Two New Papers on Fee Shifting

1. Megan LaBelle has posted a paper on ssrn titled Fee Shifting for PTAB Proceedings.  Here is a link to the paper, and here is the abstract:

Fee shifting in patent litigation has been a hot topic in recent years. In Octane Fitness v. ICON and Highmark v. Allcare, the Supreme Court made it easier to shift fees under 35 U.S.C. § 285, which allows courts to award reasonable attorney’s fees to prevailing parties in patent cases. Moreover, several bills have been introduced in Congress since 2013 that would expand courts’ power beyond the parameters of § 285. Various aspects of these proposals have been heavily debated, including whether fee shifting should be mandatory or discretionary, how to recover fees from the “real party in interest,” and whether to adopt a one-way or two-way fee shifting scheme.

These sort of design choices regarding a fee shifting regime are not simply about who should pay for patent litigation. Fee shifting schemes also provide a roadmap from lawmakers about whether and how litigation ought to proceed. Fee shifting regimes, in other words, are used to influence litigation conduct. Thus, if Congress is going to alter the fee shifting landscape for patent litigation, it must make careful choices in order to incentivize certain types of patent disputes, while simultaneously discouraging others.

This Article does not advocate for a new fee shifting regime for patent litigation, nor does it endeavor to design one. Instead, it focuses on one narrow but important question about fee shifting in patent cases that has received surprisingly little attention: whether prevailing parties should be able to recover attorney’s fees incurred for litigation before the Patent Trial and Appeal Board (PTAB) — the administrative tribunal of the U.S. Patent & Trademark Office that was created by the America Invents Act (AIA). With the steep rise in both PTAB proceedings (post-AIA) and fee motions (post-Octane/Highmark), district courts are bound to face this question more frequently. While the U.S. Court of Appeals for the Federal Circuit has allowed for the recovery of such fees in the past, the Federal Circuit’s analysis was flawed in light of Supreme Court precedent. Thus, this Article proposes that Congress enact legislation allowing parties who prevail at the PTAB to recover their attorney’s fees.

2.  Scott Flanz has published a paper titled Octane Fitness:  The Shifting of Patent Attorneys' Fees Moves into High Gear, 19 Stanford Tech. L. Rev. 329 (2016).  Here is a link to the paper, and here is the abstract:

In 2014, the United States Supreme Court decided Octane Fitness. LLC v. ICON Health & Fitness, LLC, significantly altering the standard for granting attorneys’ fees shifting at the close of a patent litigation. Combine with precedent announced on the same day in Highmark Inc. v. Allcare Health Management Systems, scholars have opined that under the new regime, the standard for proving entitlement to attorneys’ fees in patent litigations will be considerably relaxed. Despite the widespread acceptance of the viewpoint, few empirical analyses—if any—have objectively confirmed it.

This paper provides a first glimpse into whether the Supreme Court’s decision in Octane changed the attorneys’ fees standard in practice. By investigating the rate at which courts have granted attorneys’ fees motions before and after Octane, broken down by whether the movant was a patentee or accused infringer, the technology of the patent asserted, the circuit and district where the suit was decided, and what factors were considered by each court in its opinion, this research confirms that Octane’s reinterpretation of § 285 has had observable effects. In particular, this study finds a statistically significant increase in the rate of attorneys’ fee shifting after Octane, particularly for motions filed by accused infringers and in motions concerning electronics and software patents. The results of this study shed light on meaningful and recent changes to the patent litigation incentive structure and will be helpful in predicting future changes to the patent litigation landscape.

Contreras on Injunctions in U.S. Patent Cases

Jorge Contreras has posted a paper on ssrn titled Injunctive Relief in U.S. Patent Cases.  It is a draft of a chapter in a forthcoming edited volume titled Injunctions in Patent Law (Rafal Sikorski ed., forthcoming 2017).  Here is a link to the paper, and here is the abstract:

The law of injunctive relief in United States patent cases presents a puzzling set of contrasts. On one hand, it is grounded in venerable common law principles of equity that have been applied by the courts for centuries. On the other hand, it reflects the unique complexities of massively multicomponent products and advanced technology standards. This chapter provides an overview of the U.S. law of patent injunctions, both generally and specifically as applied to standards-essential patents. It also addresses, briefly, considerations surrounding the issuance of exclusion orders by the U.S. International Trade Commission (ITC), a non-judicial federal agency that has recently become an important venue for patent litigation.

I understand that the edited volume in which this paper will appear is intended to provide a thorough look at the law of patent injunctions in the principal jurisdictions for patent litigation.  It should be a welcome addition to the literature.

Today's Oral Argument in Samsung v. Apple

The U.S. Supreme Court today heard oral argument in Samsung Elecs. Corp. v. Apple, Inc.  Here's a link to the transcript.  This is the case involving Apple design patents relating to the iPhone.  The district court and the Federal Circuit both interpreted the relevant statute, 35 U.S.C. § 289, as requiring a defendant to disgorge its entire profit earned from the sale of a design-patent-infringing product.  The statute reads: 

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.   

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement. 

The question presented to the U.S. Supreme Court is "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?"  For previous discussion on this blog of the case, the statute and its history, and the briefing leading up to today's oral argument, see here and previous posts linked therein.

Overall, I found this to be a fairly confusing argument.  It seems to me, however, that both sides and the government (as amicus curiae) ultimately are agreeing that the first step of the analysis is to identify the relevant article of manufacture, though there is some disagreement about exactly how you do that, with the government proposing a four-factor test that in the government's (but not Apple's) view shouldn't take into account the extent to which the design contributes to the demand for the article.  (Assistant Solicitor General Fletcher:  "[W]e say you should compare the scope of the patented design as shown in the drawings in the patent, how prominently that design features in the accused article, whether there are other conceptually distinct innovations or components in the article that are not part of or associated with the patented design, and finally the physical relationship between the patented design and the rest of the article" (p28).)  The second question is how much of the profit on the sale of the end product is attributable to that article of manufacture (not how much is attributable to the patented design of that article).  To answer this second part, the parties may need to present expert testimony on the cost of production and the extent to which the design drives demand for the article.  Some of the justices seemed to suggest that this sort of analysis requires some kind of apportionment or causation analysis, which may be contrary to Congress's intent, while others seemed to question whether the profit to be awarded in this case rightfully could include profit attributable to the internal working of the phone.   

I'm guessing, though it's only a guess, that the Court will adopt some sort of two-step test along the lines discussed at oral argument; and that, in order to determine what unit should be considered the relevant article of manufacture, the trier of fact may take into account whether that unit (including both its design and its functional attributes) is a substantial part of what drives the demand for the entire product.  This still entitles the patent owner to the entire profit from that unit, however one goes about determining what that is, and not just the profit attributable to the design.  It's still going to be a mess trying to explain all of this to a jury, though; and the idea that the owner of a design patent should get any portion of the profit beyond what is attributable to the design itself is economically irrational, even if that was what Congress intended during the administration of Grover Cleveland.

Update (Thursday, October 13):  For additional commentary on the oral argument, check out Sarah Burstein's post on Patently-O and MIchael Risch's on Written Description.

Today's Nobel Prize in Economics and Its Relevance to Patent Law

This morning the Royal Swedish Academy of Sciences announced its award of the 2016  Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Oliver D. Hart of Harvard and Bengt Holmström of MIT for their work in contract theory.  Here is a link to the press release, which in turn has links to "Popular Science Background" and "Science Background" papers.  Hart (along with Oliver Williamson, the winner of the 2009 prize) is one of the leading theorists of incomplete contracts, holdup, and opportunism, which as readers of this blog are aware is of central importance today in the field of patent law (particularly with regard to standard-essential patents).  Holmström's work on principal-agent problems is cited in relation to, among other things, the division of rewards for intellectual property between employers and employee-inventors, as in this article by Rob Merges.  Both Hart and Holmström are also cited in the literature on firm structure and IP, as in this paper by Burk and McDonnell.

Federal Trade Commission Releases Its Long-Awaited Report on PAEs

Here is a link to the FTC's report on patent assertions entities (PAEs).  As stated in the executive summary (p.2):

The Federal Trade Commission has authority under Section 6(b) of the Federal Trade Commission Act to collect confidential business information and conduct industry studies. We used our authority to study PAE acquisition, litigation, and licensing practices because more data on and analysis of the non-public aspects of PAE business models can enhance the quality of the policy dialogue. Furthermore, to better understand how PAE business models compare with other business models that utilize patent licensing, we conducted a more specific study of the wireless chipset sector, in which not only PAEs, but other non-practicing entities (NPEs) and wireless chipset manufacturers (Wireless Manufacturers) assert wireless-technology patents.

I haven't read the whole thing yet--it just came out about an hour and a half ago, I believe--but there appear to be some references to damages and injunctions issues throughout (although they're not the principal focus of the report).  The summary notes, for example, that "early disclosure of damages theories would flag potential legal issues for summary judgment motions and provide more information for settlement discussions," (p.11), while other parts of the report note concerns over treble damages.  You can be sure that lots of people will be reviewing this report over the next few days.

Patent Damages in France

Thanks to a post on LinkedIn by Pierre-Aimé Despalle, I recently became aware of a study published on June 27, 2016 by Antoine Féliers titled Montants alloués par les juridictions en contentieux de brevets (“Damages Awarded by the Jurisdictions in Patent Disputes”), available here.  The study reports the average damages awarded under article 615-7 of the French I.P. Code by the Tribunal de grande instance de Paris (TGI Paris), which now hears all patent infringement actions in France, as well as by the Cour d’appel de Paris and the Cour de cassation.   It also reports average awards of costs under article 700 of the Civil Procedure Code.  The study made use of the Darts-IP Database.

(For the current text of article 615-7, which was enacted in March 2014, and my translation thereof, see here.  For the immediately preceding version, see here.  As for article 700,  this document explains that “The French Courts make two forms of orders for costs. The first one is known as an order for ‘dépens’ article 695 of the NCPC (new code of the Civil procedure) . . . , which is often translated as ‘costs’. The ‘Dépens’ cover a variety of costs. . . .  A party who successfully brings proceedings in France cannot expect to recover anything like the sums effectively spent on the litigation but will usually recover simply a contribution to its real costs spent (Article 700 of the NCPC (new code of the Civil procedure)) other than the ‘Dépens’ (ie Articles 695 and 696 of the NCPC (new code of the Civil procedure).”)  

M.  Féliers reports, among other matters, the average damages awarded by the TGI Paris from 2000-15.  He states that, although the average peaked at about €900,000 in 2009 (due to single decision in which the court awarded over €9 million), no general tendency can be drawn from the data.  The average in 2015 appears to be well under €100,000.  The number of cases awarding damages also is pretty small:  although there were 139 patent cases filed in 2015, only 12 resulted in a damages award under article 615-7.  Average awards under article 700 also tended to be small, averaging less than €20,000 in 2015.  (Again the peak was in 2009, when the court awarded over €300,000 in costs in two cases.)  The study also compares average awards in France with awards in Germany (which the author reports as frequently exceeding €500,000), and with the U.S. average for 2012-15, which the author reports as €49.85 million.  (That may be correct, though the damages studies published in recent years by PricewaterhouseCoopers and by Lex Machina report medians, not averages, which makes sense given that a few outliers can really distort one’s perception if you only report averages.  According to PwC, the median U.S. award in 2015 was $10.2 million, see post here.)

For previous discussion on this blog of a French damages study by Béatrice Dumont, see here.  For brief discussion of the Dumont and other studies of damages in France, see this paper I coauthored with John Golden.     

The CJEU's Damages Judgment in Hansson

I confess that I missed the judgment of the Court of Justice for the European Union (CJEU) in Hansson v. Jungpflanzen Grünewald GmbH, Case C-481/14,  when it was handed down on June 9 of this year, though I had blogged about the referral from the Oberlandesgericht Düsseldorf in November 2014 (see here).  The plaintiff, owner of Community Plant Variety Right EU 4282 in a variety of flower, sued the defendant for infringement; failed in his attempt to obtain interim relief; but ultimately prevailed in the main action.  The district court awarded him €66,231.74 plus interest under article 94 of the Regulation on Community Plant Variety Rights, corresponding "to the amount he had claimed in respect of the licence fee which Jungpflanzen should have paid him for the" infringing plants it sold from 2002 through 2009, but not other requested damages.   In relevant part, article 94 reads: 

1.      Whosoever:

(a)      effects one of the acts set out in Article 13(2) without being entitled to do so, in respect of a variety for which a Community plant variety right has been granted . . . may be sued by the holder to enjoin such infringement or to pay reasonable compensation or both.

2.      Whosoever acts intentionally or negligently shall moreover be liable to compensate the holder for any further damage resulting from the act in question. In cases of slight negligence, such claims may be reduced according to the degree of such slight negligence, but not however to the extent that they are less than the advantage derived therefrom by the person who committed the infringement.

In addition, article 97 reads: 

1.      Where the party liable pursuant to Article 94 has, by virtue of the infringement, made any gain at the expense of the holder or of a person entitled to exploitation rights, the courts competent pursuant to Articles 101 or 102 shall apply their national law, including their private international law, as regards restitution. 

Also of possible relevance are certain provisions from the 2004 EC Enforcement Directive.

On appeal, the Oberlandesgericht Düsseldorf referred eight questions (some of them with several sub-parts) to the CJEU, as set forth in para. 25 of the CJEU's judgment--though as the CJEU points out, the questions all go to the principles governing "the setting and calculation of the compensation payable under Article 94," with some of them concerning "the actual nature of the two forms of redress" and others "more specifically, the factors on the basis of which the reasonable compensation provided for in Article 94(1) is calculated as well as those that are the basis for calculating compensation under Article 94(2)" (paras. 26-27).  

First, then, the CJEU addresses those questions that seek guidance on whether Article 94 must be interpreted as (1) requiring "the damages awarded as compensation  . . . to be increased by an 'infringer supplement'", and  (2) providing "a legal basis for requiring the infringer to make restitution of the profits that he has made from that infringement" (para. 29).   The court's answer is no:

31       On the one hand, the purpose of Article 94(1) of the regulation is that financial compensation should be paid in respect of the benefit which has been gained by the person who committed the infringement, that benefit corresponding to the amount equivalent to the licence fee which that person has failed to pay . . . . Article 94(1) does not provide for reparation for damage other than damage connected to the failure to pay ‘reasonable compensation’ within the meaning of that provision (see judgment of 5 July 2012 in Geistbeck, C‑509/10, EU:C:2012:416, paragraph 50).

32      On the other hand, Article 94(2) of Regulation No 2100/94 concerns the ‘further damage’ for which an infringer must compensate the holder of a Community plant variety right where the infringer has acted ‘intentionally or negligently’.

33      It follows that Article 94 of that regulation establishes for the holder of a Community plant variety right an entitlement to compensation which not only is full but which also rests on an objective basis, that is to say, it covers solely the damage which he has sustained as a result of the infringement.

34      Article 94 of the regulation cannot therefore be interpreted as providing a legal basis, to the benefit of the rightholder, which permits an infringer to be required to pay punitive damages, established on a flat-rate basis.

35      Rather, the extent of the compensation payable under Article 94 of Regulation No 2100/94 must reflect, as accurately as possible, the actual and certain damage suffered by the holder of the plant variety right because of the infringement. . . .

40       In those circumstances, Article 94 . . . does not permit an infringer to be ordered to pay a flat-rate ‘infringer supplement’, as described by the referring court, since such a supplement does not necessarily reflect the damage suffered by the holder of the variety infringed, although Directive 2004/48 does not prevent the Member States from laying down measures that are more protective.

41      Similarly, Article 94 does not permit the holder of a Community plant variety right to claim restitution of the gains and profits made by an infringer. In fact, both the ‘reasonable compensation’ and the amount of compensation payable under Article 94(2) of Regulation No 2100/94 must be set on the basis of the damage suffered by the injured party and not on the basis of the profit made by the person who committed the infringement.

42      Although paragraph 2 of Article 94 refers to the ‘advantage derived … by the person who committed the infringement’, it does not provide that that advantage has to be taken into account, as such, in the amount of the financial compensation actually awarded to the holder. The point should also be made that, so far as concerns an action for restitution as regards the advantage derived by the infringer, Article 97 of Regulation No 2100/94 refers expressly to the national law of the Member States.

43      It follows from those considerations that the answer to Questions 1, 5(b) and 6 is that Article 94 of Regulation No 2100/94 must be interpreted as meaning that the right to compensation which it establishes for the holder of a plant variety right that has been infringed encompasses all the damage sustained by that holder, although that article cannot serve as a basis either for the imposition of a flat-rate ‘infringer supplement’ or, specifically, for the restitution of the profits and gains made by the infringer.

Second, the court addresses the factors to be taken into account in determining reasonable compensation under article 94(1):

51        In any event, the Court has stated that Article 94(1) of Regulation No 2100/94 must be interpreted as meaning that it does no more than provide for reasonable compensation in the event of unlawful use of a plant variety, but does not provide for reparation for damage other than damage connected to the failure to pay that compensation, thereby excluding from the amount of the compensation costs incurred for monitoring compliance with the rights of the plant variety holder (see judgment of 5 July 2012 in Geistbeck, C‑509/10, EU:C:2012:416, paragraphs 50 and 51).

52      It follows from that interpretation that reasonable compensation, within the meaning of that provision, includes loss or damage that is closely connected to failure to pay that compensation.

53      Default interest may fall within that loss because of the late payment of the fee payable in the normal course of events, particularly if the contractual term is one which reasonable, informed contracting parties would have included, provided that the licence fee used as a reference does not include such interest.

54      Consequently, the answer to Questions 2 and 3 is that the concept of ‘reasonable compensation’, provided for in Article 94(1) of Regulation No 2100/94, must be interpreted as meaning that it covers, in addition to the fee that would normally be payable for licensed production, all damage that is closely connected to the failure to pay that fee, which may include, inter alia, payment of default interest. It is for the referring court to determine the circumstances which require that fee to be increased, bearing in mind that each of them may be taken into account only once for the purpose of determining the amount of reasonable compensation. . . .

Third, as for the "further damage" referred to in article 94(2), the main issue is whether this may include "legal costs incurred in interlocutory proceedings as well as . . . out-of-court expenses" (para 55).  According to the court, to obtain damages under article 94(2) the plaintiff "must produce evidence which establishes that his damage goes beyond the matters covered by the reasonable compensation provided for in Article 94(1)" (para. 56).  The court concludes that "default interest at the usual rate may be applied to the amount of the compensation for damage if that appears justified" (para. 59), and that consistent with the Enforcement Directive "the costs incurred by the successful party are, in principle, to be borne by the unsuccessful party" (para. 60).  Nevertheless, this plaintiff isn't going to recover these expenses:

64      The answer to questions 4, 5(a) and (c), 7 and 8 is that Article 94(2) of Regulation No 2100/94 must be interpreted as meaning that the amount of the damage referred to in that provision must be determined on the basis of the specific matters put forward in that regard by the holder of the variety infringed, if need be using a lump-sum method if those matters are not quantifiable. It is not contrary to that provision if the costs incurred in an unsuccessful interlocutory application are left out of account in the determination of that damage or if the out-of-court expenses incurred in connection with the main action are not taken into consideration. However, a condition for not taking those expenses into account is that the amount of the legal costs that are likely to be awarded to the victim of the infringement is not such, in view of the sums he has incurred in respect of out-of-court expenses and their utility in the main action for damages, as to deter him from bringing legal proceedings in order to enforce his rights.

As a matter of policy, I think it would make sense to award damages corresponding to some of the costs or risks that a licensee incurs, such as forfeiting any license fees already paid to the IP owner if the IP right is subsequently invalidated, but which the infringer avoids.  My understanding is that in patent cases courts in France and Germany sometimes though not invariably do increase reasonable royalties to take such matters into account (see my book pp. 269-70; see also here).  But perhaps the wording of Article 94 of the Community Plant Variety Rights Regulation precludes such awards in the present context.  I also wonder whether litigants will cite the CJEU's statement that "compensation . . . must reflect, as accurately as possible, the actual and certain damage suffered" (para. 35; see also para. 59) in future cases.  Surely the court doesn't literally mean "as accurately as possible."  As I've written about elsewhere, including my paper on Patent Damages Heuristics, in my view there's often a tradeoff between accuracy and cost, and more accuracy isn't really always desirable.  At some point the marginal benefit from investing in generating ever-more accurate awards doesn't justify the marginal cost.