Farewell to FOSS Patents

I was sorry to read that Florian Mueller has decided to wind down FOSS Patents (see here), but I will be eager to read his book on the Microsoft-ActivisionBlizzard merger when it comes out, and I wish him all the best in his new endeavor.  Florian has been a great source of information over the years--not just to me, but to the entire patent and antitrust law community--but more than that a friend, and I hope that our paths cross again before long.  Best wishes, Florian! 

Lee and Lemley on Damages for Patent Infringement

William Lee and Mark Lemley have posted a paper on ssrn titled The Broken Balance: How 'Built-In Apportionment' and the Failure to Apply Daubert Have Distorted Patent Infringement Damages.  Here is a link, and here is the abstract:

The patent system is “a carefully crafted bargain for encouraging the creation and disclosure of new, useful, and nonobvious advances in technology and design.” But if patentees are permitted to recover damages on the value of technology they did not invent, the balance is disrupted: patentees can obtain an unjustified windfall, product companies can be required to pay for technology not covered by the patents-in-suit, and the incentives for innovation can be diminished rather than enhanced. The “carefully crafted bargain” depends in no small part on the need to ensure that patent damages are not excessive and, instead, reflect the actual incremental value of the claimed invention.

The Supreme Court and the Federal Circuit have recognized this need to calibrate patent damages in several ways, the most important of which for present purposes is the principle of apportionment, under which damages must be limited to the value of the patented invention and must not capture the value of other features or technology of the accused products.

Apportionment has become even more critical in recent years. Modern products and methods, in the life sciences, computer sciences, and other fields, often consist of hundreds or thousands of features and components. Given the complexity of these products and technologies, patentees—inadvertently or intentionally—may seek to capture the value of features that they did not invent. A failure to properly apportion damages means that companies that make innovative products will pay two (or more) times for the right to use the same technology.

But therein lies the problem. Recently, the Federal Circuit and district courts have been backsliding from the principle of apportionment. Three related phenomena have led to excessive damage awards and, unless corrected, promise to undermine the “carefully crafted bargain” of patent damages.

First, some courts have allowed patentees to bypass apportionment entirely by relying on “built-in apportionment” that supposedly occurs in a comparable license. Second, patentees and their experts have figured out how to game the comparable license loophole to the apportionment requirement. An NPE in the business of litigation, not making products, will often structure its licensing and litigation campaign to generate spurious “comparable” licenses it can then point to in later litigation. Finally, compounding those problems, some courts have failed to properly apply Daubert and Federal Rule of Evidence 702 to exclude unreliable apportionment theories or gamesmanship.

All of this leaves the patent damages balance askew. Patentees have been permitted to seek billions of dollars in damages for patents whose value is nowhere near that in the real world. And operating product companies face the risk of being forced to pay excessive damages capturing the value of technology the patentee did not invent. This is not the “carefully crafted bargain” the Supreme Court envisioned.

In this article, we offer recommendations to address this dangerous trend and restore apportionment and the patent damages balance. These recommendations include: (i) recognizing that “built-in apportionment” is only the beginning of a careful, detailed damages analysis, not an exception that obviates the need for such an analysis; and (ii) more reliably enforcing Daubert when plaintiffs offer unreliable apportionment methodologies. 

I read and commented on an earlier draft of this.  It's a long paper, but thorough and worth reading.

Federal Circuit Vacates Damages Award

The case is Cyntec Co. v. Chilsin Electronics Corp., precedential opinion by Judge Stoll, joined by Chief Judge Moore and Judge Cunningham.  There are two patents in suit, one directed to molded chokes (“a type of inductor used to eliminate undesirable signals in a circuit”) and one to a method for making them.  The case was tried to a jury, which returned a verdict of infringement and awarded damages in the full amount requested (about $3.7 million); the judge thereafter awarded enhanced damages, bringing the total up to about $5.5. million.  Before the case was submitted to the jury, the judge granted judgment as a matter of law (JMOL) that the patents in suit were nonobvious.  On appeal, the Federal Circuit reverses the JMOL and remands for a new trial, reasoning that there was sufficient evidence for the jury to conclude that the patented combination would have been obvious to a person of ordinary skill in the art.  The court affirms the finding of infringement but also vacates the damages award, which is the part I will focus on.

According to the opinion, “To prove damages, Cyntec presented a market-share lost profits theory. . . . Cyntec asserted that 27 companies purchased Chilisin’s accused chokes outside the United States and then placed them into devices that were then imported into the United States. . . . Cyntec’s expert opined that Cyntec was entitled to a total damages award of $1,872,956, with $1,552,493 in lost profits and $320,463 in reasonable royalties⁴” (pp. 7-8).  (The footnote stays that the royalty “award is not at issue on appeal.”)  Chilsin argues, however, “that the district court erred in denying its Daubert motion to exclude testimony from Cyntec’s expert, Mr. Van Uden” (p.13), and the court agrees, citing two other opinions, Power Integrations v. Fairchild Semiconductor Int’l, 711 F.3d 1348 (Fed. Cir. 2013), and Niazi Licensing Corp. v. St. Judge Med. S.C., Inc., 30 F.4^th 1339 (Fed. Cir. 2022), in which the court states the patentee’s expert on included infringing and noninfringing products together to calculate damages:

In the present case, Cyntec’s damages expert, Mr. Van Uden, estimated the amount of Chilisin’s sales of accused products imported into the United States (“importation calculations”) using U.S. Securities and Exchange Commission (SEC) filings or annual reports of customers who purchased or acquired any of the alleged infringing products, as well as third-party data from Gartner Research. . . . Mr. Van Uden determined each customer’s importation rate by dividing the customer’s U.S. revenue by its total worldwide revenue. . . . By “[m]ultiplying Chilisin’s accused revenues made outside of the U.S. by the U.S. importation rates for each identified customer,” Mr. Van Uden estimated the “infringement revenue subject to . . . damages.” . . . Mr. Van Uden determined that Chilisin’s indirect sales to the United States was approximately $ 9.8 million. . . . Mr. Van Uden also estimated that Cyntec’s market share ranged from 31.2 percent to 39.4 percent. . . . Then, “us[ing] this market share number, [he] applied it to the sales subject to damages, [yielding an estimate of] Cyntec’s lost sales of approximately $3.8 million” (pp. 15-16).

The district court denied Chilsin’s Daubert motion on the ground that the expert’s data sources were sufficiently reliable, but the Federal Circuit vacates:

The revenue reported in the customers’ annual reports cited by Mr. Van Uden included sales of irrelevant products and services, and he failed to account for these irrelevant products and services. For example, Mr. Van Uden’s importation calculations for Apple Inc. use the reported revenue for 2016–2019 from Apple’s Form 10-K. See J.A. 4091; J.A. 11099–100. But Apple’s 10-K reported revenue includes revenue received from services and products that do not even contain chokes. See J.A. 11045–46 (Apple’s 2020 Form 10-K, defining its “Services” as advertising, warranty services, cloud services, digital content, and payment services); Apple Inc., Annual Rep. (Form 10-K), at 21 (Oct. 29, 2020) (stating that the “total net sales” consisted of sales of iPhones, Macs, iPads, Wearables, Home and Accessories, and Services). . . . Mr. Van Uden’s use of the reported revenue did not differentiate between what products would or would not incorporate the accused chokes. Mr. Van Uden therefore assumed all of Apple’s products imported into the United States contained the accused chokes, a mistake he repeated for other customers. . . .

 

Cyntec argues Mr. Van Uden “did not . . . assume that every [third party] product contained an accused choke,” and argues that he instead “estimated the portion of accused chokes that are imported by starting with Chilisin’s actual sales data, and then applying reliable data showing importation rates for products sold by Chilisin’s customers incorporating the infringing chokes.” . . . But as we explained above, this data for calculating importation rates contains the sales of products and services that cannot or do not contain the accused chokes. Like the erroneous assumptions in Power Integrations and Niazi, Mr. Van Uden assumed that (1) the sales revenue reported in the customers’ Form 10-K reflected sales of products with molded chokes; and (2) each third-party product shipped into the United States contained an infringing choke. Further, Mr. Van Uden’s importation calculations assumed that all 310 third-party products across all 27 customers infringed. . . . Yet no party knew whether the third-party products contained the accused chokes or how many accused chokes were in these products. . . . Indeed, no third-party discovery or testing from a technical expert was performed to see if the third-party products contained the accused chokes (pp. 16-18). . . .

The court doesn’t say anything about extraterritorial damages, and I might be misunderstanding some of the underlying fact, but it seems to me that the damages case was premised on the assumption that Cyntec (which I believe is a Taiwanese company) lost sales of chokes that it would have made outside the U.S., but for Chilisin’s violation of domestic U.S. patent law.  Things are a bit complicated, though.  According to the district court’s pre- and post-trial opinions, available at 2020 WL 5366319 and 2022 WL 1443232, Cyntec’s theories of liability included (1) induced infringement, which under Federal Circuit precedent is actionable even if (as here) the activity that induces infringement within the United States itself occurs outside the United States, and (2) as far as the process patent is concerned, liability under 35 U.S.C. § 271(g).  I’m a little confused about that second item, since § 271(g) states in relevant part that “[w]hoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent.”  Perhaps the theory was that Chilisin (also  Taiwanese firm, I think) or its U.S. affiliate (a codefendant in the case) were selling or offering to sell infringing products in the U.S., though under Federal Circuit precedent an offer to sell (regardless of where it takes place) is actionable only if there is a subsequent sale in the United States.  So, maybe there were some infringing sales within the U.S.?  That might comport with a statement quoted in the district court’s post-trial opinion that “over 95% of Cyntec's reasonable royalty damages base came from estimated importation by third parties,” which implies that a small portion of those damages were based on some other conduct within the U.S. 

Blogging Break

 I will take a blogging break this coming week, Oct. 9-13.  I hope to resume the following week.

Upcoming Speaking Engagement

The Intellectual Property Institute of Canada (IPIC) will be putting on its IPIC2023 meeting in Winnipeg next week from October 11-13.  I will be speaking on October 12 on a panel titled "Major US Supreme Court Patent Decisions."  My copanelists will be William H. Milliken and Lillian Wallace, with Benjamin Hackett moderating.  I'll be focusing on remedies, in particular the subject of extraterritorial damages after WesternGeco v. ION (which I wrote about here).

U.S. District Court Awards Nominal Damages for Patent Infringement

As some readers may recall, earlier this year I published an article titled Standing, Nominal Damages, and Nominal Damages 'Workarounds' in Intellectual Property Law After TransUnion, 56 UC Davis L. Rev. 1085 (2023).  I was therefore intrigued when I read Hailey Konnath’s recent article on Law360 titled $10M Verdict Against Intuitive Lowered to Just a Dollar, discussing an opinion by U.S. District Judge Maryellen Noreika in Rex Medical, L.P. v. Intuitive Surgical, Inc., C.A. No. 19-005 (MN) (D. Del. Sept. 20, 2023).  In 2019, plaintiff Rex sued defendant Intuitive for infringing Rex’s ‘650 and ‘892 Patents, relating to devices for stapling tissue during surgery.  Some months later, the parties agreed to dismiss with prejudice the claim asserting infringement of ‘892.  The case went to trial, and the jury concluded that Intuitive infringed claim 6 of ‘650 and awarded $10 million damages in the form of a lump-sum royalty.  Intuitive then filed a motion for JMOL or, in the alternative, a new trial.  In the above opinion, the court denies the motion for JMOL, concluding that there was sufficient evidence to sustain the jury’s decisions on infringement and validity.  I’ll skip over these issues and focus on the damages matter, which the court resolved in favor of Intuitive.

Rex initially planned to prove its damages case through the testimony of an expert, Mr. Kidder, who planned to rely on a $10 million license Rex had concluded with Covidien in settlement of litigation over both the ‘650 and ‘892 Patents; that license covered not only ‘650 and ‘892, but also eight other (apparently foreign) patents.  In a pretrial ruling on Intuitive’s Daubert motion, the court precluded Mr. Kidder from testifying about the Covidien license—but not from testifying altogether—on the ground that he had failed to apportion the value of the license between the ‘650 and ‘892 Patents, and had not substantiated this opinion that the other eight patents added little if any value.  Rex did not call Mr. Kidder to testify at trial, but instead relied on fact testimony by Rex’s president Mr. Carter, who based his opinion on the Covidien license.  But this testimony too did not adequately apportion the value among the patents licensed to Covidien, according to the court:

This testimony fails to provide any basis from which a factfinder could assign any portion of the $10,000,000 to the ’650 patent alone. Even if there is enough in the record to apportion the license with respect to the non-asserted patents⁷ (i.e., those other than the ’650 and ’892 patents), there is nothing in the record that addresses the extent to which the ’650 patent – as opposed to the ’892 patent – contributes to the $10,000,000 sum.⁸ In fact, Mr. Carter admitted that he could not assign any value to the ’650 patent. (Id. at 200:10-14). Plaintiff has thus failed to establish that the license is comparable to the hypothetical negotiation. . . .  So, for the same reason that the Court precluded Mr. Kidder from testifying about the license, given the evidence at trial about that agreement, the jury could not rely on the license to determine a reasonable royalty either.⁹

 

⁷ For example, there is testimony that the ’650 and ’892 were the only patents asserted in the Covidien litigation and that many of the other patents had lapsed or expired. (D.I. 259 at 166:6-14; 176:22-177:9). There was, however, also evidence that one foreign licensed patent was filed in 2002 and issued in 2010. (See id. at 177:6-180:12; DTX-539; JTX-007).

 

⁸ Based on the evidence presented at trial, it is entirely possible that the entire value of the Covidien license is attributable to the ’892 patent alone. Furthermore, the fact that, at the time Rex Medical and Covidien entered settlement negotiations, the ’650 patent had been dropped from the litigation seems to suggest that the ’892 patent may have held more value to Covidien. (See D.I. 166 at 4).

 

⁹ Furthermore, Plaintiff failed to offer any evidence as to the value of the patented technology in the Accused Products as compared to the non-patented features. Claim 6 is the sole asserted claim in this case. Claim 6 depends on claims 4 and 5 which have both been invalidated. (See D.I. 166 at 17). Plaintiff has failed to provide evidence from which a factfinder could attribute a specific value not only to the ’650 patent as a whole but also to the sole asserted claim of the patent.

 

The remaining evidence adduced at trial fails to provide any basis for a factfinder to tie a dollar amount to the value of the ’650 patent or support the $10,000,000 award. For example, Plaintiff cites to testimony including about the “market opportunity Defendants saw” and the “stipulated fact regarding accused product sales.” (D.I. 276 at 7 (citing D.I. 260 at 354:19-358:24, 476:2-4)). . . . This evidence fails to provide anything more than an entirely speculative basis for assigning value to the asserted patent. Therefore, the Court finds that the jury award is unsupported by the evidence (pp. 17-18).

The court further declines to reopen discovery and grant a new trial on damages, noting that “Plaintiff had the opportunity to conduct discovery and to call other witnesses, such as its damages expert, to offer other evidence potentially relevant to damages. (See D.I. 261 at 511:2-23). Instead, Plaintiff chose to hinge its damages theory on the very license that the Court had already precluded its expert from testifying about” (p.18 n.11).  The court further states, correctly in view for reasons discussed in my article above, that “A plaintiff is not entitled to an award of damages when none have been proven,” and remits the jury award to nominal damages of $1.  

USPTO Extends Deadline for Comments on Standards and IP

I noted two weeks ago that the U.S. International Trade Administration (ITA), the National Institute of Standards and Technology (NIST), and the USPTO had published a notice in the Federal Register stating that these agencies "are seeking stakeholder input on the current state of U.S. firm participation in standard setting, and the ability of U.S. industry to readily adopt standards to grow and compete, especially as that relates to the standardization of critical and emerging technologies," and would be holding a public listening session on Wednesday, September 20, 2023, from 1 to 5 p.m. ET.  The notice also stated that written comments would be accepted through September 29 (pretty short window, that), but today the USPTO announced that it was extending the deadline through November 6.  (Hat tip to Jorge Contreras for calling this to my attention.)  I have pasted the announcement below:

Deadline for stakeholder comments on standards and intellectual property extended to November 6

Comments in response to the U.S. Patent and Trademark Office (USPTO), International Trade Administration (ITA), and National Institute of Standards and Technology (NIST) joint request for comments (RFC) on standards and intellectual property (IP) must now be submitted by November 6, 2023. Full details are available in this Federal Register Notice (FRN).

Background on the joint agency request for comments on standards and IP

On September 11, 2023, ITA, NIST, and the USPTO (collectively referred to as "the Agencies") announced a request for stakeholder input on the current state of U.S. firm participation in international standard setting, and the ability of U.S. industry to readily adopt standards to grow and compete, especially as it relates to the standardization of critical and emerging technologies.

The Agencies are seeking feedback on issues that stakeholders face at the intersection of standards and IP, especially for small and medium enterprises.

“I am particularly looking forward to hearing how the U.S. Department of Commerce can foster the standardization of the industries of tomorrow as well as encouraging new market entrants, especially small- and medium-sized businesses,” said Under Secretary of Commerce for Intellectual Property and Director of the USPTO Kathi Vidal.  “And I look forward to your comments on what more the U.S. Government and the USPTO can do when it comes to Standard Essential Patents (SEP) policy.”

To learn more, and to submit your comments, see the FRN.

The September 11 request is a companion publication to a request for information published by NIST on September 7, which is broader in scope, seeking public input on how best to implement the U.S. Government National Standards Strategy for Critical and Emerging Technology. The comment period for NIST’s request for information also closes November 6, 2023. Your responses to both notices will be used to shape key U.S. strategy.

To learn more and to submit your comments to the NIST RFI see the FRN.