JRC Report on Patent Assertion Entities in Europe

Last month I mentioned on this blog a report issued by the Joint Research Centre (JRC), "the European Commission’s science and knowledge service," and edited by Nikolaus Thumm and Garry Gabison, titled Patent Assertion Entities in Europe. Their impact on innovation and knowledge transfer in ICT markets, available here.  Here is the report's longer 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). Overall, views on the role of PAEs in ICT markets and their impact on innovation and knowledge transfer in ICT are polarized.

On the one hand, patent assertion may foster innovation by providing innovators with effective patent monetisation options and by increasing the liquidity of patent markets. On the other hand, additional litigation, the threat of litigation and arbitration efforts may impose additional cost on the innovation ecosystem and obstruct innovative initiatives.

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. Currently, little research on PAEs in Europe is available, in sharp contrast to the wealth of analysis that has been conducted in the United States. This study aims to fill this gap by investigating the specific features of patent assertion in Europe.

Now that I've had a chance to read through it, I'd say the report makes for an interesting comparison with the U.S. Federal Trade Commission's report on PAEs, which I blogged about here and here.  For readers with limited time to spare, the executive summary (pp. 4-10) gives a thorough run-down on the report's main points.  The editors summarize the report's methodology as follows:

We began this study with a literature review to understand PAE dynamics, gather Europe-specific information, and to compare them with US evidence. We also conducted five high-level interviews with a selected group of academic and industry experts in the European IP field, followed by twelve detailed interviews with representatives from PAEs, companies that have been approached by PAEs and companies that have used the services of PAEs. This information has been used to create case studies.

We are aware of the limitations of the study’s methodology. PAEs, wary of the negative publicity that their operations attract, have an incentive to present information in a more positive light by highlighting positive aspects of their behaviour while concealing other less acceptable aspects. On the other hand, critics of PAEs have similar incentives to concentrate on the more negative aspects of their operations and to downplay any positive impacts they may have. By listening to both sides, we have tried to mitigate the risk of coming up with extreme views. We will not be able to provide statistically reliable evidence based on our analysis. However, we are confident that the way we selected our interviewees and case studies has allowed us to provide a fairly comprehensive picture of patent assertion activities in the European ICT market (p.4).

The report then provides what appears to me to be a very balanced presentation of the pros and cons of PAEs and of the role that PAEs have played, so far, in Europe.  Some interesting findings to compare and contrast with the FTC report:

1.  "Assertion claims [in Europe] tend to refer to alleged infringements of standards" (p.4), in contrast with the relatively small role such claims have played so far in the U.S.  See also p.21 (citing a paper by Jorge Contreras for the proposition that "PAEs have initiated 64% of all SEP litigation cases").

2.  "Assertions are primarily targeted at the more vulnerable (and often lower) segment of the supply chain, e.g. Telecoms operators" (p.5), or as of the interviewees puts it, "the soft underbelly of the supply chain" (p.51).  As in the U.S., ICT-related patents make up a large portion of those asserted by PAEs, but "[c]ompared to telecom-related patents, other ICT sectors may not be as attractive from a monetisation viewpoint . . . " (p. 28).

3.  "The majority of assertions in Europe have been initiated in Germany" (p.5).

4.  "Findings from the literature claim that litigated patents are generally of relatively low quality.  However, views across stakeholders . . . are polarised.  Data that would allow us to test the validity of these claims is lacking" (p.5).

5.  "With these caveats in mind, evidence from our interviews suggests that, when challenged in European courts, many of the patents asserted by PAEs are invalidated.  However, stakeholders have suggested that PAEs have also asserted high quality patents in Europe.  Further research in this area would be beneficial . . ." (p.5; see also pp. 21-24).

6.  "The majority of patents asserted in Europe originated from large practicing firms operating in the Telecoms sector" (p.6).

7.  Similar to what the FTC study reported, "most PAE assertions concern technologies that have been commercialised already. . . .  In this respect, the activities of PAEs are not likely to benefit technology transfer where it is most needed, i.e., with un-commercialized patented technologies from SMEs and Universities" (p.8; see also pp. 36-38).

8.  PAE activity in Europe "appears to be on the rise" (p.27), though opinions differ as to whether or not the UPC will increase such activity. 

9.  The editors cite various possible reasons why there is more PAE activity in the U.S., including lower patent quality, the size of damages awards, the "American rule" regarding the recovery of attorneys' fees, and the comparatively high cost of litigation in the U.S., which may put more pressure on defendants to settle and encourage more accusations against small firms and end users (pp. 39-44).  On the other hand, Germany's proclivity to award injunctions and its bifurcated proceedings could give PAEs an advantage, though the editors seem to think that other features of the German system "limit[ ] significantly the number of assertion cases based on low quality patents" (p.41).

10.  Appendix 4 aims "to provide a mapping of the PAE landscape in Europe" by "develop[ing] business model classifications that cover the full spectrum of activities related to PAEs" and by "conduct[ing] desk-based research aimed at identifying PAEs operating in Europe and classifying them within the developed business model categories. It is important to stress that, relying on desk-based research, the result of this mapping exercise is intrinsically tentative in nature. More specifically: the information we have gathered on PAEs is not homogenous across all the relevant characteristics of a developed business model; and some additional characteristics that may be of particular importance in describing PAEs’ activities may not have been included due to lack of available information" (p.130).  This "qualitative analysis indicates the presence of 32 firms actively engaging in the assertion of patent rights in Europe," the majority of them however based in the U.S. (p.141).

The report's main recommendations are for Europe to continue ensuring the issuance of high-quality patents, and to minimize uncertainty by, for example, increasing patent owner transparency (the lack of which the editors cite as a factor that might embolden privateering).

CJEU Holds that Courts Can Award Double Damages

Here is a link to Wednesday's judgment of the Court of Justice for the European Union (CJEU) in Stowarzyszenie ‘Oławska Telewizja Kablowa’ v. Stowarzyszenie Filmowców Polskich, Case C-367/15.  (Hat tip to Dr. Eleonora Rosati for her report on the case yesterday on IPKat.)  I had previously mentioned the case on this blog (here), along with two others also raising questions relating to damages under the Enforcement Directive.  (For my write-ups on these other two cases, Hansson and Liffers, both of which were decided some months ago, see here and here.)  The present case involves alleged violations of the Polish Law on Copyright and Related Rights.  At issue is article 79(1) of the law, which read (notice the past tense) as follows:

A rightholder whose economic rights of copyright have been infringed may request the person who infringed those rights to . . .

(3)      remedy the loss caused:

(a)      on the basis of general principles, or

(b)      by payment of a sum of money corresponding to twice, or, in the event of a culpable infringement, three times, the amount of the appropriate fee which would have been due at the time it was sought if the rightholder had given permission for the work to be used . . . .

The Polish Supreme Court referred the following question to the CJEU:

Is Article 13 of Directive 2004/48 to be interpreted as meaning that the rightholder whose economic rights of copyright have been infringed may seek redress for the damage which it has incurred on the basis of general principles, or, without having to prove loss and the causal relationship between the event which infringed its rights and the loss, may seek payment of a sum of money corresponding to twice the amount of the appropriate fee, or, in the event of a culpable infringement, three times the amount of the appropriate fee, whereas Article 13 of Directive 2004/48 states that it is a judicial authority which must decide on damages by taking into account the factors listed in Article 13(1)(a), and only as an alternative in certain cases may set the damages as a lump sum, taking into consideration the elements listed in Article 13(1)(b) of that directive? Is the award, made at the request of a party, of damages as a predetermined lump sum corresponding to twice or three times the amount of the appropriate fee permissible pursuant to Article 13 of the directive, regard being had to the fact that recital 26 thereof states that it is not the aim of the directive to introduce punitive damages?

While the referral was pending, however, the Polish Constitutional Court held article 79(1)(3)(b) unconstitutional to the extent that it "permitted a person whose economic rights of copyright were infringed to claim, in the event of a culpable infringement, payment of a sum corresponding to three times the amount of the appropriate fee."  Thus:

As the decision of the Trybunał Konstytucyjny (Constitutional Court) has retroactive effect, the question referred for a preliminary ruling has become hypothetical and, therefore, inadmissible in so far as it relates to legislation that has been declared unconstitutional.

Since the referring court has nevertheless maintained its question, the question referred is, accordingly, to be understood as designed to establish whether Article 13 of Directive 2004/48 must be interpreted as precluding national legislation which provides for the possibility of demanding payment of a sum corresponding to twice the appropriate fee which would have been due if permission had been given for the work concerned to be used (‘the hypothetical royalty’) (paras. 19-20; emphasis added).

Noting among other things that "as the Court has already held, Directive 2004/48 lays down a minimum standard concerning the  enforcement of intellectual property rights and does not prevent the Member States from laying down measures that are more protective," the Court concludes that "Article 13(1)(b) of Directive 2004/48 must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, which provides that the holder of economic rights of copyright that have been infringed may require the person who has infringed those rights to compensate for the loss caused by payment of a sum corresponding to twice the amount of a hypothetical royalty" (arts. 23, 25).  Further:

26      That interpretation cannot be called into question by the fact, first, that compensation calculated on the basis of twice the amount of the hypothetical royalty is not precisely proportional to the loss actually suffered by the injured party. That characteristic is inherent in any lump-sum compensation, like that expressly provided for in Article 13(1)(b) of Directive 2004/48.

27      Nor, secondly, is that interpretation called into question by the fact that Directive 2004/48, as is apparent from recital 26, does not have the aim of introducing an obligation to provide for punitive damages.

28      Contrary to the view that the referring court appears to take, the fact that Directive 2004/48 does not entail an obligation on the Member States to provide for ‘punitive’ damages cannot be interpreted as a prohibition on introducing such a measure.

29      In addition, without there being any need to rule on whether or not the introduction of ‘punitive’ damages would be contrary to Article 13 of Directive 2004/48, it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages.

30      Thus, it should be pointed out that, where an intellectual property right has been infringed, mere payment of the hypothetical royalty is not capable of guaranteeing compensation in respect of all the loss actually suffered, given that payment of that royalty would not, in itself, ensure reimbursement of any costs — referred to in recital 26 of Directive 2004/48 — that are linked to researching and identifying possible acts of infringement, compensation for possible moral prejudice (see, in this latter respect, judgment of 17 March 2016, Liffers, C‑99/15, EU:C:2016:173, paragraph 26) or payment of interest on the sums due. Indeed, [defendant] OTK confirmed at the hearing that payment of twice the amount of the hypothetical royalty is equivalent in practice to compensation of an amount remaining below what the holder would be able to claim on the basis of ‘general principles’, within the meaning of Article 79(1)(3)(a) of the UPAPP. 

31      It is admittedly possible that, in exceptional cases, payment for a loss calculated on the basis of twice the amount of the hypothetical royalty will exceed the loss actually suffered so clearly and substantially that a claim to that effect could constitute an abuse of rights, prohibited by Article 3(2) of Directive 2004/48. It is apparent, however, from the Polish Government’s observations at the hearing that, under the legislation applicable in the main proceedings, a Polish court would not be bound in such a situation by the claim of the holder of the infringed right.

32      Thirdly and finally, as regards the argument that, inasmuch as the injured party could calculate the damages on the basis of twice the amount of the hypothetical royalty, he would no longer have to prove the causal link between the event giving rise to the copyright infringement and the loss suffered, it must be stated that that argument is based on an excessively strict interpretation of the concept of ‘causality’, under which the holder of the infringed right should establish a causal link between that event and not only the loss suffered but also its precise amount. Such an interpretation is irreconcilable with the very idea of setting damages as a lump sum and, therefore, with Article 13(1)(b) of Directive 2004/48, which permits that type of compensation.

33      In the light of the foregoing, the answer to the question referred is that Article 13 of Directive 2004/48 must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, under which the holder of an intellectual property right that has been infringed may demand from the person who has infringed that right either compensation for the damage that he has suffered, taking account of all the appropriate aspects of the particular case, or, without him having to prove the actual loss, payment of a sum corresponding to twice the appropriate fee which would have been due if permission had been given for the work concerned to be used. 

I'm not sure I would interpret article 28 of the judgment, as Dr. Rosati does, as affirmatively implying that EU law does not prevent punitive damages, since the Court goes on to state in para. 29 that "without there being any need to rule on whether or not the introduction of ‘punitive’ damages would be contrary to Article 13 of Directive 2004/48, it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages."  Still, it may well be that punitive damages are permissible under the Directive, assuming they are "effective, proportionate, and dissuasive" (para. 21, quoting Directive article 3(2)).  As discussed here, for example, they're available (in theory, at least) for IP infringement in the U.K. (though how long the U.K. will remain in the E.U. is a bit up in the air right now, as discussed in this other post on IPKat).  But at any rate, double damages appear to be okay generally, at least in copyright matters, where (for instance) Germany too authorizes them (see my book p.275 & n.207).  But would the CJEU's reasoning as quoted above allow for double damages or punitive damages in patent cases, on the grounds that "mere payment of the hypothetical royalty is not capable of guaranteeing compensation in respect of all the loss actually suffered, given that payment of that royalty would not, in itself, ensure reimbursement of any costs . . . that are linked to researching and identifying possible acts of infringement, compensation for possible moral prejudice . . . or payment of interest on the sums due"?  Note too that this rationale for double damages is quite different from the U.S. Supreme Court's take on enhanced damages in patent cases in Halo v. Pulse, pp. 3-4, where the Court rejected the theory that enhanced damages serve in part to compensate for otherwise uncompensable losses.

Federal Circuit Bursts Defendant's Balloon, Affirms Preliminary Injunction

Yesterday the Federal Circuit handed down an opinion in Tinnus Enterprises, LLC v. Telebrands Corp., available here, affirming the grant of a preliminary injunction barring sales of an allegedly infringing product called "Balloon Bonanza."  The opinion (authored by Judge Stoll, joined by Judges Moore and Wallach) raises a couple of interesting issues relating to remedies.

The patent in suit (U.S. Patent No. 9,051,066) "relates to a system and method for simultaneously filling multiple containers with fluid" (p.3), and is embodied in the plaintiff's product (called "Bunch O Balloons") for filling multiple water balloons through a set of hollow tubes.  Plaintiff sued defendant for patent infringement and moved for a preliminary injunction, while the defendant petitioned for a post-grant review of the '066 Patent before the PTAB.  Under U.S. law, when deciding whether to grant a preliminary injunction, the court considers whether the plaintiff has shown “[1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.”  Titan Tire Corp. v. Case New Holland, Inc., 566 F.3d 1372, 1375-76 (Fed. Cir. 2009) (quoting Winter v. Nat. Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008)).  Moreover, because U.S. patents are entitled to a presumption of validity, "if a patentee moves for a preliminary injunction and the alleged infringer does not challenge validity, the very existence of the patent with its concomitant presumption of validity satisfies the patentee’s burden of showing a likelihood of success on the validity issue.”  Titan Tire, 566 F.3d at 1377.  If the defendant comes forward with evidence of invalidity, however, the patentee has the burden of responding.  See id.  The trial court must then “weigh the evidence both for and against validity,” and if it “concludes there is a ‘substantial question’ concerning the validity of the patent . . . the patentee has not succeeded in showing it is likely to succeed at trial on the merits of the validity issue.”  Id. at 1379.  “Thus, when analyzing the likelihood of success factor, the trial court, after considering all the evidence available at this early stage of the litigation, must determine whether it is more likely than not the challenger will be able to prove at trial, by clear and convincing evidence, that the patent is invalid.”  Id.  

Applying these standards, the Magistrate Judge issued a Report and Recommendation (R&R) in favor of granting the preliminary injunction, rejecting among things the defendant's arguments (which I needn't go into here) that there was a substantial question of validity on both indefiniteness and obviousness grounds.  The defendant filed its objections to the R&R with the district court, but in the Federal Circuit's view it did not provide a specific objection to the Magistrate Judge's conclusions on indefiniteness and obviousness:

Telebrands timely filed its objections to the Magistrate Judge’s R&R, alleging that it erred (1) by failing to  provide a claim construction for the “attached,” “connecting force,” “elastic fastener,” and “shaking” limitations; (2) by improperly shifting the burden of proof to Telebrands on infringement and invalidity; and (3) by relying on insufficient evidence to support findings of commercial success and copying. . . . Notably, Telebrands did not object to the Magistrate Judge’s indefiniteness ruling or its rejection of Telebrands’ obviousness arguments. The district court overruled each of the objections . .  . (pp. 11-12).

Unfortunately for the defendant, the failure specifically to object to the rulings on validity meant that the applicable standard of review on appeal was the highly deferential "plain error" standard, and the Court of Appeals didn't think these rulings amounted to plain error. (The defendant argued that its objection to the Magistrate Judge's claim construction put the court on notice that it was also challenging the definiteness of the term "substantially filled," see p.20, but the Federal Circuit didn't agree.)  One interesting side issue, though, is that while the district court proceedings were pending the PTAB instituted the defendant's requested post-grant review, and in December 2016 it concluded that the claims were invalid on indefiniteness grounds (see pp. 12-13).  Nonetheless, as the Federal Circuit sees it, this doesn't affect the appeal:

We are aware that the PTAB issued a Final Written Decision on December 30, 2016, concluding that the claims of the ’066 patent are indefinite. The PTAB’s decision is not binding on this court, and based on the record before us and the applicable standard of review, it does not persuade us that the district court abused its discretion in granting the preliminary injunction. The parties are, of course, free to ask the district court to reconsider its preliminary injunction in light of the PTAB’s Decision (p.13 n.7).

I'm glad to know I'm not alone in thinking it's a bit odd that the Federal Circuit wouldn't take the PTAB matter into consideration in deciding there was a substantial question concerning the validity of the patent--see Dennis Crouch's post today on Patently-O, where he writes that "A seemingly reasonable approach here would be to say – “If the PTO concludes that claims are likely invalid, then those claims are probably vulnerable to being found invalid.”  Here, the court does not follow that approach . . . ."

On the issue of irreparable harm, the court similarly deferred to the district court, based on evidence of consumer confusion and price erosion:

. . . Telebrands alleges that it was clear error for the Magistrate Judge to rely on evidence pre-dating the ’066 patent’s issuance in support of its finding of irreparable harm. Citing GAF Building Materials Corp. v. Elk Corp. of Dallas, 90 F.3d 479 (Fed. Cir. 1996), Telebrands asserts that irreparable harm must be measured from the date the patent issues because that is the date on which the right to exclude others arises. The GAF case is inapposite, however, because it addresses the dismissal for lack of jurisdiction of an action for declaratory judgment of invalidity and noninfringement of a design patent that had not yet issued. Id. at 481–83. And Telebrands cites no case prohibiting reliance on evidence of irreparable harm pre-dating the patent’s issuance.

Evidence of consumer confusion, harm to reputation, and loss of goodwill pre-dating the patent is, at the very possibility of identical harms once the patent issues. Neither party has suggested that the issuance of a patent would somehow mitigate or otherwise eliminate those harms. Similarly, the pre-issuance price erosion evidence may be relevant to show what would happen if Balloon Bonanza was no longer on the market. For example, it might support an argument that, absent competition, Tinnus could raise its price back to the original price point, but would not be able to do so as long as competition from Balloon Bonanza remains.

Nonetheless, the irreparable harm analysis does not depend solely on evidence pre-dating the patent. The record contains additional evidence of harm after the ’066 patent’s issuance that is sufficient to support a finding of irreparable harm. For example, a review for Tinnus’s Bunch O Balloons product on Amazon—dated a few weeks after the patent issued—states that the customer liked the “off brand” Bunch O Balloons product better than the “name brand” Balloon Bonanza. J.A. 1436. This establishes persisting harm to Tinnus’s reputation and tarnishes its status as the innovator in this market. See Celsis In Vitro, Inc. v. CellzDirect, Inc., 664 F.3d 922, 930 (Fed. Cir. 2012) (“Price erosion, loss of goodwill, damage to reputation, and loss of business opportunities are all valid grounds for finding irreparable harm.”). Although the post-issuance evidence is thinner, we are unable to find any clear error in the district court’s conclusion that Tinnus had demonstrated irreparable harm (pp. 23-24).

The question I have about this analysis is why the alleged injury resulting from price erosion would be "irreparable," since one would think that it could be quantified and repaired through money damages.  Maybe the argument is that once consumers have come to expect paying only $9.99 for the plaintiff's product, they'll be reluctant to pay $17 (the price at which "Bunch O Balloons" sold in August 2014, see p.10).  But I don't see that specific argument discussed in the appellate opinion.  Of course, if there is evidence of consumer confusion or loss of goodwill, those harms could be irreparable--though I wonder to what extent the evidence (including a phone call, a product review, some emails, and the  fact that "Bunch O Ballons" got better ratings on Amazon.com and Toys-R-Us, see p.11) substantiate any material harm to the plaintiff's goodwill or reputation.

The Beijing IP Court's 50 Million RMB Judgment in WatchData v. Hengbao

Today I am pleased to publish a guest post authored by Yijun (Jill) Ge, a former student of mine who is now an associate at Allen & Overy LLP in Shanghai, on the Beijing IP Court's recent judgment in WatchData v. Hengbao.  (For my two earlier posts on this decision, see here and here.) 

*                    *                     * 

Compared to the damages law in the US, Chinese patent law accords a plaintiff alternative routes to prove damages.  Illegal gains are recognized here.  Yet the majority of the patent cases have ended up with the courts awarding statutory damages.

In a recent patent infringement case, WatchData v. Hengbao, the Beijing IP Court awarded damages of RMB 49 million and attorneys’ fees of RMB 1 million.  What is worth noting is not only the high damages amount, but also the fact that the court admitted all the damages evidence proffered by the plaintiff and fully adopted its damages theory.   

The accused product is an everyday product for online banking.

WatchData involves two Chinese companies and the technology at issue concerns a USB token solution.  Most of the banks in China require the use of a USB drive with a security token preinstalled (or “USB Key”) for online banking.  A user has to plug in his or her USB Key and authorize transactions from the USB Key.  The parties of the case both supply USB Key products to banks in China. 

Plaintiff sued for lost profits.

WatchData sued its competitor Hengbao in early 2015 and claimed damages of RMB 49 million and costs of RMB 1 million.  WatchData elected its lost profits as the base for calculating damages. 

Article 20(1) of the Patent Trial Guidelines issued by the Supreme Court provides that where it is difficult to determine a plaintiff’s actual losses, these may be calculated by multiplying the number of the infringing products sold in the market with the reasonable profit of the patented product.  The law assumes that the defendant’s sales can be used as a proxy for the plaintiff’s lost sales.  Note that provisions like Article 20(1) are rarely litigated, as statutory damages have been the norm in China. 

To prove its profit level for the USB Key product, WatchData filed the following evidence:

·         Its purchase agreements with two bank customers listing a per-unit price of RMB 30 and RMB 32.5, respectively.

·         An audit report commissioned by its affiliate concluding that the gross margin is 30.22% and 35.61% for the sales with those two customers.

According to WatchData, its gross profit in connection with the aforementioned sales is RMB 10.68 and RMB 9.82, respectively.  This is calculated by multiplying the per-unit price with the gross margin.

WatchData also filed the public disclosure documents of a third party competitor, Feitian Technologies Co., Ltd.   According to the disclosure, Feitian had a per-unit gross profit of RMB 15, RMB 12.6 and RMB 11.6 for 2011, 2012 and 2013, respectively.  And Feitian’s gross profit margin ranges from 36.73% to 43.24%.

As such, WatchData claimed that for purposes of damages calculation, its reasonable profit for USB Key products is RMB 10 per unit.  The court agreed with WatchData, stressing that its audit report is objective and reliable, given that a higher gross margin was reported by Feitian in its public disclosure.

The court collected evidence concerning the defendant’s sales.

Under the Civil Procedure Law, Chinese courts are empowered to investigate and collect evidence that would otherwise be impossible to collect by the parties.  This is a mechanism that can potentially mitigate the lack of discovery in China.  Nonetheless, courts rarely invoke such power. 

In this case, to ascertain the defendant’s sales of the accused products, the court issued an investigation letter to Bank of China and two other entities responsible for preinstalling the token in the USB for the banks.  One entity is China Financial Certification Authority and the other appears to be a military technology unit.

The third parties’ responses to the court reveal that the defendant sold a total of 4,814,200 units of USB Key products to 12 banks.  The defendant challenged the accuracy of the data stating that other than those sold to Bank of China, the reported number cannot evidence the units that were actually sold.  The court dismissed this argument citing the fact that a token is uniquely assigned to each USB Key product purchased by the banks and that the third parties’ responses are directed to products with tokens preinstalled. 

Accordingly, the court went on calculating the lost profits by multiplying 4,814,200 units with a per-unit profit of RMB 10.  This arrives at RMB 48.142 million.

The court also drew negative inference from the defendant’s refusal to adduce evidence.

WatchData proffered evidence of the defendant’s website, through which it admitted sale to three additional banks.  The court twice ordered the defendant to submit its books and records concerning its sales to those three banks.  The defendant did not comply. 

The Supreme Court’s evidentiary rules provide that a negative inference can be drawn from such failure to cooperate unless there is good cause shown.  Note that a similar provision has been adopted in the Judicial Interpretation II for the Adjudication of Patent Infringement Disputes, which came into effect on April 1, 2016.

Consequently, drawing a negative inference against the defendant, the court supported the plaintiff’s estimation that the profits made by the defendant from sales to three additional banks exceed RMB 2 million.  The decision did not specify the basis for such estimation.  The court merely noted in passing that this is in accordance with the industry standard.

As a result, the court concluded that the damages calculation should also take into account RMB 2 million for sales to the three additional banks by the defendant.  Yet the plaintiff chose to claim only RMB 0.858 million. 

A shift from statutory damages?

The WatchData court awarded the plaintiff damages of RMB 49 million.  The amount consists of (i) RMB 48.142 million for the plaintiff’s lost profits in respect of the defendant’s sales to 12 banks, and (ii) RMB 0.858 million for the defendant’s gains derived from the sales to three other banks.

This is in fact a hybrid approach as the damages account for both the plaintiff’s lost profits and the defendant’s illegal gains.   

China has been known for low damages awards, which are usually in the form of statutory damages.  Some papers suggest that the top jurisdictions in China have a median damages award between RMB 80,000 and RMB 150,000.  Statutory damages have arguably led to under-compensation for patent infringement in China.  The WatchData case illustrates the trend where the Chinese courts have endeavored to increase the damages award and to properly compensate patentees. 

In particular, courts now might employ procedural mechanisms so as to allow damages evidence to be introduced and appraised in a trial.  Courts might also show more willingness to admit evidence indicative of the parties’ profit level or that of the industry.  

The next issue is how the courts would exercise scrutiny of the damages assessment.  While proving damages would likely remain an exercise of estimation, questions need to be raised as to whether any estimation is economically sound and evidentiarily reliable.  Otherwise it could result in overcompensation.

Updated Version of Cotter & Golden Paper on Empirical Studies of Patent Remedies

John Golden and I have posted an updated version of our paper 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 2017).  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.

FTC Files Antitrust Complaint Against Qualcomm

. . . and while on the subject of SEPs and FRAND (see today's other post below), I should note in addition that the U.S. Federal Trade Commission (FTC) voted earlier today to file a complaint in federal district court, accusing Qualcomm of unfair methods of competition in violation of section 5 of the Federal Trade Commission Act.  Here is a link to the FTC's press release, here is a link to the complaint, and here is a link to a dissenting statement filed by Commission Maureen Ohlhausen.  The press release summarizes the allegations as follows:

. . . The complaint alleges that Qualcomm:

• Maintains a “no license, no chips” policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to Qualcomm’s preferred license terms. The FTC alleges that this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor’s baseband processors. According to the Commission’s complaint, this is an anticompetitive tax on the use of rivals’ processors. “No license, no chips” is a condition that other suppliers of semiconductor devices do not impose. The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks.

• Refuses to license standard-essential patents to competitors. Despite its commitment to license standard-essential patents on FRAND terms, Qualcomm has consistently refused to license those patents to competing suppliers of baseband processors.

• Extracted exclusivity from Apple in exchange for reduced patent royalties. Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016. Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors.

  I need to review the complaint more carefully and give the matter some more thought.  If I am understanding the first point above correctly, though, the gist is that Qualcomm uses its dominance in the market for baseband processors to extract a supra-FRAND royalty for its SEPs, which the OEMs must pay whether or not they use Qualcomm processors.  Since excessive pricing is not itself an offense under U.S. antitrust law, though, the theory must be that Qualcomm is expanding or maintaining its monopoly in the baseband processor markets by making it more difficult for competitors in those markets to compete.  For example, suppose that Qualcomm initially charged a profit-maximizing price of $5 for a processor and $1 for a license to use a particular FRAND.  (The numbers are arbitrary, and for illustrative purposes only.)  Then Qualcomm decides to charge $4 for the processor and $2 for the SEP (regardless of whether the implementer uses a Qualcomm processor or an imperfect-substitute processor produced a competitive-fringe firm).  Suppose further that the imperfect-substitute firm's processor markets for $3.  The implementer will be less likely to buy the imperfect substitute if it has to pay $2, as opposed to $1, for the SEP (see para. 87).  And if the competing firm lowers its price from, say, $3 to $2 to attract some business from implementers, maybe it can't make enough of a profit to remain in the market.  Whether such alleged conduct, if proven, amounts to an antitrust offense is not immediately clear to me; couldn't Qualcomm achieve much the same effect by temporarily charging a low (but non-predatory) price for its processors?  That would result in lower prices, to be sure, but would have much the same effect of putting those competitors at a disadvantage and thus preserving Qualcomm's dominance.  But it's late as I write this, and maybe I'm overlooking something.  I'll give it some more thought tomorrow.
  
  Meanwhile, here are links to write-ups in the Wall Street Journal and Reuters.

Update:  I'm still mulling this over.  To the extent the FTC is alleging that Qualcomm is inhibiting licensees from challenging the validity or infringement of its SEPs, I can see how in theory that could amount in some cases to an antitrust violation, because it might preserve a monopoly in either the SEP or processor markets or both.  But since you can challenge patent validity without terminating the license (see MedImmune v. Genentech), I'm not sure why a motivated licensee wouldn't be able to do so.  Maybe it depends on what the specific licenses say, or maybe licensees are afraid that if they do challenge validity Qualcomm will refuse to sell them processors (shades of the Intergraph v. Intel--in which the Federal Circuit, however, reversed a preliminary injunction against Intel based on the latter's refusing to sell chips to a firm that was suing it for patent infringement).  Some of the allegations in the public version of the complaint are redacted, however, and there is an allegation (para. 127) that Qualcomm obligated Apple not to induce litigation challenging the licenses as non-FRAND.

As for the monopolization theory I was thinking about last night, I'm still inclined to think that an antitrust judge isn't going to want to get into the business of determining whether the price Qualcomm charges for its SEPs is too high.  Moreover, if the royalty isn't consistent with Qualcomm's FRAND obligations, couldn't the implementers (other than Apple, apparently) file suit for breach of contract as in Microsoft v. Motorola?  Though in that event, the court hearing the breach of contract claim would have to determine what a FRAND royalty is.  Given that option, though, is an antitrust claim necessary?

JRC Report on the Licensing Terms of SEPs

The Joint Research Centre (JRC), "the European Commission’s science and knowledge service," has just published a report titled Licensing Terms of Standard Essential Patents:  A Comprehensive Analysis of Cases, available here.  The authors are Chryssoula Pentheroudakis and Justus A. Baron, and the editor Nikolaus Thumm.  I'll have more to say about this report after I read it, but I thought readers of this blog would like to hear about it right away.  (Hat tip to Dr. Pentheroudakis for calling it to my attention.)  Here is the abstract:

The prospect of licensing patents that are essential to standards on an industry-wide scale is a major incentive for companies to invest in standardization activities. Most standard development organizations (SDOs) have defined intellectual property rights (IPR) policies whereby SDO members must commit to licensing their standard-essential patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This study aims to provide a consistent framework for both the interpretation of FRAND commitments and the definition of FRAND royalties. Our methodology is built on the analysis of landmark and significant decisions taken by courts and competition authorities in Europe and worldwide. The purpose of the comparative analysis is to provide a comprehensive overview of how FRAND licensing terms have been defined in the evolving case law, while testing the economic soundness of the concepts and methodologies applied by courts and antitrust authorities.