Friday, February 21, 2020

Damages for Infringement Without Use or Sale?

This is the post I was working on in December, when I blogged about the Federal Circuit's decision in Amgen Inc. v. Hospira, Inc.  The issue is one I've been thinking about, off and on, for several months, and that I might want to develop into an article at some point--so I'd appreciate any feedback that readers may have.  Suppose that someone, without authorization, makes another's patented invention--or wrongly acquires another's trade secret--but then doesn't use, or sell any products  made from, the invention or secret.  Should the defendant be liable at all, and if so what is the remedy?

I started thinking about this issue a bit last summer, when I read that a jury (1) had found Huawei liable for wrongly acquiring trade secret information from a company called Cnex, but (2) awarded no damages based on a lack of evidence that Huawei had benefited from the information (see here).  Shortly thereafter, I discovered Sharon Sandeen's article Out of Thin Air:  Trade Secrets, Cybersecurity, and the Wrongful Acquisition Tort, 19 Minn. J. L. Sci. & Tech. (2018), which questions whether there should be a tort of wrongful acquisition of trade secrets (absent disclosure or use of the trade secret information), and also discusses whether the unauthorized acquisition of other types of information or data should give rise to liability absent proof of use.  In addition, I blogged about the U.K. Supreme Court's decision in Morris-Garner v. One Step Ltd [2018] UKSC 20, in which the court approved of the use of "user" or "negotiating" damages (based on a hypothetical ex ante negotiation) in a case involving a breach of a noncompete agreement, and noted the use of this principle in certain other contexts including IP and breach of confidence matters; and I came across a couple of commentaries on Morris-Garner in the European Intellectual Property Review, John Hull's A Reappraisal of Negotiating Damages:  The Supreme Court Judgment in Morris-Garner v. One Step (Support) Ltd,, 41 EIPR 180 (2019), and his earlier Aiming for "Jackpot Damages" in a Breach of Confidence Case:  Marathon Asset Management LLP v. Seddon.  The latter article discusses the implications of Morris-Garner in a case in which the defendant copied certain documents upon leaving his job, but then didn't use them in his new position.  It also occurred to me that these types of cases are similar to the fact pattern that arises when an infringer makes the patented invention but then decides not to use it.  Bernard Chao and Jonathan Gray have critiqued one such case, Monsanto Co. v. E.I. DuPont De Nemours & Co., 2012 WL 2979080 (E.D. Mo. July 29, 2012), in which the court awarded a reasonable royalty in the amount of $1 billion, based on the assumption that this is what the parties would have agreed to ex ante under the hypothetical bargaining approach.  See Chao & Gray, A $1 Billion Parable, 90 Denver U. L. Rev. Online 185 (2013).  Finally, you could make an analogy to data privacy cases in which consumers whose data has been stolen as a result of a corporation's inadequate safety precautions sometimes seek damages from the corporation, even though the data theft has not yet resulted in any actual economic harm such as identity theft.  As Daniel Solove and Danielle Citron argue in their paper Risk and Anxiety:  A Theory of Data Breach Harms, 96 Tex. L. Rev. 737 (2018), however, these uses may cause consumers to suffer emotional distress based upon the possibility of future use, but U.S. courts have not consistently recognized such harms as cognizable.

It seems to me that there are a range of possible choices to make in cases like those described above:

1.  There could be no liability at all, or liability with only nominal damages, in these types of cases, on the theory that acquisition or manufacture of an intangible without subsequent use causes no harm.

2.   Courts could award noneconomic damages for emotional distress, at least in the data privacy cases and perhaps some of the others, based on the theory that emotional distress is sometimes a real and foreseeable consequence of the wrongful acquisition or manufacture, but no economic damages.

3.  Courts could award economic damages in the form of a reasonable royalty, based upon the ex ante hypothetical bargaining approach as in Monsanto and as contemplated in Morris-Garner.

4.  Courts could award economic damages in the form of a reasonable royalty based on a contingent ex ante approach, as advocated by Norman Siebrasse and me in A New Framework for Determining Reasonable Royalties in Patent Litigation, 68 Fla. L. Rev. 929 (2016), in which we cite Chao & Gray with approval. In other words, award the royalty the parties would have negotiated ex ante had they known the extent to which the defendant would actually make use of the subject information ex post.  Where there was no use of the information ex post, that number is zero.

As suggested by point #4, I think the correct answer in patent cases is the contingent ex ante approach, for discussion of which I refer readers to my coauthored article (see here) and to pp. 31-33 of Patent Remedies for Complex Products.  (Briefly, we think the contingent ex ante approach betters aligns the reward with the contribution of the patented technology to the art.)  Point # 1 might make sense in some other bodies of law, as Professor Sandeen proposes, but I don't think it's an option under U.S. patent law, where the statute clearly defines unauthorized manufacture as an act of infringement.  As for trade secrets, there might be an argument for making wrongful acquisition unlawful even if in some cases there are no damages, if we think that otherwise defendants might be motivated to wrongly acquire trade secrets for purposes of evaluating whether to use them, which if nothing else puts the secret at risk and circumvents a potential license (but I need to think about this some more).  In the data privacy cases, it would be interesting to think about the consequences if consumers could use the hypothetical bargaining approach to demand a royalty for the unauthorized disclosure of their data.  Under the "pure" ex ante approach this might result in catastrophic liability on the part of negligent corporations--a fact which, if you think such liability would be disproportionate to the defendant''s fault, might might be a good reason not to recognize property rights in data (as some have advocated); but again I need to think about this some more. 

Readers:  any initial reactions? 

Note: I've had a lot of administrative work this month, and I probably will take a blogging break next week while I try to catch up on some other work, unless Unwired Planet or some other monumental decision comes out.
Update (May 2021):  I just noticed that in the above post from February 2020 I suggested, incorrectly, that the U.K. Supreme Court had approved the use of negotiating damages on the facts of Morris-Garner (involving breach of a noncompete agreement), when in fact it generally didn't.  See Morris-Garner v. One Step, [2018] UKSC para. 100.  The court did approve of the use of such damages for breach of a contract involving IP or confidential information, see id. para. 93, and noted previous case approving its use in cases involving IP infringement, see id. paras. 26-30.  Lord Carnwath, concurring, stated that in his view the relevant time from in such a case is "the time of the taking or the infringement," id. para. 159, but the majority did not express an opinion on this issue, see id. para. 56.    

1 comment:

  1. It seems to me that by eliminating disgorgement as a remedy, and focusing instead on the reasonable royalty, the Patent Act chose a mostly ex ante approach. The patentee doesn't reap the windfall of the infringer's success by getting profits, but the infringer likewise does not get to escape substantial damages based on its own failure. The infringer did make use of the patented invention, and may have failed to make a product for any number of reasons (poor execution, flawed business strategy, even bad luck, and so on). And as you suggest, even if the use of the invention did not lead to a commercial product because of some sort of technical inadequacy, sometimes knowing what not to do (as you suggest) can be incredibly commercially valuable - that's why trade secret law protects negative know-how. Granted, the prevalence of reasonable royalty measures based on a running royalty is in tension with what I just said - which makes me wonder if a true ex ante approach should base the running royalty on a number of anticipated sales, not actual ones.