Friday, September 1, 2017

Federal Circuit Denies Rehearing En Banc on Apportionment of Lost Profits

This morning the court issued an order in Mentor Graphics Corp. v. EVE-USA, Inc. denying a rehearing en banc.  (The original panel opinion, authored by Judge Moore and joined by Judges Lourie and Chen, is available here, and my blog post on it is available here.)  To cut to the chase, the original panel (correctly, in my view) affirmed a lost profits award based on evidence that the defendant's infringement cost the defendant x amount of sales, without further apportioning the lost profits award (even though the patent in suit is only one of many embodied in the infringing device).   Appended to the order denying a rehearing en banc is a short concurring opinion by Judge Stoll (joined by Judges Newman, Moore, O'Malley, Reyna, and Wallach); a dissenting opinion by Judge Dyk (joined by Judge Hughes); and another concurring opinion by Judge Moore (joined by Judge Chen) on a separate issue (assignor estoppel).  I'm glad the court denied a rehearing, and won't go into detail about why I think the court was correct (interested readers should simply consult my previous post on the matter), but I will note this one page from the dissent which in my view highlights the problem with the dissent's argument (dissenting opinion, p.5):
. . . even if “but for” a patented feature the item would not have been purchased, it could be equally true that but for an unpatented feature (or a feature covered by another patent) the item would not have been purchased. Apportionment between features covered by the asserted patents and other features makes eminent sense. The panel makes no such apportionment.
Think about that for a minute:  suppose the infringing device has two components, A and B, and that only A is patented.  Patent owner similarly sells a device including those two components.  Suppose further that there's no substitute for A; that the infringer sold ten devices; and that the evidence shows that, but for the infringement, the patent owner would have made those ten sales.  In my view the patent owner should recover its lost profit on those ten sales, even though the the device also contained the unpatented component B.  It's true that people wouldn't have bought the device absent this unpatented component too, but so what?  If the court were to award the patent owner, say, half its actual lost profit because the unpatented component contributed half the value of the device to consumers, this means that the owner would remain worse off as a result of the infringement, and the infringer potentially better off than if it  had not infringed.  Apportionment, in other words, would encourage infringement and would not restore the patent owner to its but-for position.  (Of course, if patents are unnecessary to stimulate invention, then this is a wonderful result for consumers:  we pay less and get more for our money.  But if that's the case we may as well get rid of patents altogether rather than fiddling around with damages rules.)  Indeed, the economic logic seems so straightforward that I have a hard time understanding how anyone could dispute it, but so it goes.  Nonetheless, I respect Judges Dyk and Hughes, as well as Professor Bernard Chao, who in a recent article mounts a vigorous argument (albeit one with which I profoundly disagree) in support of the position reflected in the dissenting opinion.  See Bernard Chao, Lost Profits in a Multicomponent World, available on ssrn here.  Readers, judge for yourselves.      

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