Tuesday, December 6, 2016

Supreme Court Opinion in Samsung v. Apple: Analysis

As I noted earlier today, the U.S. Supreme Court this morning issued its opinion in Samsung Elecs. Co. v. Apple Inc., Case No. 15-777, reversing the Federal Circuit's judgment and remanding for further proceedings.  Justice Sotomayor wrote for a unanimous Court.

In case you're not familiar with this matter already, it arises out of Apple's civil action against Samsung for, inter alia, the infringement of three design patents relating to the iPhone.  The jury found for Apple and awarded Samsung's entire profit from the sale of its infringing smartphone models ($399 million, according to the Supreme Court).  To put the issues in context, at one time it was common to award the successful patent owner the infringer's profits from the sales of infringing products.  Congress eliminated this remedy for utility patent infringement in 1946, though it's still a common remedy for patent infringement in many countries.  Congress kept the disgorgement remedy for design patent infringement, however, where it is enshrined in its own provision of the Patent Act, 35 U.S.C. § 289.  In its entirety, the statute reads as follows:
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.
In the present case, both the district court and the Federal Circuit read this statute as requiring a design patent infringer to disgorge its entire profit earned from the sale of a design-patent-infringing end product.  The question presented to the U.S. Supreme Court was "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?"  We now know that the answer to this question is yes, though the Supreme Court decided to leave it to the Federal Circuit to come up with a test for defining the relevant "article of manufacture"/component for purposes of the statute.

The Court begins with a brief explanation of the genesis of § 289:
In 1885, this Court limited the damages available for design patent infringement. The statute in effect at the time allowed a holder of a design patent to recover “the actual damages sustained” from infringement. . . . In Dobson v. Hartford Carpet Co., 114 U. S. 439 (1885), the lower courts had awarded the holders of design patents on carpets damages in the amount of “the entire profit to the [patent holders], per yard, in the manufacture and sale of carpets of the patented designs, and not merely the value which the designs contributed to the carpets.” Id., at 443. This Court reversed the damages award and construed the statute to require proof that the profits were“due to” the design rather than other aspects of the carpets. Id., at 444; see also Dobson v. Dornan, 118 U. S. 10, 17 (1886) (“The plaintiff must show what profits or damages are attributable to the use of the infringing design”).
In 1887, in response to the Dobson cases, Congress enacted a specific damages remedy for design patent infringement. . . . The new provision made it unlawful to manufacture or sell an article of manufacture to which a patented design or a colorable imitation thereof had been applied. . . . It went on to make a design patent infringer “liable in the amount of ” $250 or“the total profit made by him from the manufacture or sale . . . of the article or articles to which the design, or color-able imitation thereof, has been applied.” . . . 
The Patent Act of 1952 codified this provision in § 289. . . .
As I've stated before, in my view the 1887 amendment was an unfortunate response to the Dobson cases, insofar as awarding the plaintiff the entire profit from the article of manufacture--whether the relevant article of manufacture is the entire end product or just a component--runs contrary to the sound economic principle that the plaintiff should recover damages reflecting only the value of the patented feature.  The statute in effect creates a legal presumption that the entire profit from the article of manufacture is attributable to the patent, which seems wildly overinclusive.  I don't know, maybe such an assumption would have been justified in the carpet case, but it's hard to see why it would be appropriate across the board; people might buy a product for lots of reasons not limited to the features covered by the design patent.  But so it goes.  There is, by the way, a counterargument that I believe was presented in some of the briefs in the Samsung case to the effect that the second sentence of § 289, referring to "the profit made from the infringement," actually does require some sort of apportionment, that is, a causal connection between the infringement and the profit to be awarded (as would have been required for the disgorgement of profits in a case involving utility patents, back when the disgorgement remedy was available in that context), but the Supreme Court says that "Samsung abandoned this theory at argument, and so we do not address it" (p.5 n.2).  See also opinion p.5 ("The 'total profit' for which § 289 makes an infringer liable is thus all of the profit made from the prohibited conduct, that is, from the manufacture or sale of the 'article of manufacture to which [the patented] design or colorable imitation has been applied.'”).    

Moving along, then, the Court turns to the question of whether the relevant article of manufacture must be the end product, or whether it can be a component.  Citing some dictionary definitions, the Court opts for the latter view (pp. 6-7): 
. . . the term “article of manufacture” is broad enough to encompass both a product sold to a consumer as well as a component of that product. A component of a product, no less than the product itself, is a thing made by hand or machine. That a component may be integrated into a larger product, in other words, does not put it outside the category of articles of manufacture.
This reading of article of manufacture in §289 is consistent with 35 U. S. C. §171(a), which makes “new, original and ornamental design[s] for an article of manufacture” eligible for design patent protection. . . . The Patent Office and the courts have understood §171 to permit a design patent for a design extending to only a component of a multicomponent product. . . .
This reading is also consistent with 35 U. S. C. §101, which makes “any new and useful . . . manufacture . . . or any new and useful improvement thereof ” eligible for utility patent protection. . . . The broad term includes “the parts of a machine considered separately from the machine itself.” 1 W. Robinson, The Law of Patents for Useful Inventions § 183, p. 270 (1890).
As noted above, however, the Court decides to leave it to the lower courts to come up with a standard for defining the relevant article of manufacture, rather than coming up with one itself (as I had expected the Court might do, after reading the oral argument transcript):
The parties ask us to go further and resolve whether, for each of the design patents at issue here, the relevant article of manufacture is the smartphone, or a particular smartphone component. Doing so would require us to set out a test for identifying the relevant article of manufacture at the first step of the §289 damages inquiry and to parse the record to apply that test in this case. The United States as amicus curiae suggested a test, see Brief for United States as Amicus Curiae 27–29, but Samsung and Apple did not brief the issue. We decline to lay out a test for the first step of the § 289 damages inquiry in the absence of adequate briefing by the parties. Doing so is not necessary to resolve the question presented in this case,and the Federal Circuit may address any remaining issues on remand (p.9).
So now things move back to the Federal Circuit to come up with an appropriate test for defining the relevant article of manufacture (the "first step," as it is referred to in the quote above).  At oral argument, Assistant Solicitor General Fletcher suggested that "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" (transcript p.28).  But should the court also consider the extent to which the patented feature contributed to the demand for the (proposed) article, or whether there is a separate market for the component to which the feature is affixed?  (The latter sounds like what the Federal Circuit did, though, and that's clearly not what the Supreme Court has in mind.  See opinion p.1 ("The United States Court of Appeals for the Federal Circuit identified the entire smartphone as the only permissible “article of manufacture” for the purpose of calculating §289 damages because consumers could not separately purchase components of the smartphones. The question before us is whether that reading is consistent with § 289. We hold that it is not.").)   And let's not forget that once you determine what the relevant article is, you still have to conduct a second step of determining how much of the profit on the sale of the end product is attributable to that component (though not how much is attributable to the patented feature affixed to the component, because that would mean the patent owner isn't getting the entire profit from the relevant "article of manufacture").  

At the end of the day, it seems to me that if we're going to involve ourselves in such complexities, we may as well just apportion profits to the infringing feature, which is arguably economically justifiable (it's certainly debatable, but not crazy, to believe that disgorgement of the profits attributable to the infringement, rather than an award of lost profits or reasonable royalties, may sometimes be an appropriate remedy for patent infringement), rather than going through this exercise in pursuit of a goal that has no economic justification (awarding the entire profit from the article).  But so it shall be, I guess.  Maybe we just need to adopt an existential approach.  If as Camus imagined Sisyphus could be happy rolling the boulder uphill for eternity, only to see it come crashing down at the end of the day, maybe judges, experts, and patent lawyers can be happy engaging in a task that is similarly meaningless.  (And unlike Sisyphus, at least they'll get paid for their effort.)       

As a closing note, at page 8 of the opinion the Court cited with apparent disapproval the Federal Circuit's design patent damages decision in Nordock, Inc. v. Systems, Inc., which has been the subject of a pending cert petition while the Court decided Samsung.  (See my previous blog post on Nordock here.)  So I'd expect a vacate and remand in light of Samsung in that case; looks like the Court will be considering it on Friday.

Update (December 7):  Not surprisingly, there's lots of commentary on the Supreme Court's opinion throughout the blogosphere, including FOSS Patents, IPKat, Patently-O, SpicyIP, and Written Description.  I should note that my post above wasn't intended to be overly negative.  The Court's decision, that the relevant article of manufacture can be less than the entire product, is surely an improvement that should result in fewer overly generous awards.  My point was simply that it makes little sense, as a matter of policy, to require the disgorgement of the entire profit of whatever the article of manufacture is, rather than just the portion that is attributable to the infringing design; and that if we're going to have to devote substantial time and energy now to defining the article of manufacture, we may as well go the remaining distance and determine what portion of the profit attributable to the article is attributable to the design.

Breaking News: U.S. Supreme Court Reverses in Samsung v. Apple Design Patent Damages Case

Link here.  From the syllabus:  "In the case of a multicomponent product, the relevant 'article of manufacture' for arriving at a § 289 damages award need not be the end product sold to the consumer but may be only a component of that product."  Unanimous opinion by Justice Sonia Sotomayor.  I'll be back later today, after I've read the opinion, with analysis.

Monday, December 5, 2016

FRAND News from Germany

As I mentioned late last month (here), Daniel Hoppe recently published an article titled Die Rechtsprechung der deutschen Instanzgerichte zum Patent- und Gebrauchsmusterrecht seit dem Jahr 2015 ("The Patent and Utility Model Case Law of the Lower German Courts Since 2015") in the October 2016 issue of GRUR RR (pp. 385-96).  A good portion of the article discusses the German post-Huawei v. ZTE FRAND cases.  I've blogged about a few of these cases before (see here, here, here, here, here, and here), but this article discusses a few additional cases I hadn't seen, including one appellate decision, the May 9, 2016 judgment of the Oberlandesgericht Düsseldorf, I-15 U 35/16.  (There is an almost identical May 9, 2016 Judgment of the Oberlandesgericht Düsseldorf with the case number I-15 U 36/16, involving a separate defendant.)  So if I've got this right, we now have (essentially) three German appellate decisions, including the January 13, 2016 decision of the Oberlandesgericht Düsseldorf and the the May 31, 2016 judgment of the Oberlandesgericht Karlsruhe, 6 U 55/16,  (If readers are aware of any others in addition to these, please let me know.)  Then last week Florian Mueller published a post on FOSS Patents titled "Mannheim Regional Court denies injunction in standard-essential patents case for antitrust reasons," which includes a translation of key passages of another recent district court judgment, the July 1, 2016 judgment of the Landgericht Mannheim, 7 O 209/15. 

To put the matter in context, the CJEU's July 2015 judgment in Huawei v. ZTE holds that "the proprietor of an SEP which considers that that SEP is the subject of an infringement cannot, without infringing Article 102 TFEU, bring an action for a prohibitory injunction or for the recall of products against the alleged infringer without notice or prior consultation with the alleged infringer, even if the SEP has already been used by the alleged infringer" (para. 60).  In particular:
61      Prior to such proceedings, it is thus for the proprietor of the SEP in question, first, to alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed. . . .
63      Secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, it is for the proprietor of the SEP to present to that alleged infringer a specific, written offer for a licence on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated. . . .
65      . . . [I]t is for the alleged infringer diligently to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.
66      Should the alleged infringer not accept the offer made to it, it may rely on the abusive nature of an action for a prohibitory injunction or for the recall of products only if it has submitted to the proprietor of the SEP in question, promptly and in writing, a specific counter-offer that corresponds to FRAND terms.
67      Furthermore, where the alleged infringer is using the teachings of the SEP before a licensing agreement has been concluded, it is for that alleged infringer, from the point at which its counter-offer is rejected, to provide appropriate security, in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit. The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.
By itself, this formulation leaves a number of interpretive issues on the table, including whether all SEPs are deemed to confer monopoly power; whether or to what extent this framework applies if the plaintiff and defendants are not competitors; whether it applies when the patent in suit is a de facto SEP and there is no formal FRAND commitment; how detailed the plaintiff's initial offer must be; and whether the defendant's failure to provide a counteroffer and security are relevant if the initial offer was not within the FRAND range, however the court evaluates the latter.  For previous discussion on this blog, see, e.g., here, here, and here.

Anyway, as discussed in the July 1 Judgment of the Landgericht Mannheim (see Florian Mueller's post) and in Mr. Hoppe's article, one of the important principles that may be emerging is that the SEP owner's initial offer must be in the FRAND range.  According to the May 31 Judgment, it isn't sufficient for the court to engage in a very minimal review (Evidenzkontrolle) to determine whether the offer was manifestly non-FRAND.  At the same time, it may not be necessary for the court to determine precisely what a FRAND offer would have been in order to adjudicate the competition-law defense; the SEP owner is entitled to "a generous degree of wiggle room" (ein großzügiger Entscheidigungsspielraum).  However, according to the Mannheim court, there has to be a sufficient degree of  transparency for the alleged infringer to evaluate the offer, such as claim charts and a delineation of the method (a standard licensing program, a patent pool, whatever) by which the owner calculates the FRAND rate.  On the other hand, as discussed in the May 9 Judgment of the Oberlandesgericht Düsseldorf, where the alleged infringer waits to respond until five months after the SEP owner has put it on notice of its alleged infringement, this indicates that the alleged infringer hasn't "expressed its willingness to conclude a licensing agreement on FRAND terms" (Huawei, para. 63), and thus that there is no abuse of dominant position if the SEP owner proceeds to request an injunction.  If I'm understanding correctly, the SEP owner isn't required to convey a FRAND-range offer if, as here, the accused hasn't expressed its willingness to license.

Thursday, December 1, 2016

Enhanced Damages for the Infringement of Standard Essential Patents

On November 1, 2016, United States District Judge Rodney Gilstrap entered a final judgment in Core Wireless Licensing S.a.r.l. v. LG Elecs., Inc., awarding Core Wireless a 20% damages enhancement based on a jury finding that LG had willfully infringed two Core Wireless standard essential patents (copy of the judgment here).  Among the factors Judge Gilstrap cited for his decision were the following:  (1) "LG had detailed knowledge of the patents-in-suit long before the filing of this lawsuit"; (2) LG's ability "to muster a non-infringement position during negotiations and at trial does not necessarily insulate it from enhanced damages"; (3) its invalidity defense was "belied by the admission of LG’s corporate representative"; and (4) "the manner in which LG abruptly terminated licensing negotiations," including "making Core Wireless send representatives to Korea to be handed a one-page document" stating, among other things, that "LG would prefer to wait until another major cell phone manufacturer licensed the portfolio, at which point LG intended to be a 'a follower' in the established royalty scheme".  The judge concluded that a 20% enhancement (amounting to $456,000 on a $2,280,000) was appropriate.

I first learned about the judgment from David Long's November 22 post on the Essential Patent Blog.  Mr. Long states that"This appears to be the first case of a court enhancing damages based on willful infringement of a standard essential patent."  He also says that Judge Gilstrap awarded the enhancement sua sponte, following the jury's finding of willfulness, without further briefing from the parties, but that he stayed execution to permit the parties to file post-trial motions.

A few days later, I came upon Greg Sidak's article Enhanced Damages for Infringement of Standard-Essential Patents, 1 Criterion Journal on Innovation 1101 (2016). which also discusses Judge Gilstrap's final judgment (fast work, Greg!).  Here's the abstract of the article:
In Halo Electronics, Inc. v. Pulse Electronics, Inc., the Supreme Court overruled the Federal Circuit’s Seagate standard for enhancing patent damages for willful infringement, as provided by section 284 of the Patent Act. The Court said that egregious infringement alone could justify a court’s decision to enhance the damages award, regardless of the objective reasonableness of the infringement defense. However, some standards implementers have urged courts not to read Halo to permit enhanced damages for the infringement of SEPs, on the rationale that infringement is an expected part of standard setting. That argument, which implies that the infringement of SEPs is never so egregious as to justify the enhancement of a damages award, does not withstand scrutiny.
Enhanced damages for the infringement of SEPs are likely to be unavailable as long as the contract arising from the FRAND obligation governs the relationship between the SEP holder and the infringer. However, the SEP holder’s FRAND commitment becomes moot as a matter of contract law as soon as the infringer has exhausted its rights as a third-party beneficiary of the FRAND contract by rejecting the SEP holder’s FRAND offer, either expressly or by operation of law. Thereafter, the governing law reverts to the Patent Act and its interpretation by the federal courts, pursuant to which the SEP holder may seek enhancement of the damages award under section 284. As the Court emphasized in Halo, the decision to enhance the damages award rests in the court’s discretion, provided that the infringement is egregious. Factors such as the infringer’s knowledge of the SEPs’ existence and the infringer’s conduct in negotiating a license for SEPs inform whether the infringer has engaged in egregious misconduct justifying a punitive sanction.
According to Mr. Sidak, Judge Gilstrap had earlier rejected LG's argument that "enhanced damages are inappropriate for SEPs because 'infringement is an expected part of the standard setting model.'"  As suggested by the abstract, Mr. Sidak agrees with the judge that enhanced damages may be appropriate, because in his view (1) a FRAND commitment is an enforceable contract; (2) a SEP owner discharges its FRAND obligation by extending a FRAND offer; (3) the infringer extinguishes or exhausts its rights as a third-party beneficiary of the FRAND commitment by rejecting or failing to accept the offer within a reasonable time; and (4) once those rights are extinguished, the contractual constraint of the FRAND commitment is no longer applicable (pp. 1105-07).

For my part--and without having given the matter a huge amount of thought yet--I'm inclined to agree that enhanced damages should be available for the willful infringement of a SEP.  As readers of this blog may be aware, I'm not a big fan of enhanced damages generally,especially when they are conditioned on the infringer's state of mind rather than on objective criteria.  But as I've stated before, I do think they can be justified "when compensatory damages alone (1) would leave the plaintiff worse off than it would have been but for the infringement (perhaps because certain harms are not susceptible to quantification); or (2) would leave the defendant in a better position than a willing licensee (perhaps because the infringer avoids certain risks that a licensee normally would shoulder); or (3) would be necessary to achieve adequate deterrence (perhaps because the infringing act was of a type that often would go undetected, or the defendant has deliberately driven up litigation costs to discourage an impecunious patentee from filing suit)."  Moreover, as I've also stated before, in the context of SEPs I think that courts generally should deny injunctive relief in order to avoid holdup, but at the same time they should be careful to ensure that an award of past damages plus ongoing royalty is fully compensatory, and that the infringer isn't better off for having infringed.  It seems to me that, in order to ensure that infringers don't benefit from undue delay (whatever that means) in coming to terms, a modest damages enhancement might be appropriate.  After all, attorneys' fees, even when awarded, usually are not fully compensatory (in the U.S. and in some other countries as well); prejudgment interest, even when awarded (as it usually is, in the U.S.) and compounded (as it often is in the U.S., but not necessarily elsewhere), may not be fully compensatory if the patentee or the infringer has a higher internal rate of return than is reflected in the interest rate the court uses; and other costs of delay (opportunity costs, etc.) probably won't be compensated at all otherwise.  (I realize that this compensatory rationale is at odds with the Supreme Court's statement in Halo that enhanced damages are not intended to be compensatory, but I'm just speaking as a matter of policy here.)  

One other note:  it doesn't appear that Judge Gilstrap awarded Core Wireless its attorneys' fees, which may well be correct under U.S. law; the case probably wasn't "exceptional."  But again, as a matter of policy, it strikes me as odd that we're so hesitant to award fees (even when they aren't fully compensatory, as they usually aren't) but less so to award enhancements, at least after Halo.  That seems to get things backwards, in my view.