.  Mr. Huang writes that "The court adopted the 'hybrid' formulation 'defendant's sales × plaintiff's profit for patented products', as allowed by a judicial interpretation issued by the PRC Supreme People's Court."  Both Mr. Cohen and Mr. Huang note that the court's award of attorneys' fees based on time charged may be a new development in China. 

I understand that the judgment itself has just been made publicly available, and I'm hoping to publish a post--possibly a guest post--discussing the matter in more detail sometime soon. 

2.  On Sufficient Description, Norman Siebrasse published a post last month titled The Patentee, Not the Infringer, Elects an Accounting, discussing a case in which Canada's Federal Court held (not surprisingly, it seems to me) that the patentee, rather than the infringer, is the entity that gets to request that the court order an accounting of the infringer's profits.  There's also a write-up by Peter Menyasz on Bloomberg BNA's World Intellectual Proeprty Report (available here, but behind a paywall).  Professor Siebrasse also has a published a recent series on "unjustified threats" (wrongful enforcement) in Canada (see here, here, and here), which I hope to discuss in a separate post on this blog sometime soon.  

3.  On Patently-O, Dennis Crouch published  a short post on a new article by Michael Risch titled (Un)Reasonable Royalties, which is now up on ssrn (here).  I'm hoping to sit down and read the article myself over the next couple of days.  Here is the abstract:

Though reasonable royalty damages are ubiquitous in patent litigation, they are only one-hundred years old. But in that time they have become deeply misunderstood. This Article returns to the development and origins of reasonable royalties, exploring both why and how courts originally assessed them.

It then turns a harsh eye toward all that we think we know about reasonable royalties. No current belief is safe from criticism, from easy targets such as the 25% “rule of thumb” to fundamental dogma such as the hypothetical negotiation. In short, the Article concludes that we are doing it wrong, and have been for some time.

This Article is agnostic as to outcome; departure from traditional methods can and has led to both over- and under-compensation. But it challenges those who support departure from historic norms—all the while citing cases from the same time period—to justify new rules, many of which fail any economic justification.

The biggest patent-related news in the U.S. so far this month, however, besides the Samsung v. Apple decision (see here) is probably the U.S. Supreme Court's grant of certiorari in Impression Products v. Lexmark Int'l (on the exhaustion doctrine) and in T.C. Heartland v. Kraft Food (on venue).  This may be  shaping up to be an unusually patent-heavy term for the Court.  These two cases are not directly related to remedies, though surely the resolution of the issues presented could have an impact on matters such as damages awards and negotiated royalties.

Wright and Ginsburg on the FTC's PAE Study

As previously noted on this blog, in early October the U.S. Federal Trade Commission released a document titled Patent Assertion Entity Activity:  An FTC Study.  The study is based on information the agency obtained under its authority to collect confidential business information from private entities, and its methodology is spelled out in detail at study pages 2, 38-40, and appendix F (pages F-2 to -4 in particular).  Altogether the study analyzed information from 22 Responding PAEs with over 2,500 “Affiliates and other related entities,” of which 327 had engaged in patent assertion by sending demand letters, litigating, or licensing.  (“Affiliates” are defined for purposes of the study as including parent companies, subsidiaries, divisions, and any other person or persons over which a responding firm exercised supervision or control.  The agency also conducted a separate Wireless Case Study involving analysis of information from six wireless manufacturers and five NPEs.)  The agency found that the responding PAEs could be grouped into two categories:  Litigation PAEs, which filed 96% of the cases in the study and accounted for 91% of the reported licenses, but only 20% of the reported revenue, or approximately $800 million,” id. at 2-4; and Portfolio PAEs, which generated approximately 80% of the revenue reported by responding PAEs, even though they accounted for only 9% of the reported licenses in the study.  Id.at 3-4, 45.  The study reports a number of interesting findings--among them that 77% of the assertions by responding Litigation PAEs settled for less than $300,000, that is, less than the estimated median cost of litigating even a small-stakes patent infringement suit through the end of discovery, according to the AIPLA's Annual Report of the Economic Survey—and that over 30% settled for less than $50,000.  See id. at 7, 49, 90.

Anyway, Professor Joshua Wright and Judge Douglas Ginsburg have posted on ssrn a short paper titled The FTC PAE Study: A Cautionary Tale About Making Unsupported Policy Recommendations.  Here's a link to the paper, and here is the abstract: 

In October 2016, the Federal Trade Commission released its long awaited case study examining the business practices of 22 Patent Assertion Entities (PAEs). One clear policy implication is that PAEs do not present an antitrust problem. While the study makes a number of interesting and potentially important factual findings, it makes four policy recommendations that simply are not substantiated by anything in the study. The FTC acknowledged that the limitations of its sample rendered it inappropriate to extrapolate its findings to PAEs as a whole. Curiously, however, in spite of that acknowledgement, FTC went on to make recommendations applicable to the entire population of PAEs. Because it is unclear whether the policy recommendations in the FTC’s PAE study would survive a cost-benefit test, and because they certainly cannot be substantiated based upon the PAE Study alone, we conclude the policy recommendations should be afforded little weight.

In my view, the authors are a bit too critical of the recommendations, which include discovery reforms similar to those that Congress has considered enacting in recent years; amending Federal Rule of Civil Procedure 7.1 so as to require more transparency with regard to the ultimate parent company and affiliates of LLCs (the corporate form used by many Litigation PAEs); enacting legislation to codify the "customer stay" exception (see previous discussion on this blog here); and requiring greater specificity in patent pleadings.  Their principal critique is as follows (pp. 2-3):

As the FTC correctly acknowledges, because the full population of PAEs is not identified in any publicly available data set, its results are based upon a potentially unrepresentative sample, making it inappropriate to extrapolate its findings to PAEs as a whole.^4/ Curiously, however, the FTC goes on to do just that. Specifically, “based on the overall findings of this study,” . . . the FTC offers four policy recommendations to remedy “nuisance infringement litigation” that would necessarily apply to the entire population of PAEs—and beyond. . . .

^4/  PAE Study, supra note 1, at F-2. See also Id. at F-12 (“this is a case study, and as such, it is not statistically valid to extrapolate the findings from the case study to the population of PAEs, manufacturers, or NPEs. Instead, the findings of the case study should be viewed as descriptive and probative for future studies seeking to explore the relationships between organizational form and assertion behavior.”).

The authors' quotations are accurate, in that the study doesn't purport to be "generalizable to the population" of all PAEs (F-2).  However, the study also states:

Making the best use of available data, the FTC has designed a subject-selection procedure that will simultaneously be more likely to include more economically important firms (that account for a larger proportion of PAE behavior) while including firms of different sizes (to ensure that firms operating a variety of business models are included). . . . 

. . . Hence, the results of this study will not be extrapolated to the population of all PAEs. Instead, the study’s results should be interpreted as a detailed case study of the PAE industry where the study subjects have been selected to disproportionately include firms with more patents and litigation activity, while still including small and medium-sized firms (F-2, -3).

So, the findings may not be representative of all PAEs--but they do appear to give us an unprecedented window into the characteristics of the ones that, at least individually, have the most economic impact.  That seems pretty important to me.  

Wright and Ginsburg also note that responding "Litigation PAE patents had 80% more citations than the average patent, implying that PAEs are not litigating lower than average quality patents" (p.2), a finding that is consistent with some other research that predated the FTC study.  Given that PAEs also have a lower "win rate" than non-PAEs in cases that go to trial, however--both according to the FTC Study, and to John R. Allison, Mark A. Lemley & David L. Schwartz, How Often Do Patent Assertion Entities Win Patent Suits?, 32 Berkeley Tech. L.J. __, __ (forthcoming 2017)--perhaps the better inference to draw is that patent citations aren't really as indicative of value as people sometimes think they are (a point that Allison et al. have raised as well in other work). The authors also quarrel with the agency's description of the cases that settle for less than the median cost of discovery as "nuisance litigation," stating that "PAEs are not the first plaintiffs to take advantage of our legal system by bringing or threatening to bring cases purely for their settlement value" (p.7).  Aside from the unflattering term "nuisance litigation," though, I'm not sure what the criticism is; if a large percentage of Litigation PAEs are settling for lawsuits for, basically, the avoided costs of discovery--and especially if they aren't transferring any technology in return, as would often appear to be the case if as is commonly believed inadvertent infringement is the norm, not the exception--it's a bit hard to see how this behavior serves the public interest.  

The authors also believe that the FTC should have conducted an actual cost-benefit analysis before making any specific recommendations (pp. 4, 9), and note that much of the data the agency used pre-date the Supreme Court's recent decisions on attorney's fees and on software patents, which might mitigate some of the concerns raised by PAE critics without the need for further legislation. 

By the way, readers of this blog also may be interested in a report issued by the Joint Research Centre, which describes itself as "the European Commission’s science and knowledge service," titled Patent Assertion Entities in Europe. Their impact on innovation and knowledge transfer in ICT markets, available here.  (I only learned about this report recently, and haven't read it yet.  I'll probably have something to say about it on this blog before too long.)  Here's the abstract:

Patent assertion has become a common practice in shaping the balance between technology creation and technology dissemination in the Information and Communication Industry (ICT). The importance of this practice for the functioning of ICT markets has given rise to new entities that enforce patents but do not utilise the patented technology, commonly referred to as patent assertion entities (PAEs). This study provides an overview of patent assertion practices and of PAEs in Europe, taking into consideration their impact on innovation and technology transfer in European ICT markets.