Federal Circuit Agrees to Hear Interlocutory Appeal of Order Excluding Damages Evidence

The court issued a per curiam order yesterday in MLC Intellectual Property, LLC v. Micron Technology, Inc., accepting an interlocutory appeal.  Here are the relevant facts:

MLC sued Micron for infringement of a patent that has expired and sought reasonable royalty damages. MLC’s expert submitted a report proposing a royalty calculation using a royalty rate he derived from two license agreements and extrinsic evidence. He multiplied that rate by alternative royalty bases: either all revenue from the accused products or all revenue from what the parties agreed was the smallest salable patent practicing unit (“SSPPU”). Micron filed pre-trial motions to exclude the testimony.

The district court issued three separate damages orders, granting Micron’s motions and excluding MLC’s expert report and testimony. The district court then certified the three orders for review under 28 U.S.C. § 1292(b), which authorizes a district court to certify for appeal an otherwise-unappealable order when it is “of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b).^/1  

^/1 In the same certification order, the district court denied Micron’s motion for summary judgment of no remedy despite noting that it had excluded all of MLC’s expert evidence because it could not reach the conclusion that it is undisputed that zero was the only reasonable royalty rate here.  

I haven't researched the underlying facts and can't comment on them.  Based solely on the facts quoted above, however, the case potentially raises the question of what to do when a party prevails on liability but offers no admissible evidence on damages.  (An injunction wouldn't be available on the facts of MLC, because the patent has expired.)   It reminds me a bit of Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014).  As I wrote about the case at the time:

Judge Posner had granted summary judgment to Motorola with regard to Apple’s ‘647 Patent, on the ground that Apple had not presented admissible evidence as to what a reasonable royalty would be for this patent.  The potential weakness is that 35 U.S.C. § 284 states that “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer”, which might suggest that some reasonable royalty is due even if a party presents weak or no evidence as to amount.  Here, I think Judge Reyna finessed the issue pretty well (see pp. 63-69):

If a patentee’s evidence fails to support its specific royalty estimate, the fact finder is still required to determine what royalty is supported by the record. . . .  Indeed, if the record evidence does not fully support either party’s royalty estimate, the fact finder must still determine what constitutes a reasonable royalty from the record evidence. . . . Certainly, if the patentee’s proof is weak, the court is free to award a low, perhaps nominal, royalty, as long as that royalty is supported by the record. . . . 

Thus, a fact finder may award no damages only when the record supports a zero royalty award. For example, in a case completely lacking any evidence on which to base a damages award, the record may well support a zero royalty award. Also, a record could demonstrate that, at the time of infringement, the defendant considered the patent valueless and the patentee would have accepted no payment for the defendant’s infringement. Of course, it seems unlikely that a willing licensor and willing licensee would agree to a zero royalty payment in a hypothetical negotiation, where both infringement and validity are assumed.

 At summary judgment, as is the case here, a judge may award a zero royalty for infringement if there is no genuine issue of material fact that zero is the only reasonable royalty. Thus, if a patentee raises a factual issue regarding whether it is due any non-zero royalty, summary judgment must be denied. In any event, simply because a patentee fails to show that its royalty estimate is correct does not, by itself, justify awarding a royalty of zero at summary judgment, as the district court did here. . . .

The record before us does not support granting summary judgment of no damages. Motorola has not met its burden of demonstrating, as the party who moved for summary judgment, that the record is uncontroverted that zero is the only reasonable royalty.

I also discussed these issues, very briefly, in my paper Patent Damages Heuristics, 25 Tex. Intell. Prop. L.J. 159 (2018), as follows:

Courts sometimes have employed heuristics to help determine if the claimant is eligible to recover a certain class of damages at all. Section 284 of the U.S. Patent Act, for example, states that “[u]pon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer” (emphasis added). . . . In Apple, Inc. v. Motorola, Inc., . . . the Federal Circuit interpreted the italicized language to mean that, even when the patent owner fails to introduce admissible evidence quantifying the amount of its loss, the court still has an obligation to “determine what constitutes a reasonable royalty from the record evidence” . . . —in effect, creating a rebuttable presumption that the patent owner is entitled to something as a consequence of the infringement. The rule is consistent with practice in some other countries,⁷⁶ but it provides no guidance on how to calculate the royalty due when the parties’ evidence is deficient. One might imagine, though, that in such cases courts will have to take it upon themselves to apply methodology heuristics akin to those I discuss in a subsequent section below, based on whatever record evidence there may be concerning the amount of the use, comparable license rates, and the advantages of the technology over alternatives. For now, however, this appears to be an area in which U.S. patent damages law remains largely underdeveloped.⁷⁷

⁷⁶ See, e.g., Markus Schönknecht, Determination of Patent Damages in Germany, 43 IIC 309, 311–13 (2012) (discussing the German courts’ “free discretion” (nach freier Überzeugung) to estimate patent damages under § 287 of the Code of Civil Procedure); see also Charlotte Scott, Damages Inquiries and Accounts of Profits in the IPEC, 38 E.I.P.R. 273, 273 (2016) (asserting that the procedural rules employed in the Intellectual Property Enterprise Court of England and Wales—a sort of smallish-claims court in which damages are capped at £500,000—“enable a rough and ready determination with more limited disclosure”). According to Schönknecht, in Germany “[t]he injured party is not required to prove the exact amount of its damage; rather, it is sufficient if it presents a factual basis on which the court can establish ‘at least a rough estimate’ of the damage.” Schönknecht, supra, at 312 (citing Federal Supreme Court (Tolbutamid), 1980 GRUR 841, 842, translated in 11 IIC 763, 764 (1980)). Statutory damages, which are (by far) the dominant form of damages award for IP infringement in China, arguably are intended to play a similar role of allowing the court to provide compensation when the evidence on lost profits, royalties, and defendant’s profits is lacking, though critics argue that awards of statutory damages are not closely correlated with actual losses or gains. For discussion, see Jingjing Hu, Determining Damages for Patent Infringement in China, 47 IIC 5 (2016).

⁷⁷ Although, as I have noted elsewhere, one of the recent FRAND cases—Microsoft Corp. v. Motorola, Inc., Case No. C10-1823JLR, 2013 WL 2111217, at *39-49 (W.D. Wash. Apr. 25, 2013), aff’d, 795 F.3d 1024 (9th Cir. 2015)—arguably provides some insight into how judges can determine damages without relying too closely on either side’s damages calculation. See Thomas F. Cotter, The Comparative Law and Economics of of Standard-Essential Patents and FRAND Royalties, 22 Tex. Intell. Prop. L.J. 311, 360 (2014). See also In re Marriage of Abu-Hashim, 14 N.E.3d 524, 531 (Ill. App. 2014) (affirming a trial judge’s methodology for valuing a daycare business in a divorce proceeding, on the ground that “where a party does not offer evidence of an asset’s value, the party cannot complain as to the disposition of that asset by the court”).

Maybe after MLC the law will no longer be so underdeveloped.

From Around the Blogs, Part 3

1.  On Patently-O, Dennis Crouch published a post last week titled This week in Property: Efficient Infringement.  The post discusses a real property case, Jacque v. Steenberg Homes,  209 Wis. 2d 605 (1997), the rejected the efficient infringement concept and awarded punitive damages of $100,000 for a trespass to land (despite trivial actual harm), and compares that case to the patent landscape post-eBay. Very interesting post--and I appreciate the citation to my 2001 paper with Roger Blair--though I would disagree with the statement that, under current law, "Patent rights are protected with a liability rule."  Sometimes they are, but the statistics I've seen show that prevailing patent owners still get injunctions about 75% of the time when they request one.  

Professor Crouch also had an interesting post yesterday titled $85.23 million for WiLAN against Apple., discussing a recent damages judgment from the Southern District of California.

2.  Norman Siebrasse published some recent posts on a Canadian case, Seedlings Life Science Ventures, LLC v Pfizer Canada ULC 2020 FC 1, two of which deal with damages issues.  The first, titled Use of ex Post Information in Assessing a Reasonable Royalty, discusses the judge's statement (in dictum) that, for purposes of calculating a reasonable royalty, "The hypothetical negotiation takes place at the time of first infringement. . . . Therefore, the exercise must be informed by the then existing situation. Changes that took place later are not relevant, as the parties would not have been aware of them at the time of the hypothetical negotiation. Subsequent events may only be relevant insofar as it can be said that they would have been expected or anticipated by the parties at the time of negotiation.”  Professor Siebrasse argues, for reasons that he and I have discussed in other work he cites in the post, that "[u]sing only information available at the date of first infringement might result in undercompensation . . . but it might also result in overcompensation."

The second, titled Can an Entity That Does Not Practise the Invention Be Entitled to an Accounting?, discusses the judge's suggestion (in dictum) that a nonpracticing entity cannot recover an accounting of the defendant's profits.  Siebrasse argues that a strict rule forbidding an accounting is unwise, insofar as "a reasonable royalty . . . may not provide an adequate deterrent against infringement" while "punitive damages are arguably an excessive deterrent."  It's an interesting argument:  if we need to have a remedy that goes beyond compensatory damages, would an award of the infringer's profits attributable to the infringement be preferable to punitive or enhanced damages?  (Note, by the way, that there is conflicting Japanese precedent on the question whether nonpracticing entities can recover an award of the infringer's profits.  See discussion here.)

3.  On JUVE Patent, Matthieu Klos published a post titled FRAND: Unwired Planet and Huawei in advanced settlement negotiations.  The piece discusses whether the U.K. Supreme Court would still publish an opinion in this case if parties settle.

Some More Commentary on Germany's Proposed Amendment to Its Patent Law

1. Matthew Bultman has published a piece on Bloomberg News titled Pressure Grows to Stop Automatic Product Bans in EU Patent Rows.  The article quotes several commentators, including me, on the proposal to delay the entry of injunctive relief "when it would be disproportionate and cause unjustified harm," and to close the "injunction gap" by requiring the Patent Court to render a preliminary assessment of validity within six months.

2. Matthieu Klos has published a piece on JUVE Patent, titled No hot air: industry considers German bifurcation update, which quotes a range of commentators arguing variously that the proposal goes too far, doesn't go far enough, or is just right.  On the "goes too far" end of the spectrum is one commentator who argues that the current system works because "the feared shutdown of entire production lines due to the patent infringement of a product part practically never occurs."  The obvious response is that, just because implementers find it in their interest to pay a royalty to avoid shutdown doesn't mean that the royalty is proportionate to the value of the invention.  In fact, there's every reason to think that the threat of an injunction ex post will cause an implementer to pay an excessive royalty, which is good for neither consumers nor innovation.  That's the patent holdup concept in a nutshell. 

3.  Florian Mueller, who is clearly of the "doesn't go far enough" view, published a third post on the amendment on FOSS Patents, titled Without eBay factor #2, German patent reform movement is left with nothing but Kremlinology, spin, and self-delusion: licensing vs. injunction.  He calls attention to the fact that neither the proposed amendment nor the Ministry's rationale for it discusses "the second eBay v. MercExchange factor: the requirement for an injunction that monetary relief (= a damages award) be 'inadequate' to make the patentee whole. That includes, but is not limited to, the intrinsic value of the invention at issue and its relevance to the accused product."

Conferences Next Week at the University of Texas

On Friday and Saturday of next week, the Texas Law Review will host a symposium titled "Remedies in Complex Litigation."  The conference description is:

The symposium is designed to bring together leading thinkers from across the country to present and discuss various perspectives on and applications for complex litigation, from assessments of patent damages to complex-litigation techniques for reparations.

The program on Friday will include a Copyright and Trademark session and the aforementioned Patent Damages session.  Speakers at these two sessions will include Professors Bob Bone, Laura Heymann, Oren Bracha, Zahr Said, Sarah Burstein, John Golden, Liza Vertinsky, Abe Wickelgren, Melissa Wasserman, and Jeremy Bock.  More information is available here.

 

The day preceding the symposium, there will be a Patent Roundtable, which the University of Texas School of Law's calendar succinctly describes as "Judges and Lawyers coming together to talk about Patent Remedies."  This event is by invitation-only, however.  I will be one of the participants.

Some New Papers on FRAND

1.  Oscar Bongorgno and Giuseppe Colangelo have posted a paper on ssrn titled Disentangling the FRAND Conundrum.  Here is a link to the paper, and here is the abstract:

Courts, antitrust authorities, and policy makers across the world have been over concerned by holdup risks involving the strategic use of standard essential patents (SEPs). In order to avoid or at least mitigate holdup problems, it has been adopted the view that a fair, reasonable, and non-discriminatory (FRAND) commitment implies a waiver of the right to seek injunctions against infringers. However, contrary to the mainstream belief, there is no empirical evidence of structural and systematic problems of holdup and royalty stacking affecting SEPs licensing. Therefore, there is no convincing reason for laying down an exceptional antitrust treatment for FRAND-encumbered patents.

Problems afflicting SEP licensing stems from the lack of contractual or organizational solutions provided by standard setting organizations (SSOs) which exacerbates the risk of strategic behaviors. First and foremost, SSOs should require all SEP owners involved in a standardization process to disclose, ahead of the standard adoption, the most restrictive licensing terms. Secondly, since holdup and royalty stacking problems increase proportionally with the number of SEPs and many patents declared essential by SSOs lack this characteristic, essentiality checks carried out by independent third parties should be imposed to mitigate the risk of over-declaration. 

I'm sympathetic to the points raised in the second paragraph, but not the first.

2.  Peter George Picht has published an article in the November 2019 issue of GRUR (pp. 1097-1103) titled The future of FRAND Injunction.  Here is the abstract:

The CJEU's famous Huawei/ZTE case has added a FRAND layer to general patent injunction law for SEPs.  In spite of this specific grid, SEP/FRAND injunction litigation remains rampant, courts are both granting and denying injunctions.  The present contribution reviews recent case law from Germany and the UK, assesses its achievments and shortcomings, discusses the impact of the general patent law discourse on a more proportionality based, more flexible granting of injunctions, and suggests some ways forward.

Professor Picht's observations in section VI ("Ways Forward") are definitely worth a read.

3.  J. Gregory Sidak has published a paper titled Negotiating FRAND Licenses in Good Faith, 5 Criterion J. Innov. 1 (2020).  Here's a link, and here's the abstract:

This article has two messages. First, any set of principles for defining whether a fair, reasonable, and nondiscriminatory (FRAND) negotiation has transpired in good faith must identify what economists who work on questions of market design call activity rules and closing rules. Judges, practicing lawyers, legal scholars, and government officials working on the defining of principles for good-faith negotiation of FRAND licenses for standard-essential patents (SEPs) have not recognized that need. Nor, to my knowledge, has any academic economist or expert economic witness commented on this lacuna.

Second, the American jurisprudence on offer, acceptance, and contract formation fortuitously has the clarity of an unambiguous closing rule, but the contract jurisprudence of other nations appears, at least to my American eyes, to be less clear. In my experience, the potential for there to be material variation across jurisdictions in the level of ambiguity of the legal principles for determining whether an SEP holder and an implementer have conducted their FRAND negotiation in good faith has received virtually no attention from judges, practicing lawyers, legal scholars, and government officials. And, to my knowledge, this issue has received absolutely no consideration from academic economists or expert economic witnesses testifying in FRAND disputes.

This phenomenon of differential ambiguity in matters of contract formation and good-faith negotiation has important practical implications because French law, which appears to be less emphatic than American law on such questions, often is the controlling law for interpreting the duties imposed by a FRAND contract because the European Telecommunications Standards Institute (ETSI) is so prominent in the setting of voluntary standards for wireless communication, and ETSI’s FRAND contract prescribes that French law controls. In contrast, New York law controls the Institute of Electrical and Electronics Engineers’ (IEEE’s) reasonable and nondiscriminatory (RAND) contract. Those legal differences in turn could influence the content and evidentiary relevance of expert testimony on questions of economic fact, such as the quantification of a FRAND or RAND royalty.

To begin the task of reducing legal and economic ambiguity concerning the determination of whether an SEP holder and an implementer have conducted a FRAND licensing negotiation in good faith, I have proposed here the formulation of a specific activity rule and a specific closing rule when American contract jurisprudence does not control interpretation of the FRAND contract in question. My proposed activity rule is that, in each round of offer and counteroffer—and to the extent that the SEP holder has not already discharged its contractual obligation to ETSI (such as by already having made a legitimately FRAND offer at the very outset of the negotiation)—a party must revise its bid or ask price by the minimum agreed-upon increment for that party to be deemed still to be negotiating in good faith. My proposed closing rule is that a party will be deemed to have made its final offer or counteroffer if it does not, within a commercially reasonable amount of time after receiving an offer or counteroffer, sweeten its price relative to its price in the previous round of offer and counteroffer. These rules of market design are proposals, which will surely benefit from scrutiny and refinement by others, but these proposals should suffice to invite a needed discussion.

Finally, because ETSI’s FRAND contract contains the distinctive (but evidently ambiguous) requirement that an SEP holder be “prepared to grant” licenses to its SEPs, I offer here one particular interpretation of that phrase that is explicitly informed by the economic analysis of law. Whether a court would find my suggested interpretation compatible with the principles of interpretation used in French contract law is a question I must leave to others better suited to the task.

4.  Larry Sandell published an article on Law360 titled Litigating FRAND Rates After Fed. Circ. Ericsson Decision.  Mr. Sandell advises, among other things, "certain best practices . . .  for FRAND cases involving a retrospective 'release payment' claim for past unlicensed sale," and that litigators "focus on distilling a compelling, simplified story for the jury and adopt a mantra of 'substantial' evidence'".